HSBC 2002 Annual Report Download - page 297

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Net assets arising due to reverse repo transactions of US$18,736 million (2001: US$10,926 million) and US$12,545
million (2001: US$14,823 million) are included under ‘Loans and advances to banks’ and ‘Loans and advances to
customers’ respectively.
Net liabilities arising due to repo transactions of US$8,271 million (2001: US$7,113 million) and US$13,126 million
(2001: US$9,769 million) are included in ‘Deposits by banks’ and ‘Customer accounts’ respectively. Average repo
liabilities during the year were US$19,624 million (2001: US$23,850 million). The maximum quarter-end repo
liability outstanding during the year was US$21,688 million (2001: US$24,901 million).
HSBC enters into repo and reverse repo transactions which are accounted for as secured borrowings. Under SFAS
140, securities pledged as collateral whereby the counterparty has the right to sell or repledge the collateral would be
reclassified within ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’ as encumbered. As
at 31 December 2002, the impact on ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’
would be to reclassify securities amounting to US$20,061 million as encumbered (2001: US$28,973 million).
As at 31 December 2002, collateral received under reverse repo transactions where HSBC has the right to sell or
repledge the security obtained amounted to US$27,439 million gross (2001: US$35,820 million).
As at 31 December 2002, approximately US$15 billion of the collateral obtained from reverse repo transactions had
been sold or pledged by HSBC in connection with repo transactions and securities sold not yet purchased (2001:
approximately US$34 billion).
HSBC also enters into stock lending and borrowing transactions for which either cash or other securities may be
received in exchange. At 31 December 2002, stock lending transactions where the securities lent are subject to sale
or repledge amounted to US$5,050 million (2001: US$3,966 million). At 31 December 2002, stock borrowing
transactions where the securities borrowed are subject to sale or repledge amounted to US$4,643 million (2001:
US$2,972 million).
(a) Debt swaps
Under UK GAAP, assets acquired in exchange for advances in order to achieve an orderly realisation are
included at the net book value of the advance disposed of at the date of exchange, with any provision having
been duly updated. Under SFAS 15, such assets are included at the fair value at the date of acquisition. Under
US GAAP, as the Group disposed of its remaining debt swaps accounted for under SFAS 15 during 2001 there
is no adjustment to shareholders’ funds at 31 December 2002 (2001: nil). Profit before tax would increase by
US$ nil (2001: US$4 million; 2000: US$97 million) to show such assets at their fair value at the date of
acquisition.
(b) Shareholders’ interest in the long-term assurance fund
Under UK GAAP, the value of the shareholders’ interest in the in-force life assurance and fund pensions
policies of the long-term assurance fund are valued at the net present value of the profits inherent in such
policies. The net present value of such profits is not recognised under US GAAP.
US GAAP requires the application of different accounting treatments in a number of areas of accounting for the
long-term assurance fund. In particular, the accounting treatment of assets which are held-to-maturity, the
definition and amortisation of deferred acquisition costs and the methodology for determining actuarial reserves
vary between US and UK GAAP.
US GAAP profits in respect of the shareholders’ interest in the long-term assurance fund would have been some
US$6 million lower (2001: US$152 million; 2000: US$140 million) than those under UK GAAP. Shareholders’
equity would be US$875 million (2001: US$798 million) lower under US GAAP. The smaller adjustment to US
GAAP profits in 2002, compared with that in 2001, mainly reflects lower UK GAAP profits, where despite an
increase in new business income, the growth in the present value of in-force policies has been inhibited by weak
markets. This adjustment also reduces other assets by US$875 million (2001: US$798 million) under US
GAAP.
(c) Pension costs
For the purpose of the above reconciliations, the provisions of SFAS 87 ‘Employers’ Accounting for Pensions’
have been applied to HSBC’ s main pension plans, which make up approximately 94% of all HSBC’ s schemes in
terms of plan assets. For non-US schemes, HSBC has applied SFAS 87 ‘Employers’ Accounting for Pensions’