HSBC 2006 Annual Report Download - page 406

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
404
• In accordance with IAS 19 (revised 2006), HSBC has elected to record all actuarial gains and losses on the
pension surplus or deficit in the year in which they occur within the ‘Consolidated statement of recognised
income and expense’.
US GAAP
• SFAS 87, ‘Employers’ Accounting for Pensions’, prescribes a similar method of actuarial valuation for pension
liabilities and requires the measurement of plan assets at fair value.
• SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106 and 132(R)’ (SFAS 158), was adopted by HSBC as at
31 December 2006 and aligns the US GAAP balance sheet treatment with IFRSs by requiring the funded status
of HSBC’s benefit plan (the difference between plan assets at fair value and the plan benefit obligations) to be
recognised on the balance sheet.
• In 2005, when the value of benefits accrued based on employee service up to the balance sheet date (the
accumulated benefit obligation) exceeded the value of plan assets, HSBC recognised an additional minimum
pension liability to the extent that the excess was greater than any accrual already established for unfunded
pension costs.
• SFAS 87 does not permit recognition of all actuarial gains and losses in a statement other than the primary
income statement. As permitted by US GAAP, HSBC uses the 'corridor method', whereby actuarial gains and
losses outside a certain range are recognised in the income statement in equal amounts over the remaining
service lives of current employees. That range is 10 per cent of the greater of plan assets and plan liabilities. The
remaining additional minimum pension liability and the transition to SFAS 158 are recognised directly in Other
comprehensive income (‘OCI’).
Impact
• Net income under US GAAP is lower than under IFRSs as a result of the amortisation of the amount by which
actuarial losses exceed gains beyond the 10 per cent 'corridor'.
Stock-based compensation
IFRSs
• IFRS 2, ‘Share-based Payment’, requires that when annual bonuses are paid in restricted shares and the
employee must remain with the employer for a fixed period in order to receive the shares, the fair value of the
award is expensed over that period.
US GAAP
• For awards made before 1 July 2005, SFAS 123, ‘Accounting for Stock-based Compensation’, (‘SFAS 123’)
requires that compensation cost be recognised over the period(s) in which the related employee services are
rendered. HSBC has interpreted this service period as the period to which the bonus relates.
• For 2005 bonuses awarded in early 2006, HSBC will follow SFAS 123 (revised 2004) ‘Share-based Payment’
(‘SFAS 123R’). SFAS 123R is consistent with IFRS 2 in requiring that restricted bonuses are expensed over the
period the employee must remain with HSBC. However, SFAS 123R only applies to awards made after the date
of adoption, which for HSBC is 1 July 2005.
Impact
• Some of the bonuses awarded in respect of 2002, 2003 and 2004 were recognised over the relevant vesting
period and were, therefore, expensed in ‘Net income’ under IFRSs during 2005 and 2006. Under US GAAP,
these awards were expensed in the years for which they were granted. 2005 and 2006 bonuses will be expensed
over the vesting period under both IFRSs and US GAAP. Net income was, therefore, higher under US GAAP in
2005 and 2006.
• IFRSs and US GAAP are now largely aligned and this transition difference will be eliminated over the next few
years.