HSBC 2009 Annual Report Download - page 373

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When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at
its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not
reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised
cost, as applicable.
(f) Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by HSBC which are not
classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is
advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans are
sold or written off, or substantially all the risks and rewards of ownership are transferred. They are initially
recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised
cost using the effective interest method, less any impairment losses. Where exposures are hedged by derivatives
designated and qualifying as fair value hedges, the carrying value of the loans and advances so hedged includes a
fair value adjustment for the hedged risk only.
HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time, where the
drawdown of the loan is contingent upon certain future events outside the control of HSBC. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a
derivative and measured at fair value through profit or loss. On drawdown, the loan is classified as held for
trading and measured at fair value through profit or loss. Where it is not HSBC’s intention to trade but hold the
loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss. This
may occur, for example, where a loss of principal is probable or the interest rate charged on the loan is lower
than the cost of funding. On inception, the loan to be held is recorded at its fair value and subsequently measured
at amortised cost using the effective interest method. However, where the initial fair value is lower than the cash
amount advanced (for example, due to the rate of interest charged on the loan being below the market rate of
interest), the write-down is charged to the income statement. The write-down will be recovered over the life of
the loan, through the recognition of interest income using the effective interest method, unless the loan becomes
impaired. The write-down is recorded as a reduction to other operating income.
Financial assets which have been reclassified out of the fair value through profit or loss category into the loans
and receivables category are initially recorded at the fair value at the date of reclassification. The reclassified
assets are subsequently measured at amortised cost, using the effective interest rate determined at the date of
reclassification.
(g) Impairment of loans and advances
Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or
portfolio of loans has occurred. Impairment allowances are calculated on individual loans and on groups of loans
assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount
of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses
expected from future events are not recognised.
Individually assessed loans and advances
For all loans that are considered individually significant, HSBC assesses on a case-by-case basis at each balance
sheet date whether there is any objective evidence that a loan is impaired. For those loans where objective
evidence of impairment exists, impairment losses are determined considering the following factors:
– HSBC’s aggregate exposure to the customer;
– the viability of the customer’s business model and their capacity to trade successfully out of financial
difficulties and generate sufficient cash flow to service debt obligations;
– the amount and timing of expected receipts and recoveries;
– the likely dividend available on liquidation or bankruptcy;
– the extent of other creditors’ commitments ranking ahead of, or pari passu with, HSBC and the likelihood
of other creditors continuing to support the company;