Barclays 2015 Annual Report Download - page 263

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1 Significant accounting policies continued
Classification and measurement
Financial assets and liabilities are initially recognised at fair value and may be held at fair value or amortised cost depending on the Group’s
intention towards the assets and the nature of the assets and liabilities, mainly determined by their contractual terms.
The accounting policy for each type of financial asset or liability is included within the relevant note for the item. The Group’s policies for
determining the fair values of the assets and liabilities are set out in Note 18.
Derecognition
The Group derecognises a financial asset, or a portion of a financial asset, from its balance sheet where the contractual rights to cash flows from
the asset have expired, or have been transferred, usually by sale, and with them either substantially all the risks and rewards of the asset or
significant risks and rewards, along with the unconditional ability to sell or pledge the asset.
Financial liabilities are derecognised when the liability has been settled, has expired or has been extinguished. An exchange of an existing financial
liability for a new liability with the same lender on substantially different terms – generally a difference of 10% in the present value of the cash
flows or a substantive qualitative amendment – is accounted for as an extinguishment of the original financial liability and the recognition of a
new financial liability.
Critical accounting estimates and judgements
Transactions in which the Group transfers assets and liabilities, portions of them, or financial risks associated with them can be complex and it may
not be obvious whether substantially all of the risks and rewards have been transferred. It is often necessary to perform a quantitative analysis. Such
an analysis compares the Group’s exposure to variability in asset cash flows before the transfer with its retained exposure after the transfer.
A cash flow analysis of this nature may require judgement. In particular, it is necessary to estimate the asset’s expected future cash flows as well
as potential variability around this expectation. The method of estimating expected future cash flows depends on the nature of the asset, with
market and market-implied data used to the greatest extent possible. The potential variability around this expectation is typically determined by
stressing underlying parameters to create reasonable alternative upside and downside scenarios. Probabilities are then assigned to each scenario.
Stressed parameters may include default rates, loss severity, or prepayment rates.
(iv) Issued debt and equity instruments
The Group applies IAS 32, Financial Instruments: Presentation, to determine whether funding is either a financial liability (debt) or equity.
Issued financial instruments or their components are classified as liabilities if the contractual arrangement results in the Group having a present
obligation to either deliver cash or another financial asset, or a variable number of equity shares, to the holder of the instrument. If this is not the
case, the instrument is generally an equity instrument and the proceeds included in equity, net of transaction costs. Dividends and other returns
to equity holders are recognised when paid or declared by the members at the AGM and treated as a deduction from equity.
Where issued financial instruments contain both liability and equity components, these are accounted for separately. The fair value of the debt is
estimated first and the balance of the proceeds is included within equity.
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended standards or
interpretations that resulted in a change in accounting policy.
Future accounting developments
There have been, and are expected to be, a number of significant changes to the Group’s financial reporting after 2015 as a result of amended or
new accounting standards that have been or will be issued by the IASB. The most significant of these are as follows:
IFRS 9 – Financial instruments
IFRS 9 Financial Instruments which will replace IAS 39 Financial Instruments: Recognition and Measurement is effective for periods beginning on
or after 1 January 2018 and is currently expected to be endorsed by the EU in 2016. IFRS 9, in particular the impairment requirements, will lead to
significant changes in the accounting for financial instruments.
Impairment
IFRS 9 introduces a revised impairment model which will require entities to recognise expected credit losses based on unbiased forward-looking
information, replacing the existing incurred loss model which only recognises impairment if there is objective evidence that a loss is already
incurred.
The IFRS 9 impairment model will be applicable to all financial assets at amortised cost, lease receivables, debt financial assets at fair value
through OCI, loan commitments and financial guarantee contracts. This contrasts to the IAS 39 impairment model which is not applicable to loan
commitments and financial guarantee contracts (these were covered by IAS 37). In addition, the IAS 39 Available for Sale assets model is not fully
aligned to the model for amortised cost assets.
IFRS 9 requires the recognition of lifetime expected credit losses for financial instruments for which the credit risk has increased significantly since
initial recognition. If the credit risk has not increased significantly since initial recognition 12 month expected credit losses are recognised, being
the expected credit losses from default events that are possible within 12 months after the reporting date.
Expected credit losses are the unbiased probability of default weighted average credit losses determined by evaluating a range of possible
outcomes and forecast future economic conditions. Credit losses are the expected cash shortfalls from what is contractually due over the
expected life of the financial instrument, discounted at the effective interest rate.
Under IFRS 9, impairment will be recognised earlier than is the case under IAS 39 because it requires expected losses to be recognised before the
loss event arises. Measurement will involve increased complexity and judgement including estimation of probabilities of defaults, loss given
default, a range of unbiased future economic scenarios, estimation of expected lives, estimation of exposures at default and assessing increases
in credit risk. It is expected to have a material financial impact, but it will not be practical to disclose reliable financial impact estimates until the
implementation programme is further advanced.
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