HSBC 2012 Annual Report Download - page 391

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
(f) Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by HSBC which are not
classified as held for trading or designated at fair value. Loans and advances are recognised when cash is
advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans
are sold or written off, or substantially all the risks and rewards of ownership are transferred. They are initially
recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised
cost using the effective interest method, less any reduction from impairment or uncollectibility. Where exposures
are hedged by derivatives designated and qualifying as fair value hedges, the carrying value of the loans and
advances so hedged includes a fair value adjustment relating only to the hedged risk.
Loans and advances are reclassified to ‘Assets held for sale’ when their carrying amounts are to be recovered
principally through sale, they are available for sale in their present condition and their sale is highly probable
(Note 2ac); however, such loans and advances continue to be measured in accordance with the policy described
above.
HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time, where the
drawdown of the loan is contingent upon certain future events outside the control of HSBC. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as
a derivative and measured at fair value through profit or loss. On drawdown, the loan is classified as held for
trading and measured at fair value through profit or loss. Where it is not HSBC’s intention to trade but hold the
loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss. This
may occur, for example, where a loss of principal is probable or the interest rate charged on the loan is lower
than the cost of funding. On inception of the loan, the loan to be held is recorded at its fair value and
subsequently measured at amortised cost using the effective interest method. For certain transactions, such as
leveraged finance and syndicated lending activities, the cash advanced is not necessarily the best evidence of the
fair value of the loan. For these loans, where the initial fair value is lower than the cash amount advanced (for
example, due to the rate of interest charged on the loan being below the market rate of interest), the write-down
is charged to the income statement. The write-down will be recovered over the life of the loan, through the
recognition of interest income using the effective interest method, unless the loan becomes impaired. The write-
down is recorded as a reduction to other operating income.
Financial assets which have been reclassified into the loans and receivables category are initially recorded at the
fair value at the date of reclassification and are subsequently measured at amortised cost, using the effective
interest rate determined at the date of reclassification.
(g) Impairment of loans and advances
Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or
portfolio of loans has occurred. Impairment allowances are calculated on individual loans and on groups of loans
assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount
of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses
which may arise from future events are not recognised.
Individually assessed loans and advances
The factors considered in determining whether a loan is individually significant for the purposes of assessing
impairment include:
– the size of the loan;
– the number of loans in the portfolio; and
– the importance of the individual loan relationship, and how this is managed.
Loans that meet the above criteria will be individually assessed for impairment, except when volumes of defaults
and losses are sufficient to justify treatment under a collective assessment methodology.
Loans considered as individually significant are typically to corporate and commercial customers and are for
larger amounts, which are managed on an individual relationship basis. Retail lending portfolios are generally
assessed for impairment on a collective basis as the portfolios generally consist of large pools of homogeneous
loans.