Barclays 2008 Annual Report Download - page 201

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Financial statements
17. Issued debt and equity securities
Issued financial instruments or their components are classified as liabilities
where the contractual arrangement results in the Group having a present
obligation to either deliver cash or another financial asset to the holder, to
exchange financial instruments on terms that are potentially unfavourable
or to satisfy the obligation otherwise than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of equity
shares. Issued financial instruments, or their components, are classified as
equity where they meet the definition of equity and confer on the holder a
residual interest in the assets of the Company. The components of issued
financial instruments that contain both liability and equity elements are
accounted for separately with the equity component being assigned the
residual amount after deducting from the instrument as a whole the
amount separately determined as the fair value of the liability component.
Financial liabilities, other than trading liabilities and financial liabilities
designated at fair value, are carried at amortised cost using the effective
interest method as set out in policy 6. Derivatives embedded in financial
liabilities that are not designated at fair value are accounted for as set out
in policy 7. Equity instruments, including share capital, are initially recognised
at net proceeds, after deducting transaction costs and any related income
tax. Dividend and other payments to equity holders are deducted from
equity, net of any related tax.
18. Share capital
Share issue costs
Incremental costs directly attributable to the issue of new shares or
options including those issued on the acquisition of a business are shown
in equity as a deduction, net of tax, from the proceeds.
Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period
in which they are paid or, if earlier, approved by the Barclays PLC
(the Company) shareholders.
Treasury shares
Where the Company or any member of the Group purchases the Company’s
share capital, the consideration paid is deducted from shareholders’
equity as treasury shares until they are cancelled. Where such shares are
subsequently sold or reissued, any consideration received is included in
shareholders’ equity.
19. Insurance contracts and investment contracts
The Group offers wealth management, term assurance, annuity,
property and payment protection insurance products to customers
that take the form of long- and short-term insurance contracts.
The Group classifies its wealth management and other products as
insurance contracts where these transfer significant insurance risk,
generally where the benefits payable on the occurrence of an insured
event are at least 5% more than the benefits that would be payable if
the insured event does not occur.
Contracts that do not contain significant insurance risk or
discretionary participation features are classified as investment contracts.
Financial assets and liabilities relating to investment contracts, and assets
backing insurance contracts are classified and measured as appropriate
under IAS 39, ‘Financial Instruments: Recognition and Measurement’.
Long-term insurance contracts
These contracts, insure events associated with human life (for example,
death or survival) over a long duration. Premiums are recognised as
revenue when they become payable by the contract holder. Claims and
surrenders are accounted for when notified. Maturities on the policy
maturity date and regular withdrawals are accounted for when due.
A liability for contractual benefits that are expected to be incurred in
the future is recorded when the premiums are recognised, based on the
expected discounted value of the benefit payments and directly related
administration costs, less the expected discounted value of the future
premiums that would be required to meet the benefits and other expenses.
The calculation of the liability contains assumptions regarding mortality,
maintenance expenses and investment income.
Liabilities under unit-linked life insurance contracts (such as
endowment policies) in addition reflect the value of assets held within
unitised investment pools.
Short-term insurance contracts
Under its payment protection insurance products the Group is committed
to paying benefits to the policyholder rather than forgiving interest or
principal on the occurrence of an insured event, such as unemployment,
sickness, or injury. Property insurance contracts mainly compensate the
policyholders for damage to their property or for the value of property lost.
Premiums are recognised as revenue proportionally over the period of
the coverage. Claims and claims handling costs are charged to income as
incurred, based on the estimated liability for compensation owed to
policyholders arising from events that have occurred up to the balance
sheet date even if they have not yet been reported to the Group, based on
assessments of individual cases reported to the Group and statistical
analyses for the claims incurred but not reported.
Deferred acquisition costs (DAC)
Commissions and other costs that are related to securing new insurance
and investment contracts are capitalised and amortised over the estimated
lives of the relevant contracts.
Deferred income liability
Fees that are designed to recover commissions and other costs related
to either securing new insurance and investment contracts or renewing
existing investment contracts are included as a liability and amortised
over the estimated life of the contract.
Value of business acquired
On acquisition of a portfolio of contracts, such as through the acquisition
of a subsidiary, the Group recognises an intangible asset representing
the value of business acquired (VOBA), representing the future profits
embedded in acquired insurance contracts and investment contracts
with a discretionary participation feature. The asset is amortised over
the remaining terms of the acquired contracts.
Liability adequacy test
Liability adequacy tests are performed at each balance sheet date to
ensure the adequacy of contract liabilities net of DAC and VOBA assets.
Current best estimates of future contractual cash flows, claims handling
and administration costs, and investment returns from the assets backing
the liabilities are taken into account in the tests. Where a deficiency
is highlighted by the test, DAC and VOBA assets are written off first,
and insurance liabilities increased when these are written off in full.
Any deficiency is immediately recognised in the income statement.
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