Annual Financial Report - 7 of 9

RNS Number : 6522F

HSBC Holdings PLC

11 March 2020

 

Financial statements

229 Financial statements

240 Notes on the financial statements

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Financial statements
	Page
Consolidated income statement	229
Consolidated statement of comprehensive income	230
Consolidated balance sheet	231
Consolidated statement of cash flows	232
Consolidated statement of changes in equity	233
HSBC Holdings income statement	236
HSBC Holdings statement of comprehensive income	236
HSBC Holdings balance sheet	237
HSBC Holdings statement of cash flows	238
HSBC Holdings statement of changes in equity	239

Consolidated income statement
for the year ended 31 December
		2019		2018		2017
	Notes*	$m		$m		$m
Net interest income		30,462		30,489		28,176
-  interest income1,2		54,695		49,609		40,995
-  interest expense3		(24,233	)	(19,120	)	(12,819	)
Net fee income	2	12,023		12,620		12,811
-  fee income		15,439		16,044		15,853
-  fee expense		(3,416	)	(3,424	)	(3,042	)
Net income from financial instruments held for trading or managed on a fair value basis	3	10,231		9,531		8,426
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss	3	3,478		(1,488	)	2,836
Changes in fair value of designated debt and related derivatives4	3	90		(97	)	155
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	3	812		695		N/A
Gains less losses from financial investments		335		218		1,150
Net insurance premium income	4	10,636		10,659		9,779
Other operating income		2,957		960		443
Total operating income		71,024		63,587		63,776
Net insurance claims and benefits paid and movement in liabilities to policyholders	4	(14,926	)	(9,807	)	(12,331	)
Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions		56,098		53,780		51,445
Change in expected credit losses and other credit impairment charges		(2,756	)	(1,767	)	N/A
Loan impairment charges and other credit risk provisions		N/A		N/A		(1,769	)
Net operating income		53,342		52,013		49,676
Employee compensation and benefits	5	(18,002	)	(17,373	)	(17,315	)
General and administrative expenses		(13,828	)	(15,353	)	(15,707	)
Depreciation and impairment of property, plant and equipment and right-of-use assets5		(2,100	)	(1,119	)	(1,166	)
Amortisation and impairment of intangible assets		(1,070	)	(814	)	(696	)
Goodwill impairment	21	(7,349	)	-		-
Total operating expenses		(42,349	)	(34,659	)	(34,884	)
Operating profit		10,993		17,354		14,792
Share of profit in associates and joint ventures	18	2,354		2,536		2,375
Profit before tax		13,347		19,890		17,167
Tax expense	7	(4,639	)	(4,865	)	(5,288	)
Profit for the year		8,708		15,025		11,879
Attributable to:
-  ordinary shareholders of the parent company		5,969		12,608		9,683
-  preference shareholders of the parent company		90		90		90
-  other equity holders		1,324		1,029		1,025
-  non-controlling interests		1,325		1,298		1,081
Profit for the year		8,708		15,025		11,879
		$		$		$
Basic earnings per ordinary share	9	0.30		0.63		0.48
Diluted earnings per ordinary share	9	0.30		0.63		0.48

*  For Notes on the financial statements, see page 240.

1  Interest income includes $45,708m (2018: $42,130m) of interest recognised on financial assets measured at amortised cost and $8,259m (2018: $7,020m) of interest recognised on financial assets measured at fair value through other comprehensive income.

2  Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income.

3  Interest expense includes $21,922m (2018: $16,972m) of interest on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value.

4  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

5  Includes depreciation of the right-of-use assets of $912m (2018: nil). Right-of-use assets have been recognised from 1 January 2019 following the adoption of IFRS 16. Comparatives have not been restated.

Consolidated statement of comprehensive income
for the year ended 31 December
	2019		2018		2017
	$m		$m		$m
Profit for the year	8,708		15,025		11,879
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Available-for-sale investments	N/A		N/A		146
-  fair value gains	N/A		N/A		1,227
-  fair value gains reclassified to the income statement	N/A		N/A		(1,033	)
-  amounts reclassified to the income statement in respect of impairment losses	N/A		N/A		93
-  income taxes	N/A		N/A		(141	)
Debt instruments at fair value through other comprehensive income	1,152		(243	)	N/A
-  fair value gains/(losses)	1,793		(168	)	N/A
-  fair value gains transferred to the income statement on disposal	(365	)	(95	)	N/A
-  expected credit recoveries/(losses) recognised in the income statement	109		(94	)	N/A
-  income taxes	(385	)	114		N/A
Cash flow hedges	206		19		(192	)
-  fair value gains/(losses)	551		(267	)	(1,046	)
-  fair value (gains)/losses reclassified to the income statement	(286	)	317		833
-  income taxes	(59	)	(31	)	21
Share of other comprehensive income/(expense) of associates and joint ventures	21		(64	)	(43	)
-  share for the year	21		(64	)	(43	)
Exchange differences	1,044		(7,156	)	9,077
-  other exchange differences	1,044		(7,156	)	8,939
-  income tax attributable to exchange differences	-		-		138
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability	13		(329	)	2,419
-  before income taxes	(17	)	(388	)	3,440
-  income taxes	30		59		(1,021	)
Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	(2,002	)	2,847		(2,024	)
-  before income taxes	(2,639	)	3,606		(2,409	)
-  income taxes	637		(759	)	385
Equity instruments designated at fair value through other comprehensive income	366		(27	)	N/A
-  fair value gains/(losses)	364		(71	)	N/A
-  income taxes	2		44		N/A
Effects of hyperinflation	217		283		N/A
Other comprehensive income/(expense) for the period, net of tax	1,017		(4,670	)	9,383
Total comprehensive income for the year	9,725		10,355		21,262
Attributable to:
-  ordinary shareholders of the parent company	6,838		8,083		18,914
-  preference shareholders of the parent company	90		90		90
-  other equity holders	1,324		1,029		1,025
-  non-controlling interests	1,473		1,153		1,233
Total comprehensive income for the year	9,725		10,355		21,262

Consolidated balance sheet
		At
		31 Dec		31 Dec
		2019		2018
	Notes*	$m		$m
Assets
Cash and balances at central banks		154,099		162,843
Items in the course of collection from other banks		4,956		5,787
Hong Kong Government certificates of indebtedness		38,380		35,859
Trading assets	11	254,271		238,130
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	14	43,627		41,111
Derivatives	15	242,995		207,825
Loans and advances to banks		69,203		72,167
Loans and advances to customers		1,036,743		981,696
Reverse repurchase agreements - non-trading		240,862		242,804
Financial investments	16	443,312		407,433
Prepayments, accrued income and other assets	22	136,680		110,571
Current tax assets		755		684
Interests in associates and joint ventures	18	24,474		22,407
Goodwill and intangible assets	21	20,163		24,357
Deferred tax assets	7	4,632		4,450
Total assets		2,715,152		2,558,124
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation		38,380		35,859
Deposits by banks		59,022		56,331
Customer accounts		1,439,115		1,362,643
Repurchase agreements - non-trading		140,344		165,884
Items in the course of transmission to other banks		4,817		5,641
Trading liabilities	23	83,170		84,431
Financial liabilities designated at fair value	24	164,466		148,505
Derivatives	15	239,497		205,835
Debt securities in issue	25	104,555		85,342
Accruals, deferred income and other liabilities	26	118,156		97,380
Current tax liabilities		2,150		718
Liabilities under insurance contracts	4	97,439		87,330
Provisions	27	3,398		2,920
Deferred tax liabilities	7	3,375		2,619
Subordinated liabilities	28	24,600		22,437
Total liabilities		2,522,484		2,363,875
Equity
Called up share capital	31	10,319		10,180
Share premium account	31	13,959		13,609
Other equity instruments		20,871		22,367
Other reserves		2,127		1,906
Retained earnings		136,679		138,191
Total shareholders' equity		183,955		186,253
Non-controlling interests		8,713		7,996
Total equity		192,668		194,249
Total liabilities and equity		2,715,152		2,558,124

*  For Notes on the financial statements, see page 240.

The accompanying notes on pages 240 to 322 and the audited sections in: 'Risk' on pages 73 to 151, 'Capital' on pages 152 to 155, and 'Directors' remuneration report' on pages 184 to 210 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 18 February 2020 and signed on its behalf by:

Mark E Tucker		Ewen Stevenson
Group Chairman		Group Chief Financial Officer

Consolidated statement of cash flows
for the year ended 31 December
	2019		2018		2017
	$m		$m		$m
Profit before tax	13,347		19,890		17,167
Adjustments for non-cash items:
Depreciation, amortisation and impairment1	10,519		1,933		1,862
Net gain from investing activities	(399	)	(126	)	(1,152	)
Share of profits in associates and joint ventures	(2,354	)	(2,536	)	(2,375	)
Gain on disposal of subsidiaries, businesses, associates and joint ventures	(929	)	-		(79	)
Change in expected credit losses gross of recoveries and other credit impairment charges	3,012		2,280		N/A
Loan impairment losses gross of recoveries and other credit risk provisions	N/A		N/A		2,603
Provisions including pensions	2,423		1,944		917
Share-based payment expense	478		450		500
Other non-cash items included in profit before tax	(2,297	)	(1,303	)	(381	)
Elimination of exchange differences2	(3,742	)	4,930		(20,757	)
Changes in operating assets and liabilities
Change in net trading securities and derivatives	(18,910	)	20,855		(13,615	)
Change in loans and advances to banks and customers	(53,760	)	(44,071	)	(108,984	)
Change in reverse repurchase agreements - non-trading	(7,390	)	(25,399	)	(37,281	)
Change in financial assets designated and otherwise mandatorily measured at fair value	(2,308	)	(1,515	)	(5,303	)
Change in other assets	(21,863	)	6,766		(6,570	)
Change in deposits by banks and customer accounts	79,163		(5,745	)	102,457
Change in repurchase agreements - non-trading	(25,540	)	35,882		41,044
Change in debt securities in issue	19,268		18,806		(1,369	)
Change in financial liabilities designated at fair value	20,068		4,500		8,508
Change in other liabilities	23,124		(2,187	)	13,514
Dividends received from associates	633		910		740
Contributions paid to defined benefit plans	(533	)	(332	)	(685	)
Tax paid	(2,267	)	(3,417	)	(3,175	)
Net cash from operating activities	29,743		32,515		(12,414	)
Purchase of financial investments	(445,907	)	(399,458	)	(357,264	)
Proceeds from the sale and maturity of financial investments	413,186		386,056		418,352
Net cash flows from the purchase and sale of property, plant and equipment	(1,343	)	(1,196	)	(1,167	)
Net cash flows from purchase/(disposal) of customer and loan portfolios	1,118		(204	)	6,756
Net investment in intangible assets	(2,289	)	(1,848	)	(1,285	)
Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures	(83	)	4		165
Net cash from investing activities	(35,318	)	(16,646	)	65,557
Issue of ordinary share capital and other equity instruments	-		6,001		5,196
Cancellation of shares	(1,000	)	(1,998	)	(3,000	)
Net sales/(purchases) of own shares for market-making and investment purposes	141		133		(67	)
Redemption of preference shares and other equity instruments	-		(6,078	)	-
Subordinated loan capital repaid3	(4,210	)	(4,077	)	(3,574	)
Dividends paid to shareholders of the parent company and non-controlling interests	(9,773	)	(10,762	)	(9,005	)
Net cash from financing activities	(14,842	)	(16,781	)	(10,450	)
Net increase/(decrease) in cash and cash equivalents	(20,417	)	(912	)	42,693
Cash and cash equivalents at 1 Jan4	312,911		323,718		263,324
Exchange differences in respect of cash and cash equivalents	1,248		(9,895	)	17,701
Cash and cash equivalents at 31 Dec4, 5	293,742		312,911		323,718
Cash and cash equivalents comprise:
-  cash and balances at central banks	154,099		162,843		180,624
-  items in the course of collection from other banks	4,956		5,787		6,628
-  loans and advances to banks of one month or less	41,626		39,460		61,973
-  reverse repurchase agreements with banks of one month or less	65,370		74,702		58,850
-  treasury bills, other bills and certificates of deposit less than three months	20,132		21,685		11,593
-  cash collateral and net settlement accounts	12,376		14,075		10,900
-  less: items in the course of transmission to other banks	(4,817	)	(5,641	)	(6,850	)
Cash and cash equivalents at 31 Dec4, 5	293,742		312,911		323,718

