HSBC 2010 Annual Report Download - page 258

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
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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. The criteria used by HSBC to
determine that there is such objective evidence include:
– known cash flow difficulties experienced by the borrower;
– past due contractual payments of either principal or interest;
– breach of loan covenants or conditions;
– the probability that the borrower will enter bankruptcy or other financial realisation; and
– a significant downgrading in credit rating by an external credit rating agency.
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;
– the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to
which legal and insurance uncertainties are evident;
– the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
– the likely deduction of any costs involved in recovery of amounts outstanding;
– the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in
local currency; and
– when available, the secondary market price of the debt.
Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective
interest rate and comparing the resultant present value with the loan’s current carrying amount. The impairment
allowances on individually significant accounts are reviewed at least quarterly and more regularly when
circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and
the timing and amount of actual and anticipated receipts. Individually assessed impairment allowances are only
released when there is reasonable and objective evidence of a reduction in the established loss estimate.
Collectively assessed loans and advances
Impairment is assessed on a collective basis in two circumstances:
– to cover losses which have been incurred but have not yet been identified on loans subject to individual
assessment; and
– for homogeneous groups of loans that are not considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis
are grouped together according to their credit risk characteristics for the purpose of calculating an estimated
collective loss. This reflects impairment losses that HSBC has incurred as a result of events occurring before
the balance sheet date, which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. These losses will only be individually identified in the future. As soon as information becomes
available which identifies losses on individual loans within the group, those loans are removed from the group
and assessed on an individual basis for impairment.