HSBC 2007 Annual Report Download - page 353

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there have been changes in economic, regulatory or behavioural conditions, such that the most recent trends in
the portfolio risk factors are not fully reflected in the statistical models.
These additional portfolio risk factors may include recent loan portfolio growth and product mix, unemployment
rates, bankruptcy trends, geographic concentrations, loan product features (such as the ability of borrowers to
repay adjustable-rate loans where reset interest rates give rise to increases in interest charges), economic
conditions such as national and local trends in housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of write-offs, changes in laws and regulations and other items
which can affect customer payment patterns on outstanding loans, such as natural disasters. These risk factors,
where relevant, are taken into account when calculating the appropriate level of impairment allowances by
adjusting the impairment allowances derived solely from historical loss experience.
Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure they remain appropriate.
Write-off of loans and advances
A loan (and the related impairment allowance account) is normally written off, either partially or in full, when
there is no realistic prospect of recovery of the principal amount and, for a collateralised loan, when the proceeds
from realising the security have been received.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The write back is recognised in the income statement.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as assets held
for sale and reported in ‘Other assets’. The asset acquired is recorded at the lower of its fair value (less costs to
sell) and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation
is charged in respect of assets held for sale. Any subsequent write-down of the acquired asset to fair value less
costs to sell is recognised in the income statement, in ‘Other operating income’. Any subsequent increase in the
fair value less costs to sell, to the extent this does not exceed the cumulative write down, is also recognised in
‘Other operating income’, together with any realised gains or losses on disposal.
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered
past due, but are treated as new loans for measurement purposes once the minimum number of payments
required under the new arrangements have been received. Loans subject to individual impairment assessment,
whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired
or should be considered past due. The carrying amount of loans that have been classified as renegotiated retain
this classification until maturity or derecognition.
(g) Trading assets and trading liabilities
Treasury bills, debt securities, equity shares, loans, deposits, debt securities in issue, and short positions in
securities are classified as held for trading if they have been acquired principally for the purpose of selling or
repurchasing in the near term, or they form part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent pattern of short-term profit-taking. These financial
assets or financial liabilities are recognised on trade date, when HSBC enters into contractual arrangements with
counterparties to purchase or sell securities, and are normally derecognised when either sold (assets) or
extinguished (liabilities). Measurement is initially at fair value, with transaction costs taken to the income
statement. Subsequently, their fair values are remeasured, and all gains and losses from changes therein are
recognised in the income statement in ‘Net trading income’ as they arise.