Barclays 2010 Annual Report Download - page 199

1 Significant accounting policies continued
Regular way purchases of held to maturity financial assets are recognised on trade date, being the date on which the Group commits to purchase the asset.
Available for sale
Available for sale assets are non-derivative financial assets that are designated as available for sale and are not categorised into any of the other categories
described above. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains
and losses arising from changes in fair value are included as a separate component of equity (the available for sale reserve) until sale when the cumulative
gain or loss is transferred to the income statement. Interest on debt instruments, determined using the effective interest method (see accounting policy 6),
dividends on equity instruments, impairment losses and translation differences on monetary items are recognised in the income statement.
Regular way purchases and sales of available for sale financial instruments are recognised on trade date, being the date on which the Group commits
to purchase or sell the asset.
A financial asset classified as available for sale that would have met the definition of loans and receivables may only be transferred from the available
for sale classification where the Group has the intention and the ability to hold the asset for the foreseeable future or until maturity.
Embedded derivatives
Some contracts (‘hybrid contracts’) contain both a derivative (the ‘embedded derivative’)and a non-derivative (the ‘host contract’). Where the economic
characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract itself is not carried at fair
value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains and losses are recognised in the income statement.
Derecognition of financial assets
The Group derecognises a financial asset, or a portion of a financial asset, where the contractual rights to that asset have expired, or where the rights
to further cash flows from the asset have been transferred to a third party and, with them, either:
(i) substantially all the risks and rewards of the asset; or
(ii) significant risks and rewards, along with the unconditional ability to sell or pledge the asset.
Where significant risks and rewards have been transferred, but the transferee does not have the unconditional ability to sell or pledge the asset,
the Group continues to account for the asset to the extent of its continuing involvement (‘continuing involvement accounting’).
To assess the extent to which risks and rewards have been transferred, it is often necessary to perform a quantitative analysis. Such an analysis
will compare the Group’s exposure to variability in asset cash flows before the transfer with its retained exposure after the transfer.
Where neither derecognition nor continuing involvement accounting is appropriate, the Group continues to recognise the asset in its entirety
and recognises any consideration received as a financial liability.
Loan commitments
Loan commitments, where the Group has a past practice of selling the resulting assets shortly after origination, are held at fair value through profit
or loss. Other loan commitments are accounted for in accordance with accounting policy 23.
Financial liabilities
Financial liabilities are measured at amortised cost, except for trading liabilities and liabilities designated at fair value, which are held at fair value through
profit or loss. Financial liabilities are derecognised when extinguished.
An exchange of an existing debt instrument for a new instrument with the lender on substantially different terms is accounted for as an extinguishment
of the original financial liability and the recognition of a new financial liability. An assessment is made as to whether the terms are substantially different
considering qualitative and quantitive characteristics. For example, if the discounted present value calculated using the original effective interest rate
of the cash flows under the new terms, including fees, is at least 10% different from the discounted present value of the remaining cash flows of the
original financial liability, or if the qualitative assessment concludes that the nature and risk profile of the original financial liability is materially different
from that of the new financial liability based on the terms of the instruments including repayment terms, coupon terms and call options, the original
financial liability is extinguished.
When an exchange is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment.
The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid, including any
non-cash assets transferred or liabilities assumed, is recognised in profit or loss.
Determining fair value
Where the classification of a financial instrument requires it to be stated at fair value, fair value is determined by reference to a quoted market price for
that instrument or by using a valuation model. Where the fair value is calculated using valuation models, the methodology is to calculate the expected
cash flows under the terms of each specific contract and then discount these values back to a present value. These models use as their basis
independently sourced market parameters including, for example, interest rate yield curves, equities and commodities prices, option volatilities and
currency rates. For financial liabilities measured at fair value, the carrying amount reflects the effect on fair value of changes in own credit spreads
derived from observable market data, such as spreads on Barclays issued bonds or credit default swaps. Most market parameters are either directly
observable or are implied from instrument prices. The model may perform numerical procedures in the pricing such as interpolation when input values
do not directly correspond to the most actively traded market trade parameters. However, where valuations include significant unobservable inputs, the
transaction price is deemed to provide the best evidence of initial fair value for accounting purposes. As such, profits or losses are recognised upon trade
inception only when such profits can be measured solely by reference to observable market data. For valuations that include significant unobservable
inputs, the difference between the model valuation and the initial transaction price is recognised in profit or loss either:
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 when previously unobservable inputs become observable.
Barclays PLC Annual Report 2010 www.barclays.com/annualreport10 197
Strategy Performance Risk management and governance Shareholder informationFinancial statementsAbout Barclays