Interest received was $58,627m (2018: $45,291m; 2017: $41,676m), interest paid was $27,384m (2018: $14,172m; 2017: $10,962m) and dividends received (excluding dividends received from associates, which are presented separately above) were $2,369m (2018: $1,702m; 2017: $2,225m).

1  The impact of the right-of-use assets recognised under IFRS 16 at the beginning of 2019 is not recognised in 2018 and 2017. This also includes the impact of a $7.3bn goodwill impairment in 2019. 

2  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.

 3   Subordinated liabilities changes during the year are attributable to repayments of $(4.2)bn (2018: $(4.1)bn; 2017: $(3.6)bn) of securities. Non-cash changes during the year included foreign exchange gains/(losses) of $0.6bn (2018: $(0.6)bn; 2017: $(0.6)bn) and fair value gains/(losses) of $1.4bn (2018: $(1.4)bn; 2017: $(1.2)bn).

4  In 2019, HSBC included settlement accounts with bank counterparties of one month or less on a net basis. Comparatives have been re-presented and also include the net impact of other cash equivalents not previously included in cash and cash equivalents. The net effect of these changes increased cash and cash equivalents by $11.8bn in 2018 and decreased cash and cash equivalents by $(13.7)bn in 2017.

5   At 31 December 2019, $35,735m (2018: $26,282m; 2017: $39,830m) was not available for use by HSBC, of which $19,353m (2018: $19,755m; 2017: $21,424m) related to mandatory deposits at central banks.

Consolidated statement of changes in equity
for the year ended 31 December
							Other reserves
	Called up share capital and share premium		Other equity instru-ments		Retained earnings3,4		Financial assets at FVOCI reserve		Cash flow hedging reserve		Foreign exchange reserve		Merger  and other reserves4,6		Total share- holders' equity		Non- controlling interests		Total equity
	$m		$m		$m		$m		$m		$m		$m		$m		$m		$m
At 1 Jan 2019	23,789		22,367		138,191		(1,532	)	(206	)	(26,133	)	29,777		186,253		7,996		194,249
Profit for the year	-		-		7,383		-		-		-		-		7,383		1,325		8,708
Other comprehensive income (net of tax)	-		-		(1,759	)	1,424		204		1,000		-		869		148		1,017
-  debt instruments at fair value through other comprehensive income	-		-		-		1,146		-		-		-		1,146		6		1,152
- equity instruments designated at fair value through other comprehensive income	-		-		-		278		-		-		-		278		88		366
-  cash flow hedges	-		-		-		-		204		-		-		204		2		206
-  changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	-		-		(2,002	)	-		-		-		-		(2,002	)	-		(2,002	)
-  remeasurement of defined benefit asset/liability	-		-		5		-		-		-		-		5		8		13
-  share of other comprehensive income of associates and joint ventures	-		-		21		-		-		-		-		21		-		21
-  effects of hyperinflation	-		-		217		-		-		-		-		217		-		217
-  exchange differences	-		-		-		-		-		1,000		-		1,000		44		1,044
Total comprehensive income for the year	-		-		5,624		1,424		204		1,000		-		8,252		1,473		9,725
Shares issued under employee remuneration and share plans	557		-		(495	)	-		-		-		-		62		-		62
Shares issued in lieu of dividends and amounts arising thereon	-		-		2,687		-		-		-		-		2,687		-		2,687
Dividends to shareholders	-		-		(11,683	)	-		-		-		-		(11,683	)	(777	)	(12,460	)
Redemption of securities2	-		(1,496	)	(12	)	-		-		-		-		(1,508	)	-		(1,508	)
Transfers7	-		-		2,475		-		-		-		(2,475	)	-		-		-
Cost of share-based payment arrangements	-		-		478		-		-		-		-		478		-		478
Cancellation of shares9	(68	)	-		(1,000	)	-		-		-		68		(1,000	)	-		(1,000	)
Other movements	-		-		414		-		-		-		-		414		21		435
At 31 Dec 2019	24,278		20,871		136,679		(108	)	(2	)	(25,133	)	27,370		183,955		8,713		192,668

Consolidated statement of changes in equity (continued)
							Other reserves
	Called up share capital and share premium		Other equity instru-ments		Retained earnings3,4		Financial assets at FVOCI reserve5		Cash flow hedging reserve		Foreign exchange reserve		Merger  and other reserves4,6		Total share- holders' equity		Non- controlling interests		Total equity
	$m		$m		$m		$m		$m		$m		$m		$m		$m		$m
At 31 Dec 2017	20,337		22,250		139,999		(350	)	(222	)	(19,072	)	27,308		190,250		7,621		197,871
Impact on transition to IFRS 910	-		-		(585	)	(1,021	)	-		-		-		(1,606	)	(41	)	(1,647	)
At 1 Jan 2018	20,337		22,250		139,414		(1,371	)	(222	)	(19,072	)	27,308		188,644		7,580		196,224
Profit for the year	-		-		13,727		-		-		-		-		13,727		1,298		15,025
Other comprehensive income (net of tax)	-		-		2,765		(245	)	16		(7,061	)	-		(4,525	)	(145	)	(4,670	)
-  debt instruments at fair value through other comprehensive income	-		-		-		(245	)	-		-		-		(245	)	2		(243	)
- equity instruments designated at fair value through other comprehensive income	-		-		-		-		-		-		-		-		(27	)	(27	)
-  cash flow hedges	-		-		-		-		16		-		-		16		3		19
-  changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	-		-		2,847		-		-		-		-		2,847		-		2,847
-  remeasurement of defined benefit asset/liability	-		-		(301	)	-		-		-		-		(301	)	(28	)	(329	)
-  share of other comprehensive income of associates and joint ventures	-		-		(64	)	-		-		-		-		(64	)	-		(64	)
-  effects of hyperinflation	-		-		283		-		-		-		-		283		-		283
-  exchange differences	-		-		-		-		-		(7,061	)	-		(7,061	)	(95	)	(7,156	)
Total comprehensive income for the year	-		-		16,492		(245	)	16		(7,061	)	-		9,202		1,153		10,355
Shares issued under employee remuneration and share plans	721		-		(610	)	-		-		-		-		111		-		111
Shares issued in lieu of dividends and amounts arising thereon	-		-		1,494		-		-		-		-		1,494		-		1,494
Capital securities issued1	-		5,968		-		-		-		-		-		5,968		-		5,968
Dividends to shareholders	-		-		(11,547	)	-		-		-		-		(11,547	)	(710	)	(12,257	)
Redemption of securities2	-		(5,851	)	(237	)	-		-		-		-		(6,088	)	-		(6,088	)
Transfers7	-		-		(2,200	)	-		-		-		2,200		-		-		-
Cost of share-based payment arrangements	-		-		450		-		-		-		-		450		-		450
Cancellation of shares8,9	2,731		-		(4,998	)	-		-		-		269		(1,998	)	-		(1,998	)
Other movements	-		-		(67	)	84		-		-		-		17		(27	)	(10	)
At 31 Dec 2018	23,789		22,367		138,191		(1,532	)	(206	)	(26,133	)	29,777		186,253		7,996		194,249
At 1 Jan 2017	22,715		17,110		136,795		(477	)	(27	)	(28,038	)	27,308		175,386		7,192		182,578
Profit for the year	-		-		10,798		-		-		-		-		10,798		1,081		11,879
Other comprehensive income (net of tax)	-		-		328		131		(194	)	8,966		-		9,231		152		9,383
-  available-for-sale investments	-		-		-		131		-		-		-		131		15		146
-  cash flow hedges	-		-		-		-		(194	)	-		-		(194	)	2		(192	)
-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk	-		-		(2,024	)	-		-		-		-		(2,024	)	-		(2,024	)
-  remeasurement of defined benefit asset/liability	-		-		2,395		-		-		-		-		2,395		24		2,419
-  share of other comprehensive income of associates and joint ventures	-		-		(43	)	-		-		-		-		(43	)	-		(43	)
-  exchange differences	-		-		-		-		-		8,966		-		8,966		111		9,077
Total comprehensive income for the year	-		-		11,126		131		(194	)	8,966		-		20,029		1,233		21,262
Shares issued under employee remuneration and share plans	622		-		(566	)	-		-		-		-		56		-		56
Shares issued in lieu of dividends and amounts arising thereon	-		-		3,206		-		-		-		-		3,206		-		3,206
Capital securities issued1	-		5,140		-		-		-		-		-		5,140		-		5,140
Dividends to shareholders	-		-		(11,551	)	-		-		-		-		(11,551	)	(660	)	(12,211	)
Cost of share-based payment arrangements	-		-		500		-		-		-		-		500		-		500
Cancellation of shares9	(3,000	)	-		-		-		-		-		-		(3,000	)	-		(3,000	)
Other movements	-		-		489		(4	)	(1	)	-		-		484		(144	)	340
At 31 Dec 2017	20,337		22,250		139,999		(350	)	(222	)	(19,072	)	27,308		190,250		7,621		197,871

  In 2018, HSBC Holdings issued $4,150m, £1,000m and SGD750m of perpetual subordinated contingent convertible capital securities on which there were $60m of external issuance costs, $49m of intra-Group issuance costs and $11m of tax benefits. In 2017, HSBC Holdings issued $3,000m, SGD1,000m and €1,250m of perpetual subordinated contingent convertible capital securities, on which there were $14m of external issuance costs, $37m of intra-Group issuance costs and $10m of tax benefits. Under IFRSs these issuance costs and tax benefits are classified as equity.

