HSBC 2015 Annual Report Download - page 358

Notes on the Financial Statements (continued)
1 – Basis of preparation and significant accounting policies
HSBC HOLDINGS PLC
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Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which have been incurred but have not yet been identified on loans subject
to individual assessment or for homogeneous groups of loans that are not considered individually significant. Retail lending
portfolios are generally assessed for impairment collectively as the portfolios are generally large homogeneous loan pools.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are
grouped together according to their credit risk characteristics for a collective impairment assessment. These credit risk
characteristics may include country of origination, type of business involved, type of products offered, security obtained or
other relevant factors. This assessment captures impairment losses that HSBC has incurred as a result of events occurring
before the balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably estimated.
When information becomes available which identifies losses on individual loans within a group, those loans are removed from
the group and assessed individually.
The collective impairment allowance is determined after taking into account:
• historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or
product);
• the estimated period between a loss occurring and the loss being identified and evidenced by the establishment of an
appropriate allowance against the individual loan; and
• management’s judgement as to whether current economic and credit conditions are such that the actual level of inherent
losses at the balance sheet date is likely to be greater or less than that suggested by historical experience.
The period between a loss occurring and its identification is estimated by management for each identified portfolio based on
economic and market conditions, customer behaviour, portfolio management information, credit management techniques and
collection and recovery experiences in the market. As it is assessed empirically on a periodic basis, the estimated period may
vary over time as these factors change.
Homogeneous groups of loans and advances
Statistical methods are used to determine collective impairment losses for homogeneous groups of loans not considered
individually significant. The methods that are used to calculate collective allowances are:
• When appropriate empirical information is available, HSBC utilises roll-rate methodology, which employs statistical analyses
of historical data and experience of delinquency and default to reliably estimate the amount of the loans that will
eventually be written off as a result of the events occurring before the balance sheet date but which HSBC is not able to
identify individually. Individual loans are grouped using ranges of past due days; statistical analysis is then used to estimate
the likelihood that loans in each range will progress through the various stages of delinquency and become irrecoverable.
Additionally, individual loans are segmented based on their credit characteristics as described above. In applying this
methodology, adjustments are made to estimate the periods of time between a loss event occurring and its discovery, for
example through a missed payment (known as the emergence period) and the period of time between discovery and write-
off (known as the outcome period). Current economic conditions are also evaluated when calculating the appropriate level
of allowance required to cover inherent loss. In certain highly-developed markets, sophisticated models also take into
account behavioural and account management trends as revealed in, for example, bankruptcy and rescheduling statistics.
• When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll-rate methodology,
HSBC adopts a basic formulaic approach based on historical loss rate experience, or a discounted cash flow model. Where
a basic formulaic approach is undertaken, the period between a loss event occurring and its identification is explicitly
estimated by local management, and is typically between six and twelve months.
The inherent loss within each portfolio is assessed on the basis of statistical models using historical data observations which
are updated periodically to reflect recent portfolio and economic trends. When the most recent trends arising from changes in
economic, regulatory or behavioural conditions are not fully reflected in the statistical models, they are taken into account by
adjusting the impairment allowances derived from the statistical models to reflect these changes as at the balance sheet date.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no
realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable
expectation of further recovery, write-off may be earlier.