HSBC 2006 Annual Report Download - page 412

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
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the sensitivity of the floating leg of the swap to changes in short-term interest rates. In addition, the
economic relationship between the swap and own debt can be affected by relative movements in market
factors, such as bond and swap rates, and the relative bond and swap rates at inception. The size and
direction of the accounting consequences of changes in own credit spread and ineffectiveness can be volatile
from period to period, but do not alter the cash flows envisaged as part of the documented interest rate
management strategy.
− certain financial assets held by insurance operations and managed at fair value to meet liabilities under
insurance contracts (in 2006, approximately US$6 billion; 2005: US$4 billion of assets);
− financial liabilities under investment contracts and the related financial assets, when the change in value of
the assets is correlated with the change in value of the liabilities to policyholders (in 2006, approximately
US$12 billion; 2005: US$8 billion of liabilities and related assets).
• Under US GAAP, debt issues are generally reported at amortised cost. There are circumstances, by virtue of
different technical requirements and the transition arrangements to IFRSs, where derivatives providing an
economic hedge for an asset or liability, and so designated under IFRSs, are not so treated under US GAAP,
thereby creating a reconciliation difference and asymmetrical accounting between the asset and liability and the
offsetting derivative. Such derivatives result in an adjustment that is included in the reconciliations below, within
‘Derivatives and hedge accounting’.
• Prior to 1 January 2006, debt issues which had embedded derivatives were also reported at amortised cost with
any embedded derivatives bifurcated where required by SFAS 133.
• From 1 January 2006, as described above, the Group’s hybrid debt issues that contain an embedded derivative
that would otherwise require bifurcation are accounted for in a consistent manner under both IFRSs and US
GAAP, where such instruments are designated to be measured at fair value. On the US GAAP balance sheet,
such instruments are reclassified as ‘Financial liabilities designated at fair value’.
• Under US GAAP, assets held to meet insurance/investment contracts are reported as available-for-sale, with
gains and losses taken directly to ‘Other comprehensive income’. When the corresponding liability is reported at
fair value, with movements reported immediately in net income, this also results in asymmetrical accounting
being reflected in US GAAP net income.
• All these adjustments are included as ‘Derivatives and hedge accounting’ in the reconciliations below.
Available-for-sale securities
IFRSs
• Treasury bills, debt securities and equity shares intended to be held on a continuing basis are classified as
available-for-sale securities unless designated at fair value (see above) or classified as held-to-maturity.
• Available-for-sale securities are initially measured at fair value plus direct and incremental transaction costs.
They are subsequently remeasured at fair value. Changes in fair value are recognised in equity until the securities
are either sold or impaired. On the sale of available-for-sale securities, cumulative gains or losses previously
recognised in equity are recognised through the income statement and classified as ‘Gains less losses from
financial investments’. Interest income is recognised on such securities using the effective interest rate method,
calculated over the asset’s expected life. When dated available-for-sale securities are purchased at a premium or
a discount, the premiums and discounts are included in the calculation of the effective interest rate.
• If an available-for-sale security is determined to be impaired, the cumulative loss (measured as the difference
between the acquisition cost, net of any principal repayments and amortisation, and the current fair value, less
any impairment loss on that financial asset previously recognised in the income statement) is removed from
equity and recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument
classified as available-for-sale increases 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.