HSBC 2004 Annual Report Download - page 246

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
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(b) Interest on debt issuance
Premiums and discounts on the issue of debt and fair value adjustments to debt arising on acquisitions are
amortised to interest payable so as to give a consistent rate over the life of the debt. Where debt is callable,
either by HSBC or the holder, the premium or discount is amortised over the period to the earliest call date.
(c) Loans and advances and doubtful debts
It is HSBC’ s policy that each operating company will make provisions for bad and doubtful debts promptly
where required and on a consistent basis in accordance with established Group guidelines.
There are two basic types of provision, specific and general, each of which is considered in terms of the charge
and the amount outstanding.
Specific provisions
Specific provisions represent the quantification of actual and inherent losses from homogeneous portfolios of
assets and individually identified accounts. Specific provisions are deducted from loans and advances in the
balance sheet. The majority of specific provisions are determined on a portfolio basis.
Portfolios
Where homogeneous groups of assets are reviewed on a portfolio basis, two alternative methods are used to
calculate specific provisions:
– When appropriate empirical information is available, the Group utilises roll rate methodology (a statistical
analysis of historical trends of the probability of default and amount of consequential loss, assessed at each
time period for which payments are overdue), other historical data and an evaluation of current economic
conditions to calculate an appropriate level of specific provision based on inherent loss. Additionally, in
certain highly developed markets, sophisticated models also take into account behavioural and account
management trends such as bankruptcy and rescheduling statistics. Roll rates are regularly benchmarked
against actual outcomes to ensure they remain appropriate.
– In other cases, when information is insufficient or not sufficiently reliable to adopt a roll rate methodology,
the Group adopts a formulaic approach which allocates progressively higher loss rates in line with the
period of time for which a customer’ s loan is overdue.
Individually assessed accounts
Specific provisions on individually assessed accounts are determined by an evaluation of the exposures on a
case-by-case basis. This procedure is applied to all accounts that do not qualify for, or are not subject to, a
portfolio based approach. In determining such provisions on individually assessed accounts, the following
factors are considered:
– the Group’ s aggregate exposure to the customer (including contingent liabilities);
– the viability of the customer’ s business model and the capability to trade successfully out of financial
difficulties and generate sufficient cash flow to service their debt obligations;
– the likely dividend available on liquidation or bankruptcy;
– the extent of other creditors’ commitments ranking ahead of, or pari passu with, the Group and the
likelihood of other creditors continuing to support the company;
– the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to
which legal and insurance uncertainties are evident;
– the amount and timing of expected receipts and recoveries;
– the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
– the deduction of any costs involved in recovery of amounts outstanding;
– the ability of the borrower to obtain and make payments in the relevant foreign currency if loans are not in
local currency; and