Barclays 2012 Annual Report Download - page 260

18 Fair value of financial instruments
Accounting for financial assets and liabilities – fair values
The Group applies IAS 39. All financial instruments are initially recognised at fair value on the date of initial recognition and, depending on
the classification of the asset, may continue to be held at fair value either through profit or loss or other comprehensive income.
The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, in an arm’s length
transaction between knowledgeable willing parties.
Wherever possible, fair value is determined by reference to a quoted market price for that instrument. For many of the Group’s financial assets
and liabilities, especially derivatives, quoted prices are not available, and valuation models are used to estimate fair value. The models 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 held 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.
On initial recognition, it is presumed that the transaction price is the fair value unless there is observable information available in an active
market to the contrary.
For valuations that have made use of significant unobservable inputs, the difference between the model valuation and the initial transaction
price (‘Day One profit’) is recognised in profit or loss either:
 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
 released in full when 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 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.
The sensitivity of valuations used in the financial statements to reasonably possible changes in variables is shown on page 268.
Comparison of carrying amounts and fair values
The following table summarises the fair value of financial assets and liabilities measured at amortised cost on the Group’s balance sheet.
2012 2011
Carrying
amount
£m
Fair
value
£m
Carrying
amount
£m
Fair
value
£m
Financial assets
Loans and advances to banks 40,489 40,489 47,446 47,446
Loans and advances to customers:
– Home loans 174,988 164,608 171,272 163,433
– Credit cards, unsecured and other retail lending 66,414 65,357 64,492 63,482
– Corporate loans 184,327 178,492 196,170 190,408
Reverse repurchase agreements and other similar secured lending 176,956 176,895 153,665 153,365
Financial liabilities
Deposits from banks 77,010 77,023 91,116 91,137
Customer accounts:
– Current and demand accounts 127,819 127,819 116,208 116,208
– Savings accounts 99,875 99,875 93,160 93,160
– Other time deposits 158,013 158,008 156,664 156,689
Debt securities in issue 119,581 119,725 129,736 128,997
Repurchase agreements and other similar secured borrowing 217,342 217,342 207,292 207,292
Subordinated liabilities 24,018 23,467 24,870 20,745
barclays.com/annualreport258 I Barclays PLC Annual Report 2012
Notes to the financial statements
For the year ended 31 December 2012 continued