HSBC 2012 Annual Report Download - page 323

321
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
of US$1.3bn is based on appropriate
assumptions about future expected redress
payments, while noting the sensitivity of the
provision to different outcomes from those
assumed;
− HSBC’s involvement in the sale of interest
rate swaps to small and medium sized
businesses in the UK and the potential costs
of remediation. The Committee noted that
the provision of US$598m at 31 December
2012 reflected the outcome of the FSA’s
findings from the pilot reviews completed
by banks on the selling of these products to
customers;
− the level of loan impairment allowances and
charges throughout the year, discussing
with management the reasons for significant
increases, notably in Brazil as a result of
economic conditions and strong growth in
lending in recent periods. The Committee
considered the judgements and estimates
involved in applying roll rate
methodologies and noted the recognition of
an additional impairment allowance of
US$225m in respect of the US mortgage
lending portfolios to reflect a longer
estimated average period of time from
current status to write-off. In response to an
industry letter from the FSA concerning the
application of loan impairment
methodologies to loan portfolios vulnerable
to credit stresses, the Committee considered
reports on the application of HSBC’s
accounting policies and loan impairment
methodologies. The Committee also
considered a report on credit exposures and
the extent of refinancing risk in HSBC’s
UK corporate real estate lending portfolio,
and how this is reflected in loan impairment
allowances;
− the recoverability of major deferred tax
assets balances recognised, including the
deferred tax asset balances recognised in
the US, Mexico and Brazil;
− management’s judgements involved in the
change in estimation methodology for credit
valuation adjustments and debit valuation
adjustments on derivative financial
instruments as at 31 December 2012 as a
result of changing market practices;
− the impairment test performed on HSBC’s
investment in Bank of Communications
Co., Limited as at 31 December 2012.
During the year, the market value of the
investment was below the carrying amount
for a period of approximately ten months,
which gave rise to an indicator of
impairment. The impairment test identified
that, based on an assessment of the value in
use of the investment, the investment is not
impaired; and
− management’s conclusion that goodwill
relating to GB&M Europe is not impaired
following reduced profitability in the
second half of 2012 which triggered the re-
testing of the related goodwill as at
31 December 2012. The Committee noted
that disclosure has been made with regards
to the extent to which a change in key
assumptions would result in the recoverable
amount to be equal to its carrying amount
(see note 23 on the financial statements).
• Internal controls over financial reporting.
The Committee undertook an annual review of
HSBC’s systems of internal controls over
financial reporting. During 2012, the Committee
monitored the effectiveness of such internal
controls and reported regularly to the Board as
described on page 334. The Committee received
regular reports from the Group Finance
Director, the Group Chief Accounting Officer,
and the Group Head of Internal Audit. Minutes
of the Group Risk Committee (‘GRC’) and
executive committee meetings including
the GMB and Risk Management Meetings were
provided to the Committee members. The
Committee also reviewed the adequacy of
resources, qualifications and experience of staff
in the Finance function. Reports were submitted
to the Committee on internal control matters in
relation to the Sarbanes-Oxley Act. The Group
Finance Director, the Group Chief Risk Officer,
the Group Head of Internal Audit, the Group
Chief Accounting Officer, Group Company
Secretary, external auditor and other senior
executives attended Committee meetings. The
Committee had regular discussions with the
external auditor and the Group Head of Internal
Audit, with an opportunity at each meeting for
discussions to take place without management
present.
• Effectiveness of the internal audit function.
The Committee satisfied itself that the internal
audit function was effective and adequately
resourced through regular meetings held with,
and reports provided by, the Group Head of
Internal Audit on internal audit issues, including
the effectiveness and adequacy of resources.
KPMG undertook a quality assurance review of