HSBC 2012 Annual Report Download - page 400

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
398
(o) Subsidiaries, associates and joint ventures
HSBC classifies investments in entities which it controls as subsidiaries. Where HSBC is a party to a contractual
arrangement whereby, together with one or more parties, it undertakes an economic activity that is subject to
joint control, HSBC classifies its interest in the venture as a joint venture. HSBC classifies investments in
entities over which it has significant influence, and that are neither subsidiaries nor joint ventures, as associates.
For the purpose of determining this classification, control is considered to be the power to govern the financial
and operating policies of an entity so as to obtain benefits from its activities.
HSBC Holdings’ investments in subsidiaries are stated at cost less any impairment losses. An impairment loss
recognised in prior periods shall be reversed through the income statement if, and only if, there has been a
change in the estimates used to determine the recoverable amount of the investment in subsidiary since the last
impairment loss was recognised.
Investments in associates and interests in joint ventures are recognised using the equity method. Under this
method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter
for the post-acquisition change in HSBC’s share of net assets.
(p) Goodwill and intangible assets
(i) Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration
transferred, the amount of any non-controlling interest and the fair value of any previously held equity
interest in the acquiree exceed the amount of the identifiable assets and liabilities acquired. If the amount
of the identifiable assets and liabilities acquired is greater, the difference is recognised immediately in the
income statement. Goodwill arises on the acquisition of interests in joint ventures and associates when the
cost of investment exceeds HSBC’s share of the net fair value of the associate’s or joint venture’s
identifiable assets and liabilities.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual
or other legal rights, and their fair value can be measured reliably.
Goodwill is allocated to cash-generating units (‘CGU’) for the purpose of impairment testing, which is
undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC’s
cash-generating units are based on geographical regions subdivided by global business. Impairment testing
is performed at least annually, and whenever there is an indication that the CGU may be impaired, by
comparing the recoverable amount of a CGU with its carrying amount. The carrying amount of a CGU is
based on the assets and liabilities of each CGU, including attributable goodwill. The recoverable amount of
an asset is the higher of its fair value less cost to sell, and its value in use. Value in use is the present value
of the expected future cash flows from a cash-generating unit. If the recoverable amount is less than the
carrying value, an impairment loss is charged to the income statement. Goodwill is stated at cost less
accumulated impairment losses.
Goodwill on acquisitions of interests in joint ventures and associates is included in ‘Interests in associates
and joint ventures’ and is not tested separately for impairment.
At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the
calculation of the gain or loss on disposal.
Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been
allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is
measured on the basis of the relative values of the operation disposed of and the portion of the CGU
retained.
(ii) Intangible assets include the present value of in-force long-term insurance business, computer software,
trade names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer
relationships and merchant or other loan relationships. Computer software includes both purchased and
internally generated software. The cost of internally generated software comprises all directly attributable
costs necessary to create, produce and prepare the software to be capable of operating in the manner
intended by management. Costs incurred in the ongoing maintenance of software are expensed immediately
as incurred.