HSBC 2007 Annual Report Download - page 347

345
(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 132 to
134 which form an integral part of these financial statements).
Further information about key assumptions concerning the future, and other key sources of estimation
uncertainty, are set out in these notes on the 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,
by setting up an ‘autopilot’ mechanism, HSBC has delegated these decision-making powers;
• HSBC has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks
incident to the activities of the SPE; or
• HSBC retains the majority of the residual or ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
HSBC performs a re-assessment of consolidation whenever there is a change in the substance of the relationship
between HSBC and an SPE.
All intra-HSBC transactions are eliminated on consolidation.
The consolidated financial statements of HSBC also include the attributable share of the results and reserves of
joint ventures and associates. These are based on financial statements made up to 31 December, with the
exception of the Bank of Communications, Ping An Insurance and Industrial Bank which are included on the
basis of financial statements made up for the twelve months to 30 September. These are equity accounted three
months in arrears in order to meet the requirements of the Group’s reporting timetable. HSBC has taken into
account changes in the period from 1 October to 31 December that would have materially affected its results.
(g) Future accounting developments
Standards and Interpretations issued by the IASB and endorsed by the EU
IFRS 8 ‘Operating Segments’ (‘IFRS 8’), which replaces IAS 14 ‘Segment Reporting’ (‘IAS 14’), was issued on
30 November 2006 and is effective for annual periods beginning on or after 1 January 2009. This standard
specifies how an entity should report information about its operating segments, based on information about the