HSBC 2009 Annual Report Download - page 370

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Notes 1 and 2
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– all consideration transferred, including contingent consideration, is recognised and measured at fair value at
the acquisition date;
– equity interests held prior to control being obtained are remeasured to fair value at the date of obtaining
control, and any gain or loss is recognised in the income statement;
– changes in a parent’s ownership interest in a subsidiary that do not result in a change of control are treated
as transactions between equity holders and are reported in equity; and
– an option is available, on a transaction-by-transaction basis, to measure any non-controlling (previously
referred to as minority) interests in the entity acquired either at fair value, or at the non-controlling interests’
proportionate share of the net identifiable assets of the entity acquired.
The effect that the changes will have on HSBC’s consolidated financial statements and the separate financial
statements of HSBC Holdings will depend on the incidence and timing of business combinations occurring after
31 December 2009.
Standards and Interpretations issued by the IASB but not endorsed by the EU
IFRS 9 ‘Financial Instruments’ introduces new requirements for the classification and measurement of financial
assets. The standard is effective for annual periods beginning on or after 1 January 2013 with early adoption
permitted. IFRS 9 is required to be applied retrospectively. If the standard is adopted prior to 1 January 2012, an
entity will be exempt from the requirement to restate prior period comparative information. IFRS 9 is subject to
EU endorsement, the timing of which is uncertain. Accordingly, HSBC is unable to provide a date by which it
plans to apply IFRS 9.
The main changes to the requirements of IAS 39 are summarised below.
– All financial assets that are currently in the scope of IAS 39 will be classified as either amortised cost or fair
value. The available-for-sale and held-to-maturity categories will no longer exist.
– Classification is based on an entity’s business model for managing the financial assets and the contractual
cash flow characteristics of the financial assets. Reclassifications between the two categories are prohibited
unless there is a change in the entity’s business model.
– A financial asset is measured at amortised cost if two criteria are met: i) the objective of the business model
is to hold the financial asset for the collection of the contractual cash flows; and ii) the contractual cash
flows of the instrument are solely payments of principal and interest on the principal outstanding. All other
financial assets are measured at fair value. Movements in the fair value of financial assets classified at fair
value are recognised in profit or loss, except for equity investments where an entity takes the option to
designate an equity instrument that is not held for trading at fair value through other comprehensive income.
If this option is taken, all subsequent changes in fair value are recognised in other comprehensive income
with no recycling of gains or losses to the income statement. Dividend income would continue to be
recognised in the income statement.
– An entity is only permitted to designate a financial asset otherwise meeting the amortised cost criteria at fair
value through profit or loss if doing so significantly reduces or eliminates an accounting mismatch. This
designation is made on initial recognition and is irrevocable.
– Financial instruments which contain embedded derivatives are to be classified in their entirety either at fair
value or amortised cost depending on whether the contracts as a whole meet the relevant criteria under
IFRS 9.
IFRS 9 is the first instalment in the IASB’s planned phased replacement of IAS 39 with a less complex and
improved standard for financial instruments. The next steps in the IASB’s project will address the classification
and measurement requirements for financial liabilities, the impairment of financial assets measured at amortised
cost and hedge accounting. The IASB has indicated that it aims to finalise the replacement of IAS 39 by the end
of 2010. In addition, the IASB is working with the US Financial Accounting Standards Board to reduce
inconsistencies between US GAAP and IFRS in accounting for financial instruments. The impact of IFRS 9 may
change as a consequence of further developments resulting from the IASB’s financial instruments project. As a
result, it is impracticable to quantify the impact of IFRS 9 as at the date of publication of these financial
statements.