HSBC 2005 Annual Report Download - page 381

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hedge. The policy also requires documentation of the assessment, both at hedge inception and on an ongoing
basis, of whether the derivatives used in the hedging transaction are highly effective in offsetting changes in
fair values or cash flows of hedged items attributable to the hedged risks. Interest on designated qualifying
hedges is included in ‘Net interest income’.
Fair value hedge
− Changes in the fair values of derivatives that are designated and qualify as fair value hedging instruments
are recorded in the income statement, together with changes in the fair values of the assets or liabilities or
groups thereof that are attributable to the hedged risks.
− If the hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to
the carrying amount of a hedged item is amortised to the income statement based on a recalculated effective
interest rate over the residual period to maturity, unless the hedged item has been derecognised whereby it is
released to the income statement immediately.
Cash flow hedge
− The effective portion of changes in the fair values of derivatives that are designated and qualify as cash flow
hedges are recognised in equity. Any gain or loss relating to an ineffective portion is recognised
immediately in the income statement.
− Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged
item will affect the income statement. However, when the forecast transaction that is hedged results in the
recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in
equity are transferred from equity and included in the initial measurement of the cost of the asset or liability.
− When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast
transaction is ultimately recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the
income statement.
Net investment hedge
− Hedges of net investments in foreign operations are accounted for in a similar manner to cash flow hedges.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in
equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement.
Gains and losses accumulated in equity are included in the income statement on the disposal of the foreign
operation.
Hedge effectiveness testing
− IAS 39 requires that at inception and throughout its life, each hedge must be expected to be highly effective
(prospective effectiveness) to qualify for hedge accounting. Actual effectiveness (retrospective
effectiveness) must also be demonstrated on an ongoing basis.
− The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The
method HSBC entities adopt for assessing hedge effectiveness will depend on their risk management
strategies.
− For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving
offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the
hedge is designated. For retrospective effectiveness, the changes in fair value or cash flows must offset each
other in the range of 80 per cent to 125 per cent for the hedge to be deemed effective.
Derivatives that do not qualify for hedge accounting
− All gains and losses from changes in the fair value of any derivatives that do not qualify for hedge
accounting are recognised immediately in the income statement. These gains and losses are reported in ‘Net
trading income’, except where derivatives are managed in conjunction with financial instruments designated