HSBC 2008 Annual Report Download - page 343

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(d) Comparative information
As required by US public company reporting requirements, these consolidated financial statements include two
years of comparative information for the consolidated income statement, consolidated cash flow statement,
consolidated statement of recognised income and expense and related notes on the financial statements.
(e) Use of estimates and assumptions
The preparation of financial information requires the use of estimates and assumptions about future conditions.
The use of available information and the application of judgement are inherent in the formation of estimates;
actual results in the future may differ from those reported. Management believes that HSBC’s critical accounting
policies where judgement is necessarily applied are those which relate to impairment of loans and advances,
goodwill impairment, the valuation of financial instruments, the impairment of available-for-sale financial assets
and deferred tax assets (see ‘Critical Accounting Policies’ on pages 61 to 66, which form an integral part of these
financial statements).
Further information about key assumptions concerning the future, and other key sources of estimation
uncertainty, are set out in these notes on the financial statements.
(f) Consolidation
The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its
subsidiaries made up to 31 December, with the exception of the banking and insurance subsidiaries of HSBC
Bank Argentina, whose financial statements are made up to 30 June annually to comply with local regulations.
Accordingly, HSBC uses their audited interim financial statements, drawn up to 31 December annually.
Subsidiaries are consolidated from the date that HSBC gains control. The purchase method of accounting is used
to account for the acquisition of subsidiaries by HSBC. The cost of an acquisition is measured at the fair value of
the consideration given at the date of exchange, together with costs directly attributable to that acquisition. The
acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of
acquisition. Any excess of the cost of acquisition over the fair value of HSBC’s share of the identifiable assets,
liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair
value of HSBC’s share of the identifiable assets, liabilities and contingent liabilities of the business acquired, the
difference is recognised immediately in the income statement.
Entities that are controlled by HSBC are consolidated until the date that control ceases.
In the context of Special Purpose Entities (‘SPE’s), the following circumstances may indicate a relationship in
which, in substance, HSBC controls and consequently consolidates an SPE:
• the activities of the SPE are being conducted on behalf of HSBC according to its specific business needs so
that HSBC obtains benefits from the SPE’s operation;
• HSBC has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or,
by setting up an ‘autopilot’ mechanism, HSBC has delegated these decision-making powers;
• HSBC has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks
incident to the activities of the SPE; or
• HSBC retains the majority of the residual or ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
HSBC performs a re-assessment of consolidation whenever there is a change in the substance of the relationship
between HSBC and an SPE.
All intra-HSBC transactions are eliminated on consolidation.
The consolidated financial statements of HSBC also include the attributable share of the results and reserves of
joint ventures and associates. These are based on financial statements made up to 31 December, with the
exception of the Bank of Communications, Ping An Insurance and Industrial Bank which are included on the
basis of financial statements made up for the twelve months to 30 September. These are equity accounted three
months in arrears in order to meet the requirements of the Group’s reporting timetable. HSBC has taken into
account changes in the period from 1 October to 31 December that would have materially affected its results.