HSBC 2009 Annual Report Download - page 383

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The defined benefit pension costs and the present value of defined benefit obligations are calculated at the
reporting date by the schemes’ actuaries using the Projected Unit Credit Method. The net charge to the income
statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan liabilities,
less the expected return on plan assets, and is presented in operating expenses. Past service costs are charged
immediately to the income statement to the extent that the benefits have vested, and are otherwise recognised
on a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise
experience adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred), as well as the effects of changes in actuarial assumptions. Actuarial gains and losses are
recognised in other comprehensive income in the period in which they arise.
The defined benefit liability recognised in the balance sheet represents the present value of defined benefit
obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any net
defined benefit surplus is limited to unrecognised past service costs plus the present value of available refunds
and reductions in future contributions to the plan.
The cost of obligations arising from other post-employment defined benefit plans, such as defined benefit health-
care plans, are accounted for on the same basis as defined benefit pension plans.
(u) Share-based payments
The cost of share-based payment arrangements with employees is measured by reference to the fair value of
equity instruments on the date they are granted, and recognised as an expense on a straight-line basis over the
vesting period, with a corresponding credit to the ‘Share-based payment reserve’. The vesting period is the
period during which all the specified vesting conditions of a share-based payment arrangement are to be
satisfied. The fair value of equity instruments that are made available immediately, with no vesting period
attached to the award, are expensed immediately.
Fair value is determined by using appropriate valuation models, taking into account the terms and conditions
upon which the equity instruments were granted. Vesting conditions include service conditions and performance
conditions; any other features of a share-based payment arrangement are non-vesting conditions. Market
performance conditions and non-vesting conditions are taken into account when estimating the fair value of
equity instruments at the date of grant, so that an award is treated as vesting irrespective of whether the market
performance condition or non-vesting condition is satisfied, provided all other vesting conditions are satisfied.
Vesting conditions, other than market performance conditions, are not taken into account in the initial estimate
of the fair value at the grant date. They are taken into account by adjusting the number of equity instruments
included in the measurement of the transaction, so that the amount recognised for services received as
consideration for the equity instruments granted shall be based on the number of equity instruments that
eventually vest. On a cumulative basis, no expense is recognised for equity instruments that do not vest because
of a failure to satisfy non-market performance or service conditions.
Where an award has been modified, as a minimum, the expense of the original award continues to be recognised
as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or
increase the number of equity instruments, the incremental fair value of the award or incremental fair value of
the extra equity instruments is recognised in addition to the expense of the original grant, measured at the date of
modification, over the modified vesting period.
A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised
immediately for the amount that would otherwise have been recognised for services over the vesting period.
Where HSBC Holdings enters into share-based payment arrangements involving employees of subsidiaries, the
cost is recognised in ‘Investment in subsidiaries’ and credited to the ‘Share-based payment reserve’ over the
vesting period. Where a subsidiary funds the share-based payment arrangement, ‘Investment in subsidiaries’ is
reduced by the fair value of equity instruments.
(v) Foreign currencies
Items included in the financial statements of each of HSBC’s entities are measured using the currency of the
primary economic environment in which the entity operates (‘the functional currency’). HSBC’s consolidated
financial statements are presented in US dollars which is also HSBC Holdings’ functional currency.