HSBC 2009 Annual Report Download - page 379

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Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are
recorded in the income statement, along with changes in the fair value of the hedged assets, liabilities or group
thereof that are attributable to the hedged risk.
If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the
carrying amount of the hedged item is amortised to the income statement based on a recalculated effective
interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case,
it is released to the income statement immediately.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income within the ‘Cash flow hedges – fair value gains/(losses)’.
Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the income
statement.
The accumulated gains and losses recognised in other comprehensive income are reclassified to the income
statement in the periods in which the hedged item will affect profit or loss. However, when the forecast
transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains
and losses previously recognised in other comprehensive income are removed from equity and included in the
initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss recognised in other comprehensive income at that time remains in equity until the
forecast transaction is eventually recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is
immediately reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain
or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; a gain or
loss on the ineffective portion is recognised immediately in the income statement. Gains and losses previously
recognised in other comprehensive income are reclassified to the income statement on the disposal of the foreign
operation.
Hedge effectiveness testing
To qualify for hedge accounting, HSBC requires that at the inception of the hedge and throughout its life, each
hedge must be expected to be highly effective (prospective effectiveness), and demonstrate actual effectiveness
(retrospective effectiveness) on an ongoing basis.
The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The
method adopted by an entity to assess hedge effectiveness will depend on its risk management strategy.
For prospective effectiveness, the hedging instrument must be expected to be highly effective in offsetting
changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is
designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other
in the range of 80 per cent to 125 per cent.
Hedge ineffectiveness is recognised in the income statement in ‘Net trading income’.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are
recognised immediately in the income statement. These gains and losses are reported in ‘Net trading income’,
except where derivatives are managed in conjunction with financial instruments designated at fair value (other
than derivatives managed in conjunction with debt securities issued by the Group), in which case gains and
losses are reported in ‘Net income from financial instruments designated at fair value’. The interest on
derivatives managed in conjunction with debt securities issued by the Group which are designated at fair value is