HSBC 2005 Annual Report Download - page 257

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(t) Equity compensation plans
Shares awarded to an employee on joining HSBC that are made available immediately, with no vesting period
attached to the award, are expensed immediately. When an inducement is awarded to an employee on
commencement of employment with HSBC, and the employee must complete a specified period of service
before the inducement vests, the expense is spread over the period to vesting.
The compensation expense of share options is recognised over the vesting period. Compensation expense is
determined by reference to the fair value of the options on grant date, and the effect of any non-market vesting
conditions such as option lapses. An option may lapse if, for example, an employee ceases to be employed by
HSBC before the end of the vesting period. Estimates of future such employee departures are taken into account
when accruing the cost during the service period.
The cost of bonuses awarded in respect of past service, by which an employee is required to complete a specified
period of future service to be entitled to the award, is spread over the period of service rendered to the vesting
date.
The compensation expense charged to the income statement is credited to the share-based payment reserve over
the vesting period of the shares and options. If awards of shares and options lapse during the vesting period due
to an employee leaving employment with HSBC, the charge to date is reversed to the income statement. If an
award lapses due to an employee leaving a plan but not employment with HSBC or due to HSBC cancelling or
modifying a plan, this is accounted for as an acceleration of vesting with full immediate recognition of the
outstanding charge in the income statement. If awards of shares or options lapse after they have fully vested, the
amount in respect of the award charged to the share-based payment reserve is transferred to retained earnings.
(u) Foreign currencies
Items included in the financial statements of each of HSBC’s entities are measured using the currency of the
primary economic environment in which the entity operates (‘the functional currency’). The consolidated
financial statements of HSBC are presented in US dollars, which is the Group’s presentation currency.
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into
the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange
differences are included in the income statement. Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated into the functional currency using the rate of exchange at
the date of the initial transaction, except for goodwill arising on consolidation, which is translated into the
functional currency using the rate of exchange ruling at the balance sheet date. Non-monetary assets and
liabilities measured at fair value in a foreign currency are translated into the functional currency using the rate of
exchange at the date the fair value was determined.
The results of branches, subsidiaries, joint ventures and associates not reporting in US dollars are translated into
US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the
retranslation of opening foreign currency net investments, and exchange differences arising from retranslation of
the result for the reporting period from the average rate to the exchange rate prevailing at the period end, are
accounted for in a separate foreign exchange reserve. Exchange differences on a monetary item that is part of a
net investment in a foreign operation are recognised in the income statement of the separate subsidiary financial
statements. In consolidated financial statements these exchange differences are recognised in the foreign
exchange reserve in shareholders’ equity. In accordance with IFRS 1, HSBC has set the cumulative exchange
differences for all foreign operations to zero at the date of transition to IFRSs. On disposal of a foreign operation,
exchange differences relating thereto and previously recognised in reserves are recognised in the income
statement.
(v) Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a
current legal or constructive obligation as a result of past events, and a reliable estimate can be made of the
amount of the obligation.