HSBC 2012 Annual Report Download - page 406

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
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investments designated at fair value’. Premiums receivable and amounts withdrawn are accounted for as
increases or decreases in the liability recorded in respect of investment contracts.
Liabilities under linked investment contracts are at least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying funds or indices.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services, in ‘Net fee income’.
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are deferred and amortised over the period during which the investment management
services are provided.
Investment contracts with discretionary participation features
While investment contracts with discretionary participation features are financial instruments, they continue to
be treated as insurance contracts as permitted by IFRS 4. The Group therefore recognises the premiums for those
contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect
the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in
either the income statement or other comprehensive income, following the treatment of the unrealised gains on
the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the
extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and
losses on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as long-term insurance business or long-term
investment contracts with discretionary participating features (‘DPF’) and are in force at the balance sheet date
is recognised as an asset. The asset represents the present value of the equity holders’ interest in the issuing
insurance companies’ profits expected to emerge from these contracts written at the balance sheet date.
The present value of in-force long-term insurance business and long-term investment contracts with DPF,
referred to as ‘PVIF’, is determined by discounting the equity holders’ interest in future profits expected to
emerge from business currently in force using appropriate assumptions in assessing factors such as future
mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to
the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial
options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements
in the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.
(z) Debt securities issued and deposits by customers and banks
Financial liabilities are recognised when HSBC enters into the contractual provisions of the arrangements with
counterparties, which is generally on trade date, and initially measured at fair value, which is normally the
consideration received, net of directly attributable transaction costs incurred. Subsequent measurement of
financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is
at amortised cost, using the effective interest method to amortise the difference between proceeds received, net
of directly attributable transaction costs incurred, and the redemption amount over the expected life of the
instrument.
(aa) Share capital
Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.
Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from
the proceeds, net of tax.
HSBC Holdings plc shares held by HSBC are recognised in equity as a deduction from retained earnings until
they are cancelled. When such shares are subsequently sold, reissued or otherwise disposed of, any consideration
received is included in equity, net of any directly attributable incremental transaction costs and related income
tax effects.