HSBC 2006 Annual Report Download - page 435

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In connection with the securitisations, HSBC’s retained interests include investment grade certificates of
US$316 million and other residual interests of US$176 million at 31 December 2006. Residual interests of
US$14 million were retained at 31 December 2005. Retained interests are recorded in trading assets and are
measured at fair value. Investment grade certificates are valued using quoted market prices. Key assumptions
used during 2006 and 2005 in measuring the fair value of residual interests at the date of securitisation are
presented in the table below.
2006 2005
Expected weighted average life (in years) .....................................................................................
.
2.1 – 2.7 3
Payment speed assumption (annual rate) .......................................................................................
.
28.5 – 36.0% 45.0%
Expected credit losses (annual rate) ...............................................................................................
.
2.4 - 4.7% 6.0%
Discount rate on residual cash flows (annual rate) ........................................................................
.
15.0 – 25.0% 20.0%
Key economic assumptions used in measuring the fair value of residual interests in mortgage loans
securitisations and the sensitivity of the current fair values of residual interests to changes in those assumptions
are presented in the table below:
2006 2005
Expected weighted average life (in years) .....................................................................................
.
1.7 – 2.5 3
Payment speed assumption (annual rate) .......................................................................................
.
31.5 – 44.2% 45.0 %
Impact on fair value of 10% adverse change (US$ millions) ........................................................
.
(8) (1)
Impact on fair value of 20% adverse change (US$ millions) ........................................................
.
(17) (2)
Expected credit losses (annual rate) ...............................................................................................
.
1.2 – 6.9% 6.0%
Impact on fair value of 10% adverse change (US$ millions) ........................................................
.
(25) –
Impact on fair value of 20% adverse change (US$ millions) ........................................................
.
(41) –
Discount rate on residual cash flows (annual rate) ........................................................................
.
15.0 – 25.0% 20.0%
Impact on fair value of 10% adverse change (US$ millions) ........................................................
.
(8) –
Impact on fair value of 20% adverse change (US$ millions) ........................................................
.
(15) (1)
These sensitivities are hypothetical and should not be considered to be predictive of future performance. As the
figures indicate, the change in fair value based on a 10 per cent variation in assumptions cannot necessarily be
extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.
Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interests is
calculated independently from any change in another assumption. In reality, changes in one factor may
contribute to changes in another (for example, increases in market interest rates may result in lower
prepayments) which might magnify or counteract the sensitivities.
Future US GAAP accounting developments
The Financial Accounting Standards Board (‘FASB’) has issued the following accounting standards, which will
become fully effective in future financial statements.
In June 2006, the FASB issued Interpretation No. 48, ‘Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109’ (FIN 48). FIN 48 establishes threshold and measurement attributes for
financial statement measurement and recognition of tax positions taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after 15 December 2006. Adoption of FIN 48
is not expected to have a material effect on the US GAAP information in HSBC’s financial statements.
In September 2006, the FASB issued SFAS 157 ‘Fair Value Measurements’. SFAS 157 defines fair value, establishes
a framework for measuring fair value in US GAAP and requires expanded disclosures about fair value
measurements. SFAS 157 applies under many other extant US GAAP accounting pronouncements which prescribe
that fair value is the relevant measurement, although the Statement does not extend the use of fair value for
measurement purposes. SFAS 157 is effective for fiscal years beginning after 15 November 2007. HSBC is currently
evaluating the impact that adoption of SFAS 157 will have on its US GAAP financial statements.
In February 2007, the FASB issued SFAS 159 ‘The Fair Value Option for Financial Assets and Financial Liabilities’.
SFAS 159 creates a fair value option under which an entity may irrevocably elect fair value as the initial and
subsequent measurement attribute for certain financial assets and liabilities on a contract-by-contract basis, with