HSBC 2010 Annual Report Download - page 255

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
– 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, held-to-maturity and loans and receivables categories will no longer exist.
– Classification of financial assets is based on an entity’s business model for managing the financial assets and
their contractual cash flow characteristics. 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 assets 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.
– Most of IAS 39’s requirements for financial liabilities are retained, including amortised cost accounting for
most financial liabilities. The guidance on separation of embedded derivatives will continue to apply to host
contracts that are financial liabilities. However, fair value changes attributable to changes in own credit risk
for financial liabilities designated under the fair value option other than loan commitments and financial
guarantee contracts are to be presented in the statement of other comprehensive income unless the treatment
would create or enlarge an accounting mismatch in profit or loss. These amounts are not subsequently
reclassified to the income statement but may be transferred within equity.
The second and third phases in the IASB’s project to replace IAS 39 will address the impairment of financial
assets measured at amortised cost and hedge accounting. The IASB has indicated that it expects to finalise the
replacement of IAS 39 by June 2011. 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 project
to replace IAS 39. As a result, it is impracticable to quantify the impact of IFRS 9 as at the date of publication of
these financial statements.
2 Summary of significant accounting policies
(a) Interest income and expense
Interest income and expense for all financial instruments except for those classified as held for trading or
designated at fair value (other than debt securities issued by HSBC and derivatives managed in conjunction with
such debt securities issued) are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement
using the effective interest method. The effective interest method is a way of calculating the amortised cost of a
financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the
interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through
the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of
the financial asset or financial liability. When calculating the effective interest rate, HSBC estimates cash flows
considering all contractual terms of the financial instrument but excluding future credit losses. The calculation
includes all amounts paid or received by HSBC that are an integral part of the effective interest rate of a financial
instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss.