HSBC 2004 Annual Report Download - page 245

HSBC HOLDINGS PLC
Notes on the Financial Statements
243
1 Basis of preparation
(a) The financial statements have been prepared under the historical cost convention, as modified by the revaluation
of certain investments and land and buildings, and in accordance with applicable accounting standards.
The consolidated financial statements are prepared in accordance with the special provisions of Part VII Chapter
II of the UK Companies Act 1985 (‘the Act’ ) relating to banking groups. The consolidated financial statements
comply with Schedule 9 and the financial statements of HSBC Holdings comply with Schedule 4 to the Act.
As permitted by Section 230 of the Act, no profit and loss account is presented for HSBC Holdings.
The accounts have been prepared in accordance with the Statements of Recommended Accounting Practice
(‘SORPs’ ) issued by the British Bankers’ Association (‘BBA’ ) and Irish Bankers’ Federation and with the SORP
‘Accounting issues in the asset finance and leasing industry’ issued by the Finance & Leasing Association.
The SORP issued by the Association of British Insurers ‘Accounting for insurance business’ contains
recommendations on accounting for insurance business for insurance companies and insurance groups. HSBC is
primarily a banking group, rather than an insurance group, and, consistent with previously established practice
for such groups preparing consolidated financial statements complying with Schedule 9 to the Act, places a
value on its long-term assurance businesses using a valuation of the discounted future earnings expected to
emerge from business currently in force, taking into account factors such as recent experience and general
economic conditions, together with the surplus retained in the long-term assurance funds.
(b) The preparation of financial information requires the use of estimates and assumptions about future conditions.
In this connection, management believes that the critical accounting policies where management judgement is
necessarily applied are those in relation to provisions for bad and doubtful debts, goodwill impairment, and the
valuation of securities and derivatives. Application of these policies and the key estimates and assumptions used
are described in the Financial Review section on pages 118 to 121 under the heading ‘Critical Accounting
Policies’ .
(c) The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its
subsidiary undertakings. Financial statements of subsidiary undertakings are made up to 31 December, with the
exception of the banking and insurance subsidiaries of HSBC Bank Argentina, whose financial statements are
made up to 30 June annually to comply with local regulations. Accordingly HSBC uses interim financial
statements for its principal banking and insurance subsidiaries in Argentina, drawn up to 31 December annually,
and these interim financial statements are audited.
The consolidated financial statements include the attributable share of the results and reserves of joint ventures
and associates, based on financial statements made up to dates not earlier than six months prior to 31 December.
All significant intra-HSBC transactions are eliminated on consolidation.
(d) HSBC’ s financial statements are prepared in accordance with UK generally accepted accounting principles (‘UK
GAAP’ ), which differs in certain respects from Hong Kong and US generally accepted accounting principles
(‘Hong Kong GAAP’ and ‘US GAAP’ ). A discussion of the significant differences between UK GAAP and
Hong Kong GAAP is contained in note 48. A discussion of the significant differences between UK GAAP and
US GAAP and a reconciliation to US GAAP of certain amounts is contained in Note 49. The Notes on the
Financial Statements, taken together with the Financial Review, include the aggregate of all disclosures
necessary to satisfy both UK and US reporting requirements.
2 Principal accounting policies
(a) Income recognition
Interest income is recognised in the profit and loss account as it accrues, except in the case of doubtful debts
(Note 2 (c) below).
Fee and commission income is accounted for in the period when receivable, except where it is charged to cover
the costs of a continuing service to, or risk borne for, the customer, or is interest in nature. In these cases, it is
recognised on an appropriate basis over the relevant period.