HSBC 2005 US GAAP FILING
HSBC Holdings PLC
30 September 2005
This Report on Form 6-K is hereby incorporated by reference in the following
HSBC Holdings plc registration statements: file numbers 333-10474, 333-92024,
333-102027, 333-103887, 333-104203, 333-109288, 333-113427 and 333-127327
HSBC HOLDINGS PLC
US GAAP information for the six months ended 30 June 2005
Contents
1. Amounts in accordance with US GAAP 3
2. Differences between IFRSs and US GAAP 4
3. Reconciliations from IFRSs to US GAAP 17
4. Pension and other post-retirement benefits 18
5. Future accounting developments (US GAAP) 19
6. Supplementary information on transition to IFRSs 20
7. Ratio of earnings to combined fixed charges and preference share
dividends 21
Cautionary Statement Regarding Forward-Looking Statements
The following analysis contains certain forward-looking statements with
respect to the financial condition, results of operations and business of
HSBC. These forward-looking statements represent HSBC's expectations or
beliefs concerning future events and involve known and unknown risks and
uncertainty that could cause actual results, performance or events to differ
materially from those expressed or implied in such statements. For example,
certain of the market risk disclosures, some of which are only estimates
and, therefore, could be materially different from actual results, are
dependent on key model characteristics and assumptions and are subject to
various limitations. Certain statements, such as those that include the
words 'potential', 'value at risk', 'estimated', 'expects', 'anticipates',
'objective', 'intends', 'plans', 'believes', 'estimates', and similar
expressions or variations on such expressions may be considered
'forward-looking statements'.
Written and/or oral forward-looking statements may also be made in the
periodic reports to the US Securities and Exchange Commission ('SEC') on
Form 20-F, Form 6-K, summary financial statements to shareholders, proxy
statements, offering circulars and prospectuses, press releases and other
written materials and in oral statements made by HSBC's Directors, officers
or employees to third parties, including financial analysts.
Forward-looking statements involve inherent risks and uncertainties. Readers
should be cautioned that a number of factors could cause actual results to
differ, in some instances materially, from those anticipated or implied in
any forward-looking statement. Forward-looking statements speak only as of
the date they are made, and it should not be assumed that they have been
reviewed or updated in the light of new information or future events. Trends
and factors that are expected to affect HSBC's results of operations are
described in the 'Financial Review'. A more detailed cautionary statement is
given on pages 5 and 6 of the Annual Report and Accounts 2004.
Certain Defined Terms
Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings
plc and 'HSBC' or the 'Group' means HSBC Holdings together with its
subsidiary and associated undertakings. When used in the terms
'shareholders' equity' and 'profit attributable to shareholders',
'shareholders' means holders of HSBC ordinary shares.
Statutory Accounts
The information in this document does not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985 ('the Act'). The
statutory accounts for the year ended 31 December 2004 have been delivered
to the Registrar of Companies in accordance with Section 242 of the Act. The
auditor has reported on those accounts. Its report was unqualified and did
not contain a statement under Section 237 (2) or (3) of the Act.
1. Amounts in accordance with US GAAP
The consolidated financial statements of HSBC are prepared in accordance
with International Financial Reporting Standards ('IFRSs') which differ in
certain significant respects from Generally Accepted Accounting Principles
in the United States ('US GAAP'). HSBC's Interim Report for the six months
to 30 June 2005, prepared in accordance with IFRSs, was filed on Form 6-K on
5 August 2005.
In preparing its interim consolidated financial statements, HSBC has elected
to take advantage of certain transitional provisions within IFRS 1
'First-time Adoption of International Financial Reporting Standards' which
offer exemption from presenting comparative information or applying IFRSs
retrospectively. The most significant of these provisions is the exemption
from presenting comparative information in accordance with IAS 32 'Financial
Instruments: Disclosure and Presentation' ('IAS 32'), IAS 39 'Financial
Instruments: Recognition and Measurement' ('IAS 39') and IFRS 4 'Insurance
Contracts' ('IFRS 4'). IFRSs comparative information for financial
instruments and insurance contracts has been prepared on the basis of HSBC's
previous accounting policies. The accounting policies applied to financial
instruments and insurance contracts for 2004 are disclosed in italics in
Section 2 below.
