Annual Financial Report - 6 of 7

RNS Number : 9111Y

HSBC Holdings PLC

08 March 2017



Financial Statements

		Page
Consolidated income statement		184
Consolidated statement of comprehensive income		185
Consolidated balance sheet		186
Consolidated statement of cash flows		187
Consolidated statement of changes in equity		188
HSBC Holdings income statement		190
HSBC Holdings statement of comprehensive income		190
HSBC Holdings balance sheet		191
HSBC Holdings statement of cash flows		192
HSBC Holdings statement of changes in equity		193

Notes on the Financial Statements

1	Basis of preparation and significant accounting policies	194
2	Net income/(expense) from financial instruments designated at fair value	203
3	Insurance business	204
4	Operating profit	206
5	Employee compensation and benefits	206
6	Auditors' remuneration	212
7	Tax	213
8	Dividends	215
9	Earnings per share	216
10	Trading assets	216
11	Fair values of financial instruments carried at fair value	217



12	Fair values of financial instruments not carried at fair value	224
13	Financial assets designated at fair value	226
14	Derivatives	226
15	Financial investments	229
16	Assets pledged, collateral received and assets transferred	230
17	Interests in associates and joint ventures	231
18	Investments in subsidiaries	235
19	Structured entities	236
20	Goodwill and intangible assets	238
21	Prepayments, accrued income and other assets	241
22	Assets held for sale and liabilities of disposal groups held for sale	241
23	Trading liabilities	242
24	Financial liabilities designated at fair value	242
25	Debt securities in issue	242
26	Accruals, deferred income and other liabilities	243
27	Provisions	243
28	Subordinated liabilities	244
29	Maturity analysis of assets, liabilities and off-balance sheet commitments	247
30	Offsetting of financial assets and financial liabilities	252
31	Non-controlling interests	253
32	Called up share capital and other equity instruments	253
33	Contingent liabilities, contractual commitments and guarantees	255
34	Lease commitments	256
35	Legal proceedings and regulatory matters	256
36	Related party transactions	262
37	Events after the balance sheet date	264
38	HSBC Holdings' subsidiaries, joint ventures and associates	265



HSBC Holdings plc Annual Report and Accounts 2016	183

Financial Statements



Consolidated income statement
for the year ended 31 December
		2016		2015		2014
	Notes	$m		$m		$m
Net interest income		29,813		32,531		34,705
- interest income		42,414		47,189		50,955
- interest expense		(12,601	)	(14,658	)	(16,250	)
Net fee income		12,777		14,705		15,957
- fee income		15,669		18,016		19,545
- fee expense		(2,892	)	(3,311	)	(3,588	)
Net trading income		9,452		8,723		6,760
- trading income excluding net interest income		8,066		6,948		4,853
- net interest income on trading activities		1,386		1,775		1,907
Net income/(expense) from financial instruments designated at fair value	2	(2,666	)	1,532		2,473
- changes in fair value of long-term debt and related derivatives		(3,975	)	863		508
- net income from other financial instruments designated at fair value		1,309		669		1,965
Gains less losses from financial investments		1,385		2,068		1,335
Dividend income		95		123		311
Net insurance premium income	3	9,951		10,355		11,921
Other operating income/(expense)		(971	)	1,055		1,131
Total operating income		59,836		71,092		74,593
Net insurance claims and benefits paid and movement in liabilities to policyholders	3	(11,870	)	(11,292	)	(13,345	)
Net operating income before loan impairment charges and other credit risk provisions		47,966		59,800		61,248
Loan impairment charges and other credit risk provisions	4	(3,400	)	(3,721	)	(3,851	)
Net operating income		44,566		56,079		57,397
Employee compensation and benefits	5	(18,089	)	(19,900	)	(20,366	)
General and administrative expenses		(16,473	)	(17,662	)	(18,565	)
Depreciation and impairment of property, plant and equipment		(1,229	)	(1,269	)	(1,382	)
Amortisation and impairment of intangible assets		(777	)	(937	)	(936	)
Goodwill impairment of Global Private Banking - Europe	20	(3,240	)	-		-
Total operating expenses		(39,808	)	(39,768	)	(41,249	)
Operating profit	4	4,758		16,311		16,148
Share of profit in associates and joint ventures	17	2,354		2,556		2,532
Profit before tax		7,112		18,867		18,680
Tax expense	7	(3,666	)	(3,771	)	(3,975	)
Profit for the year		3,446		15,096		14,705
Attributable to:
- ordinary shareholders of the parent company		1,299		12,572		13,115
- preference shareholders of the parent company	8	90		90		90
- other equity holders	8	1,090		860		483
- non-controlling interests		967		1,574		1,017
Profit for the year		3,446		15,096		14,705
		$		$		$
Basic earnings per ordinary share	9	0.07		0.65		0.69
Diluted earnings per ordinary share	9	0.07		0.64		0.69



184	HSBC Holdings plc Annual Report and Accounts 2016



Consolidated statement of comprehensive income
for the year ended 31 December
	2016		2015		2014
	$m		$m		$m
Profit for the year	3,446		15,096		14,705
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Available-for-sale investments	(299	)	(3,072	)	2,972
- fair value gains/(losses)	475		(1,231	)	4,794
- fair value gains reclassified to the income statement	(895	)	(2,437	)	(1,672	)
- amounts reclassified to the income statement in respect of impairment losses	71		127		374
- income taxes	50		469		(524	)
Cash flow hedges	(68	)	(24	)	188
- fair value (losses)/gains	(297	)	704		1,512
- fair value losses/(gains) reclassified to the income statement	195		(705	)	(1,244	)
- income taxes	34		(23	)	(80	)
Share of other comprehensive income/(expense) of associates and joint ventures	54		(9	)	80
- share for the year	54		(9	)	78
- reclassified to income statement on disposal	-		-		2
Exchange differences	(8,092	)	(10,945	)	(8,903	)
- foreign exchange gains reclassified to income statement on disposal of a foreign operation	1,894		-		(21	)
- other exchange differences	(9,791	)	(11,112	)	(8,917	)
- income tax attributable to exchange differences	(195	)	167		35
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability	7		101		1,985
- before income taxes	(84	)	130		2,419
- income taxes	91		(29	)	(434	)
Other comprehensive income for the year, net of tax	(8,398	)	(13,949	)	(3,678	)
Total comprehensive income for the year	(4,952	)	1,147		11,027
Attributable to:
- ordinary shareholders of the parent company	(6,968	)	(490	)	8,672
- preference shareholders of the parent company	90		90		90
- other equity holders	1,090		860		483
- non-controlling interests	836		687		1,782
Total comprehensive income for the year	(4,952	)	1,147		11,027



HSBC Holdings plc Annual Report and Accounts 2016	185

Financial Statements



Consolidated balance sheet
at 31 December
		2016		2015
	Notes	$m		$m
Assets
Cash and balances at central banks		128,009		98,934
Items in the course of collection from other banks		5,003		5,768
Hong Kong Government certificates of indebtedness		31,228		28,410
Trading assets	10	235,125		224,837
Financial assets designated at fair value	13	24,756		23,852
Derivatives	14	290,872		288,476
Loans and advances to banks		88,126		90,401
Loans and advances to customers		861,504		924,454
Reverse repurchase agreements - non-trading		160,974		146,255
Financial investments	15	436,797		428,955
Assets held for sale	22	4,389		43,900
Prepayments, accrued income and other assets	21	59,520		54,398
Current tax assets		1,145		1,221
Interests in associates and joint ventures	17	20,029		19,139
Goodwill and intangible assets	20	21,346		24,605
Deferred tax assets	7	6,163		6,051
Total assets at 31 Dec		2,374,986		2,409,656
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation		31,228		28,410
Deposits by banks		59,939		54,371
Customer accounts		1,272,386		1,289,586
Repurchase agreements - non-trading		88,958		80,400
Items in the course of transmission to other banks		5,977		5,638
Trading liabilities	23	153,691		141,614
Financial liabilities designated at fair value	24	86,832		66,408
Derivatives	14	279,819		281,071
Debt securities in issue	25	65,915		88,949
Liabilities of disposal groups held for sale	22	2,790		36,840
Accruals, deferred income and other liabilities	26	41,501		38,116
Current tax liabilities		719		783
Liabilities under insurance contracts	3	75,273		69,938
Provisions	27	4,773		5,552
Deferred tax liabilities	7	1,623		1,760
Subordinated liabilities	28	20,984		22,702
Total liabilities at 31 Dec		2,192,408		2,212,138
Equity
Called up share capital	32	10,096		9,842
Share premium account	32	12,619		12,421
Other equity instruments		17,110		15,112
Other reserves		(1,234	)	7,109
Retained earnings		136,795		143,976
Total shareholders' equity		175,386		188,460
Non-controlling interests	31	7,192		9,058
Total equity at 31 Dec		182,578		197,518
Total liabilities and equity at 31 Dec		2,374,986		2,409,656

The accompanying notes on pages 194 to 271, the audited sections in 'Global businesses and regions' on pages 44 to 60, 'Risk' on pages 64 to 126, 'Capital' on pages 127 to 131 and 'Directors' Remuneration Report' on pages 153 to 170 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 21 February 2017 and signed on its behalf by:




Douglas Flint		Iain Mackay
Group Chairman		Group Finance Director



186	HSBC Holdings plc Annual Report and Accounts 2016



Consolidated statement of cash flows
for the year ended 31 December
		2016		2015		2014
	Footnotes	$m		$m		$m
Profit before tax		7,112		18,867		18,680
Adjustments for non-cash items:
Depreciation, amortisation and impairment		5,212		2,181		2,251
Net gain from investing activities		(1,215	)	(1,935	)	(1,928	)
Share of profits in associates and joint ventures		(2,354	)	(2,556	)	(2,532	)
(Gain)/loss on disposal of subsidiaries, businesses, associates and joint ventures		1,743		-		41
Loan impairment losses gross of recoveries and other credit risk provisions		4,090		4,546		5,125
Provisions including pensions		2,482		3,472		3,609
Share-based payment expense		534		757		732
Other non-cash items included in profit before tax		(207	)	(191	)	(487	)
Elimination of exchange differences	1	15,364		18,308		24,571
Changes in operating assets and liabilities
Change in net trading securities and derivatives		4,395		24,384		(18,498	)
Change in loans and advances to banks and customers		52,868		32,971		17,813
Change in reverse repurchase agreements - non-trading		(13,138	)	(3,011	)	18,900
Change in financial assets designated at fair value		(1,235	)	2,394		3,269
Change in other assets		(6,591	)	9,090		4,393
Change in deposits by banks and customer accounts		(8,918	)	(65,907	)	(17,443	)
Change in repurchase agreements - non-trading		8,558		(26,481	)	(56,788	)
Change in debt securities in issue		(23,034	)	960		(8,133	)
Change in financial liabilities designated at fair value		17,802		(10,785	)	(10,734	)
Change in other liabilities		8,792		(4,549	)	(716	)
Dividends received from associates		689		879		757
Contributions paid to defined benefit plans		(726	)	(664	)	(681	)
Tax paid		(3,264	)	(3,852	)	(3,573	)
Net cash from operating activities		68,959		(1,122	)	(21,372	)
Purchase of financial investments		(457,084	)	(438,376	)	(384,199	)
Proceeds from the sale and maturity of financial investments		430,085		399,636		382,837
Net cash flows from the purchase and sale of property, plant and equipment		(1,151	)	(1,249	)	(1,389	)
Net cash inflow/(outflow) from disposal of customer and loan portfolios		9,194		2,023		(1,035	)
Net investment in intangible assets		(906	)	(954	)	(903	)
Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures	2	4,802		8		(272	)
Net cash from investing activities		(15,060	)	(38,912	)	(4,961	)
Issue of ordinary share capital and other equity instruments		2,024		3,727		5,948
Net sales/(purchases) of own shares for market-making and investment purposes		523		331		(96	)
Purchase of treasury shares		(2,510	)	-		-
Redemption of preference shares and other equity instruments		(1,825	)	(463	)	(234	)
Subordinated loan capital issued		2,622		3,180		3,500
Subordinated loan capital repaid		(595	)	(2,157	)	(3,163	)
Dividends paid to shareholders of the parent company and non-controlling interests		(9,157	)	(8,195	)	(7,823	)
Net cash from financing activities		(8,918	)	(3,577	)	(1,868	)
Net increase/(decrease) in cash and cash equivalents		44,981		(43,611	)	(28,201	)
Cash and cash equivalents at 1 Jan		243,863		301,301		346,281
Exchange differences in respect of cash and cash equivalents		(14,294	)	(13,827	)	(16,779	)
Cash and cash equivalents at 31 Dec		274,550		243,863		301,301
Cash and cash equivalents comprise:	3
- cash and balances at central banks		128,009		98,934		129,957
- items in the course of collection from other banks		5,003		5,768		4,927
- loans and advances to banks of one month or less		77,318		70,985		89,285
- reverse repurchase agreements with banks of one month or less		55,551		53,971		68,930
- treasury bills, other bills and certificates of deposit less than three months		14,646		19,843		14,192
- less: items in the course of transmission to other banks		(5,977	)	(5,638	)	(5,990	)
		274,550		243,863		301,301

Interest received was $42,586m (2015: $47,623m; 2014: $51,522m), interest paid was $12,027m (2015: $14,559m; 2014: $15,633m) and dividends received were $475m (2015: $914m; 2014: $1,199m).


1	Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.


2	In July 2016, we completed the disposal of the Brazilian operations resulting in net cash inflow of $4.8bn.


3	At 31 December 2016 $35,501m (2015: $33,744m) was not available for use by HSBC, of which $21,108m (2015: $21,773m) related to mandatory deposits at central banks.



HSBC Holdings plc Annual Report and Accounts 2016	187

Financial Statements



Consolidated statement of changes in equity
for the year ended 31 December
					Other reserves⁵
	Called up share capital and share premium¹	Other equity instru-ments²	Retained earnings^{3, 4}		Available- for-sale fair value reserve		Cash flow hedging reserve		Foreign exchange reserve		Merger reserve⁶	Total share- holders' equity		Non- controlling interests		Total equity
	$m	$m	$m		$m		$m		$m		$m	$m		$m		$m
At 1 Jan 2016	22,263	15,112	143,976		(189	)	34		(20,044	)	27,308	188,460		9,058		197,518
Profit for the year	-	-	2,479		-		-		-		-	2,479		967		3,446
Other comprehensive income (net of tax)	-	-	59		(271	)	(61	)	(7,994	)	-	(8,267	)	(131	)	(8,398	)
- available-for-sale investments	-	-	-		(271	)	-		-		-	(271	)	(28	)	(299	)
- cash flow hedges	-	-	-		-		(61	)	-		-	(61	)	(7	)	(68	)
- remeasurement of defined benefit asset/liability	-	-	5		-		-		-		-	5		2		7
- share of other comprehensive income of associates and joint ventures	-	-	54		-		-		-		-	54		-		54
- foreign exchange reclassified to income statement on disposal of a foreign operation	-	-	-		-		-		1,894		-	1,894		-		1,894
- exchange differences	-	-	-		-		-		(9,888	)	-	(9,888	)	(98	)	(9,986	)
Total comprehensive income for the year	-	-	2,538		(271	)	(61	)	(7,994	)	-	(5,788	)	836		(4,952	)
Shares issued under employee remuneration and share plans	452	-	(425	)	-		-		-		-	27		-		27
Shares issued in lieu of dividends and amounts arising thereon	-	-	3,040		-		-		-		-	3,040		-		3,040
Net increase in treasury shares	-	-	(2,510	)	-		-		-		-	(2,510	)	-		(2,510	)
Capital securities issued	-	1,998	-		-		-		-		-	1,998		-		1,998
Dividends to shareholders	-	-	(11,279	)	-		-		-		-	(11,279	)	(919	)	(12,198	)
Cost of share-based payment arrangements	-	-	534		-		-		-		-	534		-		534
Other movements	-	-	921		(17	)	-		-		-	904		(1,783	)	(879	)
At 31 Dec 2016	22,715	17,110	136,795		(477	)	(27	)	(28,038	)	27,308	175,386		7,192		182,578

At 1 Jan 2015	21,527	11,532	137,144		2,143		58		(9,265	)	27,308	190,447		9,531		199,978
Profit for the year	-	-	13,522		-		-		-		-	13,522		1,574		15,096
Other comprehensive income (net of tax)	-	-	73		(2,332	)	(24	)	(10,779	)	-	(13,062	)	(887	)	(13,949	)
- available-for-sale investments	-	-	-		(2,332	)	-		-		-	(2,332	)	(740	)	(3,072	)
- cash flow hedges	-	-	-		-		(24	)	-		-	(24	)	-		(24	)
- remeasurement of defined benefit asset/liability	-	-	82		-		-		-		-	82		19		101
- share of other comprehensive income of associates and joint ventures	-	-	(9	)	-		-		-		-	(9	)	-		(9	)
- exchange differences	-	-	-		-		-		(10,779	)	-	(10,779	)	(166	)	(10,945	)
Total comprehensive income for the year	-	-	13,595		(2,332	)	(24	)	(10,779	)	-	460		687		1,147
Shares issued under employee remuneration and share plans	736	-	(589	)	-		-		-		-	147		-		147
Shares issued in lieu of dividends and amounts arising thereon	-	-	3,162		-		-		-		-	3,162		-		3,162
Capital securities issued	-	3,580	-		-		-		-		-	3,580		-		3,580
Dividends to shareholders	-	-	(10,660	)	-		-		-		-	(10,660	)	(697	)	(11,357	)
Cost of share-based payment arrangements	-	-	757		-		-		-		-	757		-		757
Other movements	-	-	567		-		-		-		-	567		(463	)	104
At 31 Dec 2015	22,263	15,112	143,976		(189	)	34		(20,044	)	27,308	188,460		9,058		197,518



188	HSBC Holdings plc Annual Report and Accounts 2016



Consolidated statement of changes in equity (continued)
					Other reserves⁵
	Called up share capital and share premium¹	Other equity instru-ments²	Retained earnings^{3, 4}		Available- for-sale fair value reserve	Cash flow hedging reserve		Foreign exchange reserve		Merger reserve⁶	Total share- holders' equity		Non- controlling interests		Total equity
	$m	$m	$m		$m	$m		$m		$m	$m		$m		$m
At 1 Jan 2014	20,550	5,851	128,728		97	(121	)	(542	)	27,308	181,871		8,588		190,459
Profit for the year	-	-	13,688		-	-		-		-	13,688		1,017		14,705
Other comprehensive income (net of tax)	-	-	2,066		2,025	189		(8,723	)	-	(4,443	)	765		(3,678	)
- available-for-sale investments	-	-	-		2,025	-		-		-	2,025		947		2,972
- cash flow hedges	-	-	-		-	189		-		-	189		(1	)	188
- remeasurement of defined benefit asset/liability	-	-	1,986		-	-		-		-	1,986		(1	)	1,985
- share of other comprehensive income of associates and joint ventures	-	-	80		-	-		-		-	80		-		80
- exchange differences	-	-	-		-	-		(8,723	)	-	(8,723	)	(180	)	(8,903	)
Total comprehensive income for the year	-	-	15,754		2,025	189		(8,723	)	-	9,245		1,782		11,027
Shares issued under employee remuneration and share plans	977	-	(710	)	-	-		-		-	267		-		267
Shares issued in lieu of dividends and amounts arising thereon	-	-	2,709		-	-		-		-	2,709		-		2,709
Capital securities issued	-	5,681	-		-	-		-		-	5,681		-		5,681
Dividends to shareholders	-	-	(9,893	)	-	-		-		-	(9,893	)	(712	)	(10,605	)
Cost of share-based payment arrangements	-	-	732		-	-		-		-	732		-		732
Other movements	-	-	(176	)	21	(10	)	-		-	(165	)	(127	)	(292	)
At 31 Dec 2014	21,527	11,532	137,144		2,143	58		(9,265	)	27,308	190,447		9,531		199,978


1	For further details refer to Note 32.

During 2016, HSBC Holdings issued $2,000m of perpetual subordinated contingent convertible capital securities, after issuance costs of $6m and tax benefits of $4m. In 2015, HSBC Holdings issued $2,450m and €1,000m of perpetual subordinated contingent convertible capital securities, on which there were $12m of external issuance costs, $25m of intra-group issuance costs and $19m of tax. In 2014, HSBC Holdings issued $2,250m, $1,500m and €1,500m of perpetual subordinated contingent convertible capital securities, on which there were $13m of external issuance costs and $33m of intra-group issuance costs. Under IFRSs these issuance costs and tax benefits are classified as equity.

At 31 December 2016, retained earnings included 353,356,251 treasury shares (2015: 81,580,180; 2014: 85,337,430). The increase principally reflects the share buy-back initiative, with the purchase of 325,273,407 ordinary shares to reduce outstanding ordinary shares. In addition, treasury shares are also held within HSBC's Insurance business retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Markets.


4	Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged against retained earnings.


5	At 31 December 2015, our operations in Brazil were classified as held for sale (see Note 22). The cumulative amount of other reserves attributable to these operations were as follows: available-for-sale fair value reserve debit of $176m, cash flow hedging reserve credit of $34m and foreign exchange reserve debit of $2.6bn.

Statutory share premium relief under Section 131 of the Companies Act 1985 (the 'Act') was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003, and the shares issued were recorded at their nominal value only. In HSBC's consolidated financial statements the fair value differences of $8,290m in respect of HSBC France and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of intra-group reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was recognised in the merger reserve. The merger reserve includes a deduction of $614m in respect of costs relating to the rights issue, of which $149m was subsequently transferred to the income statement. Of this $149m, $121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of $344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.



HSBC Holdings plc Annual Report and Accounts 2016	189

Financial Statements



HSBC Holdings income statement
for the year ended 31 December
		2016		2015		2014
	Notes	$m		$m		$m
Net interest expense		(424	)	(438	)	(486	)
- interest income		1,380		866		944
- interest expense		(1,804	)	(1,304	)	(1,430	)
Fee (expense)/income		(1	)	39		47
Net trading income/(expense)		119		(349	)	(215	)
Net (expense)/income from financial instruments designated at fair value	2	(49	)	276		438
Dividend income from subsidiaries		10,436		8,469		9,077
Other operating income		696		654		608
Total operating income		10,777		8,651		9,469
Employee compensation and benefits	5	(570	)	(908	)	(681	)
General and administrative expenses		(4,014	)	(3,434	)	(2,522	)
Impairment of subsidiaries		-		(26	)	(38	)
Total operating expenses		(4,584	)	(4,368	)	(3,241	)
Profit before tax		6,193		4,283		6,228
Tax credit		402		570		299
Profit for the year		6,595		4,853		6,527



HSBC Holdings statement of comprehensive income
for the year ended 31 December
	2016		2015		2014
	$m		$m		$m
Profit for the year	6,595		4,853		6,527
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Available-for-sale investments	(72	)	(57	)	116
- fair value gains/(losses)	(83	)	(77	)	152
- income taxes	11		20		(36	)
Items that will not be reclassified subsequently to profit or loss:
Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk	(896	)	-		-
- before income taxes	(1,030	)	-		-
- income taxes	134		-		-
Other comprehensive income for the year, net of tax	(968	)	(57	)	116
Total comprehensive income for the year	5,627		4,796		6,643



190	HSBC Holdings plc Annual Report and Accounts 2016



HSBC Holdings balance sheet
at 31 December
		2016	2015
	Notes	$m	$m
Assets
Cash and balances with HSBC undertakings		247	242
Derivatives	14	2,148	2,467
Loans and advances to HSBC undertakings		77,421	44,350
Financial investments in HSBC undertakings		3,590	4,285
Prepayments, accrued income and other assets		503	265
Current tax assets		631	723
Investments in subsidiaries	18	95,850	97,770
Intangible assets		176	75
Deferred tax assets		232	17
Total assets at 31 Dec		180,798	150,194
Liabilities and equity
Liabilities
Amounts owed to HSBC undertakings		2,157	2,152
Financial liabilities designated at fair value	24	30,113	19,853
Derivatives	14	5,025	2,278
Debt securities in issue	25	21,805	960
Accruals, deferred income and other liabilities		1,651	1,642
Deferred tax liabilities		-	-
Subordinated liabilities	28	15,189	15,895
Total liabilities		75,940	42,780
Equity
Called up share capital	32	10,096	9,842
Share premium account		12,619	12,421
Other equity instruments		17,004	15,020
Other reserves		37,483	37,907
Retained earnings		27,656	32,224
Total equity		104,858	107,414
Total liabilities and equity at 31 Dec		180,798	150,194

The accompanying notes on pages 194 to 271 and the audited sections in 'Global businesses and regions' on pages 44 to 60, 'Risk' on pages 64 to 126, 'Capital' on pages 127 to 131 and 'Directors' Remuneration Report' on pages 153 to 170 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 21 February 2017 and signed on its behalf by:




Douglas Flint		Iain Mackay
Group Chairman		Group Finance Director



HSBC Holdings plc Annual Report and Accounts 2016	191

Financial Statements



HSBC Holdings statement of cash flows
for the year ended 31 December
	2016		2015		2014
	$m		$m		$m
Profit before tax	6,193		4,283		6,228
Adjustments for non-cash items:	48		114		52
- depreciation, amortisation and impairment	10		30		39
- charge for share-based payment	34		86		74
- other non-cash items included in profit before tax	4		(2	)	(61	)
Changes in operating assets and liabilities
Change in loans to HSBC undertakings	(33,069	)	(454	)	3,474
Change in net trading securities and net derivatives	3,066		1,413		483
Change in other assets	(239	)	(141	)	7
Change in debt securities in issue	(1,633	)	(49	)	(149	)
Change in financial liabilities designated at fair value	(1,229	)	(1,228	)	(694	)
Change in other liabilities	(693	)	(1,065	)	(9,071	)
Tax received	646		470		133
Net cash from operating activities	(26,910	)	3,343		463
Purchase of financial investments in HSBC undertakings	-		(276	)	(2,410	)
Proceeds from the sale and maturity of financial investments in HSBC undertakings	610		-		300
Net cash outflow from acquisition of or increase in stake of subsidiaries	(2,073	)	(2,118	)	(1,603	)
Repayment of capital from subsidiaries	3,920		790		3,505
Net investment in intangible assets	(109	)	(79	)	-
Net cash from investing activities	2,348		(1,683	)	(208	)
Issue of ordinary share capital and other equity instruments	2,381		4,216		6,559
Purchase of treasury shares	(2,510	)	-		-
Subordinated loan capital issued	2,636		3,180		3,500
Subordinated loan capital repaid	(1,781	)	(1,565	)	(1,654	)
Debt securities issued	32,080		0		-
Debt securities repaid	-		-		(1,634	)
Dividends paid on ordinary shares	(7,059	)	(6,548	)	(6,611	)
Dividends paid to holders of other equity instruments	(1,180	)	(950	)	(573	)
Net cash from financing activities	24,567		(1,667	)	(413	)
Net increase/(decrease) in cash and cash equivalents	5		(7	)	(158	)
Cash and cash equivalents at 1 January	242		249		407
Cash and cash equivalents at 31 Dec	247		242		249
Cash and cash equivalents comprise
Cash at bank with HSBC undertakings	247		242		249

Interest received was $2,605m (2015: $2,026m), interest paid was $2,910m (2015: $2,309m) and dividends received were $10,412m (2015: $8,469m).



192	HSBC Holdings plc Annual Report and Accounts 2016



HSBC Holdings statement of changes in equity
for the year ended 31 December
							Other reserves
	Called up share capital	Share premium		Other equity instruments	Retained earnings¹		Available-for-sale fair value reserve		Other paid-in capital²		Merger and other reserves	Total share- holders' equity
	$m	$m		$m	$m		$m		$m		$m	$m
At 1 Jan 2016	9,842	12,421		15,020	32,224		183		2,597		35,127	107,414
Profit for the year	-	-		-	6,595		-		-		-	6,595
Other comprehensive income (net of tax)	-	-		-	(896	)	(72	)	-		-	(968	)
- available-for-sale investments	-	-		-	-		(72	)	-		-	(72	)
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk	-	-		-	(896	)	-		-		-	(896	)
Total comprehensive income for the year	-	-		-	5,699		(72	)	-		-	5,627
Shares issued under employee share plans	35	417		-	(51	)	-		-		-	401
Shares issued in lieu of dividends and amounts arising thereon	219	(219	)	-	3,040		-		-		-	3,040
Net increase in treasury shares	-	-		-	(2,510	)	-		-		-	(2,510	)
Capital securities issued	-			1,984	-		-		-		-	1,984
Dividends to shareholders	-	-		-	(11,279	)	-		-		-	(11,279	)
Cost of share-based payment arrangements	-	-		-	34		-		-		-	34
Other movements	-	-		-	499		1		(353	)	-	147
At 31 Dec 2016	10,096	12,619		17,004	27,656		112		2,244		35,127	104,858

At 1 Jan 2015	9,609	11,918		11,476	34,986		240		2,089		35,127	105,445
Profit for the year	-	-		-	4,853		-		-		-	4,853
Other comprehensive income (net of tax)	-	-		-	-		(57	)	-		-	(57	)
- available-for-sale investments	-	-		-	-		(57	)	-		-	(57	)
Total comprehensive income for the year	-	-		-	4,853		(57	)	-		-	4,796
Shares issued under employee share plans	45	691		-	(59	)	-		-		-	677
Shares issued in lieu of dividends and amounts arising thereon	188	(188	)	-	3,162		-		-		-	3,162
Capital securities issued	-	-		3,544	-		-		-		-	3,544
Dividends to shareholders	-	-		-	(10,660	)	-		-		-	(10,660	)
Cost of share-based payment arrangements	-	-		-	86		-		-		-	86
Other movements	-	-		-	(144	)	-		508		-	364
At 31 Dec 2015	9,842	12,421		15,020	32,224		183		2,597		35,127	107,414

At 1 Jan 2014	9,415	11,135		5,828	35,406		124		2,052		35,127	99,087
Profit for the year	-	-		-	6,527		-		-		-	6,527
Other comprehensive income (net of tax)	-	-		-	-		116		-		-	116
- available-for-sale investments	-	-		-	-		116		-		-	116
Total comprehensive income for the year	-	-		-	6,527		116		-		-	6,643
Shares issued under employee share plans	60	917		-	(53	)	-		-		-	924
Shares issued in lieu of dividends and amounts arising thereon	134	(134	)	-	2,709		-		-		-	2,709
Capital securities issued	-	-		5,648	-		-		-		-	5,648
Dividends to shareholders	-	-		-	(9,893	)	-		-		-	(9,893	)
Cost of share-based payment arrangements	-	-		-	74		-		-		-	74
Other movements	-	-		-	216		-		37		-	253
At 31 Dec 2014	9,609	11,918		11,476	34,986		240		2,089		35,127	105,445

Dividends per ordinary share at 31 December 2016 were $0.51 (2015: $0.50; 2014:$0.49).


1	At 31 December 2016, retained earnings included 325,499,152 ($2,499m) of treasury shares (2015: 67,881 ($1m); 2014: 179,419 ($3m)). The increase principally reflects the share buy-back initiative, with the purchase of 325,273,407 ordinary shares ($2,497m) to reduce outstanding ordinary shares. In addition, treasury shares are held to fund employee share plans.


2	Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries.



HSBC Holdings plc Annual Report and Accounts 2016	193

Notes on the Financial Statements

Basis of preparation and significant accounting policies


1.1	Basis of preparation


(a)	Compliance with International Financial Reporting Standards

The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with IFRSs as issued by the IASB, including interpretations ('IFRICS') issued by the IFRS Interpretations Committee, and as endorsed by the European Union ('EU'). At 31 December 2016, there were no unendorsed standards effective for the year ended 31 December 2016 affecting these consolidated and separate financial statements, and HSBC's application of IFRSs results in no differences between IFRSs as issued by the IASB and IFRSs as endorsed by the EU.

Standards adopted during the year ended 31 December 2016

There were no new standards applied during the year ended 31 December 2016 by HSBC.

The requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value were adopted in the separate financial statements of HSBC Holdings. As a result, the effects of changes in those liabilities' credit risk is presented in other comprehensive income with the remaining effect presented in profit or loss. In accordance with the transitional requirements of IFRS 9, comparatives have not been restated. Adoption increased profit before tax by $896m with the opposite effect on other comprehensive income, with no effect on net assets.

During 2016, HSBC adopted a number of interpretations and amendments to standards which had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.


(b)	Differences between IFRSs and Hong Kong Financial Reporting Standards

There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of their application to HSBC and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures necessary to satisfy IFRSs and Hong Kong reporting requirements.


(c)	Future accounting developments

Minor amendments to IFRSs

The IASB has published a number of minor amendments to IFRSs in the 'Annual Improvements to IFRSs 2012-2014' and in a series of stand-alone amendments, one of which has not yet been endorsed for use in the EU. HSBC has not early adopted any of the amendments effective after 31 December 2016 and it expects they will have an insignificant effect, when adopted, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

Major new IFRSs

The IASB has published IFRS 9 'Financial Instruments', IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leases'. IFRS 9 and IFRS 15 have been endorsed for use in the EU and IFRS 16 has not yet been endorsed.

IFRS 9 'Financial Instruments'

In July 2014, the IASB issued IFRS 9 'Financial Instruments', which is the comprehensive standard to replace IAS 39 'Financial Instruments: Recognition and Measurement', and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.

Classification and measurement

The classification and measurement of financial assets will depend on how these are managed (the entity's business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income ('FVOCI') or fair value through profit or loss ('FVPL'). The combined effect of the application of the business model and the contractual cash flow characteristics tests may result in some differences in the population of financial assets measured at amortised cost or fair value compared with IAS 39. However, based on an assessment of financial assets performed to date and expectations around changes to balance sheet composition, HSBC expects that the overall impact of any change will not be significant.

For financial liabilities designated to be measured at fair value, gains or losses relating to changes in the entity's own credit risk are to be included in other comprehensive income.

Impairment

The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, an impairment allowance (or provision in the case of commitments and guarantees) is required for expected credit losses ('ECL') resulting from default events that are possible within the next 12 months ('12-month ECL'). In the event of a significant increase in credit risk, an allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12‑month ECL is recognised are in 'stage 1'; financial assets that are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment, so are considered to be in default or otherwise credit impaired, are in 'stage 3'.

The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39, and the resulting impairment charge will tend to be more volatile. IFRS 9 will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39.



194	HSBC Holdings plc Annual Report and Accounts 2016

Hedge accounting

The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. However they do not explicitly address macro hedge accounting strategies, which are particularly important for banks. As a result, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting.

Based on the analysis performed to date, HSBC expects to exercise the accounting policy choice to continue IAS 39 hedge accounting and therefore is not currently planning to change hedge accounting, although it will implement the revised hedge accounting disclosures required by the related amendments to IFRS 7 'Financial Instruments: Disclosures'.

Transition

The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. HSBC does not intend to restate comparatives. The mandatory application date for the standard as a whole is 1 January 2018, but it is possible to apply the revised presentation for certain liabilities measured at fair value from an earlier date. HSBC has early adopted the revised presentation of fair value gains and losses relating to an entity's own credit risk on certain liabilities in the separate financial statements of HSBC Holdings from 1 January 2016, and since interim financial statements have been issued during 2016 without adoption, will adopt new requirements in the consolidated financial statements from 1 January 2017. If this presentation was applied in the consolidated financial statements at 31 December 2016, the effect would be to increase profit before tax with the opposite effect on other comprehensive income based on the change in fair value attributable to changes in HSBC's credit risk for the year, with no effect on net assets. Further information on the change in fair value attributable to changes in credit risk, including HSBC's credit risk, is disclosed in Note 24. HSBC is assessing the impact that the impairment requirements will have on the financial statements.

The joint Global Risk and Global Finance IFRS 9 Implementation Programme continues to progress with the documentation of Group accounting policy, the development of operating and system target operating models and the development, build and testing of risk modelling methodologies for the calculation of impairment nearing completion. HSBC intends to perform a parallel run during the second half of 2017 to gain a better understanding of the potential effect of the new standard and for the governance framework to gain experience. 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 reliable estimates of the impact are available, particularly on the interaction with the regulatory capital requirements, further information on the expected impact on the financial position and on capital planning cannot be provided. Further information about the application of IFRS 9 by HSBC is available on pages 347 to 352 of the Annual Report and Accounts 2015.

IFRS 15 'Revenue from Contracts with Customers'

In May 2014, the IASB issued IFRS 15 'Revenue from Contracts with Customers'. The original effective date of IFRS 15 has been delayed by one year and the standard is now effective for annual periods beginning on or after 1 January 2018 with early application permitted. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for performance obligations as they are satisfied. The standard should be applied retrospectively, with certain practical expedients available. HSBC has assessed the impact of IFRS 15 and expects that the standard will have no significant effect, when applied, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

IFRS 16 'Leases'

In January 2016, the IASB issued IFRS 16 'Leases' with an effective date for annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 'Leases'. Lessees will recognise a 'right of use' asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as under IAS 17. HSBC is currently assessing the impact of IFRS 16, and it is not practicable to quantify the effect at the date of the publication of these financial statements. Existing operating lease commitments are set out in Note 34.


(d)	Foreign currencies

HSBC's consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings' functional currency because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.

Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost that are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised.

In the consolidated financial statements, the assets, liabilities and results of foreign operations whose functional currency is not US dollars are translated into the Group's presentation currency at the reporting date. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement.


(e)	Presentation of information

Certain disclosures required by IFRSs have been included in the audited sections of this Annual Report and Accounts as follows:


•	segmental disclosures are included in the 'Report of the Directors: Financial Review' on pages 30 to 63;


•	disclosures concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in the 'Report of the Directors: Risk' on pages 64 to 126;


•	capital disclosures are included in the 'Report of the Directors: Capital' on pages 127 to 131; and



HSBC Holdings plc Annual Report and Accounts 2016	195

Notes on the Financial Statements


•	disclosures relating to HSBC's securitisation activities and structured products are included in the 'Report of the Directors: Risk' on pages 64 to 126.

