HSBC 2007 Annual Report Download - page 360

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
358
(s) Pension and other post-employment benefits
HSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans
include both defined benefit and defined contribution plans and various other post-employment benefits such as
post-employment health-care.
Payments to defined contribution plans and state-managed retirement benefit plans, where HSBC’s obligations
under the plans are equivalent to a defined contribution plan, are charged as an expense as they fall due.
The defined benefit pension costs and the present value of defined benefit obligations are calculated at the
reporting date by the schemes’ actuaries using the Projected Unit Credit Method. The net charge to the income
statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan liabilities,
less the expected return on plan assets, and is presented in operating expenses. Past service costs are charged
immediately to the income statement to the extent that the benefits have vested, and are otherwise recognised
on a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise
experience adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred), as well as the effects of changes in actuarial assumptions. Actuarial gains and losses are
recognised in ‘Shareholders’ equity’ and presented in the Statement of Recognised Income and Expense in the
period in which they arise.
The defined benefit liability recognised in the balance sheet represents the present value of defined benefit
obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any net
defined benefit surplus is limited to unrecognised past service costs plus the present value of available refunds
and reductions in future contributions to the plan.
The costs of obligations arising from other defined post-employment benefits plans, such as defined benefit
health-care plans, are accounted for on the same basis as defined benefit pension plans.
(t) Share-based payments
The cost of share-based payment arrangements with employees is measured by reference to the fair value of
equity instruments on the date they are granted, and recognised as an expense on a straight-line basis over the
vesting period, with a corresponding credit to the ‘Share-based payment reserve’. The fair value of equity
instruments that are made available immediately, with no vesting period attached to the award, are expensed
immediately.
Fair value is determined by using appropriate valuation models, taking into account the terms and conditions
upon which the equity instruments were granted. Market performance conditions are reflected as an adjustment
to the fair value of equity instruments at the date of grant, so that an award is treated as vesting irrespective of
whether the market performance condition is satisfied, provided all other conditions are satisfied.
Vesting conditions, other than market performance conditions, are not factored into the initial estimate of the fair
value at the grant date. They are taken into account by adjusting the number of equity instruments included in the
measurement of the transaction, so that the amount recognised for services received as consideration for the
equity instruments granted shall be based on the number of equity instruments that eventually vest. On a
cumulative basis, no expense is recognised for equity instruments that do not vest because of a failure to satisfy
non-market performance or service conditions.
Where an award has been modified, as a minimum the expense of the original award continues to be recognised
as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or
increase the number of equity instruments, the incremental fair value of the award or incremental fair value of
the extra equity instruments is recognised in addition to the expense of the original grant, measured at the date of
modification, over the remaining vesting period.
A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised
immediately for the amount that would otherwise have been recognised for services over the vesting period.
Where HSBC Holdings enters into share-based payment arrangements involving employees of subsidiaries, the
cost is recognised in ‘Investment in subsidiaries’ and credited to the ‘Share-based payment reserve’ over the
vesting period. Where the cost is recharged to the subsidiary, it is recognised as an inter-company debtor, not as
an investment in subsidiary. Where a subsidiary has funded the share-based payment arrangement, ‘Investment