HSBC 2003 Annual Report Download - page 245

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The designation of a loan as non-performing and the suspension of interest may be deferred for up to 12 months
in either of the following situations:
− cash collateral is held covering the total of principal and interest due and the right of set-off is legally
sound; or
− the value of any net realisable tangible security is considered more than sufficient to cover the full
repayment of all principal and interest due and credit approval has been given to the rolling-up or
capitalisation of interest payments.
In certain subsidiaries, principally in the UK and Hong Kong, provided that there is a realistic prospect of
interest being paid at some future date, interest on non-performing loans is charged to the customer’ s account.
However, the interest is not credited to the profit and loss account but to an interest suspense account in the
balance sheet, which is netted against the relevant loan.
In other subsidiaries and in any event where the probability of receiving interest payments is remote, interest is
no longer accrued and any suspended interest balance is written off.
On receipt of cash (other than from the realisation of security), the overall risk is re-evaluated and, if
appropriate, suspended or non-accrual interest is recovered and taken to the profit and loss account. A specific
provision of the same amount as the interest receipt is then raised against the principal balance. Amounts
received from the realisation of security are applied to the repayment of outstanding indebtedness, with any
surplus used to recover any specific provisions and then suspended interest.
Loans are not reclassified as accruing until interest and principal payments are up-to-date and future payments
are reasonably assured.
Loan write-offs
Loans (and the related provisions) are normally written off, either partially or in full, when there is no realistic
prospect of recovery of these amounts and when the proceeds from the realisation of security have been
received.
Assets acquired in exchange for advances
Assets acquired in exchange for advances in order to achieve an orderly realisation continue to be reported as
advances. The asset acquired is recorded at the carrying value of the advance disposed of at the date of the
exchange and subsequent provisions are based on any further deterioration in value.
(c) Treasury bills, debt securities and equity shares
Treasury bills, debt securities and equity shares intended to be held on a continuing basis are disclosed as
investment securities and are included in the balance sheet at cost less provision for any permanent diminution
in value.
Where dated investment securities have been purchased at a premium or discount, these premiums and discounts
are amortised through the profit and loss account over the period from the date of purchase to the date of
maturity so as to give a constant rate of return. If the maturity is at the borrowers’ option within a specified
range of years, the earliest maturity is adopted. These securities are included in the balance sheet at cost adjusted
for the amortisation of premiums and discounts arising on acquisition. The amortisation of premiums and
discounts is included in ‘Interest receivable’ . Any profit or loss on realisation of these securities is recognised in
the profit and loss account as it arises and included in ‘Gains on disposal of investments’ .
Other treasury bills, debt securities, equity shares and short positions in securities are included in the balance
sheet at market value. Changes in the market value of such assets and liabilities are recognised in the profit and
loss account as ‘Dealing profits’ as they arise. For liquid portfolios market values are determined by reference to
independently sourced mid-market prices. In certain less liquid portfolios securities are valued by reference to
bid or offer prices as appropriate. Where independent prices are not available, market values may be determined