Barclays 2012 Annual Report Download - page 261

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
18 Fair value of financial instruments continued
Valuation
The fair value is the amount an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction. As a wide range of valuation techniques are available, it may be inappropriate to compare the Barclays fair value information to
independent market or other financial institutions. Assumptions changes and different valuation methodologies can have significant impact on
fair values which are based on unobservable inputs.
Financial assets
The carrying value of financial assets held 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 noted on pages 271-272.
Loans and advances to banks and customers
The carrying value of variable rate loans is assumed to be their fair value based on frequent repricing. The fair value of the fixed rate loans is
determined using discounted cash flows by aggregating for the same or similar products. This approach is used mainly in Retail and Business
Banking and Wealth and Investment Management by applying derived market interest rates on expected cash flows. These valuation techniques
also consider expected credit losses and changes to behavioural profiles.
For the Investment Bank and Corporate Banking, the fair value is determined by applying a credit spread for the counterparty. Credit spreads are
based on regional and industry segments and take the contractual maturity of the loan facilities into consideration. In the absence of counterparty
rating, the average of regional and industry segmental credit spreads are applied to the contractual maturity of the loan.
The fair value of asset backed securities and reclassified trading portfolio assets to loans and advances are determined primarily from market
quotes and, where these are not available, by alternative techniques including reference to credit spreads on similar assets with similar obligor,
broker quotes and other research data.
Financial liabilities
The carrying value of financial liabilities held at amortised cost (including customer accounts and other deposits such as repurchase agreements
and cash collateral on securities lent, debt securities in issue and subordinated liabilities) is determined in accordance with the accounting policy
noted on page 271.
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.
The fair value for deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits is estimated
using discounted cash flows applying either market rates or current rates for deposits of similar remaining maturities.
Fair values of other debt securities in issue are based on quoted prices where available, or where these are unavailable, are estimated using
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 terms and conditions.
Valuation inputs
IFRS 7 Financial Instruments: Disclosure requires an entity to classify its financial instruments held at fair value according to a hierarchy that
reflects the significance of observable market inputs. The three levels of the fair value hierarchy are defined below.
Quoted market prices – Level 1
Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued 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 liquid government bonds actively traded through an exchange or clearing house, actively traded listed equities and actively
exchange-traded derivatives.
Valuation technique using observable inputs – Level 2
Financial instruments classified as Level 2 have been valued using models whose inputs are observable in an active market. Valuations based on
observable inputs include financial instruments such as swaps and forwards which are valued using market standard pricing techniques, and
options that are commonly traded in markets where all the inputs to the market standard pricing models are observable.
This category includes most investment grade and liquid high yield bonds, certain asset backed securities, US agency securities, government
bonds, less actively traded listed equities, bank, corporate and municipal obligations, certain OTC derivatives, certain convertible bonds, certificates
of deposit, commercial paper, collateralised loan obligations (CLOs), most 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.
barclays.com/annualreport Barclays PLC Annual Report 2012 I 259