HSBC 2006 Annual Report Download - page 304

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 1
302
Capital disclosures under IAS 1 ‘Presentation of Financial Statements’ have been included in the audited
sections of ‘Capital management and allocation’ on pages 243 to 247.
As a result of the Companies (Disclosure of Auditor Remuneration) Regulations 2005 coming into force, the
presentation and the level of detail of the information disclosed in Note 8 has changed compared with the prior
year. Comparative information has been provided on a consistent basis with the current year presentation as
required by IAS 1 ‘Presentation of Financial Statements’.
In publishing the parent company financial statements here together with the Group financial statements, HSBC
Holdings has taken advantage of the exemption in section 230 of the Companies Act 1985 not to present its
individual income statement and related notes that form a part of these financial statements.
HSBC has taken advantage of the exemption under Regulation 7 of the Partnerships and Unlimited Companies
(Accounts) Regulations 1993 from certain partnerships that are consolidated by HSBC presenting their own
individual financial statements under IFRSs.
The functional currency of HSBC Holdings plc is US dollars, which is also the presentational currency of the
consolidated financial statements of HSBC.
(d) Comparative information
As required by US GAAP, these consolidated financial statements include two years of comparative information
for the consolidated income statement, consolidated cash flow statement, consolidated statement of recognised
income and expense, and related notes on the financial statements, with certain exceptions in respect of the 2004
comparative information, as explained in (a) Compliance with International Financial Reporting Standards
above.
(e) Use of estimates and assumptions
The preparation of financial information requires the use of estimates and assumptions about future conditions.
Use of available information and application of judgement are inherent in the formation of estimates. Actual
results in the future may differ from those reported. In this regard, management believes that the critical
accounting policies where judgement is necessarily applied are those which relate to loan impairment, goodwill
impairment and the valuation of financial instruments (see Critical Accounting Policies on pages 111 to 115).
Further information about key assumptions concerning the future, and other key sources of estimation
uncertainty, are set out in the notes on these financial statements.
(f) Consolidation
The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its
subsidiaries made up to 31 December, with the exception of the banking and insurance subsidiaries of HSBC
Bank Argentina, whose financial statements are made up to 30 June annually to comply with local regulations.
Accordingly, HSBC uses their audited interim financial statements, drawn up to 31 December annually.
Newly acquired subsidiaries are consolidated from the date that HSBC gains control. The purchase method of
accounting is used to account for the acquisition of subsidiaries by HSBC. The cost of an acquisition is measured
at the fair value of the consideration given at the date of exchange, together with costs directly attributable to that
acquisition. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values
at the date of acquisition. Any excess of the cost of acquisition over the fair value of HSBC’s share of the
identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition
is less than the fair value of HSBC’s share of the identifiable assets, liabilities and contingent liabilities of the
business acquired, the difference is recognised immediately in the income statement.
Entities that are controlled by HSBC are consolidated until the date that control ceases.
In the context of Special Purpose Entities (‘SPEs’), the following circumstances may indicate a relationship in
which, in substance, HSBC controls and, consequently, consolidates an SPE:
• the activities of the SPE are being conducted on behalf of HSBC according to its specific business needs so
that HSBC obtains benefits from the SPE’s operation;
• HSBC has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or,