HSBC 2009 Annual Report Download - page 377

375
The fair value designation, once made, is irrevocable. Designated financial assets and financial liabilities are
recognised when HSBC enters into the contractual provisions of the arrangements with counterparties, which
is generally on trade date, and are normally derecognised when either sold (assets) or extinguished (liabilities).
Measurement is initially at fair value, with transaction costs taken to the income statement. Subsequently, the
fair values are remeasured, and gains and losses from changes therein are recognised in the income statement in
‘Net income from financial instruments designated at fair value’.
(j) Financial investments
Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those
designated at fair value, are classified as available-for-sale or held-to-maturity. Financial investments are
recognised on trade date when HSBC enters into contractual arrangements with counterparties to purchase
securities, and are normally derecognised when either the securities are sold or the borrowers repay their
obligations.
(i) Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction
costs. They are subsequently remeasured at fair value, and changes therein are recognised in other
comprehensive income in ‘Available-for-sale investments – fair value gains/(losses)’ until the financial
assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative
gains or losses previously recognised in other comprehensive income are recognised in the income statement
as ‘Gains less losses from financial investments’.
Interest income is recognised on available-for-sale debt securities using the effective interest rate, calculated
over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated investment
securities are included in the calculation of their effective interest rates. Dividends are recognised in the
income statement when the right to receive payment has been established.
At each balance sheet date an assessment is made of whether there is any objective evidence of impairment
in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence
of impairment as a result of one or more events that occurred after the initial recognition of the financial
asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the
financial asset that can be reliably estimated.
If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition
cost (net of any principal repayments and amortisation) and the current fair value, less any previous
impairment loss recognised in the income statement, is removed from other comprehensive income and
recognised in the income statement.
Impairment losses for available-for-sale debt securities are recognised within ‘Loan impairment charges and
other credit risk provisions’ in the income statement and impairment losses for available-for-sale equity
securities are recognised within ‘Gains less losses from financial investments’ in the income statement.
Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent
accounting treatment for changes in the fair value of that asset differs depending on the nature of the
available-for-sale financial asset concerned:
– for an available-for-sale debt security, a subsequent decline in the fair value of the instrument is
recognised in the income statement when there is further objective evidence of impairment as a result of
further decreases in the estimated future cash flows of the financial asset. Where there is no further
objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other
comprehensive income. If the fair value of a debt security increases in a subsequent period, and the
increase can be objectively related to an event occurring after the impairment loss was recognised in the
income statement, the impairment loss is reversed through the income statement to the extent of the
increase in fair value;
– for an available-for-sale equity security, all subsequent increases in the fair value of the instrument are
treated as a revaluation and are recognised in other comprehensive income. Impairment losses recognised
on the equity security are not reversed through the income statement. Subsequent decreases in the fair
value of the available-for-sale equity security are recognised in the income statement, to the extent that
further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity
security.