HSBC 2005 Annual Report Download - page 254

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
252
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair values of any derivatives that do not qualify for hedge accounting
are recognised immediately in the income statement. These gains and losses are reported in ‘Net trading
income’, except where derivatives are managed in conjunction with financial instruments designated at fair
value, (other than derivatives managed in conjunction with debt securities issued by the Group) in which case
gains and losses are reported in ‘Net income from financial instruments designated at fair value’. The interest on
derivatives managed in conjunction with debt securities issued by the Group which are designated at fair value is
recognised in ‘Interest expense’. All other gains and losses on these derivatives are reported in ‘Net income from
financial instruments designated at fair value’.
(l) Derecognition of financial assets and liabilities
Financial assets are derecognised when the right to receive cash flows from the assets has expired; or when
HSBC has transferred its contractual right to receive the cash flows of the financial assets, and substantially all
the risks and rewards of ownership; or where control is not retained. Financial liabilities are derecognised when
they are extinguished, that is when the obligation is discharged, cancelled or expires.
(m) Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is
a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
(n) Subsidiaries, associates and joint ventures
HSBC Holdings’ investments in subsidiaries are stated at cost less impairment losses. Reversals of impairment
losses are recognised in the income statement if there has been a change in the estimates used to determine the
recoverable amount of the investment.
Investments in associates and interests in joint ventures are recognised using the equity method, initially stated at
cost, including attributable goodwill, and are adjusted thereafter for the post-acquisition change in HSBC’s share
of net assets.
Unrealised gains on transactions between HSBC and its associates and joint ventures are eliminated to the extent
of HSBC’s interest in the respective associates or joint ventures. Unrealised losses are also eliminated to the
extent of HSBC’s interest in the associates or joint ventures unless the transaction provides evidence of an
impairment of the asset transferred.
(o) Goodwill and intangible assets
(i) Goodwill arises on business combinations, including the acquisition of subsidiaries, joint ventures or
associates, when the cost of acquisition exceeds the fair value of HSBC’s share of the identifiable assets,
liabilities and contingent liabilities acquired. By contrast, if HSBC’s interest in the fair value of the
identifiable assets, liabilities and contingent liabilities of an acquired business is greater than the cost to
acquire, the excess is recognised immediately in the income statement.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual
or other legal rights, and their fair value can be measured reliably.
Goodwill is allocated to cash-generating units for the purpose of impairment testing, which is undertaken at
the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is
performed annually by comparing the present value of the expected future cash flows from a business with
the carrying amount of its net assets, including attributable goodwill. Goodwill is stated at cost less
accumulated impairment losses which are charged to the income statement.
Goodwill on acquisitions of joint ventures or associates is included in ‘Interests in associates and joint
ventures’.
At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the
calculation of the gain or loss on disposal.