HSBC 2006 Annual Report Download - page 334

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Notes 8 and 9
332
The following fees were payable by HSBC’s associated pension schemes to KPMG:
2006 2005
2004
US$’000 US$’000
US$’000
Audit fees ......................................................................................................... 581 550
536
Tax services ..................................................................................................... 23 17
11
All other services ............................................................................................. 23 5
5
Total fees payable ............................................................................................ 627 572
552
No fees were payable by HSBC’s associated pension schemes to KPMG for the following types of services: other
services pursuant to legislation, services relating to information technology, internal audit services, valuation and
actuarial services, services related to litigation, services related to recruitment and remuneration, and services related
to corporate finance transactions.
In addition to the above, KPMG estimate they have been paid fees of US$2.1 million (2005: US$4.5 million; 2004:
US$4.0 million) by parties other than HSBC but where HSBC is connected with the contracting party and therefore
may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by
HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.
Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are
disclosed on a consolidated basis for HSBC Group.
9 Share-based payments
During 2006, US$854 million was charged to the income statement in respect of equity-settled share-based payment
transactions (2005: US$540 million; 2004: US$450 million). This expense was based on the fair value of the share-
based payment transactions when contracted. All of the expense arose under employee share awards made within
HSBC’s reward structures.
Calculation of fair values
Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a
binomial lattice model methodology that is based on the underlying assumptions of the Black-Scholes model. When
modelling options/awards with vesting dependent on HSBC’s Total Shareholder Return over a period, these
performance targets are incorporated into the model using Monte Carlo simulation. The expected life of options
depends on the behaviour of option holders, which is incorporated into the option model consistent with historic
observable data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and
the limitations of the model used.
The significant weighted average assumptions used to estimate the fair value of the options granted were as follows:
HSBC
Holdings
Group Share
Option Plan
1-year
Savings-
Related
Share Option
Plan
3-year
Savings-
Related
Share Option
Plans
5-year
Savings-
Related Share
Option
Plans
The
HSBC
Share Plan
2006
Risk-free interest rate1 (%) ............... – 4.7 4.8 4.7 –
Expected life2 (years) ........................ – 1 3 5 –
Expected volatility3 (%) .................... – 17 17 17 –
Share price at grant date (£) .............. – 9.54 9.54 9.54 –
2005
Risk-free interest rate1 (%) ............... 4.6 – 4.3 4.3 4.3
Expected life2 (years) ........................ 7.8 – 3 5 5
Expected volatility3 (%) .................... 20 – 20 20 20
Share price at grant date (£) .............. 8.30 – 8.68 8.68 8.37
1 The risk-free rate was determined from the UK gilts yield curve for the HSBC Holdings Group Share Option Plan awards and UK
Savings-Related Share Option Plans. A similar yield curve was used for the International Savings-Related Share Option Plans.
2 Expected life is not a single input parameter but a function of various behavioural assumptions.
3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded
options over HSBC shares of similar maturity to those of the employee options.