2  During 2019, HSBC Holdings redeemed $1,500m 5.625% perpetual subordinated capital securities on which there were $12m of external issuance costs. In 2018, HSBC Holdings redeemed $2,200m 8.125% perpetual subordinated capital securities and its $3,800m 8.000% perpetual subordinated capital securities, Series 2, on which there were $172m of external issuance costs and $23m of intra-Group issuance costs wound down. Under IFRSs external issuance costs are classified as equity.

3  At 31 December 2019, retained earnings included 432,108,782 treasury shares (2018: 379,926,645; 2017: 360,590,019). 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 Global 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  The $350m at 31 December 2017 represents the IAS 39 available-for-sale fair value reserve as at 31 December 2017.

6  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. 

7  Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. In 2018, a part reversal of this impairment resulted in a transfer from retained earnings back to the merger reserve of $2,200m. At 31 December 2019, an additional impairment of $2,475m was recognised and a permitted transfer of this amount was made from the merger reserve to retained earnings.

8   This includes a re-presentation of the cancellation of shares to retained earnings and capital redemption reserve in respect of the 2017 share buy-back, under which retained earnings have been reduced by $3,000m, called up capital and share premium increased by $2,836m and other reserves increased by $164m.

9  For further details, refer to Note 31 in the Annual Report and Accounts 2019. In August 2019, HSBC announced a share buy-back of up to $1.0bn, which was completed in September 2019. In May 2018, HSBC announced a share buy-back of up to $2.0bn, which was completed in August 2018. In February 2017, HSBC announced a share buy-back of up to $1.0bn, which was completed in April 2017. In July 2017, HSBC announced a share buy-back of up to $2.0bn, which was completed in November 2017. Shares bought back from these buy-back programmes have been cancelled.

10  The impact of transitioning to IFRS 9 at 1 January 2018 on the consolidated financial statements of HSBC was a decrease in net assets of $1.6bn, arising from a decrease of $2.2bn from additional impairment allowances, a decrease of $0.9bn from our associates reducing their net assets, an increase of $1.1bn from the remeasurement of financial assets and liabilities as a consequence of classification changes and an increase in net deferred tax assets of $0.4bn.

HSBC Holdings income statement
for the year ended 31 December
		2019		2018		2017
	Notes*	$m		$m		$m
Net interest expense		(2,554	)	(1,112	)	(383	)
-  interest income		1,249		2,193		2,185
-  interest expense		(3,803	)	(3,305	)	(2,568	)
Fee (expense)/income		(2	)	0		2
Net income from financial instruments held for trading or managed on a fair value basis	3	1,477		245		(181	)
Changes in fair value of designated debt and related derivatives1	3	(360	)	(77	)	103
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	3	1,659		43		-
Gains less losses from financial investments		-		4		154
Dividend income from subsidiaries2		15,117		55,304		10,039
Other operating income		1,293		960		769
Total operating income		16,630		55,367		10,503
Employee compensation and benefits	5	(37	)	(37	)	(54	)
General and administrative expenses		(4,772	)	(4,507	)	(4,911	)
Reversal of impairment/(impairment) of subsidiaries3		(2,562	)	2,064		(63	)
Total operating expenses		(7,371	)	(2,480	)	(5,028	)
Profit before tax		9,259		52,887		5,475
Tax (charge)/credit		(218	)	(62	)	64
Profit for the year		9,041		52,825		5,539

*  For Notes on the financial statements, see page 240.

1  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

2  The 2018 year included $44,893m (2019: nil) return on capital from HSBC Finance (Netherlands) resulting from restructuring the Group's Asia operation to meet resolution and recovery requirements.

3  The 2019 year includes $2,475m impairment of HSBC Overseas Holdings (UK) Limited (2018: reversal of $2,200m).

HSBC Holdings statement of comprehensive income
for the year ended 31 December
	2019		2018		2017
	$m		$m		$m
Profit for the year	9,041		52,825		5,539
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Financial investments in HSBC undertakings	-		-		(53	)
-  fair value gains/(losses)	-		-		(70	)
-  income taxes	-		-		17
Items that will not be reclassified subsequently to profit or loss:
Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	(396	)	865		(828	)
-  before income taxes	(573	)	1,090		(1,007	)
-  income taxes	177		(225	)	179
Other comprehensive (expense)/income for the year, net of tax	(396	)	865		(881	)
Total comprehensive income for the year	8,645		53,690		4,658

HSBC Holdings balance sheet
		31 Dec 2019		31 Dec 2018
	Notes*	$m		$m
Assets
Cash and balances with HSBC undertakings		2,382		3,509
Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value		61,964		23,513
Derivatives	15	2,002		707
Loans and advances to HSBC undertakings		10,218		56,144
Financial investments		16,106		-
Prepayments, accrued income and other assets		559		126
Current tax assets		203		594
Investments in subsidiaries1		161,473		160,231
Intangible assets		333		357
Deferred tax assets		-		-
Total assets at 31 Dec		255,240		245,181
Liabilities and equity
Liabilities
Amounts owed to HSBC undertakings		464		949
Financial liabilities designated at fair value	24	30,303		25,049
Derivatives	15	2,021		2,159
Debt securities in issue	25	56,844		50,800
Accruals, deferred income and other liabilities		1,915		994
Subordinated liabilities	28	18,361		17,715
Deferred tax liabilities		288		162
Total liabilities		110,196		97,828
Equity
Called up share capital	31	10,319		10,180
Share premium account		13,959		13,609
Other equity instruments		20,743		22,231
Other reserves		37,539		39,899
Retained earnings		62,484		61,434
Total equity		145,044		147,353
Total liabilities and equity at 31 Dec		255,240		245,181

*  For Notes on the financial statements, see page 240.

1  The 2018 year included $56,587m (2019: nil) capital injection to HSBC Asia Holdings Limited.

The accompanying notes on pages 240 to 322 and the audited sections in: 'Global businesses and geographical regions' on pages 56 to 71, 'Risk' on pages 73 to 151, 'Capital' on pages 152 to 155 and 'Directors' remuneration report' on pages 184 to 210 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 18 February 2020 and signed on its behalf by:

Mark E Tucker		Ewen Stevenson
Group Chairman		Group Chief Financial Officer

HSBC Holdings statement of cash flows
for the year ended 31 December
	2019		2018		2017
	$m		$m		$m
Profit before tax	9,259		52,887		5,475
Adjustments for non-cash items	2,657		(46,878	)	(17	)
-  depreciation, amortisation and impairment/expected credit losses	72		70		33
-  share-based payment expense	1		-		(2	)
-  other non-cash items included in profit before tax1	2,584		(46,948	)	(48	)
Changes in operating assets and liabilities
Change in loans to HSBC undertakings	41,471		7,293		(1,122	)
Change in financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value	(38,451	)	(7,305	)	(11,944	)
Change in financial investments in HSBC undertakings	-		-		(1,775	)
Change in net trading securities and net derivatives	(1,433	)	758		(2,183	)
Change in other assets	(437	)	231		134
Change in financial investments	(70	)	-		-
Change in debt securities in issue	1,899		(1,094	)	1,020
Change in financial liabilities designated at fair value	1,227		(740	)	954
Change in other liabilities	437		(1,883	)	721
Tax received	459		301		443
Net cash from operating activities	17,018		3,570		(8,294	)
Purchase of financial investments	(19,293	)	-		-
Proceeds from the sale and maturity of financial investments	6,755		-		1,165
Net cash outflow from acquisition of or increase in stake of subsidiaries	(3,721	)	(8,992	)	(89	)
Repayment of capital from subsidiaries	-		3,627		4,070
Net investment in intangible assets	(44	)	(121	)	(150	)
Net cash from investing activities	(16,303	)	(5,486	)	4,996
Issue of ordinary share capital and other equity instruments	500		6,652		5,647
Redemption of other equity instruments	-		(6,093	)	-
Purchase of treasury shares	-		-		-
Cancellation of shares	(1,006	)	(1,998	)	(3,000	)
Subordinated loan capital issued	-		-		-
Subordinated loan capital repaid	(4,107	)	(1,972	)	(1,184	)
Debt securities issued	10,817		19,513		11,433
Debt securities repaid	-		(1,025	)	-
Dividends paid on ordinary shares	(7,582	)	(8,693	)	(6,987	)
Dividends paid to holders of other equity instruments	(1,414	)	(1,360	)	(1,359	)
Net cash from financing activities	(2,792	)	5,024		4,550
Net increase/(decrease) in cash and cash equivalents	(2,077	)	3,108		1,252
Cash and cash equivalents at 1 January	8,057		4,949		3,697
Cash and cash equivalents at 31 Dec2	5,980		8,057		4,949
Cash and cash equivalents comprise:
-  cash at bank with HSBC undertakings	2,382		3,509		1,985
-  loans and advances to banks of one month or less	102		4,548		2,964
-  treasury and other eligible bills	3,496		-		-

Interest received was $2,216m (2018: $2,116m; 2017: $2,103m), interest paid was $3,819m (2018: $3,379m; 2017: $2,443m) and dividends received were $15,117m (2018: $10,411m; 2017: $10,039m ).

1  The 2018 year included $44,893m (2019: nil) return on capital from HSBC Finance (Netherlands) resulting from restructuring the Group's Asia operation to meet resolution and recovery requirements.

2  In 2019, HSBC included settlement accounts with bank counterparties of one month or less on a net basis. Comparatives have been re-presented and also include other cash equivalents not included in 2018 cash and cash equivalents. The net effect of these changes increased cash and cash equivalents by $1,548m in 2018 and had no impact in 2017.