In accordance with HSBC's policy to provide disclosures that help investors and other stakeholders understand the Group's performance, financial position and changes to them, the information provided in the Notes on the Financial Statements and the Report of the Directors goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In addition, HSBC follows the British Bankers' Association Code for Financial Reporting Disclosure ('the BBA Code'). The BBA Code aims to increase the quality and comparability of UK banks' disclosures and sets out five disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC assesses good practice recommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.


(f)	Critical accounting estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical accounting estimates and judgements in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based, resulting in materially different conclusions from those reached by management for the purposes of these Financial Statements. Management's selection of HSBC's accounting policies which contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.


(g)	Segmental analysis

HSBC's chief operating decision-maker is the Group Chief Executive, supported by the Group Management Board ('GMB'), which operates as a general management committee under the direct authority of the Board, and operating segments are reported in a manner consistent with the internal reporting provided to the Group Chief Executive and the GMB.

Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group's accounting policies. Segmental income and expenses include transfers between segments, and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.


(h)	Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.


1.2	Summary of significant accounting policies


(a)	Consolidation and related policies

Investments in subsidiaries

Where an entity is governed by voting rights, HSBC consolidates when it holds, directly or indirectly, the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.

Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. This election is made for each business combination.

HSBC Holdings' investments in subsidiaries are stated at cost less impairment losses.

Goodwill

Goodwill is allocated to cash-generating units ('CGUs') for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC's CGUs are based on geographical regions subdivided by global business, except for Global Banking and Markets, for which goodwill is monitored on a global basis.

Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained.

Critical accounting estimates and judgements

The review of goodwill for impairment reflects management's best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:

•

The future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management's view of future business prospects at the time of the assessment.

•

The rates used to discount future expected cash flows can have a significant effect on their valuation and are based on the costs of capital assigned to individual CGUs. The cost of capital percentage is generally derived from a capital asset pricing model, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management's control, are subject to uncertainty and require the exercise of significant judgement.

The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such circumstances, management retests goodwill for impairment more frequently than once a year when indicators of impairment exist to ensure that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management's best estimate of future business prospects.



196	HSBC Holdings plc Annual Report and Accounts 2016

HSBC sponsored structured entities

HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. HSBC is generally not considered a sponsor if the only involvement with the entity is merely administrative.

Interests in associates and joint arrangements

Joint arrangements are investments in which HSBC, together with one or more parties, has joint control. Depending on HSBC's rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. HSBC classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as associates.

HSBC recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates are included in the consolidated financial statements of HSBC based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and 31 December.

Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisitions of interests in joint ventures and associates is not tested separately for impairment but is assessed as part of the carrying amount of the investment.

Critical accounting estimates and judgements

Impairment testing of investments in associates involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment. The most significant judgements relate to the impairment testing of our investment in Bank of Communications Co., Limited ('BoCom'). Key assumptions used in estimating BoCom's value in use, the sensitivity of the value in use calculation to different assumptions and a sensitivity analysis that shows the changes in key assumptions that would reduce the excess of value in use over the carrying amount (the 'headroom') to nil are described in Note 17.


(b)	Income and expense

Operating income

Interest income and expense

Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. However, as an exception to this, interest on debt securities issued by HSBC that are designated under the fair value option and derivatives managed in conjunction with those debt securities are included in interest expense.

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.

Non-interest income and expense

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 a transaction, such as the acquisition of shares, for a third party); and


•	income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management services).

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.

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.

Net income/(expense) from financial instruments designated at fair value includes all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value through profit or loss, including derivatives that are managed in conjunction with those financial assets and liabilities, and liabilities under investment contracts. Interest income, interest expense and dividend income in respect of those 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'.

The accounting policies for insurance premium income are disclosed in Note 1.2(f).


(c)	Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, HSBC recognises the difference as a trading gain or loss at inception ('day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction until the transaction matures or is closed out, the valuation inputs become observable or HSBC enters into an offsetting transaction.

The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria.



HSBC Holdings plc Annual Report and Accounts 2016	197

Notes on the Financial Statements

Critical accounting estimates and judgements

The majority of valuation techniques employ only observable market data. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them the measurement of fair value is more judgemental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's inception profit or greater than 5% of the instrument's valuation is driven by unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).


(d)	Financial instruments measured at amortised cost

Loans and advances to banks and customers, held-to-maturity investments and most financial liabilities are measured at amortised cost. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. If the initial fair value is lower than the cash amount advanced, such as in the case of some leveraged finance and syndicated lending activities, the difference is deferred and recognised over the life of the loan (as described in paragraph (c) above) through the recognition of interest income, unless the loan becomes impaired.

HSBC may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When HSBC intends to hold the loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss.

Impairment of loans and advances

Losses for impaired loans are recognised when there is objective evidence that impairment of a loan or portfolio of loans has occurred. Losses which may arise from future events are not recognised.

Individually assessed loans and advances

The factors considered in determining whether a loan is individually significant for the purposes of assessing impairment include the size of the loan, the number of loans in the portfolio, the importance of the individual loan relationship and how this is managed. Loans that are determined to be individually significant will be individually assessed for impairment, except when volumes of defaults and losses are sufficient to justify treatment under a collective methodology.

Loans considered as individually significant are typically to corporate and commercial customers, are for larger amounts and are managed on an individual basis. For these loans, HSBC considers on a case-by-case basis at each balance sheet date whether there is any objective evidence that a loan is impaired.

The determination of the realisable value of security is based on the most recently updated market value at the time the impairment assessment is performed. The value is not adjusted for expected future changes in market prices, though adjustments are made to reflect local conditions such as forced sale discounts.

Impairment losses are calculated by discounting the expected future cash flows of a loan, which include expected future receipts of contractual interest, at the loan's original effective interest rate or an approximation thereof, and comparing the resultant present value with the loan's current carrying amount.

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, generally retail lending portfolios.

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. 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.

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 used to calculate collective allowances are set out below:

•

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. Individual loans are grouped using ranges of past due days, and statistical estimates are made of 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, such as industry sector, loan grade or product. In applying this methodology, adjustments are made to estimate the periods of time between a loss event occurring, for example because of a missed payment, and its confirmation through write-off (known as the loss identification period). Current economic conditions are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed markets, 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 estimated by local management, and is typically between six and 12 months.



198	HSBC Holdings plc Annual Report and Accounts 2016

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.

Reversals of impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the loan impairment allowance account accordingly. The write-back is recognised in the income statement.

Assets acquired in exchange for loans

When non-financial assets acquired in exchange for loans as part of an orderly realisation are held for sale, these assets are recorded as 'Assets held for sale.'

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 has been received. Where collectively assessed loan portfolios include significant levels of renegotiated loans, these loans are segregated from other parts of the loan portfolio for the purposes of collective impairment assessment to reflect their risk profile. Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or derecognition.

A loan that is renegotiated is derecognised 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. Any new loans that arise following derecognition events will continue to be disclosed as renegotiated loans and are assessed for impairment as above.

Critical accounting estimates and judgements

Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at the balance sheet date. Management is required to exercise judgement in making assumptions and estimates when calculating loan impairment allowances on both individually and collectively assessed loans and advances.

Collective impairment allowances are subject to estimation uncertainty, in part because it is not practicable to identify losses on an individual loan basis due to the large number of individually insignificant loans in the portfolio. The estimation methods include the use of statistical analyses of historical information, supplemented with significant management judgement, to assess whether current economic and credit conditions are such that the actual level of incurred losses is likely to be greater or less than historical experience. Where changes in economic, regulatory or behavioural conditions result in the most recent trends in portfolio risk factors being not fully reflected in the statistical models, risk factors are taken into account by adjusting the impairment allowances derived solely from historical loss experience.

Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographical concentrations, loan product features, economic conditions such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations, and other influences on customer payment patterns. Different factors are applied in different regions and countries to reflect local economic conditions, laws and regulations. The methodology and the assumptions used in calculating impairment losses are reviewed regularly in the light of differences between loss estimates and actual loss experience. For example, roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate.

For individually assessed loans, judgement is required in determining whether there is objective evidence that a loss event has occurred and, if so, the measurement of the impairment allowance. In determining whether there is objective evidence that a loss event has occurred, judgement is exercised in evaluating all relevant information on indicators of impairment, including the consideration of whether payments are contractually past due and the consideration of other factors indicating deterioration in the financial condition and outlook of borrowers affecting their ability to pay.

A higher level of judgement is required for loans to borrowers showing signs of financial difficulty in market sectors experiencing economic stress, particularly where the likelihood of repayment is affected by the prospects for refinancing or the sale of a specified asset. For those loans where objective evidence of impairment exists, management determines the size of the allowance required based on a range of factors such as the realisable value of security, the likely dividend available on liquidation or bankruptcy, the viability of the customer's business model and the capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations.

HSBC might provide loan forbearance to borrowers experiencing financial difficulties by agreeing to modify the contractual payment terms of loans in order to improve the management of customer relationships, maximise collection opportunities or avoid default or repossession. Where forbearance activities are significant, higher levels of judgement and estimation uncertainty are involved in determining their effects on loan impairment allowances. Judgements are involved in differentiating the credit risk characteristics of forbearance cases, including those which return to performing status following renegotiation. Where collectively assessed loan portfolios include significant levels of loan forbearance, portfolios are segmented to reflect the different credit risk characteristics of forbearance cases, and estimates are made of the incurred losses inherent within each forbearance portfolio segment. Forbearance activities take place in both retail and wholesale loan portfolios, but our largest concentration is in the US, in HSBC Finance's CML run-off portfolio.

The exercise of judgement requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which our loan impairment allowances as a whole are sensitive.

Non-trading reverse repurchase and repurchase agreements

When securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.



HSBC Holdings plc Annual Report and Accounts 2016	199

Notes on the Financial Statements


(e)	Financial instruments measured at fair value

Available-for-sale financial assets

Available-for-sale financial assets are recognised on the trade date when HSBC enters into contractual arrangements to purchase those instruments, and are normally derecognised when the securities are either sold or redeemed. They are subsequently remeasured at fair value, and changes therein are recognised in other comprehensive income until the assets are either sold or become impaired. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as 'Gains less losses from financial investments'.

Impairment of available-for-sale financial assets

Available-for-sale financial assets are assessed at each balance sheet date for objective evidence of impairment. Impairment losses are recognised in the income statement within 'Loan impairment charges and other credit risk provisions' for debt instruments and within 'Gains less losses from financial investments' for equities.

Available-for-sale debt securities

In assessing 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 the recovery of future cash flows. A subsequent decline in the fair value of the instrument is recognised in the income statement when there is objective evidence of impairment as a result of decreases in the estimated future cash flows. Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, or the instrument is no longer impaired, the impairment loss is reversed through the income statement.

Available-for-sale equity securities

A significant or prolonged decline in the fair value of the equity below its cost is objective evidence of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the continuous period in which the fair value of the asset has been below its original cost at initial recognition.

All subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive income. Subsequent decreases in the fair value of the available-for-sale equity security are recognised in the income statement to the extent that further cumulative impairment losses have been incurred. Impairment losses recognised on the equity security are not reversed through the income statement.

Financial instruments designated at fair value

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below, and are so designated irrevocably at inception:


•	the use of the designation removes or significantly reduces an accounting mismatch;


•	when a group of financial assets, liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and


•	where financial instruments contain one or more non-closely related embedded derivatives.

Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in 'Net income/(expense) from financial instruments designated at fair value'.

Under this criterion, the main classes of financial instruments designated by HSBC are:

Long-term debt issues

The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy.

Financial assets and financial liabilities under unit-linked and non-linked investment contracts

A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features ('DPF'), but is accounted for as a financial liability. See Note 1.2(f) for investment contracts with DPF and contracts where HSBC accepts significant insurance risk. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries and the corresponding financial assets are designated at fair value. Liabilities are at least equivalent to the surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or indices. Premiums receivable and amounts withdrawn are accounted for as increases or decreases in the liability recorded in respect of investment contracts. The incremental costs directly related to the acquisition of new investment contracts or renewing existing investment contracts are deferred and amortised over the period during which the investment management services are provided.

Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative; this includes embedded derivatives which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

Gains and losses from changes in the fair value of derivatives that do not qualify for hedge accounting are reported in 'Net trading income'. Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in 'Net income/(expense) from financial instruments designated at fair value' together with the gains and losses on the economically



200	HSBC Holdings plc Annual Report and Accounts 2016

hedged items. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

When derivatives are held for risk management purposes they are designated in hedge relationships where the required criteria for documentation and hedge effectiveness are met. HSBC enters into fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.

Fair value hedge

Changes in the fair value of derivatives are recorded in the income statement, along with changes in the fair value of the hedged assets or liabilities attributable to the hedged risk. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.

Cash flow hedge

The effective portion of changes in the fair value of derivatives is recognised in other comprehensive income; the ineffective portion of the change in fair value is recognised immediately in the income statement within 'Net trading income'. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. In hedges of forecast transactions that result in recognition of a non-financial asset or liability, previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or liability. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

Net investment hedge

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; the residual change in fair value is recognised immediately in the income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the disposal, or part disposal, of the foreign operation.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.


(f)	Insurance contracts

A contract is classified as an insurance contract where HSBC accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, HSBC issues investment contracts with DPF which are also accounted for as insurance contracts as required by IFRS 4 'Insurance Contracts'.

Net insurance premium income

Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established.

Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate.

Net insurance claims and benefits paid and movements in liabilities to policyholders

Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.

Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified.

Reinsurance recoveries are accounted for in the same period as the related claim.

Liabilities under insurance contracts

Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices.

Future profit participation on insurance contracts with DPF

Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management's expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual terms, regulation, or past distribution policy.

Investment contracts with DPF

While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by IFRS 4. The Group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.



HSBC Holdings plc Annual Report and Accounts 2016	201

Notes on the Financial Statements

In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.

Present value of in-force long-term insurance business

HSBC recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and in-force at the balance sheet date, as an asset. The asset represents the present value of the equity holders' interest in the issuing insurance companies' profits expected to emerge from these contracts written at the balance sheet date. The present value of in-force business ('PVIF') is determined by discounting those expected future profits using appropriate assumptions in assessing factors such as future mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in 'Other operating income' on a gross of tax basis.


(g)	Employee compensation and benefits

Share-based payments

HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for services provided by employees.

The vesting period for these schemes may commence before the grant date if the employees have started to render services in respect of the award before the grant date. Expenses are recognised when the employee starts to render service to which the award relates.

Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest.

Post-employment benefit plans

HSBC operates a number of pension schemes (including defined benefit and defined contribution) and post-employment benefit schemes.

Payments to defined contribution plans are charged as an expense as the employees render service.

Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.

Re-measurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.

The cost of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension plans.


(h)	Tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement as the related item appears.

Current tax is the tax expected to be payable on the taxable profit for the year and any adjustment to tax payable in respect of previous years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled.

Current and deferred tax is calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

Critical accounting estimates and judgements

The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. In the absence of a history of taxable profits, the most significant judgements relate to expected future profitability and to the applicability of tax planning strategies, including corporate reorganisations.


(i)	Provisions, contingent liabilities and guarantees

Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.



202	HSBC Holdings plc Annual Report and Accounts 2016

Critical accounting estimates and judgements

Judgement is involved in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Professional expert advice is taken on the assessment of litigation, property (including onerous contracts) and similar obligations. Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous judgements and estimates as appropriate. At more advanced stages, it is typically easier to make judgements and estimates around a better defined set of possible outcomes. However, the amount provisioned can remain very sensitive to the assumptions used. There could be a wide range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result, it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved. Provisions for customer remediation also require significant levels of estimation and judgement. The amounts of provisions recognised depend on a number of different assumptions, such as, the volume of inbound complaints, the projected period of inbound complaint volumes, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint.

Contingent liabilities, contractual commitments and guarantees

Contingent liabilities

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.

Financial guarantee contracts

Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable.

HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. HSBC elects to account for certain guarantees as insurance contracts in HSBC Holdings' financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract by contract basis, and is irrevocable.

2 Net income/(expense) from financial instruments designated at fair value



	2016		2015		2014
	$m		$m		$m
Net income/(expense) arising on:
Financial assets
Financial assets held to meet liabilities under insurance and investment contracts	1,480		531		2,300
Other financial assets designated at fair value	90		89		131
Derivatives managed with other financial assets designated at fair value	(43	)	13		(19	)
	1,527		633		2,412
Financial liabilities
Liabilities to customers under investment contracts	(218	)	34		(435	)
HSBC's long-term debt issued and related derivatives	(3,975	)	863		508
- changes in own credit spread on long-term debt	(1,792	)	1,002		417
- derivatives managed in conjunction with HSBC's issued debt securities	(1,367	)	(1,997	)	333
- other changes in fair value	(816	)	1,858		(242	)
Other financial liabilities designated at fair value	(6	)	3		(23	)
Derivatives managed with other financial liabilities designated at fair value	6		(1	)	11
	(4,193	)	899		61
Year ended 31 Dec	(2,666	)	1,532		2,473

HSBC Holdings



Net income/(expense) arising on HSBC Holdings' long-term debt issued and related derivatives
		2016		2015		2014
	Footnotes	$m		$m		$m
Net income/(expense) arising on:
- changes in own credit spread on long-term debt	1	-		348		339
- derivatives managed in conjunction with HSBC Holdings' issued debt securities		(642	)	(927	)	126
- other changes in fair value		593		855		(27	)
Year ended 31 Dec		(49	)	276		438

From 1 January 2016, HSBC Holdings adopted, in its separate financial statements, the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value. As a result, the effects of changes in those liabilities' credit risk is presented in other comprehensive income with the remaining effect presented in profit or loss.



HSBC Holdings plc Annual Report and Accounts 2016	203

Notes on the Financial Statements

3 Insurance business



Net insurance premium income
	Non-linked insurance		Linked life insurance		Investment contracts with DPF¹	Total
	$m		$m		$m	$m
Gross insurance premium income	8,036		675		1,877	10,588
Reinsurers' share of gross insurance premium income	(629	)	(8	)	-	(637	)
Year ended 31 Dec 2016	7,407		667		1,877	9,951

Gross insurance premium income	7,506		1,409		2,097	11,012
Reinsurers' share of gross insurance premium income	(648	)	(9	)	-	(657	)
Year ended 31 Dec 2015	6,858		1,400		2,097	10,355

Gross insurance premium income	7,705		2,195		2,470	12,370
Reinsurers' share of gross insurance premium income	(441	)	(8	)	-	(449	)
Year ended 31 Dec 2014	7,264		2,187		2,470	11,921


1	Discretionary participation features.



Net insurance claims and benefits paid and movement in liabilities to policyholders
	Non-linked insurance		Linked life insurance		Investment contracts with DPF¹	Total
	$m		$m		$m	$m
Gross claims and benefits paid and movement in liabilities	8,778		1,321		2,409	12,508
- claims, benefits and surrenders paid	2,828		749		2,017	5,594
- movement in liabilities	5,950		572		392	6,914
Reinsurers' share of claims and benefits paid and movement in liabilities	(560	)	(78	)	-	(638	)
- claims, benefits and surrenders paid	(112	)	(14	)	-	(126	)
- movement in liabilities	(448	)	(64	)	-	(512	)
Year ended 31 Dec 2016	8,218		1,243		2,409	11,870

Gross claims and benefits paid and movement in liabilities	7,746		1,398		2,728	11,872
- claims, benefits and surrenders paid	3,200		1,869		2,101	7,170
- movement in liabilities	4,546		(471	)	627	4,702
Reinsurers' share of claims and benefits paid and movement in liabilities	(575	)	(5	)	-	(580	)
- claims, benefits and surrenders paid	(153	)	(64	)	-	(217	)
- movement in liabilities	(422	)	59		-	(363	)
Year ended 31 Dec 2015	7,171		1,393		2,728	11,292

Gross claims and benefits paid and movement in liabilities	7,770		2,765		3,188	13,723
- claims, benefits and surrenders paid	3,575		1,499		2,215	7,289
- movement in liabilities	4,195		1,266		973	6,434
Reinsurers' share of claims and benefits paid and movement in liabilities	(411	)	33		-	(378	)
- claims, benefits and surrenders paid	(176	)	(88	)	-	(264	)
- movement in liabilities	(235	)	121		-	(114	)
Year ended 31 Dec 2014	7,359		2,798		3,188	13,345


1	Discretionary participation features.



204	HSBC Holdings plc Annual Report and Accounts 2016



Liabilities under insurance contracts
		Non-linked insurance		Linked life insurance		Investment contracts with DPF¹		Total
	Footnotes	$m		$m		$m		$m
Gross liabilities under insurance contracts at 1 Jan 2016		40,538		6,791		22,609		69,938
Claims and benefits paid		(2,828	)	(749	)	(2,017	)	(5,594	)
Increase in liabilities to policyholders		8,778		1,321		2,409		12,508
Disposals/transfers to held-for-sale		-		-		-		-
Exchange differences and other movements	2	(445	)	(414	)	(720	)	(1,579	)
Gross liabilities under insurance contracts at 31 Dec 2016		46,043		6,949		22,281		75,273
Reinsurers' share of liabilities under insurance contracts		(1,500	)	(320	)	-		(1,820	)
Net liabilities under insurance contracts at 31 Dec 2016		44,543		6,629		22,281		73,453

Gross liabilities under insurance contracts at 1 Jan 2015		36,973		11,820		25,068		73,861
Claims and benefits paid		(3,200	)	(1,869	)	(2,101	)	(7,170	)
Increase in liabilities to policyholders		7,746		1,398		2,728		11,872
Disposals/transfers to held-for-sale		(443	)	(4,594	)	-		(5,037	)
Exchange differences and other movements	2	(538	)	36		(3,086	)	(3,588	)
Gross liabilities under insurance contracts at 31 Dec 2015		40,538		6,791		22,609		69,938
Reinsurers' share of liabilities under insurance contracts		(1,115	)	(263	)	-		(1,378	)
Net liabilities under insurance contracts at 31 Dec 2015		39,423		6,528		22,609		68,560


1	Discretionary participation features.


2	'Exchange differences and other movements' includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.

The key factors contributing to the movement in liabilities to policyholders included death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.



HSBC Holdings plc Annual Report and Accounts 2016	205

Notes on the Financial Statements

4 Operating profit

Operating profit is stated after the following items:



	2016		2015		2014
	$m		$m		$m
Income
Interest recognised on impaired financial assets	574		934		1,137
Fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate)	7,732		8,736		9,438
Fees earned on trust and other fiduciary activities	2,543		3,052		3,253
Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value	(11,858	)	(13,680	)	(15,322	)
Fees payable on financial liabilities that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate)	(1,214	)	(1,251	)	(1,427	)
Fees payable relating to trust and other fiduciary activities	(129	)	(166	)	(185	)
Payments under lease and sublease agreements	(969	)	(1,190	)	(1,548	)
- minimum lease payments	(945	)	(1,058	)	(1,199	)
- contingent rents and sublease payments	(24	)	(132	)	(349	)
UK bank levy	(922	)	(1,421	)	(1,066	)
Restructuring provisions	(415	)	(430	)	(147	)
Gains/(losses)
Impairment of available-for-sale equity securities	(36	)	(111	)	(373	)
Gains/(losses) recognised on assets held for sale	(206	)	(244	)	220
Gains on the partial sale of shareholding in Industrial Bank	-		1,372		-
Loss on disposal of Brazilian operations	(1,743	)	-		-
Loan impairment charges and other credit risk provisions	(3,400	)	(3,721	)	(3,851	)
- net impairment charge on loans and advances	(3,350	)	(3,592	)	(4,055	)
- release of impairment on available-for-sale debt securities	63		17		319
- other credit risk provisions	(113	)	(146	)	(115	)

External net operating income is attributed to countries on the basis of the location of the branch responsible for reporting the results or advancing the funds:



		2016		2015	2014
	Footnote	$m		$m	$m
External net operating income by country	1	47,966		59,800	61,248
- UK		9,495		14,132	14,392
- Hong Kong		12,864		14,447	12,656
- US		5,094		5,541	5,736
- France		2,571		2,706	2,538
- other countries		17,942		22,974	25,926
- of which: Brazil		(204	)	3,546	4,817


1	Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.

5 Employee compensation and benefits



	2016	2015	2014
	$m	$m	$m
Wages and salaries	15,735	17,245	17,477
Social security costs	1,312	1,600	1,666
Post-employment benefits	1,042	1,055	1,223
Year ended 31 Dec	18,089	19,900	20,366



Average number of persons employed by HSBC during the year by global business
	2016	2015	2014
Retail Banking and Wealth Management	137,234	155,859	156,397
Commercial Banking	45,912	51,007	50,519
Global Banking and Markets	47,623	49,912	47,219
Global Private Banking	8,322	8,934	8,799
Corporate Centre	7,842	2,721	1,833
Year ended 31 Dec	246,933	268,433	264,767



206	HSBC Holdings plc Annual Report and Accounts 2016



Average number of persons employed by HSBC during the year by geographical region
	Footnote	2016	2015	2014
Europe	1	71,196	68,408	68,163
Asia		122,282	121,438	116,492
Middle East and North Africa	1	12,021	14,467	14,477
North America		20,353	21,506	21,983
Latin America		21,081	42,614	43,652
Year ended 31 Dec		246,933	268,433	264,767


1	2015 and 2014 figures are restated for the changes explained on page 44.



Reconciliation of total incentive awards granted to income statement charge
	2016		2015		2014
	$m		$m		$m
Total incentive awards approved and granted for the current year	3,035		3,462		3,660
Less: deferred bonuses awarded, expected to be recognised in future periods	(323	)	(387	)	(359	)
Total incentives awarded and recognised in the current year	2,712		3,075		3,301
Add: current year charges for deferred bonuses from previous years	371		483		425
Other	(128	)	(40	)	(114	)
Income statement charge for incentive awards	2,955		3,518		3,612



Year in which income statement is expected to reflect deferred bonuses
	Charge recognised			Expected charge
	2016	2015	2014	2017	2018 and beyond
	$m	$m	$m	$m	$m
Variable compensation from 2016 bonus pool	152	-	-	137	186
Variable compensation from 2015 bonus pool	168	253	-	128	76
Variable compensation from 2014 bonus pool and earlier	203	483	670	88	28
Total	523	736	670	353	290
Cash awards	163	168	150	102	98
Equity awards	360	568	520	251	192

Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which $534m were equity settled (2015: $757m; 2014: $732m), as follows:



	2016	2015	2014
	$m	$m	$m
Restricted share awards	591	748	738
Savings-related and other share award option plans	33	43	36
Year ended 31 Dec	624	791	774



HSBC share awards
Award	Policy
Restricted share awards (including annual incentive awards delivered in shares) and GPSP	• An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted. • Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date. • Deferred share awards generally vest over a period of three years and GPSP awards vest after five years. • Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of employment. • Awards granted from 2010 onwards are subject to a malus provision prior to vesting. • Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post vesting.
International Employee Share Purchase Plan ('ShareMatch')	• The plan was first introduced in Hong Kong in 2013 and now includes employees based in 25 jurisdictions. • Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency. • Matching awards are added at a ratio of one free share for every three purchased. • Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.



HSBC Holdings plc Annual Report and Accounts 2016	207

Notes on the Financial Statements



Movement on HSBC share awards
	2016		2015
	Number		Number
	(000s)		(000s)
Restricted share awards outstanding at 1 Jan	118,665		116,483
Additions during the year	94,981		80,749
Released in the year	(76,552	)	(75,235	)
Forfeited in the year	(13,928	)	(3,332	)
Restricted share awards outstanding at 31 Dec	123,166		118,665
Weighted average fair value of awards granted ($)	7.25		9.67



HSBC share option plans
Main plans	Policy
Savings-related share option plans ('Sharesave')	• Two plans: the UK Plan and the International Plan. The last grant of options under the International Plan was in 2012. • From 2014, eligible employees can save up to £500 per month with the option to use the savings to acquire shares. • Exercisable within six months following either the third or fifth anniversaries of the commencement of a three-year or five-year contract, respectively. • The exercise price is set at a 20% (2015: 20%) discount to the market value immediately preceding the date of invitation.
HSBC Holdings Group share option plan	• Plan ceased in May 2005. • Exercisable between the third and 10th anniversaries of the date of grant.

Calculation of fair values

The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant.



Movement on HSBC share option plans
		Savings-related share option plans			HSBC Holdings Group share option plan
		Number		WAEP¹	Number		WAEP¹
	Footnotes	(000s)		£	(000s)		£
Outstanding at 1 Jan 2016		74,775		4.36	-		-
Granted during the year	2	15,044		4.40	-		-
Exercised during the year	3	(4,354	)	5.02	-		-
Expired during the year		(15,438	)	4.47	-		-
Outstanding at 31 Dec 2016		70,027		4.30	-		-
Weighted average remaining contractual life (years)		2.91			-

Outstanding at 1 Jan 2015		66,366		4.89	6,374		7.29
Granted during the year	2	52,629		4.05	-		-
Exercised during the year	3	(21,120	)	4.45	-		-
Expired during the year		(23,100	)	5.11	(6,374	)	7.29
Outstanding at 31 Dec 2015		74,775		4.36	-		-
Weighted average remaining contractual life (years)		3.92			-


1	Weighted average exercise price.


2	The weighted average fair value of options granted during the year was $1.28 (2015: $1.09).


3	The weighted average share price at the date the options were exercised was $6.98 (2015: $8.50) and $0 (2015: $0) for the savings-related share option plans and HSBC Holdings Group share option plan, respectively.

Post-employment benefit plans

The Group operates pension plans throughout the world for its employees. 'Pension risk management' on page 84 contains details of the policies and practices associated with these pension plans. Some are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan').

The principal plan

The principal plan has a defined benefit section and a defined contribution section. The defined benefit section was closed to future benefit accrual in 2015, with defined benefits earned by employees at that date continuing to be linked to their salary while they remain employed by HSBC Bank. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the Group.

The investment strategy of the plan is to hold the majority of assets in bonds, with the remainder in a diverse range of investments. It also includes some interest rate swaps to reduce interest rate risk and inflation swaps to reduce inflation risk.



208	HSBC Holdings plc Annual Report and Accounts 2016

The latest funding valuation of the plan at 31 December 2014 was carried out by Colin G Singer, of Willis Towers Watson Limited, who is a Fellow of the UK Institute and Faculty of Actuaries, using the projected unit credit method. At that date, the market value of the plan's assets was £24.6bn ($30.3bn) and this exceeded the value placed on its liabilities on an ongoing basis by £520m ($641m), giving a funding level of 102%. The main differences between the assumptions used for assessing the liabilities for this funding valuation and those used for IAS 19 (see 'Key actuarial assumptions' section below) are more prudent discount rate, inflation and longevity assumptions.

Although the plan was in surplus at the valuation date, HSBC agreed to make further contributions to the plan to support a lower-risk investment strategy over the longer term. These contributions amounted to £128m ($158m) in 2016 and are expected to amount to £64m ($79m) in each of 2017, 2018 and 2019, and £160m ($197m) in each of 2020 and 2021.

The chart below shows the expected profile of future benefits payable from the plan.

Future benefit payments ($bn)

The actuary also assessed the value of the liabilities if the plan were to be stopped and an insurance company asked to secure all future pension payments. This is generally larger than the amount needed on the ongoing basis described above because an insurance company would use more prudent assumptions and include an explicit allowance for the future administrative expenses of the plan. Under this approach, the amount of assets needed was estimated to be £31bn ($38bn) at 31 December 2014.



Income statement charge
	2016	2015	2014
	$m	$m	$m
Defined benefit pension plans	218	256	469
Defined contribution pension plans	783	793	687
Pension plans	1,001	1,049	1,156
Defined benefit and contribution healthcare plans	41	6	67
Year ended 31 Dec	1,042	1,055	1,223



Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans
	Fair value of plan assets	Present value of defined benefit obligations		Effect of limit on plan surpluses		Total
	$m	$m		$m		$m
Defined benefit pension plans	42,397	(39,747	)	(24	)	2,626
Defined benefit healthcare plans	118	(711	)	-		(593	)
At 31 Dec 2016	42,515	(40,458	)	(24	)	2,033
Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')						(2,681	)
Total employee benefit assets (within 'Prepayments, accrued income and other assets')						4,714

Defined benefit pension plans	41,424	(38,326	)	(14	)	3,084
Defined benefit healthcare plans	141	(762	)	-		(621	)
At 31 Dec 2015	41,565	(39,088	)	(14	)	2,463
Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')						(2,809	)
Total employee benefit assets (within 'Prepayments, accrued income and other assets')						5,272



HSBC Holdings plc Annual Report and Accounts 2016	209

Notes on the Financial Statements

Defined benefit pension plans



Net asset/(liability) under defined benefit pension plans
	Fair value of plan assets				Present value of defined benefit obligations				Effect of the asset ceiling			Net defined benefit asset/(liability)
	Principal plan		Other plans		Principal plan		Other plans		Principal plan	Other plans		Principal plan		Other plans
	$m		$m		$m		$m		$m	$m		$m		$m
At 1 Jan 2016	32,670		8,754		(27,675	)	(10,651	)	-	(14	)	4,995		(1,911	)
Current service cost	-		-		(70	)	(235	)	-	-		(70	)	(235	)
Past service cost and gains/(losses) from settlements	-		(1	)	-		(39	)	-	-		-		(40	)
Service cost	-		(1	)	(70	)	(274	)	-	-		(70	)	(275	)
Net interest income/(cost) on the net defined benefit asset/(liability)	1,085		294		(914	)	(337	)	-	(1	)	171		(44	)
Re-measurement effects recognised in other comprehensive income	6,449		671		(6,886	)	(299	)	-	(8	)	(437	)	364
- return on plan assets (excluding interest income)	6,449		671		-		-		-	-		6,449		671
- actuarial gains/(losses)	-		-		(7,029	)	(152	)	-	(8	)	(7,029	)	(160	)
- other changes	-		-		143		(147	)	-	-		143		(147	)
Exchange differences	(6,097	)	(534	)	5,254		410		-	(1	)	(843	)	(125	)
Contributions by HSBC	347		379		-		-		-	-		347		379
- normal	64		207		-		-		-	-		64		207
- special	283		172		-		-		-	-		283		172
Contributions by employees	-		30		-		(30	)	-	-		-		-
Benefits paid	(970	)	(623	)	970		698		-	-		-		75
Administrative costs and taxes paid by plan	(42	)	(15	)	42		15		-	-		-		-
At 31 Dec 2016	33,442		8,955		(29,279	)	(10,468	)	-	(24	)	4,163		(1,537	)
Present value of defined benefit obligation relating to:
- actives					(7,066	)	(5,066	)
- deferreds					(9,219	)	(2,306	)
- pensioners					(12,994	)	(3,096	)

At 1 Jan 2015	35,244		9,580		(30,480	)	(11,582	)	-	(17	)	4,764		(2,019	)
Current service cost	-		-		(129	)	(268	)	-	-		(129	)	(268	)
Past service cost and gains/(losses) from settlements	-		(3	)	(53	)	71		-	-		(53	)	68
Service cost	-		(3	)	(182	)	(197	)	-	-		(182	)	(200	)
Net interest income/(cost) on the net defined benefit asset/(liability)	1,265		322		(1,088	)	(371	)	-	(2	)	177		(51	)
Re-measurement effects recognised in other comprehensive income	(1,521	)	(394	)	1,642		339		-	(30	)	121		(85	)
- return on plan assets (excluding interest income)	(1,521	)	(394	)	-		-		-	-		(1,521	)	(394	)
- actuarial gains/(losses)	-		-		1,392		339		-	(30	)	1,392		309
- other changes	-		-		250		-		-	-		250		-
Exchange differences	(1,704	)	(458	)	1,443		529		-	35		(261	)	106
Contributions by HSBC	376		279		-		-		-	-		376		279
- normal	159		227		-		-		-	-		159		227
- special	217		52		-		-		-	-		217		52
Contributions by employees	17		35		(17	)	(35	)	-	-		-		-
Benefits paid	(970	)	(590	)	970		649		-	-		-		59
Administrative costs and taxes paid by plan	(37	)	(17	)	37		17		-	-		-		-
At 31 Dec 2015	32,670		8,754		(27,675	)	(10,651	)	-	(14	)	4,995		(1,911	)
Present value of defined benefit obligation relating to:
- actives					(6,310	)	(5,350	)
- deferreds					(7,919	)	(2,239	)
- pensioners					(13,446	)	(3,062	)

HSBC expects to make $425m of contributions to defined benefit pension plans during 2017. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:



Benefits expected to be paid from plans
		2017	2018	2019	2020	2021	2022-2026
	Footnote	$m	$m	$m	$m	$m	$m
The principal plan	1	917	948	979	1,012	1,045	5,533
Other plans	1	427	468	489	505	536	2,492


1	The duration of the defined benefit obligation is 19.0 years for the principal plan under the disclosure assumptions adopted (2015: 17.0 years) and 13.9 years for all other plans combined (2015: 13.9 years).



210	HSBC Holdings plc Annual Report and Accounts 2016



Fair value of plan assets by asset classes
	31 Dec 2016							31 Dec 2015
	Value		Quoted market price in active market	No quoted market price in active market		Thereof HSBC¹		Value	Quoted market price in active market	No quoted market price in active market	Thereof HSBC¹
	$m		$m	$m		$m		$m	$m	$m	$m
The principal plan
Fair value of plan assets	33,442		29,379	4,063		878		32,670	29,370	3,300	513
- equities	5,386		4,722	664		-		5,730	4,990	740	-
- bonds	23,426		23,426	-		-		22,704	22,704	-	-
- derivatives	2,107		-	2,107		878		1,011	-	1,011	513
- other	2,523		1,231	1,292		-		3,225	1,676	1,549	-
Other plans
Fair value of plan assets	8,955		7,631	1,324		239		8,754	7,882	872	148
- equities	2,255		1,502	753		-		2,434	1,900	534	1
- bonds	5,811		5,592	219		5		5,719	5,458	261	2
- derivatives	(89	)	44	(133	)	(85	)	7	-	7	1
- other	978		493	485		319		594	524	70	144


1	The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 36.

Post-employment defined benefit plans' principal actuarial financial assumptions

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations.



