HSBC 2003 Annual Report Download - page 354

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
352
• non-recognition of residual interests in securitisation vehicles existing at acquisition under UK GAAP.
Instead, the assets and liabilities of the securitisation vehicles are recognised on the UK GAAP balance
sheet, and credit provisions are established against the loans and advances. This GAAP adjustment existing
at acquisition unwinds over the life of the securitisation vehicles; and
• certain costs which under UK GAAP, relate to either post-acquisition management decisions or certain
decisions made prior to the acquisition are required to be expensed to the post acquisition profit and loss
account and cannot be capitalised as goodwill, or included within the fair value of the liabilities of the
acquired entity.
(i) Accruals accounted derivatives
Under UK GAAP, internal derivatives used to hedge banking book transactions may be accruals accounted but,
under US GAAP, all derivatives are held at fair value. With the exception of certain subsidiaries in North
America, HSBC has not elected to satisfy the more prescriptive hedge documentation requirements of SFAS
133 in respect of external derivative contracts. Internal derivative contracts are not recognised for hedge
accounting purposes under US GAAP.
Fair value hedges
At 1 January 2001 contracts which had previously qualified as fair value hedges under US GAAP were marked
to market with a corresponding revaluation of the hedged item. There was no material ineffectiveness of these
hedges and therefore no adjustment was required to US GAAP reported income.
HSBC’ s North American operating subsidiaries designate certain derivative financial instruments as qualifying
SFAS 133 fair value hedges of certain fixed rate assets and liabilities. Where the critical terms of the hedge
instrument are identical at the hedge inception date, the short-cut method of accounting is utilised for these
hedging relationships. As a result, no retrospective or prospective assessment of effectiveness is required and no
hedge ineffectiveness is recognised.
For a small number of fair value hedges of fixed rate liabilities, the short-cut method of accounting cannot be
utilised. Ineffectiveness of such fair value hedges recognised in US GAAP reported net income was a loss of
US$0.4 million (2002: nil; 2001: nil).
Additionally, since 2002, HSBC’ s US mortgage bank has hedged fixed rate closed residential mortgage loans
held for sale with forward sale commitments. In order to satisfy the retrospective and prospective assessment of
effectiveness for SFAS 133, the cumulative dollar offset method is utilised. Ineffectiveness is recognised in the
income statement on a monthly basis. Ineffectiveness on these hedging activities recognised in US GAAP
reported net income was a gain of US$0.2 million (2002: gain of US$7.6 million; 2001: nil).
Cash flow hedges
There were no significant contracts at 1 January 2001 which had previously qualified as cash flow hedges under
US GAAP.
HSBC’ s North American operating subsidiaries designate certain derivative financial instruments, including
interest rate swaps and future contracts, as qualifying FAS 133 cash flow hedges of the forecast repricing of
certain deposit liabilities, issues of debt and variable rate commercial loans. In order to initially qualify,
assessment of hedge effectiveness is demonstrated on a prospective basis utilising both statistical regression
analysis and the cumulative dollar offset method. In order to satisfy the retrospective assessment of
effectiveness for FAS 133, the cumulative dollar offset method is utilised and ineffectiveness is recognised in
the income statement on a monthly basis. The time value component of the derivative contracts is excluded from
the assessment of hedge effectiveness.
Ineffectiveness of cash flow hedging activities recognised in US GAAP reported net income was a gain of
US$3.6 million (2002: gain of US$12.7 million; 2001: gain of US$8.5 million). The adjustment to US GAAP