HSBC 2005 Annual Report Download - page 378

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
376
Impact
• Long-term assurance assets that are recorded in accounts meeting the definition of ‘separate accounts’ in SOP
03-1 are measured at fair value through net income and disclosed in a single line, ‘Other assets’, in the US
GAAP balance sheet.
Pension costs
IFRSs
• IAS 19 ‘Employee Benefits’ (‘IAS 19’) requires pension liabilities to be assessed on the basis of current actuarial
valuations performed on each plan, and pension assets to be measured at fair value. The net pension surplus or
deficit, representing the difference between plan assets and liabilities, is recognised on the balance sheet.
• In accordance with IAS 19 (revised 2004), HSBC has elected to record all actuarial gains and losses on the
pension surplus or deficit in the year in which they occur within the ‘Consolidated statement of recognised
income and expense’.
US GAAP
• SFAS 87, ‘Employers’ Accounting for Pensions’, prescribes a similar method of actuarial valuation for pension
liabilities and requires the measurement of plan assets at fair value.
• When the value of benefits accrued based on employee service up to the balance sheet date (the accumulated
benefit obligation) exceeds the value of plan assets, HSBC recognises an additional minimum pension liability to
the extent that the excess is greater than any accrual already established for unfunded pension costs.
• SFAS 87 does not permit recognition of all actuarial gains and losses in a statement other than the primary
income statement. As permitted by US GAAP, HSBC uses the 'corridor method', whereby actuarial gains and
losses outside a certain range are recognised in the income statement in equal amounts over the remaining
service lives of current employees. That range is 10 per cent of the greater of plan assets and plan liabilities. The
remaining additional minimum pension liability is recognised directly in ‘Other comprehensive income’.
Impact
• Net income under US GAAP is lower than under IFRSs as a result of the amortisation of the amount by which
actuarial losses exceed gains beyond the 10 per cent 'corridor'.
• Shareholders' equity under US GAAP is higher than under IFRSs because deficits recognised under IFRSs (to
the extent they exceed surpluses) are greater than the minimum pension liability recognised under US GAAP.
Stock-based compensation
IFRSs
• IFRS 2, ‘Share-based Payment’, requires that when annual bonuses are paid in restricted shares and the
employee must remain with the employer for a fixed period in order to receive the shares, the award is expensed
over that period.
US GAAP
• For awards made before 1 July 2005, SFAS 123, ‘Accounting for Stock-based Compensation’, (‘SFAS 123’)
requires that compensation cost be recognised over the period(s) in which the related employee services are
rendered. HSBC has interpreted this service period as the period to which the bonus relates.
• For 2005 bonuses awarded in early 2006, HSBC will follow SFAS 123 (revised 2004) ‘Share-based Payment’
(‘SFAS 123R’). SFAS 123R is consistent with IFRS 2 in requiring that restricted bonuses are expensed over the
period the employee must remain with HSBC. However, SFAS 123R only applies to awards made after the date
of adoption, which for HSBC is 1 July 2005.
Impact
• Some of the bonuses awarded in respect of 2002, 2003 and 2004 were recognised over the relevant vesting
period and were, therefore, expensed in ‘Net income’ under IFRSs during 2005. Under US GAAP, these awards