HSBC 2012 Annual Report Download - page 396

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
394
Measurement is initially at fair value, with transaction costs taken to the income statement. Subsequently, the
fair values are remeasured, and gains and losses from changes therein are recognised in the income statement in
‘Net income from financial instruments designated at fair value’.
(j) Financial investments
Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those
designated at fair value, are classified as available for sale or held to maturity. Financial investments are
recognised on trade date when HSBC enters into contractual arrangements with counterparties to purchase
securities, and are normally derecognised when either the securities are sold or the borrowers repay their
obligations.
(i) Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction
costs. They are subsequently remeasured at fair value, and changes therein are recognised in other
comprehensive income in ‘Available-for-sale investments – fair value gains/(losses)’ until the financial
assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative
gains or losses previously recognised in other comprehensive income are recognised in the income statement
as ‘Gains less losses from financial investments’.
Interest income is recognised on available-for-sale debt securities using the effective interest rate, calculated
over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated investment
securities are included in the calculation of their effective interest rates. Dividends are recognised in the
income statement when the right to receive payment has been established.
At each balance sheet date an assessment is made of whether there is any objective evidence of impairment
in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence
of impairment as a result of one or more events that occurred after the initial recognition of the financial
asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the
financial asset that can be reliably estimated.
If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition
cost (net of any principal repayments and amortisation) and the current fair value, less any previous
impairment loss recognised in the income statement, is removed from other comprehensive income and
recognised in the income statement.
Impairment losses for available-for-sale debt securities are recognised within ‘Loan impairment charges
and other credit risk provisions’ in the income statement and impairment losses for available-for-sale equity
securities are recognised within ‘Gains less losses from financial investments’ in the income statement.
The impairment methodologies for available-for-sale financial assets are set out in more detail below.
– Available-for-sale debt securities. When assessing available-for-sale debt securities for objective
evidence of impairment at the reporting date, HSBC considers all available evidence, including
observable data or information about events specifically relating to the securities which may result in a
shortfall in recovery of future cash flows. These events may include a significant financial difficulty of
the issuer, a breach of contract such as a default, bankruptcy or other financial reorganisation, or the
disappearance of an active market for the debt security because of financial difficulties relating to the
issuer.
These types of specific event and other factors such as information about the issuers’ liquidity, business
and financial risk exposures, levels of and trends in default for similar financial assets, national and
local economic trends and conditions, and the fair value of collateral and guarantees may be considered
individually, or in combination, to determine if there is objective evidence of impairment of a debt
security.
In addition, when assessing available-for-sale asset-backed securities (‘ABS’s) for objective evidence
of impairment, HSBC considers the performance of underlying collateral and the extent and depth of
market price declines. Changes in credit ratings are considered but a downgrade of a security’s credit
rating is not, of itself, evidence of impairment. The primary indicators of potential impairment are
considered to be adverse fair value movements and the disappearance of an active market for a security.
ABS impairment methodologies are described in more detail in ‘Impairment methodologies’ on
page 260.