HSBC 2009 Annual Report Download - page 376

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
374
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered
past due, but are treated as up to date loans for measurement purposes once the minimum number of payments
required under the new arrangements have been received. These renegotiated loans are segregated from other
parts of the loan portfolio for the purposes of collective impairment assessment, to reflect their risk profile.
Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing
review to determine whether they remain impaired or should be considered past due. The carrying amount of
loans that have been classified as renegotiated retain this classification until maturity or derecognition.
(h) Trading assets and trading liabilities
Treasury bills, debt securities, equity securities, loans, deposits, debt securities in issue, and short positions in
securities are classified as held for trading if they have been acquired or incurred principally for the purpose of
selling or repurchasing in the near term, or they form part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent pattern of short-term profit-taking. These
financial assets or financial liabilities are recognised on trade date, when HSBC enters into contractual
arrangements with counterparties to purchase or sell the financial instruments, and are normally derecognised
when either sold (assets) or extinguished (liabilities). Measurement is initially at fair value, with transaction costs
taken to the income statement. Subsequently, the fair values are remeasured, and gains and losses from changes
therein are recognised in the income statement in ‘Net trading income’.
(i) Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of
the criteria set out below, and are so designated by management. HSBC may designate financial instruments at
fair value when the designation:
– eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise
from measuring financial assets or financial liabilities, or recognising gains and losses on them, on different
bases. Under this criterion, the main classes of financial instruments designated by HSBC are:
Long-term debt issues. The interest payable on certain fixed rate long-term debt securities issued has been
matched with the interest on ‘receive fixed/pay variable’ interest rate swaps as part of a documented interest
rate risk management strategy. An accounting mismatch would arise if the debt securities issued were
accounted for at amortised cost, because the related derivatives are measured at fair value with changes in
the fair value recognised in the income statement. By designating the long-term debt at fair value, the
movement in the fair value of the long-term debt will also be recognised in the income statement.
Financial assets and financial liabilities under investment contracts. Liabilities to customers under
linked contracts are determined based on the fair value of the assets held in the linked funds, with changes
recognised in the income statement. If no designation was made for the assets relating to the customer
liabilities they would be classified as available-for-sale and the changes in fair value would be recorded
in other comprehensive income. These financial instruments are managed on a fair value basis and
management information is also prepared on this basis. Designation at fair value of the financial assets
and liabilities under investment contracts allows the changes in fair values to be recorded in the income
statement and presented in the same line.
– applies to groups of financial assets, financial liabilities or combinations thereof that are managed, and their
performance evaluated, on a fair value basis in accordance with a documented risk management or
investment strategy, and where information about the groups of financial instruments is reported to
management on that basis. Under this criterion, certain financial assets held to meet liabilities under
insurance contracts are the main class of financial instrument so designated. HSBC has documented risk
management and investment strategies designed to manage such assets at fair value, taking into
consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports are
provided to management on the fair value of the assets. Fair value measurement is also consistent with the
regulatory reporting requirements under the appropriate regulations for these insurance operations.
– relates to financial instruments containing one or more embedded derivatives that significantly modify the
cash flows resulting from those financial instruments, including certain debt issues and debt securities held.