Key actuarial assumptions for the principal plan
	Discount rate	Inflation rate	Rate of increase for pensions	Rate of pay increase
	%	%	%	%
UK
At 31 Dec 2016	2.50	3.50	3.20	4.00
At 31 Dec 2015	3.70	3.20	3.00	3.70
At 31 Dec 2014	3.70	3.20	3.00	3.70



Mortality tables and average life expectancy at age 65 for the principal plan
	Mortality table	Life expectancy at age 65 for a male member currently:		Life expectancy at age 65 for a female member currently:
		Aged 65	Aged 45	Aged 65	Aged 45
UK
At 31 Dec 2016	SAPS S2¹	22.4	24.1	24.7	26.6
At 31 Dec 2015	SAPS S1²	23.6	25.0	24.9	26.7

Self-administered Pension Scheme ('SAPS') S2 table (Males: 'All Pensioners' version, Females: 'Normal Pensions' version) with a multiplier of 0.98 for both male and female pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI) core projection model 2015 with a long-term rate of improvement of 1.25% per annum. Separate tables assuming lighter mortality have been applied to higher paid pensioners.


2	Self-administered Pension Scheme ('SAPS') Light table with a multiplier of 1.01 for male pensioners and 1.02 for female pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') core projection model 2015 with a long-term rate of improvement of 1.25% per annum.



The effect of changes in key assumptions on the principal plan
	Impact on HSBC Bank (UK) Pension Scheme Obligation
	Financial impact of increase				Financial impact of decrease
	2016		2015		2016		2015
	$m		$m		$m		$m
Discount rate - increase/decrease of 0.25%	(1,322	)	(1,107	)	1,419		1,180
Inflation rate - increase/decrease of 0.25%	735		747		(1,048	)	(855	)
Pension payments and deferred pensions - increase/decrease of 0.25%	1,305		990		(1,255	)	(937	)
Pay - increase/decrease of 0.25%	143		119		(139	)	(119	)
Change in mortality - increase of 1 year	1,326		670		n/a		n/a



HSBC Holdings plc Annual Report and Accounts 2016	211

Notes on the Financial Statements

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2016 amounted to $571m (2015: $908m). The average number of persons employed during 2016 was 1,660 (2015: 2,656). Employees who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions determined by the trustees of the plans and recognises these contributions as an expense as they fall due.

From 1 July 2016 employment costs of most employees are recognised by the ServCo group and the ServCo group has started providing services to HSBC Holdings. HSBC Holdings recognised a management charge of $406m for these services which is included under 'General and administrative expenses'.

Directors' emoluments

Details of directors' emoluments, pensions and their interests are disclosed in the Directors' Remuneration Report on page 153.

6 Auditors' remuneration



		2016	2015	2014
	Footnotes	$m	$m	$m
Audit fees payable to PwC/KPMG	1, 2	65.7	62.0	40.6
Other audit fees payable		1.6	1.2	1.2
Year ended 31 Dec		67.3	63.2	41.8




Fees payable by HSBC to PwC/KPMG²
			2016	2015	2014
		Footnotes	$m	$m	$m
	Fees for HSBC Holdings' statutory audit	3	14.0	13.1	13.4
	Fees for other services provided to HSBC		97.1	85.1	62.5
	- audit of HSBC's subsidiaries	4	51.7	48.9	27.2
	- audit-related assurance services	5	20.6	16.6	22.6
	- taxation-related services:
	taxation compliance services		1.9	1.0	1.5
	taxation advisory services		0.4	0.9	0.8
	- other assurance services	6	4.5	2.8	0.7
	- other non-audit services	6	18.0	14.9	9.7
	Year ended 31 Dec		111.1	98.2	75.9

No fees were payable by HSBC to PwC or KPMG as principal auditor for the following types of services: internal audit services and services related to litigation, recruitment and remuneration.




Fees payable by HSBC's associated pension schemes to PwC/KPMG²
		2016	2015	2014
		$000	$000	$000
	Audit of HSBC's associated pension schemes	208	352	322
	Audit related assurance services	4	5	5
	Year ended 31 Dec	212	357	327


1	Included within the 2016 audit fees payable is a final fee adjustment of $4.2m related to the prior year audit in respect of overruns.


2	PwC became the Group's principal auditor in 2015. KPMG was the principal auditor during 2014.


3	Fees payable to PwC and KPMG for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to the consolidation returns of HSBC Holdings' subsidiaries which are clearly identifiable as being in support of the Group audit opinion.


4	Fees payable for the statutory audit of the financial statements of HSBC's subsidiaries, including the 2016 changes in scope and additional procedures performed due to the technology systems and data access controls matter as described on page 174.


5	Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews and work performed related to the implementation of IFRS 9.


6	Including other permitted services relating to advisory, corporate finance transactions, etc.

No fees were payable by HSBC's associated pension schemes to PwC or KPMG as principal auditor for the following types of services: audit-related assurance services, internal audit services, other assurance services, services related to corporate finance transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology.

In addition to the above, the estimated fees paid to PwC by third parties other than HSBC amount to $4.3m (PwC 2015: $2.4m; KPMG 2014: $3.6m). In these cases, HSBC is connected with the contracting party and may therefore be involved in appointing PwC. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

Fees payable for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for the HSBC Group.



212	HSBC Holdings plc Annual Report and Accounts 2016

7 Tax



Tax expense
		2016		2015		2014
	Footnotes	$m		$m		$m
Current tax	1	3,669		3,797		3,950
- for this year		3,525		3,882		4,477
- adjustments in respect of prior years		144		(85	)	(527	)
Deferred tax		(3	)	(26	)	25
- origination and reversal of temporary differences		(111	)	(153	)	(477	)
- effect of changes in tax rates		(4	)	110		83
- adjustments in respect of prior years		112		17		419
Year ended 31 Dec		3,666		3,771		3,975


1	Current tax included Hong Kong profits tax of $1,118m (2015: $1,294m; 2014: $1,135m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2015: 16.5%; 2014: 16.5%).

Tax reconciliation

The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:



	2016				2015				2014
	$m		%		$m		%		$m		%
Profit before tax	7,112				18,867				18,680
Tax expense
Taxation at UK corporation tax rate of 20.0% (2015: 20.25%; 2014: 21.5%)	1,422		20.0		3,821		20.25		4,016		21.50
Impact of differently taxed overseas profits in overseas locations	43		0.6		71		0.4		33		0.2
Items increasing tax charge in 2016 not in 2015:
- non-deductible goodwill write-down	648		9.1		-		-		-		-
- non-deductible loss and taxes suffered on Brazil disposal	464		6.5		-		-		-		-
- UK tax losses not recognised	305		4.3		-		-		-		-
- adjustments in respect of prior period liabilities	256		3.6		(68	)	(0.4	)	(108	)	(0.6	)
- UK Banking Surcharge	199		2.8		-		-		-		-
- non-UK tax losses not recognised	147		2.1		-		-		-		-
Other items increasing tax charge in 2016:
- local taxes and overseas withholding taxes	434		6.1		416		2.2		434		2.3
- other permanent disallowables	438		6.2		421		2.2		476		2.5
- bank levy	170		2.4		286		1.5		229		1.2
- non-deductible UK customer compensation	162		2.3		87		0.5		-		-
- other items	-		-		(116	)	(0.6	)	(22	)	(0.1	)
- non-deductible regulatory settlements	20		0.3		184		1.0		264		1.4
Items reducing tax charge in 2016:
- non-taxable income and gains	(577	)	(8.1	)	(501	)	(2.7	)	(668	)	(3.5	)
- effect of profits in associates and joint ventures	(461	)	(6.5	)	(508	)	(2.7	)	(547	)	(2.9	)
- change in tax rates	(4	)	(0.1	)	110		0.6		22		0.1
Non-taxable income and gains - Industrial Bank	-		-		(227	)	(1.2	)	-		-
US deferred tax temporary differences previously not recognised	-		-		(184	)	(1.0	)	(154	)	(0.8	)
Other deferred tax temporary differences previously not recognised	-		-		(21	)	(0.1	)	-		-
Year ended 31 Dec	3,666		51.6		3,771		20.0		3,975		21.3

The Group's profits are taxed at different rates depending on the country in which the profits arise. The key applicable tax rates include Hong Kong (16.5%), USA (35%) and UK (20%). If the Group's profits were taxed at the statutory rates of the countries in which the profits arise then the tax rate for the year would have been 20.6% (2015: 20.65%). The effective tax rate for the year was 51.6% (2015: 20%) and was significantly higher than 2015 due to the non-deductible goodwill write-down and loss on disposal of Brazil, tax losses not recognised, adjustments in respect of prior periods and the 8% UK banking surcharge, which became applicable from 1 January 2016.

Accounting for taxes involves some estimation because the tax law is uncertain and its application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. HSBC only recognises current and deferred tax assets where recovery is probable.



HSBC Holdings plc Annual Report and Accounts 2016	213

Notes on the Financial Statements



Movement of deferred tax assets and liabilities
		Loan impairment provisions		Unused tax losses and tax credits		Derivatives, FVOD¹and other investments		Insurance business		Expense provisions		Other		Total
	Footnotes	$m		$m		$m		$m		$m		$m		$m
Assets		1,351		1,388		1,400		-		1,271		1,050		6,460
Liabilities		-		-		(230	)	(1,056	)	-		(883	)	(2,169	)
At 1 Jan 2016		1,351		1,388		1,170		(1,056	)	1,271		167		4,291
Income statement	3	(279	)	876		18		(123	)	(370	)	(314	)	(192	)
Other comprehensive income		-		-		28		-		-		259		287
Equity		-		-		-		-		-		20		20
Foreign exchange and other adjustments		(122	)	(52	)	(49	)	9		(8	)	356		134
At 31 Dec 2016		950		2,212		1,167		(1,170	)	893		488		4,540
Assets	2	950		2,212		1,441		-		893		1,857		7,353
Liabilities	2	-		-		(274	)	(1,170	)	-		(1,369	)	(2,813	)

Assets		2,264		1,332		1,764		-		1,244		836		7,440
Liabilities		-		-		(233	)	(861	)	-		(759	)	(1,853	)
At 1 Jan 2015		2,264		1,332		1,531		(861	)	1,244		77		5,587
Income statement		45		379		(557	)	(143	)	418		(116	)	26
Other comprehensive income		-		-		22		-		156		321		499
Reclassification to 'Assets held for sale'		(673	)	(186	)	76		87		(386	)	(136	)	(1,218	)
Equity		-		-		-		-		-		4		4
Foreign exchange and other adjustments		(285	)	(137	)	98		(139	)	(161	)	17		(607	)
At 31 Dec 2015		1,351		1,388		1,170		(1,056	)	1,271		167		4,291
Assets	2	1,351		1,388		1,400		-		1,271		1,050		6,460
Liabilities	2	-		-		(230	)	(1,056	)	-		(883	)	(2,169	)


1	Fair value of own debt.


2	After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets $6,163m (2015: $6,051m); and deferred tax liabilities $1,623m (2015: $1,760m).


3	Excludes a tax credit of $195m relating to deferred tax balances in Brazil, which were included within 'Assets held for sale' prior to disposal.

In applying judgement in recognising deferred tax assets, management has critically assessed all available information, including future business profit projections and the track record of meeting forecasts.

The net deferred tax asset of $4.5bn (2015: $4.3bn) includes $4.8bn (2015: $4.5bn) deferred tax assets relating to the US, of which $2bn deferred tax asset relates to US tax losses that expire in 16-20 years. Management expects the US deferred tax asset to be substantially recovered in six to seven years, with the majority recovered in the first five years. The most recent financial forecasts approved by management covers a five-year period and the forecasts have been extrapolated beyond five years by assuming that performance remains constant after the fifth year. The forecasts also include additional tax losses in 2017 - these losses expire in 2037 and are expected to be utilised by 2023.

The US reported a loss for the current period, mainly due to the Household International class action litigation settlement. Excluding the Household International class action settlement the US would have reported a profit for the current year. In addition, the US reported a profit in 2014 and 2015. Management does not expect the current year loss to adversely impact future deferred tax asset recovery to a significant extent.

The US deferred tax asset has been calculated using the current federal tax rate of 35%. Any possible future reduction of the US federal tax rate from 35% would reduce the value of the US deferred tax assets and create a tax charge in the period in which any change in the tax rate is enacted. This tax charge should be ultimately offset by the benefit of reduced US tax charges in future years.

Unrecognised deferred tax

The amount of gross temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was $18.2bn (2015: $15.5bn). These amounts included unused state losses arising in the Group's US operations of $12.3bn (2015: $11.3bn). Of the total amounts unrecognised, $4.9bn (2015: $3.1bn) had no expiry date, $1.0bn (2015: $0.9bn) was scheduled to expire within 10 years and the remaining balance is expected to expire after 10 years.

Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where HSBC is able to control the timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches is $10.6bn (2015: $9.1bn) and the corresponding unrecognised deferred tax liability is $0.7bn (2015: $0.6bn).



214	HSBC Holdings plc Annual Report and Accounts 2016

8 Dividends



Dividends to shareholders of the parent company
	2016			2015			2014
	Per share $	Total $m	Settled in scrip $m	Per share $	Total $m	Settled in scrip $m	Per share $	Total $m	Settled in scrip $m
Dividends paid on ordinary shares
In respect of previous year:
- fourth interim dividend	0.21	4,137	408	0.20	3,845	2,011	0.19	3,582	1,827
In respect of current year:
- first interim dividend	0.10	1,981	703	0.10	1,951	231	0.10	1,906	284
- second interim dividend	0.10	1,991	994	0.10	1,956	160	0.10	1,914	372
- third interim dividend	0.10	1,990	935	0.10	1,958	760	0.10	1,918	226
Total	0.51	10,099	3,040	0.50	9,710	3,162	0.49	9,320	2,709
Total dividends on preference shares classified as equity (paid quarterly)	62.00	90		62.00	90		62.00	90



Total coupons on capital securities classified as equity
			2016			2015	2014
					Total	Total	Total
	Footnotes	First call date	Per security		$m	$m	$m
Perpetual subordinated capital securities	1, 3
- $2,200m		Apr 2013		$2.032	179	179	179
- $3,800m		Dec 2015		$2.000	304	304	304
Perpetual subordinated contingent convertible securities	2, 3
- $2,250m issued at 6.375%		Sep 2024		$63.750	143	143	-
- $1,500m issued at 5.625%		Jan 2020		$56.250	84	70	-
- €1,500m issued at 5.250%		Sep 2022		€52.500	88	86	-
- $2,450m issued at 6.375%		Mar 2025		$63.750	156	78	-
- €1,000m issued at 6.000%		Sep 2023		€60.000	67	-	-
- $2,000m issued at 6.875%		Jun 2021		$68.750	69	-	-
Total					1,090	860	483


1	Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security.


2	Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of 1,000 per security.


3	Further details of these securities can be found in Note 32.

After the end of the year, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2016 of $0.21 per ordinary share, a distribution of approximately $4,172m. The fourth interim dividend will be payable on 6 April 2017 to holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 24 February 2017. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2016.

On 17 January 2017, HSBC paid a coupon on its $2,200m subordinated capital securities of $0.508 per security, a distribution of $45m. On 17 January 2017, HSBC paid a coupon on its $1,500m subordinated contingent convertible securities of $28.125 per security, a distribution of $42m. No liability was recorded in the balance sheet at 31 December 2016 in respect of these coupon payments.



HSBC Holdings plc Annual Report and Accounts 2016	215

Notes on the Financial Statements

9 Earnings per share

Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.



Profit attributable to the ordinary shareholders of the parent company
	2016		2015		2014
	$m		$m		$m
Profit attributable to shareholders of the parent company	2,479		13,522		13,688
Dividend payable on preference shares classified as equity	(90	)	(90	)	(90	)
Coupon payable on capital securities classified as equity	(1,090	)	(860	)	(483	)
Year ended 31 Dec	1,299		12,572		13,115



Basic and diluted earnings per share
		2016			2015			2014
		Profit	Number of shares	Per share	Profit	Number of shares	Per share	Profit	Number of shares	Per share
	Footnote	$m	(millions)	$	$m	(millions)	$	$m	(millions)	$
Basic	1	1,299	19,753	0.07	12,572	19,380	0.65	13,115	18,960	0.69
Effect of dilutive potential ordinary shares			92			137			96
Diluted	1	1,299	19,845	0.07	12,572	19,517	0.64	13,115	19,056	0.69


1	Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).

The weighted average number of dilutive potential ordinary shares excludes 10m employee share options that were anti‑dilutive (2015: 7m; 2014: 6m).

10 Trading assets



		2016	2015
	Footnote	$m	$m
Treasury and other eligible bills		14,451	7,829
Debt securities		94,054	99,038
Equity securities		63,604	66,491
Trading securities		172,109	173,358
Loans and advances to banks	1	24,769	22,303
Loans and advances to customers	1	38,247	29,176
At 31 Dec		235,125	224,837


1	Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos and other amounts.




Trading Securities¹
			2016	2015
		Footnotes	$m	$m
	US Treasury and US Government agencies	2	17,010	14,833
	UK Government		9,493	10,177
	Hong Kong Government		7,970	6,495
	Other governments		49,229	48,567
	Asset-backed securities	3	2,668	3,135
	Corporate debt and other securities		22,135	23,660
	Equity securities		63,604	66,491
	At 31 Dec		172,109	173,358


1	Included within these figures are debt securities issued by banks and other financial institutions of $14,630m (2015: $16,403m), of which $789m (2015: $1,034m) are guaranteed by various governments.


2	Includes securities that are supported by an explicit guarantee issued by the US Government.


3	Excludes asset-backed securities included under US Treasury and US Government agencies.



216	HSBC Holdings plc Annual Report and Accounts 2016

11 Fair values of financial instruments carried at fair value

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used. For inactive markets, HSBC sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices.

For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.

The majority of financial instruments measured at fair value are in GB&M. GB&M's fair value governance structure comprises its Finance function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the Valuation Committees, which consist of independent support functions. These Committees are overseen by the Valuation Committee Review Group, which considers all material subjective valuations.

Financial liabilities measured at fair value

In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instruments are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:


•	Level 1 - valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date.


•	Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.


•	Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.



Financial instruments carried at fair value and bases of valuation
	2016				2015
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Recurring fair value measurements at 31 Dec
Assets
Trading assets	133,744	94,892	6,489	235,125	133,095	84,886	6,856	224,837
Financial assets designated at fair value	19,882	4,144	730	24,756	18,947	4,431	474	23,852
Derivatives	1,076	287,044	2,752	290,872	1,922	284,292	2,262	288,476
Financial investments: available for sale	274,655	111,743	3,476	389,874	262,929	117,197	4,727	384,853
Liabilities
Trading liabilities	45,171	104,938	3,582	153,691	41,462	95,867	4,285	141,614
Financial liabilities designated at fair value	4,248	82,547	37	86,832	5,260	61,145	3	66,408
Derivatives	1,554	275,965	2,300	279,819	2,243	277,618	1,210	281,071



HSBC Holdings plc Annual Report and Accounts 2016	217

Notes on the Financial Statements



Transfers between Level 1 and Level 2 fair values
	Assets				Liabilities
	Available for sale	Held for trading	Designated at fair value	Derivatives	Held for trading	Designated at fair value	Derivatives
	$m	$m	$m	$m	$m	$m	$m
At 31 Dec 2016
Transfers from Level 1 to Level 2	162	1,614	122	465	2,699	-	209
Transfers from Level 2 to Level 1	1,314	-	-	-	341	-	-

At 31 Dec 2015
Transfers from Level 1 to Level 2	-	67	-	56	1,563	857	100
Transfers from Level 2 to Level 1	-	487	-	2	515	2	-

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each semi-annual reporting period.

Fair value adjustments

Fair value adjustments are adopted when HSBC determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and fair value adjustments may no longer be required.



Global Banking and Markets fair value adjustments
	2016		2015
	$m		$m
Type of adjustment
Risk-related	1,131		1,402
- bid-offer	416		477
- uncertainty	87		95
- credit valuation adjustment ('CVA')	633		853
- debit valuation adjustment ('DVA')	(437	)	(465	)
- funding fair value adjustment ('FFVA')	429		442
- other	3		-
Model-related	14		97
- model limitation	14		92
- other	-		5
Inception profit (Day 1 P&L reserves) (Note 14)	99		97
At 31 Dec	1,244		1,596

Fair value adjustments declined by $352m during the year. The most significant movement was a decline of $220m in respect of the credit valuation adjustment, driven by the disposal of Brazilian operations, refinements to modelling methodology and as a result of tightening credit spreads.

Bid-offer

IFRS 13 'Fair value measurement' requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in HSBC's valuation model.

Credit and debit valuation adjustments

The CVA is an adjustment to the valuation of over-the-counter ('OTC') derivative contracts to reflect the possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions.

The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it may not pay the full market value of the transactions.

HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across Group entities.

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of HSBC, to HSBC's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.

For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty.



218	HSBC Holdings plc Annual Report and Accounts 2016

The methodologies do not, in general, account for 'wrong-way risk' which arises when the underlying value of the derivative prior to any CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.

Funding fair value adjustment

The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. The FFVA and DVA are calculated independently.

Model limitation

Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and future material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 P&L reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1.

Fair value valuation bases



Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3
	Assets					Liabilities
	Available for sale	Held for trading	Designated at fair value	Derivatives	Total	Held for trading	Designated at fair value	Derivatives	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Private equity including strategic investments	2,435	49	712	-	3,196	25	-	-	25
Asset-backed securities	761	789	-	-	1,550	-	-	-	-
Loans held for securitisation	-	28	-	-	28	-	-	-	-
Structured notes	-	2	-	-	2	3,557	-	-	3,557
Derivatives with monolines	-	-	-	175	175	-	-	-	-
Other derivatives	-	-	-	2,577	2,577	-	-	2,300	2,300
Other portfolios	280	5,621	18	-	5,919	-	37	-	37
At 31 Dec 2016	3,476	6,489	730	2,752	13,447	3,582	37	2,300	5,919

Private equity including strategic investments	3,443	55	453	-	3,951	35	-	-	35
Asset-backed securities	1,053	531	-	-	1,584	-	-	-	-
Loans held for securitisation	-	30	-	-	30	-	-	-	-
Structured notes	-	4	-	-	4	4,250	-	-	4,250
Derivatives with monolines	-	-	-	196	196	-	-	-	-
Other derivatives	-	-	-	2,066	2,066	-	-	1,210	1,210
Other portfolios	231	6,236	21	-	6,488	-	3	-	3
At 31 Dec 2015	4,727	6,856	474	2,262	14,319	4,285	3	1,210	5,498

Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain 'other derivatives' and predominantly all Level 3 ABSs are legacy positions. HSBC has the capability to hold these positions.

Private equity including strategic investments

The investment's fair value is estimated: on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; or the price at which similar companies have changed ownership.

Asset-backed securities

While quoted market prices are generally used to determine the fair value of these securities, valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC which provide the counterparty with a return linked to the performance of equity securities and other portfolios. Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon 'no-arbitrage' principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.



HSBC Holdings plc Annual Report and Accounts 2016	219

Notes on the Financial Statements

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy



Movement in Level 3 financial instruments
		Assets								Liabilities
		Available for sale		Held for trading		Designated at fair value		Derivatives		Held for trading		Designated at fair value		Derivatives
	Footnote	$m		$m		$m		$m		$m		$m		$m
At 1 Jan 2016		4,727		6,856		474		2,262		4,285		3		1,210
Total gains/(losses) recognised in profit or loss		178		31		25		1,107		337		(1	)	1,428
- trading income/(expense) excluding net interest income		-		31		-		1,107		337		-		1,428
- net income/(expense) from other financial instruments designated at fair value		-		-		25		-		-		(1	)	-
- gains less losses from financial investments		91		-		-		-		-		-		-
- loan impairment charges and other credit risk provisions ('LICs')		87		-		-		-		-		-		-
Total gains/(losses) recognised in other comprehensive income ('OCI')	1	(162	)	(610	)	(8	)	(335	)	(130	)	(1	)	(240	)
- available-for-sale investments: fair value gains/(losses)		123		-		-		-		-		-		-
- cash flow hedges: fair value gains/(losses)		-		-		-		-		-		-		12
- exchange differences		(285	)	(610	)	(8	)	(335	)	(130	)	(1	)	(252	)
Purchases		350		823		359		-		20		6		-
New issuances		-		-		-		-		1,882		-		-
Sales		(1,212	)	(1,760	)	(7	)	-		(40	)	(2	)	-
Settlements		(177	)	(311	)	(113	)	(107	)	(1,907	)	-		(239	)
Transfers out		(947	)	(199	)	(2	)	(187	)	(920	)	-		(229	)
Transfers in		719		1,659		2		12		55		32		370
At 31 Dec 2016		3,476		6,489		730		2,752		3,582		37		2,300
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2016		87		(170	)	21		364		(143	)	1		(335	)
- trading income/(expense) excluding net interest income		-		(170	)	-		364		(143	)	-		(335	)
- net income/(expense) from other financial instruments designated at fair value		-		-		21		-		-		1		-
- loan impairment charges and other credit risk provisions		87		-		-		-		-		-		-

At 1 Jan 2015		4,988		6,468		726		2,924		6,139		-		1,907
Total gains/(losses) recognised in profit or loss		(34	)	109		30		95		(573	)	(1	)	(209	)
- trading income/(expense) excluding net interest income		-		109		-		95		(573	)	-		(209	)
- net income from other financial instruments designated at fair value		-		-		30		-		-		(1	)	-
- gains less losses from financial investments		(269	)	-		-		-		-		-		-
- loan impairment charges and other credit risk provisions ('LICs')		235		-		-		-		-		-		-
Total gains/(losses) recognised in other comprehensive income ('OCI')	1	226		(192	)	(11	)	(126	)	(118	)	(1	)	(64	)
- available-for-sale investments: fair value gains/(losses)		393		-		-		-		-		-		-
- cash flow hedges: fair value gains/(losses)		-		-		-		(4	)	-		-		-
- exchange differences		(167	)	(192	)	(11	)	(122	)	(118	)	(1	)	(64	)
Purchases		594		1,745		250		-		2		9		-
New issuances		-		-		-		-		1,471		-		-
Sales		(757	)	(1,206	)	(50	)	-		(66	)	(4	)	-
Settlements		(32	)	(146	)	(135	)	(38	)	(1,260	)	-		(241	)
Transfers out		(1,471	)	(206	)	(336	)	(1,015	)	(1,743	)	-		(283	)
Transfers in		1,231		284		-		422		433		-		100
At 31 Dec 2015		4,727		6,856		474		2,262		4,285		3		1,210
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2015		235		(9	)	12		89		384		(1	)	267
- trading income/(expense) excluding net interest income		-		(9	)	-		89		384		-		267
- net income from other financial instruments designated at fair value		-		-		12		-		-		(1	)	-
- loan impairment charges and other credit risk provisions		235		-		-		-		-		-		-


1	Included in 'Available-for-sale investments: fair value gains/(losses)' and 'Exchange differences' in the consolidated statement of comprehensive income.



220	HSBC Holdings plc Annual Report and Accounts 2016

Effect of changes in significant unobservable assumptions to reasonably possible alternatives



Sensitivity of Level 3 fair values to reasonably possible alternative assumptions
		2016						2015
		Reflected in profit or loss			Reflected in OCI			Reflected in profit or loss			Reflected in OCI
		Favourable changes	Un- favourable changes		Favourable changes	Un- favourable changes		Favourable changes	Un- favourable changes		Favourable changes	Un- favourable changes
	Footnote	$m	$m		$m	$m		$m	$m		$m	$m
Derivatives, trading assets and trading liabilities	1	238	(177	)	-	-		335	(215	)	-	-
Financial assets and liabilities designated at fair value		48	(38	)	-	-		24	(24	)	-	-
Financial investments: available for sale		72	(36	)	170	(149	)	35	(30	)	230	(243	)
At 31 Dec		358	(251	)	170	(149	)	394	(269	)	230	(243	)


1	Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed.



Sensitivity of Level 3 fair values to reasonably possible alternative assumptions by instrument type
	2016						2015
	Reflected in profit or loss			Reflected in OCI			Reflected in profit or loss			Reflected in OCI
	Favourable changes	Un- favourable changes		Favourable changes	Un- favourable changes		Favourable changes	Un- favourable changes		Favourable changes	Un- favourable changes
	$m	$m		$m	$m		$m	$m		$m	$m
Private equity including strategic investments	112	(73	)	121	(106	)	54	(53	)	152	(171	)
Asset-backed securities	43	(15	)	33	(27	)	18	(12	)	57	(51	)
Loans held for securitisation	1	(1	)	-	-		1	(1	)	-	-
Structured notes	10	(7	)	-	-		15	(11	)	-	-
Derivatives with monolines	3	(3	)	-	-		11	(11	)	-	-
Other derivatives	141	(94	)	-	-		179	(87	)	-	-
Other portfolios	48	(58	)	16	(16	)	116	(94	)	21	(21	)
At 31 Dec	358	(251	)	170	(149	)	394	(269	)	230	(243	)

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.



HSBC Holdings plc Annual Report and Accounts 2016	221

Notes on the Financial Statements

Key unobservable inputs to Level 3 financial instruments



Quantitative information about significant unobservable inputs in Level 3 valuations
		Fair value				2016								2015
		Assets	Liabilities	Valuation techniques	Key unobservable inputs	Full range of inputs				Core range of inputs¹				Full range of inputs				Core range of inputs¹
	Footnotes	$m	$m			Lower		Higher		Lower		Higher		Lower		Higher		Lower		Higher

Private equity including strategic investments		3,196	25	See page 224	See page 224	n/a		n/a		n/a		n/a		n/a		n/a		n/a		n/a
Asset-backed securities	2	1,550	-
- CLO/CDO		498	-	Market proxy	Prepayment rate	2	%	7	%	2	%	7	%	1	%	6	%	1	%	6	%
				Market proxy	Bid quotes	0		101		42		94		3		147		54		117
other ABSs		1,052	-	Market proxy	Bid quotes	0		96		57		90		0		147		44		109
Loans held for securitisation		28	-
Structured notes		2	3,557
- equity-linked notes		-	3,090	Model - Option model	Equity volatility	11	%	96	%	16	%	36	%	12	%	72	%	19	%	43	%
		-	300	Model - Option model	Equity correlation	33	%	94	%	46	%	81	%	35	%	93	%	43	%	79	%
- fund-linked notes		-	9	Model - Option model	Fund volatility	6	%	11	%	6	%	11	%	6	%	8	%	6	%	8	%
- FX-linked notes		-	87	Model - Option model	FX volatility	3	%	29	%	5	%	18	%	5	%	35	%	5	%	20	%
- other		2	71
Derivatives with monolines		175	-	Model - Discounted cash flow	Credit spread	2	%	2	%	2	%	2	%	4	%	4	%	4	%	4	%
Other derivatives		2,577	2,300
Interest rate derivatives:
- securitisation swaps		711	1,117	Model - Discounted cash flow	Prepayment rate	0	%	90	%	8	%	27	%	0	%	90	%	14	%	71	%
- long-dated swaptions		1,236	109	Model - Option model	IR volatility	8	%	101	%	21	%	39	%	3	%	66	%	20	%	41	%
- other		204	108
FX derivatives:
- FX options		240	364	Model - Option model	FX Volatility	0.6	%	25	%	7	%	12	%	0.5	%	35	%	5	%	14	%
- other		4	2
Equity derivatives:
- long-dated single stock options		103	165	Model - Option model	Equity volatility	11	%	83	%	16	%	36	%	8	%	104	%	18	%	44	%
- other		55	388
Credit derivatives:
- other		24	47
Other portfolios		5,919	37
- structured certificates		4,446	-	Model - Discounted cash flow	Credit volatility	3	%	4	%	3	%	4	%	2	%	4	%	2	%	4	%
- EM corporate debt		124	-	Market proxy	Bid quotes	96		144		113		113		70		124		100		123
- other	3	1,349	37
At 31 Dec 2016		13,447	5,919


1	The core range of inputs is the estimated range within which 90% of the inputs fall.


2	Collateralised loan obligation/collateralised debt obligation.


3	'Other' includes a range of smaller asset holdings.



222	HSBC Holdings plc Annual Report and Accounts 2016

Private equity including strategic investments

Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs.

Prepayment rates

Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling.

Market proxy

Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option.

Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair.

Credit spread

Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices and may not be observable in more illiquid markets.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC's net risk position in respect of each variable.

HSBC Holdings



Basis of valuing HSBC Holdings' financial assets and liabilities measured at fair value
	2016	2015
	$m	$m
Valuation technique using observable inputs: Level 2
Assets at 31 Dec
- derivatives	2,148	2,467
- available for sale	3,590	4,285
Liabilities at 31 Dec
- designated at fair value	30,113	19,853
- derivatives	5,025	2,278



HSBC Holdings plc Annual Report and Accounts 2016	223

Notes on the Financial Statements

12 Fair values of financial instruments not carried at fair value



Fair values of financial instruments not carried at fair value and bases of valuation
		Fair value
	Carrying amount	Quoted market price Level 1	Observable inputs Level 2	Significant unobservable inputs Level 3	Total
	$m	$m	$m	$m	$m
At 31 Dec 2016
Assets
Loans and advances to banks	88,126	-	85,568	2,572	88,140
Loans and advances to customers	861,504	-	15,670	845,894	861,564
Reverse repurchase agreements - non-trading	160,974	-	159,504	1,527	161,031
Financial investments - debt securities	46,923	1,190	46,014	19	47,223
Liabilities
Deposits by banks	59,939	-	59,883	42	59,925
Customer accounts	1,272,386	-	1,262,540	10,136	1,272,676
Repurchase agreements - non-trading	88,958	-	88,939	-	88,939
Debt securities in issue	65,915	-	66,386	-	66,386
Subordinated liabilities	20,984	-	23,264	292	23,556

At 31 Dec 2015
Assets
Loans and advances to banks	90,401	-	88,156	2,255	90,411
Loans and advances to customers	924,454	-	12,412	910,057	922,469
Reverse repurchase agreements - non-trading	146,255	-	145,307	959	146,266
Financial investments - debt securities	44,102	1,163	44,076	19	45,258
Liabilities
Deposits by banks	54,371	-	54,295	76	54,371
Customer accounts	1,289,586	-	1,280,368	9,421	1,289,789
Repurchase agreements - non-trading	80,400	-	80,400	-	80,400
Debt securities in issue	88,949	-	89,023	-	89,023
Subordinated liabilities	22,702	-	24,344	649	24,993



Fair values of selected financial instruments not carried at fair value and bases of valuation - assets and disposal groups held for sale
		Fair value
	Carrying amount	Quoted market price Level 1	Observable inputs Level 2	Significant unobservable inputs Level 3	Total
	$m	$m	$m	$m	$m
At 31 Dec 2016
Loans and advances to customers	3,756	-	241	3,306	3,547
Customer accounts	2,713	-	2,713	-	2,713

At 31 Dec 2015
Loans and advances to customers	21,109	-	4,068	16,884	20,952
Customer accounts	16,682	-	15,578	1,104	16,682

Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.



224	HSBC Holdings plc Annual Report and Accounts 2016



Carrying amount and fair value of loans and advances to customers by industry sector
	Carrying amount			Fair value
	Not Impaired	Impaired	Total	Not Impaired	Impaired	Total
	$m	$m	$m	$m	$m	$m
Loans and advances to customers
- personal	332,574	5,252	337,826	330,167	4,597	334,764
- corporate and commercial	453,151	7,058	460,209	456,816	6,393	463,209
- financial	63,316	153	63,469	63,411	180	63,591
At 31 Dec 2016	849,041	12,463	861,504	850,394	11,170	861,564

Loans and advances to customers
- personal	361,716	9,487	371,203	359,559	9,024	368,583
- corporate and commercial	485,933	7,145	493,078	487,196	6,592	493,788
- financial	60,049	124	60,173	59,941	157	60,098
At 31 Dec 2015	907,698	16,756	924,454	906,696	15,773	922,469

Loans and advances to customers are classified as not impaired or impaired in accordance with the criteria described on page 90.

Valuation

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that HSBC expects to flow from an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third party valuation specialist to measure the fair value of a pool of loans.

The fair value of loans reflects impairments at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

The fair values of on demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements - non-trading

Fair values approximate carrying amounts as balances are generally short dated.

HSBC Holdings

The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of measurement and disclosure are described above.



Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet
	2016		2015
	Carrying amount	Fair value¹	Carrying amount	Fair value¹
	$m	$m	$m	$m
Assets at 31 Dec
Loans and advances to HSBC undertakings	77,421	79,985	44,350	45,180
Liabilities at 31 Dec
Amounts owed to HSBC undertakings	2,157	2,156	2,152	2,152
Debt securities in issue	21,805	23,147	960	1,224
Subordinated liabilities	15,189	17,715	15,895	18,297


1	Fair values were determined using valuation techniques with observable inputs (Level 2).



HSBC Holdings plc Annual Report and Accounts 2016	225

Notes on the Financial Statements

13 Financial assets designated at fair value



	2016	2015
	$m	$m
Securities	24,677	23,732
- treasury and other eligible bills	204	396
- debt securities	4,189	4,341
- equity securities	20,284	18,995
Loans and advances to banks and customers	79	120
At 31 Dec	24,756	23,852




Securities¹
			2016	2015
		Footnotes	$m	$m
	US Treasury and US Government agencies	2	104	145
	UK Government		41	103
	Hong Kong Government		16	33
	Other governments		747	1,020
	Asset-backed securities	3	20	25
	Corporate debt and other securities		3,465	3,411
	Equities		20,284	18,995
	At 31 Dec		24,677	23,732


1	Included within these figures are debt securities issued by banks and other financial institutions of $1,766m (2015: $1,536m), of which $19m (2015: $35m) are guaranteed by various governments.


