HSBC 2010 Annual Report Download - page 265

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each
other in the range of 80% to 125%.
Hedge ineffectiveness is recognised in the income statement in ‘Net trading income’.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are
recognised immediately in the income statement. These gains and losses are reported in ‘Net trading income’,
except where derivatives are managed in conjunction with financial instruments designated at fair value (other
than derivatives managed in conjunction with debt securities issued by the Group), in which case gains and
losses are reported in ‘Net income from financial instruments designated at fair value’. The interest on
derivatives managed in conjunction with debt securities issued by the Group which are designated at fair value
is recognised in ‘Interest expense’. All other gains and losses on these derivatives are reported in ‘Net income
from financial instruments designated at fair value’.
(m) Derecognition of financial assets and liabilities
Financial assets are derecognised when the contractual right to receive cash flows from the assets has expired; or
when HSBC has transferred its contractual right to receive the cash flows of the financial assets, and either:
– substantially all the risks and rewards of ownership have been transferred; or
– HSBC has neither retained nor transferred substantially all the risks and rewards, but has not retained
control.
Financial liabilities are derecognised when they are extinguished, that is when the obligation is discharged,
cancelled, or expires.
(n) Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
(o) Subsidiaries, associates and joint ventures
HSBC classifies investments in entities which it controls as subsidiaries. Where HSBC is a party to a contractual
arrangement whereby, together with one or more parties, it undertakes an economic activity that is subject to
joint control, HSBC classifies its interest in the venture as a joint venture. HSBC classifies investments in
entities over which it has significant influence, and that are neither subsidiaries nor joint ventures, as associates.
For the purpose of determining this classification, control is considered to be the power to govern the financial
and operating policies of an entity so as to obtain benefits from its activities.
HSBC Holdings’ investments in subsidiaries are stated at cost less any impairment losses. An impairment loss
recognised in prior periods shall be reversed through the income statement if, and only if, there has been a
change in the estimates used to determine the recoverable amount of the investment in subsidiary since the last
impairment loss was recognised.
Investments in associates and interests in joint ventures are recognised using the equity method. Under this
method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter
for the post-acquisition change in HSBC’s share of net assets.
Profits on transactions between HSBC and its associates and joint ventures are eliminated to the extent of
HSBC’s interest in the respective associates or joint ventures. Losses are also eliminated to the extent of HSBC’s
interest in the associates or joint ventures unless the transaction provides evidence of an impairment of the asset
transferred.
(p) Goodwill and intangible assets
(i) Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration
transferred, the amount of any non-controlling interest and the fair value of any previously held equity