HSBC 2004 Annual Report Download - page 346

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
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hsbc.com, Inc., has been engaged in development activities to provide a global website and web hosting services
to HSBC companies. The provisions for impairment against the US GAAP capitalised amount of development
costs disclosed above arise largely on this project. At 31 December 2004, capitalised amounts in respect of
hsbc.com, Inc., totalled US$72 million (2003: US$150 million).
(g) Purchase accounting adjustments
The reconciling item ‘Purchase accounting adjustments’ predominantly reflects:
• the measurement of equity consideration at the date the terms of acquisition are agreed and announced under
US GAAP; under UK GAAP equity consideration is measured at the date of acquisition;
• recognition of deferred tax on all fair value adjustments under US GAAP, and corresponding amortisation
post-acquisition; and
• 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.
(h) 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.
During the latter part of 2004, as part of its preparation for the transition from UK GAAP to IFRS, HSBC
undertook a review of its hedging activities in order to confirm which transactions would comply with the hedge
accounting requirements of IFRS. As a result of this review, the management of HSBC Finance Corporation
concluded that there were some deficiencies in the documentation designed to re-establish hedge accounting
under SFAS 133 following the acquisition by HSBC. As a result of these deficiencies, it was determined by
HSBC Finance Corporation management that hedge accounting should not have been applied in these
circumstances. The cumulative effect of the loss of hedge accounting has been reported as part of US GAAP net
income in 2004 and the element attributable to 2003 was not material to HSBC’ s reported US GAAP net income
for that year.
Fair value hedges
HSBC’ s North American operating subsidiaries designate certain derivative financial instruments as qualifying
fair value hedges of certain fixed rate assets and liabilities under SFAS 133. Where the critical terms of the
hedge instrument are identical to the hedged item 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 gain of
US$1 million (2003: loss of US$0.4 million; 2002: 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$2 million (2003: US$0.2 million; 2002: US$8 million).
Cash flow hedges
HSBC’ s North American operating subsidiaries designate certain derivative financial instruments, including
interest rate swaps and future contracts, as qualifying cash flow hedges under SFAS 133 of the forecast repricing
of certain deposit liabilities, issues of debt and variable rate commercial loans. In order to initially qualify,