HSBC 2006 Annual Report Download - page 115

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calculated from the discounted expected future cash
flows from a portfolio.
In normal circumstances, historical experience
provides the most objective and relevant information
from which to assess inherent loss within each
portfolio. In certain circumstances, historical loss
experience provides less relevant information about
the inherent loss in a given portfolio at the balance
sheet date, for example, where there have been
changes in economic, regulatory or behavioural
conditions such that the most recent trends in the
portfolio risk factors are not fully reflected in the
statistical models. In these circumstances, such risk
factors are taken into account when calculating the
appropriate level of impairment allowances, by
adjusting the impairment allowances derived solely
from historical loss experience. Key risk factors
include recent trends in charge-off and delinquency,
economic conditions such as national and local
trends in housing markets, changes in product mix
and concentration, bankruptcy trends, other market
conditions such as changes in interest rates and
energy prices, changes in laws and regulations and
natural disasters.
Roll rates, loss rates and the expected timing of
future recoveries are regularly benchmarked against
actual outcomes to ensure they remain appropriate.
The portfolio approach is generally applied to
the following types of portfolios:
• low value, homogeneous small business
accounts in certain jurisdictions;
• residential mortgages;
• credit cards and other unsecured consumer
lending products; and
• motor vehicle financing.
These portfolio allowances are generally
reassessed monthly and charges for new allowances,
or reversals of existing allowances, are calculated for
each separately identified portfolio.
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 when the proceeds
from realising 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
as part of 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 charged in respect of
assets held for sale. Any subsequent write-down of
the acquired asset to fair value less costs to sell is
recognised in the income statement in ‘Other
operating income’. Any subsequent increase in the
fair value less costs to sell, to the extent this does not
exceed the cumulative write down, is also recognised
in ‘Other operating income’, together with any
realised gains or losses on disposal.
Renegotiated loans
The impairment of personal loans is generally
subject to collective assessment. Personal loans
whose terms have been renegotiated are no longer
considered past due, but are treated as new loans
only after a minimum required number of payments
required 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 should be considered past due.
Further information on impairment assessment
and impairment allowances is set out on pages
174 to 176.
Goodwill impairment
HSBC’s accounting policy for goodwill is described
in Note 2(o) on the Financial Statements.
Goodwill arises on business combinations,
including the acquisition of subsidiaries, and
interests in joint ventures and associates, when the
cost of acquisition exceeds the fair value of HSBC’s
share of the identifiable assets, liabilities and
contingent liabilities acquired. By contrast, if
HSBC’s interest in the fair value of the identifiable
assets, liabilities and contingent liabilities of an