HSBC 2006 Annual Report Download - page 432

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 47
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Application of FIN 46R
FIN 46R requires the consolidation of VIEs in which HSBC is the primary beneficiary, and disclosures in
respect of other VIEs in which HSBC has a significant variable interest.
Under IFRSs, HSBC consolidates entities in which it has a controlling interest. For SPEs, determination of the
entity that holds the controlling interest involves a balanced assessment of certain factors, including an analysis
of risks and rewards incidental to their activities. HSBC’s interests in entities deemed to be VIEs may result in
differences in accounting and disclosure treatment under US GAAP.
The following table analyses HSBC’s total consolidated VIE assets in a US GAAP balance sheet:
At 31 December
2006
US$m
2005
US$m
Classification
Loans and advances to customers ............................................................................................. 23,937 23,843
Financial investments ................................................................................................................ 27,715 4,403
Tangible fixed assets ................................................................................................................. 1,617 2,017
Other assets ............................................................................................................................... 876 256
54,145 30,519
Of the 2006 total, US$48,699 million (2005: US$23,843 million) represented asset-backed commercial paper
conduits and securitisation vehicles, and US$2,683 million (2005: US$2,017 million) represented infrastructure
projects and funds. The remaining balance consisted of guaranteed pension funds, investment funds, and other
entities. Certain of these entities with assets of approximately US$54,145 million at 31 December 2006 (2005:
US$19,475 million) were consolidated by HSBC in its IFRSs financial statements. There was no significant
impact on net income under US GAAP for the year ended 31 December 2006 as a result of consolidating these
VIEs.
HSBC also had significant involvement in, but was not the primary beneficiary of, VIEs with total assets of
approximately US$104.9 billion (2005: US$86.2 billion), including asset-backed commercial paper conduits and
securitisation vehicles with assets of approximately US$32.5 billion (2005: US$14.7 billion), infrastructure
projects and funds of approximately US$6.0 billion (2005: US$6.2 billion), and interests in investment funds,
low income housing tax credit partnerships, guaranteed pension funds, government debt restructuring
programmes and other entities. HSBC’s maximum exposure to loss in relation to these entities was estimated at
US$19.5 billion (2005: US$9.7 billion) which arose from guarantees, retained interests and recourse liabilities.
HSBC was also involved in other investment funds and similar entities that are considered VIEs for which its
involvement was limited to that of administrator, investment adviser, or other service provider.
In addition, HSBC had an interest in certain capital funding vehicles that are consolidated under IFRSs.
However, under US GAAP, these vehicles were not recognised on HSBC’s balance sheet because it was not the
primary beneficiary.
(k) Consolidated cash flow statement
HSBC prepares its cash flow statement in accordance with IAS 7 ‘Cash Flow Statements’, which is consistent
with the objectives and principles of SFAS 95 ‘Statement of Cash Flows’ as amended by SFAS 104 ‘Statement
of Cash Flows – Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows
from Hedging Transactions’.
(l) Securitisations
HSBC Finance
Following the acquisition of HSBC Finance in 2003, HSBC increased its securitisation activity and the following
discussion relates only to HSBC Finance’s securitisation activities including securitised credit card receivables
transferred to HSBC Bank USA. In other HSBC entities such activities do not represent a significant part of
HSBC’s business and retained interests in securitisations are not significant.
In the third quarter of 2004, HSBC began to structure all new collateralised funding transactions as secured
financings. In a secured financing, the underlying receivables and debt remain on HSBC’s balance sheet. HSBC