HSBC 2006 Annual Report Download - page 315

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– leasehold buildings are depreciated over the unexpired terms of the leases, or over their remaining useful
lives.
Equipment, fixtures and fittings (including equipment on operating leases where HSBC is the lessor) are stated at
cost less any impairment losses and depreciation calculated on a straight-line basis to write off the assets over
their useful lives, which run to a maximum of 35 years but are generally between five years and 20 years.
Property, plant and equipment is subject to an impairment review if there are events or changes in circumstances
which indicate that the carrying amount may not be recoverable.
HSBC holds certain properties as investments to earn rentals or for capital appreciation, or both. Investment
properties are included in the balance sheet at fair value with changes therein recognised in the income statement
in the period of change. Fair values are determined by independent professional valuers who apply recognised
valuation techniques.
(q) Finance and operating leases
Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of
assets, but not necessarily legal title, are classified as finance leases. When HSBC is a lessor under finance leases
the amounts due under the leases, after deduction of unearned charges, are included in ‘Loans and advances to
banks’ or ‘Loans and advances to customers’ as appropriate. Finance income receivable is recognised in ‘Net
interest income’ over the periods of the leases so as to give a constant rate of return on the net investment in the
leases.
When HSBC is a lessee under finance leases, the leased assets are capitalised and included in ‘Property, plant
and equipment’ and the corresponding liability to the lessor is included in ‘Other liabilities’. A finance lease and
its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of
the minimum lease payments. Finance charges payable are recognised in ‘Net interest income’ over the period of
the lease based on the interest rate implicit in the lease so as to give a constant rate of interest on the remaining
balance of the liability.
All other leases are classified as operating leases. When acting as lessor, HSBC includes the assets subject to
operating leases in ‘Property, plant and equipment’ and accounts for them accordingly. Impairment losses are
recognised to the extent that residual values are not fully recoverable and the carrying value of the equipment is
thereby impaired. When HSBC is the lessee, leased assets are not recognised on the balance sheet. Rentals
payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the
leases and are included in ‘General and administrative expenses’ and ‘Other operating income’ respectively.
(r) Income tax
Income tax on the profit or loss for the year comprises current tax and deferred tax. Income tax is recognised in
the income statement except to the extent that it relates to items recognised directly in shareholders’ equity, in
which case it is recognised in shareholders’ equity.
Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted
or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous
years. Current tax assets and liabilities are offset when HSBC intends to settle on a net basis and the legal right
to offset exists.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the
balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that future taxable profits will be available against which deductible temporary differences can
be utilised.
Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised
or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income
taxes levied by the same taxation authority, and when a legal right to offset exists in the entity.
Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised directly in equity.
From 1 January 2005, deferred tax relating to fair value remeasurement of available-for-sale investments and