This document should be read in conjunction with the Interim Report which
explains the impact of IAS 32, 39 and IFRS 4 in more detail.
Amounts in accordance with US GAAP Half-year to
30 June 30 June 31 December
2005 2004 2004
US$m US$m US$m
Income statement for the period
Net income available for
ordinary shareholders 9,105 7,338 5,168
Other comprehensive income (5,781) (4,156) 5,139
Dividends (4,575) (4,053) (2,879)
Balance sheet data at
period-end
Total assets 1,493,120 1,135,976 1,266,365
Shareholders' equity 89,260 80,808 90,082
US$ US$ US$
Per ordinary share amounts
Basic earnings 0.83 0.68 0.47
Diluted earnings 0.82 0.67 0.46
Dividends 0.41 0.37 0.26
Net asset value at
period end 7.95 7.33 8.06
Amounts in accordance with US GAAP
2004 2003 2002 2001 2000
US$m US$m US$m US$m US$m
Income statement for
the year
Net income available
for ordinary 12,506 7,231 4,900 4,911 6,236
shareholders
Other comprehensive 983 7,401 5,502 (1,439) (511)
income
Dividends (6,932) (6,974) (4,632) (4,394) (3,137)
Balance sheet at
31 December
Total assets 1,266,365 1,012,023 763,565 698,312 680,076
Shareholders' 90,082 80,251 55,831 48,444 48,072
equity
US$ US$ US$ US$ US$
Per ordinary share
Basic earnings 1.15 0.69 0.52 0.53 0.71
Diluted earnings 1.13 0.69 0.52 0.53 0.70
Dividends 0.63 0.685 0.495 0.48 0.34
Net asset value at
year end 8.06 7.32 5.89 5.18 5.19
2.Differences between IFRSs and US GAAP
The following is a summary of the significant differences applicable to
HSBC:
Shareholders' interest in the long-term assurance fund
IFRSs
•IFRS 4 permits entities to continue to account for insurance contracts
under guidance issued under previous GAAP until a comprehensive standard
relating to the measurement of insurance assets and liabilities is
developed.
•Under UK GAAP, and, hence, current IFRSs, the value placed on HSBC's
interest in long-term assurance business includes a valuation of the
discounted future earnings expected to emerge from business currently in
force, taking into account factors such as recent experience and general
economic conditions, together with the surplus retained in the long-term
assurance funds. These are determined annually in consultation with
independent actuaries.
•Movements in the value of in-force long-term assurance business are
included in other operating income on a gross of tax basis.
•From 1 January 2005, a contract that transfers financial risk, without
significant insurance risk, is classified as an investment contract, and
accounted for as a financial instrument under IAS 39.
US GAAP
•The net present value of future earnings is not recognised. Acquisition
costs and fees are deferred and amortised in accordance with SFAS 97
'Accounting and reporting by insurance enterprises for certain long-duration
contracts and for realised gains and losses from the sale of investments'.
Impact
•US GAAP shareholders' equity is lower than that under IFRSs as a result
of not recognising the present value of in-force long-term assurance
business.
•The effect of this is offset partly by the deferral and amortisation of
acquisition costs under US GAAP, which are written off immediately as an
expense for long-term assurance business reported according to the above
method under IFRSs.
Long-term assurance assets and liabilities
IFRSs
•Long-term assurance fund assets, excluding own shares held, are
classified consistently with other holdings of similar assets, unless
designated as at fair value (see below). Liabilities attributable to
policyholders under insurance contracts are recognised in accordance with
IFRS 4 and appropriate actuarial principles as 'Liabilities under insurance
contracts'. Liabilities attributable to policyholders under linked
investment contracts are recognised at fair value as financial liabilities
under 'Liabilities to customers under investment contracts'. Prior to 1
January 2005, both types of contract were recognised as 'Liabilities to
policyholders under long-term assurance business'.
US GAAP
•Under the Statement of Position issued by the American Institute of
Certified Public Accountants ('AICPA SOP') 03-1, 'Accounting and reporting
by Insurance Enterprises for certain Non-traditional and Long-duration
Contracts and for Separate Accounts', which became fully effective in 2004,
where assets qualify for separate accounting they should be measured at fair
value and be reported in the financial statements as a summary total, with
an equivalent summary total for related liabilities. Otherwise, assets
representing policyholders funds under the arrangements should be accounted
for and recognised as general account assets, i.e. consistent with other
holdings of similar assets. Any related liability should be accounted for as
a general account liability.
