Summary Re UK GAAP & IFRS PT2

HSBC Holdings PLC
09 December 2004


           UK GAAP                                IFRS
Property

HSBC values its properties         As permitted under IAS 16 'Property,
including both freehold and        Plant and Equipment', HSBC intends to
leasehold land on an annual        adopt the cost model whereby the
basis and adjustments arising      asset is carried at cost less any
from such revaluations are taken   accumulated depreciation and any
to reserves. Non-investment        accumulated impairment losses.
properties are generally valued    Advantage will be taken of the
at their 'existing use value',     exemption in IFRS 1 which allows
an amount reflecting their         carrying value at the date of
current usage.                     transition to IFRS (including where
                                   properties have been revalued) to be
                                   used as deemed cost in most
                                   circumstances.

Investment properties are          Investment properties will be
included in the balance sheet at   measured, as allowed by IAS 40
their open market value.           'Investment Property', at fair value
Movements in open market value     with changes in fair value recognised
are taken to an investment         in the income statement.
property revaluation reserve.

IMPACT
Low - no account will be taken in the future of revaluation surpluses or
deficits on non-investment properties (where the property is not
impaired).

          UK GAAP                                IFRS

Foreign currency translation

SSAP 20 'Foreign currency          IAS 21 'The Effects of Changes in
translation' states that           Foreign Exchange Rates' states that
exchange gains or losses arising   in consolidated financial statements,
from the retranslation of a        all exchange differences arising on
company's net investment in a      the retranslation of a foreign
foreign operation should not be    operation with a different functional
recognised in the profit and       currency from the Group's
loss account, but accounted for    presentation currency (US dollar)
as an adjustment to the profit     should be recognised as a separate
and loss account reserve.          component of equity, in the foreign
                                   exchange reserve.

On disposal of a foreign           On disposal of a foreign operation,
operation, foreign exchange        the exchange differences previously
gains and losses in respect of     recognised in reserves in relation to
that operation remain in           that operation should be recognised
reserves.                          in the income statement for the
                                   period.

                                   HSBC intends to deem cumulative
                                   translation differences at 1 January
                                   2004 as zero, as permitted by IFRS
                                   1.
IMPACT
Low - going forward, this will be a presentational change on the face of
the balance sheet. In addition, gains on any future disposals of
subsidiaries will be augmented where the subsidiary has a functional
currency which has appreciated against the US dollar since it was
established or acquired; the converse will be true where the functional
currency has depreciated against the US dollar.


           UK GAAP                                IFRS

Consolidation of special purpose entities

FRS 5 'Reporting the substance of         SIC 12 'Consolidation -
transactions' defines control as the      Special Purpose Entities'
ability of an undertaking to direct the   requires consolidation of
financial and operating policies of       special purpose entities
another undertaking with a view to        (SPEs) when the substance of
gaining economic benefits from its        the relationship between the
activities. FRS 5 requires that           SPE and the reporting entity
entities controlled by HSBC and giving    indicates that the SPE is
rise to benefits in substance no          controlled by that entity.
different to those that would arise
were the vehicle a subsidiary must be     SIC 12 gives more prescriptive
consolidated as quasi-subsidiaries.       examples of how control could
                                          be evidenced, and directs
When assessing control under FRS 5, the   entities to assess the risks
risks and benefits and the substance of   and rewards inherent in the
the entire transaction are                SPE in order to determine who
considered.                               controls it.
                                          
                                          .
IMPACT
Low - certain of the Group's securitisations and conduit vehicles that
are currently off-balance-sheet may be consolidated under IFRS. The
impact of this difference will be limited to a small number of
transactions.