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 earnings1,2		Financial assets at FVOCI reserve		Merger and other reserves2		Total shareholders' equity
	$m		$m		$m		$m		$m		$m		$m
At 1 Jan 2019	10,180		13,609		22,231		61,434		-		39,899		147,353
Profit for the year	-		-		-		9,041		-		-		9,041
Other comprehensive income (net of tax)	-		-		-		(396	)	-		-		(396	)
-  changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	-		-		-		(396	)	-		-		(396	)
Total comprehensive income for the year	-		-		-		8,645		-		-		8,645
Shares issued under employee share plans	36		521		-		(56	)	-		-		501
Shares issued in lieu of dividends and amounts arising thereon	171		(171	)	-		2,687		-		-		2,687
Cancellation of shares3	(68	)	-		-		(1,000	)	-		68		(1,000	)
Capital securities issued	-		-		-		-		-		-		-
Dividends to shareholders	-		-		-		(11,683	)	-		-		(11,683	)
Redemption of capital securities	-		-		(1,488	)	(20	)	-		-		(1,508	)
Transfers5	-		-		-		2,475		-		(2,475	)	-
Other movements	-		-		-		2		-		47		49
At 31 Dec 2019	10,319		13,959		20,743		62,484		-		37,539		145,044
At 31 Dec 2017	10,160		10,177		22,107		23,903		59		37,381		103,787
Impact on transition to IFRS 9	-		-		-		949		(59	)	-		890
At 1 Jan 2018	10,160		10,177		22,107		24,852		-		37,381		104,677
Profit for the year	-		-		-		52,825		-		-		52,825
Other comprehensive income (net of tax)	-		-		-		865		-		-		865
-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk	-		-		-		865		-		-		865
Total comprehensive income for the year	-		-		-		53,690		-		-		53,690
Shares issued under employee share plans	42		679		-		-		-		-		721
Shares issued in lieu of dividends and amounts arising thereon	83		(83	)	-		1,494		-		-		1,494
Cancellation of shares4	(105	)	2,836		-		(4,998	)	-		269		(1,998	)
Capital securities issued	-		-		5,967		-		-		-		5,967
Dividends to shareholders	-		-		-		(11,547	)	-		-		(11,547	)
Redemption of capital securities	-		-		(5,843	)	(236	)	-		-		(6,079	)
Transfers5	-		-		-		(2,200	)	-		2,200		-
Other movements	-		-		-		379		-		49		428
At 31 Dec 2018	10,180		13,609		22,231		61,434		-		39,899		147,353
At 1 Jan 2017	10,096		12,619		17,004		27,656		112		37,371		104,858
Profit for the year	-		-		-		5,539		-		-		5,539
Other comprehensive income (net of tax)	-		-		-		(828	)	(53	)	-		(881	)
-  available-for-sale investments	-		-		-		-		(53	)	-		(53	)
-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk	-		-		-		(828	)	-		-		(828	)
Total comprehensive income for the year	-		-		-		4,711		(53	)	-		4,658
Shares issued under employee share plans	38		584		-		(52	)	-		-		570
Shares issued in lieu of dividends and amounts arising thereon	190		(190	)	-		3,205		-		-		3,205
Cancellation of shares	(164	)	(2,836	)	-		-		-		-		(3,000	)
Capital securities issued	-		-		5,103		-		-		-		5,103
Dividends to shareholders	-		-		-		(11,551	)	-		-		(11,551	)
Cost of share-based payment arrangements	-		-		-		(2	)	-		-		(2	)
Other movements	-		-		-		(64	)	-		10		(54	)
At 31 Dec 2017	10,160		10,177		22,107		23,903		59		37,381		103,787

Dividends per ordinary share at 31 December 2019 were $0.51 (2018: $0.51; 2017: $0.51).

1  At 31 December 2019, retained earnings included 326,191,804 ($2,543m) of treasury shares (2018: 326,503,319 ($2,546m); 2017: 326,843,840 ($2,542m)).

2  HSBC Holdings distributable reserves at 31 December 2019 of $31,656m (2018: $30,705m) represents realised profits for the year included in retained earnings of $11,516m (2018: $14,974m) and in merger reserve of $15,731m (2018: $15,731m). The distributable reserves are lower than retained earnings of $62,484m (2018: $61,434m). In 2018, $44,893m (2019: nil) represented income generated from restructuring the Group's Asia operation to meet resolution and recovery requirements, which does not form part of distributable reserves.

3  In August 2019, HSBC announced a share buy-back of up to $1.0bn, which was completed in September 2019.

4  The 2018 year included a re-presentation of the cancellation of shares to retained earnings and capital redemption reserve in respect of the 2017 share buy-back, under which retained earnings has been reduced by $3,000m, share premium increased by $2,836m and other reserves increased by $164m.

5  Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. In 2018, a part reversal of this impairment resulted in a transfer from retained earnings back to the merger reserve of $2,200m. At 31 December 2019, an additional impairment of $2,475m was recognised and a permitted transfer of this amount was made from the merger reserve to retained earnings. 

Notes on the financial statements
		Page				Page
1	Basis of preparation and significant accounting policies	240		21	Goodwill and intangible assets	289
2	Net fee income	251		22	Prepayments, accrued income and other assets	292
3	Net income/(expense) from financial instruments measured at fair value through profit or loss	252		23	Trading liabilities	292
				24	Financial liabilities designated at fair value	292
4	Insurance business	252		25	Debt securities in issue	293
5	Employee compensation and benefits	253		26	Accruals, deferred income and other liabilities	293
6	Auditors' remuneration	259		27	Provisions	293
7	Tax	259		28	Subordinated liabilities	295
8	Dividends	261		29	Maturity analysis of assets, liabilities and off-balance sheet commitments	298
9	Earnings per share	262
10	Segmental analysis	263		30	Offsetting of financial assets and financial liabilities	304
11	Trading assets	265		31	Called up share capital and other equity instruments	305
12	Fair values of financial instruments carried at fair value	266		32	Contingent liabilities, contractual commitments and guarantees	307
13	Fair values of financial instruments not carried at fair value	273		33	Finance lease receivables	308
14	Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	274		34	Legal proceedings and regulatory matters	308
				35	Related party transactions	312
15	Derivatives	275		36	Events after the balance sheet date	314
16	Financial investments	279		37	HSBC Holdings' subsidiaries, joint ventures and associates	314
17	Assets pledged, collateral received and assets transferred	282
18	Interests in associates and joint ventures	283
19	Investments in subsidiaries	286
20	Structured entities	287

1	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 International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'), including interpretations issued by the IFRS Interpretations Committee, and as endorsed by the European Union ('EU'). Interest Rate Benchmark Reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments', was endorsed in January 2020 and has been early adopted as set out below. Therefore, there were no unendorsed standards effective for the year ended 31 December 2019 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 2019

IFRS 16 'Leases'  

On 1 January 2019, we adopted the requirements of IFRS 16 retrospectively. The cumulative effect of initially applying the standard was recognised as an adjustment to the opening balance of retained earnings at that date. Comparatives were not restated. The adoption of the standard increased assets by $5bn and increased financial liabilities by the same amount with no effect on net assets or retained earnings.

On adoption of IFRS 16, we recognised lease liabilities in relation to leases that had previously been classified as 'operating leases' in accordance with IAS 17 'Leases'. These liabilities were recognised in 'other liabilities' and measured at the present value of the remaining lease payments, discounted at the lessee's incremental borrowing rate at 1 January 2019. The associated right of use ('ROU') assets were recognised in 'other assets' and measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments or provisions for onerous leases recognised on the balance sheet at 31 December 2018. In addition, the following practical expedients permitted by the standard were applied:

•   reliance was placed on previous assessments on whether leases were onerous;

•   operating leases with a remaining lease term of less than 12 months at 1 January 2019 were treated as short-term leases; and

•   initial direct costs were not included in the measurement of ROU assets for leases previously accounted for as operating leases.

The differences between IAS 17 and IFRS 16 are summarised in the table below:  

Leases were classified as either finance or operating leases. Payments made under operating leases were charged to profit or loss on a straight-line basis over the period of the lease.

Leases are recognised as an ROU asset and a corresponding liability at the date at which the leased asset is made available for use. Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease term so as to produce a constant period rate of interest on the remaining balance of the liability. The ROU asset is depreciated over the shorter of the ROU asset's useful economic life and the lease term on a straight-line basis. In determining the lease term, we consider all facts and circumstances that create an economic incentive to exercise an extension option or not exercise a termination option over the planning horizon of five years. In general, it is not expected that the discount rate implicit in the lease is available so the lessee's incremental borrowing rate is used. This is the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of a similar value in a similar economic environment with similar terms and conditions. The rates are determined for each economic environment in which we operate and for each term by adjusting swap rates with funding spreads (own credit spread) and cross-currency basis where appropriate.

Interest Rate Benchmark Reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments'

Amendments to IFRS 9 and IAS 39 issued in September 2019 modify specific hedge accounting requirements so that entities apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform. These amendments replace the need for specific judgements to determine whether certain hedge accounting relationships that hedge the variability of cash flows or interest rate risk exposures for periods after the interest rate benchmarks are expected to be reformed or replaced continue to qualify for hedge accounting as at 31 December 2019. For example, in the context of cash flow hedging, the amendments require the interest rate benchmark on which the hedged cash flows are based, or on which the cash flows of the hedging instrument are based, to be assumed to be unaltered over the period of the documented hedge relationship, while uncertainty over the interest rate benchmark reform exists. The IASB is expected to provide further guidance on the implication for hedge accounting during the reform process and after the reform uncertainty is resolved.

These amendments apply from 1 January 2020 with early adoption permitted. HSBC has adopted the amendments that apply to IAS 39 from 1 January 2019 and has made the additional disclosures as required by the amendments. Further information is included in Note 15.

Amendment to IAS 12 'Income Taxes'   and other changes

An amendment to IAS 12 was issued in December 2017 as part of the annual improvement cycle. The amendment clarifies that an entity should recognise the tax consequences of dividends where the transactions or events that generated the distributable profits are recognised. This amendment was applied on 1 January 2019 and had no material impact. Comparatives have not been restated.

In addition, HSBC has adopted a number of interpretations and amendments to standards, which have had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. In 2018, HSBC adopted IFRS 9 and made voluntary presentation changes, including to certain financial liabilities, which contain both deposit and derivative components, and to cash collateral, margin and settlement accounts. The impact of this is included in the HSBC Holdings statement of changes in equity for that year end and 2017 comparatives were not restated.

(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 that are effective from 1 January 2020, some of which have been endorsed for use in the EU. HSBC 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

IFRS 17 'Insurance Contracts'

IFRS 17 'Insurance Contracts' was issued in May 2017 and sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. IFRS 17 is currently effective from 1 January 2021. However, the IASB is considering delaying the mandatory implementation date by one year and may make additional changes to the standard. The Group is in the process of implementing IFRS 17. Industry practice and interpretation of the standard are still developing and there may be changes to it. Therefore the likely impact of its implementation remains uncertain.

(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, which 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 sections marked as ('Audited') in this Annual Report and Accounts 2019 as follows:

•   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 73 to 151;

•   the 'Own funds disclosure' included in the 'Report of the Directors: Capital' on pages 152 to 155; and

•   disclosures relating to HSBC's securitisation activities and structured products are included in the 'Report of the Directors: Risk' on pages 73 to 151.

