Barclays 2010 Annual Report Download - page 205

1 Significant accounting policies continued
Liability adequacy test
Liability adequacy tests are performed at each balance sheet date to ensure the adequacy of contract liabilities net of deferred acquisition costs (DAC)
and value of business acquired assets (VOBA). 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 then insurance liabilities are increased if required. Any deficiency is immediately recognised in the income statement.
Reinsurance
Short and long-term insurance business is ceded to reinsurers under contracts to transfer part or all of one or more of the following risks: mortality,
investment and expenses. All such contracts are dealt with as insurance contracts. The benefits to which the Group is entitled under its reinsurance
contracts are recognised as reinsurance assets. The Group assesses reinsurance assets at each balance sheet date. If there is objective evidence of
impairment, the carrying amount of the reinsurance asset is reduced accordingly, resulting in a charge to the income statement.
20. Leases
As Lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are
classified as finance leases. When assets are transferred under a finance lease, the present value of the lease payments, discounted at the rate of interest
implicit in the lease, is recognised as a receivable. The difference between the total payments receivable under the lease and the present value of the
receivable is recognised as unearned finance income, which is allocated to accounting periods under the pre-tax net investment method to reflect a
constant periodic rate of return.
Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating
leases. The leased assets are included within property, plant and equipment on the Group’s balance sheet and depreciation is provided on the
depreciable amount of these assets on a systematic basis over their estimated useful lives. Lease income is recognised on a straight-line basis over
the period of the lease unless another systematic basis is more appropriate.
As Lessee
Leases entered into by the Group are primarily operating leases. Operating lease rentals payable are recognised as an expense in the income statement
on a straight-line basis over the lease term unless another systematic basis is more appropriate.
21. Employee benefits
Short-term employee benefits, such as salaries, paid absences, and other benefits include any estimated tax payable in respect of employee services
rendered during the period and are accounted for on an accruals basis over the period in which the employees provide the related services. Bonuses are
recognised to the extent that the Group has a present obligation to its employees that can be measured reliably.
The Group operates a number of pension schemes which may be funded or unfunded and of a defined contribution or defined benefit nature.
In addition, the Group contributes, according to local law in the various countries in which it operates, to Governmental and other plans which have
the characteristics of defined contribution plans.
For defined benefit schemes, actuarial valuation of each of the scheme’s obligations using the projected unit credit method and the fair valuation of each
of the scheme’s assets are performed annually, using the assumptions set out in Note 28. The difference between the fair value of the plan assets and
the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognised actuarial gains or losses and past
service cost, is recognised as an asset or liability in the balance sheet.
An asset arising, for example, as a result of past over funding or the performance of the plan investments, is recognised to the extent that it does not
exceed the present value of future contribution holidays or refunds of contributions.
Cumulative actuarial gains and losses in excess of the greater of 10% of the assets or 10% of the obligations of the plan (the corridor) are recognised
in the income statement over the remaining average service lives of the employees of the related plan, on a straight-line basis.
Gains and losses on curtailments are recognised when the curtailment occurs which is when there is a demonstrable commitment to make a significant
reduction in the number of employees covered by the plan or amendments have been made to the terms of the plan so that a significant element of
future service will no longer qualify for benefits or will qualify only for reduced benefits. The gain or loss comprises any resulting change in the present
value of the defined benefit obligation, any resulting change in the fair value of the plan assets and any related actuarial gain or loss that had not
previously been recognised since they fell within the corridor.
For defined contribution schemes, the Group recognises contributions due in respect of the accounting period in the income statement. Any contributions
unpaid at the balance sheet date are included as a liability.
The Group also provides health care benefits to certain retired employees, the cost of which is accrued as a liability in the financial statements over the
period of employment, using a methodology similar to that for defined benefit pensions plans.
All expenses related to employee benefits are recognised in the income statement in staff costs, which is included within operating expenses.
Barclays PLC Annual Report 2010 www.barclays.com/annualreport10 203
Strategy Performance Risk management and governance Shareholder informationFinancial statementsAbout Barclays