HSBC 2015 Annual Report Download - page 337

HSBC HOLDINGS PLC
335
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Recoverability of deferred tax assets
Nature of the area of focus Matters discussed with the GAC
HSBC has deferred tax assets of $6.1bn as at 31 December 2015, of
which $4.5bn relates to the US. A further $1.2bn net deferred assets
are included in Assets Held For Sale and relates to Brazil.
These assets have arisen because of historic losses, deferred relief for
impairment and other temporary differences. An assessment is
required as to whether sufficient future taxable profits are likely to
be generated to enable the assets to be realised.
The estimation of future taxable profits is inherently judgemental,
particularly when this extends beyond the normal planning cycle. In
the case of Brazil, this is exacerbated by recent performance not
being in accordance with plan.
The carrying value of deferred tax assets in Brazil and the US was
discussed several times during the year. HSBC updated performance
against forecasts to support the continued recognition of the assets
and this was considered during GAC meetings.
Brazil: In light of the disposal of the business discussed on page 416,
the appropriate basis on which to assess future taxable profits was
discussed. HSBC has considered both the internal strategic plan as
well as profits implied by the agreed sales price using the
Price/Earnings ratios considered appropriate for Brazilian banks.
Whilst performance in 2015 has not been in line with the strategic
plan, the implicit profit forecast derived from the sales price provides
support for the expected profitability of the business. Sufficient
taxable profits to support recognition are expected to be earned
within 8 years in the best case scenario and within 13 years in the
worst case scenario.
North America: As at 1 January 2015, the recognition of the US
deferred tax asset relied upon capital support from HSBC. Given
improved performance and forecasts management considered that it
was appropriate to recognise the asset on the basis of future taxable
profits. This change led to the recognition of additional deferred tax
assets. The change in the basis of recognition, and the increased
assets recognised, were discussed with the GAC.
Procedures performed to support our discussions and conclusions
• The application of tax rules was examined to check they had been appropriately applied and that a loss or deductible temporary
difference exists.
• Supporting calculations were tested to check that the valuation of the asset is appropriate based on the temporary differences identified
and the tax rates applied.
• The basis for management’s assessment of recoverability including the profit projections and underlying assumptions and the
calculations performed to arrive at taxable profits from these projections, was challenged using our knowledge of the business, future
strategy and past performance.
• The appropriateness and validity of tax planning strategies relied upon to support recognition where relevant was assessed.
• The range of reasonably possible alternative outcomes was assessed for the projections in each market.
• The calculation methodology used to determine the implied profits from the sales price achieved for the Brazilian subsidiary was
evaluated.
• The completeness and accuracy of the disclosures was also assessed.
Relevant references in the Annual Report and Accounts 2015
GAC Report, page 262.
Note 8: Tax, page 369.
Note 23: Assets held for sale and liabilities of disposal groups held for sale, page 416.
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