HSBC 2014 Annual Report Download - page 118

HSBC BANK PLC
Notes on the Financial Statements (continued)
116
(g) Consolidation and related disclosures
The group controls and consequently consolidates an entity when it is exposed, or has rights, to variable returns from
its involvement with the entity and has the ability to affect those returns through its power over the entity. Control is
initially assessed based on consideration of all facts and circumstances, and is subsequently reassessed when there
are significant changes to the initial setup.
Where an entity is governed by voting rights, the group would consolidate when it holds, directly or indirectly, the
necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is
more complex and requires judgement of other factors, including having exposure to variability of returns, power
over the relevant activities or holding the power as agent or principal.
Business combinations are accounted for using the acquisition method. 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 the group’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. For acquisitions 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.
All intra-group transactions are eliminated on consolidation.
The consolidated financial statements of the group also include the attributable share of the results and reserves of
joint ventures and associates, based on either financial statements made up to 31 December or pro-rated amounts
adjusted for any material transactions or events occurred between the date of financial statements available and 31
December.
(h) Foreign currencies
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the
date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the
functional currency at the rate of exchange at the balance sheet date. Any resulting exchange 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 foreign exchange
component of a gain or loss on a non-monetary item is recognised either in other comprehensive income or in the
income statement depending where the gain or loss on the underlying non-monetary item is recognised.
In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and
associates whose functional currency is not Sterling, are translated into the group’s presentation currency at the rate
of exchange at the balance sheet date, while their results are translated into Sterling at the average rates of exchange
for the reporting period. Exchange differences arising from the retranslation of opening foreign currency net assets,
and the retranslation of the results for the reporting period from the average rate to the exchange rate 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 and in
other comprehensive income in consolidated financial statements. On disposal of a foreign operation, exchange
differences previously recognised in other comprehensive income are reclassified to the income statement as a
reclassification adjustment.
(i) Loans and advances to banks and customers
These include loans and advances originated by the group, not classified as held for trading or designated at fair
value. They are recognised when cash is advanced to a borrower and are derecognised when either the borrower
repays its obligations, or the loans are sold, 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 amortised cost using the effective interest method, less impairment allowance.
Loans and advances are reclassified to ‘Assets held for sale’ when they meet the criteria presented in Note 19;
however, their measurement continues to be in accordance with this policy.
The group may commit to underwrite loans on fixed contractual terms for specified periods of time. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a
derivative. On drawdown, the loan is classified as held for trading. Where the group intends to hold the loan, a
provision on the loan commitment is only recorded where it is probable that the group will incur a loss. On inception
of the loan, the loan to be held is recorded at its fair value and subsequently measured at amortised cost. For certain
transactions, such as leveraged finance and syndicated lending activities, the cash advanced may not be the best
evidence of the fair value of the loan. For these loans, where the initial fair value is lower than the cash amount