HSBC 2007 Annual Report Download - page 432

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 33
430
HSBC Holdings
The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at
fair value in the financial statements:
Valuation techniques:
Quoted
market
price
using
observable
inputs
with significant
non-observable
inputs Total
US$m US$m US$m US$m
At 31 December 2007
Assets
Derivatives .................................................................... – 2,660 – 2,660
Financial investments: available-for-sale ..................... 346 – 2,676 3,022
Liabilities
Financial liabilities at fair value ................................... 18,683 – – 18,683
Derivatives .................................................................... – 44 – 44
At 31 December 2006
Assets
Derivatives .................................................................... – 1,599 – 1,599
Financial investments: available-for-sale ..................... 299 – 3,315 3,614
Liabilities
Financial liabilities at fair value ................................... 14,070 – – 14,070
Derivatives .................................................................... – 177 – 177
Financial investments measured using a valuation technique with significant non-observable inputs comprise fixed-
rate trust preferred securities and senior notes purchased from HSBC undertakings. The unobservable elements of the
valuation technique include the use of implied credit spreads and simplified bond pricing assumptions.
Movements in unobservable assumptions in fair value valuation models
As discussed above, the fair value of financial instruments are in certain circumstances measured using valuation
models that incorporate assumptions that are not supported by prices from observable current market transactions in
the same instrument and are not based on observable market data. The following table shows the sensitivity of non-
derivative financial instruments to reasonably possible alternative assumptions.
Reflected in equity
Favourable
changes
Unfavourable
changes
US$m US$m
Financial investments available-for-sale
At 31 December 2007 ....................................................................................................................... 53 (52)
At 31 December 2006 ........................................................................................................................ 65 (64)
Fair value of financial instruments not carried at fair value
The fair values of financial instruments that are not recognised at fair value on the balance sheet are calculated as
described below.
The calculation of fair value incorporates HSBC’s estimate of the amount at which financial assets could be
exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm’s length transaction. It
does not reflect the economic benefits and costs that HSBC expects to flow from the instruments’ cash flows over
their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in
determining fair values for which no observable market prices are available, so comparisons of fair values between
entities may not be meaningful and users are advised to exercise caution when using this data.
In recent months, the unstable market conditions in the US mortgage lending industry have resulted in a significant
reduction in the secondary market demand for US consumer lending assets. Uncertainty over the extent and timing of
future credit losses, together with an absence of liquidity for non-prime asset-backed securities, were reflected in a
lack of bid prices other than at distressed levels at 31 December 2007. It is not possible to distinguish from these
indicative market prices the relative discount that reflects cash flow impairment due to expected losses to maturity,