Impact
•Assets that are held within accounts meeting the definition of separate
accounts in SOP 03-1 are presented as a single line within other assets, in
the US GAAP balance sheet.
Pension costs
IFRSs
•IAS 19 'Employee Benefits' requires pension liabilities to be assessed
based on current actuarial assumptions and methods and pension assets to be
measured at fair value. The net pension surplus or deficit, representing the
difference between plan assets and liabilities, is recognised on the balance
sheet.
•As permitted by IAS 19 (revised 2004), HSBC elects to record all
actuarial gains and losses on the pension surplus or deficit in the year
they occur within the Statement of Recognised Income and Expense.
US GAAP
•SFAS 87 'Employers' Accounting for Pensions' prescribes a similar method
of actuarial valuation for pension liabilities and measurement of plan
assets at fair value.
•Where the accumulated benefit obligation (the value of benefits accrued
based on employee service up to the balance sheet date) exceeds the value of
plan assets, HSBC recognises an additional minimum pension liability equal
to this excess, as long as the excess is greater than any accrual already
established for unfunded pension costs.
•SFAS 87 does not permit recognition of all actuarial gains and losses in
a performance statement other than the primary income statement. Under US
GAAP, HSBC elects to use the 'corridor method', whereby actuarial gains and
losses outside a certain range are recognised in the income statement, in
equal amounts over the remaining service lives of current employees. That
range is equal to 10% of the greater of plan assets and plan liabilities.
The remaining additional minimum pension liability is recognised directly in
Other Comprehensive Income.
Impact
•US GAAP net income is lower than that under IFRSs as a result of the
amortisation of actuarial losses (which exceed gains) outside the 10%
'corridor'.
•US GAAP shareholders' equity is higher than under IFRSs since deficits
(which exceed surpluses) recognised under IFRSs exceed the minimum pension
liability recognised under US GAAP.
Stock-based compensation
IFRSs
•IFRS 2 'Share-based Payment' requires that where annual bonuses are paid
in restricted shares, whereby the employee must remain with HSBC for a fixed
period in order to receive the shares, the award is expensed over that
period.
US GAAP
•In its US GAAP reporting, under SFAS 123 'Accounting for Stock Based
Compensation', HSBC has interpreted the service period as being the period
to which the bonus relates.
•For 2005 bonuses, awarded in early 2006, HSBC will follow SFAS 123
(revised 2004) 'Share-Based Payment' ('SFAS 123R'). SFAS 123R is consistent
with IFRS 2, requiring restricted bonuses be expensed over the period the
employee must remain with HSBC. However, FAS 123R only applies to awards
made after the date of adoption, which HSBC has elected as 1 July 2005.
Impact
•A portion of bonuses awarded in respect of 2002, 2003 and 2004 are
expensed in IFRSs net income during the first half of 2005. Such awards have
already been expensed in those years for US GAAP purposes. 2005 bonuses will
be expensed over the vesting period under both IFRSs and US GAAP. This
results in higher net income under US GAAP during 2005.
•IFRSs and US GAAP are now largely aligned and this transition difference
will be eliminated over the next few years.
Goodwill, purchase accounting and intangibles
IFRSs
•IFRS 3 'Business Combinations' requires that goodwill should not be
amortised but should be tested for impairment at least annually at the
reporting unit level by applying a test based on recoverable amount.
•The book value of goodwill existing at 31 December 2003 under UK GAAP is
carried forward under IFRSs from 1 January 2004, subject to limited
adjustments.
•Prior to 1998, goodwill under UK GAAP was written off against equity.
HSBC did not elect to reinstate this goodwill on its balance sheet upon
transition to IFRSs.
•After 1998, goodwill was capitalised and amortised over its useful life.
•Where quoted securities are issued as part of the purchase consideration
in an acquisition, the fair value of those securities for the purpose of
determining the cost of acquisition is the market price of the securities at
the date of acquisition.
US GAAP
•Goodwill acquired up to 30 June 2001 was capitalised and amortised over
its useful life but not more than 25 years. The amortisation of previously
acquired goodwill ceased from 31 December 2001.
