HSBC 2005 Annual Report Download - page 388

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
386
US GAAP
• FASB Interpretation No. 46 (revised December 2003), ‘Consolidation of Variable Interest Entities’ (‘FIN 46R’),
requires consolidation of variable interest entities (‘VIE’s) in which HSBC is the primary beneficiary and
disclosures in respect of all other VIEs in which it has a significant variable interest.
• A VIE is an entity in which equity investors hold an investment that does not possess the characteristics of a
controlling financial interest or does not have sufficient equity at risk for the entity to finance its activities.
HSBC is the primary beneficiary of a VIE if its variable interests absorb a majority of the entity’s expected
losses. Variable interests are contractual, ownership or other pecuniary interests in an entity that change with
changes in the fair value of an entity’s net assets exclusive of variable interests. If no party absorbs a majority of
the entity’s expected losses, HSBC consolidates the VIE if it receives a majority of the expected residual returns
of the entity.
Impact
• When HSBC is deemed the primary beneficiary under US GAAP, but does not consolidate the vehicle under
IFRSs, the assets and liabilities of that vehicle are consolidated on the US GAAP balance sheet. This results in a
grossing up of the balance sheet but does not have a material impact on net income for the period or on
shareholders' equity.
• When HSBC is deemed not to be the primary beneficiary under US GAAP of a vehicle that is consolidated
under IFRSs, the assets and liabilities of that vehicle are de-consolidated in the US GAAP balance sheet. This
results in a reclassification in the 2004 balance sheet but does not have a material impact on shareholders' equity
or on net income for 2004 or 2005.
Restructuring provisions
IFRSs
• In accordance with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’, provisions are made for
any direct costs and net future operating losses arising from a business that management is committed to
restructure, sell or terminate; has a detailed formal plan to exit; and has raised a valid expectation of carrying out
that plan.
US GAAP
• SFAS 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’, requires that the fair value of a
liability for a cost associated with an exit or disposal activity be recognised when the liability is incurred.
Accordingly, provisions are recognised upon the implementation of the restructuring plan.
Impact
• The recognition of costs associated with plans to restructure and streamline operations is earlier under IFRSs
than under US GAAP, for example, where there is a time lag between developing and communicating a formal
plan, and putting it into practice. This resulted in marginally higher net income and shareholders’ equity under
US GAAP in 2005.
Loan impairment
IFRSs
• When statistical models, using historic loss rates adjusted for economic conditions, provide evidence of
impairment in portfolios of loans, their values are written down to their net recoverable amount. The net
recoverable amount is the present value of the estimated future recoveries discounted at the portfolio’s original
effective interest rate. The calculations include a reasonable estimate of recoveries on loans individually
identified for write-off pursuant to HSBC’s credit guidelines.
US GAAP
• When the delinquency status of loans in a portfolio is such that there is no realistic prospect of recovery, the
loans are written off in full, or to recoverable value where collateral exists. Delinquency depends on the number
of days payments is overdue. The delinquency status is applied consistently across similar loan products in
accordance with HSBC’s credit guidelines. When local regulators mandate the delinquency status at which