In accordance with the 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 UK Finance Disclosure Code ('the UKF Disclosure Code'). The UKF Disclosure Code aims to increase the quality and comparability of UK banks' disclosures and sets out five disclosure principles together with supporting guidance agreed in 2010. In line with the principles of the UKF Disclosure 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. This could result in materially different estimates and judgements from those reached by management for the purposes of these financial statements. Management's selection of HSBC's accounting policies that 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, who is supported by the rest of the Group Management Board ('GMB'), which operates as a general management committee under the direct authority of the Board. 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 accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests goodwill for impairment more frequently than once a year when indicators of impairment exist. This ensures 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	•   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 •   Key assumptions used in estimating goodwill impairment are described in Note 21

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 is 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

The most significant critical accounting judgements and estimates relate to the assessment of impairment of our investment in Bank of Communications Co. Limited ('BoCom'), which involves estimations of value in use:
	•   Management's best estimate of BoCom's earnings are based on management's explicit forecasts over the short to medium term and the capital maintenance charge, which is management's forecast of the earnings that need to be withheld in order for BoCom to meet regulatory requirements over the forecast period, both of which are subject to uncertain factors •   Key assumptions used in estimating BoCom's value in use, the sensitivity of the value in use calculations 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 18

(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 instruments issued by HSBC for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.

Interest on credit-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

HSBC generates fee income from services provided at a fixed price over time, such as account service and card fees, or when HSBC delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and HSBC's performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a significant financing component.

HSBC acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades, HSBC acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.

HSBC recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.

Where HSBC offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.

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 measured at fair value through profit or loss includes the following:

•   'Net income from financial instruments held for trading or managed on a fair value basis': This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.

•   'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss': This includes interest income, interest expense and dividend income in respect of financial assets and liabilities measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives.

•   'Changes in fair value of designated debt instruments and related derivatives': Interest paid on debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.

•   'Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss': This includes interest on instruments that fail the solely payments of principal and interest test, see (d) below.

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

(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 (a '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, 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.

Critical accounting estimates and judgements

The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified 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)	•   Details on the Group's level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonable possible alternative assumptions in determining their fair value are set out in Note 12

(d)  Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. HSBC accounts for regular way amortised cost financial instruments using trade date accounting. 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 through the recognition of interest income.

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, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements

When debt 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.

Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements.

(e)  Financial assets measured at fair value through other comprehensive income

Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income ('FVOCI'). These comprise primarily debt securities. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as 'Gains less losses from financial instruments'. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss.

(f)  Equity securities measured at fair value with fair value movements presented in other comprehensive income

The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Otherwise, equity securities are measured at fair value through profit or loss (except for dividend income, which is recognised in profit or loss).

(g)  Financial instruments designated at fair value through profit or loss

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;

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

•   the financial liability contains 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 from financial instruments held for trading or managed on a fair value basis' or 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' except for the effect of changes in the liabilities' credit risk, which is presented in 'Other comprehensive income', unless that treatment would create or enlarge an accounting mismatch in profit or loss.

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

•   Debt instruments for funding purposes that are designated to reduce an accounting mismatch: 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. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at either fair value through other comprehensive income or amortised cost. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line.

•   Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis.

(h)  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 through profit or loss. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

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 not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. HSBC uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, 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 gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within 'Net income from financial instruments held for trading or managed on a fair value basis'. 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. 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. The effective portion of gains and losses on the hedging instrument is recognised in other comprehensive income and other gains and losses are 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.

(i)  Impairment of amortised cost and FVOCI financial assets

Expected credit losses ('ECL') are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life is less than 12 months ('12-month ECL'). In the event of a significant increase in credit risk, 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 considered to be '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'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently, as set out below.

Credit impaired (stage 3)

HSBC determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:

•   contractual payments of either principal or interest are past due for more than 90 days;

•   there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and

•   the loan is otherwise considered to be in default.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.

Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance.

Write-off

Financial assets (and the related impairment allowances) 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.

Renegotiation

Loans are identified as renegotiated and classified as credit impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.

A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue to be disclosed as renegotiated loans.

Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.

Loan modifications that are not credit impaired

Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided.

Significant increase in credit risk (stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk, and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 
30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2.

For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD'), which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows:

0.1-1.2	15bps
2.1-3.3	30bps

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates.

For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle ('TTC') PDs and TTC migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration-based thresholds, as set out in the table below:

0.1	5 notches
1.1-4.2	4 notches
4.3-5.1	3 notches
5.2-7.1	2 notches
7.2-8.2	1 notch
8.3	0 notch

Further information about the 23-grade scale used for CRR can be found on page 85.

For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term, and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporates all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 
12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected, and higher than what would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.

Unimpaired and without significant increase in credit risk (stage 1)

ECL resulting from default events that are possible within the next 12 months ('12-month ECL') are recognised for financial instruments that remain in stage 1.

Purchased or originated credit impaired

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.

In general, HSBC calculates ECL using three main components: a probability of default, a loss given default ('LGD') and the exposure at default ('EAD').

The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.

The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.

HSBC leverages the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table:

PD	•   Through the cycle (represents long-run average PD throughout a full economic cycle) •   The definition of default includes a backstop of 90+ days past due, although this has been modified to 180+ days past due for some portfolios, particularly UK and US mortgages	•   Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD) •   Default backstop of 90+ days past due for all portfolios
EAD	•   Cannot be lower than current balance	•   Amortisation captured for term products
LGD	•   Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn) •   Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data •   Discounted using cost of capital •   All collection costs included	•   Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral) •   No floors •   Discounted using the original effective interest rate of the loan •   Only costs associated with obtaining/selling collateral included
Other		•   Discounted back from point of default to balance sheet date

While 12-month PDs are recalibrated from Basel II models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life.

The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the Group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.

Period over which ECL is measured

Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit HSBC's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

Forward-looking economic inputs

HSBC applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of our view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 92.

Critical accounting estimates and judgements

The calculation of the Group's ECL under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:
•   Defining what is considered to be a significant increase in credit risk •   Determining the lifetime and point of initial recognition of overdrafts and credit cards •   Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions •   Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected loss	•   The sections marked as audited on pages 92 to 103, 'Measurement uncertainty and sensitivity analysis of ECL estimates' set out the assumptions used in determining ECL and provide an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions

(j)  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 discretionary participation features ('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.

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.

(k)  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 the provision of their services.

The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. 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, defined contribution and post-employment benefit schemes.

Payments to defined contribution schemes 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.

Remeasurements 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.

Critical accounting estimates and judgements

The most significant critical accounting judgements and estimates relate to the determination of key assumptions applied in calculating the defined benefit pension obligation for the principal plan.
	•   A range of assumptions could be applied, and different assumptions could significantly alter the defined benefit obligation and the amounts recognised in profit or loss or OCI. •   The calculation of the defined benefit pension obligation includes assumptions with regard to the discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. Management determines these assumptions in consultation with the plan's actuaries. •   Key assumptions used in calculating the defined benefit pension obligation for the principal plan and the sensitivity of the calculation to different assumptions are described in Note 5

(l)  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 on 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 are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

Critical accounting estimates and judgements

The recognition of deferred tax assets depends on judgements
•   Assessing 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, assessing the expected future profitability and the applicability of tax planning strategies, including corporate reorganisations

(m)  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.

Critical accounting estimates and judgements

The recognition and measurement of provisions requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:
•   Determining whether a present obligation exists. Professional advice is taken on the assessment of litigation 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 estimates as appropriate. At more advanced stages, it is typically easier to make estimates around a better defined set of possible outcomes	•   Provisions for legal proceedings and regulatory matters remain very sensitive to the assumptions used in the estimate. There could be a wider 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. 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 populations identified as systemically mis-sold and the number of policies per customer complaint. More information about these assumptions is included in Note 27

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 that 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 fee income

Net fee income by global business
	2019
	Retail Banking and Wealth Management		Commercial Banking		Global Banking and Markets		Global Private Banking		Corporate Centre		Total
	$m		$m		$m		$m		$m		$m
Funds under management	1,295		120		460		302		-		2,177
Account services	890		654		365		101		(7	)	2,003
Cards	1,602		358		15		-		-		1,975
Credit facilities	75		785		743		15		-		1,618
Broking income	366		40		532		119		-		1,057
Unit trusts	921		22		2		90		-		1,035
Underwriting	-		6		821		3		(1	)	829
Remittances	73		362		311		4		(3	)	747
Global custody	90		18		564		45		-		717
Imports/exports	-		497		164		1		-		662
Insurance agency commission	324		20		1		32		-		377
Other	1,097		891		2,362		193		(2,301	)	2,242
Fee income	6,733		3,773		6,340		905		(2,312	)	15,439
Less: fee expense	(1,861	)	(370	)	(3,287	)	(134	)	2,236		(3,416	)
Net fee income	4,872		3,403		3,053		771		(76	)	12,023

	2018												2017
	Retail Banking and Wealth Management		Commercial Banking		Global Banking and Markets		Global Private Banking		Corporate Centre		Total		Total
	$m		$m		$m		$m		$m		$m		$m
Funds under management	1,383		134		421		284		(1	)	2,221		2,188
Account services	991		748		332		106		-		2,177		2,244
Cards	1,575		370		16		-		(5	)	1,956		1,994
Credit facilities	71		824		813		16		(1	)	1,723		1,718
Broking income	494		44		533		139		-		1,210		1,191
Unit trusts	937		25		3		73		-		1,038		1,010
Underwriting	1		10		708		4		-		723		829
Remittances	96		357		320		5		-		778		759
Global custody	100		18		584		35		(1	)	736		692
Imports/exports	3		532		176		2		(4	)	709		736
Insurance agency commission	354		23		1		27		(1	)	404		410
Other	1,110		858		2,362		186		(2,147	)	2,369		2,082
Fee income	7,115		3,943		6,269		877		(2,160	)	16,044		15,853
Less: fee expense	(1,917	)	(388	)	(3,040	)	(135	)	2,056		(3,424	)	(3,042	)
Net Fee income	5,198		3,555		3,229		742		(104	)	12,620		12,811

Net fee income includes $6,647m of 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) (2018: $7,522m; 2017: $7,577m), $1,450m of 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) (2018: $1,682m; 2017: $1,475m), $3,110m of fees earned on trust and other fiduciary activities (2018: $3,165m; 2017: $3,088m) and $237m of fees payable relating to trust and other fiduciary activities (2018: $175m; 2017: $134m).

