HSBC 2004 Annual Report Download - page 124

HSBC HOLDINGS PLC
Financial Review (continued)
122
US GAAP
The Financial Accounting Standards Board
(‘FASB’ ) (US GAAP) has issued the following
accounting standards, which become fully effective
in future financial statements.
In December 2003, the American Institute of
Certified Public Accountants (‘AICPA’ ) released
Statement of Position 03-3, ‘Accounting for Certain
Loans or Debt Securities Acquired in a Transfer’
(‘SOP 03-3’ ). SOP 03-3 addresses accounting for
differences between contractual cash flows and cash
flows expected to be collected from an investor’ s
initial investment in loans or debt securities acquired
in a transfer if those differences are attributable to
credit quality. SOP 03-3 is effective for loans
acquired in fiscal years beginning after 15 December
2004. Adoption is not expected to have a material
impact on the US GAAP information in HSBC’ s
financial statements.
In March 2004, the FASB reached a consensus
on Emergent Issues Task Force (‘EITF’ ) 03-1, ‘The
Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments’ . EITF 03-1
provides guidance for determining when an
investment is impaired and whether the impairment
is other than temporary. EITF 03-1 also incorporates
into its consensus the required disclosures about
unrealised losses on investments announced by the
EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments.
The new disclosure requirements are effective for
annual reporting periods ending after June 15, 2004
and the new impairment accounting guidance was to
become effective for reporting periods beginning
after June 15, 2004. In September 2004, the FASB
delayed the effective date of EITF 03-1 for
measurement and recognition of impairment losses
until implementation guidance is issued. In
December 2004, the FASB decided to reconsider in
its entirety all guidance on disclosing, measuring and
recognising other-than-temporary impairments of
debt and equity securities and requires companies to
continue to comply with existing accounting
literature. Until the new guidance is finalised, the
impact on HSBC’ s financial position and results of
operations cannot be determined.
SFAS 123 (revised 2004) ‘Share-Based
Payment’ (‘SFAS 123R’ ) was issued in December
2004 to replace SFAS 123 ‘Accounting for Stock
Based Compensation’ (‘SFAS 123’ ). SFAS 123R
requires a fair value method of accounting for stock-
based compensation plans. Under the fair value
method, compensation cost is measured at the date
of grant based on the value of the award and is
recognised over the service period. HSBC had
already elected to follow the fair value method
encouraged by SFAS 123. Where annual bonuses are
awarded in restricted shares, and the employee must
remain with HSBC for a fixed period in order to
receive the shares, HSBC has, to date, interpreted the
service period as being the year to which the bonus
relates. HSBC has fully expensed the share award in
that year under US GAAP, consistent with the UK
GAAP treatment. Under SFAS 123R, the service
period is presumed to be the vesting period, i.e. the
period the employee must remain with HSBC.
Accordingly, for awards granted after the effective
date of SFAS 123R, the expense of such awards will
be spread forward over the vesting period. HSBC
will adopt SFAS 123R from 1 July 2005.
The effect of adopting this new accounting
treatment will be that 2005 bonuses paid in restricted
shares will be excluded from staff costs for 2005 and
instead will be expensed over the vesting period with
a corresponding increase in net income. The amount
of these awards is dependent on 2005 performance.
2004 bonuses that will be paid in restricted shares
were approximately US$130 million.