HSBC 2003 Annual Report Download - page 360

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
358
The following table lists those financial instruments, within the scope of SFAS 107, where carrying value is an
approximation of fair value because they are either (i) carried at market value or (ii) short term in nature or
reprice frequently. By definition, the fair value of trading account assets and liabilities, including derivative
instruments, equals carrying value. Carrying values of these instruments are presented on the balance sheets and
related notes on pages 234 to 366.
Assets Liabilities
Cash and balances at central banks Deposits by banks repayable on demand or that mature / reprice
within six months
Items in the course of collection Customer accounts repayable on demand or that mature / reprice
within six months
Hong Kong Government certificates of indebtedness Hong Kong Government currency notes in circulation
Trading debt securities and equity shares Short positions in treasury bills, debt securities and equity shares
Treasury bills and other eligible bills Items in the course of transmission
Other assets Other liabilities
Prepayments and accrued income Accruals and deferred income
Off-balance-sheet trading instruments Provisions for liabilities and charges
Off-balance-sheet trading instruments
In addition, the fair value of non-derivative off balance sheet financial instruments is the same as their carrying
value under US GAAP.
Other financial instruments
The fair value of other financial instruments within the scope of SFAS 107 is set out in the table below. The
valuation technique adopted for each major category is discussed below:
(i) Loans and advances to banks and customers
For personal and commercial loans and advances which mature or reprice after six months, fair value is
principally estimated by discounting anticipated cash flows (including interest at contractual rates).
Performing loans are grouped, to the extent possible, into homogenous pools segregated by maturity and the
coupon rates of the loans within each pool. In general, cash flows are discounted using current market rates
for instruments with similar maturity, repricing and credit risk characteristics.
The fair value for conforming residential mortgages may be treated differently where there is an established
market value for asset-backed securities, such as in the United States. In such situations, the fair value is
estimated by reference to quoted market prices for loans with similar characteristics and maturities.
For non-performing uncollateralised commercial loans, an estimate is made of the time period to realise
these cash flows and the fair value is estimated by discounting these cash flows at a risk-free rate of interest.
For non-performing commercial loans where collateral exists, the fair value is the lesser of the carrying
value of the loans, net of specific provisions, or the fair value of the collateral, discounted where
appropriate. General provisions are deducted from the fair values of these non-performing loans.
(ii) Debt securities and equity shares held for investment purposes, and other participating interests
Listed investment securities are valued at middle market prices and unlisted investment securities at
management’ s valuation which takes into consideration future earnings streams, valuations of equivalent
quoted securities and other relevant techniques.
(iii) Deposits by banks and customer accounts
Deposits by banks and customer accounts which mature or reprice after six months are grouped by residual
maturity. Fair value is estimated using discounted cash flows, applying either market rates, where
applicable, or current rates offered for deposits of similar remaining maturities.
(iv) Debt securities in issue and subordinated liabilities
Fair value is estimated using quoted market prices at the balance sheet date.