HSBC 2011 Annual Report Download - page 18

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review
Financial summary > Reconciliation of reported and underlying profit before tax
16
Financial summary
Reconciliation of reported and underlying profit
before tax .................................................................. 16
Consolidated income statement .................................... 18
Group performance by income and expense item ........ 20
Net interest income ................................................... 20
Net fee income .......................................................... 22
Net trading income ................................................... 23
Net income/(expense) from financial instruments
designated at fair value ........................................ 24
Gains less losses from financial investments ........... 25
Net earned insurance premiums .............................. 26
Other operating income ........................................... 26
Net insurance claims incurred and movement in
liabilities to policyholders .................................... 27
Loan impairment charges and other credit risk
provisions ............................................................. 27
Operating expenses .................................................. 29
Share of profit in associates and joint ventures ....... 31
Tax expense .............................................................. 31
Consolidated balance sheet ........................................... 32
Movement in 2011 .................................................... 33
Economic profit/(loss) .................................................. 37
Reconciliation of RoRWA measures ............................ 37
Critical accounting policies .......................................... 38
The management commentary included in the Report of the Directors: ‘Overview’ and ‘Operating and Financial Review’, together with the
‘Employees’ and ‘Corporate sustainability’ sections of ‘Corporate Governance’ and the ‘Directors’ Remuneration Report’ is presented in
compliance with the IFRS Practice Statement ‘Management Commentary’ issued by the IASB.
Reconciliation of reported and
underlying profit before tax
In addition to results reported on an IFRSs basis, we
measure our performance internally on a like-for-like
basis by eliminating the effects of foreign currency
translation differences, acquisitions and disposals
of subsidiaries and businesses, and fair value
movements on own debt attributable to credit spread
where the net result of such movements will be zero
upon maturity of the debt; all of which distort year-
on-year comparisons. We refer to this as our
underlying performance.
Reported results include the effects of the above
items. They are excluded when monitoring progress
against operating plans and past results because
management believes that the underlying basis more
accurately reflects operating performance.
Constant currency
Constant currency comparatives for 2010 referred to in the
commentaries are computed by retranslating into US dollars
for non-US dollar branches, subsidiaries, joint ventures and
associates:
• the income statements for 2010 at the average rates of
exchange for 2011; and
• the balance sheet at 31 December 2010 at the prevailing
rates of exchange on 31 December 2011.
No adjustment has been made to the exchange rates used to
translate foreign currency denominated assets and liabilities
into the functional currencies of any HSBC branches,
subsidiaries, joint ventures or associates. When reference is
made to ‘constant currency’ in tables or commentaries,
comparative data reported in the functional currencies of
HSBC’s operations have been translated at the appropriate
exchange rates applied in the current period on the basis
described above.
Underlying performance
The following tables compare our underlying
performance in 2011 and 2010 with reported profits
in those years. Equivalent tables are provided for
each of HSBC’s global businesses and geographical
segments in the Form 20-F filed with the SEC,
which is available on www.hsbc.com.
The foreign currency translation differences
reflect the relative weakening of the US dollar
against most major currencies during 2011.
The following acquisitions and disposals
affected both comparisons:
• the gain of US$62m on reclassification of Bao
Viet Holdings (‘Bao Viet’) from an available-
for-sale asset to an associate in January 2010;
• the gain of US$66m on sale of our stake in
Wells Fargo HSBC Trade Bank in March 2010;
• the gain of US$107m on disposal of HSBC
Insurance Brokers Limited in April 2010;
• the dilution gains which arose on our holding in
Ping An Insurance (Group) Company of China,
Limited (‘Ping An’) following the issue of share
capital to third parties in May 2010 and June
2011 of US$188m and US$181m, respectively;
• the loss of US$42m on the sale of our
investment in British Arab Commercial Bank
plc in October 2010;
• the gain of US$74m on the deconsolidation of
private equity funds following the management
buy-out of Headland Capital Partners Ltd
(formerly known as HSBC Private Equity (Asia)
Ltd) in November 2010;
• the gain of US$255m on the sale of Eversholt
Rail Group in December 2010;