HSBC 2010 Annual Report Download - page 321

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Valuation
The calculation of fair value incorporates HSBC’s estimate of the amount at which financial assets could be
exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm’s length transaction. It
does not reflect the economic benefits and costs that HSBC expects to flow from the instruments’ cash flows over
their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in
determining fair values for which no observable market prices are available, so comparisons of fair values between
entities may not be meaningful and users are advised to exercise caution when using this data.
Loans and advances to banks and customers
The fair value of loans and advances is based on observable market transactions, where available. In the absence of
observable market transactions, fair value is estimated using discounted cash flow models.
Performing loans are grouped, as far as possible, into homogeneous pools segregated by maturity and interest rates
and the contractual cash flows are generally discounted using HSBC’s estimate of the discount rate that a market
participant would use in valuing instruments with similar maturity, re-pricing and credit risk characteristics.
The fair value of a loan portfolio reflects both loan impairments at the balance sheet date and estimates of market
participants’ expectations of credit losses over the life of the loans. For impaired loans, fair value is estimated by
discounting the future cash flows over the time period they are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted
financial investments are determined using valuation techniques that take into consideration the prices and future
earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
For the purpose of estimating fair value, deposits by banks and customer accounts are grouped by remaining
contractual maturity. Fair values are estimated using discounted cash flows, applying current rates offered for
deposits of similar remaining maturities. The fair value of a deposit repayable on demand is assumed to be the
amount payable on demand at the balance sheet date.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to
quoted market prices for similar instruments.
The fair values in this note are stated at a specific date and may be significantly different from the amounts which
will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to
realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values
do not represent the value of these financial instruments to HSBC as a going concern.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of
measurement and disclosure are described above.
The following table provides an analysis of the fair value of financial instruments not carried at fair value on the
balance sheet: