HSBC 2006 Annual Report Download - page 426

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
424
exception of US operating subsidiaries, HSBC has not elected hedge accounting in its US GAAP financial
statements.
HSBC’s US operating subsidiaries designate certain derivative financial instruments as qualifying hedging
instruments under SFAS 133.
HSBC utilised the shortcut method when the critical terms of the hedge instrument were identical to those of the
hedged item at the hedge inception date. HSBC’s US subsidiaries made use of the assumption of no
ineffectiveness in its fair value hedge accounting for short-cut hedges. As a result, no retrospective or
prospective assessment of effectiveness was required and no hedge ineffectiveness was recognised. All other
hedge relationships were accounted for under the 'long-haul' method whereby effectiveness is assessed and
ineffectiveness on effective hedges is recorded in the income statement.
During 2006, new designations of hedges were made using the long-haul method of accounting under SFAS 133
and certain relationships have been re-designated using this method. As a result, there were no longer any cash
flow hedges or fair value hedges using the shortcut method of accounting at 31 December 2006.
The following table summarises HSBC’s hedges of financial instruments that have been designated and qualify
as effective hedges under SFAS 133 at the end of the period.
Nominal values Number of derivatives
Fair value
hedges
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
2006 2006 2005 2005 2006 2006 2005 2005
US$bn US$bn US$bn US$bn
Financial investments
Available for sale
debt securities
Shortcut .......... – – – – – – 1 –
Long-haul ....... 1.8 – 0.2 – 52 – 10 –
Customer deposits
Shortcut ........... – – – – – – – –
Long-haul ........ – 10.9 – 6.8 2 24 1 17
Debt securities in
issue and
subordinated
liabilities
Shortcut ........... – – 3.0 – – – 16 –
Long-haul ........ 33.0 52.1 18.2 46.8 112 160 45 165
Total ................... 34.8 63.0 21.4 53.6 166 184 73 182
Fair value hedges
HSBC’s US operating subsidiaries designate certain derivative financial instruments as qualifying fair value
hedges of certain fixed rate assets and liabilities under SFAS 133. In order to qualify initially, hedge
effectiveness is assessed and demonstrated on a prospective basis utilising statistical regression analysis.
Since 1 January 2005, almost all derivatives designated as fair value hedges under US GAAP in HSBC’s US
operating subsidiaries have been reported under the fair value option for IFRSs purposes, with movements in fair
value reported as ‘Net income from financial instruments designated as at fair value’. HSBC’s US operating
subsidiaries have also elected to record financial instruments at fair value for which fair value hedge accounting
is not utilised for US GAAP.
Reporting of these arrangements as fair value hedges under US GAAP resulted in increased net income for 2006
of US$194 million, which included US$348 million arising from elimination of losses due to movements in own
credit spread recorded in IFRS net income. Off-setting the increase to net income under US GAAP arising from
the elimination of losses due to own credit spread was a decrease in US GAAP net income of US$134 million
due to amortisation of hedge valuation adjustments for de-designated hedge relationships under US GAAP that
are accounted as FVO under IFRSs.
Reporting of these arrangements as fair value hedges under US GAAP resulted in decreased net income for 2005
of US$179 million, including US$7 million arising from elimination of gains due to movements in own credit
spread recorded in IFRSs net income and reduced ineffectiveness of US$172 million on shortcut fair value