3	Net income from financial instruments measured at fair value through profit or loss

		2019		2018		2017
	Footnotes	$m		$m		$m
Net income/(expense) arising on:
Net trading activities	1	16,121		6,982		8,236
Other instruments managed on a fair value basis	1	(5,890	)	2,549		190
Net income from financial instruments held for trading or managed on a fair value basis		10,231		9,531		8,426
Financial assets held to meet liabilities under insurance and investment contracts		3,830		(1,585	)	3,211
Liabilities to customers under investment contracts		(352	)	97		(375	)
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss		3,478		(1,488	)	2,836
Derivatives managed in conjunction with HSBC's issued debt securities		2,561		(626	)	(343	)
Other changes in fair value		(2,471	)	529		498
Changes in fair value of designated debt and related derivatives	2	90		(97	)	155
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss		812		695		N/A
Year ended 31 Dec		14,611		8,641		11,417

1  At 1 January 2018 we changed our accounting policy for financial liabilities that contain both deposit and derivative components. As a result, net income from these instruments is reported in 'Other instruments managed on a fair value basis' rather than 'Trading activities'. Comparative periods have not been re-presented.

2  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

HSBC Holdings

	2019		2018		2017
	$m		$m		$m
Net income/(expense) arising on:
-  trading activities	(559	)	(176	)	(392	)
-  other instruments managed at on a fair value basis	2,036		421		211
Net income from financial instruments held for trading or managed on a fair value basis	1,477		245		(181	)
-  Derivatives managed in conjunction with HSBC Holdings-issued debt securities	764		(337	)	292
-  Other changes in fair value	(1,124	)	260		(189	)
Changes in fair value of designated debt and related derivatives	(360	)	(77	)	103
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	1,659		43		-
Year ended 31 Dec	2,776		211		(78	)

4	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	9,353		489		2,266		12,108
Reinsurers' share of gross insurance premium income	(1,465	)	(7	)	-		(1,472	)
Year ended 31 Dec 2019	7,888		482		2,266		10,636
Gross insurance premium income	8,616		422		2,300		11,338
Reinsurers' share of gross insurance premium income	(672	)	(7	)	-		(679	)
Year ended 31 Dec 2018	7,944		415		2,300		10,659
Gross insurance premium income	8,424		351		2,027		10,802
Reinsurers' share of gross insurance premium income	(1,016	)	(7	)	-		(1,023	)
Year ended 31 Dec 2017	7,408		344		2,027		9,779

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	11,305		1,217		3,810		16,332
-  claims, benefits and surrenders paid	3,783		900		1,921		6,604
-  movement in liabilities	7,522		317		1,889		9,728
Reinsurers' share of claims and benefits paid and movement in liabilities	(1,402	)	(4	)	-		(1,406	)
-  claims, benefits and surrenders paid	(411	)	(17	)	-		(428	)
-  movement in liabilities	(991	)	13		-		(978	)
Year ended 31 Dec 2019	9,903		1,213		3,810		14,926
Gross claims and benefits paid and movement in liabilities	8,943		(446	)	1,724		10,221
-  claims, benefits and surrenders paid	3,852		1,088		1,869		6,809
-  movement in liabilities	5,091		(1,534	)	(145	)	3,412
Reinsurers' share of claims and benefits paid and movement in liabilities	(605	)	191		-		(414	)
-  claims, benefits and surrenders paid	(311	)	(181	)	-		(492	)
-  movement in liabilities	(294	)	372		-		78
Year ended 31 Dec 2018	8,338		(255	)	1,724		9,807
Gross claims and benefits paid and movement in liabilities	8,894		1,413		2,901		13,208
-  claims, benefits and surrenders paid	2,883		1,044		2,002		5,929
-  movement in liabilities	6,011		369		899		7,279
Reinsurers' share of claims and benefits paid and movement in liabilities	(942	)	65		-		(877	)
-  claims, benefits and surrenders paid	(297	)	(223	)	-		(520	)
-  movement in liabilities	(645	)	288		-		(357	)
Year ended 31 Dec 2017	7,952		1,478		2,901		12,331

1  Discretionary participation features.

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 2019		57,283		5,789		24,258		87,330
Claims and benefits paid		(3,804	)	(900	)	(1,900	)	(6,604	)
Increase in liabilities to policyholders		11,326		1,217		3,789		16,332
Exchange differences and other movements	2	519		45		(183	)	381
Gross liabilities under insurance contracts at 31 Dec 2019		65,324		6,151		25,964		97,439
Reinsurers' share of liabilities under insurance contracts		(3,521	)	(71	)	-		(3,592	)
Net liabilities under insurance contracts at 31 Dec 2019		61,803		6,080		25,964		93,847
Gross liabilities under insurance contracts at 1 Jan 2018		52,112		7,548		26,007		85,667
Impact on transition to IFRS 9		(69	)	-		-		(69	)
Claims and benefits paid		(3,852	)	(1,088	)	(1,869	)	(6,809	)
Increase in liabilities to policyholders		8,943		(446	)	1,724		10,221
Exchange differences and other movements	2	149		(225	)	(1,604	)	(1,680	)
Gross liabilities under insurance contracts at 31 Dec 2018		57,283		5,789		24,258		87,330
Reinsurers' share of liabilities under insurance contracts		(2,438	)	(68	)	-		(2,506	)
Net liabilities under insurance contracts at 31 Dec 2018		54,845		5,721		24,258		84,824

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 movements in the market value of assets supporting policyholder liabilities, 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.

5	Employee compensation and benefits

	2019		2018		2017
	$m		$m		$m
Wages and salaries	15,581		14,751		15,227
Social security costs	1,472		1,490		1,419
Post-employment benefits	949		1,132		669
Year ended 31 Dec	18,002		17,373		17,315

Average number of persons employed by HSBC during the year by global business
	Footnotes	2019		2018		2017
Retail Banking and Wealth Management		141,044		135,239		134,021
Commercial Banking		46,416		48,757		46,716
Global Banking and Markets		51,127		48,990		49,100
Global Private Banking		7,099		8,206		7,817
Corporate Centre	1	1,369		1,658		7,134
Year ended 31 Dec		247,055		242,850		244,788

1  The reduction in the average number of people employed was due to the completion of the cost to achieve transformation programme at the end of 2017.

Average number of persons employed by HSBC during the year by geographical region
	2019		2018		2017
Europe	66,392		67,007		70,301
Asia	133,624		127,992		125,004
Middle East and North Africa	9,798		9,798		10,408
North America	16,615		17,350		18,610
Latin America	20,626		20,703		20,465
Year ended 31 Dec	247,055		242,850		244,788

Reconciliation of total incentive awards granted to income statement charge
	2019		2018		2017
	$m		$m		$m
Total incentive awards approved for the current year	3,341		3,473		3,303
Less: deferred bonuses awarded, expected to be recognised in future periods	(337	)	(351	)	(337	)
Total incentives awarded and recognised in the current year	3,004		3,122		2,966
Add: current year charges for deferred bonuses from previous years	327		322		336
Other	(55	)	(70	)	(78	)
Income statement charge for incentive awards	3,276		3,374		3,224

Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which $478m were equity settled (2018: $450m; 2017: $500m), as follows:

	2019	2018	2017
	$m	$m	$m
Conditional share awards	521	499	520
Savings-related and other share award option plans	30	23	26
Year ended 31 Dec	551	522	546

HSBC share awards
Deferred share awards (including annual incentive awards, LTI awards delivered in shares) and  Group Performance Share Plans ('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 generally not subject to performance conditions after the grant date. An exception to these are the LTI, which is subject to performance conditions. • Deferred share awards generally vest over a period of three, five or seven years. • Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of employment. • Awards 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 27 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.

Movement on HSBC share awards
	2019		2018
	Number		Number
	(000s)		(000s)
Conditional share awards outstanding at 1 Jan	94,897		104,525
Additions during the year	71,858		61,569
Released in the year	(67,737	)	(67,899	)
Forfeited in the year	(1,963	)	(3,298	)
Conditional share awards outstanding at 31 Dec	97,055		94,897
Weighted average fair value of awards granted ($)	7.89		7.66

HSBC share option plans
Savings-related share option plans ('Sharesave')	• From 2014, employees eligible for the UK plan could save up to £500 per month with the option to use the savings to acquire shares. • These are generally exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively. • The exercise price is set at a 20% (2018: 20%) discount to the market value immediately preceding the date of invitation.

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
		Number		WAEP1
	Footnotes	(000s)		£
Outstanding at 1 Jan 2019		57,065		4.92
Granted during the year	2	32,130		4.69
Exercised during the year	3	(11,806	)	4.40
Expired during the year		(11,321	)	5.46
Forfeited during the year		(1,008	)	4.99
Outstanding at 31 Dec 2019		65,060		4.81
Of which exercisable		2,149		4.53
Weighted average remaining contractual life (years)		2.77
Outstanding at 1 Jan 2018		64,670		4.49
Granted during the year	2	20,501		5.45
Exercised during the year	3	(23,260	)	4.14
Expired during the year		(3,148	)	5.20
Forfeited during the year		(1,698	)	4.53
Outstanding at 31 Dec 2018		57,065		4.92
Of which exercisable		3,513		4.09
Weighted average remaining contractual life (years)		2.59

1  Weighted average exercise price.

2  The weighted average fair value of options granted during the year was $1.36 (2018: $1.40).

3  The weighted average share price at the date the options were exercised was $7.99 (2018: $8.28).

Post-employment benefit plans

The Group operates pension plans throughout the world for its employees. 'Pension risk' on page 134 contains details of the policies and practices associated with these pension plans. Some are defined benefit plans, of which the largest is the HBUK section of the HSBC Bank (UK) Pension Scheme ('the principal plan').

The principal plan has changed from being the combined HSBC Bank (UK) Pension Scheme to being only the HBUK section of the scheme. This is because the HSBC Bank (UK) Pension Scheme was fully sectionalised in 2018 to meet the requirements of the Banking Reform Act.

HSBC holds on its balance sheet the net surplus or deficit, which is the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, HSBC has considered its current right to obtain a future refund or a reduction in future contributions.

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. 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.

The latest funding valuation of the plan at 31 December 2016 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 £28.8bn ($38.1bn) and this exceeded the value placed on its liabilities on an ongoing basis by £1.4bn ($1.9bn), giving a funding level of 105%. These figures include defined contribution assets amounting to £2.0bn ($2.6bn). The main differences between the assumptions used for assessing the defined benefit liabilities for this funding valuation and those used for IAS 19 are more prudent assumptions for discount rate, inflation rate and life expectancy. The next funding valuation will have an effective date of 31 December 2019.

Although the plan was in surplus at the valuation date, HSBC continues to make further contributions to the plan to support a lower-risk investment strategy over the longer term. The remaining contributions are £160m ($212m) in each of 2020 and 2021.The main employer of the principal plan is HSBC UK Bank plc, with additional support from HSBC Holdings plc. The HSBC Bank (UK) Pension Scheme is fully sectionalised and no entities outside the ring fence participate in the HBUK section of the scheme. The sectionalisation, which took place in 2018, did not materially affect the overall funding position of the plan.

