Edward Stavos is a junior analyst at a major US pension fund. Stavos is researching Barclays PLC (LSE: BARC and NYSE: BCS) for his fund’s Credit Services Portfolio and is preparing background information prior to an upcoming meeting with the company.

Headquartered in London, United Kingdom, Barclays is a major global financial services provider engaged in personal banking, credit cards, corporate and investment banking, and wealth and investment management with an extensive international presence in Europe, the Americas, Africa, and Asia.

Stavos is particularly interested in Barclays’ P/B and how adjusting asset and liability accounts to their current fair value impacts the ratio. He gathers the condensed 2012 balance sheet (as of 31 December) and footnote data from Barclay’s website as shown in Exhibit 11.

The 31 December 2012 share price for Barclays was £2.4239, and the diluted weighted average number of shares was 12,614 million. Stavos computes book value per share initially by dividing total shareholders’ equity by the by the share count and arrives at a book value per share of £4.9910 (£62,957/12,614) and a P/B of 0.49 (£2.4239/£4.9910).
Stavos then computes tangible book value per share as £4.3636 (calculated as £62,957 minus £7,915 of goodwill and intangible assets, which is then divided by 12,614 shares). The P/B ratio based on tangible book value per share is 0.56 (£2.4239/£4.3636).
Stavos then turns to the footnotes to examine the fair value data. He notes the fair value of financial assets is £17,333 million less than their carrying amount (£643,174 – £625,841) and the fair value of financial liabilities is £399 million less than their carrying amount (£823,658 – £823,259). Including these adjustments to tangible book value results in an adjusted book value per share of £3.0211 [(£62,957 – £7,915 ‒ £17,333 + £399)/12,614]. Stavos’ adjusted P/B ratio is 0.80 (£2.4239/£3.0211).

Stavos is concerned about the wide range in his computed P/B ratios. He knows that if quoted prices are not available for financial assets and liabilities, IAS 39 allows for the use of valuation models to estimate fair value. He decides to question management regarding their use of models to value assets, liabilities, and derivatives and the sensitivity of these accounts to changes in interest rates and currency values.

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EXHIBIT 11 Barclays PLC 2012 Condensed Consolidated Balance Sheet and Footnote Data ( in millions) 2012 Assets Cash and balances at central banks 86,175 Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments 1,456 145,030 46,061 469,146 Available for sale investments 75,109 Loans and advances to banks 40,489 Loans and advances to customers 425,729 Reverse repurchase agreements and other similar secured lending 176,956 Prepayments, accrued income, and other assets 4,360 Investments in associates and joint ventures 570 Property, plant, and equipment 5,754 Goodwill and intangible assets Current tax assets Deferred tax assets Retirement benefit assets Total assets 7,915 252 3,016 2,303 1,490,321