HSBC 2003 Annual Report Download - page 331

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Property
UK GAAP
• HSBC values its properties on an annual basis and adjustments arising from such revaluations are taken to
reserves. HSBC depreciates non-investment properties based on their cost or revalued amounts. No depreciation
is charged on investment properties other than leaseholds with 20 years or less to expiry.
US GAAP
• US GAAP does not permit revaluations of property, although it requires recognition of asset impairment. Any
realised surplus or deficit is, therefore, reflected in income on disposal of the property. Depreciation is charged
on all properties based on cost.
Accruals accounted derivatives
UK GAAP
• Non-trading derivatives are those which are held for hedging purposes as part of HSBC’ s risk management
strategy against cashflows, assets, liabilities, or positions 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.
• To qualify as a hedge, a derivative must effectively reduce the price, foreign exchange 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 risk 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.
• Any gain or loss arising on the termination of a qualifying derivative is deferred and amortised to earnings over
the original life of the terminated contract. Where the underlying asset, liability or position is sold or terminated,
the qualifying derivative is immediately marked-to-market through the profit and loss account.
• Derivatives that do not qualify as hedges or synthetic alterations at inception are marked-to-market through the
profit and loss account, with gains and losses included within ‘Dealing profits’ .
US GAAP
• All derivatives must be recognised as either assets or liabilities in the balance sheet and be measured at fair
value ( SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ ).
• 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:
– For a derivative designated as hedging exposure 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. Any resulting net gain or
loss represents the ineffective portion of the hedge.