HSBC 2012 Annual Report Download - page 394

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
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the statistical models, they are taken into account by adjusting the impairment allowances derived from the
statistical models to reflect these changes as at the balance sheet date.
These additional portfolio risk factors may include recent loan portfolio growth and product mix, unemployment
rates, bankruptcy trends, geographic concentrations, loan product features (such as the ability of borrowers to
repay adjustable-rate loans where reset interest rates give rise to increases in interest charges), economic
conditions such as national and local trends in housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of write-offs, adjustments to the period of time between loss
identification and write-off, changes in laws and regulations and other factors which can affect customer
payment patterns on outstanding loans, such as natural disasters. These risk factors, where relevant, are taken
into account when calculating the appropriate level of impairment allowances by adjusting the impairment
allowances derived solely from historical loss experience.
Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when
there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds
from the realisation of security. In circumstances where the net realisable value of any collateral has been
determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The write-back is recognised in the income statement.
Reclassified loans and advances
Where financial assets have been reclassified out of the fair value through profit or loss category to the loans and
receivables category, the effective interest rate determined at the date of reclassification is used to calculate any
impairment losses.
Following reclassification, where there is a subsequent increase in the estimates of future cash receipts as a result
of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the
effective interest rate from the date of change in the estimate rather than as an adjustment to the carrying amount
of the asset at the date of change in the estimate.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as assets held
for sale and reported in ‘Other assets’ if the carrying amounts of the assets are recovered principally through
sale, the assets are available for sale in their present condition and their sale is highly probable. The asset
acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of
impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any
subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement,
in ‘Other operating income’. Any subsequent increase in the fair value less costs to sell, to the extent this does
not exceed the cumulative write-down, is also recognised in ‘Other operating income’, together with any realised
gains or losses on disposal.
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 a minimum number of payments
required have been received. Loans subject to collective impairment assessment whose terms have been
renegotiated 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. The carrying