HSBC 2015 Annual Report Download - page 335

HSBC HOLDINGS PLC
333
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Investment in BoCom
Nature of the area of focus Matters discussed with the GAC
HSBC holds 19.03% of the listed equity of BoCom. This investment is
accounted for as an associate using the equity method, because of
the significant influence that comes from the shareholding.
At 31 December, the market value of the investment based on the
share price ($9.9bn), was below the carrying value of the investment
($15.3bn).
This is considered an indicator of potential impairment under IFRS.
An impairment test was performed by HSBC using a value in use
model to estimate the investment’s value assuming the investment
continues to be held rather than sold ($17.0bn). On this basis no
impairment was required and the share of BoCom’s profits has been
recognised in the income statement.
The many assumptions used in the model to estimate future profits
attributable to HSBC are derived from a combination of analysts’
forecasts and management’s best estimates and are highly
judgemental.
The critical assumptions used by HSBC in the model were discussed
with the GAC. For each assumption an independent view was
provided of the range of possible alternative inputs that could have
been used.
The discussion focussed on the long term loan impairment charge
ratio and the long term growth rate. These are difficult to
substantiate and require management to form a view on future
growth in China as well as BoCom’s potential future impairment
charges.
Procedures performed to support our discussions and conclusions
• PwC’s independent valuation experts reviewed the appropriateness of the model and the inputs selected to calculate the value in use.
They independently recalculated the discount rate applied to the cash flows in the model.
• Inputs used in the determination of assumptions for the calculation of the value in use were agreed back to third-party sources, where
available, including external data from analysts’ reports.
• The controls in place over the model including security access and end user controls were tested.
• The mathematical accuracy of the model was tested.
• The quarterly meeting between senior BoCom executive management and HSBC held specifically to assess the current performance of
the business was observed.
• Disclosures made in relation to BoCom were reviewed.
Relevant references in the Annual Report and Accounts 2015
GAC Report, page 262.
Note 19: Interests in associates and joint ventures, page 402.