HSBC 2012 Annual Report Download - page 404

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
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differences are included in the income statement. Non-monetary assets and liabilities that are measured at
historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the
date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are
translated into the functional currency using the rate of exchange at the date the fair value was determined. Any
exchange component of a gain or loss on a non-monetary item is recognised in other comprehensive income if
the gain or loss on the non-monetary item is recognised in other comprehensive income. Any exchange
component of a gain or loss on a non-monetary item is recognised in the income statement if the gain or loss
on the non-monetary item is recognised in the income statement.
In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated
into the Group’s presentation currency at the rate of exchange ruling at the balance sheet date. The results of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated
into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the
retranslation of opening foreign currency net assets, and exchange differences arising from retranslation of the
result for the reporting period from the average rate to the exchange rate prevailing at the period end, are
recognised in other comprehensive income. Exchange differences on a monetary item that is part of a net
investment in a foreign operation are recognised in the income statement of the separate financial statements.
In consolidated financial statements these exchange differences are recognised in other comprehensive income.
On disposal of a foreign operation, exchange differences relating thereto and previously recognised in other
comprehensive income are reclassified to the income statement as a reclassification adjustment when the gain
or loss on disposal is recognised.
(w) Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a
current legal or constructive obligation, which has arisen as a result of past events, and for which a reliable
estimate can be made of the amount of the obligation.
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are
possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or
non-occurrence, of one or more uncertain future events not wholly within the control of HSBC; or are present
obligations that have arisen from past events but are not recognised because it is not probable that settlement will
require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured.
Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of
settlement is remote.
(x) Financial guarantee contracts
Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded
initially at their fair value, which is generally the fee received or receivable. Subsequently, financial guarantee
liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate
of the expenditure required to settle the obligations.
HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. Where it has
previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting
applicable to insurance contracts, HSBC may elect to account for guarantees as an insurance contract in HSBC
Holdings’ financial statements. This election is made on a contract by contract basis, but the election for each
contract is irrevocable. Where these guarantees have been classified as insurance contracts, they are measured
and recognised as insurance liabilities.
(y) Insurance contracts
Through its insurance subsidiaries, HSBC issues contracts to customers that contain insurance risk, financial risk
or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an
insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance
contract if the insurance risk is significant.