•Where quoted securities are issued as part of the purchase consideration
in an acquisition, the fair value of those securities for the purpose of
determining the cost of acquisition is the average market price of the
securities for a reasonable period before and after the date that the terms
of the acquisition are agreed and announced.
Impact
•Total goodwill, and shareholders' equity, is higher under US GAAP since
(a) pre-1998 goodwill is included on the balance sheet, and (b) amortisation
of goodwill ceased on 31 December 2001, compared with 31 December 2003 under
IFRSs.
•However, US GAAP goodwill on the acquisition of HSBC Finance Corporation
is lower than that under IFRSs. This is principally as a result of differing
accounting for securitisation and intangibles in the acquired balance
sheets. Previously recognised gains on the sale of assets to securitisation
vehicles are eliminated for IFRSs purposes and the securitised assets are
recognised on balance sheet. US GAAP also required recognition of a
significant amount of intangible assets on acquisition that were not
recognised for IFRSs purposes since HSBC elected not to restate business
combinations prior to 1 January 2004 on transition to IFRSs . Offsetting
this is the recognition of a deferred tax liability under US GAAP in respect
of these intangibles and gains on sale of securitised assets.
•The impact of these items is further offset by a higher value placed on
HSBC shares as part of the purchase consideration under US GAAP. The HSBC
share price fell between the time of announcement in November 2002 and
completion of the acquisition in March 2003.
Property
IFRSs
•Under the transition rules of IFRS 1, HSBC has elected to freeze the
value of its properties at their 1 January 2004 valuations. These are the
'deemed cost' of properties under IFRSs and will not be revalued in the
future. Properties held at historical or deemed cost are depreciated except
for freehold land and leasehold leases greater than 500 years. Investment
properties are not depreciated.
•Investment properties are recognised at current market value with gains
or losses recognised in net income for the period.
US GAAP
•US GAAP does not permit revaluations of property, including investment
property, although it requires recognition of asset impairment. Any realised
surplus or deficit is, therefore, reflected in income on disposal of the
property. Depreciation is charged on all properties based on cost.
Impact
•For property held for own use, this reflects revaluation surpluses
recorded prior to 1 January 2004. Consequently, the value of tangible fixed
assets under US GAAP, and shareholders' equity, is lower than that under
IFRSs.
•There is a correspondingly lower depreciation charge and higher net
income under US GAAP, partially offset by higher gains (or smaller losses)
on the disposal of fixed assets.
•For investment properties, US GAAP net income does not reflect the gain
or loss recorded under IFRSs for the period.
Derivatives and hedge accounting
IFRSs
From 1 January 2005
•Derivatives are recognised initially, and are subsequently remeasured, at
fair value. Fair values are obtained from quoted market prices in active
markets, or by using valuation techniques, including recent market
transactions, where an active market does not exist. Valuation techniques
include discounted cash flow models and option pricing models as
appropriate. All derivatives are classified as assets when their fair value
is positive, or as liabilities when their fair value is negative.
•In the normal course of business, the fair value of a derivative on
initial recognition is considered to be the transaction price (i.e. the fair
value of the consideration given or received). However, in certain
circumstances the fair value of an instrument will be evidenced by
comparison with other observable current market transactions in the same
instrument (i.e. without modification or repackaging) or based on a
valuation technique whose variables include only data from observable
markets, including interest rate yield curves, option volatilities and
currency rates. When such evidence exists, HSBC recognises a trading profit
or loss on inception of the derivative. If observable market data are not
available, the initial increase in fair value indicated by the valuation
model, but based on unobservable inputs, is not recognised immediately in
the income statement but is recognised over the life of the transaction on
an appropriate basis, or recognised in the income statement when the inputs
become observable, or when the transaction matures or is closed out.
•Certain derivatives embedded in other financial instruments, such as the
conversion option in a convertible bond, are treated as separate derivatives
when their economic characteristics and risks are not clearly and closely
related to those of the host contract, the terms of the embedded derivative
are the same as those of a stand-alone derivative, and the combined contract
is not designated at fair value through profit and loss. These embedded
derivatives are measured at fair value with changes in fair value recognised
in the income statement.
