HSBC 2006 Annual Report Download - page 416

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
414
Interest recognition
IFRSs
• The calculation of effective interest rates under IAS 39 requires an estimate of all fees and points paid or
received between parties to the contract that are an integral part of the effective interest rate be included.
US GAAP
• FAS 91 also generally requires all fees and costs associated with originating a loan to be recognised as interest
but, when the interest rate increases during the term of the loan, it prohibits the recognition of interest income to
the extent that the net investment in the loan would increase to an amount greater than the amount at which the
borrower could settle the obligation.
Impact
• When HSBC provides introductory incentives in the form of either a low or nil interest rate for the early period
of a loan, interest income on such products is recognised under IFRSs on the basis of the overall effective
interest rate over the expected life of the product. No interest income is recognised during the incentive period
under US GAAP.
Mortgage servicing rights
IFRSs
• Intangible assets that have a finite useful life, such as mortgage servicing rights, 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 economic life.
US GAAP
• SFAS 156 ‘Accounting for Servicing of Financial Assets’ was issued by the FASB in March 2006. SFAS 156
amends SFAS 140 ‘Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities’ with respect to the accounting for separately recognised servicing assets and liabilities. SFAS 156
requires that all separately recognised servicing assets and liabilities be initially measured at fair value with
subsequent measurement at either fair value, with changes in fair value reported in the income statement when
they occur, or using the amortisation method. At the date of adoption, SFAS 156 permits a one-time
reclassification of available-for-sale securities to trading securities where those securities are identified as
offsetting exposure to changes in the fair value of servicing assets and liabilities that have been elected to be
subsequently measured at fair value. HSBC elected to adopt SFAS 156 from 1 January 2006.
• From 1 January 2006 HSBC elected to subsequently measure at fair value certain classes of mortgage servicing
rights held by its US subsidiaries.
Impact
• Prior to 1 January 2006 the amortisation method was used to account for mortgage servicing rights under US
GAAP and, therefore, no difference with IFRSs arose.
• Upon adoption of SFAS 156 the cumulative effect adjustment to US GAAP retained earnings, representing the
difference between the fair value and cost less amortisation of mortgage servicing rights, was immaterial.
• At 1 January 2006 an election was made to reclassify certain securities used by one of HSBC’s US subsidiaries
to offset changes in the fair value of mortgage servicing rights from available-for-sale financial investments to
trading assets. At 31 December 2005 those securities had a cost of US$115m and a fair value of US$111m.
This resulted in a transfer out of US GAAP other comprehensive income of the accumulated loss of US$4m at
1 January 2006, with an offsetting amount recorded as a cumulative effect adjustment to retained earnings.
• In 2006 the net difference between the fair value adjustment of the mortgage servicing asset and the offsetting
changes in the fair value of mortgage servicing rights classified as trading assets is recorded as an adjustment to
US GAAP net income.