HSBC 2015 Annual Report Download - page 267

HSBC HOLDINGS PLC
265
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Principal activities undertaken during 2015 include:
Key area Action taken
External auditor Overseeing and assessing the effectiveness of PricewaterhouseCoopers LLP during its first year as the Group’s
external auditor. In assessing the effectiveness of the external auditor an audit assessment questionnaire is
used to obtain feedback on the audit process. In addition, an assessment against best practice is undertaken.
The assessment focuses on the overall audit process, its effectiveness and the quality of output.
Implementation of COSO
Framework
GAC closely monitored the transition to the COSO Internal control framework. The transition involved a
comprehensive programme of upgrading entity level controls.
Controls over IT access
management
A significant issue for the GAC in 2015 was the tracking of progress over access rights to operating systems,
applications and data used in the financial reporting process. This was an area identified by Internal Audit as
requiring improvement and a substantial programme of work has been under way involving HSBC Operations,
Services and Technology and Finance functions.
Hedge accounting review GAC has overseen remediation work to address issues identified in relation to certain hedge accounting
activities in a number of countries.
Significant accounting judgements considered during 2015 included:
Key area Action taken
Appropriateness of
provisioning for legal
proceedings and
regulatory matters
The GAC received reports from management on the recognition and amounts of provisions, the existence of
contingent liabilities, and the disclosures relating to provisions and contingent liabilities for legal proceedings
and regulatory matters. Specific areas addressed included provisioning arising from investigations by US
regulators and law enforcement agencies relating to trading activities in the foreign exchange market and
competition law investigations relating to foreign exchange trading activities in a number of jurisdictions. The
GAC also considered management’s judgements regarding provisions and contingent liabilities in connection
with investigations of HSBC’s Swiss Private Bank by a number of tax administration, regulatory and law
enforcement authorities, and the measurement of the provision in relation to US Securities litigation (‘Jaffe’).
Quarterly and annual
reporting
The GAC reviewed key judgements in relation to the quarterly and annual reporting. In addition, the GAC
considered external analysts’ presentations and other key financial metrics included in the 10 strategic actions.
Loan impairment,
allowances and charges
The GAC reviewed loan impairment allowances for personal and wholesale lending. Significant judgements and
estimates for personal lending included a review of loss emergence periods across the retail loan portfolios. For
wholesale lending, the effects on potential wholesale loan impairments of lower oil and gas prices, the VW
vehicle emissions scandal, and trends in economic factors affecting credit quality in mainland China were
considered, along with judgemental allowance adjustments for economic factors and notable individual cases
of impairment. In particular, the GAC considered management’s judgements and assumptions informing the
recognition of a judgemental collective impairment allowance for oil and gas exposures, additional to
impairment allowances recognised for individual identified cases, as at 31 December 2015.
Valuation of financial
instruments
The GAC reviewed the key valuation metrics and judgements involved in the determination of fair value of
financial instruments. The GAC considered the valuation control framework, valuation metrics, significant
year-end judgements and emerging valuation topics.
Viability statement The Directors now have an obligation under the UK Corporate Governance Code to state whether they
believe the Group and parent company will be able to continue in operation and meet liabilities as they fall
due over the next three years. During the year, the GAC considered the enhanced governance requirements
surrounding the publication of the Viability Statement.
UK customer remediation The GAC considered the provisions for redress for mis-selling of payment protection insurance (‘PPI’) policies,
in the UK, including management’s judgements regarding the effect of the proposed time-bar for claims, on
which the UK Financial Conduct Authority (‘FCA’) is to consult. The GAC also considered the implications of the
2014 UK court case (‘Plevin’) for the non-disclosure of levels of commission in relation to the historical sales of
PPI products, and liabilities in respect of breaches of the UK Consumer Credit Act.
Bank of Communications
Co., Limited (‘BoCom’)
impairment testing
During the year the GAC considered the regular impairment reviews of HSBC’s investment in BoCom and
management’s conclusions that the investment is not impaired. When testing investments in associates for
impairment, IFRS require the carrying amount to be compared with the higher of fair value and value in use.
The GAC reviewed a number of aspects of management’s work in this area including the sensitivity of the result
of the impairment review to estimates and assumptions of projected future cash flows and the discount rate.
Goodwill impairment
testing
The GAC noted that no impairment was identified as a result of the annual goodwill impairment test as at 1 July
2015. However, the review for indicators of impairment as at 31 December 2015 identified indicators of
impairment which resulted in a formal re-test of GPB Europe and GB&M North America. The results for these
CGU’s are sensitive to key assumptions and are subject to enhanced disclosure.
Recognition of deferred
tax assets
In considering the recoverability of the Group’s deferred tax assets, the GAC reviewed the recognition of
deferred tax assets in the US and Brazil and the associated projections of future taxable income.