Barclays 2009 Annual Report Download - page 199

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a) on a straight-line basis over the term of the transaction, or over the period
until all model inputs will become observable where appropriate, or;
b) released in full where previously unobservable inputs become
observable.
Various factors influence the availability of observable inputs and these may
vary from product to product and change over time. Factors include, for
example, the depth of activity in the relevant market, the type of product,
whether the product is new and not widely traded in the marketplace, the
maturity of market modelling and the nature of the transaction (bespoke or
generic). To the extent that valuation is based on models or inputs that are
not observable in the market, the determination of fair value can be more
subjective, dependant on the significance of the unobservable input to the
overall valuation. Unobservable inputs are determined based on the best
information available, for example by reference to similar assets, similar
maturities or other analytical techniques.
8. Impairment of financial assets
The Group assesses at each balance sheet date whether there is objective
evidence that loans and receivables or available for sale financial
investments are impaired. These are impaired and impairment losses are
incurred if, and only if, there is objective evidence of impairment as a result
of one or more loss events that occurred after the initial recognition of the
asset and prior to the balance sheet date (a loss event) and that loss event or
events has had an impact on the estimated future cash flows of the financial
asset or the portfolio that can be reliably estimated. The criteria that the
Group uses to determine that there is objective evidence of an impairment
loss include:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or
principal payments;
c) the lender, for economic or legal reasons relating to the borrower’s
financial difficulty, granting to the borrower a concession that the lender
would not otherwise consider;
d) it becomes probable that the borrower will enter bankruptcy or other
financial reorganisation;
e) the disappearance of an active market for that financial asset because
of financial difficulties; or
f) observable data indicating that there is a measurable decrease in the
estimated future cash flows from a portfolio of financial assets since the
initial recognition of those assets, although the decrease cannot yet be
identified with the individual financial assets in the portfolio, including:
(i) adverse changes in the payment status of borrowers in the
portfolio;
(ii) national or local economic conditions that correlate with defaults
on the assets in the portfolio.
For loans and receivables the Group first assesses whether objective
evidence of impairment exists individually for loans and receivables that
are individually significant, and individually or collectively for loans and
receivables that are not individually significant. If the Group determines that
no objective evidence of impairment exists for an individually assessed loan
and receivable, whether significant or not, it includes the asset in a group of
loans and receivables with similar credit risk characteristics and collectively
assesses them for impairment. Loans and receivables that are individually
assessed for impairment and for which an impairment loss is or continues to
be recognised are not included in a collective assessment of impairment.
The amount of impairment loss is measured as the difference between
the asset’s carrying amount and the present value of estimated future cash
flows discounted at the asset’s original effective interest rate. The amount of
the loss is recognised using an allowance account and recognised in the
income statement.
Where appropriate, the calculation of the present value of the estimated
future cash flows of a collateralised loan and receivable asset reflect the cash
flows that may result from foreclosure costs for obtaining and selling the
collateral, whether or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, loans and
receivables are grouped on the basis of similar risk characteristics, taking
into account asset type, industry, geographical location, collateral type, past-
due status and other relevant factors. These characteristics are relevant to
the estimation of future cash flows for groups of such assets by being
indicative of the counterparty’s ability to pay all amounts due according to
the contractual terms of the assets being evaluated.
Future cash flows in a group of loans and receivables that are collectively
evaluated for impairment are estimated on the basis of the contractual cash
flows of the assets in the group and historical loss experience for assets with
credit risk characteristics similar to those in the group. Historical loss
experience is adjusted based on current observable data to reflect the effects
of current conditions that did not affect the period on which the historical
loss experience is based and to remove the effects of conditions in the
historical period that do not currently exist.
The methodology and assumptions used for estimating future cash
flows are reviewed regularly to reduce any differences between loss
estimates and actual loss experience.
Following impairment, interest income is recognised using the effective
rate of interest which was used to discount the future cash flows for the
purpose of measuring the impairment loss.
When a loan is uncollectable, it is written off against the related
allowance for loan impairment. Such loans are written off after all the
necessary procedures have been completed and the amount of the loss has
been determined. Subsequent recoveries of amounts previously written off
are credited to the income statement.
If, in a subsequent period, the amount of the impairment loss decreases
and the decrease can be related objectively to an event occurring after the
impairment was recognised, the previously recognised impairment loss is
reversed by adjusting the allowance account. The amount of the reversal is
recognised in the income statement.
Equity securities or properties acquired in exchange for loans in order
to achieve an orderly realisation are accounted for as a disposal of the loan
and an acquisition of equity securities or investment properties. Where
control is obtained over an entity as a result of the transaction, the entity
is consolidated. Any further impairment of the assets or business acquired
is treated as an impairment of the relevant asset or business and not as an
impairment of the original instrument.