The Financial Statement of Barclays Bank Plc - Case Study Example

1. Barclays Bank Plc is one of the prominent global banks in the industry dealing in retail, commercial and Investment Banking. The group has significant number of activities in several countries and enjoys a substantial asset base. The financial statement for the year ended December 2009 of Barclays Bank Plc has been prepared in accordance with accounting framework of International Financial Reporting Standards (IFRS). The prime reason of the preparation of financial statements is to enable the user to objectively assess the financial outlook of the entity and to enable him to make an educated financial decision. IFRS 8 ‘Operating Segment’ requires the entities to disclose the details related to their segment of business which earn the major revenue for the business and on which the major expenses are incurred. As per the financial statement of Barclays Bank Plc, the bank has been divided into ten major segments which are UK Retail Banking, Barclays Commercial Bank, Barclays Card, Global Retail and Commercial Banking – Western Europe, Emerging Markets and Absa, Barclays Capital, Barclays Global Investors, Barclays Wealth and Head office functions and other operations. Retail Banking, which includes UK Retail Banking, Barclays Commercial Bank, Barclays Card and Global Retail and Commercial Banking – Western Europe, Emerging Markets and Absa, is the primary business of the bank which caters Local Business, Customer Lendings, Home Finance and others. Through various retail banking products, the bank has been able to attract a diverse range of customers and organizations. In addition, the bank generates significant revenue from its commercial banking operation. Barclays provides banking services to organizations, having annual turnover of more than £1 million, which includes specialist asset financing and lease financing. Investment banking includes Barclays Capital, Barclays Global Investors and Barclays Wealth. These operating segments provide financial solutions relating to investment risk management to an expanded array of corporate, institutional and government clients. These particular operating segments also deals with providing financial assistance related to mergers and acquisitions, capital raising, corporate lendings and foreign currency risk management. Head office and other functions operations comprise head office and central support functions. Areas covered by this segment comprise of finance, treasury, human resource management, tax compliance, strategy management and others. The segment disclosure of the bank elaborates about the products and services being offered, and it also presents the financial outlook in terms of revenue generated and expenses incurred. A geographical analysis of revenue from external customers, from continued and discontinued operations, is also presented. As per IFRS 8, segment is that component of the entity the activities of which generate regular income and on which regular expenses are incurred. In addition, the operating result of that particular segment is reviewed by the decision makers of the entity, and discrete financial information is also available. The standard also defines a ‘Quantitative Threshold’ based on which information related to operating segments is disclosed. According to the criteria, for a segment to be reported, its revenue should be 10% or more of the combined revenue of all the operating segments, the profit or loss should be 10% of the combined profit and loss of all the reported segments and its assets should be 10% of the combined assets. The standard encourages the organizations to report operating segments if by disclosing such, the user of the financial statement would be able to make informed decision, even though the segment does not meet the criteria of quantitative threshold. Barclays Bank plc has divided its segment on the basis of services it offers to its customer and has disclosed this fact in its financial statement, which is in compliance with the standard. Apart from this General Information, the entity is required to disclose specific items related to income and expenses such as interest revenue and expense, depreciation and amortization, income tax expense or income, material non-cash items and others. The segmental disclosure of the bank complies with this requirement. The standard also requires to disclose a reconciliation of the total revenue and assets of the all the segments with the total assets and revenue as presented in the balance sheet and profit and loss. The segment disclosure of the bank is accompanied with the reconciliation. 2. As per the segment disclosure, the segment which constitutes the major asset base of the bank’s asset base is Barclays capital, which constitutes around 74% of the total assets. The segment earns the highest profit before tax of £2,464 million which constitutes around 54% of the combined profit before tax of all the operating segments. Barclays Capital comes under the Investment Banking division of the bank and provides services mainly to corporate institutions. The segments which have reported losses during the financial year ended December 31, 2009 are GCRB – Emerging Markets and Head Office functions, reporting losses of £ 254 million and £576 million respectively. Return on Asset (ROA) is a financial performance indicator which analyzes the revenue generated as a percentage of the total asset allocated to that particular segment. This assists in identifying the segments which are utilizing the assets most effectively and efficiently, and thus can be a prospective venture for the management to explore in future. Out of the ten segments, Barclays Card has the highest ROA of 13% followed by Barclays Wealth with 9%. The segment having the lowest ROA is Head office functions and other operations. Owing to the stringent global economic meltdown and liquidity crises, the financial outlook of the segments has declined when compared with the financial year ended December 31, 2008. Apart from Barclays Capital and Head office functions, all the other segments have shown decline in the profit before tax. The profit before tax of Barclays Capital has increased by £1,162 million during the current financial year as compared to the preceding one, which has been achieved through establishing better client relationship and synergies. 