HSBC 2005 Annual Report Download - page 249

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– for homogeneous groups of loans that are not considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of loss has been identified are grouped together according to
their credit risk characteristics for the purpose of calculating an estimated collective loss. This arises from
impairment at the balance sheet date which will only be individually identified in the future.
The collective impairment allowance is determined after taking into account:
– historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector,
loan grade or product);
– the estimated period between impairment occurring and the loss being identified and evidenced by the
establishment of an appropriate allowance against the individual loan; and
– management’s experienced judgement as to whether current economic and credit conditions are such that
the actual level of inherent losses is likely to be greater or less than that suggested by historical experience.
The period between a loss occurring and its identification is estimated by local management for each identified
portfolio.
Homogeneous groups of loans
For homogeneous groups of loans that are not considered individually significant, two alternative methods are
used to calculate allowances on a portfolio basis:
− When appropriate empirical information is available, HSBC utilises roll rate methodology. This
methodology employs a statistical analysis of historical trends of the probability of default and the amount
of consequential loss, assessed at each time period for which the customer’s contractual payments are
overdue. The estimated loss is the difference between the present value of expected future cash flows,
discounted at the original effective interest rate of the portfolio, and the carrying amount of the portfolio.
Other historical data and current economic conditions are also evaluated when calculating the appropriate
level of allowance required to cover inherent loss. In certain highly developed markets, sophisticated models
also take into account behavioural and account management trends as revealed in, for example, bankruptcy
and rescheduling statistics.
− In other cases, when the portfolio size is small or when information is insufficient or not reliable enough to
adopt a roll rate methodology, HSBC adopts a formulaic approach which allocates progressively higher
percentage loss rates in line with the period of time for which a customer’s loan is overdue. Loss rates are
calculated from the discounted expected future cash flows from a portfolio.
Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure they remain appropriate.
Loan write-offs
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when
there is no realistic prospect of recovery of these amounts and, for collateralised loans, when the proceeds from
realising the security have been received.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The reversal is recognised in the income statement.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans in order to achieve an orderly realisation are recorded as
assets held for sale and reported in ‘Other assets’. The asset acquired is recorded at the lower of its fair value
(less costs to sell) and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No
depreciation is provided in respect of assets held for sale. Any subsequent write-down of the acquired asset to