•Derivative assets and liabilities on different transactions are only
netted if the transactions are with the same counterparty, a legal right of
set-off exists, and the cash flows are intended to be settled on a net
basis.
•The method of recognising the resulting fair value gains or losses
depends on whether the derivative is held for trading, or is designated as a
hedging instrument, and if so, the nature of the risk being hedged. All
gains and losses from changes in the fair value of derivatives held for
trading are recognised in the income statement. Where derivatives are
designated as hedges, HSBC classifies them as either: (i) hedges of the
change in fair value of recognised assets or liabilities or firm commitments
('fair value hedge'); (ii) hedges of the variability in highly probable
future cash flows attributable to a recognised asset or liability, or a
forecast transaction ('cash flow hedge'); or (iii) hedges of net investments
in a foreign operation ('net investment hedge'). Hedge accounting is applied
to derivatives designated as hedging instruments in a fair value, cash flow
or net investment hedge provided certain criteria are met.
Hedge accounting
•It is HSBC's policy to document, at the inception of a hedging
relationship, the relationship between the hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking
the hedge. Such policies also require documentation of the assessment, both
at hedge inception and on an ongoing basis, of whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items attributable to the hedged
risks. Interest on designated qualifying hedges is included in 'Net interest
income'.
Fair value hedge
•Changes in the fair value of derivatives that are designated and qualify
as fair value hedging instruments are recorded in the income statement,
together with changes in the fair value of the asset or liability or group
thereof that are attributable to the hedged risk.
•If the hedging relationship no longer meets the criteria for hedge
accounting, the cumulative adjustment to the carrying amount of a hedged
item for which the effective interest method is used is amortised to the
income statement over the residual period to maturity.
Cash flow hedge
•The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash flow hedges are recognised in equity. Any
gain or loss relating to an ineffective portion is recognised immediately in
the income statement.
•Amounts accumulated in equity are recycled to the income statement in the
periods in which the hedged item will affect profit or loss. However, when
the forecast transaction that is hedged results in the recognition of a
non-financial asset or a non-financial liability, the gains and losses
previously deferred in equity are transferred from equity and included in
the initial measurement of the cost of the asset or liability.
•When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity until the forecast
transaction is ultimately recognised in the income statement. When a
forecast transaction is no longer expected to occur, the cumulative gain or
loss that was reported in equity is immediately transferred to the income
statement.
Net investment hedge
•Hedges of net investments in foreign operations are accounted for
similarly to cash flow hedges. Any gain or loss on the hedging instrument
relating to the effective portion of the hedge is recognised in equity; the
gain or loss relating to the ineffective portion is recognised immediately
in the income statement. Gains and losses accumulated in equity are included
in the income statement on the disposal of the foreign operation.
Hedge effectiveness testing
•To qualify for hedge accounting, IAS 39 requires that at the inception of
the hedge and throughout its life, each hedge must be expected to be highly
effective (prospective effectiveness). Actual effectiveness (retrospective
effectiveness) must also be demonstrated on an ongoing basis.
•The documentation of each hedging relationship sets out how the
effectiveness of the hedge is assessed. The method an HSBC entity adopts for
assessing hedge effectiveness will depend on its risk management strategy.
•For fair value hedge relationships, HSBC entities utilise the cumulative
dollar offset method or regression analysis as effectiveness testing
methodologies. For cash flow hedge relationships, HSBC entities utilise the
change in variable cash flow method or the cumulative dollar offset method
using the hypothetical derivative approach.
•For prospective effectiveness, the hedging instrument must be expected to
be highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk during the period for which the hedge
is designated. For actual effectiveness, the changes in fair value or cash
flows must offset each other in the range of 80 per cent to 125 per cent for
the hedge to be deemed effective.
Derivatives that do not qualify for hedge accounting
•All gains and losses from changes in the fair value of any derivatives
that do not qualify for hedge accounting are recognised immediately in the
income statement. These gains and losses are reported in 'Trading income',
except where derivatives are managed in conjunction with financial
instruments designated at fair value, in which case gains and losses are
reported in 'Net income from financial instruments designated at fair
value'.