The actuary also assessed the value of the liabilities if the plan was 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 £37bn ($49bn) at 31 December 2016.

Guaranteed minimum pension equalisation

Following a judgment issued by the High Court of Justice of England and Wales in 2018, we estimated the financial effect of equalising benefits in respect of guaranteed minimum pension ('GMP') equalisation, and any potential conversion of GMPs into non-GMP benefits, to be an approximate 0.9% increase in the principal plan's liabilities, or £187m ($239m). This was recognised in the income statement in 2018. We continue to assess the impact of GMP equalisation, although no further amounts have been recognised in 2019.

Income statement charge
	2019		2018		2017
	$m		$m		$m
Defined benefit pension plans	176		355		100
Defined contribution pension plans	758		756		603
Pension plans	934		1,111		703
Defined benefit and contribution healthcare plans	15		21		(34	)
Year ended 31 Dec	949		1,132		669

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	47,567		(40,582	)	(16	)	6,969
Defined benefit healthcare plans	121		(580	)	-		(459	)
At 31 Dec 2019	47,688		(41,162	)	(16	)	6,510
Total employee benefit liabilities (within Note 26 'Accruals, deferred income and other liabilities')							(1,771	)
Total employee benefit assets (within Note 22 'Prepayments, accrued income and other assets')							8,280
Defined benefit pension plans	42,799		(36,583	)	(35	)	6,181
Defined benefit healthcare plans	110		(524	)	-		(414	)
At 31 Dec 2018	42,909		(37,107	)	(35	)	5,767
Total employee benefit liabilities (within Note 26 'Accruals, deferred income and other liabilities')							(2,167	)
Total employee benefit assets (within Note 22 'Prepayments, accrued income and other assets')							7,934

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2019 amounted to $37m (2018: $37m). The average number of persons employed during 2019 was 60 (2018: 43). 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.

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)
	Principal1 plan		Other plans		Principal1 plan		Other plans		Principal1 plan		Other plans		Principal1 plan		Other plans
	$m		$m		$m		$m		$m		$m		$m		$m
At 1 Jan 2019	34,074		8,725		(26,616	)	(9,967	)	-		(35	)	7,458		(1,277	)
Service cost	-		-		(64	)	(246	)	-		-		(64	)	(246	)
-  current service cost	-		-		(40	)	(183	)	-		-		(40	)	(183	)
-  past service cost and gains/(losses) from settlements	-		-		(24	)	(63	)	-		-		(24	)	(63	)
Net interest income/(cost) on the net defined benefit asset/(liability)	939		269		(728	)	(293	)	-		-		211		(24	)
Remeasurement effects recognised in other comprehensive income	2,205		867		(2,548	)	(521	)	-		20		(343	)	366
-  return on plan assets (excluding interest income)	2,205		870		-		-		-		-		2,205		870
-  actuarial gains/(losses)	-		-		(2,548	)	(1,348	)	-		-		(2,548	)	(1,348	)
-  other changes	-		(3	)	-		827		-		20		-		844
Exchange differences	1,300		181		(1,036	)	(180	)	-		(1	)	264		-
Benefits paid	(1,014	)	(620	)	1,014		694		-		-		-		74
Other movements2	370		271		(180	)	89		-		-		190		360
At 31 Dec 2019	37,874		9,693		(30,158	)	(10,424	)	-		(16	)	7,716		(747	)
At 1 Jan 2018	37,747		9,518		(29,552	)	(10,537	)	-		(37	)	8,195		(1,056	)
Service cost	-		-		(293	)	(202	)	-		-		(293	)	(202	)
-  current service cost	-		-		(44	)	(179	)	-		-		(44	)	(179	)
-  past service cost and losses from settlements	-		-		(249	)	(23	)	-		-		(249	)	(23	)
Net interest income/(cost) on the net defined benefit asset/(liability)	955		235		(743	)	(265	)	-		(1	)	212		(31	)
Remeasurement effects recognised in other comprehensive income	(1,478	)	(591	)	1,153		440		-		-		(325	)	(151	)
-  return on plan assets (excluding interest income)	(1,478	)	(591	)	-		-		-		-		(1,478	)	(591	)
-  actuarial gains	-		-		1,153		403		-		-		1,153		403
-  other changes	-		-		-		37		-		-		-		37
Exchange differences	(2,002	)	(187	)	1,565		122		-		3		(437	)	(62	)
Benefits paid	(1,132	)	(544	)	1,132		550		-		-		-		6
Other movements2	(16	)	294		122		(75	)	-		-		106		219
At 31 Dec 2018	34,074		8,725		(26,616	)	(9,967	)	-		(35	)	7,458		(1,277	)

1  Refer to page 255 for details on the principal plan.

2  Other movements include contributions by HSBC, contributions by employees, administrative costs and taxes paid by plan.

HSBC expects to make $384m of contributions to defined benefit pension plans during 2020. 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
		2020		2021		2022		2023		2024		2025-2029
		$m		$m		$m		$m		$m		$m
The principal plan1,2		1,081		1,113		1,145		1,178		1,212		6,611
Other plans1		471		525		521		486		479		2,332

1  The duration of the defined benefit obligation is 18.1 years for the principal plan under the disclosure assumptions adopted (2018: 17.0 years) and 13.2 years for all other plans combined (2018: 12.3 years).

2  Refer to page 255 for details on the principal plan.

Fair value of plan assets by asset classes
	31 Dec 2019								31 Dec 2018
	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 plan2
Fair value of plan assets	37,874		33,921		3,953		-		34,074		30,670		3,404		-
-  equities	662		312		350		-		3,152		3,152		-		-
-  bonds	31,699		31,699		-		-		26,509		26,509		-		-
-  derivatives	2,052		-		2,052		-		2,030		-		2,030		-
-  other	3,461		1,910		1,551		-		2,383		1,009		1,374		-
Other plans
Fair value of plan assets	9,693		8,702		991		1,422		8,725		7,425		1,300		1,216
-  equities	2,065		1,455		610		2		2,186		1,265		921		2
-  bonds	6,608		6,376		232		8		5,707		5,559		148		7
-  derivatives	-		-		-		1,183		37		-		37		1,034
-  other	1,020		871		149		229		795		601		194		173

1  The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 35.

2  Refer to page 255 for details on the principal plan.

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 plan1
	Discount rate		Inflation rate		Rate of increase for pensions		Rate of pay increase
	%		%		%		%
UK
At 31 Dec 2019	2.00		3.10		2.90		3.65
At 31 Dec 2018	2.80		3.40		3.10		3.65

1  Refer to page 255 for details on the principal plan.

Mortality tables and average life expectancy at age 604 for the principal plan3
	Mortality table	Life expectancy at age 604 for a male member currently:		Life expectancy at age 604 for a female member currently:
		Aged 60	Aged 40	Aged 60	Aged 40
UK
At 31 Dec 2019	SAPS S21	28.0	29.4	28.2	29.8
At 31 Dec 2018	SAPS S22	28.1	29.6	28.4	30.0

1  Self-administered pension scheme ('SAPS') S2 table (males: 'Normal health pensioners' version; females: 'All pensioners' version) with a multiplier of 0.94 for male and 1.15 for female pensioners. Improvements are projected in accordance with the continual mortality investigation ('CMI') 2018 core projection model with an initial addition to improvements of 0.25% per annum and a long-term rate of improvement of 1.25% per annum. Separate tables have been applied to lower-paid pensioners and dependant members.

2  Self-administered pension scheme ('SAPS') S2 table (males: 'Normal health pensioners' version; females: 'All pensioners' version) with a multiplier of 0.94 for male and 1.15 for female pensioners. Improvements are projected in accordance with the continual mortality investigation ('CMI') 2017 core projection model with a long-term rate of improvement of 1.25% per annum. Separate tables have been applied to lower-paid pensioners and dependant members.

3  Refer to page 255 for details on the principal plan.

4  The presentation of the mortality table has been updated to show life expectancies at the age of 60 rather than 65 as presented in prior years to better reflect market disclosure practices. The prior year data have been updated accordingly.

The effect of changes in key assumptions on the principal plan1
	Impact on HBUK section of the HSBC Bank (UK) Pension Scheme obligation
	Financial impact of increase				Financial impact of decrease
	2019		2018		2019		2018
	$m		$m		$m		$m
Discount rate - increase/decrease of 0.25%	(1,305	)	(1,078	)	1,395		1,149
Inflation rate - increase/decrease of 0.25%	781		726		(738	)	(716	)
Pension payments and deferred pensions - increase/decrease of 0.25%	1,100		1,181		(1,026	)	(1,112	)
Pay - increase/decrease of 0.25%	73		28		(72	)	(29	)
Change in mortality - increase of 1 year	1,267		995		N/A		N/A

1  Refer to page 255 for details on the principal plan.

Directors' emoluments

Details of Directors' emoluments, pensions and their interests are disclosed in the Directors' remuneration report on page 184.

6	Auditor's remuneration

		2019	2018	2017
		$m	$m	$m
Audit fees payable to PwC		85.2	86.6	84.8
Other audit fees payable		0.9	0.9	1.2
Year ended 31 Dec		86.1	87.5	86.0

Fees payable by HSBC to PwC
		2019		2018		2017
	Footnotes	$m		$m		$m
Fees for HSBC Holdings' statutory audit	1	15.7		16.4		15.1
Fees for other services provided to HSBC		95.0		103.1		114.6
-  audit of HSBC's subsidiaries		69.5		70.2		69.7
-  audit-related assurance services	2	10.0		11.4		10.8
-  other assurance services	3	12.2		13.5		25.2
-  taxation compliance services		1.6		1.4		1.2
-  taxation advisory services		-		0.1		-
-  other non-audit services	3	1.7		6.5		7.7
Year ended 31 Dec		110.7		119.5		129.7

1  Fees payable to PwC 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.

2  Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.

3  Including permitted services relating to attestation reports on internal controls of a service organisation primarily prepared for and used by third party end user.

No fees were payable by HSBC to PwC 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
		2019		2018		2017
		$000		$000		$000
Audit of HSBC's associated pension schemes		250		172		260
Audit-related assurance services		-		-		4
Year ended 31 Dec		250		172		264

No fees were payable by HSBC's associated pension schemes to PwC as principal auditor for the following types of 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 associated with HSBC amount to $17.2m (2018: $14.0m; 2017: $3.5m). 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 that 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.

