Barclays 2015 Annual Report Download - page 275

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15 Derivative financial instruments
Accounting for derivatives
Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract.
They include swaps, forward rate agreements, futures, options and combinations of these instruments and primarily affect the Group’s net
interest income, net trading income, net fee and commission income and derivative assets and liabilities. Notional amounts of the contracts are
not recorded on the balance sheet.
The Group applies IAS 39. All derivative instruments are held at fair value through profit or loss. Derivatives are classified as assets when their fair
value is positive or as liabilities when their fair value is negative. This includes terms included in a contract or other financial asset or liability (the
host), which, had it been a stand-alone contract, would have met the definition of a derivative. These are separated from the host and accounted
for in the same way as a derivative.
Hedge accounting
The Group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects
of its interest and currency risk management strategies. Derivatives are used to hedge interest rate, exchange rate, commodity, and equity
exposures and exposures to certain indices such as house price indices and retail price indices related to non-trading positions. Where derivatives
are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the Group
applies fair value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation, as appropriate to the risks
being hedged.
Fair value hedge accounting
Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The fair value changes adjust the carrying value of
the hedged asset or liability held at amortised cost.
If hedge relationships no longer meet the criteria for hedge accounting, hedge accounting is discontinued. For fair value hedges of interest rate
risk, the fair value adjustment to the hedged item is amortised to the income statement over the period to maturity of the previously designated
hedge relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised
immediately in the income statement.
Cash flow hedge accounting
For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in
other comprehensive income, and then recycled to the income statement in the periods when the hedged item will affect profit or loss. Any
ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity and is recognised when the hedged item is ultimately recognised in the income statement. When
a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is immediately transferred to the
income statement.
Hedges of net investments
The Group’s net investments in foreign operations, including monetary items accounted for as part of the net investment, are hedged for foreign
currency risks using both derivatives and foreign currency borrowings. Hedges of net investments are accounted for similarly to cash flow hedges;
the effective portion of the gain or loss on the hedging instrument is being recognised directly in other comprehensive income and the ineffective
portion being recognised immediately in the income statement. The cumulative gain or loss recognised in other comprehensive income is
recognised in the income statement on the disposal or partial disposal of the foreign operation, or other reductions in the Group’s investment in
the operation.
Total derivatives
2015 2014
Notional
contract
amount
£m
Fair value Notional
contract
amount
£m
Fair value
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Total derivative assets/(liabilities) held for trading 29,437,102 326,772 (323,788) 32,624,342 438,270 (438,623)
Total derivative assets/(liabilities) held for risk management 316,605 937 (464) 268,448 1,639 (697)
Derivative assets/(liabilities) 29,753,707 327,709 (324,252) 32,892,790 439,909 (439,320)
The fair value of gross derivative assets decreased by 26% to £328bn, driven by decrease in interest rate derivatives of £79bn due to net trade
reduction and an increase in the major interest rate forward curves and a decrease in foreign exchange derivatives of £19bn, materially reflecting
trade maturities. Information on further netting of derivative financial instruments is included within Note 19 Offsetting financial assets and
financial liabilities.
Trading derivatives are managed within the Group’s market risk management policies, which are outlined on pages 134 and 135.
The Group’s exposure to credit risk arising from derivative contracts are outlined in the Credit Risk section on page 163.
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