HSBC 2002 Annual Report Download - page 291

289
UK GAAP US GAAP
Accruals accounted derivatives
Non-trading derivatives are those which are held for
hedging purposes as part of HSBC’ s risk management
strategy against assets, liabilities, positions or cash
flows measured on an accruals basis. Non-trading
transactions include qualifying hedges and positions
that synthetically alter the characteristics of specified
financial instruments.
Non-trading derivatives are accounted for on an
equivalent basis to the underlying assets, liabilities or
net positions. Any profit or loss arising is recognised
on the same basis as that arising from the related assets,
liabilities or positions.
SFAS 133 ‘Accounting for Derivative Instruments and
for Hedging Activities’ requires that all derivatives be
recognised as either assets or liabilities in the balance
sheet and that those instruments be measured at fair
value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting
designation as described below:
To qualify as a hedge, a derivative must effectively
reduce the price or interest rate risk of the asset,
liability or anticipated transaction to which it is linked
and be designated as a hedge at inception of the
derivative contract. Accordingly, changes in the market
value of the derivative must be highly correlated with
changes in the market value of the underlying hedged
item at inception of the hedge and over the life of the
hedge contract. If these criteria are met, the derivative
is accounted for on the same basis as the underlying
hedged item. Derivatives used for hedging purposes
include swaps, forwards and futures.
Interest rate swaps are also used to alter synthetically
the interest rate characteristics of financial instruments.
In order to qualify for synthetic alteration, a derivative
instrument must be linked to specific individual, or
pools of similar, assets or liabilities by the notional
principal and interest rate risks of the associated
instruments, and must achieve a result that is consistent
with defined risk management objectives. If these
criteria are met, accrual based accounting is applied,
i.e. income or expense is recognised and accrued to the
next settlement date in accordance with the contractual
terms of the agreement.
− For a derivative designated as hedging the
exposures to changes in the fair value of a
recognised asset or liability or a firm commitment,
the gain or loss is recognised in earnings in the
period of change together with the associated loss
or gain on the hedged item attributable to the risk
being hedged.
− For a derivative designated as hedging the
exposure to variable cash flows of a recognised
asset or liability, or of a forecasted transaction, the
derivative’ s gain or loss associated with the
effective portion of the hedge is initially reported
as a component of other comprehensive income
and subsequently reclassified into earnings when
the forecasted transaction affects earnings. The
ineffective portion is reported in earnings
immediately.