From 1 January 2004 to 31 December 2004
•Derivative financial instruments comprised futures, forward, swap and
option transactions undertaken by HSBC in the foreign exchange, interest
rate, equity, credit derivative, and commodity markets that were held
off-balance sheet. Netting was applied where a legal right of set-off
existed.
•Accounting for these instruments was dependent upon whether the
transactions were undertaken for trading or non-trading purposes.
Trading transactions
Trading transactions included transactions undertaken for market-making, to
service customers' needs and for proprietary purposes, as well as any
related hedges.
•Transactions undertaken for trading purposes were marked-to-market and
the net present value of any gain or loss arising was recognised in the
income statement as 'Trading income', after appropriate deferrals for
unearned credit margins and future servicing costs. Derivative trading
transactions were valued by reference to an independent liquid price where
this was available. For those transactions where there were no readily
available quoted prices, which predominantly related to over the counter
transactions, market values were determined by reference to independently
sourced rates, using valuation models. If market observable data was not
available, the initial increase in fair value indicated by the valuation
model, but based on unobservable inputs, was not recognised immediately in
the income statement. This amount was held back and recognised over the life
of the transaction where appropriate, or released to the income statement
when the inputs became observable, or, when the transaction matured or was
closed out. Adjustments were made for illiquid positions where appropriate.
•Assets, including gains, resulting from derivative exchange rate,
interest rate, equities, credit derivative and commodity contracts which
were marked-to-market were included in 'Derivatives' on the assets side of
the balance sheet. Liabilities, including losses, resulting from such
contracts, were included in 'Derivatives' on the liabilities side of the
balance sheet.
Non-trading transactions
•Non-trading transactions, which were those undertaken for hedging
purposes as part of HSBC's risk management strategy against cash flows,
assets, liabilities or positions, were measured on an accrual basis.
Non-trading transactions included qualifying hedges and positions that
synthetically altered the characteristics of specified financial
instruments.
•Non-trading transactions were accounted for on an equivalent basis to the
underlying assets, liabilities or net positions. Any gain or loss arising
was recognised on the same basis as that arising from the related assets,
liabilities or positions.
•To qualify as a hedge, a derivative was required effectively to reduce
the price, foreign exchange or interest rate risk of the asset, liability or
anticipated transaction to which it was linked and be capable of designation
as a hedge at inception of the derivative contract. Accordingly, changes in
the market value of the derivative were required to be highly correlated
with changes in the market value of the underlying hedged item at inception
of the hedge and over the life of the hedge contract. If these criteria were
met, the derivative was accounted for on the same basis as the underlying
hedged item. Derivatives used for hedging purposes included swaps, forwards
and futures. Interest rate swaps were also used to alter synthetically the
interest rate characteristics of financial instruments. In order to qualify
for synthetic alteration, a derivative instrument had to be linked to
specific individual, or pools of similar, assets or liabilities by the
notional principal and interest rate risks of the associated instruments,
and had to achieve a result that was consistent with defined risk management
objectives. If these criteria were met, accruals based accounting was
applied, i.e. income or expense was recognised and accrued to the next
settlement date in accordance with the contractual terms of the agreement.
Any gain or loss arising on the termination of a qualifying derivative
was deferred and amortised to earnings over the original life of the
terminated contract. Where the underlying asset, liability or position
was sold or terminated, the qualifying derivative was immediately
marked-to-market and any gain or loss arising was taken to the income
statement.
US GAAP
•The accounting under SFAS 133 'Accounting for Derivative Instruments and
Hedging Activities' is generally consistent with that under IAS 39 as
described above (from 1 January 2005).
•SFAS 133 permits the 'shortcut method' of hedge effectiveness testing for
certain transactions. Under this method, it may be assumed, at inception of
the hedge, there is no ineffectiveness in the hedging of interest rate risk
with an interest rate swap provided specific criteria are met.
Impact
•HSBC has not elected to satisfy the prescriptive hedging requirements of
SFAS 133 in respect of external derivative contracts, with the exception of
certain subsidiaries in North America. IFRSs hedging derivatives have been
marked to market with the gain or loss recognised in net income for US GAAP
purposes.
•HSBC's North American subsidiaries continue to follow the 'shortcut
method' of hedge effectiveness testing for certain transactions in their US
GAAP reporting. The shortcut method is not permitted by IFRSs and
ineffectiveness in such hedges is measured and reported in HSBC's
consolidated IFRSs financial statements. This ineffectiveness, in respect of
these North American transactions only, is eliminated to arrive at HSBC's US
GAAP net income.