2	Includes securities that are supported by an explicit guarantee issued by the US Government.


3	Excludes asset-backed securities included under US Treasury and US Government agencies.

14 Derivatives



Notional contract amounts and fair values of derivatives by product contract type held by HSBC
	Notional contract amount		Fair value - Assets				Fair value - Liabilities
	Trading	Hedging	Trading	Hedging	Total		Trading	Hedging	Total
	$m	$m	$m	$m	$m		$m	$m	$m
Foreign exchange	5,819,814	26,281	126,185	1,228	127,413		118,813	968	119,781
Interest rate	13,729,757	215,006	253,398	1,987	255,385		245,941	4,081	250,022
Equities	472,169	-	7,410	-	7,410		9,240	-	9,240
Credit	448,220	-	5,199	-	5,199		5,767	-	5,767
Commodity and other	62,009	-	2,020	-	2,020		1,564	-	1,564
Gross total fair values	20,531,969	241,287	394,212	3,215	397,427		381,325	5,049	386,374
Offset (Note 30)					(106,555	)			(106,555	)
At 31 Dec 2016	20,531,969	241,287	394,212	3,215	290,872		381,325	5,049	279,819

Foreign exchange	5,658,030	32,324	95,201	1,140	96,341		94,843	755	95,598
Interest rate	14,462,113	212,923	277,496	1,658	279,154		267,609	3,758	271,367
Equities	501,834	-	8,732	-	8,732		10,383	-	10,383
Credit	463,344	-	6,961	-	6,961		6,884	-	6,884
Commodity and other	51,683	-	3,148	-	3,148		2,699	-	2,699
Gross total fair values	21,137,004	245,247	391,538	2,798	394,336		382,418	4,513	386,931
Offset (Note 30)					(105,860	)			(105,860	)
At 31 Dec 2015	21,137,004	245,247	391,538	2,798	288,476		382,418	4,513	281,071

The notional contract amounts of derivatives held for trading purposes and derivatives designated in qualifying hedge accounting indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Derivative assets increased during 2016, driven by changes in foreign exchange rates and yield curve movements.



226	HSBC Holdings plc Annual Report and Accounts 2016



Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
	Notional contract amount		Fair value - Assets			Fair value - Liabilities
	Trading	Hedging	Trading	Hedging	Total	Trading	Hedging	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Foreign exchange	23,442	1,120	223	-	223	3,201	239	3,440
Interest rate	26,858	24,356	1,478	447	1,925	639	946	1,585
At 31 Dec 2016	50,300	25,476	1,701	447	2,148	3,840	1,185	5,025

Foreign exchange	19,036	1,120	390	-	390	2,065	213	2,278
Interest rate	10,150	5,132	1,600	477	2,077	-	-	-
At 31 Dec 2015	29,186	6,252	1,990	477	2,467	2,065	213	2,278

Use of derivatives

For details regarding use of derivatives, see page 116 under 'Market Risk'.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:



Unamortised balance of derivatives valued using models with significant unobservable inputs
		2016		2015
	Footnote	$m		$m
Unamortised balance at 1 Jan		97		114
Deferral on new transactions		156		196
Recognised in the income statement during the year:		(140	)	(207	)
- amortisation		(70	)	(121	)
- subsequent to unobservable inputs becoming observable		(5	)	(2	)
- maturity, termination or offsetting derivative		(65	)	(84	)
Exchange differences		(13	)	(6	)
Other		(1	)	-
Unamortised balance at 31 Dec	1	99		97


1	This amount is yet to be recognised in the consolidated income statement.

Hedge accounting derivatives

Fair value hedges

HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates.



Notional contract amounts and fair values of derivatives designated as fair value hedges by product type
	2016			2015
	Notional	Assets	Liabilities	Notional	Assets	Liabilities
	$m	$m	$m	$m	$m	$m
HSBC
Foreign exchange	618	10	22	196	2	-
Interest rate	124,361	1,078	3,726	105,127	672	3,395
At 31 Dec	124,979	1,088	3,748	105,323	674	3,395
HSBC Holdings
Foreign exchange	1,120	-	239	1,120	-	213
Interest rate	24,356	447	946	5,132	477	-
At 31 Dec	25,476	447	1,185	6,252	477	213



HSBC Holdings plc Annual Report and Accounts 2016	227

Notes on the Financial Statements



Gains or losses arising from fair value hedges
	2016		2015		2014
	$m		$m		$m
HSBC
Gains/(losses):
- on hedging instruments	(439	)	40		(2,542	)
- on the hedged items attributable to the hedged risk	462		(51	)	2,561
Year ended 31 Dec	23		(11	)	19
HSBC Holdings
Gains/(losses):
- on hedging instruments	(909	)	(4	)	423
- on the hedged items attributable to the hedged risk	926		6		(422	)
Year ended 31 Dec	17		2		1

Cash flow hedges

HSBC's cash flow hedges consist principally of interest rate swaps, futures and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions.



Notional contract amounts and fair values of derivatives designated as cash flow hedges by product held by HSBC
	2016			2015
	Notional	Assets	Liabilities	Notional	Assets	Liabilities
	$m	$m	$m	$m	$m	$m
Foreign Exchange	25,663	1,081	939	32,128	1,027	748
Interest rate	90,645	909	355	107,796	986	363
At 31 Dec	116,308	1,990	1,294	139,924	2,013	1,111



Forecast principal balances on which interest cash flows are expected to arise
	3 months or less		More than 3 months but less than 1 year		5 years or less but more than 1 year		More than 5 years
	$m		$m		$m		$m
Net cash inflows/(outflows) exposure
Assets	83,472		79,749		57,553		2,750
Liabilities	(13,169	)	(12,977	)	(11,761	)	(1,502	)
At 31 Dec 2016	70,303		66,772		45,792		1,248

Net cash inflows/(outflows) exposure
Assets	94,256		93,528		62,664		971
Liabilities	(16,241	)	(17,179	)	(11,681	)	(3,326	)
At 31 Dec 2015	78,015		76,349		50,983		(2,355	)

This table reflects the interest rate repricing profile of the underlying hedged items. During the year to 31 December 2016 a loss of $5m (2015: gain of $15m; 2014: gain of $34m) was recognised due to hedge ineffectiveness. A gain of $129m was recognised in respect of amounts reclassified from other comprehensive income to the income statement for partially discontinued macro cash flow hedges, where the hedged forecast transactions are no longer expected to occur (2015: nil; 2014: nil).

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings. At 31 December 2016, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of $137m (2015: $111m), liabilities of $7m (2015: $12m) and notional contract values of $3,544m (2015: $4,210m). Ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2016 was nil (2015: nil; 2014: nil).



228	HSBC Holdings plc Annual Report and Accounts 2016

15 Financial investments



Carrying amount of financial investments
		2016	2015
	Footnote	$m	$m
Available for sale securities at fair value		389,874	384,853
- treasury and other eligible bills		99,226	104,551
- debt securities		285,981	274,467
- equity securities		4,667	5,835
Held to maturity securities at amortised cost		46,923	44,102
- debt securities	1	46,923	44,102
At 31 Dec		436,797	428,955


1	Fair value $47.2bn (2015: $45.3bn).



Financial investments at amortised cost and fair value
		2016		2015
		Amortised cost	Fair value¹	Amortised cost	Fair value¹
	Footnotes	$m	$m	$m	$m
US Treasury		57,135	56,625	61,585	61,779
US Government agencies	2	15,790	15,682	22,910	22,843
US Government sponsored entities	2	14,397	14,442	10,365	10,627
UK Government		27,506	28,480	27,250	27,316
Hong Kong Government		62,500	62,475	53,676	53,674
Other governments		140,943	142,594	141,329	143,370
Asset-backed securities	3	10,246	9,392	14,239	13,375
Corporate debt and other securities		100,180	102,741	89,860	91,292
Equities		3,042	4,667	4,057	5,835
At 31 Dec		431,739	437,098	425,271	430,111


1	Included within 'Fair value' figures are debt securities issued by banks and other financial institutions of $69bn (2015: $61bn), of which $20bn (2015: $18bn) are guaranteed by various governments.


2	Includes securities that are supported by an explicit guarantee issued by the US Government.


3	Excludes asset-backed securities included under US Government agencies and sponsored entities.



Maturities of investments in debt securities at their carrying amount
	1 year or less	5 years or less but over 1 year	10 years or less but over 5 years	Over 10 years	Total
	$m	$m	$m	$m	$m
Available for sale	64,155	142,700	45,385	33,741	285,981
Held to maturity	2,502	10,210	10,348	23,863	46,923
At 31 Dec 2016	66,657	152,910	55,733	57,604	332,904

Available for sale	61,664	131,023	42,140	39,640	274,467
Held to maturity	2,428	10,242	8,881	22,551	44,102
At 31 Dec 2015	64,092	141,265	51,021	62,191	318,569



HSBC Holdings plc Annual Report and Accounts 2016	229

Notes on the Financial Statements



Contractual maturities and weighted average yields of investment debt securities
	1 year or less		5 years or less but over 1 year		10 years or less but over 5 years		Over 10 years
	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield
	$m	%	$m	%	$m	%	$m	%
Available for sale
US Treasury	5,896	1.0	22,807	1.5	19,063	1.9	4,024	3.0
US Government agencies	2	9.5	118	3.3	95	2.5	6,844	2.2
US Government-sponsored agencies	200	3.3	3,138	2.8	1,173	2.4	5,829	2.3
UK Government	2,913	1.3	6,742	0.9	10,132	1.2	547	3.4
Hong Kong Government	357	0.7	1,143	1.2	-	-	-	-
Other governments	42,513	1.8	61,734	2.4	8,151	3.0	1,480	6.5
Asset-backed securities	41	1.8	837	1.2	1,196	1.6	8,166	2.1
Corporate debt and other securities	11,641	2.0	43,936	1.6	4,524	3.7	7,316	4.2
Total amortised cost at 31 Dec 2016	63,563		140,455		44,334		34,206
Total carrying value	64,155		142,700		45,385		33,741
Held to maturity
US Treasury	22	4.8	61	4.8	46	5.0	124	4.2
US Government agencies	-	-	6	1.8	36	3.3	8,690	2.3
US Government-sponsored agencies	-	-	299	2.2	393	2.8	3,364	2.9
Hong Kong Government	26	0.3	18	3.0	23	1.5	7	1.4
Other governments	41	5.6	318	4.0	169	3.9	805	4.3
Asset-backed securities	-	-	-	-	-	-	5	7.0
Corporate debt and other securities	2,413	3.2	9,508	3.6	9,681	3.4	10,868	3.9
Total amortised cost at 31 Dec 2016	2,502		10,210		10,348		23,863
Total carrying value	2,502		10,210		10,348		23,863

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2016 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

16 Assets pledged, collateral received and assets transferred

Assets pledged



Financial assets pledged as collateral
	2016	2015
	$m	$m
Treasury bills and other eligible securities	7,151	5,941
Loans and advances to banks	17,444	15,582
Loans and advances to customers	74,109	88,927
Debt securities	80,063	69,470
Equity securities	2,655	4,644
Other	1,838	213
Assets pledged at 31 Dec	183,260	184,777

Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 76.

The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, in the case of securitisations and covered bonds, the amount of liabilities issued plus mandatory over-collateralisation is less than the book value of the pool of assets available for use as collateral. This is also the case where assets are placed with a custodian or a settlement agent which has a floating charge over all the assets placed to secure any liabilities under settlement accounts.

These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and borrowing, repurchase agreements and derivative margining. HSBC places both cash and non-cash collateral in relation to derivative transactions.



Financial assets pledged as collateral which the counterparty has the right to sell or repledge
	2016	2015
	$m	$m
Trading assets	37,141	32,633
Financial investments	4,044	8,050
At 31 Dec	41,185	40,683



230	HSBC Holdings plc Annual Report and Accounts 2016

Collateral received

The fair value of assets accepted as collateral, relating primarily to standard securities lending, reverse repurchase agreements and derivative margining, that HSBC is permitted to sell or repledge in the absence of default was $250,919m (2015: $222,065m). The fair value of any such collateral sold or repledged was $149,185m (2015: $139,532m).

HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining.

Assets transferred

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements. The transferred asset collateral continues to be recognised in full and a related liability, reflecting the Group's obligation to repurchase the assets for a fixed price at a future date is also recognised on the balance sheet. The Group is unable to use, sell or pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged assets. With the exception of 'Other sales' in the table below, the counterparty's recourse is not limited to the transferred assets.



Transferred financial assets not qualifying for full derecognition and associated financial liabilities
	Carrying amount of:		Fair value of:
	Transferred assets	Associated liabilities	Transferred assets	Associated liabilities	Net position
	$m	$m	$m	$m	$m
At 31 Dec 2016
Repurchase agreements	40,364	39,568
Securities lending agreements	3,324	2,655
Other sales (recourse to transferred assets only)	2,441	2,466	2,455	2,458	(3	)

At 31 Dec 2015
Repurchase agreements	36,153	35,913
Securities lending agreements	5,275	5,704
Other sales (recourse to transferred assets only)	2,717	2,768	2,720	2,726	(6	)

17 Interests in associates and joint ventures

Associates

At 31 December 2016, the carrying amount of HSBC's interests in associates was $19,874m (2015: $18,900m).



Principal associates of HSBC
	2016		2015
	Carrying amount	Fair value¹	Carrying amount	Fair value¹
	$m	$m	$m	$m
Bank of Communications Co., Limited	15,765	10,207	15,344	9,940
The Saudi British Bank	3,280	3,999	3,021	3,957
At 31 Dec	19,045	14,206	18,365	13,897


1	The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).



		At 31 Dec 2016
		Country of incorporation and principal place of business	Principal activity	HSBC's interest %
	Footnote	Country of incorporation and principal place of business	Principal activity	HSBC's interest %
Bank of Communications Co., Limited	1	PRC	Banking services	19.03
The Saudi British Bank		Saudi Arabia	Banking services	40.00


1	People's Republic of China.

A list of all associates and joint ventures is set out on page 271.

Bank of Communications Co., Limited

The Group's significant influence in Bank of Communications Co., Limited ('BoCom') was established via representation on BoCom's board of directors and a technical cooperation and exchange programme ('TCEP'). Under the TCEP, a number of HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies.



HSBC Holdings plc Annual Report and Accounts 2016	231

Notes on the Financial Statements

Impairment testing

At 31 December 2016, the fair value of HSBC's investment in BoCom had been below the carrying amount for approximately 56 months. As a result, the Group performed an impairment test on the carrying amount of the investment in BoCom, which confirmed there was no impairment at 31 December 2016.

At 31 Dec 2016

At 31 Dec 2015

VIU

Carrying value

Fair
value

VIU

Carrying value

Fair
value

$bn

Bank of Communications Co., Limited

16.1

15.8

10.2

17.0

15.3

9.9

Basis of recoverable amount

The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value in use ('VIU') calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's estimates of earnings. Cash flows beyond the short to medium term are extrapolated in perpetuity using a long-term growth rate. An imputed capital maintenance charge ('CMC') is calculated to reflect expected regulatory capital requirements, and is deducted from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.

Key assumptions in value in use calculation

The assumptions we used in our VIU calculation were:


•	Long-term profit growth rate 5% (2015: 5%) for periods after 2019, which does not exceed forecast GDP growth in mainland China.


•	Long-term asset growth rate: 4% (2015: 4%) for periods after 2019, which is the rate that assets are expected to grow to achieve long-term profit growth of 5%.

•

Discount rate: 13% (2015: 13%), which is derived from a range of values obtained by applying a capital asset pricing model ('CAPM') calculation for BoCom, using market data. Management also compares rates derived from the CAPM with discount rates from external sources, and HSBC's discount rate for evaluating investments in mainland China. The discount rate used was within the range of 10.2% to 15.0% (2015: 10.1% to 14.2%) indicated by the CAPM and external sources.


•	Loan impairment charge as a percentage of customer advances: a range from 0.72% to 0.87% (2015: 0.71% to 0.78%) in the short to medium term, based on forecasts disclosed by external analysts. For periods after 2019, the ratio is 0.70% (2015: 0.70%), slightly higher than the historical average.


•	Risk-weighted assets as a percentage of total assets: 62% for all forecast periods (2015: 67%). This is consistent with the medium-term forecasts disclosed by external analysts.


•	Cost-income ratio: 40% (2015: 41%) in the short to medium term. The ratios were consistent with the short- to medium-term range forecasts of 39.9% to 40.2% (2015: 40.3% to 40.7%) disclosed by external analysts.

The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil.



Key assumption	Changes to key assumption to reduce headroom to nil
• Long-term profit growth rate	• Decrease by 13 basis points
• Long-term asset growth rate	• Increase by 14 basis points
• Discount rate	• Increase by 17 basis points
• Loan impairment charge as a percentage of customer advances	• Increase by 3 basis points
• Risk-weighted assets as a percentage of total assets	• Increase by 95 basis points
• Cost-income ratio	• Increase by 60 basis points



232	HSBC Holdings plc Annual Report and Accounts 2016

The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the VIU to each key assumption on its own, and it is possible that more than one favourable and/or unfavourable change will occur at the same time.



Sensitivity of VIU to reasonably possible changes in key assumptions
	Favourable change				Unfavourable change
			Increase in VIU	VIU			Decrease In VIU		VIU
	bps		$bn	$bn	bps		$bn		$bn
At 31 Dec 2016
Long-term profit growth rate	-		-	16.1	(150	)	(3.3	)	12.8
Long-term asset growth rate	(80	)	1.8	17.8	-		-		16.1
Discount rate	(100	)	2.3	18.4	-		-		16.1
Loan impairment charge as a percentage of customer advances	-		-	16.1	2016-19: 0.93% 2020 onwards: 0.80%		(1.1	)	15.0
Risk-weighted assets as a percentage of total assets	(30	)	0.1	16.2	170		(0.6	)	15.5
Cost-income ratio	(170	)	0.9	17.0	250		(1.4	)	14.7

At 31 Dec 2015
Long-term profit growth rate	100		3.2	20.3	(210	)	(4.7	)	12.3
Long-term asset growth rate	(50	)	1.2	18.2	100		(2.8	)	14.3
Discount rate	(150	)	4.2	21.2	110		(2.1	)	14.9
Loan impairment charge as a percentage of customer advances	70 throughout		0.1	17.2	2015-18: 0.85% 2019 onwards: 0.75%		(0.7	)	16.4
Risk-weighted assets as a percentage of total assets	(350	)	1.2	18.2	10		-		17
Cost income ratio	(250	)	1.5	18.5	120		(0.7	)	16.4

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is $10.8bn to $19.0bn.

Selected financial information of BoCom

The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2016, HSBC included the associate's results on the basis of financial statements for the 12 months ended 30 September 2016, taking into account changes in the subsequent period from 1 October 2016 to 31 December 2016 that would have materially affected the results.



Selected balance sheet information of BoCom
	At 30 Sep
	2016	2015
	$m	$m
Cash and balances at central banks	137,844	144,702
Loans and advances to banks and other financial institutions	101,436	110,915
Loans and advances to customers	566,126	560,503
Other financial assets	311,207	244,722
Other assets	48,922	49,246
Total assets	1,165,535	1,110,088
Deposits by banks and other financial institutions	297,442	261,211
Customer accounts	680,915	691,959
Other financial liabilities	69,954	46,932
Other liabilities	27,860	29,329
Total liabilities	1,076,171	1,029,431
Total equity	89,364	80,657



Reconciliation of BoCom's total shareholders' equity to the carrying amount in HSBC's consolidated financial statements
	At 30 Sep
	2016	2015
	$m	$m
HSBC's share of total shareholders' equity	15,285	14,824
Add: Goodwill and other intangible assets	480	520
Carrying amount	15,765	15,344



HSBC Holdings plc Annual Report and Accounts 2016	233

Notes on the Financial Statements



Selected income statement information of BoCom
	For the 12 months ended 30 Sep
	2016		2015
	$m		$m
Net interest income	20,614		22,397
Net fee and commission income	5,493		5,432
Loan impairment charges	(4,284	)	(3,772	)
Depreciation and amortisation	(1,216	)	(1,012	)
Tax expense	(2,800	)	(2,976	)
Profit for the year	10,151		10,634
Other comprehensive income	875		377
Total comprehensive income	11,026		11,011
Dividends received from BoCom	580		624



Summarised aggregate financial information for all associates excluding BoCom
	2016	2015
	$m	$m
Carrying amount	4,109	3,556
HSBC's share of:
- total assets	20,757	21,645
- total liabilities	16,661	18,166
- revenues	923	821
- profit or loss from continuing operations	454	508

Joint ventures

At 31 December 2016, the carrying amount of HSBC's interests in joint ventures was $155m (2015: $239m).

Associates and joint ventures

For the year ended 31 December 2016, HSBC's share of associates' and joint ventures' tax on profit was $542m (2015: $575m). This is included within 'Share of profit in associates and joint ventures' in the 'Consolidated income statement'.



Movements in interests in associates and joint ventures
		2016		2015
	Footnote	$m		$m
At 1 Jan		19,139		18,181
Additions		76		3
Disposals		(25	)	(8	)
Share of results		2,354		2,556
Dividends		(751	)	(879	)
Exchange differences		(1,115	)	(718	)
Share of other comprehensive income of associates and joint ventures		54		(9	)
Other movements		297		13
At 31 Dec	1	20,029		19,139


1	Includes goodwill of $488m (2015: $593m).



234	HSBC Holdings plc Annual Report and Accounts 2016

18 Investments in subsidiaries



Principal subsidiaries of HSBC Holdings
	At 31 Dec 2016
	Country of incorporation or registration	HSBC's interest %
	Country of incorporation or registration	HSBC's interest %	Share class
Europe
HSBC Bank plc	England and Wales	100	£1 Ordinary and Preferred Ordinary, $0.01 Non-cumulative third Dollar Preference Shares
HSBC France	France	99.99	€5 Actions
HSBC Assurances Vie (France)	France	100	287.50 EUR Ordinary shares
HSBC Private Banking Holdings (Suisse) SA	Switzerland	100	CHF1,000 Ordinary
HSBC Trinkaus & Burkhardt AG	Germany	80.65	Stückaktien no par value
Asia
Hang Seng Bank Limited	Hong Kong	62.14	HK$5 Ordinary
HSBC Bank Australia Limited	Australia	100	Ordinary no par value
HSBC Bank (China) Company Limited	PRC⁴	100	CNY1 Ordinary
HSBC Bank Malaysia Berhad	Malaysia	100	RM0.50 Ordinary
HSBC Bank (Taiwan) Limited	Taiwan	100	TWD10 Ordinary
HSBC Life (International) Limited	Bermuda	100	HK$1 Ordinary
The Hongkong and Shanghai Banking Corporation Limited	Hong Kong	100	HK$2.50 Ordinary$1 CIP¹, CRP² and NIP³
HSBC Bank (Singapore) Limited	Singapore	100	SGD100 Ordinary
Middle East and North Africa
HSBC Bank Middle East Limited	United Arab Emirates	100	$1 Ordinary and $1 CRP²
HSBC Bank Egypt S.A.E.	Egypt	94.53	EGP84 Ordinary
North America
HSBC Bank Canada	Canada	100	Common no par value and Preference no par value
HSBC Bank USA, N.A.	USA	100	$100 Common and $0.01 Preference
HSBC Securities (USA) Inc.	USA	100	$0.05 Common
Latin America
HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC	Mexico	99.99	MXN2 Ordinary


1	Cumulative Irredeemable Preference shares.


2	Cumulative Redeemable Preference shares.


3	Non-cumulative Irredeemable Preference shares.


4	People's Republic of China.

Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are included in Notes 25 'Debt securities in issue', 28 'Subordinated liabilities' and 31 'Non-controlling interests', respectively.

A list of all related undertakings is set out on pages 265 to 271. The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle East Limited, which operates mainly in the Middle East and North Africa, and HSBC Life (International) Limited, which operates mainly in Hong Kong.

HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group's risk appetite for the relevant country or region. HSBC's capital management process is incorporated in the Annual Operating Plan, which is approved by the Board.

HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings' issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to this, there is no current or foreseen impediment to HSBC Holdings' ability to provide funding for such investments. During 2016, consistent with the Group's capital plan, the Group's subsidiaries did not experience any significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged with regard to planned dividends or payments. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance.

The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 33.

Information on structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights is included in Note 19 'Structured entities'. In each of these cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.



HSBC Holdings plc Annual Report and Accounts 2016	235

Notes on the Financial Statements



Subsidiaries with significant non-controlling interests
	2016	2015
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests	37.86%	37.86%
Place of business	Hong Kong	Hong Kong
	$m	$m
Profit attributable to non-controlling interests	814	1,364
Accumulated non-controlling interests of the subsidiary	5,792	5,866
Dividends paid to non-controlling interests	811	523
Summarised financial information:
- total assets	175,242	169,813
- total liabilities	159,035	153,458
- net operating income before loan impairment	3,937	5,411
- profit for the year	2,148	3,604
- total comprehensive income for the year	2,044	1,636

19 Structured entities

HSBC is mainly involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and investment funds, established either by HSBC or a third party.

Consolidated structured entities



Total assets of HSBC's consolidated structured entities, split by entity type
	Conduits	Securitisations	HSBC managed funds	Other	Total
	$bn	$bn	$bn	$bn	$bn
At 31 Dec 2016	15.8	5.7	4.8	3.7	30.0
At 31 Dec 2015	25.9	5.6	8.2	5.7	45.4

Conduits

HSBC has established and manages two types of conduits: securities investment conduits ('SICs') and multi-seller conduits.

Securities investment conduits

The SICs purchase highly rated ABSs to facilitate tailored investment opportunities.

•

Solitaire - At 31 December 2016, Solitaire, HSBC's principal SIC held $4.7bn of ABSs (2015: $6.2bn). These are included within the disclosures of ABSs on page 105. It is currently funded entirely by commercial paper ('CP') issued to HSBC. Although HSBC continues to provide a liquidity facility, Solitaire has no need to draw on it as long as HSBC purchases its issued CP, which HSBC intends to do for the foreseeable future. At 31 December 2016, HSBC held $6.1bn of CP (2015: $8.0bn).

•

Mazarin, Barion and Malachite - All three SICs are predominantly funded by repurchase agreements and medium-term notes. HSBC is exposed to the par value of Mazarin assets through the provision of a liquidity facility equal to the lesser of the amortised cost of issued debt and the amortised cost of non-defaulted assets. At 31 December 2016, this amounted to $1.0bn (2015: $1.8bn). HSBC's primary exposure to Barion and Malachite is represented by the amortised cost of the debt required to support the non-cash assets of the vehicles. At 31 December 2016, this amounted to $0.8bn (2015: $1.4bn). For all three SICs first loss protection is provided through the capital notes issued by these vehicles, which are held substantially by third parties. At 31 December 2016, HSBC held 12.2% of the capital notes (2015: 7.2%) issued by these vehicles with a par value of $69.5m (2015: $55.2m) and a carrying amount of $27.9m (2015: $24.7m).

Multi-seller conduit

HSBC's multi-seller conduit was established to provide access to flexible market-based sources of finance for its clients. Currently, HSBC bears risk equal to the transaction-specific liquidity facility offered to the multi-seller conduit, amounting to $10.2bn at 31 December 2016 (2015: $19.8bn). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.

Securitisations

HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors.

HSBC managed funds

HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than agent in its role as investment manager, HSBC controls these funds.



236	HSBC Holdings plc Annual Report and Accounts 2016

Other

HSBC has also entered into a number of transactions in the normal course of business which include asset and structured finance transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds through its involvement as a principal in the funds.

Unconsolidated structured entities

The term 'unconsolidated structured entities' refers to all structured entities not controlled by HSBC. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.



Nature and risks associated with HSBC interests in unconsolidated structured entities
	Securitisations	HSBC managed funds	Non-HSBC managed funds	Other	Total
	$bn	$bn	$bn	$bn	$bn
Total assets of the entities	14.4	200.6	2,016.5	106.3	2,337.8
Total assets in relation to HSBC's interests in the unconsolidated structured entities	2.4	7.1	8.3	10.1	27.9
- trading assets	-	0.4	0.1	2.1	2.6
- financial assets designated at fair value	-	5.9	7.5	-	13.4
- derivatives	-	-	-	3.9	3.9
- loans and advances to banks	-	-	-	0.4	0.4
- loans and advances to customers	2.4	-	-	3.2	5.6
- financial investments	-	0.8	0.7	0.2	1.7
- other assets	-	-	-	0.3	0.3
Total liabilities in relation to HSBC's interests in the unconsolidated structured entities	-	-	-	0.3	0.3
- derivatives	-	-	-	0.1	0.1
- other liabilities	-	-	-	0.2	0.2
HSBC's maximum exposure at 31 Dec 2016	2.4	7.1	11	13.5	34

Total assets of the entities	12.9	227.9	2,003.1	139.9	2,383.8
Total assets in relation to HSBC's interests in the unconsolidated structured entities	1.4	5.6	8.0	9.8	24.8
- trading assets	-	0.1	0.2	2.6	2.9
- financial assets designated at fair value	-	5.3	6.6	-	11.9
- derivatives	-	-	-	3.8	3.8
- loans and advances to banks	-	-	-	0.1	0.1
- loans and advances to customers	1.1	-	0.1	2.9	4.1
- financial investments	0.3	0.2	1.1	0.2	1.8
- other assets	-	-	-	0.2	0.2
Total liabilities in relation to HSBC's interests in the unconsolidated structured entities	-	-	-	0.1	0.1
- other liabilities	-	-	-	0.1	0.1
HSBC's maximum exposure at 31 Dec 2015	3.5	5.6	8.0	14.6	31.7

The maximum exposure to loss from HSBC's interests in unconsolidated structured entities represents the maximum loss it could incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.


•	For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses.


•	For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at the balance sheet reporting date.

The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate HSBC's exposure to loss.

Securitisations

HSBC has interests in unconsolidated securitisation vehicles through holding notes issued by these entities. In addition, HSBC has investments in ABSs issued by third party structured entities as set out on page 105.

HSBC managed funds

HSBC establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. Further information on funds under management is provided on page 61.

HSBC, as fund manager, may be entitled to receive management and performance fees based on the assets under management. HSBC may also retain units in these funds.

Non-HSBC managed funds

HSBC purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs. In addition, HSBC enters into derivative contracts to facilitate risk management solutions for non-HSBC managed funds. Note 14 provides information on derivatives entered into by HSBC.



HSBC Holdings plc Annual Report and Accounts 2016	237

Notes on the Financial Statements

Other

HSBC has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions.

HSBC sponsored structured entities

The amount of assets transferred to and income received from such sponsored entities during 2016 and 2015 were not significant.

20 Goodwill and intangible assets



		2016	2015
	Footnote	$m	$m
Goodwill		12,330	16,294
Present value of in-force long-term insurance business		6,502	5,685
Other intangible assets	1	2,514	2,626
At 31 Dec		21,346	24,605


1	Included within other intangible assets is internally generated software with a net carrying value of $1,982m (2015: $1,934m).



Movement analysis of goodwill
	2016		2015
	$m		$m
Gross amount
At 1 Jan	22,187		25,092
Exchange differences	(562	)	(1,610	)
Reclassified to held for sale	(183	)	(1,319	)
Other	3		24
At 31 Dec	21,445		22,187
Accumulated impairment losses
At 1 Jan	(5,893	)	(5,923	)
Impairment losses	(3,240	)	-
Other	18		30
At 31 Dec	(9,115	)	(5,893	)
Net carrying amount at 31 Dec	12,330		16,294

Impairment testing

The Group's impairment test in respect of goodwill allocated to each cash generating unit (CGU) is performed as at 1 July each year. A review for indicators of impairment is undertaken at each subsequent quarter-end and as at 31 December 2016. Subsequent to the
1 July 2016 annual test the CGU for Global Banking and Markets was amended from a regional to a global basis. This change is discussed further below.

30 June and 31 December 2016 impairment indicators review

At 30 June 2016, we reviewed the inputs used in our 2015 impairment tests in the light of current economic and market conditions. As a result, impairment tests were performed for Global Private Banking - Europe and Global Banking and Markets - Europe. Following these tests an impairment of $0.8bn was recognised in respect of the Global Private Banking - Europe.

At 31 December 2016, we reviewed the inputs used in our 1 July 2016 impairment test and identified that indicators of impairment existed within the Global Private Banking - Europe CGU. There were no indicators of impairment in respect of our other CGUs at this time. Refreshed cash flow projections that became available for Global Private Banking - Europe were significantly adverse when compared to those used in the 1 July 2016 impairment test. The reduction in cash flow forecasts is driven by the continuing repositioning of the business and lower net new money and associated return on asset expectations. As a result, an impairment test was performed resulting in an impairment of $2.4bn.

The assumptions and results of the Global Private Banking - Europe tests are presented below:



	Carrying amount	of which goodwill	Value in use	Impairment		Discount rate	Nominal growth rate beyond initial cash flow projections
	$bn	$bn	$bn	$bn		%	%
30 Jun 2016	4.4	3.3	3.6	(0.8	)	9.7	2.8
31 Dec 2016	3.5	2.4	1.1	(2.4	)	9.7	2.8
2016 impairment recognised				(3.2	)

Basis of the recoverable amount

The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use (VIU) at each respective testing date for 2015 and 2016. For each CGU, the VIU is calculated by discounting management's cash flow projections for the CGU. The key assumptions used in the VIU calculation for each significant CGU are discussed below.



238	HSBC Holdings plc Annual Report and Accounts 2016



Key assumptions in VIU calculation
		Goodwill at 1 Jul 2016	Discount rate	Nominal growth rate beyond initial cash flow projections	Goodwill at 1 Jul 2015	Goodwill at 31 Dec 2015	Discount rate	Nominal growth rate beyond initial cash flow projections
	Footnote	$m	%	%	$m	$m	%	%
Cash-generating unit
Europe
RBWM		3,446	8.9	3.6	3,562		6.9	3.3
GB&M		2,520	10.7	3.8	2,690		9.9	3.5
CMB		2,517	9.7	3.8	2,603		9.0	3.6
North America
GB&M	1	918	10.0	4.6	929	931	10.0	4.3
Latin America
RBWM		584	11.0	7.4	792		11.0	6.9


1	GB&M North America comparative discount rate and nominal growth rate beyond initial cash flow project rates are as at 31 December 2015.

At 1 July 2016, aggregate goodwill of $3,025m (1 July 2015: $2,787m) had been allocated to CGUs that were not considered individually significant. The Group's CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.

Management's judgement in estimating the cash flows of a CGU: The cash flow projections for each CGU are based on plans approved by the GMB. For the goodwill impairment test conducted at 1 July 2016, management's cash flow projections until the end of 2020 were used.

Discount rate: The rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a capital asset pricing model ('CAPM'). CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. The discount rates for each CGU are refined to reflect the rates of inflation for the countries within which the CGU operate. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM, with cost of capital rates produced by external sources for businesses operating in similar markets. For the purpose of goodwill testing as at 1 July 2016, all European CGUs include a 100bps uplift to reflect the increased risk in European markets following the UK referendum on membership of the EU.

Nominal long-term growth rate: The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long‑term perspective within the Group of business units making up the CGUs. These growth rates reflect GDP and inflation for the countries within which the CGU operates or derives revenue from.

Global Banking and Markets CGU basis

As described on page 44, the Group has changed its operating segments from a geographical region to a global businesses basis, and this change prompted a review of the goodwill allocation. Following this review it has been determined that Global Banking and Markets should be assessed as a single CGU rather than on a regional basis reflecting the global management and customer base of this business. An analysis was performed and Global Banking and Markets is considered to have significant headroom to support its goodwill. All other CGUs remain unchanged.

Sensitivities of key assumptions in calculating VIU

At 1 July 2016, Retail Banking and Wealth Management - Europe was sensitive to reasonably possible adverse changes in the discount rate, growth rate or management's projections of cash flows assumptions supporting the recoverable amount. Changes in one or more of these assumptions could cause an impairment to be recognised. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model such as the external range of discount rates observable, historical performance against forecast and risks attaching to the key assumptions underlying cash flow projections.

The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for this CGU; the key risks attached; and details of a reasonably possible change to assumptions where, in the opinion of management, these could result in an impairment.



HSBC Holdings plc Annual Report and Accounts 2016	239

Notes on the Financial Statements



Reasonably possible changes in key assumptions
	Input	Key assumptions	Associated risks	Reasonably possible change
Cash-generating unit
RBWM - Europe	Cash flow projections	• Level of interest rates and yield curves. • Competitors' position within the market. • Level and change in unemployment rates.	• Uncertain regulatory environment. • Customer remediation and regulatory actions.	• Cash flow projections decrease by 10%. This does not result in an impairment.
	Discount rate	• Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.	• External evidence suggests that the rate used is not appropriate to the business.	• Discount rate increases by 100bps.
	Long-term growth rates	• Business growth will reflect GDP growth rates in the long term.	• Growth does not match GDP or there is a fall in GDP forecasts.	• Real GDP growth does not occur or is not reflected in performance.



Sensitivity of VIU to reasonably possible changes in key assumptions and changes to current assumptions to achieve nil headroom
At 1 Jul 2016	RBWM - Europe
In $ billions (unless otherwise stated)	$bn
Carrying amount	16.6
VIU	19.7
Reasonably possible change in key assumption
Discount rate - bps	100
Cash flows - %	(10	)
Long-term growth rates - bps	(162	)
Impact on VIU
Discount rate	(3.1	)
Cash flows	(2.0	)
Long-term growth rates	(3.9	)
Cumulative impact of all changes	(7.3	)
Changes to current assumptions to achieve nil headroom
Discount rate - bps	102
Cash flows - %	(15.8	)
Long-term growth rates - bps	(122	)

Present value of in-force long-term insurance business

When calculating the present value of in-force insurance business ('PVIF'), expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management's judgement of future trends, and after applying risk margins to reflect any uncertainty in the underlying assumptions. Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.

Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by the Actuarial Control Committee.



Movements in PVIF
		2016		2015
	Footnotes	$m		$m
PVIF at 1 Jan		5,685		5,307
Change in PVIF of long-term insurance business		902		799
- value of new business written during the year		900		809
- expected return	1	(532	)	(552	)
- assumption changes and experience variances (see below)		513		504
- other adjustments		21		38
Transfer of assets classified as held for sale	2	(45	)	(219	)
Exchange differences and other		(40	)	(202	)
PVIF at 31 Dec		6,502		5,685


1	'Expected return' represents the unwinding of the discount rate and reversal of expected cash flows for the period.


