HSBC 2011 Annual Report Download - page 44

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Critical accounting policies // Global businesses > Summary
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These strategies remain unaffected by the
proposed sale of the Group’s US credit card and
private label credit card business and 195 non-
strategic branches. The incremental capital generated
as a result of these disposals will reduce the capital
support required from HSBC Holdings, but capital
support from HSBC Holdings will continue to be
relied on to the extent necessary to support the
recoverability of our deferred tax assets.
Provisions for liabilities
The accounting policy for provision for liabilities is
described in Note 2w on the Financial Statements.
Note 33 on the Financial Statements discloses the
major categories of provisions recognised. The
closing balance of provisions amounted to US$3.3bn
(2010: US$2.1bn), of which US$1.5bn (2010:
US$1.0bn) relates to legal proceedings and
regulatory matters and US$1.1bn (2010: US$0.4bn)
relates to customer remediation.
Provisions are liabilities of uncertain timing or
amount, and are recognised when there is a present
obligation as a result of a past event, the outflow of
economic benefit is probable and the outflow can
be estimated reliably. Judgement is involved in
determining whether an obligation exists, and in
estimating the probability, timing and amount of any
outflows. Professional expert advice is taken on
litigation provisions, taxation provisions, property
provisions including onerous contracts and similar
liabilities.
Provisions for legal proceedings and regulatory
matters typically require a higher degree of
judgement than other types of provisions. When
cases are at an early stage, accounting judgements
can be difficult because of the high degree of
uncertainty associated with determining whether a
present obligation exists as a result of a past event,
estimating the probability of outflows and making
estimates of the amount of any outflows that may
arise. As matters progress through various stages of
development, management together with legal
advisers evaluate on an ongoing basis whether
provisions should be recognised, and the estimated
amounts of any such provisions, revising previous
judgements and estimates as appropriate. At more
advanced stages, it is typically possible to make
judgements and estimates around a better defined set
of possible outcomes, however such judgements can
be very difficult and the amount of any provision can
be very sensitive to the assumptions used. There
could be a wide range of possible outcomes for any
pending legal proceedings, investigations or
inquiries. As a result, it is often not practicable to
quantify a range of possible outcomes for individual
matters. It is also not practicable to meaningfully
quantify ranges of potential outcomes in aggregate
for these types of provisions because of the diverse
nature and circumstances of such matters and the
wide range of uncertainties involved. For a detailed
description of the nature of uncertainties and
assumptions and the effect on the amount and timing
of possible cash outflows on material matters, see
Note 44, ‘Legal proceedings and regulatory matters’
on the Financial Statements.
Provisions for customer remediation also require
significant levels of estimation and judgement. The
amounts of provisions recognised depend on a
number of different assumptions, for example, the
number of customer complaints expected to be
received, the response rates from customers who are
contacted as part of customer outreach activities, the
uphold rate for complaints and the amounts payable
in respect of compensation and costs of conducting
reviews. These assumptions are revised over time as
additional information becomes available.
In view of the inherent uncertainties and the
high level of subjectivity involved in the recognition
and measurement of provisions, it is possible that the
outcomes in the next financial year could differ from
those on which management’s estimates are based,
resulting in a material change in the amounts of
provisions recognised, and outflows of economic
benefits which are materially different to those
estimated by management for the purposes of the
2011 financial statements.
Basis of preparation
(Unaudited)
The results of global businesses and geographical regions are
presented in accordance with the accounting policies used in
the preparation of HSBC’s consolidated financial statements.
Our operations are closely integrated and, accordingly,
the presentation of global business data includes internal
allocations of certain items of income and expense. These
allocations include the costs of certain support services and
global functions, to the extent that these can be meaningfully
attributed to operational business lines. While such allocations
have been made on a systematic and consistent basis, they
necessarily involve a degree of subjectivity.
Where relevant, income and expense amounts presented
include the results of inter-segment funding as well as inter-
company and inter-business line transactions. All such
transactions are undertaken on arm’s length terms.
The expense of the UK bank levy is included in the
Europe geographical region as HSBC regards the levy as a cost
of being headquartered in the UK. For the purposes of the
segmentation by global business, the cost of the levy is
included in ‘Other’.