HSBC 2005 Annual Report Download - page 401

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Application of FIN 46R
FIN 46R requires the consolidation of VIEs in which HSBC is the primary beneficiary, and disclosures in
respect of other VIEs in which HSBC has a significant variable interest.
Under IFRSs, HSBC consolidates entities in which it has a controlling interest. As IFRSs normally require a risk
and rewards approach to consolidation, HSBC’s interests in entities deemed to be VIEs may result in differences
in accounting and disclosure treatment under US GAAP.
The following table analyses HSBC’s total consolidated VIE assets in a US GAAP balance sheet:
At 31 December
2005
US$m
2004
US$m
Classification
Loans and advances to customers .......................................................................................... 23,843 12,256
Debt securities and equity shares .......................................................................................... 4,403 1,996
Tangible fixed assets ............................................................................................................. 2,017 1,865
Other assets ........................................................................................................................... 256 599
30,519 16,716
Of the 2005 total, US$23,843 million (2004: US$12,256 million) represented asset-backed commercial paper
conduits and securitisation vehicles, and US$2,017 million (2004: US$1,612 million) represented infrastructure
projects and funds. The remaining balance consisted of guaranteed pension funds, investment funds, and other
entities. Certain of these entities with assets of approximately US$19,475 million at 31 December 2005 (2004:
US$12,256 million) were consolidated by HSBC in its IFRSs financial statements. There was no significant
impact on net income under US GAAP for the year ended 31 December 2005 as a result of consolidating these
VIEs.
HSBC also had significant involvement in, but was not the primary beneficiary of, VIEs with total assets of
approximately US$86.2 billion (2004: US$32.8 billion), including asset-backed commercial paper conduits and
securitisation vehicles with assets of approximately US$14.7 billion (2004: US$15.8 billion), infrastructure
projects and funds of approximately US$6.2 billion (2004: US$4.5 billion), and interests in investment funds,
low income housing tax credit partnerships, guaranteed pension funds, government debt restructuring
programmes and other entities. HSBC’s maximum exposure to loss in relation to these entities was estimated at
US$9.7 billion (2004: US$10.7 billion) which arose from guarantees, retained interests and recourse liabilities.
HSBC was also involved in other investment funds and similar entities that are considered VIEs for which its
involvement was limited to that of administrator, investment adviser, or other service provider.
In addition, HSBC had an interest in certain capital funding vehicles that are consolidated under IFRSs.
However, under US GAAP, these vehicles were not recognised on HSBC’s balance sheet because it was not the
primary beneficiary. HSBC’s deconsolidation of these vehicles resulted in non-equity minority interests under
IFRSs of US$10,114 million being reclassified as subordinated liabilities under US GAAP at 31 December 2004.
(k) Consolidated cash flow statement
HSBC prepares its cash flow statement in accordance with IAS 7 ‘Cash Flow Statements’, which is consistent
with the objectives and principles of SFAS 95 ‘Statement of Cash Flows’ as amended by SFAS 104 ‘Statement
of Cash Flows – Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows
from Hedging Transactions’.
(l) Securitisations
HSBC Finance
Following the acquisition of HSBC Finance Corporation in 2003, HSBC increased its securitisation activity and
the following discussion relates only to HSBC Finance Corporation’s securitisation activities including
securitised credit card receivables transferred to HSBC Bank USA. In other HSBC entities such activities do not
represent a significant part of HSBC’s business and retained interests in securitisations are not significant.
In the third quarter of 2004, HSBC began to structure all new collateralised funding transactions as secured
financings. In a secured financing, the underlying receivables and debt remain on HSBC’s balance sheet. HSBC