Changes applying from 1 January 2005

              UK GAAP                                  IFRS
Accruals accounted derivatives

Non-trading derivatives are those            IAS 39 requires that all
which are held for hedging                   derivatives be recognised
purposes, as part of HSBC's risk             as either assets or
management strategy, against                 liabilities in the balance
assets, liabilities, positions or            sheet and that those
cash flows measured on an accruals           instruments be measured at
basis. Non-trading transactions              fair value. The accounting
include qualifying hedges and                for changes in the fair value
positions that synthetically alter           of a derivative (that is, gains
the characteristics of specified             and losses)depends on the 
financial instruments.                       intended use of the derivative
                                             and the resulting designation
Non-trading derivatives are                  as described below.
accounted for on an equivalent               
basis to the underlying assets,              For a derivative designated
liabilities or net positions. Any            as hedging the exposures to
profit or loss arising is                    changes in the fair value of a
recognised on the same basis as              recognised asset or liability
that arising from the related                or a firm commitment, the gain
assets, liabilities or positions.            or loss is recognised in the
                                             income statement in the period
To qualify as a hedge, a                     of change together with the
derivative must effectively reduce           associated loss or gain on the
the price, foreign exchange or               hedged item attributable to                                            
interest rate risk of the asset,             the risk being hedged.
liability or anticipated                     
transaction to which it is linked            For a derivative designated
and be designated as a hedge at              as hedging the exposure to
inception of the derivative                  variable cash flows of a
contract. Accordingly, changes in            recognised asset or liability
the market value of the derivative           or of a highly probable forecast
must be highly correlated with               transaction, the gain or loss
changes in the market value of the           on the derivative associated 
underlying hedged item at                    with the effective portion of 
inception of the hedge and over              the hedge is initially
the life of the hedge contract.              recognised in equity and
                                             subsequently released into the
If the hedging criteria are met,             income statement in line with                                
the derivative is accounted for on           the income statement recognition
the same basis as the underlying             of the element of the recognised
hedged item. Derivatives used for            asset, liability or highly
hedging purposes include swaps,              probable forecast transaction
forwards and futures.                        which is being hedged. Any
                                             ineffective portion is reported 
Interest rate swaps are also used            in the income statement as it
to alter synthetically the                   arises.
interest rate characteristics of
financial instruments. In order to
qualify for synthetic alteration
accounting, a derivative
instrument must be linked to
specific assets or liabilities, or
pools of similar assets or
liabilities with reference to the
notional principal and interest
rate risks of the hedged
instruments. The combination of
the underlying asset or liability
together with the related interest
rate swap must achieve a result
that is consistent with defined
risk management objectives. If
these criteria are met, accrual
based accounting is applied, i.e.
income or expense is recognised
and accrued to the next settlement
date in accordance with the
contractual terms of the
agreement.

Any gain or loss arising on the      If a cash flow hedging instrument
termination of a qualifying          expires or is sold, terminated or
derivative is deferred and           exercised, the cumulative gain or
amortised to earnings over the       loss on the instrument that remains
original life of the terminated      recognised directly in equity from
contract. Where the underlying       the period when the hedge was
asset, liability or position is      effective remains in equity to be
sold or terminated, the qualifying   released in line with the income
derivative is immediately            statement recognition of the
marked-to-market through the         element of the recognised asset,
profit and loss account.             liability or highly probable
                                     forecast transaction which is being
                                     hedged.Where the cash flow hedge is
                                     of a forecast transaction which
                                     results in the recognition of a
                                     non-financial asset or
                                     non-financial liability, or where
                                     such a forecast transaction becomes
                                     a firm commitment for which fair
                                     value hedging is applied, the
                                     associated gains or losses
                                     recognised within equity are
                                     released and included in the
                                     carrying amount of the asset or
                                     liability.

                                     If a fair value hedging instrument
                                     expires or is sold, terminated or
                                     exercised, any adjustment to the
                                     fair value of the hedged item in
                                     relation to the hedge is amortised
                                     based on the effective interest
                                     rate at the date amortisation
                                     begins to the profit and loss
                                     account beginning no later than
                                     when the hedged item ceases to be
                                     adjusted for changes in its fair
                                     value attributable to the risk
                                     being hedged.

IMPACT
Medium - there may be some additional volatility in income (through
dealing profits) as a result of a stricter definition of a qualifying
hedge and the recognition of hedge ineffectiveness in the income
statement under IFRS.

The amount of this additional volatility in income will depend, in part,
on the extent to which the fair value option for liabilities available
within IAS 39, but carved out in the EU adopted version of IAS 39, is
available under UK law or is ultimately endorsed by the EU.

Where possible, HSBC intends to hedge its interest rate exposure using
cash flow hedging, which will give rise to volatility in equity.

On transition on 1 January 2005 there will be an impact on equity due to
fair value movements on derivatives in existing hedging relationships
that will be allowable as cash flow hedges being taken to the cash flow
hedging reserve in equity. In addition, the recognition of current
hedging derivatives at fair value where the associated hedging
relationship does not meet the IAS 39 hedging requirements will also
impact equity.

            UK GAAP                                IFRS

Preference shares

Preference shares issued by          Under IAS 32, preference shares are
subsidiaries are classified in the   generally classified in the balance
balance sheet as non-equity          sheet as liabilities. Associated
minority interests with preference   dividends are recorded as interest
share dividends recorded as          payable.
non-equity minority interests in
the profit and loss account.

IMPACT
Medium - this presentational change will affect the face of the income
statement and balance sheet, reducing pre-tax profit but having no
impact on income attributable to ordinary shareholders as the accounting
simply moves the servicing cost of preference shares to interest expense
from non-equity minority interests. There will be corresponding impacts
on income statement ratios including net interest margin, cost:income
ratio, the ratio of bad debt expense to operating profit before
provisions and the effective tax rate.

