HSBC 2010 Annual Report Download - page 38

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Critical accounting policies // Customer groups and global businesses > Summary
36
representative of current economic and credit
conditions.
Further details of the nature and extent of our
exposures to ABSs classified as available-for-sale
and a more detailed description of the assumptions
and estimates used in assessing these securities for
impairment, together with a discussion of those
assets which are most sensitive to possible future
impairment, are provided in ‘Securitisation
exposures and other structured products’ on
page 128.
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
identified in available-for-sale debt securities which
had previously been determined not to be impaired,
potentially resulting in the recognition of material
impairment losses in the next financial year.
Deferred tax assets
Our accounting policy for the recognition of deferred
tax assets is described in Note 2s on the Financial
Statements. The recognition of a deferred tax asset
relies on an assessment of the probability and
sufficiency of future taxable profits, future reversals
of existing taxable temporary differences and
ongoing tax planning strategies.
The most significant judgements concern the US
deferred tax assets, given the recent history of losses
in our US operations. Net US deferred tax assets
amounted to US$4bn or 58% (2009: US$5.1bn;
59%) of deferred tax assets recognised on the
Group’s balance sheet.
Recognition of US deferred tax assets is
based on the evidence available about conditions
at the balance sheet date, and requires significant
judgements to be made regarding projections of loan
impairment charges and the timing of recovery in
the US economy. These judgements take into
consideration the effect of both positive and negative
evidence, including historical financial performance,
projections of future taxable income, future
reversals of existing taxable temporary differences,
tax planning strategies and the availability of loss
carrybacks.
Projections of future taxable income in the
US are based on business plans, future capital
requirements and ongoing tax planning strategies.
These projections include assumptions about future
house prices, US economic conditions, including
unemployment levels and their impact on loan
impairment charges, and capital support from HSBC
Holdings. These forecasts are consistent with
the assumption that it is probable that the results
of future operations will generate sufficient taxable
income to support the deferred tax assets. In
management’s judgement, recent market conditions,
which have resulted in losses being incurred in the
US, will create significant downward pressure and
volatility regarding the profit or loss before tax in
the next few years. To reflect this, the assessment of
recoverability of the deferred tax assets in the US
significantly discounts any future expected taxable
income and relies to a greater extent on capital
support to the US operations from HSBC Holdings,
including tax planning strategies implemented in
relation to such support.
The most significant tax planning strategy is the
investment of capital in our US operations to ensure
the realisation of the deferred tax assets. The transfer
of a subsidiary as part of an internal reorganisation
on 31 January 2010 provided substantial support
for the recoverability of the US deferred tax assets.
Management expects that, with support, our US
operations will continue to execute their business
strategies and plans until they return to profitability.
If HSBC Holdings were to decide not to provide
ongoing support, the full recovery of the deferred tax
asset may no longer be probable and could result in a
significant reduction of the deferred tax asset which
would be recognised as a charge in the income
statement.