HSBC 2012 Annual Report Download - page 397

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
– Available-for-sale equity securities. Objective evidence of impairment for available-for sale equity
securities may include specific information about the issuer as detailed above, but may also include
information about significant changes in technology, markets, economics or the law that provides
evidence that the cost of the equity securities may not be recovered.
A significant or prolonged decline in the fair value of the asset below its cost is also objective evidence
of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the
original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is
evaluated against the period in which the fair value of the asset has been below its original cost at initial
recognition.
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. If there is no
longer objective evidence that the debt security is impaired, the impairment loss is also reversed through
the income statement;
– 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.
(ii) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that HSBC positively intends, and is able, to hold to maturity. Held-to-maturity investments
are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently
measured at amortised cost using the effective interest rate method, less any impairment losses.
(k) Sale and repurchase agreements (including stock lending and borrowing)
When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they
remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities
purchased under commitments to sell (‘reverse repos’) are not recognised on the balance sheet and the
consideration paid is recorded in ‘Loans and advances to banks’, ‘Loans and advances to customers’ or ‘Trading
assets’ as appropriate. The difference between the sale and repurchase price is treated as interest and recognised
over the life of the agreement for loans and advances to banks and customers, and as net trading income for
trading assets.
Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities
or cash advanced or received. The transfer of securities to counterparties under these agreements is not normally
reflected on the balance sheet. Cash collateral advanced or received is recorded as an asset or a liability
respectively.
Securities borrowed are not recognised on the balance sheet. If they are sold on to third parties, an obligation to
return the securities is recorded as a trading liability and measured at fair value, and any gains or losses are
included in ‘Net trading income’.
(l) Derivatives and hedge accounting
Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchange-
traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are
obtained using valuation techniques, including discounted cash flow models and option pricing models.