HSBC 2006 Annual Report Download - page 311

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‘Available-for-sale reserve’ (Note 39) until the securities are either sold or impaired. When available-for-
sale securities are sold, cumulative gains or losses previously recognised in equity are recognised in the
income statement as ‘Gains less losses from financial investments’.
Interest income is recognised on available-for-sale securities using the effective interest rate method,
calculated over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated
investment securities are included in the calculation of their effective interest rates. Dividends are
recognised in the income statement when the right to receive payment has been established.
At each balance sheet date an assessment is made of whether there is any objective evidence of impairment
in the value of a financial asset or group of assets. This usually arises when circumstances are such that an
adverse effect on future cash flows from the asset or group of assets can be reliably estimated. If an
available-for-sale security is impaired, the cumulative loss (measured as the difference between the asset’s
acquisition cost (net of any principal repayments and amortisation) and its current fair value, less any
impairment loss on that asset previously recognised in the income statement) is removed from equity and
recognised in the income statement. Reversals of impairment losses are subject to contrasting treatments
depending on the nature of the instrument concerned:
– if the fair value of a debt instrument classified as available-for-sale increases in a subsequent period,
and the increase can be objectively related to an event occurring after the impairment loss was
recognised in the income statement, the impairment loss is reversed through the income statement;
– impairment losses recognised in the income statement on equity instruments are not reversed through
the income statement.
(ii) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that HSBC positively intends, and is able, to hold until maturity. Held-to-maturity
investments are initially recorded at fair value plus any directly attributable transaction costs, and are
subsequently measured at amortised cost using the effective interest rate method, less any impairment
losses.
(j) Sale and repurchase agreements (including stock lending and borrowing)
When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they
remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities
purchased under commitments to sell (‘reverse repos’) are not recognised on the balance sheet and the
consideration paid is recorded in ‘Loans and advances to banks’ or ‘Loans and advances to customers’ as
appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the
life of the agreement.
Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities
or cash advanced or received. The transfer of securities to counterparties is not normally reflected on the balance
sheet. Cash collateral advanced or received is recorded as an asset or a liability respectively.
Securities borrowed are not recognised on the balance sheet. If they are sold on to third parties, an obligation to
return the securities is recorded as a trading liability and measured at fair value, and any gains or losses are
included in ‘Net trading income’.
(k) Derivatives and hedge accounting
Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchange-
traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are
obtained using valuation techniques, including discounted cash flow models and option pricing models.
In the normal course of business, the fair value of a derivative on initial recognition is the transaction price (that
is, the fair value of the consideration given or received). In certain circumstances, however, the fair value will be
based on other observable current market transactions in the same instrument, without modification or
repackaging, or on a valuation technique whose variables include only data from observable markets, such as
interest rate yield curves, option volatilities and currency rates. When such evidence exists, HSBC recognises a
trading gain or loss on inception of the derivative. When unobservable market data have a significant impact on
the valuation of derivatives, the entire initial difference in fair value indicated by the valuation model from the