HSBC 2006 Annual Report Download - page 414

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
412
Impact
• Changes in fair value of equity securities for which IFRSs require recognition of the change in fair value and US
GAAP requires the securities to be held at amortised cost, affect net income and shareholders’ equity when the
security is classified as trading under IFRSs and affect shareholders’ equity when the security is classified as
available-for-sale under IFRSs.
Loan origination
IFRSs
From 1 January 2005
• Certain loan fee income and incremental directly attributable loan origination costs are amortised to the income
statement over the life of the loan as part of the effective interest calculation under IAS 39.
1 January 2004 to 31 December 2004
• Prior to 1 January 2005, fee and commission income was accounted for in the period when receivable, except
when charged to cover the costs of a continuing service to, or risk borne for, the customer, or was interest in
nature. In these cases, income was recognised on an appropriate basis over the relevant period. Loan costs
associated with origination were generally expensed as incurred.
US GAAP
• Certain loan fee income and direct but not necessarily incremental loan origination costs, including an
apportionment of compensation and related benefit costs, are deferred and amortised to the income statement
account over the life of the loan as an adjustment to interest income (SFAS 91, ‘Accounting for Non-refundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases’.)
Impact
• More costs are deferred and amortised under US GAAP, such as an apportionment of base salaries, than under
IFRSs. Base salaries are written off in the period they are incurred under IFRSs. This difference in treatment
results in increased net income and shareholders’ equity under US GAAP because, in the years presented, the
extra cost deferral under US GAAP exceeds the amortisation of previously deferred costs.
Securitisations
IFRSs
• The continued recognition of securitised assets is governed by a three-step process, which may be applied to the
whole asset, or, in certain circumstances, a part of an asset:
− If the rights to the cash flows arising from securitised assets have been transferred to a third party, and
substantially all the risks and rewards of the assets have been transferred, the assets concerned are
derecognised.
− If, subject to certain detailed criteria, the rights to the cash flows are retained by HSBC but there is a
contractual obligation to pay them to another party, substantially all the risks and rewards of the assets have
been transferred, and the securitised assets concerned are derecognised.
− If some significant risks and rewards of ownership have been transferred, but some have also been retained,
it must be determined whether or not control has been retained. If control has been retained, HSBC
continues to recognise the assets to the extent of its continuing involvement; if not, the assets are
derecognised.
US GAAP
• SFAS 140, ‘Accounting for Transfers and Servicing of Finance Assets and Extinguishments of Liabilities’,
requires that receivables that are sold to a special purpose entity (‘SPE’) and securitised can only be
derecognised and a gain or loss on sale recognised if the originator has surrendered control over the securitised
assets.
• Control is surrendered over transferred assets if and only if all of the following conditions are met: