HSBC 2007 Annual Report Download - page 430

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 33
428
• Private equity
HSBC’s private equity positions are generally classified as available-for-sale and are not traded in an active
market. In the absence of an active market for the investment, fair value is estimated based upon an analysis
of the investee’s financial position and results, risk profile, prospects and other factors as well as reference to
market valuations for similar entities quoted in an active market, or the price at which similar companies have
changed ownership. The exercise of judgement is required because of uncertainties inherent in estimating fair
value for private equity investments.
HSBC
Analysis of fair value determination
The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at
fair value in the consolidated financial statements:
Valuation techniques:
Quoted
market
price
using
observable
inputs
with significant
non-observable
inputs Total
US$m US$m US$m US$m
At 31 December 2007
Assets
Trading assets ............................................................... 209,339 222,678 13,951 445,968
Financial assets designated at fair value ....................... 28,565 12,694 305 41,564
Derivatives .................................................................... 8,132 175,493 4,229 187,854
Financial investments: available-for-sale ..................... 77,045 187,677 8,510 273,232
Liabilities
Trading liabilities .......................................................... 140,629 167,967 5,984 314,580
Financial liabilities at fair value ................................... 37,709 52,230 – 89,939
Derivatives .................................................................... 8,879 171,444 3,070 183,393
At 31 December 2006
Assets
Trading assets ............................................................... 166,515 158,379 3,253 328,147
Financial assets designated at fair value ....................... 16,277 4,136 160 20,573
Derivatives .................................................................... 4,903 97,490 1,309 103,702
Financial investments: available-for-sale ..................... 60,948 128,286 6,201 195,435
Liabilities
Trading liabilities .......................................................... 102,758 120,866 2,984 226,608
Financial liabilities at fair value ................................... 30,846 39,365 – 70,211
Derivatives .................................................................... 7,248 92,865 1,365 101,478
Trading assets valued using a valuation technique with significant non-observable inputs include leveraged loans
underwritten by HSBC, corporate and mortgage loans held for securitisation, and various asset-backed securities. The
amount of trading assets reported in this category is higher at 31 December 2007 compared with 31 December 2006
reflects an increase in the amount of leveraged loans held by HSBC, and also reduced liquidity in certain markets
during 2007, which affected the availability of market observable inputs for the valuation of certain types of loans
and asset-backed securities.
Trading liabilities valued using a valuation technique with significant non-observable inputs have increased as a
result of an increase in the issuance of structured note transactions, whereby HSBC issues equity-linked notes to
investors which provide the counterparty with a return that is linked to the performance of certain unlisted securities,
and holds the unlisted securities to match the liabilities.
Derivative products valued using a valuation technique with significant non-observable inputs include certain types
of correlation products, particularly equity and foreign exchange basket options and foreign exchange-interest rate
hybrid transactions, long-dated option transactions, particularly equity options, interest rate and foreign exchange
options and certain credit derivatives, including tranched credit default swap transactions and credit derivatives
executed with certain monoline insurers. Credit derivatives with these monoline insurers were included in the
category of valuation techniques using observable inputs at 31 December 2006 and in the non-observable inputs
category at 31 December 2007.