HSBC 2013 Annual Report Download - page 72

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2 Summary of significant accounting policies (continued)
f Impairment of loans and advances (continued)
Collectively assessed loans and advances
Impairment is assessed on a collective basis in two circumstances:
– to cover losses which have been incurred but have not yet been identified on loans subject to individual
assessment; and
– for homogeneous groups of loans that are not considered individually significant.
Collective allowances for business and government loans are estimated using the underlying credit metrics from the
bank’s internal rating system as a basis. Management adjusts the collective allowance where it is considered that the
underlying credit metrics does not fully reflect recent portfolio and economic trends. This judgemental adjustment
employs an established framework and references both internal and external indicators of credit quality.
Collective allowances for consumer loans, residential mortgages and credit cards are estimated through analysis of
historical data including: losses, delinquency migration and write-off trends; and is supplemented by judgemental
adjustments that employ an established framework referencing both internal and external indicators of credit quality.
The level of the collective allowance is reassessed each quarter and may fluctuate as a result of changes in portfolio
volumes, concentrations and risk; analysis of developing trends in probability of loss, severity of loss and exposure
at default factors; and management’s current assessment of indicators that may have affected the condition of the
portfolio. The balance of the collective allowance is also analyzed as a function of risk-weighted assets and is also
referenced to applicable industry data.
Provisions relating to off balance sheet credit instruments such as guarantees and credit commitments are included
in other liabilities.
The loan impairment charges and other credit risk provisions is charged to income and comprises the amounts
written off during the year, net of recoveries on amounts written off in prior years, and changes in provisions.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there
is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the
realization of security. In circumstances where the net realizable value of any collateral has been determined and
there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to
an event occurring after the impairment was recognized, the excess is written back by reducing the loan impairment
allowance account accordingly. The write-back is recognized in the income statement.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realization are recorded as assets held for
sale and reported in ‘Other assets’ if the carrying amounts of the assets are recovered principally through sale, the
assets are available for sale in their present condition and their sale is highly probable. The asset acquired is recorded
at the lower of its fair value less costs to sell and the carrying amount of the loan (net of impairment allowance) at
the date of exchange. No depreciation is charged in respect of assets held for sale. Any subsequent write-down of the
acquired asset to fair value less costs to sell is recognized in the income statement, in ‘Other operating income’. Any
subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative write-down,
is also recognized in ‘Other operating income’, together with any realized gains or losses on disposal.
Notes on the Consolidated Financial Statements (continued)
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