HSBC 2013 Annual Report Download - page 73

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71
2 Summary of significant accounting policies (continued)
f Impairment of loans and advances (continued)
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past
due, but are treated as up to date loans for measurement purposes once a minimum number of payments required
have been received.
A loan that is renegotiated is derecognized if the existing agreement is cancelled and a new agreement made on
substantially different terms, or if the terms of an existing agreement are modified, such that the renegotiated loan
is substantially a different financial instrument.
g Trading assets and trading liabilities
Treasury bills, debt securities, equity securities, acceptances, deposits, debt securities in issue, and short positions
in securities are classified as held for trading if they have been acquired principally for the purpose of selling
or repurchasing in the near term, or they form part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent pattern of short-term profit-taking. These financial
assets or financial liabilities are recognized on trade date, when the bank enters into contractual arrangements
with counterparties to purchase or sell the financial instruments, and are normally derecognized when either sold
(assets) or extinguished (liabilities). Measurement is initially at fair value, with transaction costs taken to the income
statement. Subsequently, the fair values are re-measured, and gains and losses from changes therein are recognized
in the income statement in ‘Net trading income’.
h Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet the necessary
criteria and are so designated by management. The bank may designate financial instruments at fair value when the
designation eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise
arise from measuring financial assets or financial liabilities, or recognizing gains and losses on them, on different
bases. Under this criterion, the main classes of financial instruments designated by the bank are debt securities
issued and subordinated debt. The interest payable on certain fixed rate long-term debt securities issued have been
matched with the interest on ‘receive fixed/pay variable’ interest rate swaps as part of a documented interest rate
risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at
amortized cost, because the related derivatives are measured at fair value with changes in the fair value recognized
in the income statement. By designating the long-term debt at fair value, the movement in the fair value of the
long-term debt will also be recognized in the income statement.
The fair value designation, once made, is irrevocable. Designated financial assets and financial liabilities are
recognized when the bank enters into the contractual provisions of the arrangements with counterparties, which is
generally on trade date, and are normally derecognized when sold (assets) or extinguished (liabilities). Measurement
is initially at fair value, with transaction costs taken directly to the income statement. Subsequently, the fair values
are re-measured, and gains and losses from changes therein are recognized in ‘Net income from financial instruments
designated at fair value’.
i 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. Financial investments are recognized on trade date,
when the bank enters into contractual arrangements with counterparties to purchase securities, and are normally
derecognized when either the securities are sold or the borrowers repay their obligations.
Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction costs.
They are subsequently re-measured at fair value, and changes therein are recognized 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 recognized in other
comprehensive income are recognized in the income statement as ‘Gains less losses from financial investments’.