HSBC 2003 Annual Report Download - page 121

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In many cases, the determination of these factors
will be judgemental, because either the security may
not be readily marketable or the cashflows will
require an assessment of the customer’s future
performance or the impact of litigation. HSBC’s
practice is to make estimates against these factors
and to review and update them regularly. If
management were to take a more cautious view of
the customer’s future cash flows (either by being less
optimistic of the ability of the customer to generate
profits or general economic conditions) or the
availability or value of any security, the provision
charge would be higher and HSBC’s profit on
ordinary activities would be lower.
This method of determining provisions is
applied to most corporate loans and, with the
exception of Household, which utilises portfolio
analysis, to residential mortgages 90 days or more
overdue.
HSBC has no individual loans where changes in
the underlying factors upon which specific bad and
doubtful debt provisions have been established could
cause a material change to the Group’s reported
results.
General provisions
General provisions augment specific provisions and
provide cover for loans which are impaired at the
balance sheet date but which will not be identified as
such until some time in the future. HSBC requires
each operating company to maintain a general
provision which is determined by taking into account
the structure and risk characteristics of each
company’ s loan portfolios. Provisions held against
homogenous portfolios of assets which are not
overdue and which have neither been restructured
nor are in bankruptcy are classified as general rather
than specific.
The most important factors in determining
general loan loss provisions are:
• historical roll and loss rates for each separately
identified portfolio;
• the period between losses occurring and the
establishment of a specific provision for this loss
(which in general is between four and twelve
months); and
• management’s judgement as to whether, in
current economic and credit conditions, probable
inherent losses are likely to be greater or less than
those suggested by historical experience.
The main areas of judgement are in determining
the periods during which latent losses emerge and
assessing whether current economic conditions are
likely to produce credit default rates and loss severity
in line with historical precedent. These factors are
kept under review based on an analysis of economic
forecasts, industry sector performance, insolvency
and bankruptcy statistics, together with details of the
rate and nature of losses experienced.
If management were to take a more conservative
view of economic conditions or increase the loss
emergence periods, the provisions charged would
increase and HSBC’s profit on ordinary activities
would be lower.
Goodwill impairment
HSBC’ s accounting policy for goodwill is described
in Note 2(e) in the ‘Notes on the Financial
Statements’ on page 244 of the Annual Report and
Accounts 2003.
Amortisation of goodwill is recorded on HSBC’s
profit and loss account under the caption
‘Depreciation and Amortisation – Goodwill’ . Any
impairments or reductions of goodwill are also
charged to the profit and loss account (hence
reducing HSBC’s operating profit on ordinary
activities after tax by a corresponding amount) and
also result in a corresponding reduction of
‘Goodwill’ on the balance sheet.
In accordance with the requirements of FRS 10
‘Goodwill and intangible assets’ , HSBC reviews
goodwill which has arisen on the acquisition of
subsidiary undertakings, joint ventures and interests
in associates at the end of the first full year after an
acquisition, and whenever there is an indication that
impairment may have taken place. Impaired goodwill
is accounted for in accordance with FRS 11
‘Impairment of fixed assets and goodwill’.
Indications of impairment include any events or
changes in circumstance that cast doubt on the
recoverability of the carrying amount of goodwill.
If management believes that a possible
impairment is indicated in respect of a particular
entity, the valuations of each of the entity’s relevant
‘Income Generating Units’ (‘IGUs’ ) are compared
with their respective carrying values (including