HSBC 2005 Annual Report Download - page 395

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(commonly referred to as the 'shortcut' method) for certain of these hedging relationships. As a result, no
retrospective or prospective assessment of effectiveness is required and no hedge ineffectiveness is recognised.
If any one of the criteria for utilising the shortcut method was not met, the hedging relationship was either
accounted for under the 'long-haul' method whereby effectiveness is assessed and ineffectiveness on effective
hedges is recorded in the income statement, or the hedge relationship was determined to be ineffective for
accounting purposes and the derivative was marked to market with gains and losses recorded directly in net
income.
During 2005, new designations of hedges have generally been designated using the long-haul method of
accounting under SFAS 133 and certain relationships have been re-designated using this method. As a result,
there were no longer any cash flow hedges using the shortcut method of accounting at 31 December 2005, and
HSBC’s US operating subsidiaries have significantly reduced the number of fair value hedges using the shortcut
method of accounting at this date.
The following table summarises HSBC's hedges of financial instruments that have been designated and qualify
as effective hedges under SFAS 133 at the end of the period.
Nominal values Number of derivatives
Fair value
hedges
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
2005 2005 2004 2004 2005 2005 2004 2004
US$bn US$bn US$bn US$bn US$bn US$bn US$bn US$bn
Financial
investments:
Available for
sale debt
securities
Shortcut .......... ––1.0 –1–38 –
Long-haul ....... 0.2 – ––10–––
Customer
deposits
Shortcut .......... ––1.0 10.4 ––817
Long-haul ....... –6.8 –5.8 117 –17
Debt securities
in issue and
subordinated
liabilities
Shortcut .......... 3.0 – 16.5 11.6 16 – 119 106
Long-haul ....... 18.2 46.8 9.3 6.6 45 165 29 10
Total ................... 21.4 53.6 27.8 34.4 73 182 194 150
Fair value hedges
HSBC’s US operating subsidiaries designate certain derivative financial instruments as qualifying fair value
hedges of certain fixed rate assets and liabilities under SFAS 133. In order to qualify initially, hedge
effectiveness is assessed and demonstrated on a prospective basis utilising statistical regression analysis.
2004
During 2004, the short-cut method of accounting could not be utilised for a small number of fair value hedges of
fixed rate liabilities. Ineffectiveness of such fair value hedges recognised in 2004 in net income under US GAAP
(but not under IFRS) was a gain of US$1 million.
HSBC’s US mortgage bank has historically hedged fixed rate closed residential mortgage loans held for sale
with forward sale commitments. In 2004, ineffectiveness on these hedging activities recognised in net income
under US GAAP (but not under IFRS) was a gain of US$2 million. Such hedging activity was ceased on
30 September 2005.