HSBC 2004 Annual Report Download - page 120

HSBC HOLDINGS PLC
Financial Review (continued)
118
Critical accounting policies
Introduction
The results of HSBC Holdings are sensitive to the
accounting policies, assumptions and estimates that
underlie the preparation of its consolidated financial
statements. The accounting policies used in the
preparation of the consolidated financial statements
are described in detail in Note 2 in the ‘Notes on the
Financial Statements’ on pages 243 to 356.
When preparing the financial statements, it is
the directors’ responsibility under UK company law
to select suitable accounting policies and to make
judgements and estimates that are reasonable and
prudent. Under UK GAAP, Financial Reporting
Standard (‘FRS’ ) 18 ‘Accounting policies’ requires
the Group to adopt the most appropriate accounting
policies in order to give a true and fair view.
HSBC also provides details of its net income
and shareholders’ equity calculated in accordance
with US GAAP. US GAAP differs in certain respects
from UK GAAP. Details of these differences are set
out in Note 49 in the ‘Notes on the Financial
Statements’ on pages 322 to 356.
The accounting policies that are deemed critical
to HSBC’s UK GAAP results and financial position,
in terms of materiality and the degree of judgement
and estimation involved, are discussed below.
Provisions for bad and doubtful debts
HSBC’ s accounting policy for provisions for bad
and doubtful debts on customer loans is described in
Note 2(c) in the ‘Notes on the Financial Statements’
on pages 244 to 246.
Charges for provisions for bad and doubtful
debts are reflected in HSBC’ s profit and loss account
under the caption ‘Provision for bad and doubtful
debts’ . Any increase in these provisions has the
effect of lowering HSBC’ s profit on ordinary
activities by a corresponding amount (while any
decrease in provisions or release of provisions would
have the opposite effect).
Specific provisions
Specific provisions are established either on a
portfolio basis or on a case-by-case basis depending
on the nature of the exposure and the manner in
which risks inherent in that exposure are managed.
In addition, provisions for the sovereign risk inherent
in cross-border credit exposures are established for
certain countries; this element is not currently
significant.
When specific provisions are raised on a
portfolio basis, the most important factors in
calculating the quantum of the required provision
are:
• the roll or loss rates set for each category; and
• the periods embedded in the calculations of roll
and loss rates which are designed to reflect fully
but not excessively losses inherent at the
reporting date and not future losses.
The portfolio basis is applied to overdue
accounts in HSBC Finance Corporation’s consumer
portfolios and to the following portfolios in the rest
of HSBC:
• low value, homogeneous small business
accounts in certain jurisdictions;
• residential mortgages less than 90 days overdue;
and
• credit cards and other unsecured consumer
lending products.
When establishing specific provisions on a case-
by-case basis, the most important factors are:
• the Group’ s aggregate exposure to the customer
(including contingent liabilities);
• the viability of the customer’s business model
and capability to trade successfully out of
financial difficulties and generate sufficient cash
flow to service debt obligations;
• the likely dividend available on liquidation or
bankruptcy;
• the extent of other creditors’ commitments
ranking ahead of, or pari passu with, the Group
and the likelihood of other creditors continuing
to support the company;
• the complexity of determining the aggregate
amount and ranking of all creditor claims and
the extent to which legal and insurance
uncertainties are evident;
• the amount and timing of expected receipts and
recoveries;
• the realisable value of security (or other credit
mitigants) and likelihood of successful
repossession;
• the deduction of any costs involved in recovery
of amounts outstanding;
• the ability of the borrower to obtain and make
payments in the relevant foreign currency if
loans are not in local currency; and,