HSBC 2012 Annual Report Download - page 59

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
possible that the outcomes in the next financial year
could differ from the assumptions used, and this
could result in a material adjustment to the carrying
amount of financial instruments measured at fair
value.
Deferred tax assets
Our accounting policy for the recognition of deferred
tax assets is described in Note 2s on the Financial
Statements. The recognition of a deferred tax asset
relies on an assessment of the probability and
sufficiency of future taxable profits, future reversals
of existing taxable temporary differences and
ongoing tax planning strategies.
The most significant judgements concern the US
deferred tax asset, given the recent history of losses
in our US operations. The net US deferred tax asset
amounted to US$4.6bn or 61% (2011: US$5.2bn;
68%) of deferred tax assets recognised on the
Group’s balance sheet. These judgements take into
consideration the reliance placed on the use of tax
planning strategies.
The most significant tax planning strategy is the
retention of capital in our US operations to ensure
the realisation of the deferred tax assets. The
principal strategy involves generating future taxable
profits through the retention of capital in the US in
excess of normal regulatory requirements in order
to reduce deductible funding expenses or otherwise
deploy such capital or increase levels of taxable
income. Management expects that, with this strategy,
the US operations will generate sufficient future
profits to support the recognition of the deferred
tax assets. If HSBC Holdings were to decide not to
provide this ongoing support, the full recovery of the
deferred tax asset may no longer be probable and
could result in a significant reduction of the deferred
tax asset which would be recognised as a charge in
the income statement.
Provisions
The accounting policy for provisions is described in
Note 2w on the Financial Statements. Note 32 on the
Financial Statements discloses the major categories
of provisions recognised. The closing balance of
provisions amounted to US$5.3bn (2011:
US$3.3bn), of which US$1.7bn (2011: US$1.5bn)
relates to legal proceedings and regulatory matters
and US$2.4bn (2011: US$1.1bn) relates to customer
remediation.
Judgement is involved in determining whether
a present obligation exists, and in estimating the
probability, timing and amount of any outflows.
Professional expert advice is taken on litigation
provisions, property provisions (including onerous
contracts) and similar liabilities.
Provisions for legal proceedings and regulatory
matters typically require a higher degree of
judgement than other types of provisions. When
cases are at an early stage, accounting judgements
can be difficult because of the high degree of
uncertainty associated with determining whether a
present obligation exists, and estimating the
probability and amount of any outflows that may
arise. As matters progress through various stages
of development, management and legal advisers
evaluate on an ongoing basis whether provisions
should be recognised and their estimated amounts,
revising previous judgements and estimates as
appropriate. At more advanced stages, it is typically
possible to make judgements and estimates around
a better defined set of possible outcomes. However,
such judgements can be very difficult and the
amount of any provision can be very sensitive to
the assumptions used. There could be a wide range
of possible outcomes for any pending legal
proceedings, investigations or inquiries. As a result,
it is often not practicable to quantify a range of
possible outcomes for individual matters. It is also
not practicable to meaningfully quantify ranges
of potential outcomes in aggregate for these types
of provisions because of the diverse nature and
circumstances of such matters and the wide range of
uncertainties involved. For a detailed description of
the nature of uncertainties and assumptions and the
effect on the amount and timing of possible cash
outflows on material matters, see Note 43 on the
Financial Statements.
Provisions for customer remediation also require
significant levels of estimation and judgement. The
amounts of provisions recognised depend on a
number of different assumptions, for example, the
volume of inbound complaints, the projected period
of inbound complaint volumes, the decay rate of
complaint volumes, the population identified as
systemically mis-sold and the number of policies per
customer complaint.
In view of the inherent uncertainties and the
high level of subjectivity involved in the recognition
and measurement of provisions, it is possible that the
outcomes in the next financial year could differ from
those on which management’s estimates are based,
resulting in materially different amounts of
provisions recognised and outflows of economic
benefits from those estimated by management for
the purposes of the 2012 Financial Statements.