HSBC 2004 Annual Report Download - page 350

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
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(k) Foreign exchange losses on Argentine funding
The mandatory and asymmetrical conversion of onshore US dollar denominated assets and liabilities in
Argentina (‘pesification’ ) caused significant erosion of the capital base of HSBC Argentina, in part because of
the asymmetry of the conversion and in part through the creation of a structural foreign exchange mismatch to
the extent of residual external US dollar liabilities which were no longer matched with US dollar assets. HSBC
recognised these losses through its income statement in 2001; these amounted to US$520 million.
Following pesification, HSBC Argentina’s balance sheet primarily reflected Argentine peso assets more than
fully funded by Argentine peso liabilities and this represents HSBC’s ongoing business in Argentina. On top of
this HSBC Argentina had residual external US dollar liabilities which essentially represented a portion of the loss
recognised in 2001.
Under UK GAAP these US dollar liabilities, as they were no longer funding the ongoing business, were treated
as a separate operation with the US dollar as the unit of account. These liabilities were settled as they fell due by
the Group outside Argentina. As HSBC prepares its accounts in US dollars no further translation effect arose.
Under US GAAP this accounting treatment was not possible and the external US dollar liabilities were treated as
part of the Argentine operation which accounts in Argentine pesos. As a result, when the Argentine peso
weakened the US dollar denominated liabilities generated a substantial loss in Argentine pesos which was
reflected in US GAAP income. However, as HSBC accounts in US dollars and economically there was no
change in the amount of US dollars owing, an exactly offsetting gain was reflected in the US GAAP accounts in
other comprehensive income. There was no net effect on US GAAP shareholders’ equity.
In addition, as these liabilities are settled by the Group, the resultant intra-Group Funding was treated for US
GAAP purposes as part of the permanent investment in the Argentine operation. As all such liabilities have now
been settled in this way, there in no further difference to be recorded in 2004 or subsequent years.
(l) Taxation
The components of the net deferred tax liability calculated under SFAS 109 ‘Accounting for Income Taxes’ , are
as follows:
2004 2003
US$m US$m
Deferred tax liabilities
Leasing transactions ................................................................................................................ 1,924 1,587
Capital allowances .................................................................................................................. 280 293
Provision for additional UK tax on overseas dividends .......................................................... 107 61
Reconciling items ................................................................................................................... 2,661 2,417
Other ....................................................................................................................................... 1,101 1,076
Total deferred tax liabilities .................................................................................................... 6,073 5,434
Deferred tax assets
Provisions for bad and doubtful debts ..................................................................................... 2,530 3,122
Tax losses ............................................................................................................................... 827 972
Reconciling items ................................................................................................................... 3,066 2,273
Other ....................................................................................................................................... 2,254 1,332
Total deferred tax assets before valuation allowance .............................................................. 8,677 7,699
Less: valuation allowance ....................................................................................................... (1,062) (964)
Deferred tax assets less valuation allowance ........................................................................... 7,615 6,735
Net deferred tax asset under SFAS 109 ................................................................................... 1,542 1,301
Included within ‘other assets’ under US GAAP ...................................................................... 3,272 2,669
Included within ‘deferred tax liabilities’ under US GAAP ...................................................... (1,730) (1,368)
The valuation allowance against deferred tax assets principally relates to trading and capital losses carried
forward, which have not been recognised due to uncertainty over their utilisation. A valuation allowance is
established to reduce deferred tax assets if, based on available evidence, it is considered more likely than not that
any of the deferred tax assets will not be realised.
At 31 December 2004, HSBC has recognised deferred tax assets in respect of tax losses (net of valuation