HSBC 2005 Annual Report Download - page 339

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HSBC undertook full retrospective application of IFRS 2, as permitted by IFRS 1, and recognised the fair value
of share-based payments to employees whilst reversing charges made in respect of employee share schemes
under UK GAAP. This resulted in a US$152 million reduction in operating profit for the year ended
31 December 2004.
At 31 December 2003, HSBC had a liability under UK GAAP in relation to certain sign-on and performance
bonuses which were to be settled by the purchase of HSBC shares and had been expensed as incurred. Under
IFRS 2, these transactions are treated as equity-settled share-based payments and are expensed over the vesting
period.
IAS 27 ‘Consolidated and Separate Financial Statements’ (‘IAS 27’)
IAS 27 requires that all entities be consolidated on a line-by-line basis. HSBC’s insurance subsidiaries’ third
party assets, which were historically presented in aggregate on a single line ‘Long-term assurance assets
attributable to policyholders’ within ‘Other assets’ on the consolidated balance sheet have, therefore, been
included in appropriate headings for such assets.
In addition, funds under management have been consolidated where the requirements of IAS 27 and Standard
Interpretations Committee 12 ‘Consolidation – Special Purpose Entities’ (‘SIC–12’) are met.
SIC–12 also requires consolidation of special purpose entities (‘SPEs’) when the substance of the relationship
between the SPE and the reporting entity indicates that the SPE is controlled by that entity. This resulted in
certain of the Group’s securitisation and conduit vehicles that were off-balance-sheet under UK GAAP being
consolidated under IFRSs.
The effect of consolidating funds under management and SPEs under IAS 27 and SIC–12 was to gross up the
31 December 2004 balance sheet by US$4,796 million (1 January 2004: US$5,075 million) with a minor impact
on total shareholders’ equity. Attributable profit for the year ended 31 December 2004 increased by
US$12 million as a result.
Under IAS 27, investments in subsidiaries may be carried at cost or accounted for in accordance with IAS 39 in
an entity’s separate financial statements. HSBC Holdings took the option of carrying its investments in
subsidiaries at cost instead of at net asset value, as under its previous UK GAAP policy. The effect of this
change was a decrease in total shareholders’ equity by US$39,217 million at 31 December 2004
(US$27,412 million at 1 January 2004).
IAS 12 ‘Income Taxes’ (‘IAS 12’)
Under IAS 12, deferred tax liabilities and assets are generally recognised in respect of all temporary differences
except where expressly prohibited by the Standard, subject to an assessment of the recoverability of deferred tax
assets. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences can be utilised.
In addition, unremitted earnings from subsidiaries, associates and joint ventures operating in lower tax
jurisdictions result in a deferred tax liability unless the reporting entity is able to control the timing of the
reversal of temporary differences and it is probable that the temporary differences will not reverse in the
foreseeable future.
Under IFRSs, fair value adjustments made on acquisition are tax-effected in order to present profitability on a
tax-equalised basis: under UK GAAP no tax adjustments were required for items which did not affect the
amount of tax payable or recoverable.
The IFRSs balance sheet at 31 December 2004 included an increase in the deferred tax asset of US$587 million
(1 January 2004: US$813 million) and a decrease in the deferred tax liability of US$631 million (1 January
2004: US$563 million). The net change in deferred tax mainly arose from prospective tax relief on pension
deficits, tax-effecting fair value adjustments on acquisitions, previously unrecognised tax-effecting of historical
property revaluations, and an adjustment to the grossing up of the value of in-force long-term assurance
business.
The effect on the IFRSs income statement is shown in Note 46(c). The main item in the ‘other’ column, is the
deferred tax of US$274 million for the year ended 31 December 2004 on the fair value adjustments arising on
the acquisition of subsidiaries.