HSBC 2008 Annual Report Download - page 148

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
Overview > Reclassification / Financial effect / Global Banking and Markets ABSs
146
On reclassification At 31 December 2008
Amount
reclassified1
Estimate of
future
cash flows2
Effective
interest rate
Carrying
amount Fair value
US$m US$m % US$m US$m
Reclassification to loans and receivables
ABSs ..................................................................................... 8,194 11,642 8 7,991 6,139
Trading loans – commercial mortgage loans ....................... 650 741 5 587 557
Leveraged finance loans ....................................................... 6,458 8,481 7 5,670 4,239
15,302 20,864 14,248 10,935
Reclassification to available for sale
Corporate debt and other securities ...................................... 2,549 3,626 5 2,401 2,401
17,851 24,490 16,649 13,336
1 Amounts reclassified that are denominated in foreign currencies have been translated using the rate of exchange at the date of
reclassification; all other amounts denominated in foreign currencies have been translated into the functional currency at the rate of
exchange ruling at the balance sheet date.
2 The estimate of future cash flows represents the cash flows expected to be recovered at the date of reclassification.
impairment. Amounts reclassified as available for
sale are held at fair value with changes in the fair
value recognised in equity, and tested for
impairment. In line with the transition rules, for
reclassifications made during October 2008, the
reclassified financial assets were treated as having
been so reclassified as at 1 July 2008. The impact of
back-dating these retrospective reclassifications was
that fair value movements between 1 July 2008 and
October 2008 of US$835 million were not recorded
in the income statement.
The reclassifications resulted from significant
reductions in market liquidity for these assets and
a change in HSBC’s intention to hold them for
the foreseeable future or to maturity. These
circumstances arose in the wider context of market
turmoil. As a result, the Group decided to reclassify
financial assets that would have met the definition of
loans and receivables at initial recognition, as
permitted by the IAS 39 amendments. In addition,
as permitted by the IAS 39 amendments in rare
circumstances, the Group reclassified securities, that
did not meet the definition of loans and receivables
on initial recognition, as the conditions of market
turmoil prevailing in the second half of 2008 were
considered rare.
If these reclassifications had not been made,
the Group’s pre-tax profit would have been reduced
by US$3.5 billion from US$9.3 billion to
US$5.8 billion. The reduction would have been
US$0.9 billion in the North America and
US$2.6 billion in the Europe segments. There was
no significant impairment identified on the loans
transferred even though the fair value continued to
fall as a consequence of illiquidity and market
sentiment.
The following table shows the fair value gains
and losses, income and expense recognised in the
income statement both before and after the date of
reclassification:
Effect on income statement
Prior to reclassification
After
reclassification1
Assuming no
reclassification2
Net effect of
reclassification
2008 2007 2008 2008 2008
US$m US$m US$m US$m US$m
Reclassifications to loans and receivables
ABSs ............................................................... (1,020) (357) 303 (1,549) 1,852
Trading loans – commercial mortgage loans . (16) – 17 (13) 30
Leveraged finance loans ................................. (253) (158) 192 (1,239) 1,431
(1,289) (515) 512 (2,801) 3,313
Reclassifications to available for sale
Corporate debt and other securities ................ (82) (2) 22 (202) 224
(1,371) (517) 534 (3,003) 3,537
1 Income and expense recorded in the income statement after reclassification represents the accrual of the effective interest rate and also
includes US$26 million in respect of impairment of leveraged finance loans. The group recorded no impairment charges on other
financial assets reclassified during the second half of 2008.
2 Effect on the income statement which would have arisen from the date of reclassification, had the reclassification not occurred.