HSBC 2008 Annual Report Download - page 348

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
346
(e) Reclassification of financial assets
Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial
recognition) may be reclassified out of the fair value through profit or loss category in particular circumstances:
• financial assets that would have met the definition of loans and receivables at initial recognition (if the
financial asset had not been required to be classified as held for trading) may be reclassified out of the fair
value through profit or loss category if there is the intention and ability to hold the financial asset for the
foreseeable future or until maturity; and
• financial assets (except financial assets that would have met the definition of loans and receivables) may
be reclassified out of the fair value through profit or loss category and into another category in rare
circumstances.
When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at
its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not
reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised
cost, as applicable.
(f) Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by HSBC which are not
classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is
advanced to borrowers. They are derecognised when either borrowers repay their obligations, or the loans are
sold or written off, or substantially all the risks and rewards of ownership are transferred. They are initially
recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised
cost using the effective interest method, less impairment losses. Where loans and advances are hedged by
derivatives designated and qualifying as fair value hedges, the carrying value of the loans and advances so
hedged includes a fair value adjustment for the hedged risk only.
For certain leveraged finance and syndicated lending activities, HSBC may commit to underwrite loans on fixed
contractual terms for specified periods of time, where the drawdown of the loan is contingent upon certain future
events outside the control of HSBC. Where the loan arising from the lending commitment is expected to be held
for trading, the commitment to lend is recorded as a trading derivative and measured at fair value through profit
or loss. On drawdown, the loan is classified as held for trading and measured at fair value through profit or loss.
Where it is not HSBC’s intention to trade the loan, a provision on the loan commitment is only recorded where it
is probable that HSBC will incur a loss. This may occur, for example, where a loss of principal is probable or the
interest rate charged on the loan is lower than the cost of funding. On inception of the loan, the hold portion is
recorded at its fair value and subsequently measured at amortised cost using the effective interest method.
However, where the initial fair value is lower than the cash amount advanced (for example, due to the rate of
interest charged on the loan being below the market rate of interest), the write-down is charged to the income
statement. The write-down will be recovered over the life of the loan, through the recognition of interest income
using the effective interest method, unless the loan becomes impaired. The write-down is recorded as a reduction
to other operating income.
Financial assets which have been reclassified out of the fair value through profit or loss category into the loans
and receivables category are initially recorded at the fair value at the date of reclassification. The reclassified
assets are subsequently measured at amortised cost, using the effective interest rate determined at the date of
reclassification.
(g) Impairment of loans and advances
Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or
portfolio of loans has occurred. Impairment allowances are calculated on individual loans and on groups of loans
assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount
of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses
expected from future events are not recognised.