HSBC 2006 Annual Report Download - page 418

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
416
Revaluation of property
IFRSs
• As allowed by the transition rules of IFRS 1, HSBC elected to adopt the value of all its properties held for its
own use as at 1 January 2004 as their ‘deemed cost’ at that date. Assets are carried at cost less any accumulated
depreciation and impairment losses. Freehold land is not depreciated.
• Investment properties are carried at current market values with gains or losses thereon recognised in the income
statement for the period. Investment properties are not depreciated.
US GAAP
• US GAAP does not permit revaluations of property, including investment property, although it requires
recognition of asset impairment. Any realised surplus or deficit is, therefore, reflected in net income upon
disposal of the property. Depreciation is charged on all properties based on cost.
Impact
• Under IFRSs, the value of property held for own use reflects revaluation surpluses recorded prior to 1 January
2004. Consequently, the values of tangible fixed assets and shareholders' equity are lower under US GAAP than
under IFRSs.
• There is a correspondingly lower depreciation charge and higher net income under US GAAP, partially offset by
higher gains (or smaller losses) on the disposal of fixed assets.
• For investment properties, net income under US GAAP does not reflect the gain or loss recorded under IFRSs
for the period.
Restructuring provisions
IFRSs
• In accordance with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’, provisions are made for
any direct costs arising from a business that management is committed to restructure, sell or terminate; has a
detailed formal plan and has raised a valid expectation of carrying out that plan.
US GAAP
• SFAS 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’, requires that the fair value of a
liability for a cost associated with an exit or disposal activity be recognised when the liability is incurred.
Accordingly, provisions are recognised upon the implementation of the restructuring plan.
Impact
• The recognition of costs associated with plans to restructure and streamline operations is earlier under IFRSs
than under US GAAP, for example, where there is a time lag between developing and communicating a formal
plan, and putting it into practice. This resulted in marginally higher net income and shareholders’ equity under
US GAAP in 2005.
Consolidation of special purpose entities or variable interest entities
IFRSs
• Under the IASB’s Standing Interpretations Committee (‘SIC’) Interpretation 12 (‘SIC-12’), a special purpose
entity (‘SPE’) should be consolidated when the substance of the relationship between an enterprise and the SPE
indicates that the SPE is controlled by that entity.
US GAAP
• FASB Interpretation No. 46 (revised December 2003), ‘Consolidation of Variable Interest Entities’ (‘FIN 46R’),
requires consolidation of variable interest entities (‘VIE’s) in which HSBC is the primary beneficiary and
disclosures in respect of all other VIEs in which it has a significant variable interest.
• A VIE is an entity in which equity investors hold an investment that does not possess the characteristics of a
controlling financial interest or does not have sufficient equity at risk for the entity to finance its activities.