HSBC 2009 Annual Report Download - page 179

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In general, many Level 3 instruments are risk
managed using derivatives which employ a valuation
technique with observable inputs. However, the
associated gains on these derivatives in the year are
not reflected in the table above. The table details the
total change in fair value of these instruments; it
does not isolate the component attributable to
unobservable inputs.
HSBC Holdings
The following table provides an analysis of the basis
for valuing financial assets and financial liabilities
measured at fair value in the financial statements:
Bases of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation techniques
Quoted
market
price
Using
observable
inputs
With significant
unobservable
inputs
Level 1 Level 2 Level 3 Total
US$m US$m US$m US$m
At 31 December 2009
Assets
Derivatives ................................................................ – 2,981 – 2,981
Financial investments: available for sale ................. – – 2,455 2,455
Liabilities
Financial liabilities designated at fair value ............ 12,549 4,360 – 16,909
Derivatives ................................................................ – 362 – 362
At 31 December 2008
Assets
Derivatives ................................................................ – 3,682 – 3,682
Financial investments: available for sale ................. – – 2,629 2,629
Liabilities
Financial liabilities designated at fair value ............ 13,321 3,068 – 16,389
Derivatives ................................................................ – 1,324 – 1,324
Financial investments measured using a
valuation technique with significant unobservable
inputs comprise fixed-rate preferred securities and
senior notes purchased from HSBC undertakings.
The unobservable elements of the valuation
technique include the use of implied credit spreads
and simplified bond pricing assumptions.
Assets
available
for sale
US$m
At 1 January 2009 ....................................... 2,629
Total gains or losses:
– recognised in profit or loss ................. (2)
– recognised in other comprehensive
income ............................................. 103
Settlements .................................................. (275)
At 31 December 2009 ................................. 2,455
Total gains or losses recognised in profit or
loss relating to those assets and liabilities
held on 31 December 2009 .................... (2)
Effect of changes in significant unobservable
assumptions to reasonably possible
alternatives
In certain circumstances, the fair value of financial
instruments are measured using valuation models
that incorporate assumptions that are not supported
by prices from observable current market
transactions in the same instrument and are not based
on observable market data. The following table
shows the sensitivity of non-derivative financial
instruments to reasonably possible alternative
assumptions:
Reflected in equity
Favourable
changes
Unfavourable
changes
US$m US$m
Financial investments
available for sale
At 31 December 2009 .... 115 (107)
At 31 December 2008 ..... 113 (97)