HSBC 2005 Annual Report Download - page 250

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
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fair value less costs to sell is recorded as an impairment loss and included in the income statement. Any
subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative
impairment loss, is recognised in the income statement.
Renegotiated loans
Retail loans, which are generally subject to collective impairment assessment, whose terms have been
renegotiated, are no longer considered to be past due but are treated as new loans only after the minimum
required number of payments under the new arrangements have been received.
Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing
review to determine whether they remain impaired or are considered to be past due.
(g) Trading assets and trading liabilities
Treasury bills, debt securities, equity shares and short positions in securities are classified as held for trading if
they have been acquired principally for the purpose of selling or repurchasing in the near term, or they form part
of a portfolio of identified financial instruments that are managed together and for which there is evidence of a
recent pattern of short-term profit-taking. These financial assets or financial liabilities are recognised on trade
date, when HSBC enters into contractual arrangements with counterparties to purchase or sell securities, and are
normally derecognised when either sold (assets) or extinguished (liabilities). Measurement is initially at fair
value, with transaction costs taken to the income statement. Subsequently, their fair values are remeasured, and
all gains and losses from changes therein are recognised in the income statement in ‘Net trading income’ as they
arise.
(h) Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of
the criteria set out below, and are so designated by management. HSBC may designate financial instruments at
fair value when the designation:
–eliminates or significantly reduces valuation or recognition inconsistencies that would otherwise arise from
measuring financial assets or financial liabilities, or recognising gains and losses on them, on different
bases. Under this criterion, the main classes of financial instruments designated by HSBC are:
Long-term debt issues – The interest payable on certain fixed rate long-term debt securities in issue and
subordinated liabilities has been matched with the interest on ‘receive fixed/pay variable’ interest rate swaps
as part of a documented interest rate risk management strategy. An accounting mismatch would arise if the
debt securities in issue were accounted for at amortised cost, because the related derivatives are measured at
fair value with changes in the fair value taken through the income statement. By designating the long-term
debt at fair value, the movement in the fair value of the long-term debt will be recorded in the income
statement.
Financial assets and financial liabilities under investment contracts – These are managed on a fair value
basis and management information is also prepared on this basis. Liabilities to customers under linked
contracts are determined based on the fair value of the assets held in the linked funds, with changes shown
in the income statement. Liabilities to customers under other types of investment contracts would be shown
at amortised cost. If no designation was made for the assets relating to the customer liabilities they would be
classified as available-for-sale and the changes in fair value would be recorded directly in equity.
Designation at fair value of the financial assets and liabilities under investment contracts allows the changes
in fair values to be recorded in the income statement and presented in the same line.
– applies to groups of financial assets, financial liabilities or combinations thereof that are managed, and their
performance evaluated, on a fair value basis in accordance with a documented risk management or
investment strategy, and where information about the groups of financial instruments is reported to
management on that basis. Under this criterion, certain financial assets held to meet liabilities under
insurance contracts are the main class of financial instrument so designated. HSBC has documented risk
management and investment strategies designed to manage such assets at fair value, taking into
consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports are