HSBC 2012 Annual Report Download - page 385

HSBC HOLDINGS PLC
Notes on the Financial Statements
1 – Basis of preparation
383
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
1 Basis of preparation
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have
been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’) and as endorsed by the EU. EU-endorsed IFRSs may differ
from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by
the EU.
At 31 December 2012, there were no unendorsed standards effective for the year ended 31 December 2012
affecting these consolidated and separate financial statements, and there was no difference between IFRSs
endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s
financial statements for the year ended 31 December 2012 are prepared in accordance with IFRSs as issued by
the IASB.
IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations
issued by the IFRS Interpretations Committee (‘IFRIC’) and its predecessor body.
As a result of changing market practices in response to regulatory and accounting changes, as well as general
market developments, HSBC revised its methodology for estimating the credit valuation adjustment (‘CVA’) for
derivatives at 31 December 2012. Previously, the probability of default (‘PD’) used in the CVA calculation was
based on HSBC’s internal credit rating for the counterparty taking into account how credit ratings may
deteriorate over the duration of the exposure based on historical rating transition matrices. The revised
methodology maximises the use of the PDs based on market-observable data, such as credit default swap
(‘CDS’) spreads. Where CDS spreads are not available, PDs are estimated having regard to market practice,
considering relevant data including both CDS indices and historical rating transition matrices. In addition, HSBC
aligned its methodology for estimating the debit valuation adjustment (‘DVA’) to be consistent with that applied
for CVA as at 31 December 2012. Historically, HSBC considered that a zero spread was appropriate in respect
of own credit risk and consequently did not adjust derivative liabilities for its own credit risk.
At 31 December 2012, the effect of the changes in fair value estimates as a result of the revisions to
methodology was to reduce derivative liabilities by US$518m and to reduce derivative assets by US$899m
resulting in a reduction in net trading income of US$381m. It is impracticable to estimate the effect of the
changes in fair value estimates on future periods. See Note 15 for further information on CVA and DVA
methodologies.
During 2012, HSBC adopted a number of interpretations and amendments to standards which had an
insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of
HSBC Holdings.
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms
of their application to HSBC and consequently there would be no significant differences had the financial
statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the
Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures
necessary to satisfy IFRSs and Hong Kong reporting requirements.
(c) Presentation of information
Disclosures under IFRS 4 ‘Insurance Contracts’ and IFRS 7 ‘Financial Instruments: Disclosures’ concerning the
nature and extent of risks relating to insurance contracts and financial instruments have been included in the
audited sections of the ‘Report of the Directors: Risk’ on pages 123 to 280.
Capital disclosures under IAS 1 ‘Presentation of Financial Statements’ have been included in the audited
sections of ‘Report of the Directors: Capital’ on pages 281 to 300.
Disclosures relating to HSBC’s securitisation activities and structured products have been included in the
audited section of ‘Report of the Directors: Risk’ on pages 123 to 280.
In accordance with HSBC’s policy to provide disclosures that help investors and other stakeholders understand