2	Relates to the Brazilian insurance operations which were classified as held for sale in 2015.

Assumption changes and experience adjustments

Included within this line item are:


•	$279m (2015: $114m), directly offsetting interest rate-driven changes to liabilities under insurance contracts.


•	$301m (2015: $209m), reflecting the future sharing of returns with policyholders on contracts with discretionary participation features ('DPF'), to the extent this sharing is not already included in liabilities under insurance contracts.


•	$(67)m (2015: $181m), driven by other changes in assumptions and experience variances to projected future profits.



240	HSBC Holdings plc Annual Report and Accounts 2016

Key assumptions used in the computation of PVIF for main life insurance operations

Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed market movements and the impact of such changes is included in the sensitivities presented below.



	2016		2015
	Hong Kong	France¹	Hong Kong	France¹
	%	%	%	%
Weighted average risk free rate	2.09	0.99	1.82	1.57
Weighted average risk discount rate	6.34	1.84	6.81	2.55
Expense inflation	3.00	1.66	3.00	1.70


1	For 2016, the calculation of France's PVIF assumes a risk discount rate of 1.84% (2015: 2.55%) plus a risk margin of $101m (2015: $51m).

Sensitivity to changes in economic assumptions

The Group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best estimate cash flow modelling. Where the insurance operations provide options and guarantees to policyholders the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit addition to the technical provisions required by regulators. See page 123 for further details of these guarantees and the impact of changes in economic assumptions on our insurance manufacturing subsidiaries.

Sensitivity to changes in non-economic assumptions

Policyholder liabilities and PVIF are determined by reference to non-economic assumptions including mortality and/or morbidity, lapse rates and expense rates. See page 125 for further details on the impact of changes in non-economic assumptions on our insurance manufacturing operations.

21 Prepayments, accrued income and other assets



	2016	2015
	$m	$m
Prepayments and accrued income	7,335	7,765
Bullion	15,406	11,501
Endorsements and acceptances	8,574	9,149
Reinsurers' share of liabilities under insurance contracts (Note 3)	1,820	1,378
Employee benefit assets (Note 5)	4,714	5,272
Other accounts	12,298	9,410
Property, plant and equipment	9,373	9,923
At 31 Dec	59,520	54,398

Prepayments, accrued income and other assets include $26,927 (2015: $25,310m) of financial assets, the majority of which are measured at amortised cost.

22 Assets held for sale and liabilities of disposal groups held for sale



Assets held for sale and liabilities of disposal groups held for sale
	2016	2015
	$m	$m
Held for sale at 31 Dec
Disposal groups	1,882	41,715
Non-current assets held for sale	2,507	2,185
Total assets	4,389	43,900
Liabilities of disposal groups	2,790	36,840

Disposal groups

Brazil

On 1 July 2016, we completed the sale of our operations in Brazil to Banco Bradesco S.A. for a cash consideration of $4.8bn. This resulted in a loss on disposal of $1.7bn which includes the reclassification of cumulative foreign exchange differences of $1.9bn.



HSBC Holdings plc Annual Report and Accounts 2016	241

Notes on the Financial Statements

23 Trading liabilities



		2016	2015
	Footnotes	$m	$m
Deposits by banks	1	24,827	27,054
Customer accounts	1, 2	45,085	40,208
Other debt securities in issue (Note 25)	3	32,656	30,525
Other liabilities - net short positions in securities		51,123	43,827
At 31 Dec		153,691	141,614


1	'Deposits by banks' and 'Customer accounts' include repos, settlement accounts, stock lending and other amounts.


2	Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US government agency, up to $250,000 per depositor.


3	'Other debt securities in issue' comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.

At 31 December 2016, the cumulative amount of change in fair value attributable to changes in HSBC's credit risk was a gain of $2m (2015: gain of $122m).

24 Financial liabilities designated at fair value



HSBC
	2016	2015
	$m	$m
Deposits by banks and customer accounts	135	193
Liabilities to customers under investment contracts	6,002	6,027
Debt securities in issue (Note 25)	57,112	37,678
Subordinated liabilities (Note 28)	23,172	21,168
Preferred securities (Note 28)	411	1,342
At 31 Dec	86,832	66,408

The carrying amount of financial liabilities designated at fair value was $4,413m more than the contractual amount at maturity
(2015: $4,147m more). The cumulative own credit loss recognised was $1,672m (2015: gain of $158m).



HSBC Holdings
	2016	2015
	$m	$m
Debt securities in issue (Note 25)	16,766	7,897
Subordinated liabilities (Note 28)	13,347	11,956
At 31 Dec	30,113	19,853

The carrying amount of financial liabilities designated at fair value was $2,681m more than the contractual amount at maturity
(2015: $2,127m more). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of
$1,202m (2015: loss of $172m).

25 Debt securities in issue



HSBC
	2016		2015
	$m		$m
Bonds and medium-term notes	133,721		128,348
Other debt securities in issue	21,962		28,804
Total debt securities in issue	155,683		157,152
Included within:
- trading liabilities (Note 23)	(32,656	)	(30,525	)
- financial liabilities designated at fair value (Note 24)	(57,112	)	(37,678	)
At 31 Dec	65,915		88,949



HSBC Holdings
	2016		2015
	$m		$m
Debt securities	38,571		8,857
Included within:
- financial liabilities designated at fair value (Note 24)	(16,766	)	(7,897	)
At 31 Dec	21,805		960



242	HSBC Holdings plc Annual Report and Accounts 2016

26 Accruals, deferred income and other liabilities



	2016	2015
	$m	$m
Accruals and deferred income	10,770	11,129
Endorsements and acceptances	8,567	9,135
Employee benefit liabilities (Note 5)	2,681	2,809
Other liabilities	19,483	15,043
At 31 Dec	41,501	38,116

Accruals, deferred income and other liabilities include $30,932m (2015: $29,358m) of financial liabilities, the majority of which are measured at amortised cost.

27 Provisions



	Restructuring costs		Contractual commitments		Legal proceedings and regulatory matters		Customer remediation		Other provisions		Total
	$m		$m		$m		$m		$m		$m
At 1 Jan 2016	463		240		3,174		1,340		335		5,552
Additions	415		141		1,258		762		208		2,784
Amounts utilised	(168	)	(1	)	(1,831	)	(680	)	(118	)	(2,798	)
Unused amounts reversed	(115	)	(97	)	(165	)	(94	)	(96	)	(567	)
Unwinding of discounts	-		-		-		-		6		6
Exchange and other movements	(44	)	15		-		(204	)	29		(204	)
At 31 Dec 2016	551		298		2,436		1,124		364		4,773

At 1 Jan 2015	197		234		2,184		1,831		552		4,998
Additions	430		120		2,153		765		138		3,606
Amounts utilised	(95	)	(2	)	(619	)	(856	)	(159	)	(1,731	)
Unused amounts reversed	(29	)	(15	)	(95	)	(170	)	(133	)	(442	)
Unwinding of discounts	-		-		40		6		-		46
Exchange and other movements	(40	)	(97	)	(489	)	(236	)	(63	)	(925	)
At 31 Dec 2015	463		240		3,174		1,340		335		5,552

Further details of 'Legal proceedings and regulatory matters' are set out in Note 35. Legal proceedings include: civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim); or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refers to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.

Customer remediation refers to HSBC's activities to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action. Further details of customer remediation are set out in this note.

Payment protection insurance

At 31 December 2016, a provision of $919m (2015: $1,039m) was held relating to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years. Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amount to $5.1bn, of which $4.1bn has been paid as at 31 December 2016.

An increase in provisions of $492m was recognised during the year, primarily reflecting a delay to the inception of the expected time bar on inbound complaints; and an anticipated adjustment to the redress parameters surrounding 'Plevin' (a 2014 decision of the UK Supreme Court which held that, judged on its own facts, non-disclosure of the amounts of commissions payable in connection with the sale of PPI to a customer created an unfair relationship under the provisions of the UK Consumer Credit Act).

The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on the historically observed redress per policy.

A total of 5.4 million PPI policies have been sold since 2000, generating estimated revenues of $3.5bn at 2016 average exchange rates. The gross written premiums on these policies were approximately $4.6bn.

At 31 December 2016, the estimated total complaints expected to be received were 2.0 million, representing 37% of total policies sold. It is estimated that contact will be made with regard to 2.4 million policies, representing 45% of total policies sold. This estimate includes inbound complaints as well as the group's proactive contact exercise on certain policies ('outbound contact').

The following table details the cumulative number of complaints received at 31 December 2016 and the number of claims expected in the future:



HSBC Holdings plc Annual Report and Accounts 2016	243

Notes on the Financial Statements



Cumulative PPI complaints received to 31 December 2016 and future claims expected
	Footnotes	Cumulative actual to 31 Dec 2016	Future expected
Inbound complaints (000s of policies)	1	1,363	320
Outbound contact (000s of policies)		725	-
Response rate to outbound contact		42%	n/a
Average uphold rate per claim	2	76%	84%
Average redress per claim ($)		2,670	2,702
Complaints to Financial Ombudsman Service (000s of policies)		138	47
Average uphold rate per Financial Ombudsman Service claim		41%	55%


1	Excludes invalid claims for which no PPI policy exists.


2	Claims include inbound and responses to outbound contact.

A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $203m at 2016 average exchange rates.

Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately $12m.

28 Subordinated liabilities

HSBC



	2016	2015
	$m	$m
At amortised cost	20,984	22,702
- subordinated liabilities	19,230	20,773
- preferred securities	1,754	1,929
Designated at fair value (Note 24)	23,583	22,510
- subordinated liabilities	23,172	21,168
- preferred securities	411	1,342
At 31 Dec	44,567	45,212
Issued by HSBC subsidiaries	16,860	19,150
Issued by HSBC Holdings	27,707	26,062

HSBC's subordinated liabilities

Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step up or become floating rate based on interbank rates. On capital securities other than floating rate notes, interest is payable at fixed rates of up to 10.176%.

The balance sheet amounts disclosed below are presented on an IFRSs basis and do not reflect the amount that the instruments contribute to regulatory capital due to the inclusion of issuance costs, regulatory amortisation and regulatory eligibility limits prescribed in the grandfathering provisions under CRD IV.



244	HSBC Holdings plc Annual Report and Accounts 2016



HSBC's subordinated liabilities in issue
			First call	Maturity	2016	2015
		Footnotes	date	date	$m	$m
Additional tier 1 capital securities guaranteed by HSBC Holdings plc		1
€750m	5.13% non-cumulative step-up perpetual preferred securities	2	Mar 2016		-	856
$900m	10.176% non-cumulative step-up perpetual preferred securities, series 2		Jun 2030		891	891
					891	1,747
Additional tier 1 capital securities guaranteed by HSBC Bank plc		1
£300m	5.862% non-cumulative step-up perpetual preferred securities		Apr 2020		411	488
£700m	5.844% non-cumulative step-up perpetual preferred securities		Nov 2031		863	1,038
					1,274	1,526
Tier 2 securities issued by HSBC Bank plc
£350m	5.00% callable subordinated notes	3	Mar 2018	Mar 2023	466	562
£300m	6.50% subordinated notes		-	Jul 2023	369	444
£350m	5.375% callable subordinated step-up notes	4	Nov 2025	Nov 2030	489	569
£500m	5.375% subordinated notes		-	Aug 2033	750	846
£225m	6.25% subordinated notes		-	Jan 2041	276	332
£600m	4.75% subordinated notes		-	Mar 2046	731	879
$300m	7.65% subordinated notes		-	May 2025	372	386
$750m	Undated floating rate primary capital notes		Jun 1990		750	750
$500m	Undated floating rate primary capital notes		Sep 1990		500	500
$300m	Undated floating rate primary capital notes, series 3		Jun 1992		300	300
					5,003	5,568
Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd
$400m	Primary capital undated floating rate notes	5	Aug 1990		-	401
$400m	Primary capital undated floating rate notes (third series)		Jul 1991		400	400
					400	801
Tier 2 securities issued by HSBC Bank Malaysia Berhad
MYR500m	4.35% subordinated bonds		Jun 2017	Jun 2022	112	116
MYR500m	5.05% subordinated bonds		Nov 2022	Nov 2027	112	116
					224	232
Tier 2 securities issued by HSBC USA Inc.
$750m	5.00% subordinated notes		-	Sep 2020	748	747
$250m	7.20% subordinated debentures		-	Jul 2097	220	220
	Other subordinated liabilities each less than $150m	6			284	299
					1,252	1,266
Tier 2 securities issued by HSBC Bank USA, N.A.
$500m	6.00% subordinated notes		-	Aug 2017	498	502
$1,250m	4.875% subordinated notes		-	Aug 2020	1,257	1,258
$1,000m	5.875% subordinated notes		-	Nov 2034	1,137	1,142
$750m	5.625% subordinated notes		-	Aug 2035	862	850
$700m	7.00% subordinated notes		-	Jan 2039	701	691
					4,455	4,443
Tier 2 securities issued by HSBC Finance Corporation
$2,939m	6.676% senior subordinated notes	7	-	Jan 2021	2,192	2,188

Tier 2 securities issued by HSBC Bank Canada
CAD400m	4.80% subordinated debentures		Apr 2017	Apr 2022	299	298
CAD200m	4.94% subordinated debentures	5	Mar 2016	Mar 2021	-	144
	Other subordinated liabilities each less than $150m		Oct 1996	Nov 2083	29	29
					328	471
Securities issued by HSBC Mexico, S.A.
$300m	Non-convertible subordinated obligations	8, 9	Jun 2014	Jun 2019	240	240
	Other subordinated liabilities each less than $150m	8			198	236
					438	476
Securities issued by other HSBC subsidiaries
Other subordinated liabilities each less than $200m		6			403	432
Subordinated liabilities issued by HSBC subsidiaries at 31 Dec					16,860	19,150


1	See paragraph below, 'Guaranteed by HSBC Holdings or HSBC Bank plc'.


2	In February 2016, HSBC gave notice that it will call and redeem the €750m 5.13% non-cumulative step-up perpetual preferred securities.


3	The interest rate payable after March 2018 is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80 percentage points.


4	The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50 percentage points.


5	In January 2016, HSBC called and redeemed $400m Primary capital undated floating rate notes and CAD200m 4.94% subordinated debentures.


6	Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.


7	Approximately $731m of the senior subordinated notes are held by HSBC Holdings.


8	These securities are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.


9	Approximately $60m of the subordinated obligations are held by HSBC Holdings.



HSBC Holdings plc Annual Report and Accounts 2016	245

Notes on the Financial Statements



HSBC Holdings
	2016	2015
	$m	$m
At amortised cost	15,189	15,895
Designated at fair value (Note 24)	13,347	11,956
At 31 Dec	28,536	27,851



HSBC Holdings' subordinated liabilities
			First call	Maturity	2016	2015
		Footnotes	date	date	$m	$m
Tier 2 securities issued by HSBC Holdings plc
Amounts owed to third parties
$488m	7.625% subordinated notes	1	-	May 2032	528	531
$222m	7.35% subordinated notes	1	-	Nov 2032	278	278
$2,000m	6.5% subordinated notes	1	-	May 2036	2,029	2,029
$2,500m	6.5% subordinated notes	1	-	Sep 2037	3,170	3,085
$1,500m	6.8% subordinated notes	1	-	Jun 2038	1,487	1,487
$2,000m	4.25% subordinated notes	2,4	-	Mar 2024	2,060	2,078
$1,500m	5.25% subordinated notes	2,4	-	Mar 2044	1,747	1,735
$1,500m	4.25% subordinated notes	2	-	Jun 2025	1,539	1,529
$1,500m	4.375% subordinated notes	2	-	Nov 2026	1,520	-
£900m	6.375% callable subordinated notes	1,3	Oct 2017	Oct 2022	1,163	1,432
£650m	5.75% subordinated notes	2	-	Dec 2027	932	1,079
£650m	6.75% subordinated notes	2	-	Sep 2028	793	955
£750m	7.0% subordinated notes	2	-	Apr 2038	971	1,159
£900m	6.0% subordinated notes	2	-	Mar 2040	1,086	1,310
€1,600m	6.25% subordinated notes	2	-	Mar 2018	1,693	1,748
€1,750m	6.0% subordinated notes	2	-	Jun 2019	2,168	2,284
€1,500m	3.0% subordinated notes	2	-	Jun 2025	1,716	1,691
€1,500m	3.125% subordinated notes	2	-	Jun 2028	1,139	-
€1,500m	3.375% subordinated notes	2,4	Jan 2019	Jan 2024	1,626	1,694
					27,645	26,104
Amounts owed to HSBC undertakings
€750m	5.13% fixed/floating subordinated notes		Mar 2016	Dec 2044	-	856
$900m	10.176% subordinated step-up cumulative notes		Jun 2030	Jun 2040	891	891
					891	1,747
At 31 Dec					28,536	27,851


1	Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRD IV rules.


2	These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis.


3	The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3 percentage points.


4	These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at fair value in the Group.

Additional tier 1 capital securities

Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred or cancelled at the discretion of HSBC Holdings. The securities presented in this Note are accounted for as liabilities because HSBC has an obligation to pay dividends in perpetuity. See Note 35 for additional tier 1 capital securities accounted for as equity.

The additional tier 1 securities presented in this section do not meet the identifying criteria in full for recognition as tier 1 capital under CRD IV but are eligible as regulatory capital subject to grandfathering limits and progressive phase-out.

Guaranteed by HSBC Holdings or HSBC Bank plc

These capital securities were issued by the Jersey limited partnerships and proceeds lent to the respective guarantors by the limited partnerships in the form of subordinated notes. They qualify as additional tier 1 capital for HSBC under CRD IV by virtue of the application of grandfathering provisions, and the two capital securities guaranteed by HSBC Bank plc ('HSBC Bank') also qualify as additional tier 1 capital for HSBC Bank (on a solo and a consolidated basis) under CRD IV by virtue of the same grandfathering process.

These preferred securities, together with the guarantee, are intended to provide investors with economic rights equivalent to the rights that they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC's capital adequacy requirements or if HSBC Holdings or HSBC Bank has insufficient distributable reserves (as defined).

HSBC Holdings and HSBC Bank have individually covenanted that if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or repurchase or redeem their ordinary shares, until the distribution on the preferred securities has been paid in full.

Preference shares of HSBC Holdings that have economic terms equal in all material respects to the preferred securities and their guarantee together will be substituted for the preferred securities guaranteed by HSBC Holdings if the total capital ratio of HSBC Holdings falls below the regulatory minimum required, or the Directors expect it to in the near term.



246	HSBC Holdings plc Annual Report and Accounts 2016

Preference shares of HSBC Bank that have economic terms equal in all material respects to the preferred securities and their guarantee together will be substituted for the preferred securities guaranteed by HSBC Bank if any of the two issues of preferred securities are outstanding in April 2049 or November 2048, respectively; or the total capital ratio of HSBC Bank on a solo and consolidated basis falls below the regulatory minimum required, or the Directors expect it to in the near term.

Tier 2 capital securities

These capital securities are included within HSBC's regulatory capital base as tier 2 capital under CRD IV by virtue of the application of grandfathering provisions (with the exception of identified HSBC Holding securities which are compliant with CRD IV end point rules). Tier 2 capital securities are either perpetual subordinated securities or dated securities on which there is an obligation to pay coupons. In accordance with CRD IV, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity.

29 Maturity analysis of assets, liabilities and off-balance sheet commitments

The table on page 248 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows:


•	Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the 'Due not more than 1 month' time bucket, because trading balances are typically held for short periods of time.

•

Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket.


•	Non-financial assets and liabilities with no contractual maturity are included in the 'Due over 5 years' time bucket.


•	Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction.


•	Liabilities under insurance contracts are included in the 'Due over 5 years' time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are included in the 'Due over 5 years' time bucket, however, such contracts are subject to surrender and transfer options by the policyholders.


•	Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.



HSBC Holdings plc Annual Report and Accounts 2016	247

Notes on the Financial Statements

HSBC



Maturity analysis of assets, liabilities and off-balance sheet commitments
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Financial assets
Cash and balances at central banks	128,009	-	-	-	-	-	-	-	128,009
Items in the course of collection from other banks	5,003	-	-	-	-	-	-	-	5,003
Hong Kong Government certificates of indebtedness	31,228	-	-	-	-	-	-	-	31,228
Trading assets	232,550	758	230	415	1,172	-	-	-	235,125
Financial assets designated at fair value	176	182	75	178	363	749	2,486	20,547	24,756
Derivatives	287,749	149	207	96	110	704	1,056	801	290,872
Loans and advances to banks	59,636	13,404	4,494	2,375	1,765	2,879	2,298	1,275	88,126
Loans and advances to customers	167,531	61,693	47,664	30,115	30,362	85,144	192,787	246,208	861,504
- personal	39,295	7,812	6,723	5,928	6,799	22,664	53,620	194,985	337,826
- corporate and commercial	108,906	48,333	35,180	21,317	19,573	54,739	126,890	45,271	460,209
- financial	19,330	5,548	5,761	2,870	3,990	7,741	12,277	5,952	63,469
Reverse repurchase agreements - non-trading	115,942	25,525	10,378	5,220	2,350	479	1,080	-	160,974
Financial investments	36,932	59,826	30,403	16,800	19,564	50,255	104,933	118,084	436,797
Assets held for sale	893	1,663	120	64	64	205	682	283	3,974
Accrued income and other financial assets	15,992	6,387	1,617	343	398	216	351	1,624	26,928
Financial assets at 31 Dec 2016	1,081,641	169,587	95,188	55,606	56,148	140,631	305,673	388,822	2,293,296
Non-financial assets	-	-	-	-	-	-	-	81,690	81,690
Total assets at 31 Dec 2016	1,081,641	169,587	95,188	55,606	56,148	140,631	305,673	470,512	2,374,986
Off-balance sheet commitments received
Loan and other credit-related commitments	2,813	-	2,050	-	-	110	-	-	4,973
Financial liabilities
Hong Kong currency notes in circulation	31,228	-	-	-	-	-	-	-	31,228
Deposits by banks	46,306	4,075	2,085	665	489	422	4,842	1,055	59,939
Customer accounts¹	1,180,641	45,245	19,187	10,277	8,325	4,709	3,500	502	1,272,386
- personal	590,654	22,222	12,024	5,823	4,786	3,484	2,483	121	641,597
- corporate and commercial	436,666	17,460	6,178	3,951	3,082	1,200	967	360	469,864
- financial	153,321	5,563	985	503	457	25	50	21	160,925
Repurchase agreements - non-trading	82,330	2,707	2,871	50	-	-	1,000	-	88,958
Items in the course of transmission to other banks	5,977	-	-	-	-	-	-	-	5,977
Trading liabilities	121,707	2,053	1,423	1,845	3,013	6,219	9,010	8,421	153,691
Financial liabilities designated at fair value	1,659	958	1,396	3	1,701	5,046	17,989	58,080	86,832
- debt securities in issue: covered bonds	1,587	-	303	-	-	207	1,348	2,558	6,003
- debt securities in issue: unsecured	25	15	1,091	3	1,700	4,839	14,056	29,380	51,109
- subordinated liabilities and preferred securities	-	-	-	-	-	-	2,578	21,005	23,583
- other	47	943	2	-	1	-	7	5,137	6,137
Derivatives	274,965	39	39	112	273	506	1,471	2,414	279,819
Debt securities in issue	4,708	8,598	8,280	5,996	4,610	10,953	19,432	3,338	65,915
- covered bonds	-	-	1	71	1	3	24	26	126
- otherwise secured	3,207	823	893	114	329	1,882	2,680	1,181	11,109
- unsecured	1,501	7,775	7,386	5,811	4,280	9,068	16,728	2,131	54,680
Liabilities of disposal groups held for sale	2,472	107	113	36	34	7	21	-	2,790
Accruals and other financial liabilities	16,580	8,065	2,279	797	485	878	1,278	568	30,930
Subordinated liabilities	12	-	143	61	497	1,788	5,056	13,427	20,984
Total financial liabilities at 31 Dec 2016	1,768,585	71,847	37,816	19,842	19,427	30,528	63,599	87,805	2,099,449
Non-financial liabilities	-	-	-	-	-	-	-	92,959	92,959
Total liabilities at 31 Dec 2016	1,768,585	71,847	37,816	19,842	19,427	30,528	63,599	180,764	2,192,408
Off-balance sheet commitments given
Loan and other credit-related commitments:	466,780	39,922	14,909	12,537	36,281	11,241	45,778	28,395	655,843
- personal	158,054	4,932	5,297	287	4,063	1,129	788	9,260	183,810
- corporate and commercial	259,231	33,421	9,248	11,592	26,829	7,242	40,740	15,173	403,476
- financial	49,495	1,569	364	658	5,389	2,870	4,250	3,962	68,557



248	HSBC Holdings plc Annual Report and Accounts 2016



Maturity analysis of assets, liabilities and off-balance sheet commitments (continued)
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Financial assets
Cash and balances at central banks	98,934	-	-	-	-	-	-	-	98,934
Items in the course of collection from other banks	5,768	-	-	-	-	-	-	-	5,768
Hong Kong Government certificates of indebtedness	28,410	-	-	-	-	-	-	-	28,410
Trading assets	224,691	34	-	-	-	112	-	-	224,837
Financial assets designated at fair value	429	194	222	83	390	896	2,603	19,035	23,852
Derivatives	285,797	215	223	198	33	499	841	670	288,476
Loans and advances to banks	57,296	14,530	4,063	1,964	2,499	5,134	3,274	1,641	90,401
Loans and advances to customers	176,862	69,638	54,730	33,095	34,774	81,560	201,253	272,542	924,454
- personal	39,191	8,328	8,510	7,457	9,350	22,438	57,283	218,646	371,203
- corporate and commercial	123,901	54,711	40,489	21,081	21,811	50,355	131,166	49,564	493,078
- financial	13,770	6,599	5,731	4,557	3,613	8,767	12,804	4,332	60,173
Reverse repurchase agreements - non-trading	110,478	21,978	7,220	2,786	580	2,985	228	-	146,255
Financial investments	35,104	59,098	36,897	19,102	17,293	48,634	94,549	118,278	428,955
Assets held for sale	15,816	2,628	2,544	1,218	2,611	4,675	6,365	4,422	40,279
Accrued income and other financial assets	12,732	6,682	1,995	483	395	463	445	2,115	25,310
Financial assets at 31 Dec 2015	1,052,317	174,997	107,894	58,929	58,575	144,958	309,558	418,703	2,325,931
Non-financial assets	-	-	-	-	-	-	-	83,725	83,725
Total assets at 31 Dec 2015	1,052,317	174,997	107,894	58,929	58,575	144,958	309,558	502,428	2,409,656
Off-balance sheet commitments received
Loan and other credit-related commitments	3,472	-	2,149	-	-	111	-	-	5,732
Financial liabilities
Hong Kong currency notes in circulation	28,410	-	-	-	-	-	-	-	28,410
Deposits by banks	46,693	2,225	1,049	325	116	712	3,182	69	54,371
Customer accounts¹	1,185,091	50,831	21,397	10,421	10,869	6,596	3,852	529	1,289,586
- personal	574,468	27,646	13,032	7,371	7,990	3,566	2,920	354	637,347
- corporate and commercial	459,813	18,802	7,314	2,479	2,495	2,926	828	156	494,813
- financial	150,810	4,383	1,051	571	384	104	104	19	157,426
Repurchase agreements - non-trading	73,478	3,788	1,816	164	154	-	500	500	80,400
Items in the course of transmission to other banks	5,638	-	-	-	-	-	-	-	5,638
Trading liabilities	111,691	1,471	1,529	882	2,184	4,344	10,105	9,408	141,614
Financial liabilities designated at fair value	2,036	1,822	2,943	342	1,900	4,930	14,316	38,119	66,408
- debt securities in issue: covered bonds	-	-	-	-	-	2,012	1,608	2,577	6,197
- debt securities in issue: unsecured	1,972	973	2,926	342	1,786	2,918	9,819	10,745	31,481
- subordinated liabilities and preferred securities	-	848	-	-	-	-	2,773	18,889	22,510
- other	64	1	17	-	114	-	116	5,908	6,220
Derivatives	276,765	34	251	213	52	524	1,063	2,169	281,071
Debt securities in issue	16,536	9,326	16,295	5,542	1,365	10,754	22,866	6,265	88,949
- covered bonds	-	-	1	-	1	83	17	33	135
- otherwise secured	8,436	173	195	206	173	2,082	4,354	1,118	16,737
- unsecured	8,100	9,153	16,099	5,336	1,191	8,589	18,495	5,114	72,077
Liabilities of disposal groups held for sale	20,350	1,416	1,548	1,344	1,246	5,050	1,484	115	32,553
Accruals and other financial liabilities	14,802	7,965	2,467	659	421	925	1,454	665	29,358
Subordinated liabilities	-	401	-	-	34	650	4,579	17,038	22,702
Total financial liabilities at 31 Dec 2015	1,781,490	79,279	49,295	19,892	18,341	34,485	63,401	74,877	2,121,060
Non-financial liabilities	-	-	-	-	-	-	-	91,078	91,078
Total liabilities at 31 Dec 2015	1,781,490	79,279	49,295	19,892	18,341	34,485	63,401	165,955	2,212,138
Off-balance sheet commitments given
Loan and other credit-related commitments	472,277	45,792	16,271	9,798	47,122	11,325	48,756	15,089	666,430
- personal	161,843	11,547	6,333	963	19,607	1,207	425	1,018	202,943
- corporate and commercial	272,044	32,764	9,126	8,372	23,984	8,227	38,838	12,558	405,913
- financial	38,390	1,481	812	463	3,531	1,891	9,493	1,513	57,574


1	'Customer accounts' includes $343,782m (2015: $342,908m) insured by guarantee schemes.



HSBC Holdings plc Annual Report and Accounts 2016	249

Notes on the Financial Statements

HSBC Holdings



Maturity analysis of assets, liabilities and off-balance sheet commitments
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Financial assets
Cash at bank and in hand:
- balances with HSBC undertakings	247	-	-	-	-	-	-	-	247
Derivatives	1,702	-	-	-	-	-	93	353	2,148
Loans and advances to HSBC undertakings	16,372	-	-	-	-	167	14,204	46,678	77,421
Financial investments in HSBC undertakings	40	2	-	-	-	-	838	2,710	3,590
Accrued income and other financial assets	12	-	-	-	-	-	-	107	119
Total financial assets at 31 Dec 2016	18,373	2	-	-	-	167	15,135	49,848	83,525
Non-financial assets	-	-	-	-	-	-	-	97,273	97,273
Total assets at 31 Dec 2016	18,373	2	-	-	-	167	15,135	147,121	180,798
Financial liabilities
Amounts owed to HSBC undertakings	2,052	-	-	-	-	-	105	-	2,157
Financial liabilities designated at fair value	-	-	-	-	-	2,167	5,845	22,101	30,113
- debt securities in issue	-	-	-	-	-	-	5,845	10,921	16,766
- subordinated liabilities and preferred securities	-	-	-	-	-	2,167	-	11,180	13,347
Derivatives	3,841	-	-	-	-	-	592	592	5,025
Debt securities in issue	-	-	-	-	-	953	4,822	16,030	21,805
Accruals and other financial liabilities	75	1,268	142	22	-	-	-	-	1,507
Subordinated liabilities	-	-	-	-	-	1,693	-	13,496	15,189
Total financial liabilities at 31 Dec 2016	5,968	1,268	142	22	-	4,813	11,364	52,219	75,796
Non-financial liabilities	-	-	-	-	-	-	-	144	144
Total liabilities at 31 Dec 2016	5,968	1,268	142	22	-	4,813	11,364	52,363	75,940
Off-balance sheet commitments given
Undrawn formal standby facilities, credit lines and other commitments to lend	-	-	-	-	-	-	-	-	-



250	HSBC Holdings plc Annual Report and Accounts 2016



Maturity analysis of assets, liabilities and off-balance sheet commitments (continued)
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m
Financial assets
Cash at bank and in hand:
- balances with HSBC undertakings	242	-	-	-	-	-	-	-	242
Derivatives	1,990	-	-	-	-	-	109	368	2,467
Loans and advances to HSBC undertakings	7,805	2,629	4,618	-	-	-	-	29,298	44,350
Financial investments in HSBC undertakings	40	6	-	-	-	-	-	4,239	4,285
Accrued income and other financial assets	7	-	-	-	-	-	-	109	116
Total financial assets at 31 Dec 2015	10,084	2,635	4,618	-	-	-	109	34,014	51,460
Non-financial assets	-	-	-	-	-	-	-	98,734	98,734
Total assets at 31 Dec 2015	10,084	2,635	4,618	-	-	-	109	132,748	150,194
Financial liabilities
Amounts owed to HSBC undertakings	1,629	-	-	-	-	415	-	108	2,152
Financial liabilities designated at fair value	-	960	-	-	-	-	2,285	16,608	19,853
- debt securities in issue	-	-	-	-	-	-	-	6,937	7,897
- subordinated liabilities and preferred securities	-	-	-	-	-	-	2,285	9,671	11,956
Derivatives	2,065	-	-	-	-	-	213	-	2,278
Debt securities in issue	-	-	-	-	-	-	-	960	960
Accruals and other financial liabilities	1,231	195	132	20	-	-	-	-	1,578
Subordinated liabilities	-	-	-	-	-	-	1,749	14,146	15,895
Total financial liabilities at 31 Dec 2015	4,928	1,155	132	20	-	415	4,247	31,822	42,716
Non-financial liabilities	-	-	-	-	-	-	-	64	64
Total liabilities at 31 Dec 2015	4,925	1,155	132	20	-	415	4,247	31,886	42,780
Off-balance sheet commitments given
Undrawn formal standby facilities, credit lines and other commitments to lend	-	-	-	-	-	-	-	-	-



HSBC Holdings plc Annual Report and Accounts 2016	251

Notes on the Financial Statements

30 Offsetting of financial assets and financial liabilities

The 'Amounts not set off in the balance sheet' include transactions where:


•	the counterparty has an offsetting exposure with HSBC and a master netting or similar arrangement is in place with a right to set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and


•	in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash collateral has been received/pledged.

For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains appropriate.



		Amounts subject to enforceable netting arrangements											Amounts not subject to enforceable netting arrangements⁵	Total
						Amounts not set off in the balance sheet
		Gross amounts	Amounts offset		Net amounts in the balance sheet	Financial instruments		Non-cash collateral		Cash collateral		Net amount
	Footnotes	$m	$m		$m	$m		$m		$m		$m	$m	$m
Financial assets
Derivatives (Note 14)	1	387,999	(106,555	)	281,444	(210,067	)	(11,647	)	(40,188	)	19,542	9,428	290,872
Reverse repos, stock borrowing and similar agreementsclassified as:	2
- trading assets		9,859	-		9,859	(475	)	(9,383	)	-		1	348	10,207
- non-trading assets		222,485	(87,929	)	134,556	(4,779	)	(129,373	)	(215	)	189	26,418	160,974
Loans and advances to customers	3	46,296	(14,602	)	31,694	(24,459	)	-		(248	)	6,987	743	32,437
At 31 Dec 2016		666,639	(209,086	)	457,553	(239,780	)	(150,403	)	(40,651	)	26,719	36,937	494,490

Derivatives (Note 14)	1	385,682	(105,860	)	279,822	(215,531	)	(8,621	)	(34,040	)	21,630	8,654	288,476
Reverse repos, stock borrowing and similar agreements classified as:	2
- trading assets		7,496	-		7,496	-		(7,495	)	-		1	60	7,556
- non-trading assets		200,921	(77,925	)	122,996	(544	)	(121,981	)	(270	)	201	23,259	146,255
Loans and advances to customers	3	77,547	(31,643	)	45,904	(40,790	)	-		-		5,114	1,487	47,391
At 31 Dec 2015		671,646	(215,428	)	456,218	(256,865	)	(138,097	)	(34,310	)	26,946	33,460	489,678

Financial liabilities
Derivatives (Note 14)	1	378,571	(106,555	)	272,016	(210,035	)	(15,512	)	(33,754	)	12,715	7,803	279,819
Repos, stock lending and similar agreementsclassified as:	2
- trading liabilities		5,034	-		5,034	(475	)	(4,515	)	-		44	37	5,071
- non-trading liabilities		148,443	(87,929	)	60,514	(6,202	)	(54,126	)	(146	)	40	28,444	88,958
Customer accounts	4	45,422	(14,602	)	30,820	(24,459	)	-		(248	)	6,113	228	31,048
At 31 Dec 2016		577,470	(209,086	)	368,384	(241,171	)	(74,153	)	(34,148	)	18,912	36,512	404,896

Derivatives (Note 14)	1	377,930	(105,860	)	272,070	(215,508	)	(13,629	)	(30,063	)	12,870	9,001	281,071
Repos, stock lending and similar agreementsclassified as:	2
- trading liabilities		9,300	-		9,300	-		(9,299	)	-		1	1	9,301
- non-trading liabilities		126,740	(77,925	)	48,815	(2,034	)	(46,731	)	(26	)	24	31,585	80,400
Customer accounts	4	83,085	(31,643	)	51,442	(40,790	)	-		(1	)	10,651	729	52,171
At 31 Dec 2015		597,055	(215,428	)	381,627	(258,332	)	(69,659	)	(30,090	)	23,546	41,316	422,943


1	At 31 December 2016, the amount of cash margin received that had been offset against the gross derivatives assets was $3,720m (2015: $4,135m). The amount of cash margin paid that had been offset against the gross derivatives liabilities was $5,862m (2015: $4,224m).


2	For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within 'Trading assets' $10,207m (2015: $7,556m) and 'Trading liabilities' $5,071m (2015: $9,301m), see the 'Funding sources and uses' table on page 107.


3	At 31 December 2016, the total amount of 'Loans and advances to customers' was $861,504m (2015: $924,454m) of which $31,694m (2015: $45,904m) was subject to offsetting.


4	At 31 December 2016, the total amount of 'Customer accounts' was $1,272,386m (2015: $1,289,586m) of which $30,820m (2015: $51,442m) was subject to offsetting.