Designation of financial assets and liabilities at fair value through
profit and loss
IFRSs
•Under IAS 39, a financial instrument, other than one held for trading, is
classified in this category if it meets the criteria set out below, and is
so designated by management. An entity may designate financial instruments
at fair value where the designation:
- eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial assets
or financial liabilities or recognising the gains and losses on them on
different bases; or
- applies to a group of financial assets, financial liabilities or both
that is managed and its performance evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy, and
where information about that group of financial instruments is provided
internally on that basis to key management personnel; or
- relates to financial instruments containing one or more embedded
derivatives that significantly modify the cash flows resulting from
those financial instruments.
•Financial assets and financial liabilities so designated are recognised
initially at fair value, with transaction costs taken directly to the income
statement, and are subsequently remeasured at fair value. This designation,
once made, is irrevocable in respect of the financial instruments to which
it is made. Financial assets and financial liabilities are recognised using
trade date accounting.
•Gains and losses from changes in the fair value of such assets and
liabilities are recognised in the income statement as they arise, together
with related interest income and expense and dividends, within 'Net income
from financial instruments designated at fair value'.
US GAAP
•There are no provisions to make such an election in US GAAP similar to
that in IAS 39.
•Generally, for financial assets to be measured at fair value with gains
and losses recognised immediately in the income statement under US GAAP,
they must meet the definition of trading securities in SFAS 115 'Accounting
for Certain Investments in Debt and Equity Securities'. Financial
liabilities are generally reported at amortised cost under US GAAP.
Impact
•HSBC has used the fair value designation principally in the following
cases:
- for fixed rate long-term debt issues whose interest rate characteristic
has been changed to floating through interest rate swaps as part of an
effective interest rate management strategy. Approximately US$48 billion
of the Group's debt issues have been accounted for using the option.
Included in the expense of these debt issues are interest expense and
the movement attributable to changes in credit spread. The expense also
includes any ineffectiveness inherent in the economic relationship
between the offsetting swaps and own debt. This may arise from the
different credit characteristics of the swap and own debt coupled with
the sensitivity of the floating leg of the swap to changes in short-term
interest rates. Additionally, this economic relationship will be
affected by relative movements in market factors, such as bond and swap
rates, and the relative bond and swap rates at inception. The size and
direction of these other changes will be volatile from period to period.
- certain assets held by insurance operations to meet related liabilities
under insurance and investment contracts (approximately US$12 billion of
assets); and
- liabilities under investment contracts where the change in value of a
pool of assets is correlated with the change in value of the liability to
policyholders (approximately US$9 billion of liabilities).
•Under US GAAP, debt issues are reported at amortised cost. Where an
offsetting derivative is providing an economic hedge for the asset or
liability, this results in asymmetrical accounting being reflected in US
GAAP net income, except for some transactions in certain subsidiaries in
North America where the relationship is elected a fair value hedge under
SFAS 133.
•Under US GAAP, assets held to meet insurance/investment contracts are
reported as available-for-sale, with gains and losses taken directly to
Other Comprehensive Income. Where the corresponding liability is reported at
fair value, with movements reported immediately in net income, this results
in asymmetrical accounting being reflected in US GAAP net income.
•All these adjustments are included as 'Derivatives and hedge accounting'
in the reconciliations below.
Financial investments
IFRSs
From 1 January 2005
•Treasury bills, debt securities and equity shares intended to be held on
a continuing basis are classified as available-for-sale securities unless
designated at fair value (see above) or classified as held-to-maturity.
•Available-for-sale securities are initially measured at fair value plus
direct and incremental transaction costs. They are subsequently remeasured
at fair value. Changes in fair value are recognised in equity until the
securities are either sold or impaired. On the sale of available-for-sale
securities, cumulative gains or losses previously recognised in equity are
recognised through the income statement and classified as 'Gains less losses
from financial investments'. Interest income is recognised on such
securities using the effective interest rate method, calculated over the
asset's expected life. Where dated investment securities have been purchased
at a premium or discount, these premiums and discounts are included in the
calculation of the effective interest rate.
