HSBC 2004 Annual Report Download - page 123

121
For securities carried at amortised cost
impairment may result from changes in their
estimated fair value if management changes its
assumptions regarding the above variables. In such
circumstances, it will also be necessary for
management to exercise judgement as to whether or
not the indicative change in estimated fair value
arising from revisions to the underlying valuation
assumptions are only temporary.
The table below summarises HSBC’ s trading
portfolios by valuation methodology at 31 December
2004:
Trading assets Trading liabilities
Securities
purchased Derivatives
Securities
sold Derivatives
%%%%
Fair value based on:
Quoted market prices .................................................... 81.0 6.0 81.0 6.0
Internal models with significant observable
market parameters ..................................................... 18.0 93.0 19.0 94.0
Internal models with significant unobservable
market parameters ..................................................... 1.01.0––
Total .............................................................................. 100.0 100.0 100.0 100.0
For a discussion of market risk management, see
Market Risk Management on pages 167 to 172.
UK GAAP compared with US GAAP
2004 2003 2002
US$m US$m US$m
Net income
US GAAP .................... 12,506 7,231 4,900
UK GAAP .................... 11,840 8,774 6,239
Shareholders’ equity
US GAAP .................... 90,082 80,251 55,831
UK GAAP .................... 86,623 74,473 51,765
Differences in net income and shareholders’ equity
are explained in Note 49 of the ‘Notes on the
Financial Statements on pages 322 to 356.
Future accounting developments
Transition to International Financial Reporting
Standards
The adoption of International Financial Reporting
Standards (‘IFRS’ ) from 1 January 2005 is the most
significant accounting development for HSBC.
The European Union (‘EU’ ) requires that listed
European companies prepare their 2005 financial
statements in accordance with EU-endorsed IFRS.
HSBC’ s 2005 interim financial statements will,
therefore, be prepared in accordance with IFRS. The
European Union endorsement process for IFRS is
ongoing but the majority of standards are now
endorsed including IAS 32 ‘Financial Instruments:
Disclosure and Presentation’ and most of IAS 39
‘Financial Instruments: Recognition and
Measurement’ with the exception of the deletion of a
limited number of words and paragraphs in IAS 39
including those relating to the use of the ‘fair value
option’ for financial liabilities.
HSBC has substantially completed its transition
to IFRS. The process of refining systems and
processes in order to collect data on a fully IFRS-
compliant basis for 2005 reporting is well advanced.
On 9 December 2004, HSBC filed with the US
Securities and Exchange Commission a summary of
the applicable significant differences between UK
GAAP and IFRS. This should be referred to for
details of the major IFRS effects on HSBC Group,
and is available from http://www.hsbc.com/hsbc/
investor_centre/financial-results.
IFRS will also impact HSBC Holdings’
individual accounts. Investments in subsidiary
undertakings will be carried at cost rather than net
asset value, including attributable goodwill, adjusted
for shares held by subsidiaries in HSBC Holdings.
Under IFRS, in addition to the balance sheet, HSBC
Holdings will publish an income statement and other
primary financial statements.
HSBC currently intends to file 2004
comparative data and the 2005 opening balance
sheet on an IFRS basis in the second quarter of 2005.
FRS 27 ‘Life Assurance’ was issued by the UK
Accounting Standards Board (‘ASB’ ) in December
2004. This standard is effective under UK GAAP for
2005 reporting and thus should not ostensibly be
applicable to companies adopting IFRS for 2005.
However, FRS 27 adds to the requirements of IFRS
4 ‘Insurance contracts’ with regard to further
requirements in relation to measurement of realistic
liabilities and disclosure of capital position. HSBC
continues to assess the likely impact of this
accounting standard.