5	These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset.



252	HSBC Holdings plc Annual Report and Accounts 2016

31 Non-controlling interests



	2016	2015
	$m	$m
Non-controlling interests attributable to holders of ordinary shares in subsidiaries	6,932	6,981
Preferred securities issued by subsidiaries	260	2,077
At 31 Dec	7,192	9,058

Hang Seng Bank Limited is the only subsidiary in the Group that gives rise to significant non-controlling interest. For summarised financial information of Hang Seng Bank Limited see Note 18 'Investment in subsidiaries'.

Preferred securities issued by subsidiaries

Preferred securities are securities for which there is no obligation to pay a dividend and, if the dividend is not paid, it may not be cumulative. Such securities do not generally carry voting rights but rank higher than ordinary shares for dividend payments and in the event of a winding-up. These securities have no stated maturity date but may be called and redeemed by the issuer, subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator.

All non-cumulative preferred securities are classified as additional tier 1 capital.



Preferred securities issued by HSBC's subsidiaries
		Footnotes	First call date	2016	2015
		Footnotes	First call date	$m	$m
HSBC USA Inc.
$518m	Floating rate non-cumulative preferred stock, series F	1	Apr 2010	-	518
$374m	Floating rate non-cumulative preferred stock, series G	1	Jan 2011	-	374
$374m	6.50% non-cumulative preferred stock, series H	2	Jul 2011	-	374
HSBC Finance Corporation
$575m	6.36% non-cumulative preferred stock, series B	2	Jun 2010	-	559
HSBC Bank Canada
C$175m	Non-cumulative redeemable class 1 preferred shares, series C		Jun 2010	130	126
C$175m	Non-cumulative class 1 preferred shares, series D		Dec 2010	130	126
At 31 Dec				260	2,077


1	In June 2016, HSBC redeemed its floating non-cumulative preferred stock, series F and G for $892m.


2	In June 2016, HSBC redeemed its non-cumulated preferred stock, series H and B, for $949m.

32 Called up share capital and other equity instruments

Called up share capital and share premium



HSBC Holdings ordinary shares of $0.50 each, issued and fully paid
		2016		2015
	Footnote	Number	$m	Number	$m
At 1 Jan		19,685,096,934	9,842	19,217,874,260	9,609
Shares issued under HSBC employee share plans		69,187,052	35	91,265,909	45
Shares issued in lieu of dividends		437,302,228	219	375,956,765	188
At 31 Dec	1	20,191,586,214	10,096	19,685,096,934	9,842



HSBC Holdings non-cumulative preference shares of $0.01 each
		2016		2015
	Footnote	Number	$m	Number	$m
At 1 Jan and 31 Dec	2	1,450,000	-	1,450,000	-



HSBC Holdings share premium
	2016	2015
	$m	$m
At 31 Dec	12,619	12,421



Total called up share capital and share premium
	2016	2015
	$m	$m
At 31 Dec	22,715	22,263


1	All HSBC Holdings ordinary shares in issue, excluding 325,273,407 shares held in treasury, confer identical rights, including in respect of capital, dividends and voting.


2	Included in the capital base of HSBC as additional tier 1 capital in accordance with the CRD IV rules, by virtue of the application of grandfathering provisions.



HSBC Holdings plc Annual Report and Accounts 2016	253

Notes on the Financial Statements

HSBC Holdings non-cumulative preference shares of $0.01

HSBC Holdings pays dividends on non-cumulative preference shares of $0.01 each ('dollar preference shares') quarterly, at the sole and absolute discretion of the Board. The Board will not declare a dividend on them if this would stop the company from meeting the PRA's capital adequacy requirements, or if profit available for distribution as dividends is insufficient to also pay dividends on other shares that are equally entitled and scheduled on the same date.

HSBC Holdings may not declare or pay dividends on shares ranking lower in the right to dividends than dollar preference shares, or redeem or purchase any of its other shares ranking equal or lower than dollar preference shares, unless it has fully paid, or set aside an amount to fully pay, the dividends on the dollar preference shares for the then current dividend period.

The dollar preference shares carry no rights to conversion into ordinary shares. Holders of dollar preference shares are only entitled to attend and vote at shareholder meetings if dividends on these shares have not been paid in full on four consecutive dividend payment dates. In such circumstances, holders of these shares are entitled to vote at shareholder meetings until HSBC Holdings has paid a full dividend on them. Since 16 December 2010, HSBC Holdings has been able to redeem dollar preference shares at any time, subject to prior notification to the PRA.

HSBC Holdings non-cumulative preference share of £0.01

The one non-cumulative sterling preference share of £0.01 ('sterling preference share') has been in issue since 29 December 2010 and is held by a subsidiary of HSBC Holdings. Dividends are paid quarterly at the sole and absolute discretion of the Board. The sterling preference share carries no rights of conversion into ordinary shares of HSBC Holdings and no rights to attend and vote at shareholder meetings of HSBC Holdings. HSBC Holdings may redeem it at any time.

Other equity instruments

HSBC Holdings includes three types of additional tier 1 capital securities in its tier 1 capital. Two are presented in this Note and are accounted for as equity because HSBC does not have an obligation to transfer cash or a variable number of its own ordinary shares to holders under any circumstances outside its control. See Note 28 for additional tier 1 securities accounted for as liabilities.

Additional tier 1 capital securities

Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred at HSBC Holdings' discretion. While any coupon payments are unpaid or deferred, HSBC Holdings will not declare or pay dividends or make distributions or similar periodic payments in respect of any securities of lower or equal rank, or repurchase or redeem them. Such securities do not generally carry voting rights but rank higher than ordinary shares for coupon payments, and in the event of a winding-up. They do not meet the identifying criteria in full for recognition as tier 1 capital under CRD IV but are eligible as regulatory capital subject to grandfathering limits and progressive phase-out.

At HSBC Holdings' discretion, and subject to certain conditions being satisfied, the capital securities may be exchanged on any coupon payment date for non-cumulative preference shares to be issued by HSBC Holdings and ranking pari passu with the dollar and sterling preference shares in issue. The preference shares would be issued at a nominal value of $0.01 per share and a premium of $24.99 per share, with both amounts being subscribed and fully paid. These securities may be called and redeemed by HSBC subject to prior notification to the PRA.



HSBC's additional tier 1 capital securities in issue which are accounted for in equity
		First call date	2016	2015
		First call date	$m	$m
$2,200m	8.125% perpetual subordinated capital securities	Apr 2013	2,133	2,133
$3,800m	8.00% perpetual subordinated capital securities, Series 2	Dec 2015	3,718	3,718
At 31 Dec			5,851	5,851

Additional tier 1 capital - contingent convertible securities

During 2016, HSBC continued to issue contingent convertible securities that are included in HSBC's capital base as fully CRD IV compliant additional tier 1 capital securities on an end point basis. The net proceeds of the issuances will be used for general corporate purposes and to further strengthen the capital base to meet requirements under CRD IV. These securities bear a fixed rate of interest until their initial call dates. After the initial call dates, if they are not redeemed, the securities will bear interest at rates fixed periodically in advance for five-year periods based on prevailing market rates. Interest on the contingent convertible securities will be due and payable only at the sole discretion of HSBC, and HSBC has sole and absolute discretion at all times to cancel for any reason (in whole or in part) any interest payment that would otherwise be payable on any payment date. Distributions will not be paid if they are prohibited under UK banking regulations or if the company has insufficient reserves or fails to meet the solvency conditions defined in the securities' terms.

The contingent convertible securities are undated and are repayable, at the option of HSBC, in whole at the initial call date, or on any fifth anniversary after this date. In addition, the securities are repayable at the option of HSBC in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA. These securities rank pari passu with HSBC's dollar and sterling preference shares and are therefore ahead of ordinary shares. The contingent convertible securities will be converted into fully paid ordinary shares of HSBC at a pre-determined price, should HSBC's consolidated end point CET1 ratio fall below 7.0%. Therefore, in accordance with the terms of the securities, if the end point CET1 ratio breaches the 7.0% trigger, the securities will convert into ordinary shares at fixed contractual conversion prices in the issuance currencies of the relevant securities, equivalent to £2.70 at the prevailing rate of exchange on the issuance date, subject to certain anti-dilution adjustments.



254	HSBC Holdings plc Annual Report and Accounts 2016



HSBC's additional tier 1 capital - contingent convertible securities in issue which are accounted for in equity
		First call date	2016	2015
		First call date	$m	$m
$2,250m	6.375% perpetual subordinated contingent convertible securities	Sep 2024	2,244	2,244
$1,500m	5.625% perpetual subordinated contingent convertible securities	Jan 2020	1,494	1,494
€1,500m	5.25% perpetual subordinated contingent convertible securities	Sep 2022	1,943	1,943
$2,450m	6.375% perpetual subordinated contingent convertible securities	Mar 2025	2,459	2,459
€1,000m	6.000% perpetual subordinated contingent convertible securities	Sep 2023	1,121	1,121
$2,000m	6.875% perpetual subordinated contingent convertible securities	Jun 2021	1,998	-
At 31 Dec			11,259	9,261

Shares under option

For details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings savings-related share option plans, see Note 5.



Aggregate options outstanding under these plans
31 Dec 2016			31 Dec 2015
Number of HSBC Holdings ordinary shares	Period of exercise	Exercise price	Number of HSBC Holdings ordinary shares	Period of exercise	Exercise price
69,217,725	2016 to 2022	£4.0472-5.4738	72,840,810	2015 to 2021	£4.0472-5.4738
504,467	2016 to 2018	HK$55.4701-63.9864	1,114,830	2015 to 2018	HK$55.4701-63.9864
86,916	2016 to 2018	€5.3532-5.7974	153,610	2015 to 2018	€5.3532-6.0657
217,738	2016 to 2018	$7.1456-8.2094	665,445	2015 to 2018	$7.1456-8.2094

Maximum obligation to deliver HSBC Holdings ordinary shares

At 31 December 2016, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above option arrangements and the HSBC International Employee Share Purchase Plan, together with GPSP awards and restricted share awards granted under the HSBC Share Plan and/or the HSBC Share Plan 2011, was 198,483,750 (2015: 193,178,906). The total number of shares at 31 December 2016 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was 3,997,619 (2015: 4,753,747).

33 Contingent liabilities, contractual commitments and guarantees



	HSBC		HSBC Holdings¹
	2016	2015	2016	2015
	$m	$m	$m	$m
Guarantees and other contingent liabilities:
- financial guarantees and similar contracts	37,072	46,116	7,619	68,333
- other guarantees	44,394	39,739	-	-
- other contingent liabilities	553	490	-	-
At 31 Dec	82,019	86,345	7,619	68,333
Commitments:
- documentary credits and short-term trade-related transactions	9,190	10,168	-	-
- forward asset purchases and forward deposits placed	5,386	981	-	-
- standby facilities, credit lines and other commitments to lend	641,267	655,281	-	-
At 31 Dec	655,843	666,430	-	-


1	Guarantees by HSBC Holdings are all in favour of other Group entities.

The above table discloses the nominal principal amounts, which represents the maximum amounts at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.

Approximately half the guarantees have a term of less than one year, while guarantees with terms of more than one year are subject to HSBC's annual credit review process.

Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are disclosed in Notes 27 and 35.

Financial Services Compensation Scheme

The Financial Services Compensation Scheme ('FSCS') has provided compensation to consumers following the collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans from HM Treasury, which at 31 December 2016 stood at approximately £15.7bn ($19.3bn). The Group could be liable to pay a proportion of the outstanding amount that the FSCS has borrowed from HM Treasury. The ultimate FSCS levy to the industry as a result of the collapses cannot currently be estimated reliably as it is dependent on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the level of protected deposits and the population of FSCS members at the time.

Associates

HSBC's share of associates' contingent liabilities amounted to $35.3bn at 31 December 2016 (2015: $39.2bn). No matters arose where HSBC was severally liable.



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34 Lease commitments

Operating lease commitments

At 31 December 2016, future minimum lease payments under non-cancellable operating leases for land, buildings and equipment were $3,893m (2015: $5,333m).

Finance lease receivables

HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income.



	2016				2015
	Total future minimum payments	Unearned finance income		Present value	Total future minimum payments	Unearned finance income		Present value
	$m	$m		$m	$m	$m		$m
Lease receivables:
No later than one year	3,248	(330	)	2,918	3,382	(332	)	3,050
Later than one year and no later than five years	6,563	(702	)	5,861	7,219	(837	)	6,382
Later than five years	4,548	(633	)	3,915	4,897	(702	)	4,195
At 31 Dec	14,359	(1,665	)	12,694	15,498	(1,871	)	13,627

35 Legal proceedings and regulatory matters

HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 31 December 2016 (see Note 27). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.

Securities litigation

Household International, Inc. ('Household International') and certain former officers were named as defendants in a securities class action lawsuit, Jaffe v. Household International, Inc., et al., filed in the US District Court for the Northern District of Illinois (the 'Illinois District Court') in August 2002. The complaint asserted claims under the US Securities Exchange Act and alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household International's Consumer Lending operations (some of which ultimately led to a 2002 settlement with 46 states and the District of Columbia) and certain accounting practices, as evidenced by an August 2002 restatement of previously reported consolidated financial statements. A class was certified on behalf of all persons who acquired and disposed of Household International common stock between July 1999 and October 2002. In April 2009, a jury trial was decided partly in favour of the plaintiffs and, in October 2013, the Illinois District Court entered a partial final judgment against the defendants in the amount of approximately $2.5bn (including pre-judgment interest). The defendants appealed the partial final judgment and, in May 2015, the US Court of Appeals for the Seventh Circuit reversed the partial final judgment of the Illinois District Court and remanded the case for a new trial on loss causation.

In June 2016, HSBC reached an agreement to pay $1.6bn to settle all claims. Final court approval of the settlement and a final court order of dismissal with prejudice was granted in November 2016.

Bernard L. Madoff Investment Securities LLC

Bernard L. Madoff ('Madoff') was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. His firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), is being liquidated in the US by a trustee (the 'Trustee').

Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff.

Based on information available to HSBC, the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time HSBC serviced the funds are estimated to have totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities' fraud.

US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the English High Court, seeking recovery of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. HSBC and other parties to the action have moved to dismiss the Trustee's US actions. The US Bankruptcy Court granted HSBC's motion to dismiss with respect to certain of the Trustee's claims in November 2016, though this ruling is subject to appeal.

The deadline by which the Trustee must serve HSBC with his English action has been extended to September 2017 for UK-based defendants and November 2017 for all other defendants.

Alpha Prime Fund Ltd ('Alpha Prime') and Senator Fund SPC ('Senator'), co-defendants in one of the Trustee's US actions, have each brought cross-claims against certain HSBC defendants. In December 2016, the US Bankruptcy Court granted HSBC's motion to dismiss the cross-claims and Alpha Prime and Senator's failure to appeal renders the court's ruling final.

Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, 'Fairfield') (in liquidation since July 2009) have brought lawsuits in the US and the British Virgin Islands ('BVI') against fund shareholders, including HSBC companies that



256	HSBC Holdings plc Annual Report and Accounts 2016

acted as nominees for clients, seeking restitution of redemption payments. In October 2016, the liquidators for Fairfield ('Fairfield Liquidators') filed a motion seeking leave to amend their complaints in the US Bankruptcy Court. Briefing on the defendants' opposition to the Liquidators' motion and the defendants' own motion to dismiss is underway. In January 2017, the defendants filed their consolidated motion to dismiss and opposition to the Fairfield Liquidators' motion seeking leave to amend.

In December 2014, three additional actions were filed in the US. A purported class of direct investors in Madoff Securities asserted common law claims against various HSBC companies in the United States District Court for the Southern District of New York (the 'New York District Court'). In September 2016, the New York District Court granted HSBC's motion to dismiss this action and the plaintiffs' failure to appeal renders the court's ruling final. Two investors in Hermes International Fund Limited ('Hermes') also asserted common law claims against various HSBC companies in the New York District Court. HSBC's motion to dismiss this action remains pending. In addition, SPV Optimal SUS Ltd ('SPV OSUS'), the purported assignee of the Madoff-invested company, Optimal Strategic US Equity Ltd ('Optimal'), filed a lawsuit in New York state court against various HSBC companies and others, seeking damages on various alleged grounds, including breach of fiduciary duty and breach of trust. This action has been stayed pending the issuance of a potentially dispositive decision in an action initiated by Optimal regarding the validity of the assignment of its claims to SPV OSUS.

BVI litigation: Beginning in October 2009, the Fairfield Liquidators commenced lawsuits against fund shareholders, including HSBC companies that acted as nominees for clients, seeking recovery of redemption payments. In March 2016, the BVI court denied a motion brought by certain non-HSBC defendants challenging the Fairfield Liquidators' authorisation to pursue their US claims, which those defendants have appealed. In August 2016, the Fairfield Liquidators voluntarily discontinued their actions against the HSBC defendants.

Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, 'Kingate') brought an action against HSBC Bank Bermuda Limited ('HBBM') for recovery of funds held in Kingate's accounts, fees and dividends. This action is pending, but is not expected to move forward until the resolution of the Trustee's US actions against Kingate and HBBM.

Thema Fund Limited ('Thema') and Hermes each brought three actions in 2009. The first set of actions seeks recovery of funds in frozen accounts held at HSBC Institutional Trust Services (Bermuda) Limited. The second set of actions asserts liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for mistake, recovery of fees and damages for breach of contract. The third set of actions seeks return of fees from HBBM and HSBC Securities Services (Bermuda) Limited. The parties have agreed to a standstill in respect of all three sets of actions.

Cayman Islands litigation: In February 2013, Primeo Fund Limited ('Primeo') (in liquidation since April 2009) brought an action against HSBC Securities Services Luxembourg ('HSSL') and The Bank of Bermuda (Cayman), alleging breach of contract and breach of fiduciary duty, and claiming damages and equitable compensation. Trial began in November 2016 and is scheduled to run until the end of February 2017.

Luxembourg litigation: In April 2009, Herald Fund SPC ('Herald') (in liquidation since July 2013) brought an action against HSSL before the Luxembourg District Court, seeking restitution of cash and securities Herald purportedly lost because of Madoff Securities' fraud, or money damages. The Luxembourg District Court dismissed Herald's securities restitution claim, but reserved Herald's cash restitution claim and its claim for money damages. Herald has appealed this judgment to the Court of Appeal.

In March 2010, Herald (Lux) SICAV ('Herald (Lux)') (in liquidation since April 2009) brought an action against HSSL before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or money damages. Herald (Lux) has also requested the restitution of fees paid to HSSL.

In October 2009, Alpha Prime and, in December 2014, Senator, each brought an action against HSSL before the Luxembourg District Court, seeking the restitution of securities, or the cash equivalent, or money damages. The action initiated by Senator has been temporarily suspended at Senator's request. In April 2015, Senator commenced an action against the Luxembourg branch of HSBC Bank plc asserting identical claims before the Luxembourg District Court.

HSSL has also been named as a defendant in various actions by shareholders in Primeo Select Fund, Herald, Herald (Lux), and Hermes. Most of these actions have been dismissed, suspended or postponed.

Ireland litigation: In November 2013, Defender Limited brought an action against HSBC Institutional Trust Services (Ireland) Limited ('HTIE') and others, alleging breach of contract and claiming damages and indemnification for fund losses. A trial date has not yet been scheduled.

In May 2016, following a hearing on two preliminary issues, HTIE was successful in obtaining an order dismissing two remaining claims by purported shareholders in Thema International Fund plc.

SPV OSUS's action against HTIE and HSBC Securities Services (Ireland) Limited alleging breach of contract and claiming damages and indemnification for fund losses was dismissed in October 2015. SPV OSUS's appeal against this first instance decision was heard in January 2017.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought. Based upon the information currently available, management's estimate of possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $800m, excluding costs and interest. Due to uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.

US mortgage-related investigations

In April 2011, HSBC Bank USA N.A. ('HSBC Bank USA') entered into a consent order (the 'OCC Servicing Consent Order') with the Office of the Comptroller of the Currency ('OCC'), and HSBC Finance Corporation ('HSBC Finance') and HSBC North America Holdings Inc. ('HNAH') entered into a similar consent order with the Federal Reserve Board ('FRB') (together with the OCC Servicing Consent Order, the 'Servicing Consent Orders').

The Servicing Consent Orders required prescribed actions to address certain foreclosure practice deficiencies. The Servicing Consent Orders also required an independent foreclosure review which, pursuant to amendments to the Servicing Consent Orders in February 2013, ceased and was replaced by a settlement under which HSBC and 12 other participating servicers agreed to provide cash payments and other assistance to eligible borrowers. In June 2015, the OCC issued an amended OCC Servicing Consent Order citing



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Notes on the Financial Statements

the failure of HSBC Bank USA to be in compliance with all requirements of the OCC Servicing Consent Order and stating that the failure to satisfy all requirements of the OCC Servicing Consent Order may result in a variety of regulatory consequences for HSBC Bank USA, including the imposition of civil money penalties. In January 2017, the OCC terminated the OCC Servicing Consent Order, together with its February 2013 and June 2015 amendments, after determining that HSBC Bank USA had satisfied the requirements thereunder. In connection with the termination of the Servicing Consent Order, the OCC also assessed a civil money penalty against HSBC Bank USA finding that HSBC Bank USA failed to correct deficiencies identified under the OCC Servicing Consent Order in a timely fashion.

In February 2016, HSBC Bank USA, HSBC Finance, HSBC Mortgage Services Inc. and HNAH entered into an agreement with the US Department of Justice (the 'DoJ'), the US Department of Housing and Urban Development, the Consumer Financial Protection Bureau, other federal agencies (the 'Federal Parties') and the Attorneys General of 49 states and the District of Columbia (the 'State Parties') to resolve civil claims related to past residential mortgage loan origination and servicing practices (the 'National Mortgage Settlement Agreement'). In addition, in February 2016, the FRB announced the imposition against HSBC Finance and HNAH of a $131m civil money penalty in connection with the FRB's consent order of April 2011. Pursuant to the terms of the FRB's civil money penalty order, the penalty will be satisfied through the cash payments made to the Federal Parties and the consumer relief provided under the National Mortgage Settlement Agreement.

The Servicing Consent Orders and the National Mortgage Settlement Agreement do not completely preclude other enforcement actions by regulatory, governmental or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitisation of mortgages for investors, which could include the imposition of civil money penalties, criminal fines or other sanctions. In addition, these practices have in the past resulted in private litigation, and may result in further private litigation.

US mortgage securitisation activity and litigation

HSBC Bank USA was a sponsor or seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. ('HSI'). From 2005 to 2007, HSBC Bank USA purchased and sold approximately $24bn of such loans to HSI, which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance was approximately $4.6bn as at 31 December 2016. HSBC notes that the scale of its mortgage securitisation activities was more limited in relation to a number of other banks in the industry. In addition, HSI served as an underwriter on securitisations issued by HSBC Finance or third parties, and HSBC Bank USA served as trustee on behalf of various mortgage securitisation trusts.

Mortgage foreclosure and trustee matters: As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to a number of foreclosed homes as trustee on behalf of various mortgage securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws relating to property upkeep and tenants' rights. While HSBC believes and continues to maintain that these obligations and any related liabilities are those of the servicer of each trust, HSBC continues to receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.

Beginning in June 2014, a number of lawsuits were filed in state and federal court in New York and Ohio against HSBC Bank USA as trustee of over 320 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a putative class of investors including, among others, BlackRock and PIMCO funds. The complaints allege that the trusts have sustained losses in collateral value of approximately $38bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duty, negligence, breach of contract and breach of the common law duty of trust. HSBC's motions to dismiss in several of these lawsuits were, for the most part, denied.

It is not practicable to estimate the possible financial impact of these matters, as there are many factors that may affect the range of possible outcomes; however, the resulting financial impact could be significant.

Loan repurchase matters: HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) ('Decision One') have been named as defendants in various mortgage loan repurchase actions brought by trustees of mortgage securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages, totalling at least $1bn. In August 2016, HSBC reached an agreement in principle to settle one of the matters and the other matters remain pending.

HSBC Mortgage Corporation (USA) Inc. and Decision One have also been named as defendants in two separate actions filed by Residential Funding Company LLC ('RFC'), a mortgage loan purchase counterparty, seeking unspecified damages in connection with approximately 25,000 mortgage loans.

FIRREA: Since 2010, various HSBC entities have received subpoenas and requests for information from the DoJ and the Massachusetts state Attorney General seeking the production of documents and information regarding HSBC's involvement in certain RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014, HNAH, on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC Mortgage Corporation (USA), HSBC Finance and Decision One, received a subpoena from the US Attorney's Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act ('FIRREA'), concerning the origination, financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages.

HSBC continues to cooperate with the DoJ's investigation, which is at or nearing completion. In December 2016, HSBC had an initial discussion with the DoJ, wherein the DoJ stated its preliminary view that HSBC is subject to liability under FIRREA in connection with certain securitisations from 2005 to 2007 with respect to which HSBC Bank USA served as sponsor or seller of loans and HSI served as underwriter. HSBC disagrees with the DoJ's preliminary view, and the DoJ has offered HSBC an opportunity to respond. There can be no assurance as to how or when this matter will be resolved, or whether this matter will be resolved prior to the institution of formal legal proceedings by the DoJ. Moreover, it is possible that any such resolution could result in significant penalties and other costs. To date, at least one bank has been sued by the DoJ and at least eight other banks have reported settlements of mortgage-backed securities-related matters pursuant to FIRREA. The prior DoJ settlements provide no clear guidance as to how those individual settlement amounts were calculated, and due to the high degree of uncertainty involved, it is not practicable to estimate any possible financial effect of this matter, which could be significant.



258	HSBC Holdings plc Annual Report and Accounts 2016

HSBC expects the focus on mortgage securitisations to continue and may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.

Anti-money laundering and sanctions-related matters

In October 2010, HSBC Bank USA entered into a consent order with the OCC, and HNAH entered into a consent order with the FRB (each an 'Order' and together, the 'Orders'). These Orders required improvements to establish an effective compliance risk management programme across HSBC's US businesses, including risk management related to the Bank Secrecy Act ('BSA') and AML compliance. HSBC Bank USA is not currently in compliance with the OCC Order. Steps are being taken to address the requirements of the Orders.

In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with, among others, the DoJ (the 'US DPA'); and HSBC Holdings consented to a cease-and-desist order, and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions, as well as an undertaking with the UK FCA to comply with certain forward-looking AML and sanctions-related obligations. In addition, HSBC Bank USA entered into civil money penalty orders with the Financial Crimes Enforcement Network of the US Treasury Department and the OCC.

Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities and undertook various further obligations, including, among others, to continue to cooperate fully with the DoJ in any and all investigations, not to commit any crime under US federal law subsequent to the signing of the agreement, and to retain an independent compliance monitor (the 'Monitor'). In February 2017, the Monitor delivered his third annual follow-up review report.

Through his country-level reviews, the Monitor identified potential anti-money laundering and sanctions compliance issues that the DoJ and HSBC are reviewing further. Additionally, as discussed elsewhere in this Note, HSBC is the subject of other ongoing investigations and reviews by the DoJ. HSBC Bank plc is also the subject of an investigation by the FCA into its compliance with UK money laundering regulations and financial crime systems and controls requirements. The potential consequences of breaching the US DPA, as well as the role of the Monitor and his third annual review, are discussed on page 82.

HSBC Bank USA also entered into two consent orders with the OCC. These required HSBC Bank USA to correct the circumstances noted in the OCC's report and to adopt an enterprise-wide compliance programme, and imposed restrictions on acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, without the OCC's prior approval.

These settlements with US and UK authorities have led to private litigation, and do not preclude further private litigation related to HSBC's compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions for BSA, AML, sanctions or other matters not covered by the various agreements.

In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the 'Nominal Corporate Defendants') in New York state court against certain current and former directors and officers of those HSBC companies (the 'Individual Defendants'). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. In November 2015, the New York state court granted the Nominal Corporate Defendants' motion to dismiss. The plaintiff has appealed that decision.

In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July 2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law misrepresentations in documents released by HSBC Holdings and its wholly owned indirect subsidiary, HSBC Bank Canada, relating to HSBC's compliance with BSA, AML, sanctions and other laws.

Since November 2014, four lawsuits have been filed in federal court in New York, Illinois and Texas, against various HSBC companies and others, on behalf of plaintiffs who are, or are related to, victims of terrorist attacks in Iraq, Jordan and Mexico. In each case, it is alleged that the defendants aided and abetted the unlawful conduct of various sanctioned parties in violation of the US Anti-Terrorism Act. These actions are at an early stage.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these lawsuits, including the timing or any possible impact on HSBC, which could be significant.

Tax-related investigations

Various tax administration, regulatory and law enforcement authorities around the world, including in the US, France, Belgium, Argentina and India, are conducting investigations and reviews of HSBC Private Bank (Suisse) SA ('HSBC Swiss Private Bank') and other HSBC companies in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.

HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees, including those associated with HSBC Swiss Private Bank and an HSBC company in India, acted appropriately in relation to certain customers who had US tax reporting obligations. In connection with these investigations, HSBC Swiss Private Bank, with due regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss Private Bank that it was not eligible for the 'Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks' since a formal investigation had previously been authorised.

In November 2014, HSBC Swiss Private Bank was placed under formal criminal examination in Belgium for alleged tax-related offences. In November 2014, HSBC Swiss Private Bank was also placed under formal criminal examination in France for alleged tax-related offences in 2006 and 2007 and required to pay bail of €50m. In April 2015, HSBC Holdings was informed that it had been placed under formal criminal examination in France in connection with the conduct of HSBC Swiss Private Bank, and a €1bn bail was imposed. HSBC Holdings appealed the bail decision and, in June 2015, bail was reduced to €100m. The ultimate financial impact of these matters could differ significantly, however, from the bail amounts of €150m. In March 2016, HSBC was informed that the



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French magistrates had completed their investigation with respect to HSBC Swiss Private Bank and HSBC Holdings, and have referred the matter to the French public prosecutor for a recommendation on any potential charges. In October 2016, HSBC Swiss Private Bank and HSBC Holdings received the French public prosecutor`s brief in which the prosecutor recommended the judge to refer the cases to trial, and HSBC Swiss Private Bank and HSBC Holdings have responded to the prosecutor's brief.

In November 2014, the Argentine tax authority initiated a criminal action against various individuals, including current and former HSBC employees. The criminal action includes allegations of tax evasion, conspiracy to launder undeclared funds and an unlawful association among HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain HSBC employees, which allegedly enabled numerous HSBC customers to evade their Argentine tax obligations.

In February 2015, the Indian tax authority issued a summons and request for information to an HSBC company in India. In August 2015 and November 2015, HSBC companies received notices issued by two offices of the Indian tax authority, alleging that the Indian tax authority had sufficient evidence to initiate prosecution against HSBC Swiss Private Bank and an HSBC company in Dubai for allegedly abetting tax evasion of four different Indian individuals and/or families and requesting that the HSBC companies show why such prosecution should not be initiated. HSBC Swiss Private Bank and the HSBC company in Dubai have responded to the show cause notices.

HSBC is cooperating with the relevant authorities. As at 31 December 2016, HSBC has recognised a provision for these various matters in the amount of $773m. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.

In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.

Mossack Fonseca & Co.

HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co., a service provider of personal investment companies. HSBC is cooperating with the relevant authorities.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.

London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation

Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU and Switzerland, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of Libor, Euribor and other benchmark interest rates. As certain HSBC companies are members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.

In December 2016, the European Commission (the 'Commission') issued a decision finding that HSBC, among other banks, engaged in anti-competitive practices in connection with the pricing of euro interest rate derivatives in early 2007. The Commission determined that the duration of HSBC's infringement was 1 month and fined HSBC. HSBC has appealed the decision.

US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act ('US CEA'), and state law. The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court.

The New York District Court has issued decisions dismissing certain of the claims in response to motions filed by the defendants. Those decisions resulted in the dismissal of the plaintiffs' federal and state antitrust claims, racketeering claims, and unjust enrichment claims. Dismissal of certain of these claims was appealed to the US Court of Appeals for the Second Circuit, which reversed the New York District Court's dismissal of plaintiffs' antitrust claims in May 2016. In July 2016, defendants filed a joint motion to dismiss all antitrust claims and, in December 2016, the New York District Court granted in part and denied in part the motion, leaving only certain antitrust claims to be litigated. Separately, in October 2016, the New York District Court granted a motion to dismiss claims brought by an individual plaintiff for lack of personal jurisdiction, which dismissal is currently on appeal to the Second Circuit. Finally, in January 2017, the District Court granted defendants' motion to dismiss certain of the remaining antitrust claims against defendants that did not serve on the US dollar Libor submission panel.

Euroyen Tokyo interbank offered rate ('Tibor') and/or Japanese yen Libor: In April 2012 and July 2015, HSBC and other panel banks were named as defendants in putative class actions filed in the New York District Court on behalf of persons who transacted in financial instruments allegedly related to the euroyen Tibor and/or Japanese yen Libor. The complaints allege, among other things, misconduct related to euroyen Tibor, although HSBC is not a member of the Japanese Bankers Association's euroyen Tibor panel, as well as Japanese yen Libor, in violation of US antitrust laws, the US CEA, and state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve both of these actions, and the settlement was granted final court approval in November 2016.

Euribor: In November 2013, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments allegedly related to Euribor. The complaint alleges, among other things, misconduct related to Euribor in violation of US antitrust laws, the US CEA and state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve this action, subject to court approval.

Singapore Interbank Offered Rate ('SIBOR'), Singapore Swap Offer Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW'): In July 2016 and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in products related to the SIBOR, SOR and BBSW benchmark rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law. These matters are at an early stage.



260	HSBC Holdings plc Annual Report and Accounts 2016

US dollar International Swaps and Derivatives Association fix ('ISDAfix'): In September 2014, HSBC and other panel banks were named as defendants in a number of putative class actions consolidated in the New York District Court on behalf of persons who transacted in interest rate derivatives or purchased or sold financial instruments that were either tied to ISDAfix rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The consolidated complaint alleges, among other things, misconduct related to these activities in violation of US antitrust laws, the US CEA and state law. HSBC's motion to dismiss the complaint was denied in March 2016.

There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.

Foreign exchange rate investigations and litigation

Various regulators and competition and law enforcement authorities around the world, including in the US, the EU, Switzerland, Brazil, South Korea and South Africa are conducting investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC is cooperating with these investigations and reviews.

In May 2015, the DoJ resolved its investigations with respect to five non-HSBC financial institutions, four of whom agreed to plead guilty to criminal charges of conspiring to manipulate prices in the foreign exchange spot market, and resulting in the imposition of criminal fines in the aggregate of more than $2.5bn. Additional penalties were imposed at the same time by the FRB and other banking regulators. HSBC was not a party to these resolutions. In August 2016, the DoJ indicted one current and one former HSBC employee and charged them with wire fraud and conspiracy relating to a 2011 foreign exchange transaction. The trial is currently scheduled to begin in September 2017. HSBC was not named as a defendant in the indictment, and investigations into HSBC by the DoJ, FRB and others continue.

In December 2016, HSBC Bank plc entered into a settlement with Brazil's Administrative Council of Economic Defense ('CADE') in connection with its investigation into 15 banks, including HSBC Bank plc, as well as 30 individuals, relating to practices in the offshore foreign exchange market. Under the terms of the settlement, HSBC Bank plc agreed to pay a financial penalty to CADE.

In February 2017, the Competition Commission of South Africa referred a complaint for proceedings before the South African Competition Tribunal against 18 financial institutions, including HSBC Bank plc, for alleged misconduct related to the foreign exchange market in violation of South African antitrust laws. These proceedings are at an early stage.

In late 2013 and early 2014, HSBC and other banks were named as defendants in various putative class actions consolidated in the New York District Court. The consolidated complaint alleged, among other things, that the defendants conspired to manipulate the WM/Reuters foreign exchange benchmark rates. In September 2015, HSBC reached an agreement with plaintiffs to resolve the consolidated action, subject to court approval. In December 2015, the court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account. The final settlement approval hearing is scheduled for October 2017.

In June 2015, a putative class action was filed in the New York District Court making similar allegations on behalf of Employee Retirement Income Security Act of 1974 ('ERISA') plan participants, and another complaint was filed in the US District Court for the Northern District of California in May 2015. The court dismissed the claims in the ERISA action, and the plaintiffs have appealed to the US Court of Appeals for the Second Circuit. HSBC filed a motion to transfer the California action to New York, which was granted in November 2015. In September 2016, a putative class action making similar allegations on behalf of purported 'indirect' purchasers of foreign exchange products was filed in New York. This action is at an early stage.

In September 2015, two additional putative class actions making similar allegations under Canadian law were issued in Canada against various HSBC companies and other financial institutions.

As at 31 December 2016, HSBC has recognised a provision for these various matters in the amount of $1.2bn. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.

Precious metals fix-related investigations and litigation

Various regulators and competition and law enforcement authorities, including in the US and the EU, are conducting investigations and reviews relating to HSBC's precious metals operations and trading. HSBC is cooperating with these investigations and reviews. In November 2014, the Antitrust Division and Criminal Fraud Section of the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain documents in connection with a criminal investigation that the DoJ is conducting of alleged anti-competitive and manipulative conduct in precious metals trading. In January 2016, the Antitrust Division of the DoJ informed HSBC that it was closing its investigation; however, the Criminal Fraud Section's investigation remains ongoing.

Gold: Beginning in March 2014, numerous putative class actions were filed in the New York District Court and the US District Courts for the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. Defendants' motion to dismiss the consolidated action was granted in part and denied in part in October 2016.

In December 2015, a putative class action under Canadian law was filed in the Ontario Superior Court of Justice against various HSBC companies and other financial institutions. Plaintiffs allege that, among other things, from January 2004 to March 2014, defendants conspired to manipulate the price of gold and gold derivatives in violation of the Canadian Competition Act and common law. This action is at an early stage.

Silver: Beginning in July 2014, numerous putative class actions were filed in the US District Courts for the Southern and Eastern Districts of New York, naming HSBC and other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 1999 to the present, defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. Defendants' motion to dismiss the consolidated action was granted in part and denied in part in October 2016.

