HSBC 2012 Annual Report Download - page 386

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
1 – Basis of preparation
384
the Group’s performance, financial position and changes thereto, the information provided in the Notes on the
Financial Statements and the Report of the Directors goes beyond the minimum levels required by accounting
standards, statutory and regulatory requirements and listing rules. In particular, HSBC has provided additional
disclosures following the issue of the Enhanced Disclosures Task Force (‘EDTF’) report ‘Enhancing the Risk
Disclosures of Banks’ in 2012 and will further enhance its risk disclosures in 2013. The report aims to help
financial institutions identify areas that investors had highlighted needed better and more transparent information
about banks’ risks, and how these risks relate to performance measurement and reporting. The recommendations
for disclosure improvement focused on the principal risks faced by the banking industry, and included
disclosures about risk governance, capital adequacy, liquidity, funding, credit risk, market risk and other risks. In
addition, HSBC follows the British Bankers’ Association Code for Financial Reporting Disclosure (‘the BBA
Code’). The BBA Code aims to increase the quality and comparability of UK banks’ disclosures and sets out five
disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC
assesses good practice recommendations issued from time to time by relevant regulators and standard setters and
will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.
In publishing the parent company financial statements here together with the Group financial statements, HSBC
Holdings has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its
individual income statement and related notes that form a part of these financial statements.
HSBC’s consolidated financial statements are presented in US dollars which is also HSBC Holdings’ functional
currency. HSBC Holdings’ functional currency is the US dollar because the US dollar and currencies linked to
it are the most significant currencies relevant to the underlying transactions, events and conditions of its
subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.
HSBC uses the US dollar as its presentation currency in its consolidated financial statements because the US
dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business.
(d) Use of estimates and assumptions
The preparation of financial information requires the use of estimates and assumptions about future conditions.
The use of available information and the application of judgement are inherent in the formation of estimates;
actual results in the future may differ from estimates upon which financial information is prepared. Management
believes that HSBC’s critical accounting policies where judgement is necessarily applied are those which relate
to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, deferred tax
assets and provisions for liabilities. See ‘Critical accounting policies’ on pages 54 to 57, which form an integral
part of these financial statements.
Further information about key assumptions concerning the future, and other key sources of estimation
uncertainty, are set out in the Notes on the Financial Statements.
(e) Consolidation
The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its
subsidiaries made up to 31 December, with the exception of the banking and insurance subsidiaries of HSBC
Bank Argentina, whose financial statements are made up to 30 June annually to comply with local regulations.
Accordingly, HSBC uses their audited interim financial statements, drawn up to 31 December annually.
Subsidiaries are consolidated from the date that HSBC gains control. The acquisition method of accounting is
used when subsidiaries are acquired by HSBC. The cost of an acquisition is measured at the fair value of the
consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are
recognised as an expense in the income statement in the period in which they are incurred. The acquired
identifiable assets, liabilities and contingent liabilities are generally measured at their fair values at the date of
acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of
non-controlling interest and the fair value of HSBC’s previously held equity interest, if any, over the net of the
amounts of the identifiable assets acquired and the liabilities assumed. The amount of non-controlling interest is
measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable
net assets. In a business combination achieved in stages, the previously held equity interest is remeasured at the
acquisition-date fair value with the resulting gain or loss recognised in the income statement. In the event that the
amount of net assets acquired is in excess of the aggregate of the consideration transferred, the amount of non-
controlling interest and the fair value of HSBC’s previously held equity interest, the difference is recognised