HSBC 2015 Annual Report Download - page 396

Notes on the Financial Statements (continued)
16 – Derivatives
HSBC HOLDINGS PLC
394
Securities listed on a recognised exchange and unlisted (continued)
Treasury
and other
eligible bills
Debt
securities
Equity
securities Total
$m $m $m $m
Fair value
Listed1 5 2,731 13,837 16,573
Unlisted 51 6,160 6,169 12,380
At 31 December 2014 56 8,891 20,006 28,953
1 Included within listed investments are $1,181m of investments listed on a recognised exchange in Hong Kong (2014: $1,361m).
16 Derivatives
Accounting policy
Derivatives
Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign
exchange, credit spreads, commodities and equity or other indices. Derivatives are recognised initially, and are subsequently measured, at
fair value. Fair values of derivatives are obtained either from quoted market prices or by using valuation techniques. Derivatives are classified
as assets when their fair value is positive or as liabilities when their fair value is negative.
Embedded derivatives are bifurcated from the host contract when their economic characteristics and risks are not clearly and closely related
to those of the host non-derivative contract, their terms would otherwise meet the definition of a stand-alone derivative and the combined
contract is not held for trading or designated at fair value. The bifurcated embedded derivatives are measured at fair value with changes
therein recognised in the income statement.
Derivative assets and liabilities arising from different transactions are only offset for accounting purposes if the offsetting criteria presented
in Note 32 are met.
Gains and losses from changes in the fair value of derivatives, that do not qualify for hedge accounting are reported in ‘Net trading income’.
Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in ‘Net income from
financial instruments designated at fair value’ together with the gains and losses on the economically hedged items. Where the derivatives
are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in ‘Interest expense’
together with the interest payable on the issued debt.
Hedge accounting
When derivatives are designated in hedge relationships, HSBC classifies them as either: (i) hedges of the change in fair value of recognised
assets or liabilities or firm commitments (‘fair value hedges’); (ii) hedges of the variability in highly probable future cash flows attributable to
a recognised asset or liability, or a forecast transaction (‘cash flow hedges’); or (iii) a hedge of a net investment in a foreign operation (‘net
investment hedges’).
HSBC formally designates and documents each hedge relationship from inception, setting out the risk management objective and strategy
for undertaking the hedge along with the specifically identified hedging instrument, hedged item or transaction, the nature of the risk being
hedged and the method for assessing hedge effectiveness. The method selected to assess hedge effectiveness will depend on the risk
management strategy.
To qualify for hedge accounting, HSBC requires that a hedge must be expected to be highly effective at inception and on an ongoing basis for the
duration of the hedge relationship with each hedge relationship subject to an ongoing retrospective and prospective hedge effectiveness assessment.
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, along with
changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.
If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment
to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate over the residual
period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other
comprehensive income; the ineffective portion of the change in fair value is recognised immediately in the income statement within ‘Net
trading income’.
The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in
which the hedged item affects profit or loss. In hedges of forecast transactions that result in recognition of a non-financial asset or liability,
previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or liability.
When a hedge relationship is discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until
the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative
gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.