HSBC 2015 Annual Report Download - page 351

HSBC HOLDINGS PLC
349
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
HSBC is assessing the impact that the financial asset classification and impairment requirements will have on the financial
statements.
IFRS 9 implementation programme
Within HSBC, a joint Global Risk and Global Finance IFRS 9 Implementation Programme (‘the Programme’) has been set up to
prepare for implementation of IFRS 9 since 2012 and significant preparatory and design work has taken place. The Programme
is sponsored by the Group Chief Risk Officer and Group Finance Director. A Steering Committee comprising senior management
from Risk, Finance and HSBC Operations, Services and Technology has been established. In common with all significant change
programmes in HSBC, the Programme is managed according to the Group’s business transformation framework. Delivery of
the required changes will be undertaken by individual workstreams, with Global Risk leading the work to calculate impairments
and Global Finance leading the development of financial reporting systems and processes. Significant legal entities in the
Group have established steering committees to manage implementation locally, within this global framework. Global
businesses have been engaged but are not themselves responsible for the implementation activity.
To date, the Programme has been directed towards preliminary impact analysis, documenting Group accounting policy,
developing the operating and system target operating models and developing risk modelling methodologies for the calculation
of impairment. In addition, an impact assessment of the classification and measurement requirements was performed during
2015. The Programme’s focus is now on the impairment models and processes which need to be developed by the end of
2016 as HSBC intends to perform a parallel run during 2017 to gain a better understanding of the potential effect of the new
standard. The Programme has a defined governance framework to operate over the impairment process once it becomes live.
The framework includes dedicated committees to review, challenge and sign off the assumptions used and the results in each
significant legal entity, and second-line assurance capabilities for each key step in the process. An expert panel will be
established to govern the setting of forward-looking economic assumptions used in the process. Governance over the
impairment process is the responsibility of the Global Risk and Global Finance functions, operating within each member
company of the Group. Global businesses are consulted but are not granted decision making power.
HSBC intends to quantify the potential impact of IFRS 9 once it is practicable to provide reliable estimates, which will be no
later than in the Annual Report and Accounts 2017.
Until sufficient models have been developed and tested, HSBC will not have a reliable understanding of the potential impact
on its financial statements and any consequential effects on regulatory capital requirements. In the absence of information on
whether there will be any changes to the regulatory requirements, assumptions will have to be made about how the existing
regulatory requirements will be interpreted when IFRS 9 is adopted. For example, the relationship between specific and
general credit risk adjustments in accordance with Basel requirements and the IFRS 9 stages is unclear. The Basel Committee
is considering the implications of the new accounting requirements for existing regulatory requirements.
Comparison of IAS 39 accounting policies with IFRS 9
The accounting policies and critical accounting estimates and judgements for the impairment of loans and advances and
available-for-sale financial assets (in accordance with IAS 39 ‘Financial Instruments’) are set out in Note 1(j). Their equivalents
for financial assets at amortised cost and at FVOCI (in accordance with IFRS 9) are being developed, but the following similarities
and differences are likely to be important to understanding the potential effect of the change in accounting policy resulting
from the implementation of IFRS 9 ‘Financial Instruments’:
• Amortised cost
The accounting policies in accordance with IAS 39 generally make a distinction between individually significant loans and
homogeneous groups of loans which are assessed collectively. This distinction has less relevance in developing IFRS 9
accounting policies. However, under IFRS 9, whether the loans are managed through wholesale credit risk systems or retail
credit risk systems becomes the more relevant distinction because of differences in the types of information available and the
way credit risk is managed.
• Stage 3
Financial assets will be included in stage 3 when there is objective evidence that the loan is credit impaired. The objective
evidence that is used is the same as the criteria used by HSBC to determine whether an individually significant loan is impaired
in accordance with IAS 39 and is set out on page 355. Therefore, the population included in stage 3 is expected to be
consistent with impaired loans under IAS 39 which are considered individually significant.
For wholesale loans, individual discounted cash flow calculations will continue to be performed and impairment losses
determined as set out on page 355. Changes may be made to these calculations to ensure the measurement requirements of
IFRS 9 are met. For example, the net realisable value of security will be adjusted for expected future changes in market prices.
In accordance with IAS 39, statistical methods are used to determine impairment losses on a collective basis for homogeneous
groups of loans that are not considered individually significant using either roll rate methodologies or historical loss rate
experience for loans. Under these methodologies, impairment allowances are recognised at a portfolio level. However, loans
are classified as impaired for presentation purposes when they are more than 90 days past due or have been renegotiated for