HSBC 2008 Annual Report Download - page 347

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(c) Segment reporting
HSBC’s segments are organised into five geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, North
America and Latin America, and four customer groups: Personal Financial Services; Commercial Banking;
Global Banking and Markets; and Private Banking. The main items reported in the ‘Other’ segment are certain
property activities, unallocated investment activities, centrally held investment companies and HSBC’s holding
company and financing operations. The ‘Other’ segment also includes gains and losses on the disposal of certain
significant subsidiaries or business units. Segment income and expenses include transfers between geographical
regions and transfers between customer groups. These transfers are conducted on arm’s length terms and
conditions.
In HSBC’s segmental analysis of the income statement by customer groups and global businesses, net trading
income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities
classified as held for trading, together with third-party and intra-segment interest income and interest expense,
and dividends received; in the consolidated income statement, intra-segment interest income and expense are
eliminated.
(d) Determination of fair value
All financial instruments are recognised initially at fair value. In the normal course of business, the fair value of
a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration
given or received). In certain circumstances, however, the fair value will be based on other observable current
market transactions in the same instrument, without modification or repackaging, or on a valuation technique
whose variables include only data from observable markets, such as interest rate yield curves, option volatilities
and currency rates. When such evidence exists, HSBC recognises a trading gain or loss on inception of the
financial instrument. When unobservable market data have a significant impact on the valuation of financial
instruments, the entire initial difference in fair value indicated by the valuation model from the transaction price
is not recognised immediately in the income statement but is recognised over the life of the transaction on an
appropriate basis, or when the inputs become observable, or the transaction matures or is closed out, or when
HSBC enters into an offsetting transaction.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in
active markets are based on bid prices for assets held and offer prices for liabilities issued. When independent
prices are not available, fair values are determined by using valuation techniques which refer to observable
market data. These include comparison with similar instruments where market observable prices exist,
discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market
participants. Fair values of financial instruments may be determined in whole or in part using valuation
techniques based on assumptions that are not supported by prices from current market transactions or observable
market data, where current prices or observable market data are not available.
Factors such as bid-offer spread, credit profile and model uncertainty are taken into account, as appropriate,
when fair values are calculated using valuation techniques. Valuation techniques incorporate assumptions that
other market participants would use in their valuations, including assumptions about interest rate yield curves,
exchange rates, volatilities, and prepayment and default rates. Where a portfolio of financial instruments has
quoted prices in an active market, the fair value of the instruments are calculated as the product of the number of
units and quoted price and no block discounts are made.
If the fair value of a financial asset measured at fair value becomes negative, it is recorded as a financial liability
until its fair value becomes positive, at which time it is recorded as a financial asset.
The fair values of financial liabilities are measured using quoted market prices where available, or using
valuation techniques. These fair values include market participants’ assessments of the appropriate credit spread
to apply to HSBC’s liabilities. The amount of change during the period, and cumulatively, in the fair value of
designated financial liabilities and loans and advances that is attributable to changes in their credit spread is
determined as the amount of change in the fair value that is not attributable to changes in market conditions that
give rise to market risk.