HSBC 2013 Annual Report Download - page 70

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2 Summary of significant accounting policies (continued)
d Valuation of financial instruments
All financial instruments are recognized initially at fair value. In the normal course of business, the fair value
of a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration
given or received). In certain circumstances, however, the fair value will be based on other observable current
market transactions in the same instrument, without modification or repackaging, or on a valuation technique
whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and
currency rates. When such evidence exists, the bank recognizes a trading gain or loss on inception of the financial
instrument, being the difference between the transaction price and the fair value. When unobservable market data
have a significant impact on the valuation of financial instruments, the entire initial difference in fair value indicated
by the valuation model is not recognized immediately in the income statement. Instead, it is recognized over the life
of the transaction on an appropriate basis, when the inputs become observable, the transaction matures or is closed
out, or when the bank enters into an offsetting transaction.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value are measured in
accordance with the bank’s valuation methodologies, which are described in note 25.
e Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by the bank. Loans and advances
are recognized when cash is advanced to a borrower. They are derecognized when either the borrower repays its
obligations, or the loans are sold or written off, or substantially all the risks and rewards of ownership are transferred.
They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured
at amortized cost using the effective interest method, less any reduction from impairment or uncollectibility. Where
exposures are hedged by derivatives designated and qualifying as fair value hedges, the carrying value of the loans
and advances so hedged includes a fair value adjustment relating only to the hedged risk.
The bank may commit to underwrite loans on fixed contractual terms for specified periods of time, where the
drawdown of the loan is contingent upon certain future events outside the control of the bank.
f Impairment of loans and advances
Losses for impaired loans are recognized when there is objective evidence that impairment of a loan or portfolio
of loans has occurred. Impairment allowances are calculated on individual loans and on groups of loans assessed
collectively. Impairment losses are recorded as charges to the income statement. The carrying amount of impaired
loans on the statement of financial position is reduced through the use of impairment allowance accounts. Losses
which may arise from future events are not recognized.
Individually assessed loans and advances
The factors considered in determining whether a loan is individually significant for the purposes of assessing
impairment include:
– the size of the loan;
– the number of loans in the portfolio; and
– the importance of the individual loan relationship, and how this is managed.
Loans that meet the above criteria will be individually assessed for impairment, except when volumes of defaults
and losses are sufficient to justify treatment under a collective assessment methodology.
Loans considered as individually significant are typically to corporate and commercial customers and are for larger
amounts, which are managed on an individual relationship basis. Retail lending portfolios are generally assessed for
impairment on a collective basis as the portfolios generally consist of large pools of homogeneous loans.
Notes on the Consolidated Financial Statements (continued)
HSBC BANK CANADA