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HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
314
cash flow hedging instruments which are charged or credited directly to equity, is also credited or charged
directly to equity and is subsequently recognised in the income statement when the deferred fair value gain or
loss is recognised in the income statement.
(s) Pension and other post-employment benefits
HSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans
include both defined benefit and defined contribution plans and various other post-employment benefits such as
post-employment health-care.
Payments to defined contribution plans and state-managed retirement benefit plans, where HSBC’s obligations
under the plans are equivalent to a defined contribution plan, are charged as an expense as they fall due.
The costs recognised for funding defined benefit plans are determined using the Projected Unit Credit Method,
with annual actuarial valuations performed on each plan. Actuarial differences that arise are recognised in
shareholders’ equity and presented in the Statement of Recognised Income and Expense in the period in which
they arise. Past service costs are recognised immediately to the extent that the benefits have vested, and are
otherwise recognised on a straight-line basis over the average period until the benefits vest. Current service costs
and any past service costs, together with the unwinding of the discount on plan liabilities less the expected return
on plan assets, are charged to operating expenses.
The defined benefit liability recognised in the balance sheet represents the present value of defined benefit
obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any net
defined benefit surplus is limited to unrecognised past service costs plus the present value of available refunds
and reductions in future contributions to the plan.
The costs of providing other defined post-employment benefits, such as post-employment health-care, are
accounted for on the same basis as defined benefit pension plans.
(t) Equity compensation plans
Shares awarded to an employee on joining HSBC that are made available immediately, with no vesting period
attached to the award, are expensed immediately. When an inducement is awarded to an employee on
commencement of employment with HSBC, and the employee must complete a specified period of service
before the inducement vests, the expense is spread over the period to vesting.
The expense of share options is recognised over the vesting period, and is determined by reference to the fair
value of the options on grant date, and the effect of any non-market vesting conditions such as option lapses. An
option may lapse if, for example, an employee ceases to be employed by HSBC before the end of the vesting
period. Estimates of future such employee departures are taken into account when accruing the cost during the
service period.
The expense relating to shares awarded as bonuses in respect of past service, by which an employee is required
to complete a specified period of future service to be entitled to the award, is spread over the period of service
rendered to the vesting date.
The compensation expense charged to the income statement is credited to the share-based payment reserve over
the vesting period of the shares and options. If awards of shares and options lapse during the vesting period due
to an employee leaving employment with HSBC, the charge to date is reversed to the income statement. If an
award lapses due to an employee leaving a plan but not employment with HSBC or due to HSBC cancelling or
modifying a plan, this is accounted for as an acceleration of vesting with full immediate recognition of the
outstanding charge in the income statement. If awards of shares or options lapse after they have fully vested, the
amount in respect of the award charged to the share-based payment reserve is transferred to retained earnings.
(u) Foreign currencies
Items included in the financial statements of each of HSBC’s entities are measured using the currency of the
primary economic environment in which the entity operates (‘the functional currency’). The consolidated
financial statements of HSBC are presented in US dollars, which is the Group’s presentation currency.
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into