            UK GAAP                                IFRS
Investment securities

Debt securities and equity shares   Under IASs 32 and 39, all investment
intended to be held on a            securities (debt securities and
continuing basis are disclosed as   equity shares) are classified and
investment securities and are       disclosed within one of the
included in the balance sheet at    following three categories:
cost less provision for any         held-to-maturity;
permanent diminution in value.      available-for-sale; or at fair value
Other participating interests are   through profit or loss.
accounted for on the same
basis.                              Held-to-maturity debt securities are
                                    measured at amortised cost less any
Other debt securities and equity    impairment loss.
shares held for trading purposes    
are included in the balance sheet   Available-for-sale securities are  
at market value. Changes in the     measured at fair value with holding
market value of such assets are     gains and losses (with the exception
recognised in the profit and loss   of any foreign exchange impact)
account as 'Dealing profits'.       excluded from the income statement
                                    and reported net of applicable taxes
SSAP 20 'Foreign currency           and minority interests in a separate
translation' requires foreign       component of shareholders' funds.
exchange differences on             Foreign exchange differences arising
foreign-currency-denominated        from the amortised cost of debt
monetary items, including debt      securities should be recognised in
securities, to be recognised in     the income statement, with other
the profit and loss account. The    foreign exchange differences
BBA Statement of Recommended        relating to debt securities
Accounting Practice ('SORP') on     recognised in equity. All foreign
securities expands on this by       exchange differences arising on
requiring that all investment       equity securities are recognised in
securities (including equities)     reserves.
are carried at cost in the          
relevant currency with foreign      At fair value through profit or loss
exchange movements taken to the     securities are measured at fair
profit and loss account.            value with all holding gains and
                                    losses recognised in the income
                                    statement.

                                    When there is objective evidence
                                    that an available-for-sale security
                                    is impaired, the cumulative loss
                                    that has been recognised in equity
                                    should be removed from equity and
                                    recognised in the income statement.
                                    Reversals of impairment losses of
                                    held-to-maturity and
                                    available-for-sale debt securities
                                    are recorded in the income
                                    statement. Reversals of impairment
                                    losses of available-for-sale equity
                                    securities are recorded in equity.

IMPACT
Medium - on transition to IFRS, HSBC will classify most of its
investment securities as available-for-sale. There will be an impact in
recorded equity arising from the changes in their fair value where these
changes do not relate to impairment.

            UK GAAP                                IFRS
Life assurance

Under UK GAAP, the value placed     IFRS 4 is more restrictive than
on life assurance business in the   current UK GAAP in the type of
Group's consolidated financial      contract that can be classified as
statements includes a valuation     insurance. Those contracts meeting
of the discounted future earnings   the IFRS 4 definition of insurance
expected to emerge from the         will continue to be accounted under
business currently in force,        HSBC's existing accounting policies.
using appropriate assumptions in    For long-term investment contracts
assessing factors such as recent    not transferring significant
lapse experience and general        insurance risk, IAS 39 will apply to
economic conditions, together       any financial instrument element.
with the surplus retained in the    The inclusion of a valuation of the
long-term assurance funds           discounted future earnings expected
attributable to shareholders. The   to emerge from the business
relevant assumptions are            currently in force will no longer be
determined annually in              possible for such contracts. Any
consultation with independent       investment management element of
actuaries and the resulting         such contracts will be accounted for
valuation is included in 'Other     under IAS 18 'Revenue'. This
assets'.                            requires that investment management
                                    fees (and incremental directly
Changes in the value placed on      attributable costs) be spread over
HSBC's interest in long-term        the period in which services are
assurance business are calculated   provided.
on a post-tax basis and reported
gross in the profit and loss
account as part of 'Other
operating income' after adjusting
for taxation.

IMPACT
Medium - certain contracts currently accounted for as insurance products
will be reclassified as financial instruments under IAS 39. As a
consequence, the valuation of the discounted future earnings expected to
emerge from the business currently in force in the balance sheet is
expected to decrease, leading to a reduction in equity. Income will be
recognised on these contracts in later periods owing to the change in
valuation basis.

