HSBC 2005 Annual Report Download - page 385

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recognised in equity are recognised through the income statement and classified as ‘Gains less losses from
financial investments’. Interest income is recognised on such securities using the effective interest rate method,
calculated over the asset’s expected life. When dated investment securities are purchased at a premium or a
discount, the premiums and discounts are included in the calculation of the effective interest rate.
• If an available-for-sale security is determined to be impaired, the cumulative loss (measured as the difference
between the acquisition cost and the current fair value, less any impairment loss on that financial asset
previously recognised in the income statement) is removed from equity and recognised in the income statement.
If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the
increase can be objectively related to an event occurring after the impairment loss was recognised in the income
statement, the impairment loss is reversed through the income statement. Impairment losses recognised in the
income statement on equity instruments are not reversed through the income statement.
• Foreign exchange differences on available-for-sale securities denominated in foreign currency are recognised in
net income to the extent that they relate to the translation of the amortised cost of the security.
1 January 2004 to 31 December 2004
• Debt securities and equity shares intended to be held on a continuing basis were classified as financial
investments and included in the balance sheet at cost less provision for any permanent diminution in value.
Other participating interests were accounted for on the same basis. Premiums or discounts on dated investment
securities purchased at other than face value were amortised through the income statement over the period from
date of purchase to date of maturity and included in ‘Interest income’. Any gain or loss on realisation of these
securities was recognised in the income statement as it arose and included in ‘Gains less losses from financial
investments’.
• Foreign exchange differences on foreign currency-denominated monetary items, including securities, were
recognised in the income statement.
US GAAP
• All debt securities and equity shares with a readily determinable fair value are classified and disclosed within
one of the following three categories: held-to-maturity; available-for-sale; or trading (SFAS 115).
• Held-to-maturity debt securities are measured at amortised cost less any provision other than for temporary
impairment.
• Available-for-sale securities are measured at fair value with unrealised holding gains and losses excluded from
earnings and reported net of applicable taxes and minority interests as a separate component of shareholders’
funds. Foreign exchange differences on available-for-sale securities denominated in foreign currency are also
excluded from earnings and recorded as part of the same separate component of shareholders’ funds.
• A decline in fair value below the cost of an available-for-sale or held-to-maturity security is treated as a realised
loss and included in earnings if it is considered ‘other than temporary’. The reduced fair value is then treated as
the cost basis for the security. A decline in fair value is generally considered other than temporary when
management does not intend or expect to hold the investment for sufficient time to enable the fair value to rise
back to the original cost of the investment.
• Equity shares that do not have a readily determinable fair value are measured at cost, less any provisions for
impairment, and are reported within ‘Other assets’. Under SFAS 115, the fair value of an equity share is ‘readily
determinable’ if quotations are currently available on a recognised exchange.
Impact
• In 2004, available-for-sale securities, excluding equity shares that do not have a readily determinable fair value,
were recorded at fair value in the US GAAP balance sheet. This value was higher than cost in the comparative
IFRSs balance sheet.
• In 2005, certain assets have been reported as designated as at fair value for IFRSs purposes (see above). Under
US GAAP, equity shares that do not have a readily determinable fair value as defined in SFAS 115 are recorded
at cost rather than at fair value under IFRSs.