HSBC 2012 Annual Report Download - page 389

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
The second and third phases in the IASB’s project to replace IAS 39 will address the impairment of financial
assets and hedge accounting.
The IASB is in the process of amending the requirements for classification and measurement in IFRS 9 to
address practice and other issues.
The final IFRS 9 requirements for classification and measurement and impairment remain uncertain and so
HSBC remains unable to provide a date by which it will apply IFRS 9 as a whole and it remains impracticable
to quantify the effect of IFRS 9 as at the date of the publication of these financial statements.
EU endorsement
All the standards applicable in 2013 and 2014 have been endorsed for use in the EU, except for the amendments
to IFRS 10, IFRS 11 and IFRS 12 ‘Transition Guidance’ and the amendments to IFRS 10, IFRS 12 and IAS 27
‘Investment Entities’. Until these amendments are endorsed, the relief they provide for comparatives disclosures
in accordance with IFRS 12 will not be available for use in the EU.
2 Summary of significant accounting policies
(a) Interest income and expense
Interest income and expense for all financial instruments except for those classified as held for trading or
designated at fair value (except for debt securities issued by HSBC and derivatives managed in conjunction with
those debt securities) are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using
the effective interest method. The effective interest method is a way of calculating the amortised cost of a
financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the
interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through
the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of
the financial asset or financial liability. When calculating the effective interest rate, HSBC estimates cash flows
considering all contractual terms of the financial instrument but excluding future credit losses. The calculation
includes all amounts paid or received by HSBC that are an integral part of the effective interest rate of a financial
instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss.
(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’.
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 by HSBC, and derivatives managed in conjunction with those debt
securities, which is recognised in ‘Interest expense’ (Note 2a).