HSBC 2005 Annual Report Download - page 377

375
47 Differences between IFRSs and US GAAP
The consolidated financial statements of HSBC are prepared in accordance with IFRSs which differ in certain
significant respects from US GAAP. The following is a summary of the significant differences applicable to HSBC.
Shareholders’ interest in the long-term assurance fund
IFRSs
• IFRS 4 permits entities to continue to account for insurance contracts under guidance issued under previous
GAAP until a comprehensive standard relating to the measurement of insurance assets and liabilities is
developed.
• Under UK GAAP and, hence, current IFRSs, the value placed on HSBC’s interest in long-term assurance
business includes a valuation of the discounted future earnings expected to emerge from business currently in
force, using appropriate assumptions in assessing factors such as recent experience and general economic
conditions, together with the surplus retained in the long-term assurance funds. The assumptions are determined
annually in consultation with independent actuaries.
• Movements in the value of in-force long-term assurance business are included in ‘Other operating income’ on a
gross of tax basis.
US GAAP
• The net present value of future earnings is not recognised. Acquisition costs and fees are deferred and amortised
in accordance with Statement of Financial Accounting Standard (‘SFAS’) 97 ‘Accounting and Reporting by
Insurance Enterprises for Certain Long-duration Contracts and for Realised Gains and Losses from the Sale of
Investments’.
Impact
• Under US GAAP, shareholders' equity is lower than under IFRSs because the present value of in-force long-term
assurance business is not recognised.
• This effect is partly offset by the treatment of acquisition costs, which are deferred and amortised under US
GAAP but are written off immediately as an expense of long-term assurance business under IFRSs.
Long-term assurance assets and liabilities
IFRSs
• Long-term assurance fund assets, excluding own shares held, are classified according to the nature of the asset,
for example, financial investments, unless designated at fair value. The accounting for these assets is consistent
with other holdings of similar assets.
• Liabilities attributable to policyholders under insurance contracts are recognised in accordance with IFRS 4 and
appropriate actuarial principles as ‘Liabilities under insurance contracts issued’. Liabilities attributable to
policyholders under linked investment contracts are recognised at fair value as financial liabilities under
‘Financial liabilities designated at fair value’. Prior to 1 January 2005, both types of contract were recognised as
‘Liabilities to policyholders under long-term assurance business’.
US GAAP
• Under the Statement of Position issued by the American Institute of Certified Public Accountants (‘AICPA’)
03-1 (‘SOP 03-1’), ‘Accounting and Reporting by Insurance Enterprises for Certain Non-traditional and Long-
duration Contracts and for Separate Accounts’, which became fully effective in 2004, when long-term assurance
assets qualify for separate accounting they are measured at fair value and are reported in the financial statements
as a summary total, with an equivalent summary total for related liabilities. Otherwise, assets that do not qualify
for separate accounting and that represent policyholders’ funds are accounted for and recognised as general
account assets, that is consistent with other holdings of similar assets. Any related liability is accounted for as a
general account liability.