HSBC 2009 Annual Report Download - page 67

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identified in available-for-sale debt securities which
had previously been determined not to be impaired,
potentially resulting in the recognition of material
impairment losses in the next financial year.
Deferred tax assets
HSBC’s accounting policy for the recognition of
deferred tax assets is described in Note 2s on the
Financial Statements. A deferred tax asset is
recognised to the extent that it is probable that future
taxable profits will be available against which
deductible temporary differences can be utilised.
The recognition of a deferred tax asset relies on
management’s judgements about the probability and
sufficiency of future taxable profits, future reversals
of existing taxable temporary differences and
ongoing tax planning strategies.
HSBC’s most significant judgements are
around the US deferred tax assets, given the recent
history of losses in HSBC’s US operations. Net US
deferred tax assets amounted to US$5.1 billion or
59 per cent (2008: US$5.1 billion; 73 per cent) of
deferred tax assets recognised on the Group’s
balance sheet.
Recognition of US deferred tax assets is based
on the evidence available about conditions at the
balance sheet date, and requires significant
judgements to be made by management regarding
projections of loan impairment charges and the
timing of recovery in the US economy.
Management’s judgement takes into consideration
the impact of both positive and negative evidence,
including historical financial performance,
projections of future taxable income, future
reversals of existing taxable temporary differences,
tax planning strategies and the availability of loss
carrybacks.
The tax losses incurred in HSBC’s US
operations in 2009 were primarily caused by the high
level of loan impairment charges which were due to
the current housing and credit market conditions
and continued weakness in the general economy,
resulting in high unemployment levels. Management
has evaluated the factors contributing to the losses to
determine whether the factors leading to the losses
are temporary or indicative of a permanent decline in
earnings.
Management’s projections of future taxable
income in the US are based on business plans, future
capital requirements and ongoing tax planning
strategies. These projections include assumptions
about the depth and severity of house price
depreciation, assumptions about the US economic
downturn, including unemployment levels and their
impact on loan impairment charges, and assumptions
about capital support from HSBC.
Management’s forecasts are consistent with
the assumption that it is probable that the results of
future operations will generate sufficient taxable
income to support the deferred tax assets. In
management’s judgement, recent market conditions,
which have resulted in losses being incurred in the
US over the last three years, will create significant
downward pressure and volatility regarding the
profit or loss before tax in the next few years. To
reflect this, the assessment of recoverability of the
deferred tax asset in the US significantly discounts
any future expected taxable income and relies to a
greater extent on capital support to the US operations
from HSBC, including tax planning strategies
implemented in relation to such support. The most
significant tax planning strategy is HSBC’s
investment of capital in its US operations to ensure
the realisation of the deferred tax assets. Further to
the implementation of this strategy, an internal
reorganisation on 31 January 2010 resulted in a
capital injection that provided substantial support for
the recoverability of the US deferred tax assets.
HSBC expects that, with support, its US operations
will continue to execute their business strategies and
plans until they return to profitability. If HSBC were
to decide not to provide ongoing support, the full
recovery of the deferred tax asset may no longer be
probable and could result in a significant write-off of
the deferred tax asset which would be recognised as
a charge in the income statement.