Barclays 2012 Annual Report Download - page 266

18 Fair value of financial instruments continued
Gains and losses on Level 3 financial assets and liabilities
The following table discloses the gains and losses recognised in the year arising on Level 3 financial assets and liabilities held at year end.
Gains and losses recognised during the period on Level 3 financial assets and liabilities held
Trading
portfolio
assets
£m
Financial
assets
designated at
fair value
£m
Available
for sale
investments
£m
Trading
portfolio
liabilities
£m
Financial
liabilities
designated
at fair value
£m
Net
derivative
financial
instruments
£m
Total
£m
As at 31 December 2012
Recognised in the income statement
– trading income (36) (174) (3) (1) 33 (1,747) (1,928)
– other income (7) 6 (11) – 55 (61) (18)
Total gains or losses recognised in other comprehensive
income – – 67 – – – 67
Total (43) (168) 53 (1) 88 (1,808) (1,879)
As at 31 December 2011
Recognised in the income statement
– trading income (44) 270 – – 729 (324) 631
– other income – 118 (54) – – – 64
Total gains or losses recognised in other comprehensive
income – – 135 – – – 135
Total (44) 388 81 – 729 (324) 830
Valuation techniques and sensitivity analysis
Current year valuation methodologies were consistent with the prior year unless otherwise noted below. These methodologies are commonly
used by market participants.
Sensitivity analysis is performed on products with significant unobservable parameters (Level 3) to generate a range of reasonably possible
alternative valuations. The sensitivity methodologies applied take account of the nature of valuation techniques used, as well as the availability
and reliability of observable proxy and historical data and the impact of using alternative models. Sensitivities are calculated without reflecting the
impact of any diversification in the portfolio.
Sensitivities are dynamically calculated on a monthly basis. The calculation is based on a range, standard deviation or spread data of a reliable
reference source or a scenario based on alternative market views alongside the impact of using alternative models. The level of shift or scenarios
applied is considered for each product and varied according to the quality of the data and variability of underlying market. Sensitivity to using
alternative models is quantified through scenario analysis and proxy approaches. The approach adopted in determining these sensitivities has
continued to evolve during the year, in the context of changing market conditions.
The valuation techniques used for the main products that are not determined by reference to unadjusted quoted prices (Level 1), observability and
sensitivity analysis for Level 3 are described below.
Commercial real estate loans
Description: This legacy portfolio includes lending on a range of commercial property types including retail, hotel, office, multi-family and
industrial properties.
Valuation: Performing loans are valued using a spread-based approach, with consideration of characteristics such as property type, geographic
location, yields, credit quality and property performance reviews. Where there is significant uncertainty regarding loan performance, valuation is
based on the underlying collateral, whose value is determined through property-specific information such as third party valuation reports and bids
for the underlying properties.
Observability: Since each commercial real estate loan is unique in nature and the secondary commercial loan market is relatively illiquid, valuation
inputs are generally considered unobservable.
Level 3 sensitivity: For performing loans, sensitivity is determined by applying an adjusted spread of 15% for each loan (both up and down). This
adjusted spread is derived from loan origination spreads provided by independent market research. For non-performing loans, a plausible
worst-case valuation is determined from the history of third-party valuation reports or bids received.
barclays.com/annualreport264 I Barclays PLC Annual Report 2012
Notes to the financial statements
For the year ended 31 December 2012 continued