HSBC 2008 Annual Report Download - page 67

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relating to that asset is removed from equity and
recognised in the income statement as an impairment
loss. A further decline in the fair value of an
available-for-sale debt security subsequent to the
initial impairment is recognised in the income
statement when there is further objective evidence of
impairment.
At 31 December 2008 the Group’s total
available-for-sale financial assets amounted to
US$286 billion (2007: US$273 billion), of
which US$279 billion or 98 per cent (2007:
US$261 billion; 95 per cent) were debt securities.
At 31 December 2008, the available-for-sale fair
value reserve relating to debt securities amounted
to a deficit of US$21.4 billion (2007: deficit of
US$2.4 billion). A deficit in the available-for-sale
fair value reserve occurs on an available-for-sale
debt security when the fair value of the security is
less than the security’s acquisition cost (net of any
principal repayments and amortisation) less any
previous impairment loss recognised in the income
statement, but there is no evidence of any
impairment or, if an impairment was previously
recognised, any subsequent impairment.
Management is required to exercise judgement
in determining whether there is objective evidence
that an impairment loss has occurred. Once an
impairment has been identified, the amount of
impairment loss is measured in relation to the fair
value of the asset. More information on assumptions
and estimates requiring management judgement
relating to the determination of fair values of
financial instruments is provided above in ‘Valuation
of financial instruments’.
The objective evidence required to determine
whether an available-for-sale debt security is
impaired comprises evidence of the occurrence of a
loss event and evidence that the loss event results in
a decrease in estimated future cash flows. Where
cash flows are readily determinable, a low level of
judgement may be involved. Where determination of
estimated future cash flows requires consideration of
a number of variables, some of which may be
unobservable in current market conditions, more
significant judgement is required.
The most significant judgements concern more
complex instruments, such as asset-backed securities
(‘ABS’s), where it is necessary to consider factors
such as the estimated future cash flows on
underlying pools of collateral, the extent and depth
of market price declines and changes in credit
ratings. The review of estimated future cash flows
on underlying collateral is subject to estimation
uncertainties where the assessment is based on
historical information on pools of assets, and
judgement is required to determine whether
historical performance is likely to be representative
of current economic and credit conditions. A
description of these securities is included in the
‘Impact of market turmoil’ section under ‘Nature
and extent of HSBC’s exposures’ on page 150 and a
more detailed description of the assumptions and
estimates used in assessing these securities for
impairment is disclosed in the section ‘Assessing
available-for-sale assets for impairment’ on
page 170.
There is no single factor to which the Group’s
charge for impairment of available-for-sale debt
securities is particularly sensitive, because of the
range of different types of securities held, the range
of geographical areas in which those securities are
held, and the wide range of factors which can affect
the occurrence of loss events and the cash flows of
securities, including different types of collateral.
Management’s current assessment of the
holdings of available-for-sale ABSs with the most
sensitivity to possible future impairment is focused
on sub-prime and Alt-A residential mortgage-backed
securities (‘MBSs’). The Group’s principal exposure
to these securities is in the Global Banking and
Markets’ business. Excluding holdings in certain
special purpose entities where significant first loss
risks are borne by external investors, the available-
for-sale holdings in these categories within Global
Banking and Markets amounted to US$5.2 billion at
31 December 2008 (2007: US$11.8 billion). The
deficit in the available-for-sale fair value reserve as
at 31 December 2008 in relation to these securities
was US$5.9 billion (2007: US$1.1 billion).
The main factors in the reduction in fair value
of these securities over the period were the effects
of reduced market liquidity and negative market
sentiment. The level of actual credit losses
experienced was low in 2008, notwithstanding the
deterioration in the performance of the underlying
mortgages in the period as US house prices fell and
defaults increased. The absence of material credit
losses is judged to be attributable to the seniority of
the tranches held by HSBC as well as the priority for
cash flow held by these tranches.
Further details of the nature and extent of
HSBC’s exposures to asset backed securities
classified as available-for-sale are provided in
‘Impact of market turmoil–nature and extent of
HSBC’s exposures’ on page 150.
It is reasonably possible that outcomes in the
next financial year could be different from the
assumptions and estimates used in identifying