HSBC 2006 Annual Report Download - page 306

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
304
US GAAP
Future accounting developments in respect of US GAAP are set out on page 433.
2 Summary of significant accounting policies
(a) Interest income and expense
Interest income and expense for all financial instruments except for those classified as held for trading or
designated at fair value (other than debt securities issued by HSBC and derivatives managed in conjunction with
such debt securities issued) are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement
using the effective interest method. The effective interest method is a way of calculating the amortised cost of a
financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the
interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through
the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of
the financial asset or financial liability. When calculating the effective interest rate, HSBC estimates cash flows
considering all contractual terms of the financial instrument but not future credit losses. The calculation includes
all amounts paid or received by HSBC that are an integral part of the effective interest rate of a financial
instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is calculated by applying the original effective interest rate of the financial
asset to the carrying amount as reduced by any allowance for impairment.
(b) Non interest income
Fee income
HSBC earns fee income from a diverse range of services provided to its customers. Fee income is accounted for
as follows:
− income earned on the execution of a significant act is recognised as revenue when the act is completed (for
example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party,
such as the arrangement for the acquisition of shares or other securities);
− income earned from the provision of services is recognised as revenue as the services are provided (for
example, asset management, portfolio and other management advisory and service fees); and
− income which forms an integral part of the effective interest rate of a financial instrument is recognised as
an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in
‘Interest income’ (Note 2a).
Net trading income
Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial
liabilities held for trading, together with related interest income, expense and dividends.
Net income from financial instruments designated at fair value
‘Net income from financial instruments designated at fair value’ includes all gains and losses from changes in
the fair value of financial assets and financial liabilities designated at fair value through profit or loss. Interest
income and expense and dividend income arising on these financial instruments are also included, except for
debt securities issued and derivatives managed in conjunction with debt securities issued. Interest on these
instruments is presented in ‘Interest expense’.
Dividend income
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for
equity securities.