In April 2016, two putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. Plaintiffs in both actions allege that, from January 1999 to August 2014,



HSBC Holdings plc Annual Report and Accounts 2016	261

Notes on the Financial Statements

defendants conspired to manipulate the price of silver and silver derivatives in violation of the Canadian Competition Act and common law. The Ontario action is at an early stage. The Quebec action has been temporarily stayed.

Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The complaints allege that, from January 2008 to the present, defendants conspired to manipulate the price of platinum group metals ('PGM') and PGM-based financial products for their collective benefit in violation of US antitrust laws and the US CEA. Defendants have moved to dismiss the action.

There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.

Credit default swap litigation

Various HSBC companies, among other financial institutions, ISDA, and Markit, were named as defendants in numerous putative class actions filed in the New York District Court and the Illinois District Court. The actions alleged that the defendants violated US antitrust laws by, among other things, conspiring to restrict access to credit default swap pricing exchanges and block new entrants into the exchange market. The actions were subsequently consolidated in the New York District Court. In September 2015, the HSBC defendants reached an agreement with the plaintiffs to resolve the consolidated action, and final court approval of that settlement was granted in April 2016.

Treasury auctions

Beginning in July 2015, HSI, amongst other financial institutions, was named as a defendant in several putative class actions filed in the New York District Court. The complaints generally allege that the defendants violated US antitrust laws and the US CEA by colluding to manipulate prices of US Treasury securities sold at auction. The cases have been consolidated in the New York District Court. This matter is at an early stage.

The DoJ has requested information from HSBC and reportedly other banks regarding US Treasury securities trading practices. HSBC is cooperating with this ongoing investigation.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.

Interest rate swap litigation

In February 2016, various HSBC companies, among others, were named as defendants in a putative class action filed in the New York District Court. The complaint alleged that the defendants violated US antitrust laws by, among other things, conspiring to boycott and eliminate various entities and practices that would have brought exchange trading to buy‐side investors in the interest rate swaps marketplace. In June 2016, this action along with other complaints filed in the New York District Court and the Illinois District Court were consolidated in the New York District Court, and in January 2017, the defendants filed a motion to dismiss. This matter is at an early stage.

Fédération Internationale de Football Association ('FIFA') related investigations

HSBC has received inquiries from the DoJ regarding its banking relationships with certain individuals and entities that are or may be associated with FIFA. The DoJ is investigating whether multiple financial institutions, including HSBC, permitted the processing of suspicious or otherwise improper transactions, or failed to observe applicable AML laws and regulations. HSBC is cooperating with the DoJ's investigation.

Hiring practices investigation

The US Securities and Exchange Commission (the 'SEC') is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific. HSBC has received various requests for information and is cooperating with the SEC's investigation.

36 Related party transactions

Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC employees, Key Management Personnel ('KMP') as defined by IAS 24, close family members of KMP and entities which are controlled or jointly controlled by KMP or their close family members. KMP are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Holdings. These individuals also constitute 'senior management' for the purposes of the Hong Kong Listing Rules. Following a review of the application of IAS 24, it was determined that the roles of Chief Legal Officer, Group Head of Internal Audit and Group Head of Human Resources did not meet the criteria for KMP as provided for in the standard.

Particulars of transactions with related parties are tabulated below. The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful information to represent the amount of the transactions and outstanding balances during the year.

Key Management Personnel

Details of Directors' remuneration and interest in shares are disclosed in the Directors' remuneration report on pages 153 to 170.
IAS 24 'Related party disclosures' requires the following additional information for key management compensation.



262	HSBC Holdings plc Annual Report and Accounts 2016



Compensation of Key Management Personnel
	2016	2015	2014
	$m	$m	$m
Short-term employee benefits	41	40	41
Post-employment benefits	-	1	1
Other long-term employee benefits	5	9	7
Share-based payments	37	51	54
Year ended 31 Dec	83	101	103



Shareholdings, options and other securities of Key Management Personnel
	2016	2015
	(000s)	(000s)
Number of options held over HSBC Holdings ordinary shares under employee share plans	18	29
Number of HSBC Holdings ordinary shares held beneficially and non-beneficially	22,283	18,961
At 31 Dec	22,301	18,990



Transactions and balances during the year with Key Management Personnel
		2016		2015
		Balance at 31 Dec	Highest amounts outstanding during year	Balance at 31 Dec	Highest amounts outstanding during year
	Footnote	$m	$m	$m	$m
Key Management Personnel
Advances and credits	1	215	220	218	411
Guarantees		55	63	67	91
Deposits		229	677	387	768


1	Advances and credits entered into by subsidiaries of HSBC Holdings during 2016 with Directors, disclosed pursuant to Section 413 of the Companies Act 2006, totalled $2m (2015: $4m).

Some of the transactions were connected transactions as defined by the Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited, but were exempt from any disclosure requirements under the provisions of those rules. The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.

Associates and joint ventures

The Group provides certain banking and financial services to associates and joint ventures including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and joint ventures are given in Note 17.



Transactions and balances during the year with associates and joint ventures
	2016		2015
	Highest balance during the year	Balance at 31 Dec	Highest balance during the year	Balance at 31 Dec
	$m	$m	$m	$m
Unsubordinated amounts due from joint ventures	126	113	195	151
Unsubordinated amounts due from associates	3,136	2,881	4,209	2,035
Amounts due to associates	1,112	576	1,047	92
Guarantees and commitments	776	594	905	904

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

Post-employment benefit plans

At 31 December 2016, $4.4bn (2015: $4.3bn) of HSBC post-employment benefit plan assets were under management by
HSBC companies, earning management fees of $6m in 2016 (2015: $8m). At 31 December 2016 HSBC's post-employment
benefit plans had placed deposits of $710m (2015: $811m) with its banking subsidiaries, earning interest payable to the schemes
of $1m (2015: nil). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

The HSBC Bank (UK) Pension Scheme and International Staff Retirement Benefit Scheme enter into swap transactions with HSBC to manage inflation and interest rate sensitivity of its liabilities and selected assets. At 31 December 2016 the gross notional value of the swaps with HSBC Bank (UK) Pension Scheme was $10.5bn (2015: $13.3bn); these swaps had a positive fair value to the scheme of $0.9bn (2015: $0.5bn); and HSBC had delivered collateral of $0.9bn (2015: $1.1bn) to the scheme in respect of these arrangements.

At 31 December 2016, the gross notional value of the swaps with the International Staff Retirement Benefit Scheme was
$1.2bn (2015: $1.7bn) and the swaps had a net negative fair value to the scheme of $85m (2015: $96m negative). All swaps were executed at prevailing market rates and within standard market bid/offer spreads.

HSBC Holdings



HSBC Holdings plc Annual Report and Accounts 2016	263

Notes on the Financial Statements

Details of HSBC Holdings' subsidiaries are shown in Note 38.



Transactions and balances during the year with subsidiaries
	2016		2015
	Highest balance during the year	Balance at 31 Dec	Highest balance during the year	Balance at 31 Dec
	$m	$m	$m	$m
Assets
Cash at bank	997	247	620	242
Derivatives	4,494	2,148	3,409	2,466
Loans and advances	77,732	77,421	47,229	44,350
Financial investments	4,314	3,590	4,427	4,285
Investments in subsidiaries	97,827	95,850	97,770	97,770
Total related party assets at 31 Dec	185,364	179,256	153,455	149,113
Liabilities
Amounts owed to HSBC undertakings	3,823	2,157	2,892	2,152
Derivatives	5,025	5,025	2,459	2,277
Subordinated liabilities	1,749	891	2,652	1,746
Total related party liabilities at 31 Dec	10,597	8,073	8,003	6,175
Guarantees and commitments	63,719	7,619	68,349	68,333

Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 5.

37 Events after the balance sheet date

A fourth interim dividend for 2016 of $0.21 per ordinary share (a distribution of approximately $4,172m) was declared by the Directors after 31 December 2016.

On 21 February 2017, the Board approved a share buy-back programme of up to $1.0bn.

These accounts were approved by the Board of Directors on 21 February 2017 and authorised for issue.



264	HSBC Holdings plc Annual Report and Accounts 2016

38 HSBC Holdings' subsidiaries, joint ventures and associates

In accordance with Section 409 of the Companies Act 2006 a list of HSBC Holdings plc's subsidiaries, joint ventures and associates, the registered office address and the effective percentage of equity owned at 31 December 2016 is disclosed below.

Unless otherwise stated, the share capital comprises ordinary or common shares which are held by Group subsidiaries. The ownership percentage is provided for each undertaking. The undertakings below are consolidated by HSBC unless otherwise indicated.

Subsidiaries



Subsidiaries	Group interest %	Footnotes	Subsidiaries	Group interest %	Footnotes
ACN 087 652 113 Pty Limited	100.00	182	Card-Flo #1, Inc.	100.00	36
AEA Investors (Cayman) IA L.P.	100.00	1,19, 130	Card-Flo #3, Inc.	100.00	127
Allblack Investments Limited	100.00	16, 162	Cayman International Finance Limited	100.00	166
Almacenadora Banpacifico S.A.	99.99	201	Cayman Nominees Limited	100.00	228
AMP Client HSBC Custody Nominee (UK) Limited	100.00	1, 94	CBS/Holdings, Inc.	100.00	101
Assetfinance December (F) Limited	100.00	94	CC&H Holdings LLC	100.00	10, 133
Assetfinance December (H) Limited	100.00	94	CCF & Partners Asset Management Limited	100.00	94
Assetfinance December (M) Limited	100.00	94	CCF Charterhouse GmbH	100.00	4, 233
Assetfinance December (P) Limited	100.00	94	CCF Charterhouse GmbH & Co Asset Leasing KG	100.00	9, 233
Assetfinance December (R) Limited	100.00	94	CCF Holding (LIBAN) S.A.L. (in liquidation)	74.99	1, 220
Assetfinance December (W) Limited	100.00	94	Charterhouse Administrators ( D.T.) Limited	100.00	94
Assetfinance June (A) Limited	100.00	94	Charterhouse Development Limited	100.00	94
Assetfinance June (D) Limited	100.00	94	Charterhouse Management Services Limited	100.00	94
Assetfinance June (E) Limited	100.00	94	Charterhouse Pensions Limited	100.00	1, 94
Assetfinance Limited	100.00	94	Chongqing Dazu HSBC Rural Bank Company Limited	100.00	22, 190
Assetfinance March (B) Limited	100.00	84	Chongqing Fengdu HSBC Rural Bank Company Limited	100.00	22, 191
Assetfinance March (D) Limited	100.00	94	Chongqing Fengdu HSBC Rural Bank Company Limited	100.00	22, 191
Assetfinance March (F) Limited	100.00	94	Chongqing Rongchang HSBC Rural Bank Company Limited	100.00	22, 195
Assetfinance September (F) Limited	100.00	94	Chongqing Rongchang HSBC Rural Bank Company Limited	100.00	22, 195
Assetfinance September (G) Limited	100.00	94	CL Residential Limited	100.00	94
B&Q Financial Services Limited	100.00	131	COIF Nominees Limited	100.00	1, 8, 94
Banco Nominees (Guernsey) Limited	99.98	1, 108	Cordico Management AG	100.00	109
Banco Nominees 2 (Guernsey) Limited	100.00	108	Corhold Limited	100.00	151
Banco Nominees Limited	100.00	87	Dalian Pulandian HSBC Rural Bank Company Limited	100.00	22, 147
Bank of Bermuda (Cayman) Limited	100.00	166	Decision One Mortgage Company, LLC	100.00	10, 139
Beau Soleil Limited Partnership	99.99	19, 27	Dem 5	100.00	4, 74
Beijing Miyun HSBC Rural Bank Company Limited	100.00	22, 148	Dem 9	100.00	4, 74
Beneficial Company LLC	100.00	10, 127	Dempar 1	100.00	4, 29
Beneficial Consumer Discount Company	100.00	135	Dempar 4	100.00	4, 29
Beneficial Financial I Inc.	100.00	142	Desarrollo Turistico, S.A. de C.V.	100.00	201
Beneficial Florida Inc.	100.00	127	Eagle Rock Holdings, Inc.	100.00	101
Beneficial Homeowner Service Corporation	100.00	127	Ellenville Holdings, Inc.	100.00	101
Beneficial Kentucky Inc.	100.00	127	Elysees GmbH	100.00	6, 233
Beneficial Loan & Thrift Co.	100.00	127	Elysées Immo Invest	100.00	4, 89
Beneficial Louisiana Inc.	100.00	127	Emerging Growth Real Estate II GP Limited	100.00	108
Beneficial Maine Inc.	100.00	127	EMTT Limited	100.00	1, 94
Beneficial Massachusetts Inc.	100.00	127	Endeavour Personal Finance Limited	100.00	153
Beneficial Michigan Inc.	100.00	127	Equator Holdings Limited	100.00	94
Beneficial New Hampshire Inc.	100.00	127	Eton Corporate Services Limited	100.00	200
Beneficial Oregon Inc.	100.00	127	Far East Leasing SA	100.00	1, 189
Beneficial Rhode Island Inc.	100.00	127	Fdm 5 SAS	100.00	4, 74
Beneficial South Dakota Inc.	100.00	127	FEPC Leasing Ltd.	100.00	16, 234
Beneficial Tennessee Inc.	100.00	141	Finanpar 2	100.00	4, 89
Beneficial West Virginia, Inc.	100.00	143	Finanpar 7	100.00	4, 89
Beneficial Wyoming Inc.	100.00	136	First Corporate Director Inc.	100.00	151
BerCay Holdings Limited	100.00	166	First Direct Investments (UK) Limited	100.00	94
Bermuda International Securities Limited	100.00	87	Flandres Contentieux S.A.	100.00	1, 4, 44
BFC Insurance Agency of Nevada	100.00	61	Foncière Elysées	100.00	4, 29
Billingsgate City Securities Limited	100.00	94	Forward Trust Rail Services Limited	100.00	16, 94
Billingsgate Nominees Limited	100.00	94	Fujian Yongan HSBC Rural Bank Company Limited	100.00	22, 192
Cal-Pacific Services, Inc.	100.00	142	Fulcher Enterprises Company Limited	62.14	96
Canada Crescent Nominees (UK) Limited	100.00	1, 94	Fundacion HSBC, A.C.	60.00	1, 20, 201
Canada Square Nominees (UK) Limited	100.00	94	G.M. Gilt-Edged Nominees Limited	100.00	1, 94
Canada Square Property Participations Limited	100.00	1, 94	Gesellschaft fur Industrielle Beteiligungen und Finanzierung mbH	100.00	176
Canada Water Nominees (UK) Limited	100.00	1, 94		100.00	176
Capco/Cove, Inc.	100.00	101	Gesico International SA	100.00	113



HSBC Holdings plc Annual Report and Accounts 2016	265

Notes on the Financial Statements



Subsidiaries	Group interest %	Footnotes	Subsidiaries	Group interest %	Footnotes
Giller Ltd.	100.00	101	HSBC Administradora de Inversiones S.A.	100.00	111
GPIF Co-Investment, LLC	80.00	10, 127	HSBC AFS (USA) LLC	100.00	10, 101
GPIF-I Equity Co., Ltd.	100.00	1, 11, 118	HSBC Agency (India) Private Limited	100.00	85
GPIF-I Finance Co., Ltd	100.00	1, 11, 118	HSBC Alpha Funding (UK) Holdings	100.00	166
Griffin International Limited	100.00	94	HSBC Alternative Investments Limited	100.00	94
Grundstuecksgesellschaft Trinkausstrasse Kommanditgesellschaft	100.00	176	HSBC Amanah Malaysia Berhad	100.00	94
	100.00	176	HSBC Americas Corporation (Delaware)	100.00	127
Grupo Financiero HSBC, S. A. de C. V.	100.00	201	HSBC Argentina Holdings S.A.	100.00	150
Guangdong Enping HSBC Rural Bank Company Limited	100.00	22, 196	HSBC Asia Holdings (UK) Limited	100.00	94
Guangdong Enping HSBC Rural Bank Company Limited	100.00	22, 196	HSBC Asia Holdings B.V.	100.00	16,94
GZ Trust Corporation	100.00	151	HSBC Asia Pacific Holdings (UK) Limited	100.00	16,94
Hang Seng (Nominee) Limited	62.14	96	HSBC Asset Finance (UK) Limited	100.00	94
Hang Seng Bank (China) Limited	62.14	22, 71	HSBC Asset Finance Holdings Limited	100.00	94
Hang Seng Bank (Trustee) Limited	62.14	96	HSBC Asset Finance M.O.G. Holdings (UK) Limited	100.00	94
Hang Seng Bank Limited	62.14	96	HSBC Asset Management (India) Private Limited	100.00	76
Hang Seng Bullion Company Limited	62.14	96	HSBC Assurances Vie (France)	100.00	4, 44
Hang Seng Credit Limited	62.14	96	HSBC Australia Holdings Pty Limited	100.00	16, 182
Hang Seng Data Services Limited	62.14	96	HSBC Bank (Chile)	100.00	171
Hang Seng Finance Limited	62.14	96	HSBC Bank (China) Company Limited	100.00	22, 157
Hang Seng Financial Information Limited	62.14	96	HSBC Bank (General Partner) Limited	100.00	163
Hang Seng Futures Limited	62.14	96	HSBC Bank (Mauritius) Limited	72.96	91
Hang Seng Indexes Company Limited	62.14	96	HSBC Bank (RR) (Limited Liability Company)	100.00	23, 57
Hang Seng Insurance Company Limited	62.14	96	HSBC Bank (Singapore) Limited	100.00	58
Hang Seng Investment Management Limited	62.14	96	HSBC Bank (Taiwan) Limited	100.00	38
Hang Seng Investment Services Limited	62.14	96	HSBC Bank (Uruguay) S.A.	100.00	211
Hang Seng Life Limited	62.14	96	HSBC Bank (Vietnam) Ltd.	100.00	227
Hang Seng Real Estate Management Limited	62.14	96	HSBC Bank A.S.	100.00	146
Hang Seng Securities Limited	62.14	96	HSBC Bank Argentina S.A.	99.99	149
Hang Seng Security Management Limited	62.14	96	HSBC Bank Armenia cjsc	70.00	90
Haseba Investment Company Limited	62.14	96	HSBC Bank Australia Limited	100.00	182
HBL Nominees Limited	100.00	1, 94	HSBC Bank Bermuda Limited	100.00	87
HDSAP GP Limited	100.00	108	HSBC Bank Canada	100.00	16, 98
HFC Bank Limited	100.00	94	HSBC Bank Capital Funding (Sterling 1) LP	100.00	19, 163
HFC Company LLC	100.00	10, 127	HSBC Bank Capital Funding (Sterling 2) LP	100.00	19, 163
High Meadow Management, Inc.	100.00	101	HSBC Bank Egypt S.A.E	94.53	69
High Time Investments Limited	62.14	96	HSBC Bank International Limited	100.00	162
HITG Administration GmbH	100.00	34	HSBC Bank Malaysia Berhad	100.00	31
Honey Green Enterprises Ltd.	100.00	103	HSBC Bank Malta p.l.c.	70.03	35
Hongkong International Trade Finance (Holdings) Limited	100.00	94	HSBC Bank Middle East Limited	100.00	16, 177
Hongkong International Trade Finance (Holdings) Limited	100.00	94	HSBC Bank Middle East Limited, Representative Office Morocco SARL	100.00	229
Household Capital Markets LLC	100.00	10, 127		100.00	229
Household Commercial Financial Services, Inc.	100.00	127	HSBC Bank Nominee (Jersey) Limited	100.00	162
Household Finance Consumer Discount Company	100.00	127	HSBC Bank Oman S.A.O.G.	51.00	105
Household Finance Corporation II	100.00	127	HSBC Bank Pension Trust (UK) Limited	100.00	94
Household Finance Corporation III	100.00	127	HSBC Bank plc	100.00	2, 16, 94
Household Finance Corporation of Alabama	100.00	137	HSBC Bank Polska S.A.	100.00	16, 214
Household Finance Corporation of California	100.00	127	HSBC Bank USA, National Association	100.00	16, 52
Household Finance Corporation of West Virginia	100.00	143	HSBC Branch Nominee (UK) Limited	100.00	1, 94
Household Finance Industrial Loan Company of Iowa	100.00	138	HSBC Brasil Holding S.A.	100.00	216
Household Finance Realty Corporation of Nevada	100.00	127	HSBC BRASIL S.A. BANCO DE INVESTIMENTO	100.00	216
Household Finance Realty Corporation of New York	100.00	127	HSBC Broking Forex (Asia) Limited	100.00	27
Household Financial Center Inc.	100.00	141	HSBC Broking Futures (Asia) Limited	100.00	14, 27
Household Industrial Finance Company	100.00	126	HSBC Broking Futures (Hong Kong) Limited	100.00	27
Household Industrial Loan Company of Kentucky	100.00	140	HSBC Broking Nominees (Asia) Limited	100.00	27
Household Insurance Group Holding Company	100.00	86	HSBC Broking Securities (Asia) Limited	100.00	27
Household International Europe Limited	100.00	16, 94	HSBC Broking Securities (Hong Kong) Limited	100.00	27
Household Pooling Corporation	100.00	226	HSBC Broking Services (Asia) Limited	100.00	27
Household Realty Corporation	100.00	127	HSBC Canada Holdings (UK) Limited	100.00	94
HPUT A Limited	100.00	1,94	HSBC Capital (Canada) Inc.	100.00	68
HPUT B Limited	100.00	1,94	HSBC Capital (USA), Inc.	100.00	127
HRMG Nominees Limited	100.00	108	HSBC Capital Funding (Dollar 1) L.P.	100.00	19,163
HSBC (BGF) Investments Limited	100.00	94	HSBC Capital Limited	100.00	27
HSBC (General Partner) Limited	100.00	2, 163	HSBC Card Services Inc.	100.00	127
HSBC (Kuala Lumpur) Nominees Sdn Bhd	100.00	31	HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero HSBC	100.00	201
HSBC (Malaysia) Trustee Berhad	100.00	40	HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero HSBC	100.00	201
HSBC (Singapore) Nominees Pte Ltd	100.00	58	HSBC Cayman Services Limited	100.00	166



266	HSBC Holdings plc Annual Report and Accounts 2016



Subsidiaries	Group interest %	Footnotes	Subsidiaries	Group interest %	Footnotes
HSBC City Funding Holdings	100.00	94	HSBC Global Asset Management (Japan) K. K.	100.00	155
HSBC Client Holdings Nominee (UK) Limited	100.00	1, 94	HSBC Global Asset Management (Malta) Limited	70.03	95
HSBC Client Share Offer Nominee (UK) Limited	100.00	1, 94	HSBC Global Asset Management (México), S.A. de C.V., Sociedad Operadora de Fondos de Inversión, Grupo Financiero HSBC	100.00	201
HSBC Columbia Funding, LLC	100.00	10, 127
HSBC Consumer Lending (USA) Inc.	100.00	127
HSBC Corporate Advisory (Malaysia) Sdn Bhd	100.00	31	HSBC Global Asset Management (Oesterreich) GmbH	100.00	6, 152
HSBC Corporate Finance (Hong Kong) Limited	100.00	27	HSBC Global Asset Management (Singapore) Limited	100.00	58
HSBC Corporate Trustee Company (UK) Limited	100.00	94	HSBC Global Asset Management (Switzerland) AG	100.00	4, 109
HSBC Credit Center, Inc.	100.00	127	HSBC Global Asset Management (Taiwan) Limited	100.00	63
HSBC Custody Nominees (Australia) Limited	100.00	182	HSBC Global Asset Management (UK) Limited	100.00	94
HSBC Custody Services (Guernsey) Limited	100.00	108	HSBC Global Asset Management (USA) Inc.	100.00	80
HSBC Daisy Investments (Mauritius) Limited	100.00	123	HSBC Global Asset Management Holdings (Bahamas) Limited	100.00	187
HSBC Electronic Data Processing (Guangdong) Limited	100.00	22, 77	HSBC Global Asset Management Holdings (Bahamas) Limited	100.00	187
HSBC Electronic Data Processing (Guangdong) Limited	100.00	22, 77	HSBC Global Asset Management Limited	100.00	94
HSBC Electronic Data Processing (Malaysia) Sdn Bhd	100.00	222	HSBC Global Custody Nominee (UK) Limited	100.00	1, 94
HSBC Electronic Data Processing (Philippines), Inc.	100.00	169	HSBC Global Custody Proprietary Nominee (UK) Limited	100.00	1, 94
HSBC Electronic Data Processing India Private Limited	100.00	165	HSBC Global Custody Proprietary Nominee (UK) Limited	100.00	1, 94
HSBC Electronic Data Processing India Private Limited	100.00	165	HSBC Global Services (UK) Limited	100.00	94
HSBC Electronic Data Processing Lanka (Private) Limited	100.00	79	HSBC Global Services Limited	100.00	2, 94
HSBC Electronic Data Processing Lanka (Private) Limited	100.00	79	HSBC Global Shared Services (India) Private Limited	100.00	1, 85
HSBC Electronic Data Service Delivery (Egypt) S.A.E.	100.00	219	HSBC Group Management Services Limited	100.00	94
HSBC Enterprise Investment Company (UK) Limited	100.00	94	HSBC Group Nominees UK Limited	100.00	1, 2, 94
HSBC Epargne Entreprise (France)	100.00	4,44	HSBC Guyerzeller Trust Company	100.00	82
HSBC Equator (UK) Limited	100.00	94	HSBC Holdings B.V.	100.00	16, 94
HSBC Equipment Finance (UK) Limited	100.00	94	HSBC Home Equity Loan Corporation II	100.00	127
HSBC Equities (Luxembourg) S.a r.l.	100.00	1,45	HSBC IM Pension Trust Limited	100.00	1, 94
HSBC Equity (UK) Limited	100.00	94	HSBC Infrastructure Limited	100.00	94
HSBC Europe B.V.	100.00	94	HSBC INKA Investment-AG TGV	100.00	24, 112
HSBC European Clients Depositary Receipts Nominee (UK) Limited	100.00	1, 94	HSBC Inmobiliaria (Mexico), S.A. de C.V.	99.96	201
	100.00	1, 94	HSBC Institutional Trust Services (Asia) Limited	100.00	27
HSBC Executor & Trustee Company (UK) Limited	100.00	94	HSBC Institutional Trust Services (Bermuda) Limited	100.00	87
HSBC Factoring (France)	100.00	4,29	HSBC Institutional Trust Services (Ireland) DAC	100.00	26
HSBC Finance (Brunei) Berhad	100.00	230	HSBC Institutional Trust Services (Mauritius) Limited	100.00	160
HSBC Finance (Netherlands)	100.00	2,94	HSBC Institutional Trust Services (Singapore) Limited	100.00	58
HSBC Finance Corporation	100.00	16, 127	HSBC Insurance (Asia) Limited	100.00	53
HSBC Finance Limited	100.00	94	HSBC Insurance (Asia-Pacific) Holdings Limited	100.00	16, 181
HSBC Finance Mortgages Inc.	100.00	224	HSBC Insurance (Bermuda) Limited	100.00	87
HSBC Finance Transformation (UK) Limited	100.00	2, 94	HSBC Insurance (Singapore) Pte. Limited	100.00	58
HSBC Financial Services (Middle East) Limited	100.00	158	HSBC Insurance Agency (USA) Inc.	100.00	80
HSBC Financial Services (Lebanon) s.a.l.	99.70	158	HSBC Insurance Brokers (Philippines) Inc	100.00	102
HSBC Financial Services (Uruguay) S.A.	100.00	237	HSBC Insurance Brokers (Taiwan) Limited	100.00	46
HSBC Fondo 1, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	HSBC Insurance Holdings Limited	100.00	2,94
	100.00	1, 201	HSBC Insurance Management Services Limited	100.00	94
HSBC Fondo 3, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	HSBC Insurance Services (Lebanon) S.A.L.	100.00	158
	100.00	1, 201	HSBC Insurance Services Holdings Limited	100.00	94
HSBC Fondo 4, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	HSBC International Finance Corporation (Delaware)	100.00	66
	100.00	1, 201	HSBC International Financial Services (UK) Limited	100.00	15, 94
HSBC Fondo 5, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	HSBC International Holdings (Jersey) Limited	100.00	162
	100.00	1, 201	HSBC International Nominees Limited	100.00	1, 208
HSBC Fondo 6, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	HSBC International Trade Finance Limited	100.00	94
	100.00	1, 201	HSBC International Trustee (BVI) Limited	100.00	17, 235
HSBC Fondo Global 1, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	HSBC International Trustee (Holdings) Pte. Limited	100.00	58
	100.00	1, 201	HSBC International Trustee Limited	100.00	208
HSBC France	99.99	24, 29	HSBC Inversiones S.A.	100.00	171
HSBC Fund Administration (Jersey) Limited	100.00	162	HSBC Inversiones y Servicios Financieros Limitada	100.00	171
HSBC Fund Services (Korea) Limited	92.96	1, 178	HSBC InvestDirect (India) Limited	99.54	100
HSBC Funding (UK) Holdings	100.00	94	HSBC InvestDirect Financial Services (India) Limited	100.00	100
HSBC Funds Nominee (Jersey) Limited	100.00	162	HSBC InvestDirect Sales & Marketing (India) Limited	99.00	85
HSBC Germany Holdings GmbH	100.00	176	HSBC InvestDirect Securities (India) Private Limited	100.00	16, 100
HSBC Gestion (Monaco) SA	99.80	48	HSBC Investment Asia Holdings Limited	100.00	27
HSBC Global Asset Management (Bermuda) Limited	100.00	16,87	HSBC Investment Bank Holdings B.V.	100.00	94
HSBC Global Asset Management (Canada) Limited	100.00	64	HSBC Investment Bank Holdings Limited	100.00	2, 94
HSBC Global Asset Management (Deutschland) GmbH	100.00	176	HSBC Investment Company (Egypt) S.A.E	100.00	1,65
HSBC Global Asset Management (France)	100.00	4,170	HSBC Investment Funds (Canada) Inc.	100.00	16, 64
HSBC Global Asset Management (Hong Kong) Limited	100.00	27	HSBC Investment Funds (Hong Kong) Limited	100.00	27
HSBC Global Asset Management (Hong Kong) Limited	100.00	27	HSBC Investment Funds (Luxembourg) SA	100.00	45
HSBC Global Asset Management (International) Limited	100.00	168	HSBC Investment Holdings (Guernsey) Limited	100.00	200
HSBC Global Asset Management (International) Limited	100.00	168	HSBC Investment Services (Africa) (Pty) Limited	100.00	56



HSBC Holdings plc Annual Report and Accounts 2016	267

Notes on the Financial Statements



Subsidiaries	Group interest %	Footnotes	Subsidiaries	Group interest %	Footnotes
HSBC Investments (Bahamas) Limited	100.00	188	HSBC Provident Fund Trustee (Hong Kong) Limited	100.00	27
HSBC Invoice Finance (UK) Limited	100.00	59	HSBC Quest Trustee (UK) Limited	100.00	1, 2, 94
HSBC Iris Investments (Mauritius) Ltd	100.00	123	HSBC Rail (UK) Limited	100.00	94
HSBC Issuer Services Common Depositary Nominee (UK) Limited	100.00	1, 94	HSBC Real Estate Leasing (France)	100.00	4, 44
HSBC Issuer Services Common Depositary Nominee (UK) Limited	100.00	1, 94	HSBC Realty Credit Corporation (USA)	100.00	16, 127
HSBC Issuer Services Depositary Nominee (UK) Limited	100.00	1, 94	HSBC REIM (France)	100.00	4, 44
HSBC Issuer Services Depositary Nominee (UK) Limited	100.00	1, 94	HSBC Representative Office (Nigeria) Limited	100.00	221
HSBC Land Title Agency (USA) LLC	55.00	10, 70	HSBC Republic Management Services (Guernsey) Limited	100.00	200
HSBC Latin America B.V.	100.00	94	HSBC Republic Management Services (Guernsey) Limited	100.00	200
HSBC Latin America Holdings (UK) Limited	100.00	2, 94	HSBC Retail Services Inc.	100.00	127
HSBC Leasing (Asia) Limited	100.00	27	HSBC Retirement Benefits Trustee (UK) Limited	100.00	1, 2, 94
HSBC Leasing (France)	100.00	4, 74	HSBC Saudi Arabia Limited	69.40	1, 156
HSBC Life (International) Limited	100.00	87	HSBC Savings Bank (Philippines) Inc.	100.00	231
HSBC Life (UK) Limited	100.00	94	HSBC Securities (Asia) Limited	100.00	14, 27
HSBC Life Assurance (Malta) Limited	70.03	95	HSBC Securities (B) Berhad	100.00	1, 161
HSBC Life Insurance Company Limited	50.00	51	HSBC Securities (Canada) Inc.	100.00	93
HSBC Lodge Funding (UK) Holdings	100.00	94	HSBC Securities (Egypt) S.A.E.	94.53	69
HSBC London Holdings Limited	100.00	1, 2, 94	HSBC Securities (Japan) Limited	100.00	94
HSBC LU Nominees Limited	100.00	94	HSBC Securities (Philippines) Inc.	100.00	1, 12, 92
HSBC Management (Guernsey) Limited	100.00	108	HSBC Securities (Singapore) Pte Limited	100.00	12, 58
HSBC Markets (Asia) Limited (In Liquidation)	100.00	25	HSBC Securities (South Africa) (Pty) Limited	100.00	56
HSBC Markets (USA) Inc.	100.00	127	HSBC Securities (Taiwan) Corporation Limited	100.00	38
HSBC Marking Name Nominee (UK) Limited	100.00	1, 94	HSBC Securities (USA) Inc.	100.00	127
HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC	99.99	201	HSBC Securities and Capital Markets (India) Private Limited	100.00	16, 85
	99.99	201	HSBC Securities and Capital Markets (India) Private Limited	100.00	16, 85
HSBC Middle East Finance Company Limited	80.00	218	HSBC Securities Asia International Nominees Limited	100.00	199
HSBC Middle East Holdings B.V.	100.00	16, 94	HSBC Securities Asia Nominees Limited	100.00	27
HSBC Middle East Leasing Partnership	100.00	19, 183	HSBC Securities Brokers (Asia) Limited	100.00	27
HSBC Middle East Securities L.L.C	49.00	154	HSBC Securities Investments (Asia) Limited	100.00	27
HSBC Mortgage Corporation (Canada)	100.00	16, 98	HSBC Securities Services (Bermuda) Limited	100.00	87
HSBC Mortgage Corporation (USA)	100.00	127	HSBC Securities Services (Guernsey) Limited	100.00	108
HSBC Mortgage Services Inc.	100.00	127	HSBC Securities Services (Ireland) DAC	100.00	26
HSBC Nominees (Asing) Sdn Bhd	100.00	31	HSBC Securities Services (Luxembourg) S.A.	100.00	45
HSBC Nominees (Hong Kong) Limited	100.00	27	HSBC Securities Services (USA) Inc.	100.00	134
HSBC Nominees (New Zealand) Limited	100.00	164	HSBC Securities Services Holding Limited	100.00	208
HSBC Nominees (Tempatan) Sdn Bhd	100.00	31	HSBC Securities Services Holdings (Ireland) DAC	100.00	26
HSBC North America Holdings Inc.	100.00	16, 127	HSBC Seguros de Retiro (Argentina) S.A.	100.00	150
HSBC Odeme Sistemleri Bilgisayar Teknolojileri Basin Yayin Ve Musteri Hizmetleri	99.99	115	HSBC Seguros de Vida (Argentina) S.A.	100.00	150
	99.99	115	HSBC Seguros, S.A de C.V., Grupo Financiero HSBC	100.00	202
HSBC Overseas Holdings (UK) Limited	100.00	2, 94	HSBC Service Delivery (Polska) Sp. z o.o.	100.00	174
HSBC Overseas Investments (UK) Limited	100.00	2, 94	HSBC Services (France)	100.00	4, 29
HSBC Overseas Investments Corporation (New York)	100.00	128	HSBC Services Japan Limited	100.00	188
HSBC Overseas Nominee (UK) Limited	100.00	1, 94	HSBC Servicios Financieros, S.A. de C.V	100.00	201
HSBC Participaciones (Argentina) S.A.	100.00	150	HSBC Servicios, S.A. DE C.V., Grupo Financiero HSBC	100.00	201
HSBC PB Corporate Services 1 Limited	100.00	167	HSBC SFH (France)	100.00	4,44
HSBC PB Services (Suisse) SA	100.00	210	HSBC Software Development (Canada) Inc	100.00	223
HSBC Pension Trust (Ireland) DAC	100.00	26	HSBC Software Development (Guangdong) Limited	100.00	22, 215
HSBC Pensiones, S.A.	100.00	202	HSBC Software Development (India) Private Limited	100.00	159
HSBC PI Holdings (Mauritius) Limited	100.00	160	HSBC Software Development (Malaysia) Sdn Bhd	100.00	222
HSBC Portfoy Yonetimi A.S.	100.00	114	HSBC South Point Investments (Barbados) LLP	100.00	19, 42
HSBC Preferential LP (UK)	100.00	94	HSBC Specialist Investments Limited	100.00	16, 94
HSBC Private Bank (C.I.) Limited	100.00	200	HSBC Stockbroker Services (Client Assets) Nominees Limited	100.00	1, 94
HSBC Private Bank (Luxembourg) S.A.	100.00	45	HSBC Stockbroker Services (Client Assets) Nominees Limited	100.00	1, 94
HSBC Private Bank (Monaco) SA	100.00	4, 48	HSBC Stockbrokers Nominee (UK) Limited	100.00	1, 94
HSBC Private Bank (Suisse) SA	100.00	210	HSBC Structured Funds (Asia) Limited	100.00	27
HSBC Private Bank (UK) Limited	100.00	94	HSBC Taxpayer Financial Services Inc.	100.00	127
HSBC Private Bank International	100.00	41	HSBC Technology & Services (China) Limited	100.00	22, 179
HSBC Private Banking Holdings (Suisse) SA	100.00	210	HSBC Technology & Services (USA) Inc.	100.00	127
HSBC Private Banking Nominee 3 (Jersey) Limited	100.00	167	HSBC TFS I 2005 LLC	100.00	10, 36
HSBC Private Equity Advisors LLC	100.00	10, 127	HSBC TKM Limited	100.00	1, 94
HSBC Private Equity Investments (UK) Limited	100.00	94	HSBC Transaction Services GmbH	80.65	6, 238
HSBC Private Trustee (Hong Kong) Limited	100.00	27	HSBC Trinkaus & Burkhardt (International) S.A.	80.65	1, 45
HSBC Private Wealth Services (Canada) Inc.	100.00	16, 64	HSBC Trinkaus & Burkhardt AG	80.65	24, 176
HSBC Professional Services (India) Private Limited	100.00	85	HSBC Trinkaus & Burkhardt Gesellschaft fur Bankbeteiligungen mbH	80.65	176
HSBC Property (UK) Limited	100.00	94		80.65	176
HSBC Property Funds (Holding) Limited	100.00	94	HSBC Trinkaus Consult GmbH	80.65	176
HSBC Property Funds Investment Limited	100.00	153	HSBC Trinkaus Europa Immobilien-Fonds Nr. 5 GmbH	80.65	176