3. There are several aspects of the segment information of Barclays Bank plc the analysis of which can highlight its compliance with the requirements of IFRS 8. The bank has identified its segment based on the requirements set out in IFRS 8 of identifying operating segments. The bank has an Executive Committee under whose domain fall the responsibility of allocating the resources to these operating segments and assessing their financial performance. As per IFRS 8, an organization, which intends to disclose information about its operating segments, must have a chief decision maker who regularly performs the review of the operating segments result. The executive committee performs the role of the chief decision maker. Majority of the operating segments reported by the bank follow the threshold criteria as defined in IFRS 8. However, there is certain financial information which is required by IFRS 8 to be presented along with the segments disclosures, which the financial statement of Barclays does not present. Moreover, the standard requires disclosing information about the extent of an organization reliance on its major customers. The threshold defined by the standard, for the qualification of a customer as a major customer, is when the revenue earned from transaction with a single external customer exceeds 10% or more of an entity’s revenue. The bank has specifically disclosed the fact that no single external customer contributes more than 5% of the total revenue earned during the financial year. The financial statement does not disclose sufficient geographical information pertaining to the segments as required by the standard. Although a geographical analysis of revenue has been presented but as per the requirement of IFRS 8, an entity must also disclose a detail of non-current assets, deferred tax assets and post employment benefit assets related to that geographic segment. 4. Shareholders are the most prominent users of the financial statement and it has always been the top most priority of International Accounting Standards Board (IASB) to implement such standards and guidelines for organizations which make their financial reporting useful for the users. The core principle behind the implementation of IFRS 8 was to enable the share holders to analyze and evaluate the financial effects of the business activities in which the entity is operating. Segment reporting is now considered an essential aspect of financial reporting from investor’s point of view. Such reporting allows the shareholder to grasp the understanding of complex business operations which also allows the shareholders to assess different line of business in an organization. Through a critical analysis of segments, a shareholder will be able to evaluate facts such as whether the organization is investing in segments which are more risk prone under the current economic scenario, or the identification of segments which are operating inefficiently and downgrading the overall financial outlook of the organization. The information presented in segment disclosure is more direct and presents the true operating capability of the organization. Based on all the above mentioned facts, a shareholder will be able to make an educated investment by analyzing segment information. 5. The policy implication for the adoption of the IFRS 8 ‘Operating Segment’ differs from entity to entity based on their business and structure. A few organizations might find it a bit difficult to adopt the requirement of IFRS 8 and depart from their conventional method of identifying operating segments. Many organizations following European Union (EU) standards have found the disclosure requirement of IFRS 8 ambiguous and vague. Moreover, the cost of preparing the information for the segment disclosure might be greater than the benefits derived from it. Another major policy implication for the adoption of IFRS 8 is that the standard does not require the organization to use the same accounting policies, for the segment disclosure, as for the amounts disclosed in other areas of financial statement. This could encourage the organizations to have separate reporting systems. On the other hand, a significant number of organizations have appreciated and adopted the requirement of IFRS 8 on the ground that it will assist the user in making better investment decision with greater precision. IASB believes that by adopting IFRS 8, organization will be able to identify more operating segments than before. References [1] Deloitte 2010, “IFRS 8 Operating Segments” [online], 11th December 2010 [2] Basware Corporation, “Implementation of IFRS 8 Operating Segments” [online], 13th December 2010 [3] Nicolas Véronn, “EU Adoption of the IFRS 8 Standard on Operating Segments” [online], 13th December 2010 Read More