HSBC 2005 Annual Report Download - page 384

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
382
• Financial assets and financial liabilities so designated are recognised initially at fair value, with transaction costs
taken directly to the income statement, and are subsequently remeasured at fair value. The designation, once
made, is irrevocable in respect of the financial instruments to which it relates. Financial assets and financial
liabilities are recognised using trade date accounting.
• Gains and losses from changes in the fair value of such assets and liabilities are recognised in the income
statement as they arise, together with related interest income and expense and dividends, within ‘Net income
from financial instruments designated at fair value’, except for interest on own debt issued by HSBC, and related
derivatives, which is reported in ‘interest expense’.
US GAAP
• There are no provisions in US GAAP to make an election similar to that in IAS 39.
• Generally, for financial assets to be measured at fair value with gains and losses recognised immediately in the
income statement, they must meet the definition of trading securities in SFAS 115 ‘Accounting for Certain
Investments in Debt and Equity Securities’ (‘SFAS 115’). Financial liabilities are usually reported at amortised
cost under US GAAP.
Impact
• HSBC has principally used the fair value designation in the following cases:
− for certain fixed rate long-term debt issues whose interest rate characteristic has been changed to floating
through interest rate swaps as part of a documented interest rate management strategy. Approximately
US$51 billion of the Group’s debt issues have been accounted for using the option. The movement in fair
value of these debt issues includes the effect of changes in own credit spread and any ineffectiveness in the
economic relationship between the related swaps and own debt. Such ineffectiveness arises from the
different credit characteristics of the swap and own debt coupled with the sensitivity of the floating leg of
the swap to changes in short-term interest rates. In addition, the economic relationship between the swap and
own debt can be affected by relative movements in market factors, such as bond and swap rates, and the
relative bond and swap rates at inception. The size and direction of the accounting consequences of changes
in own credit spread and ineffectiveness can be volatile from period to period, but do not alter the cash flows
envisaged as part of the documented interest rate management strategy.
− certain financial assets held by insurance operations and managed at fair value to meet liabilities under
insurance contracts (approximately US$4 billion of assets);
− financial liabilities under investment contracts and the related financial assets, when the change in value of
the assets is correlated with the change in value of the liabilities to policyholders (approximately US$8
billion of liabilities and related assets).
• Under US GAAP, debt issues are reported at amortised cost. An offsetting derivative providing an economic
hedge for an asset or liability results in asymmetrical accounting, which in US GAAP is reflected in net income
except for some transactions in certain subsidiaries in North America where the relationship is usually elected as
a fair value hedge under SFAS 133.
• Under US GAAP, assets held to meet insurance/investment contracts are reported as available-for-sale, with
gains and losses taken directly to ‘Other comprehensive income’. When the corresponding liability is reported at
fair value, with movements reported immediately in net income, this also results in asymmetrical accounting
being reflected in US GAAP net income.
• All these adjustments are included as ‘Derivatives and hedge accounting’ in the reconciliations below.
Financial investments
IFRSs
• Treasury bills, debt securities and equity shares intended to be held on a continuing basis are classified as
available-for-sale securities unless designated at fair value (see above) or classified as held-to-maturity.
• Available-for-sale securities are initially measured at fair value plus direct and incremental transaction costs.
They are subsequently remeasured at fair value. Changes in fair value are recognised in equity until the securities
are either sold or impaired. On the sale of available-for-sale securities, cumulative gains or losses previously