            UK GAAP                                IFRS
Netting

Under UK GAAP, the following        Under IAS 32, netting is only
conditions must be satisfied in     allowed if the entity:
order to achieve netting of debit
and credit balances in the          (a) currently has a legally enforceable
balance sheet:                          right to set off the recognised
                                        amounts; and
(a) the reporting entity and        (b) intends either to settle on a net   
    another party owe each other        basis, or to realise the asset and
    determinablemonetary amounts,       settle the liability simultaneously.
    denominated either in the same 
    currency, or in different but    It is expected that netting will not
    freely convertible currencies;   be widely available under IFRS as
(b) the reporting entity has the     point (b) above will not always be  
    ability to insist on a net       satisfied.   
    settlement; and                              
(c) the reporting entity's ability    
    to insist on a net settlement       
    is assured beyond reasonable           
    doubt.                              

IMPACT
Medium - the move from an ability to insist on net settlement to an
intention to settle on a net basis is not in line with market practice
in a number of areas and, in consequence, certain financial instruments
will be grossed up for presentational purposes.

            UK GAAP                                IFRS
Loan origination

Fee and commission income is        Substantially all loan fee income
accounted for in the period when    and incremental directly
receivable, except when it is       attributable loan origination costs
charged to cover the costs of a     are amortised to the income
continuing service to, or risk      statement over the expected life of
borne for, the customer, or is      the loan as part of the effective
interest in nature. In these        interest calculation under IAS 39.
cases, it is recognised on an
appropriate basis over the          Under IAS 18 certain fees earned on
relevant period.                    the completion of a significant act
                                    must be recognised immediately.
Loan origination costs are          
generally expensed as incurred.     
As permitted by UK GAAP, HSBC       
applies a restricted definition
of the incremental, directly
attributable origination expenses
that are deferred and
subsequently amortised over the
life of the loans.

IMPACT
Low - on transition there will be an impact on equity as previously
recognised fees and costs are reversed and spread forward over the
residual term of the financial instrument. This change is also expected
to result in reclassification within the income statement with lower
levels of fees and commissions and origination expenses, and higher
interest income on an ongoing basis, as HSBC currently expects that
deferred fees will be greater than deferred costs.

           UK GAAP                                IFRS
Acceptances

Acceptances are currently          Under IAS 39 it will be necessary to
accounted for on a net basis.      recognise a liability for acceptances
There is no grossing up of the     from the date of acceptance. A
amount to be paid and the amount   corresponding asset due from the
receivable from the originator,    originator will also be recognised.
and thus no balance appears in
the balance sheet in relation to
these products.

IMPACT
Low - this will gross up the balance sheet but will not have an impact
on equity.

           UK GAAP                                IFRS
Income on trading securities

Under UK GAAP, dividend income     IAS 39 permits all income and
on trading equity securities and   expenses in relation to trading items
interest income on trading debt    to be accounted within dealing
securities are recognised in       profits.
dividend income and interest
income respectively. The related
funding costs are recognised in
interest expense.

IMPACT
Low - this will align external reporting with the basis on which the
business is managed and will change dealing profits with corresponding
changes in net interest income and dividend income.

           UK GAAP                                IFRS
Provisioning

Under UK GAAP, an impairment is    Under IAS 39, impairment provisions
recognised if, based on current    are recognised on an incurred loss
information or events, an          basis when an entity has objective
advance or portfolio of advances   evidence that an advance is impaired.
is no longer expected to be        Provisions under IAS 39 are
recovered in full.                 calculated on a discounted future
                                   cash flow basis.

Specific provisions are            Individually assessed provisions are
recognised in respect of           calculated using a discounted cash
impaired advances that have been   flow analysis for the impaired
recognised as such in order to     advance.
reduce the carrying amount to
the expected ultimate net
realisable value.

General provisions are made in     IAS 39 allows collective assessment
respect of impaired advances       of impairment for individually
which are known through            insignificant items or items where no
experience to exist but which      impairment has been identified on an
have not yet been specifically     individual basis. Formula-based
identified. The level of the       approaches or statistical methods may
general provision takes account    be used to determine losses in groups
of past experience and current     of financial assets provided they
economic conditions and other      incorporate the effect of the time
relevant factors affecting the     value of money, consider the cash
various categories of advances     flows for the expected remaining life
in the portfolio.                  of the asset, consider the age of the
                                   loans within the portfolio and do not
                                   give rise to an impairment loss on
                                   initial recognition of an asset.

Interest on non-performing loans   The concepts of suspended interest
is not normally credited to the    and non-accrual are not relevant
profit and loss account and        under IAS 39. Following impairment of
either interest accruals will      an asset, interest income is
cease ('non-accrual loans') or     recognised using the rate of interest
interest will be credited to an    used to discount the future cash
interest in suspense account in    flows for the purpose of measuring
the balance sheet, which is        the impairment loss (the original
netted against the relevant loan   effective interest rate of the
('suspended interest').            asset).

IMPACT
Low - this change in methodology is not expected to produce a
significant adjustment on transition.



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