HSBC 2002 Annual Report Download - page 98

HSBC HOLDINGS PLC
Financial Review (continued)
96
segment including the impact of the Princeton Note
provision and exceptional bad debt provisions and
currency redenomination losses in Argentina.
Net fees and commissions and other income of
the Group’ s wholesale insurance operations
amounted to US$297 million in 2001 and US$256
million in 2000.
Critical Accounting Policies
Introduction
The results of HSBC Holdings plc are sensitive to
the accounting policies, assumptions and estimates
that underlie the preparation of its consolidated
financial statements. The accounting policies used in
the preparation of the consolidated financial
statements are set out in Note 2 in the ‘Notes to the
financial statements’ on pages 197 to 202.
When preparing the financial statements, it is the
directors’ responsibility under UK company law to
select suitable accounting policies and to make
judgements and estimates that are reasonable and
prudent. Under UK GAAP, Financial Reporting
Standard 18 ‘Accounting Policies’ requires the
Group to adopt the most appropriate accounting
policies in order to give a true and fair view.
HSBC also provides details of its net income
and shareholders’ equity calculated in accordance
with US GAAP. US GAAP differs in certain
respects from UK GAAP. Details of these
differences are set out in Note 50 to the financial
statements on pages 286 to 313.
The accounting policies that are deemed critical
to the Group’s results and financial position, based
upon materiality and significant judgement and
estimates, are discussed below.
Provisions for bad and doubtful debts
HSBC’s accounting policy for provisions for bad and
doubtful debts on customer loans is described in
Note 2 (b) to the financial statements on pages 197 to
199. The process for applying this policy is described
on pages 122 to 124.
Specific provisions
Specific provisions are established either on a case-
by-case basis or on a portfolio basis, depending on
the nature of the asset. In addition, provisions for the
sovereign risk inherent in cross-border credit
exposures are established for certain countries; this
element is not currently significant.
Where specific provisions are established on a
case-by-case basis, the most important factors are:
• the amount and timing of cashflows forecast to
be received from the borrower; and
• the enforceability and amount which may be
recovered through the sale of any security held.
In many cases, the determination of these factors
will be judgmental, either because the security may
not be readily marketable or the cashflows will
require an assessment of the customer’ s future
performance. HSBC’ s practice is to make a
conservative estimate of these factors and to review
and update them on a regular basis.
This basis of determining provisions is applied
to residential mortgages more than 90 days
delinquent and to most corporate loans. Corporate
loans and residential mortgages together comprise
about 85 per cent of loans and advances to non-
financial customers.
HSBC has no individual loans for which specific
bad and doubtful debt provisions have been
established on a case-by-case basis where changes in
the underlying factors could cause a material change
to the Group’ s reported results.
Where specific provisions are raised on a
portfolio basis, the most important factors are:
• loss rate set for each delinquency category;
• roll rates where determined for specific
portfolios; and
• the period embedded in the loss rate and roll rate
calculations which is designed to reflect only
losses inherent at the reporting date and not
future losses.
The factor most susceptible to variability in
management judgement is the period used in the loss
rate and roll rate calculations. This factor is kept
under continuous review based on the incidence of
losses experienced.
The portfolio basis is applied to small corporate
accounts (typically less than US$15,000) in certain
countries, residential mortgages overdue but less
than 90 days overdue, credit card and other