HSBC 2009 Annual Report Download - page 66

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Critical accounting policies
64
Impairment of available-for-sale financial
assets
HSBC’s accounting policy for impairment of
available-for-sale financial assets is described in
Note 2j on the Financial Statements.
Available-for-sale financial assets are measured
at fair value, and changes in fair value are recognised
in other comprehensive income in ‘Available-for-
sale investments – fair value gains/(losses)’ until the
financial assets are either sold or become impaired.
An impairment loss is recognised if there is objective
evidence of impairment as a result of loss events
which have an impact on the estimated future cash
flows of the financial asset that can be reliably
estimated. If an available-for-sale financial asset
becomes impaired, the cumulative balance
previously recognised in other comprehensive
income is removed and recognised in the income
statement as an impairment loss. A further decline in
the fair value of an available-for-sale debt security
subsequent to the initial impairment is recognised in
the income statement when there is further objective
evidence of impairment.
At 31 December 2009, the Group’s total
available-for-sale financial assets amounted to
US$352 billion (2008: US$286 billion), of
which US$342 billion or 97 per cent (2008:
US$279 billion; 98 per cent) were debt securities.
The available-for-sale fair value reserve relating
to debt securities amounted to a deficit of
US$11.4 billion (2008: deficit of US$21.4 billion).
A deficit in the available-for-sale fair value reserve
occurs on debt securities when the fair value of a
security so categorised is less than the security’s
acquisition cost (net of any principal repayments and
amortisation) less any previous impairment loss
recognised in the income statement, but where
there is no evidence of any impairment or, if an
impairment was previously recognised, any
subsequent impairment.
Management is required to exercise judgement
in determining whether there is objective evidence
that an impairment loss has occurred. Once an
impairment has been identified, the amount of
impairment loss is measured with reference to the
fair value of the asset. More information on
assumptions and estimates requiring management
judgement relating to the determination of fair
values of financial instruments is provided above in
‘Valuation of financial instruments’.
The objective evidence required to determine
whether an available-for-sale debt security is
impaired comprises evidence of the occurrence of a
loss event and evidence that the loss event results in
a decrease in estimated future cash flows. When cash
flows are readily determinable, less judgement is
required. When determination of estimated future
cash flows requires consideration of a number of
variables, some of which may be unobservable in
current market conditions, more judgement is
required.
The most significant judgements concern more
complex instruments, such as asset-backed securities
(‘ABS’s), where it is necessary to consider factors
such as the estimated future cash flows on
underlying pools of collateral including prepayment
speeds, the extent and depth of market price declines
and changes in credit ratings. The review of
estimated future cash flows on underlying collateral
is subject to uncertainties when the assessment is
based on historical information on pools of assets,
and judgement is required to determine whether
historical performance remains representative of
current economic and credit conditions.
There is no single factor to which the Group’s
charge for impairment of available-for-sale debt
securities is particularly sensitive, because of the
range of different types of securities held, the range
of geographical areas in which those securities are
held, and the wide range of factors which can affect
the occurrence of loss events and the cash flows of
securities, including different types of collateral.
Management’s current assessment of the
holdings of available-for-sale ABSs with the most
sensitivity to possible future impairment is focused
on sub-prime and Alt-A residential mortgage-backed
securities. Excluding holdings in certain special
purpose entities where significant first loss risks are
borne by external investors, the available-for-sale
holdings in these categories amounted to
US$4.9 billion at 31 December 2009 (2008:
US$6.1 billion). The deficit in the available-for-sale
fair value reserve at 31 December 2009 in relation to
these securities was US$4.3 billion (2008:
US$6.0 billion).
Further details of the nature and extent of
HSBC’s exposures to ABSs classified as available-
for-sale are provided in ‘Impact of market turmoil’
under ‘Nature and extent of HSBC’s exposures’ on
page 157 and a more detailed description of the
assumptions and estimates used in assessing these
securities for impairment is disclosed in ‘Assessing
available-for-sale assets for impairment’ on
page 178.
It is possible that outcomes in the next financial
year could be different from those modelled when
seeking to identify impairment on available-for-sale
debt securities. In this event, impairment may be