HSBC 2007 Annual Report Download - page 363

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The PVIF long-term insurance business is determined by discounting future cash flows expected to emerge from
business currently in force using appropriate assumptions in assessing factors such as future mortality, lapse
rates and levels of expenses and a risk discount rate that reflects the risk premium attributable to the respective
long-term insurance business. Movements in the PVIF long-term insurance business are included in ‘Other
operating income’ on a gross of tax basis.
Future profit participation
Where contracts provide discretionary profit participation benefits to policyholders, insurance liabilities include
the net unrealised gains recognised in connection with the assets backing the contracts to the extent that
policyholders will benefit from such gains. This benefit may arise from the contractual terms, regulation, or past
distribution policy. The corresponding movement in liability is recognised in equity or in the income statement
in the same proportion to the net unrealised gains on the assets. In the case of net unrealised losses, a deferred
participating asset is recognised only to the extent that its recoverability is highly probable.
(y) Investment contracts
Customer liabilities under linked and certain non-linked investment contracts and the corresponding financial
assets are designated at fair value. Movements in fair value are recognised in ‘Net income from financial
investments designated at fair value’. Premiums receivable and amounts withdrawn are accounted for as
increases or decreases in the liability recorded in respect of investment contracts.
Liabilities under linked investment contracts are at least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying funds or indices.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services, in ‘Net fee income’.
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are deferred and amortised over the period during which the investment management
services are provided.
(z) Debt securities issued and deposits by customers and banks
Financial liabilities are recognised when HSBC enters into the contractual provisions of the arrangements with
counterparties, which is generally on trade date, and initially measured at fair value, which is normally the
consideration received net of directly attributable transaction costs incurred. Subsequent measurement of
financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is at
amortised cost, using the effective interest rate method to amortise the difference between proceeds net of
directly attributable transaction costs and the redemption amount over the expected life of the debt.
(aa) Share capital
Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.
Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from
the proceeds, net of tax.
HSBC Holdings plc shares held by HSBC are recognised in ‘Total shareholders’ equity’ as a deduction from
retained earnings until they are cancelled. When such shares are subsequently sold, reissued or otherwise
disposed of, any consideration received is included in ‘Total shareholders’ equity’, net of any directly
attributable incremental transaction costs and related income tax effects.
(ab) Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents include highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
Such investments are normally those with less than three months’ maturity from the date of acquisition, and
include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to banks,
items in the course of collection from or in transmission to other banks, and certificates of deposit.