HSBC 2011 Annual Report Download - page 43

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Deciding whether an available-for-sale debt
security is impaired requires objective evidence of
both the occurrence of a loss event and a related
change in estimated future cash flows. The degree
of judgement involved is less when cash flows
are readily determinable, but increases when
estimating future cash flows requires consideration
of a number of variables, some of which may be
unobservable in current market conditions.
There is no single factor to which the Group’s
charge for impairment of available-for-sale debt
securities is particularly sensitive, because of the
various types of securities we hold, the range of
geographical areas in which those securities are held,
and the wide range of factors which can affect the
occurrence of loss events and the cash flows of
securities, including different types of collateral.
The most significant judgements concern more
complex instruments, such as asset-backed securities
(‘ABS’s), where it is necessary to consider factors
such as the estimated future cash flows on
underlying pools of collateral including prepayment
speeds, the extent and depth of market price declines
and changes in credit ratings. The review of
estimated future cash flows on underlying collateral
is subject to uncertainties when the assessment is
based on historical information on pools of assets,
and judgement is required to determine whether
historical performance remains representative of
current economic and credit conditions.
Further details of the nature and extent of our
exposures to ABSs classified as available-for-sale
and a more detailed description of the assumptions
and estimates used in assessing these securities for
impairment, together with a discussion of those
assets which are most sensitive to possible future
impairment, are provided in ‘Securitisation
exposures and other structured products’ on
page 149.
It is possible that outcomes in the next financial
year could be different from those modelled when
seeking to identify impairment on available-for-sale
debt securities. In this event, impairment may be
identified in available-for-sale debt securities which
had previously been determined not to be impaired,
potentially resulting in the recognition of material
impairment losses in the next financial year.
Deferred tax assets
Our accounting policy for the recognition of deferred
tax assets is described in Note 2s on the Financial
Statements. The recognition of a deferred tax asset
relies on an assessment of the probability and
sufficiency of future taxable profits, future reversals
of existing taxable temporary differences and
ongoing tax planning strategies.
The most significant judgements concern the US
deferred tax asset, given the recent history of losses
in our US operations. The net US deferred tax asset
amounted to US$5.2bn or 68% (2010: US$4bn;
58%) of deferred tax assets recognised on the
Group’s balance sheet.
Recognition of the US deferred tax asset is
based on the evidence available about conditions
at the balance sheet date, and requires significant
judgements to be made regarding projections of loan
impairment charges and the timing of recovery in
the US economy. These judgements take into
consideration the effect of both positive and negative
evidence, including historical financial performance,
projections of future taxable income, future
reversals of existing taxable temporary differences,
tax planning strategies and the availability of loss
carrybacks.
Projections of future taxable income in the
US are based on business plans, future capital
requirements and ongoing tax planning strategies.
These projections include assumptions about future
house prices, US economic conditions including
unemployment levels and their impact on loan
impairment charges, and capital support from HSBC
Holdings. These forecasts are consistent with
the assumption that it is probable that the results
of future operations will generate sufficient taxable
income to support the deferred tax assets. In
management’s judgement, recent market conditions,
which have resulted in losses being incurred in the
US, will create significant downward pressure and
volatility regarding the profit or loss before tax in
the next few years. To reflect this, the assessment of
recoverability of the deferred tax assets in the US
significantly discounts any future expected taxable
income and relies to a greater extent on capital
support to the US operations from HSBC Holdings,
including tax planning strategies implemented in
relation to such support.
The most significant tax planning strategy is the
retention of capital in our US operations to ensure
the realisation of the deferred tax assets.
Management expects that, with this strategy, the US
operations will generate sufficient future profits to
support the recognition of the deferred tax assets. If
HSBC Holdings were to decide not to provide this
ongoing support, the full recovery of the deferred tax
asset may no longer be probable and could result in a
significant reduction of the deferred tax asset which
would be recognised as a charge in the income
statement.