HSBC 2010 Annual Report Download - page 256

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
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(b) Non-interest income
Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is
accounted for as follows:
− income earned on the execution of a significant act is recognised as revenue when the act is completed (for
example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third-party,
such as an arrangement for the acquisition of shares or other securities);
− income earned from the provision of services is recognised as revenue as the services are provided (for
example, asset management, portfolio and other management advisory and service fees); and
− income which forms an integral part of the effective interest rate of a financial instrument is recognised as
an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in
‘Interest income’ (Note 2a).
Net trading income comprises all gains and losses from changes in the fair value of financial assets and
financial liabilities held for trading, together with the related interest income, expense and dividends.
Net income from financial instruments designated at fair value includes all gains and losses from changes
in the fair value of financial assets and financial liabilities designated at fair value through profit or loss. Interest
income and expense and dividend income arising on these financial instruments are also included, except for
interest arising from debt securities issued, and derivatives managed in conjunction with those debt securities,
which is recognised in ‘Interest expense’ (Note 2a).
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for
listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity
securities.
(c) Operating segments
HSBC’s operating segments are organised into six geographical regions; Europe, Hong Kong, Rest of Asia-
Pacific, Middle East, North America and Latin America. Due to the nature of the Group, HSBC’s chief operating
decision-maker regularly reviews operating activity on a number of bases, including by geographical region,
customer group and global business, and retail businesses by geographical region. HSBC’s operating segments
were determined to be geographical regions because the chief operating decision-maker primarily uses
information on geographical regions in order to make decisions about allocating resources and assessing
performance.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting
policies. Segmental income and expenses include transfers between segments and these transfers are conducted
on arm’s length terms and conditions. Shared costs are included in segments on the basis of the actual recharges
made.
(d) Valuation of financial instruments
All financial instruments are recognised initially at fair value. In the normal course of business, the fair value of
a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration
given or received). In certain circumstances, however, the fair value will be based on other observable current
market transactions in the same instrument, without modification or repackaging, or on a valuation technique
whose variables include only data from observable markets, such as interest rate yield curves, option volatilities
and currency rates. When such evidence exists, HSBC recognises a trading gain or loss on inception of the
financial instrument, being the difference between the transaction price and the fair value. When unobservable
market data have a significant impact on the valuation of financial instruments, the entire initial difference in fair
value indicated by the valuation model from the transaction price is not recognised immediately in the income
statement but is recognised over the life of the transaction on an appropriate basis, or when the inputs become
observable, or the transaction matures or is closed out, or when HSBC enters into an offsetting transaction.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value are measured in
accordance with HSBC’s valuation methodologies, which are described in Note 16.