HSBC 2015 Annual Report Download - page 350

Notes on the Financial Statements (continued)
1 – Basis of preparation and significant accounting policies
HSBC HOLDINGS PLC
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of financial assets as at 31 December 2014 and expectations around changes to balance sheet composition, HSBC expects that
generally:
• loans and advances to banks and to customers and non-trading reverse repurchase agreements that are classified as loans
and receivables under IAS 39 will be measured at amortised cost under IFRS 9;
• financial assets designated at FVPL will remain at FVPL, because it is required under IFRS 9 or designation will continue;
• debt securities classified as available for sale will primarily be measured at amortised cost or FVOCI, with a small minority
at FVPL either because of their contractual cash flow characteristics or the business model within which they are held;
• debt securities classified as held to maturity will be measured at amortised cost;
• Treasury and other eligible bills classified as available for sale will be measured at amortised cost or FVOCI depending upon
the business model in which they are held; and
• all equity securities will remain measured at fair value. A significant majority will have fair value movements shown in profit
or loss, while a minority will have fair value movements presented in other comprehensive income. The equity securities
for which fair value movements will be shown in other comprehensive income are business facilitation and other similar
investments where HSBC holds the investments other than to generate a capital return.
Impairment
The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables and
certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of
commitments and guarantees) is required for expected credit losses (‘ECL’) resulting from default events that are possible
within the next 12 months (’12-month ECL’). In the event of a significant increase in credit risk, allowance (or provision) is
required for ECL resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’).
Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’; financial assets which are considered to have
experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of
impairment so are considered to be in default or otherwise credit impaired are in ‘stage 3’.
The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period
by considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by
considering an increase in ECL.
The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should
incorporate all available information which is relevant to the assessment including information about past events, current
conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation
of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is
intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. It
will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at
least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population
for which there is objective evidence of impairment in accordance with IAS 39.
Hedge accounting
The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management
strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. The standard
does not explicitly address macro hedge accounting strategies, which are being considered in a separate project. To remove the
risk of any conflict between existing macro hedge accounting practice and the new general hedge accounting requirements,
IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting.
Based on the analysis performed to date, HSBC expects to exercise the accounting policy choice to continue IAS 39 hedge
accounting and therefore is not currently planning to change hedge accounting, although it will implement the revised hedge
accounting disclosures required by the related amendments to IFRS 7 ‘Financial Instruments: Disclosures’.
Transition
The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening
balance sheet at the date of initial application, with no requirement to restate comparative periods.
The mandatory application date for the standard as a whole is 1 January 2018, but it is possible to apply the revised presentation
for certain liabilities measured at fair value from an earlier date. HSBC intends to revise the presentation of fair value gains
and losses relating to the entity’s own credit risk on certain liabilities as soon as permitted by EU law. If this presentation
was applied at 31 December 2015, the effect would be to decrease profit before tax with the opposite effect on other
comprehensive income based on the change in fair value attributable to changes in HSBC’s credit risk for the year, with no
effect on net assets. Further information on the change in fair value attributable to changes in credit risk, including HSBC’s
credit risk, is disclosed in Note 25.