HSBC 2006 Annual Report Download - page 317

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the functional currency at the rate of exchange ruling 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
exchange component of a gain or loss on a non-monetary item is recognised directly in equity if the gain or loss
on the non-monetary item is recognised directly in equity. Any exchange component of a gain or loss on a non-
monetary item is recognised directly in the income statement if the gain or loss on the non-monetary item is
recognised in the income statement.
In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated
into the Group’s presentation currency at the rate of exchange ruling at the balance sheet date. The results of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated
into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the
retranslation of opening foreign currency net investments, and exchange differences arising from retranslation of
the result for the reporting period from the average rate to the exchange rate prevailing at the period end, are
recognised in equity in the ‘foreign exchange reserve’. 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.
In consolidated financial statements these exchange differences are recognised in the foreign exchange reserve in
shareholders’ equity. On disposal of a foreign operation, exchange differences relating thereto and previously
recognised in reserves are recognised in the income statement.
(v) Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a
current legal or constructive obligation as a result of past events, and a reliable estimate can be made of the
amount of the obligation.
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are
possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or
non-occurrence, of one or more uncertain future events not wholly within the control of HSBC. Contingent
liabilities are not recognised in the financial statements but are disclosed unless they are remote.
(w) Financial guarantee contracts
Liabilities under financial guarantees contracts which are not classified as insurance contracts, are recorded
initially at their fair value, which is generally the fee received or receivable. Subsequently, the financial
guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the
best estimate of the expenditure required to settle the obligations.
HSBC Holdings has issued financial guarantees to other Group entities. Where these guarantees have been
classified as insurance contracts, they are measured consistently with insurance liabilities.
(x) Insurance contracts
Through its insurance subsidiaries, HSBC issues contracts to customers that contain insurance risk, financial risk
or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an
insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance
contract if the insurance risk is significant.
Insurance contracts are accounted for as follows:
Premiums
Gross insurance premiums for non-life insurance business are reported as income over the term of the insurance
contracts based on the proportion of risks borne during the accounting period. The unearned premium (the
proportion of the business underwritten in the accounting year relating to the period of risk after the balance
sheet date) is calculated on a daily or monthly pro rata basis.