Barclays 2014 Annual Report Download - page 290

288 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Notes to the financial statements
Assets and liabilities held at fair value
18 Fair value of financial instruments continued
Commercial real estate loans
Description: This portfolio includes loans that are secured by a range of commercial property types including retail, hotel, office, multi-family and
industrial properties.
Valuation: Performing loans are valued using discounted cash flow analysis which considers the characteristics of the loan such as property type,
geographic location, credit quality and property performance reviews in order to determine an appropriate credit spread. Where there is significant
uncertainty regarding loan performance, valuation is based on independent third party appraisals or bids for the underlying properties.
Independent third party appraisals are determined by discounted cash flow analysis. The key valuation inputs are yield and loss given default.
Observability: Since each commercial real estate loan is unique in nature, and the secondary loan market is relatively illiquid, valuation inputs are
generally considered unobservable.
Level 3 sensitivity: For performing loans, sensitivity is determined by stressing the credit spread for each loan. For loans which have significant
uncertainty regarding loan performance, sensitivity is determined by either a range of bids or by stressing the inputs to independent third party
appraisals.
Issued debt
Description: This category contains Barclays’ issued notes.
Valuation: Fair valued Barclays’ issued notes are valued using discounted cash flow techniques and industry standard models incorporating
various observable input parameters depending on the terms of the instrument.
Observability: Barclays’ issued notes are generally observable. Structured notes are debt instruments containing embedded derivatives. Where
either an input to the embedded derivative or the debt instrument is deemed unobservable and significant to the overall valuation of the note, the
structured note is classified as Level 3.
Level 3 sensitivity: Sensitivity to the unobservable input in the embedded derivative is calculated in line with the method used for the derivative
instrument concerned and incorporated within the derivative lines.
Private equity investments
Description: This category includes private equity investments.
Valuation: Private equity investments are valued in accordance with the ‘International Private Equity and Venture Capital Valuation Guidelines’. This
requires the use of a number of individual pricing benchmarks such as the prices of recent transactions in the same or similar entities, discounted
cash flow analysis, and comparison with the earnings multiples of listed comparative companies. Full valuations are generally performed at least
biannually, with the positions reviewed periodically for material events that might impact upon fair value. The valuation of unquoted equity
instruments is subjective by nature. However, the relevant methodologies are commonly applied by other market participants and have been
consistently applied over time.
Observability: Unobservable inputs include earnings estimates, multiples of comparative companies, marketability discounts and discount rates.
Level 3 sensitivity: The relevant valuation models are each sensitive to a number of key assumptions, such as projected future earnings,
comparator multiples, marketability discounts and discount rates. Valuation sensitivity is estimated by flexing such assumptions to reasonable
alternative levels and determining the impact on the resulting valuation.
Other
Description: The US Lehman acquisition assets are included within Other. For more details, refer to Note 29. Other also includes investment
property and non-current assets held for sale. See below for more details.
Level 3 sensitivity: No stress has been applied to the receivables relating to the Lehman acquisition (Note 29). The sensitivity inherent in the
measurement of the receivables is akin to a litigation provision. Due to this, an upside and downside stress on a basis comparable with the other
assets cannot be applied.
Investment property
Description: Investment property consists of commercial real estate property including most of the major property types: retail, office, industrial
and multi-family properties.
Valuation: Investment property is valued using competitive asset specific market bids. When bids are unavailable, valuations are determined by
independent third party appraisers through a discounted cash flow analysis. The key inputs to the discounted cash flow valuation are
capitalisation rates, yields, growth rate, and loss given default.
Observability: Since each investment property is unique in nature and the commercial real estate market is illiquid, valuation inputs are largely
unobservable.
Non-current assets held for sale
Description: Non-current assets held for sale materially consists of the Spanish business, which includes all assets and liabilities of Barclays Bank
S.A.U. and its subsidiaries being offered for sale.
Valuation: Non-current assets held for sale are valued at the lower of carrying value and fair value less cost to sell. The Spanish business has been
recognised at the agreed price less costs to sell.
Observability: There is no liquid market for such transactions and therefore valuation inputs are largely unobservable.
Level 3 sensitivity: The Spanish business is valued at the agreed price less costs to sell and is not expected to display significant sensitivity.