HSBC 2005 Annual Report Download - page 247

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asset to the carrying amount as reduced by any allowance for impairment.
(b) Non interest income
Fee income
HSBC earns fee income from a diverse range of services provided to its customers. Fee income is accounted for
as follows:
− income earned on the execution of a significant act is recognised as revenue when the act is completed (for
example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party,
such as the arrangement for the acquisition of shares or other securities);
− income earned from the provision of services is recognised as revenue as the services are provided (for
example, asset management, portfolio and other management advisory and service fees); and
− income which forms an integral part of the effective interest rate of a financial instrument is recognised as
an adjustment to the effective interest rate (for example, loan commitment fees) and recorded in ‘Interest
income’ (Note 2a).
Dividend income
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for
equity securities.
Net income from financial instruments designated at fair value
‘Net income from financial instruments designated at fair value’ includes all gains and losses from changes in
the fair value of financial assets and financial liabilities designated at fair value through profit or loss. Interest
income and expense and dividend income arising on these financial instruments are also included, except for
debt securities in issue and derivatives managed in conjunction with debt securities in issue. Interest on these
instruments is shown in ‘Interest expense’.
Net trading income
Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial
liabilities held for trading, together with related interest income, expense and dividends.
(c) Segment reporting
HSBC is organised into five geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, North America and
South America, and manages its business through four customer groups: Personal Financial Services;
Commercial Banking; Corporate Investment Banking and Markets; and Private Banking. The main items
reported in the ‘Other’ segment are the income and expenses of wholesale insurance operations, certain property
activities, unallocated investment activities including hsbc.com, centrally held investment companies and
HSBC’s holding company and financing operations. Segment income and expenses include transfers between
geographical regions and transfers between customer groups. These transfers are conducted at arm’s length.
(d) Determination of fair value
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 refer to observable market data.
These include comparison with similar instruments where market observable prices exist, discounted cash flow
analysis, option pricing models and other valuation techniques commonly used by market participants.