7

Tax

Tax expense
		2019		2018		2017
	Footnotes	$m		$m		$m
Current tax	1	3,768		4,195		4,264
-  for this year		3,689		4,158		4,115
-  adjustments in respect of prior years		79		37		149
Deferred tax		871		670		1,024
-  origination and reversal of temporary differences		684		656		(228	)
-  effect of changes in tax rates		(11	)	17		1,337
-  adjustments in respect of prior years		198		(3	)	(85	)
Year ended 31 Dec	2	4,639		4,865		5,288

1  Current tax included Hong Kong profits tax of $1,413m (2018: $1,532m; 2017: $1,350m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2018: 16.5%; 2017: 16.5%).

2  In addition to amounts recorded in the income statement, a tax charge of $6m (2018: credit of $234m) was recorded directly to equity.

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:

	2019				2018				2017
	$m		%		$m		%		$m		%
Profit before tax	13,347				19,890				17,167
Tax expense
Taxation at UK corporation tax rate of 19.00% (2018: 19.00%; 2017: 19.25%)	2,536		19.0		3,779		19.0		3,305		19.25
Impact of differently taxed overseas profits in overseas locations	253		1.9		264		1.3		407		2.3
Items increasing tax charge in 2019:
-  non-deductible goodwill write-down	1,421		10.7		-		-		-		-
-  local taxes and overseas withholding taxes	484		3.6		437		2.2		618		3.6
-  other permanent disallowables	481		3.6		396		2.0		400		2.3
-  non-deductible UK customer compensation	382		2.9		16		0.1		166		1.0
-  UK tax losses not recognised	364		2.7		435		2.2		70		0.4
-  adjustments in respect of prior period liabilities	277		2.1		34		0.2		64		0.4
-  bank levy	184		1.4		191		1.0		180		1.0
-  impacts of hyperinflation	29		0.2		78		0.4		-		-
-  UK banking surcharge	29		0.2		229		1.1		136		0.8
-  non-UK movements in unrecognised deferred tax	12		0.1		32		0.2		(16	)	(0.1	)
-  non-deductible regulatory settlements	5		-		153		0.8		(132	)	(0.8	)
-  deferred tax remeasurement due to US federal tax rate reduction	-		-		-		-		1,288		7.5
Items reducing tax charge in 2019:
-  non-taxable income and gains	(844	)	(6.3	)	(691	)	(3.5	)	(766	)	(4.4	)
-  effect of profits in associates and joint ventures	(467	)	(3.5	)	(492	)	(2.5	)	(481	)	(2.8	)
-  deductions for AT1 coupon payments	(263	)	(2.0	)	-		-		-		-
-  non-taxable gain on dilution of shareholding in SABB	(181	)	(1.3	)	-		-		-		-
-  impact of changes in tax rates	(11	)	(0.1	)	17		0.1		49		0.3
-  other items	(52	)	(0.4	)	(13	)	(0.1	)	-		-
Year ended 31 Dec	4,639		34.8		4,865		24.5		5,288		30.8

The Group's profits are taxed at different rates depending on the country or territory in which the profits arise. The key applicable tax rates for 2019 include Hong Kong (16.5%), the US (21%) and the UK (19%). If the Group's profits were taxed at the statutory rates of the countries in which the profits arose, then the tax rate for the year would have been 20.90% (2018: 20.30%). The effective tax rate for the year was 34.8% (2018: 24.5%). The effective tax rate for 2019 was significantly higher than for 2018 as 2019 included a non-deductible impairment of goodwill of $7.3bn.

Following an amendment to IAS 12 effective 1 January 2019, the income tax consequences of distributions, including AT1 coupon payments, are recorded in the income statement tax expense. Prior periods have not been restated.

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.

Movement of deferred tax assets and liabilities
		Loan impairment provisions		Unused tax losses and tax credits		Derivatives, FVOD1 and other investments		Insurance business		Expense provisions		Fixed assets		Retirement obligations		Other		Total
	Footnotes	$m		$m		$m		$m		$m		$m		$m		$m		$m
Assets		982		1,156		492		-		629		1,151		-		738		5,148
Liabilities		-		-		(376	)	(1,271	)	-		-		(1,387	)	(283	)	(3,317	)
At 1 Jan 2019		982		1,156		116		(1,271	)	629		1,151		(1,387	)	455		1,831
Income statement		45		266		(386	)	(303	)	(18	)	(185	)	(149	)	(141	)	(871	)
Other comprehensive income		-		-		544		-		-		-		30		(391	)	183
Equity		-		-		-		-		-		-		-		-		-
Foreign exchange and other adjustments		(44	)	(8	)	147		(47	)	39		36		(107	)	98		114
At 31 Dec 2019		983		1,414		421		(1,621	)	650		1,002		(1,613	)	21		1,257
Assets	2	983		1,414		979		-		650		1,002		-		422		5,450
Liabilities	2	-		-		(558	)	(1,621	)	-		-		(1,613	)	(401	)	(4,193	)
Assets		713		1,373		1,282		-		643		1,201		352		760		6,324
Liabilities		-		-		(93	)	(1,182	)	-		-		(1,387	)	(968	)	(3,630	)
At 1 Jan 2018		713		1,373		1,189		(1,182	)	643		1,201		(1,035	)	(208	)	2,694
IFRS 9 transitional adjustment		358		-		(411	)	-		-		-		-		459		406
Income statement		(72	)	(203	)	51		(104	)	19		(68	)	35		(328	)	(670	)
Other comprehensive income		-		-		(722	)	-		-		-		25		165		(532	)
Equity		-		-		-		-		-		-		(15	)	(8	)	(23	)
Foreign exchange and other adjustments		(17	)	(14	)	9		15		(33	)	18		(397	)	375		(44	)
At 31 Dec 2018		982		1,156		116		(1,271	)	629		1,151		(1,387	)	455		1,831
Assets	2	982		1,156		492		-		629		1,151		-		738		5,148
Liabilities	2	-		-		(376	)	(1,271	)	-		-		(1,387	)	(283	)	(3,317	)

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 $4,632m (2018: $4,450m) and deferred tax liabilities $3,375m (2018: $2,619m).

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 $1.3bn (2018: $1.8bn) includes $2.8bn (2018: $3.0bn) of deferred tax assets relating to the US, of which $1.1bn relates to US tax losses that expire in 14 to 18 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 cover a five-year period and the forecasts have been extrapolated beyond five years by assuming that performance remains constant after the fifth year.

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 $8.3bn (2018: $7.2bn). This amount includes unused UK corporation tax losses of $6.2bn (2018: $4.6bn) which are not recognised due to uncertainty regarding the availability of sufficient future taxable profits against which to recover them. Of the total amounts unrecognised, $6.4bn (2018: $4.7bn) had no expiry date, $1.3bn (2018: $1.3bn) 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 $13.4bn  (2018: $13.2bn) and the corresponding unrecognised deferred tax liability is $1.0bn (2018: $0.9bn).

8

Dividends

Dividends to shareholders of the parent company
	2019						2018						2017
	Per share		Total		Settled in scrip		Per share		Total		Settled in scrip		Per share		Total		Settled in scrip
	$		$m		$m		$		$m		$m		$		$m		$m
Dividends paid on ordinary shares
In respect of previous year:
-  fourth interim dividend	0.21		4,206		1,160		0.21		4,197		393		0.21		4,169		1,945
In respect of current year:
-  first interim dividend	0.10		2,013		375		0.10		2,008		213		0.10		2,005		826
-  second interim dividend	0.10		2,021		795		0.10		1,990		181		0.10		2,014		193
-  third interim dividend	0.10		2,029		357		0.10		1,992		707		0.10		2,005		242
Total	0.51		10,269		2,687		0.51		10,187		1,494		0.51		10,193		3,206
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			1,324						1,270						1,268
Dividends to shareholders			11,683						11,547						11,551

Total coupons on capital securities classified as equity
			2019				2018		2017
					Total		Total		Total
	Footnotes	First call date	Per security		$m		$m		$m
Perpetual subordinated capital securities	1, 3
$2,200m issued at 8.125%		Apr 2013	$0.000		-		89		179
$3,800m issued at 8.000%		Dec 2015	$0.000		-		76		304
Perpetual subordinated contingent convertible securities	2, 3
$1,500m issued at 5.625%	4	Nov 2019	$56.250		84		84		84
$2,000m issued at 6.875%		Jun 2021	$68.750		138		138		138
$2,250m issued at 6.375%		Sep 2024	$63.750		143		143		143
$2,450m issued at 6.375%		Mar 2025	$63.750		156		156		156
$3,000m issued at 6.000%		May 2027	$60.000		180		180		90
$2,350m issued at 6.250%		Mar 2023	$62.500		147		73		-
$1,800m issued at 6.500%		Mar 2028	$65.000		117		59		-
€1,500m issued at 5.250%		Sep 2022	€52.500		88		95		89
€1,000m issued at 6.000%		Sep 2023	€60.000		66		72		68
€1,250m issued at 4.750%		July 2029	€47.500		68		70		-
SGD1,000m issued at 4.700%		Jun 2022	SGD47.000		34		35		17
£1,000m issued at 5.875%		Sep 2026	£58.750		75		-		-
SGD750m issued at 5%		Sep 2023	SGD50.000		28		-		-
Total					1,324		1,270		1,268

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 each security's issuance currency 1,000 per security.

3  Further details of these securities can be found in Note 31.

4  This security was called by HSBC Holdings on 22 November 2019 and was redeemed and cancelled on 17 January 2020. Between the date of exercise of the call option and the redemption, this security was considered to be a subordinated liability. Refer to Note 31 for further details on additional tier 1 securities.

After the end of the year, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2019 of $0.21 per ordinary share, a distribution of approximately $4,266m. The fourth interim dividend will be payable on 14 April 2020 to holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 28 February 2020. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2019.

On 6 January 2020, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($33m).   No liability was recorded in the balance sheet at 31 December 2019 in respect of this coupon payment.

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
	2019		2018		2017
	$m		$m		$m
Profit attributable to shareholders of the parent company	7,383		13,727		10,798
Dividend payable on preference shares classified as equity	(90	)	(90	)	(90	)
Coupon payable on capital securities classified as equity	(1,324	)	(1,029	)	(1,025	)
Year ended 31 Dec	5,969		12,608		9,683

Basic and diluted earnings per share
		2019						2018						2017
		Profit		Number of shares		Per  share		Profit		Number of shares		Per share		Profit		Number of shares		Per share
	Footnotes	$m		(millions)		$		$m		(millions)		$		$m		(millions)		$
Basic	1	5,969		20,158		0.30		12,608		19,896		0.63		9,683		19,972		0.48
Effect of dilutive potential ordinary shares				75						87						100
Diluted	1	5,969		20,233		0.30		12,608		19,983		0.63		9,683		20,072		0.48

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

The number of anti-dilutive employee share options excluded from the weighted average number of dilutive potential ordinary shares is 1.1m  (2018: nil; 2017: nil).

 

END

 

 

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