HSBC 2006 Annual Report Download - page 415

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− The transferred assets are put presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership.
− Each holder of interests in the transferee (i.e. holder of issued notes) has the right to pledge or exchange
their beneficial interests, and no condition constrains this right and provides more than a trivial benefit to the
transferor.
− The transferor does not maintain effective control over the assets through either an agreement that obligates
the transferor to repurchase or to redeem them before their maturity, or through the ability to unilaterally
cause the holder to return specific assets other than through a clean-up call.
• If these conditions are not met the securitised assets continue to be consolidated.
• When HSBC retains an interest in securitised assets, such as a servicing right or the right to residual cash flows
from the special purpose entity, HSBC recognises this interest at fair value on sale of the assets to the SPE.
Impact
• Gains on sale of assets to securitisation vehicles are recognised under US GAAP in cases when no such gain is
recognised under IFRSs. This results in higher US GAAP net income in periods in which there is significant
securitisation activity.
• Since early 2004, HSBC has reduced securitisation activity that results in ‘gain on sale’ accounting under US
GAAP. As a result, net income is lower under US GAAP because the amortisation of HSBC’s retained interest
in previous securitisations exceeds the gains on new transactions where a gain is recognised. The new
transactions largely replenish short-term loan assets held by existing vehicles.
• Note (l) on page 430 gives further details of transactions during the year where assets are derecognised under US
GAAP.
Loan impairment
IFRSs
• When statistical models, using historic loss rates adjusted for economic conditions, provide evidence of
impairment in portfolios of loans, their values are written down to their net recoverable amount. The net
recoverable amount is the present value of the estimated future recoveries discounted at the portfolio’s original
effective interest rate. The calculations include a reasonable estimate of recoveries on loans individually
identified for write-off pursuant to HSBC’s credit guidelines.
US GAAP
• When the delinquency status of loans in a portfolio is such that there is no realistic prospect of recovery, the
loans are written off in full, or to recoverable value where collateral exists. Delinquency depends on the number
of days payments is overdue. The delinquency status is applied consistently across similar loan products in
accordance with HSBC’s credit guidelines. When local regulators mandate the delinquency status at which
write-off must occur for different retail loan products and these regulations reasonably reflect estimated
recoveries on individual loans, this basis of measuring loan impairment is reflected in US GAAP accounting.
Cash recoveries relating to pools of such written-off loans, if any, are reported as loan recoveries upon
collection.
Impact
• Under both IFRSs and US GAAP, HSBC’s policy and regulatory instructions mandate that individual loans
evidencing adverse credit characteristics which indicate no reasonable likelihood of recovery, are written off.
When, on a portfolio basis, cash flows can reasonably be estimated in aggregate from these written-off loans, an
asset equal to the present value of the future cash flows is recognised under IFRSs.
• No asset for future recoveries arising from written-off assets was recognised in the balance sheet under IFRSs
prior to 1 January 2005.