Barclays 2009 Annual Report Download - page 296

294 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Notes to the accounts
For the year ended 31st December 2009
continued
50 Fair value of financial instruments continued
Notes
a) Fair value approximates carrying value due to the short-term nature of these financial assets and liabilities.
b) The carrying value of financial instruments subsequently measured at fair value (including those held for trading, designated at fair value, derivatives
and available for sale) is determined in accordance with accounting policy as noted on pages 195 and196 and further description and analysis of these
fair values are set out below.
c) The carrying value of financial assets subsequently measured at amortised cost (including loans and advances, and other lending such as reverse
repurchase agreements and cash collateral on securities borrowed) is determined in accordance with the accounting policy as noted on page 196.
In many cases the fair value disclosed approximates the carrying value because the instruments are short-term in nature or have interest rates that
reprice frequently. In other cases, fair value is determined using discounted cash flows, applying either market derived interest rates or, where the
counterparty is a bank, rates currently offered by other financial institutions for placings with similar characteristics. Alternatively, fair value can be
determined by applying an average of available regional and industry segmental credit spreads to the loan portfolio, taking the contractual maturity
of the loan facilities into consideration.
d) The carrying value of financial liabilities subsequently measured at amortised cost (including customer accounts and other deposits such as repurchase
agreements and cash collateral on securities lent, debt securities in issue, subordinated liabilities) is determined in accordance with the accounting policy
as noted on page 196. In many cases, the fair value disclosed approximates the carrying value because the instruments are short-term in nature or have
interest rates that reprice frequently such as customer accounts and other deposits and short-term debt securities. Fair values of other debt securities in
issue are based on quoted prices where available, or where these are unavailable, are estimated using a valuation model. Fair values for dated and undated
convertible and non convertible loan capital are based on quoted market rates for the issue concerned or similar issues with similar terms and conditions.
Valuation inputs
During the year, the Group adopted the requirements of IFRS 7 – Financial Instruments: Disclosures. This requires an entity to classify its financial assets and
liabilities held at fair value according to a hierarchy that reflects the significance of observable market inputs. The classification of these instruments is based
on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined below.
Quoted market prices – Level 1
Financial instruments, the valuation of which are determined by reference to unadjusted quoted prices for identical assets or liabilities in active markets
where the quoted price is readily available, and the price represents actual and regularly occurring market transactions on an arm’s length basis. An active
market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
This category includes highly liquid government bonds, short dated US agency securities, active listed equities and actively exchange-traded derivatives.
Valuation technique using observable inputs – Level 2
Financial instruments that have been valued using inputs other than quoted prices as described for level 1 but which are observable for the asset or liability,
either directly or indirectly.
This category includes most investment grade and liquid high yield bonds; asset backed securities; long dated US agency securities; certain government
bonds, less liquid listed equities; bank, corporate, and municipal obligations; certain OTC derivatives; certain convertible bonds; certificates of deposit and
commercial paper; certain collateralised debt obligations (CDOs) (cash and synthetic underlyings); collateralised loan obligations (CLOs); commodities
based derivatives; credit derivatives, certain credit default swaps (CDSs); most fund units; certain loans; foreign exchange spot and forward transactions;
and certain issued notes.
Valuation technique using significant unobservable inputs – Level 3
Financial instruments, the valuation of which incorporate significant inputs for the asset or liability that are not based on observable market data (unobservable
inputs). Unobservable inputs are those not readily available in an active market due to market illiquidity or complexity of the product. These inputs are generally
determined based on observable inputs of a similar nature, historic observations on the level of the input or analytical techniques.
This category includes certain corporate debt securities; highly distressed debt; private equity investments; commercial real estate loans; certain OTC
derivatives (requiring complex and unobservable inputs such as correlations and long dated volatilities); certain convertible bonds; some CDOs (cash and
synthetic underlyings); certain credit default swaps; derivative exposures to Monoline insurers; fund units; certain asset backed securities; certain issued
notes; certain collateralised loan obligations (CLOs) and certain loans.