Barclays 2015 Annual Report Download - page 249

home.barclays/annualreport Barclays PLC Annual Report 2015 I 247
Area of focus How our audit addressed the area of focus
Valuation of financial
instruments held at
fair value
The valuation of the Group’s financial
instruments held at fair value was a key area of
audit focus due to their significance.
The Directors make significant judgement
because of the complexity involved in valuing
some of these assets and liabilities given the
limited external evidence to support the
Group’s valuations.
In particular, the Education, Social Housing
and Local Authority (ESHLA) loan books
(£16.2bn) requires significant judgement in
the valuation methodology used due to limited
availability of observable market data used to
calibrate the funding and credit spreads used
in the valuation.
The Group’s Funding Fair Value Adjustment
(FFVA) for the measurement of uncollateralised
derivatives is an area of judgement for the
Directors as there are limited uncollateralised
derivative trades. The limited data available
does not allow the different elements of
pricing to be isolated resulting in the Directors
exercising their judgement in assessing fair
value.
See Notes 14 to 18 to the financial statements
on pages 272 to 292.
We assessed the design and operating effectiveness of the Group’s key
controls supporting the identification, measurement and oversight of
valuation risk of financial instruments.
We examined the Group’s independent price verification processes,
model validation and approval processes, controls over data feeds and
inputs to valuation and the Group’s governance and reporting processes
and controls. We made our own examination of collateral disputes, gains
and losses on disposals and other events which could provide evidence
about the appropriateness of the Group’s valuations. We determined
that we could rely on the key controls operated by the Group for the
purposes of our audit.
For the more judgemental valuations, which may depend on
unobservable inputs, we evaluated the assumptions, methodologies and
models used by the Group. We performed an independent valuation of a
sample of positions which in some cases resulted in a different valuation
to that calculated by management. In our view, the differences were
within a reasonable range of outcomes in the context of the inherent
uncertainties disclosed in the financial statements.
In auditing the ESHLA loan book, we assessed the appropriateness of
the valuation methodology for the portfolio and the level of observability
in the market, including performing comparable credit spread research
and comparing any observations to those used by management within
the Credit Valuation Adjustment. We independently performed the
valuation of a sample of derivatives and loans and evaluated the
appropriateness of ESHLA specific fair value adjustments.
In respect of the FFVA for uncollateralised derivatives we assessed the
methodology applied, and assumptions made, by the Group and
compared it with our knowledge of current industry practice. We tested
the controls over the data inputs to the valuation model and involved our
internal specialists to test the appropriateness of the model. We
evaluated the extent to which funding costs are incorporated into
derivative valuation with reference to the limited observable transaction
and other market data available.
Overall, in our view, in the context of the inherent uncertainties as
disclosed in the financial statements, these valuations were within a
reasonable range of outcomes.
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