HSBC 2005 Annual Report Download - page 103

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value less costs to sell is recorded as an impairment
loss and included in the income statement. Any
subsequent increase in the fair value less costs to
sell, to the extent this does not exceed the cumulative
impairment loss, is recognised in the income
statement.
Renegotiated loans
Retail loans, which are generally subject to
collective impairment assessment, whose terms have
been renegotiated, are no longer considered to be
past due but are treated as new loans only after the
minimum required number of payments under the
new arrangements have been received.
Loans subject to individual impairment
assessment, whose terms have been renegotiated, are
subject to ongoing review to determine whether they
remain impaired or are considered to be past due.
Goodwill impairment
HSBC’s accounting policy for goodwill is described
in Note 2(o) on the Financial Statements.
Goodwill arises on business combinations,
including the acquisition of subsidiaries, joint
ventures or associates, when the cost of acquisition
exceeds the fair value of HSBC’s share of the
identifiable assets, liabilities and contingent
liabilities acquired. By contrast, if HSBC’s interest
in the fair value of the identifiable assets, liabilities
and contingent liabilities of an acquired business is
greater than the cost to acquire, the excess is
recognised immediately in the income statement.
Goodwill is allocated to cash-generating units
for the purpose of impairment testing, which is
undertaken at the lowest level at which goodwill is
monitored for internal management purposes.
Impairment testing is performed annually by
comparing the present value of the expected future
cash flows from a business with the carrying amount
of its net assets, including attributable goodwill.
Significant management judgement is involved
in two aspects of the process of identifying and
evaluating goodwill impairment.
First, the cost of capital assigned to an
individual cash-generating unit and used to discount
its future cash flows can have a significant effect on
its valuation. The cost of capital percentage is
generally derived from an appropriate Capital Asset
Pricing Model, which itself depends on inputs
reflecting a number of financial and economic
variables including the risk-free rate in the country
concerned and a premium to reflect the inherent risk
of the business being evaluated. These variables are
established on the basis of management judgement.
Second, management judgement is required in
estimating the future cash flows of the cash-
generating units. These values are sensitive to the
cash flows projected for the periods for which
detailed forecasts are available, and to assumptions
regarding the long-term sustainable pattern of cash
flows thereafter. While the acceptable range within
which underlying assumptions can be applied is
governed by the requirement for resulting forecasts
to be compared with actual performance and
verifiable economic data in future years, the cash
flow forecasts necessarily and appropriately reflect
management’s view of future business prospects.
When the analysis demonstrates that the
expected cash flows of a cash-generating unit have
declined and/or that its cost of capital has increased,
the effect will be to reduce the estimated fair value
of the cash-generating unit. If this results in an
estimated recoverable amount that is lower than the
carrying value of the cash-generating unit, a charge
for impairment of goodwill will be recorded, thereby
reducing by a corresponding amount HSBC’s profit
for the year. Goodwill is stated at cost less
accumulated impairment losses.
Goodwill on acquisitions of joint ventures or
associates is included in ‘Interests in associates and
joint ventures’.
At the date of disposal of a business, attributable
goodwill is included in HSBC’s share of net assets in
the calculation of the gain or loss on disposal.
Valuation of financial instruments
HSBC’s accounting policy for valuation of financial
instruments is described in Note 2(d) on the
Financial Statements.
All financial instruments are recognised initially
at fair value. The fair value of a financial instrument
on initial recognition is normally the transaction
price, i.e. the fair value of the consideration given or
received. In certain circumstances, however, the
initial fair value may be based on other observable
current market transactions in the same instrument,
without modification or repackaging, or on a
valuation technique whose variables include only
data from observable markets.
Subsequent to initial recognition, the fair values
of financial instruments measured at fair value that
are quoted in active markets are based on bid prices
for assets held and offer prices for liabilities. When
independent prices are not available, fair values are
determined by using valuation techniques which