HSBC 2003 Annual Report Download - page 358

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
356
six months. The only exception to this policy is in respect of debt securities where their decline in market value
is due solely to an increase in underlying rates of interest and where HSBC has the ability to hold these
securities until maturity. None of the securities disclosed in the table above are considered ‘Other-than-
temporarily’ impaired at 31 December 2003.
(l) Foreign exchange losses on Argentine funding
The mandatory and asymmetrical conversion of onshore US dollar denominated assets and liabilities in
Argentina (‘pesification’ ) caused significant erosion of the capital base of HSBC Argentina, in part because of
the asymmetry of the conversion and in part through the creation of a structural foreign exchange mismatch to
the extent of residual external US dollar liabilities which were no longer matched with US dollar assets. HSBC
recognised these losses through its income statement in 2001; these amounted to US$520 million.
Following pesification, HSBC Argentina’s balance sheet primarily reflected Argentine peso assets more than
fully funded by Argentine peso liabilities and this represents HSBC’s ongoing business in Argentina. On top of
this HSBC Argentina had residual external US dollar liabilities which essentially represented a portion of the
loss recognised in 2001.
Under UK GAAP these US dollar liabilities, as they were no longer funding the ongoing business, were treated
as a separate operation with the US dollar as the unit of account. These liabilities were settled as they fell due
by the Group outside Argentina. As HSBC prepares its accounts in US dollars no further translation effect
arose.
Under US GAAP this accounting treatment was not possible and the US dollar liabilities were treated as part of
the Argentine operation which accounts in Argentine pesos. As a result, when the Argentine peso weakened the
US dollar denominated liabilities generated a substantial loss in Argentine pesos which was reflected in US
GAAP income. However, as HSBC accounts in US dollars and economically there was no change in the
amount of US dollars owing, an exactly offsetting gain was reflected in the US GAAP accounts in shareholders’
equity.
(m) Taxation
The components of the net deferred tax liability calculated under SFAS 109 ‘Accounting for Income Taxes’, are
as follows:
2003 2002
US$m US$m
Deferred tax liabilities
Leasing transactions ..................................................................................................................... 1,587 1,247
Capital allowances ....................................................................................................................... 293
2
73
Provision for additional UK tax on overseas dividends ............................................................... 61 44
Reconciling items ........................................................................................................................ 2,417
2
1,060
Other ............................................................................................................................................ 1,076 460
Total deferred tax liabilities ......................................................................................................... 5,434 2,884
Deferred tax assets
Provisions for bad and doubtful debts .......................................................................................... 3,122 1,259
Tax losses .................................................................................................................................... 972
3
908
Reconciling items ........................................................................................................................ 2,273 1,316
Other ............................................................................................................................................ 1,332
2
661
Total deferred tax assets before valuation allowance ................................................................... 7,699 4,144
Less: valuation allowance ............................................................................................................ (964
)
(868
)
Deferred tax assets less valuation allowance ................................................................................ 6,735 3,276
Net deferred tax (asset) under SFAS 109 ..................................................................................... (1,301
)
(392
)
Included within ‘other assets’ under US GAAP ........................................................................... (2,669
)
(2,585
)
Included within ‘deferred tax liabilities’ under US GAAP ........................................................... 1,368 2,193
The valuation allowance against deferred tax assets principally relates to trading and capital losses carried
forward, which have not been recognised due to uncertainty over their utilisation. A valuation allowance is