HSBC 2006 Annual Report Download - page 314

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
312
Profits on transactions between HSBC and its associates and joint ventures are eliminated to the extent of
HSBC’s interest in the respective associates or joint ventures. Losses are also eliminated to the extent of HSBC’s
interest in the associates or joint ventures unless the transaction provides evidence of an impairment of the asset
transferred.
(o) Goodwill and intangible assets
(i) 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 acquired business is greater than the
cost of acquisition, the excess is recognised immediately in the income statement.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual
or other legal rights, and their fair value can be measured reliably.
Goodwill is allocated to cash-generating units for the purpose of impairment testing, which is undertaken at
the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is
performed at least annually by comparing the present value of the expected future cash flows from a
business with the carrying amount of its net assets, including attributable goodwill. Goodwill is stated at cost
less accumulated impairment losses which are charged to the income statement.
Goodwill on acquisitions of interests in joint ventures and associates is included in ‘Interests in associates
and joint ventures’.
At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the
calculation of the gain or loss on disposal.
(ii) Intangible assets include the value of in-force long-term insurance business, computer software, trade
names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer
relationships and merchant or other loan relationships. Intangible assets are subject to impairment review if
there are events or changes in circumstances that indicate that the carrying amount may not be recoverable.
– Intangible assets that have an indefinite useful life, or are not yet ready for use, are tested for
impairment annually. This impairment test may be performed at any time during the year, provided it is
performed at the same time every year. An intangible asset recognised during the current period is
tested before the end of the current year.
– Intangible assets that have a finite useful life, except for the value of in-force long-term insurance
business, are stated at cost less amortisation and accumulated impairment losses and are amortised over
their estimated useful lives. Estimated useful life is the lower of legal duration and expected useful life.
The amortisation of mortgage servicing rights is included within ‘Net fee income’.
For the accounting policy governing the value of in-force long-term insurance business see Note 2(x).
(iii) Intangible assets are amortised over their finite useful lives, generally on a straight line basis, as follows:
Trade names ......................................................................................................................................... 10 years
Mortgage servicing rights .................................................................................................................... between 5 and 30 years
Purchased software ............................................................................................................................... between 3 and 5 years
Internally generated software ............................................................................................................... between 3 and 5 years
Customer/merchant relationships ......................................................................................................... between 3 and 10 years
Other ..................................................................................................................................................... generally 10 years
(p) Property, plant and equipment
Land and buildings are stated at historical cost, or fair value at the date of transition to IFRSs (‘deemed cost’),
less any impairment losses and depreciation calculated to write off the assets over their estimated useful lives as
follows:
– freehold land is not depreciated;
– freehold buildings are depreciated at the greater of two per cent per annum on a straight-line basis or over
their remaining useful lives; and