268	HSBC Holdings plc Annual Report and Accounts 2016



Subsidiaries	Group interest %	Footnotes	Subsidiaries	Group interest %	Footnotes
HSBC Trinkaus Family Office GmbH	80.65	6, 176	James Capel (Custodian) Nominees Limited	100.00	94
HSBC Trinkaus Immobilien Beteiligungs KG	80.65	176	James Capel (Nominees) Limited	100.00	94
HSBC Trinkaus Real Estate GmbH	80.65	6, 176	James Capel (Second Nominees) Limited	100.00	94
HSBC Trust Company (BVI) Limited	100.00	151	James Capel (Taiwan) Nominees Limited	100.00	94
HSBC Trust Company (Canada)	100.00	98	James Capel (Third Nominees) Limited	100.00	94
HSBC Trust Company (Delaware), National Association	100.00	1,67	John Lewis Financial Services Limited	100.00	94
HSBC Trust Company (Delaware), National Association	100.00	1,67	Katonah Close Corp.	100.00	101
HSBC Trust Company (UK) Limited	100.00	94	Keyser Ullmann Limited	100.00	94
HSBC Trust Company AG	100.00	109	Kings Meadow Nominees Limited	100.00	175
HSBC Trustee (C.I.) Limited	100.00	167	Legend Estates Limited	100.00	94
HSBC Trustee (Cayman) Limited	100.00	207	Lemasco Nominees Limited	100.00	168
HSBC Trustee (Guernsey) Limited	100.00	200	Lion Corporate Services Limited	100.00	1, 27
HSBC Trustee (Hong Kong) Limited	100.00	27	Lion International Corporate Services Limited	100.00	208
HSBC Trustee (Mauritius) Limited	100.00	122	Lion International Management Limited	100.00	208
HSBC Trustee (Singapore) Limited	100.00	58	Lion Management (Hong Kong) Limited	100.00	1, 27
HSBC UK RFB Limited	100.00	1, 2, 94	Lyndholme Limited	100.00	27
HSBC USA Inc.	100.00	16, 119	MAGIM Client HSBC GIS Nominee (UK) Limited	100.00	1, 94
HSBC Valores S.A.	100.00	110	Marks and Spencer Financial Services plc	100.00	175
HSBC Violet Investments (Mauritius) Limited	100.00	123	Marks and Spencer Retail Financial Services Holdings Limited	100.00	175
HSBC Wealth Advisory Israel Ltd	100.00	1, 107		100.00	175
HSBC Wealth Client Nominee Limited	100.00	1, 94	Marks and Spencer Savings and Investments Limited	100.00	175
HSBC Yatirim Menkul Degerler A.S.	100.00	114	Marks and Spencer Unit Trust Management Limited	100.00	175
HSBC-D1, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	Maxima S.A. AFJP	100.00	150
	100.00	1, 201	Mercantile Company Limited	100.00	14, 94
HSBCD10, S. A. de C. V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	Mexicana de Fomento, S.A. de C.V.	99.99	201
	100.00	1, 201	Midcorp Limited	100.00	2, 16, 94
HSBC-D2, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	Midland Australia Pty Limited	100.00	182
	100.00	1, 201	Midland Bank (Branch Nominees) Limited	100.00	1, 94
HSBC-D7, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	Midland Nominees Limited	100.00	1, 94
	100.00	1, 201	MIL (Cayman) Limited	100.00	166
HSBC-D9, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	MM Mooring #2 Corp.	100.00	101
	100.00	1, 201	MW Gestion SA	100.00	150
HSBC-DE, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	Oakwood Holdings, Inc.	100.00	101
	100.00	1, 201	Promocion en Bienes Raices, S.A. de C.V.	100.00	16, 201
HSBC-DG, S. A. de C. V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	ProServe Bermuda Limited	50.00	125
	100.00	1, 201	Prudential Client HSBC GIS Nominee (UK) Limited	100.00	1, 94
HSBC-DH, S. A. de C. V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	PT Bank HSBC Indonesia	98.94	236
	100.00	1, 201	PT HSBC Securities Indonesia	85.00	83
HSBC-DL, S. A. de C. V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	PTC New LLC	100.00	10, 127
	100.00	1, 201	R/CLIP Corp.	100.00	127
HSBC-E2, S.A. de C. V., Sociedad de Inversion de Renta Variable	100.00	1, 201	Real Estate Collateral Management Company	100.00	127
	100.00	1, 201	Republic Nominees Limited	100.00	200
HSBC-E3, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda	100.00	1, 201	Republic Overseas Capital Corporation	100.00	80
	100.00	1, 201	S.A.P.C. - Ufipro Recouvrement	99.98	20, 74
HSBC-FF, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	Saf Baiyun	100.00	4, 89
	100.00	1, 201	Saf Chang Jiang	100.00	4, 89
HSBC-V2, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	Saf Chang Jiang Shi Liu	100.00	4, 89
	100.00	1, 201	Saf Chang Jiang Shi Wu	100.00	1, 4, 89
HSBC-V3, S.A. de C.V., Sociedad de Inversion de Renta Variable	100.00	1, 201	Saf Chang Jiang Shi'Er	100.00	4, 89
	100.00	1, 201	Saf Chang Jiang Shiyi	100.00	1, 4, 89
HSI Asset Securitization Corporation	100.00	127	Saf Guangzhou	100.00	4, 89
HSI International Limited	62.14	96	Saf Zhu Jiang	100.00	4, 89
HSIL Investments Limited	100.00	94	Saf Zhu Jiang Yi	100.00	4, 89
Hubei Macheng HSBC Rural Bank Company Limited	100.00	22, 197	Saf Zhu Jiang Ba	100.00	4, 89
Hubei Suizhou Cengdu HSBC Rural Bank Company Limited	100.00	22, 194	Saf Zhu Jiang Er	100.00	4, 89
Hubei Suizhou Cengdu HSBC Rural Bank Company Limited	100.00	22, 194	Saf Zhu Jiang Jiu	100.00	4, 89
Hubei Tianmen HSBC Rural Bank Company Limited	100.00	22, 99	Saf Zhu Jiang Liu	100.00	4, 89
Hunan Pingjiang HSBC Rural Bank Company Limited	100.00	22, 213	Saf Zhu Jiang Qi	100.00	4, 89
Imenson Limited	62.14	96	Saf Zhu Jiang San	100.00	4, 89
INKA Internationale Kapitalanlagegesellschaft mbH	80.65	238	Saf Zhu Jiang Shi	100.00	4, 89
Inmobiliaria Banci, S.A. de C.V.	99.99	201	Saf Zhu Jiang Shi Ba	100.00	4, 89
Inmobiliaria Bisa, S.A. de C.V.	99.99	201	Saf Zhu Jiang Shi Er	100.00	4, 89
Inmobiliaria Grufin, S.A. de C.V.	99.99	201	Saf Zhu Jiang Shi Jiu	100.00	4, 89
Inmobiliaria Guatusi, S.A. de C.V.	99.99	201	Saf Zhu Jiang Shi Liu	100.00	4, 89
IRERE Property Investments (French Offices) Sarl	100.00	1, 88	Saf Zhu Jiang Shi Qi	100.00	4, 89
James Capel & Co. Limited	100.00	94	Saf Zhu Jiang Shi Wu	100.00	4, 89
James Capel (Channel Islands) Nominees Limited	100.00	168	Saf Zhu Jiang Shiyi	100.00	4, 89



HSBC Holdings plc Annual Report and Accounts 2016	269

Notes on the Financial Statements



Subsidiaries	Group interest %	Footnotes	Subsidiaries	Group interest %	Footnotes
Saf Zhu Jiang Wu	100.00	4, 89	Tempus Management AG	100.00	109
Samada Limited	100.00	167	Thasosfin	100.00	4, 44
Samuel Montagu & Co. Limited	100.00	1, 94	The Hongkong and Shanghai Banking Corporation Limited	100.00	13, 27
SAS Bosquet -Audrain	94.90	1, 4, 43	The Hongkong and Shanghai Banking Corporation Limited	100.00	13, 27
SAS Cyatheas Pasteur	94.93	1, 4, 74	The Venture Catalysts Limited	100.00	94
SAS Orona	94.93	1,4,28	Timberlink Settlement Services (USA) Inc.	100.00	127
SCI Hervet Mathurins	100.00	20,89	TKM International Limited	100.00	94
SCI HSBC Assurances Immo	100.00	1, 20, 44	Tooley Street View Limited	100.00	1, 94
Secondary Club Deal I GP Limited	100.00	108	Tower Investment Management	100.00	32
Secondary Club Deal II GP Limited	100.00	108	Trinkaus Australien Immobilien Fonds Nr. 1 Brisbane GmbH & Co. KG	80.65	176
SFSS Nominees (Pty) Limited	100.00	56		80.65	176
Shandong Rongcheng HSBC Rural Bank Company Limited	100.00	22, 198	Trinkaus Australien Immobilien-Fonds Nr. 1 Treuhand-GmbH	80.65	6, 176
Shandong Rongcheng HSBC Rural Bank Company Limited	100.00	22, 198	Trinkaus Australien Immobilien-Fonds Nr. 1 Treuhand-GmbH	80.65	6, 176
Shenfield Nominees Limited	100.00	1, 94	Trinkaus Canada Immobilien-Fonds Nr. 1 Verwaltungs-GmbH	80.65	176
Sico Limited	100.00	235	Trinkaus Canada Immobilien-Fonds Nr. 1 Verwaltungs-GmbH	80.65	176
SNC Dorique	100.00	1, 20, 78	Trinkaus Europa Immobilien-Fonds Nr.3 Objekt Utrecht Verwaltungs-GmbH	80.65	176
SNC Kerouan	100.00	1, 20, 89		80.65	176
SNC Les Mercuriales	100.00	1, 20, 89	Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH	80.65	6, 176
SNC Les Oliviers D'Antibes	60.00	20, 89	Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH	80.65	6, 176
SNC Makala	100.00	1, 20, 89	Trinkaus Immobilien-Fonds Verwaltungs-GmbH	80.65	6, 176
SNC Nuku-Hiva Bail	100.00	1, 20, 89	Trinkaus Private Equity Management GmbH	80.65	176
SNCB/M6 - 2008 A	100.00	1, 4, 89	Trinkaus Private Equity Verwaltungs GmbH	80.65	6, 176
SNCB/M6-2007 A	100.00	1, 4, 89	Tropical Nominees Limited	100.00	166
SNCB/M6-2007 B	100.00	1, 4, 89	Trumball Management, Inc.	100.00	101
Societe CCF Finance Moyen-Orient S.A.L. (in liquidation)	99.90	1, 220	Turnsonic (Nominees) Limited	100.00	1, 94
Societe CCF Finance Moyen-Orient S.A.L. (in liquidation)	99.90	1, 220	Vadep Holding AG	100.00	203
Société Financière et Mobilière	100.00	4, 29	Valeurs Mobilières Elysées	100.00	4, 30
Société Française et Suisse	100.00	4, 89	Vintage 2016 HV GP Limited	100.00	108
Societe Immobiliere Atlas S.A.	100.00	210	Vintage 2016 KKR GP Limited	100.00	108
Somers & Co	100.00	19, 121	Vintage 2017 Athyrium GP Limited	100.00	1, 108
Somers Dublin DAC	100.00	26	Vintage I Secondary GP Limited	100.00	108
Somers Nominees (Far East) Limited	100.00	87	Vintage III Special Situations GP Limited	100.00	108
Sopingest	100.00	4, 89	Wardley Limited	100.00	27
South Yorkshire Light Rail Limited	100.00	1, 94	Wayfoong Credit Limited	100.00	27
SPE 1 2005 Manager Inc.	100.00	36	Wayfoong Finance Limited	100.00	27
St Cross Trustees Limited	100.00	1, 94	Wayfoong Nominees Limited	100.00	27
Sterling Credit Limited	100.00	131	Wayhong (Bahamas) Limited	100.00	187
Sun Hung Kai Development (Lujiazui III) Limited	100.00	22, 212	Westminster House, LLC	100.00	10, 127
Swan National Leasing (Commercials) Limited	100.00	94	Woodex Limited	100.00	87
Swan National Limited	100.00	94	Yan Nin Development Company Limited	62.14	96
Tasfiye Halinde HSBC Internet ve Telekomunikasyon Hizmetleri Anonim Sirketi	96.00	12, 116
	96.00	12, 116
Tayside Holdings Limited (In liquidation)	100.00	1, 12, 187



270	HSBC Holdings plc Annual Report and Accounts 2016

Joint Ventures

The undertakings below are Joint Ventures and equity accounted.



Joint Ventures	Group interest %	Footnotes
GSI Retail Property Holdings Limited	50.00	1, 217
HCM Holdings Limited	51.00	153
HOUSe Network Sdn Bhd	25.00	1, 225
HSBC Jintrust Fund Management Company Limited	49.00	1, 22, 50
HSBC Kingdom Africa Investments (Cayman) Limited	50.00	1, 186
Vaultex UK Limited	50.00	60
Vaultex Isle of Man Insurance Limited	50.00	55

Associates

The undertakings below are associates and equity accounted.



Associates	Group interest %	Footnotes
AREIT Management Ltd	41.90	1, 206
Ashwood Energy Limited	25.00	1, 129
Bank of Communications Co., Ltd.	19.03	193
Barrowgate Limited	15.31	81
Business Growth Fund plc	24.31	37
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited	26.00	232
CFAC Payment Scheme Limited	33.33	1, 21, 47
Chemi & Cotex (Rwanda) Limited	33.33	173
Chemi & Cotex Kenya Limited	34.00	185
Chemi and Cotex Industries Limited	34.00	1, 204
Electronic Payment Services Company (Hong Kong) Limited	19.33	1, 27
EPS Company (Hong Kong) Limited	38.66	1, 27
GIE GNIFI	25.00	1, 7, 73
GZHS Research Co Ltd	20.51	1, 10, 33
Hang Seng Qianhai Fund Management Company Limited	43.50	22, 62
HSBC Amanah Takaful (Malaysia) Berhad	49.00	31
HSBC Middle East Securities L.L.C	49.00	154
HSBC Mortgage LLP	33.30	1, 19, 72
HSBC TFS II 2005 LLC	20.00	10, 36
Icon Brickell LLC	24.90	1, 10, 117
Intercede Holdco Limited	29.92	1, 106
Jeppe Star Limited	34.00	1, 129
MENA Infrastructure Fund (GP) Ltd	33.33	1, 180
NAS Holding Limited	22.13	1, 129
NAS United Healthcare Services LLC	22.13	1, 10, 39
Northstar Trade Finance Inc.	17.89	97
Novo Star Limited	34.00	1, 172
SABB Takaful	45.50	209
SCI Karuvefa	33.33	1, 20, 184
sino AG	20.16	5, 145
The Headland Asian Ventures Fund 3 Limited	32.59	1, 16, 166
The London Gold Market Fixing Limited	25.00	1, 8, 120
The Saudi British Bank	40.00	104
Trinkaus Europa Immobilien-Fonds Nr. 7 Frankfurt Mertonviertel KG	33.22	1, 9, 176



HSBC Holdings plc Annual Report and Accounts 2016	271

Notes on the Financial Statements



Footnotes for Note 38
1	Management has determined that these undertakings are excluded from consolidation in the Group accounts as these entities do not meet the definition of subsidiaries in accordance with IFRSs. HSBC's consolidation policy is described in Note 1.2(a).
2	Directly held by HSBC Holdings plc
3	Entity is incorporated in The Netherlands
Description of shares
4	Actions shares
5	Aktiengesellschaft (AG) shares
6	GmbH Anteil
7	Groupement D'intérêt Economique shares
8	Guarantee shares
9	Kommanditgesellschaft (KG) shares
10	Limited Liability Company - no shares
11	Liquidating shares
12	Nominal shares
13	Ordinary and Cumulative Irredeemable and Non-cumulative Irredeemable Preference shares
14	Ordinary and Deferred shares
15	Ordinary and Non-Voting Redeemable shares
16	Ordinary and Preference shares
17	Ordinary Non-Participating, Non Voting shares
18	Ordinary Redeemable Non Participating shares
19	Partnership shares
20	Parts shares
21	Preference shares
22	Registered Capital shares
23	Russian limited liability company shares
24	Stückaktien



Registered Offices
25	(Liquidator's address) 62/F One Island East 18 Westlands Road, Island East Hong Kong
26	1 Grand Canal Square, Grand Canal Harbour, Dublin 2, D02 P820, Ireland
27	1 Queen's Road Central, Hong Kong
28	10, Rue Jean Jaurès BP Q5 Noumea 98845 Nouvelle Calédonie
29	103, Avenue des Champs-Elysées, 75008, Paris, France
30	109, Avenue des Champs-Elysees, 75008, Paris, France
31	10th Floor, North Tower 2, Leboh Ampang 50100, Kuala Lumpur, Malaysia
32	11 Dr. Roy's Drive PO Box 694GT Grand Cayman KY1-1107 Cayman Islands
33	1101-J46, 11/F, Nansha Financial Building 171 Haibin Road, Nansha District Guangzhou China
34	11-17, Ludwig-Erhard-Str., 20459, Hamburg, Germany
35	116 Archbishop Street Valletta Malta
36	1209 Orange Street, Wilmington, Delaware 19899, United States
37	13-15 York Buildings, London, Great Britain, WC2N 6JU, United Kingdom
38	13F-14F, 333 Keelung Road, Sec.1 Taipei 110 Taiwan, Province of China
39	13th Floor, Lulu Center Building, Salam Street, PO Box 44505, Abu Dhabi, United Arab Emirates
40	13th Floor, South Tower 2, Leboh Ampang, 50100 Kuala Lumpur, Malaysia
41	1441 Brickell Avenue, Miami FL 33131, United States
42	15 Canada Square, London E14 5GL, United Kingdom
43	15 Rue Guynemer BP 412 Noumea 98845 Nouvelle Calédonie
44	15, Rue Vernet, 75008, Paris France
45	16 Boulevard d'Avranches, L-1160, Luxembourg
46	16F, 369 Zhongxiao East Road, Section 7 Nangang District, Taipei 115, Taiwan
47	17 Rochester Row, London SW1P 1QT, United Kingdom
48	17, Avenue d'Ostende, 98000, Monaco
49	171, Old Bakery Street, Valletta VLT 1455, Malta
50	17F, HSBC Building, Shanghai IFC, 8 Century Avenue, Pudong, Shanghai, China
51	18/F, HSBC Building, 8 Century Avenue, China (Shanghai) Pilot Free Trade Zone, 200120, China
52	1800 Tysons Boulevard, Suite 50, McLean, Virginia 22102, United States
53	18th Floor, Tower 1, HSBC Centre, 1 Sham Mong Road, Kowloon, Hong Kong
54	192 Old Bakery Street, Valletta, Malta
55	1st Floor Rose House, 51-59 Circular Road, Douglas IM1 1RE, Isle of Man
56	2 Exchange Square, 85 Maude Street, Sandown, Sandton 2196, South Africa
57	2 Paveletskaya square, building 2, 115054 Moscow, Russia
58	21 Collyer Quay, #13-02, HSBC Building, 49320, Singapore
59	21 Farncombe Road, Worthing, Sussex BN11 2BW, England
60	21, Garlick Hill, London, EC4V 2AU, United Kingdom
61	2156 Horse Prairie Drive, Henderson, NV 89052, United States



62	2-3/F, Unit 21A, Qianhai Enterprise Dream Park, No. 63 Qian Wan Yi Road, Qianhai Shenzhen-Hongkong Cooperation Zone, Shenzhen China
63	24th Fl., 99, Sec.2, Tunhwa S. Rd., Taipei, Taiwan, R.O.C.
64	2910 Virtual Way, Vancouver BC, V5M 0B2, Canada
65	3, Aboul Feda Street, Zamalek, Cairo Egypt
66	300 Delaware Avenue, Suite 1400, Wilmington, DE 19801, United States
67	300 Delaware Avenue, Suite 1401, Wilmington, DE 19801, United States
68	300, 885 West Georgia Street Vancouver BC V6C 3E9 Canada
69	306 Corniche El Nil Maadi, Cairo 11728, Egypt
70	3303 Express Drive North Islandia NY 11749 United States
71	34/F and 36/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road 27/F, Shanghai Stock Exchange Bldg, 528 Pudong South Road Shanghai 200120 China
72	35 Great St Helens, London EC3A 6AP, United Kingdom
73	37 Avenue Henri Lafleur Nouméa, BP K3 98849, New Caledonia
74	39, Rue de Bassano, 75008, Paris, France
75	3rd Floor, HSBC Bank Middle East Limited Building Al Souq Road, Bur Dubai PO Box 4604, Dubai United Arab Emirates
76	3rd Floor, Merchantile Bank Chamber 16, Veer Nariman Road Fort Mumbai Maharashtra 400001 India
77	4-17/F, Office Tower 2 TaiKoo Hui, No. 381 Tian He Road, Tian He District Guangzhou Guangdong China
78	43, Rue de Paris, Saint Denis 97400, Reunion
79	439, Sri Jayawardenapura Mawatha Welikada, Rajagiriya, Colombo, Sri Lanka
80	452 Fifth Avenue, New York, NY10018, United States
81	49/F, The Lee Gardens, 33 Hysan Avenue Hong Kong
82	4th Floor, Harbour Place 103 South Church Street George Town Grand Cayman KY1-1002 Cayman Islands
83	4th Floor, World Trade Center, J1, Jend. Sudirman Kav. 29-31 Jakarta 12920 Indonesia
84	5 Donegal Square South Belfast BT1 5JP Northern Ireland
85	52/60, M G Road Fort, Mumbai, Maharashtra 400 001 India
86	545 Washington Blvd., 11th Floor Jersey City NJ 07310 United States
87	6 Front Street, Hamilton HM 11, Bermuda
88	6, Rue Adolphe Grand-Duchy of Luxembourg L-1116 Luxembourg
89	64, Rue Galilée, 75008, Paris, France
90	66 Teryan street Yerevan 9 Armenia
91	6th Floor, HSBC Centre, 18, Cybercity, Ebene Mauritius
92	7/F The Enterprise Centre - Tower I, 6766 Ayala Avenue corner Paseo De Roxas, Makati City, Philippines
93	70 York Street, 7th Floor, Toronto ON, M5J 1S9 Canada
94	8 Canada Square, London E14 5HQ, United Kingdom
95	80, Mill Street, Qormi, QRM 3101, Malta
96	83 Des Voeux Road, Central, Hong Kong SAR
97	833 Three Bentall Centre, 595 Burrard Street, Vancouver BC V7X 1C4, Canada
98	885 West Georgia Street, Suite 300, Vancouver BC, V6C 3E9, Canada
99	89 Jingling Hongjian Avenue Tianmen Hubei Province 431700 China
100	9-11 Floors, NESCO IT Park Building No. 3, Western Express Highway, Goregaon (East), Mumbai, Maharashtra 400063, India
101	95 Washington Street, Buffalo NY, 14203, United States
102	9th Floor, HSBC Centre 3058 Fifth Avenue West, Bonifacio Global City Taguig City Philippines
103	Akara Bldg. 24 De Castro Street Wickhams Cay I, Road Town Tortola Virgin Islands, British
104	Al Amir Abdulaziz Ibn Mossaad Ibn Jalawi Street Riyadh Saudi Arabia
105	Al Khuwair Office PO Box 1727 PC111 CPO Seeb Muscat Oman
106	Alderflat Drive, Newstead Industrial Estate, Trentham Stoke on Trent, ST4 8HX, United Kingdom
107	Amot Atrium Tower, 30th Floor, 2 Jabotinsky St,. Ramat Gan 5250501, Israel
108	Arnold House, St Julians Avenue, St Peter Port, GY1 3NF, Guernsey
109	Bederstrasse 49, CH-8002, Zurich, Switzerland
110	Bouchard 680, 11° Ciudad de Buenos Aires 1106 Argentina
111	Bouchard 680, 9° Ciudad de Buenos Aires 1106 Argentina
112	Breite Str. 29/31 40213 Düsseldorf Germany
113	Bufete Tapia, PO Box 7412 Panama 5 Panama
114	Büyükdere Cad. No.128 D Blok Esentepe, Sisli Istanbul, Turkey
115	Büyükdere Cad. No:124 B Blok Kat 9 Oda:1, Esentepe, Sisli, I Turkey
116	Buyukdere Cad. No:124 B Blok Kat 9 Oda:2 34394 , Sisli / Ese Turkey
117	C T Corporation System 1200 South Pine Island Road Plantation FL 33324 United States
118	C/O Bank of Bermuda (Cayman) Limited, PO Box 513, HSBC House, 68 West Bay Road, Grand Cayman KY1-1106, Cayman Islands
119	C/O Corporation Trust Incorporated, 351 West Camden Street, Baltimore MD 21201, United States
120	C/O Hackwood Secretaries Limited, One Silk Street, London EC2Y 8HQ, United Kingdom
121	C/O HSBC AFS (USA) LLC, 452 Fifth Avenue, New York, NY 10018, United States
122	C/O HSBC Bank (Mauritius) Limited 6th Floor, HSBC Centre, 18 Cyber City, Ebene, Mauritius
123	C/O Kross Border Trust Services Limited, St. Louis Business Centre, Cnr Desroches & St Louis Streets, Port Louis, Mauritius



272	HSBC Holdings plc Annual Report and Accounts 2016



124	C/O Morrison & Foerster (UK) LLP, City Point, 1 Ropemake Street, London EC2Y 9AW, United Kingdom
125	C/O MUFG Fund Services (Bermuda) Limited The Belvedere Building 69 Pitts Bay Road Pembroke HM08 Bermuda
126	C/O The Corporation Trust Company 100 S. 5th Street-Suite 1075 Minneapolis MN 55401 United States
127	C/O The Corporation Trust Company, 1209 Orange Street, Wilmington DE 19801, United States
128	C/O The Corporation Trust Incorporated 351 West Camden Street Baltimore MD 21201 United States
129	C/O Trident Trust Company, Trident Chambers, PO Box 146, Tortola, British Virgin Islands
130	C/O Walkers SPV Limited, Walker House 87 Mary Street, PO Box 908GT George Town Grand Cayman Cayman Islands
131	Camden House West, The Parade, Birmingham, B1 3PY, United Kingdom
132	City Gate House 22 Southwark Bridge Road London SE1 9HB
133	Corporation Service Company 2711 Centerville Road Suite 400 Wilmington DE 19808 United States
134	Corporation Service Company 830 Bear Tavern Road West Trenton NJ 08628 United States
135	CT Corporation System 1515 Market Street Registered Office Philadelphia PA 19102 United States
136	CT Corporation System 1720 Carey Avenue Cheyenne WY 82001 United States
137	CT Corporation System 2 North Jackson Street Suite 605 Montgomery AL 36104 United States
138	CT Corporation System 2222 Grand Avenue Des Moines IA 50312 United States
139	CT Corporation System 225 Hillsborough Street Raleigh NC 27603 United States
140	CT Corporation System Kentucky Home Life Building Louisville KY 40202 United States
141	CT Corporation System, 530 Gay Street, Knoxville, TN 37902, United States
142	CT Corporation System, 800 S. Figueroa, Los Angeles, California 90017, United States
143	CT Corporation System, Secretary of State, 707 Virginia Street, East Charleston, WV 25301, United States
144	Drake House, Three Rivers Court, Homestead Road, Rickmansworth, Hertfordshire, WD3 1FX, United Kingdom
145	Ernst-Schneider-Platz 1 40212 Duesseldorf Germany
146	Esentepe Mah. Büyükdere Caddesi No.128 Istanbul 34394 Turkey
147	First & Second Floor, No.3 Nanshan Road, Pulandian Dalian Liaoning Province China
148	First Floor, Xinhua Bookstore Xindong Road (SE of roundabout) Miyun District Beijing China
149	Florida 201 10°, Ciudad de Buenos Aires C1005AAE Argentina
150	Florida 229, 10° Ciudad de Buenos Aires, C1005AAE, Argentina
151	Harneys Corporate Services Limited, Craigmuir Chambers, PO Box 71, Road Town, Tortola, British Virgin Islands
152	Herrengasse 1-3 1010 Wien Austria
153	Hill House, 1 Little New Street, London EC4A 3TR, United Kingdom
154	HSBC Bank Middle East Building - level 5, building 5, Emaar Dubai 502601 United Arab Emirates
155	HSBC Building 11-1, Nihonbashi 3-Chome Chuo-ku Tokyo 103-0027 Japan
156	HSBC Building 7267 Olaya - Al Murrooj Riyadh 12283 - 2255 Saudi Arabia
157	HSBC Building Shanghai IFC 8 Century Avenue, Pudong Shanghai 200120 China
158	HSBC Building, Minet El Hosn, Riad el Solh Beirut 1107-2080, PO Box 11-1380, Lebanon
159	HSBC Centre River Side, West Avenue, 25B Raheja woods Kalyaninagar Pune Maharashtra 411006 India
160	HSBC Centre, Eighteen Cybercity Ebene, Mauritius
161	HSBC Chambers, Corner of Jalan Sultan and Jalan Pemancha Bandar Seri Begawan BS8811 Brunei Darussalam
162	HSBC House Esplanade, St. Helier, JE1 1HS, Jersey
163	HSBC House Esplanade, St. Helier, JE4 8UB, Jersey
164	HSBC House, Level 9, One Queen Street, Auckland 1010, New Zealand
165	HSBC House Plot No.8, Survey No.64 (Part) Hightec City Layout Madhapur Hyderabad Andhra Pradesh 500081 India
166	HSBC House, 68 West Bay Road, PO Box 1109, George Town, Grand Cayman KY1-1102, Cayman Islands
167	HSBC House, Esplanade, St. Helier, JE1 1GT, Jersey
168	HSBC House, Esplanade, St. Helier, JE4 8WP, Jersey
169	HSBC, Filinvest One Bldg, Northgate Cyberzone, Filinvest Corporate City Alabang, Muntinlupa City Philippines
170	Immeuble Coeur Défense 110, Esplanade du Général de Gaulle- La Défense 4 92400 Courbevoie France
171	Isidora Goyenechea 2800, 23rd Floor, Las Condes, Santiago 7550647, Chile
172	Jayla Place Wickhams Cay I PO Box 3190 Road Town Tortola British Virgin Islands
173	Kacyiru BP 3094 Kigali Rwanda
174	Kapelanka 42A 30-347 Krakow Poland
175	Kings Meadow, Chester Business Park, Chester, Cheshire CH99 9FB, United Kingdom
176	Königsallee 21/23, 40212, Düsseldorf Germany
177	Level 1, Building No. 8, Gate Village Dubai International Financial Centre PO Box 502601 United Arab Emirates
178	Level 12, HSBC Building 37, Chilpae-ro Jung-gu Seoul Korea, Republic of
179	Level 19, HSBC Building, Shanghai IFC 8 Century Avenue Pudong Shanghai China
180	Level 3 Building 4, Gate District Dubai International Financial Centre Dubai MENA United Arab Emirates
181	Level 32, HSBC Main Building 1 Queen's Road Central Hong Kong SAR Hong Kong



182	Level 36, Tower 1, International Towers Sydney, 100 Barangaroo Avenue, Sydney, NSW 2000, Australia
183	Level 4, Building 4, The Gate Dubai International Financial Centre PO Box 506553 Dubai United Arab Emirates
184	Lot n°5, la Rocade , Grand Camp LES ABYMES 97142 Guadeloupe
185	LR No. 1758/13 Grevella Grove Road Kalamu House PO Box 47323-00100 Nairobi Kenya
186	Maples Corporate Services Limited, PO Box 309, Ugland House, South Church Street, George Town, Grand Cayaman, KY1-1104, Cayman Islands
187	Mareva House, 4 George Street, Nassau, Bahamas
188	MB&H Corporate Services Ltd, Mareva House, 4 George Street, Nassau, New Providence, Bahamas
189	MMG Tower, 23 Floor Ave. Paseo del Mar Urbanizacion Costa del Este Panama
190	No 1, Bei Huan East Road Dazu County Chongqing China
191	No 107, Ping Du Avenue (E), Sanhe Town, Fengdu County Chongqing China
192	No. 1 1211 Yanjiang Zhong Road Yongan Fujian China
193	No. 188 Yincheng Zhong Lu, Pudong New District Shanghai 200120 China
194	No. 205, Lie Shan Road Suizhou Hubei China
195	No. 3, 5, 7, Haitang Erzhi Road Changyuan, Rongchang Chongqing 402460 China
196	No. 44, Xin Ping Road Central, Encheng, Enping Guangdong 529400 China
197	No. 56, Yu Rong Street Macheng Hubei Province 438300 China
198	No.198-2, Chengshan Avenue (E) Rongcheng Shangdong 264300 China
199	Palm Grove House PO Box 438 Road Town Tortola British Virgin Islands
200	Park Place, Park Street, St Peter Port, GY1 1EE, Guernsey
201	Paseo de la Reforma 347, Col. Cuauhtemoc, 6500, Mexico
202	Paseo de la Reforma 359, 6th Floor, D.F. 6500, Mexico
203	Philippe Kaiser Baarerstrasse 8 6300 Zug Switzerland
204	Plot No. 89-90 Mbezi Industrial Area Box 347 Dar es Salaam City United Republic of Tanzania
205	PO Box 1109, HSBC House 68 West Bay Road Grand Cayman KY1-1102 Cayman Islands
206	PO Box 309 Ugland House, South Church Street George Town Grand Cayman KY1 - 1104 Cayman Islands
207	PO Box 484, Ground Floor, HSBC House 68 West Bay Road Grand Cayman, KY1-1106 Cayman Islands
208	PO Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands
209	PO Box 9086 Riyadh 11413 Saudi Arabia
210	Quai des Bergues 9-17, 1201, Geneva, Switzerland
211	Rincon 391 Montevideo 11000 Uruguay
212	RM 2112, HSBC Building, Shanghai IFC No. 8 Century Road, Pudong Shanghai 200120 China
213	RM101, 102 & 106 Sunshine Fairview, Sunshine Garden Pedestrian Walkway Pingjiang Hunan China
214	Rondo ONZ 1 00-124 Warsaw Poland
215	Room 305 No.886 Tianhe Bei Road, Tianhe District, Guangzhou Guangdong China
216	Rua Funchal, nº 160, SP Corporate Towers, Torre Norte, 19° Andar, cj 191A - Parte, São Paulo 04551-060, Brazil
217	Second Floor, St Peters House, Le Bordage, St Peter Port, GY1 1B, Guernsey
218	Shop 4 & 5 Ground Floor & Mezzanine, Bldg. of Hilal Salim Bin Tarraf Al Wasel Area, Sheikh Zayed Road PO Box 1956 Dubai United Arab Emirates
219	Smart Village 28th Km Cairo- Alexandria Desert Road Building Cairo Egypt
220	Solidere - Rue Saad Zaghloul Immeuble - 170 Marfaa, PO Box 17, 5476 Mar Michael, 11042040 Beyrouth, Lebanon
221	St Nicholas House, 10th Floor Catholic Mission St Lagos Nigeria
222	Suite 1005, 10th Floor, Wisma Hamzah Kwong Hing No. 1, Leboh Ampang 50100, Kuala Lumpur, Malaysia
223	Suite 2400, 745 Thurlow Street, Vancouver BC V6E 0C5 Canada
224	Suite 300, 3381 Steeles Avenue East Toronto ON M2H 3S7 Canada
225	Suite 8-3A, Menara RA, No. 18, Jalan Dataran SD2, Dataran SD, PJU 9, Bandar Sri Damansara 52200 Wilayah Persekutuan Malaysia
226	The Corporation Trust Company of Nevada 311 S. Division Street Carson City NV 89703 United States
227	The Metropolitan 235 Dong Khoi Street District 1, Ho Chi Minh City Viet Nam
228	The R&H Trust Co. Ltd. Windward 1, Regatta Office Park PO Box 897 Grand Cayman KY1-1103 Cayman Islands
229	Tour Crystal 1 10EME Etage BD Al Mohades 20000 Casablanca, ANFA Morocco
230	Unit 04A-04B, 1F, Bangunan Gadong Properties Jalan Gadong Bandar Seri Begawan BE4119 Brunei Darussalam
231	Unit 1 GF The Commercial Complex Madrigal Avenue Ayala Alabang Village Muntinlupa City 1770 Philippines
232	Unit No. 208, 2nd Floor, Kanchenjunga Building, 18 Barakhamba Road, New Delhi - 110001, India
233	Unsoeldstrasse 2, 80538, Munich, Germany
234	Walkers Corporate Services Limited, Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands
235	Woodbourne Hall, Road Town, PO Box 916, Tortola, British Virgin Islands
236	World Trade Center 1, Floor 8-9 Jalan Jenderal Sudirman Kavling 29 - 31 Jakarta 12920 Indonesia
237	World Trade Center Montevideo Avenida Luis Alberto de Herrera 1248 Torre 1, Piso 15, Oficina 1502 Montevideo CP 11300 Uruguay
238	Yorckstraße 21 - 23, 40476, Duesseldorf, Germany



HSBC Holdings plc Annual Report and Accounts 2016	273

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