HSBC 2015 Annual Report Download - page 332

Report of the independent auditors to the members of HSBC Holdings plc
Appendix
HSBC HOLDINGS PLC
330
Application of hedge accounting
Nature of the area of focus Matters discussed with the GAC
To qualify for hedge accounting, certain criteria must be met
including documenting the nature and purpose of the hedge and
performing regular testing over its effectiveness.
Due to the complex nature of the hedge accounting rules this is often
an area of significant risk for banks. However, given the nature of
HSBC’s business we initially believed the risk to be lower.
The audit testing identified a number of instances where hedge
accounting was applied, but the accounting rules had not been
adequately met. This led to the disqualification for hedge accounting
purposes of some macro cash flow hedges in the UK, France and
Canada.
As a result of these findings, management instigated a full review of
all hedge accounting relationships. The audit risk associated with
hedge accounting was reassessed to be significant for certain hedges,
and the extent of testing increased.
The disqualified hedges resulted in an immaterial adjustment to
the income statement. A discussion was held with the GAC about
whether the adjustment would have been more appropriate to 2014.
Due to the size of the adjustment it was concluded that the
adjustment should be recognised in 2015.
The control implications of the findings were also discussed. A
project team was established by management, which regularly
reported progress and proposed a revised control structure be
established.
Procedures performed to support our discussions and conclusions
• Material macro cash flow hedge documentation was examined and the relationships assessed to determine if the hedges had been
appropriately designated. This included consideration of the hedge objectives and specific compliance with IFRS.
• A sample of all other hedging relationships was examined and the relationships assessed to determine if they had been appropriately
designated. This included consideration of the hedge objectives and specific compliance with IFRS.
• Management’s hedge effectiveness reviews, and the measurement and recording of hedge ineffectiveness, were tested for a sample of
hedge relationships.
• Understood and tested controls over the documentation and review of the hedge relationships and their initial and ongoing
effectiveness.
• Examined the output from management’s review of hedge accounting relationships.
Relevant references in the Annual Report and Accounts 2015
GAC Report, page 262.
Note 16: Derivatives, page 394.