•If an available-for-sale security is determined to be impaired, the
cumulative loss (measured as the difference between the acquisition cost and
the current fair value, less any impairment loss on that financial asset
previously recognised in the income statement) is removed from equity and
recognised in the income statement. If, in a subsequent period, the fair
value of a debt instrument classified as available-for-sale increases and
the increase can be objectively related to an event occurring after the
impairment loss was recognised in the income statement, the impairment loss
is reversed through the income statement. Impairment losses recognised in
the income statement on equity instruments are not reversed through the
income statement.
•The foreign exchange gains or losses on foreign currency denominated
available-for-sale securities are recognised in net income to the extent
they relate to the translation of amortised cost of the security.
1 January 2004 to 31 December 2004
•Debt securities and equity shares intended to be held on a continuing
basis are disclosed as investment securities and are included in the balance
sheet at cost less provision for any permanent diminution in value. Other
participating interests are accounted for on the same basis. Premiums or
discounts on dated investment securities purchased at other than face value
are amortised through the profit and loss account over the period from date
of purchase to date of maturity and are included in 'interest income'. Any
gain or loss on realisation of these securities is recognised in the profit
and loss account as it arises and included in 'Gains less losses from
financial investments'.
•Foreign currency exchange differences on foreign currency-denominated
monetary items, including securities, are recognised in the income
statement.
US GAAP
•All debt securities and quoted equity shares are classified and disclosed
within one of the following three categories: held-to-maturity;
available-for-sale; or trading (SFAS 115 'Accounting for Certain Investments
in Debt and Equity Securities').
•Held-to-maturity debt securities are measured at amortised cost.
•Available-for-sale securities are measured at fair value with unrealised
holding gains and losses excluded from earnings and reported net of
applicable taxes and minority interests in a separate component of
shareholders' funds. Foreign exchange gains or losses on foreign currency
denominated available-for-sale securities are also excluded from earnings
and recorded as part of the same separate component of shareholders' funds.
•A decline considered other than temporary in fair value below cost of an
available-for-sale or held-to-maturity security is treated as a realised
loss and included in earnings. This lower fair value is then treated as the
cost basis for the security. A decline in fair value is generally considered
other than temporary where management does not have the ability and intent
to hold the investment for a reasonable period of time sufficient for the
fair value to recover back up to the cost of the investment.
•Unquoted equity shares are measured at cost, less any provisions for
impairment, and are reported within 'other assets'.
Impact
•In 2004, available for sale securities, other than unquoted equity
shares, are recorded at fair value in the US GAAP balance sheet which is
higher than cost in the comparative IFRSs balance sheet.
•In 2005, certain assets have been reported as 'designated as at fair
value' for IFRS purposes (see above).
•Under US GAAP unquoted equity shares are recorded at cost rather than
fair value.
•Foreign exchange gains and losses on foreign currency denominated
available-for-sale securities, recognised in net income under IFRSs are not
reflected in US GAAP net income where they are deferred and recognised on
maturity or sale of the security.
•Subsequent recoveries in the value of an impaired debt security are not
reported in net income for US GAAP purposes.
Interests in own shares held
IFRSs
•IAS 32 requires that HSBC Holdings' shares are deducted from
shareholders' funds. No gains or losses are recognised on own shares held.
•The rules in IAS 32 also apply to derivatives over HSBC's own shares,
where they meet the definition of equity instruments, and HSBC shares held
to meet liabilities under insurance and investment contracts.
US GAAP
•AICPA Accounting Research Bulletin 51 'Consolidated Financial Statements'
requires a reduction in shareholders' equity for own shares held. The rules
in ARB 51 do not extend to derivatives over HSBC's own shares.
•AICPA Accounting Research Bulletin 43 'Restatement and Revision of
Accounting Research Bulletins' also requires a reduction in shareholders'
equity for own shares held. HSBC shares held within 'Long-term assurance
assets attributable to policyholders' remain classified as an asset where
the criteria for classification as 'separate accounts' are met.
Impact
•Certain insurance operations hold shares in HSBC as part of policyholder
funds that qualify for classification as 'separate accounts'. These shares
represent an addition to shareholders' equity for US GAAP purposes and are
reported within 'other assets' with gains and losses during the period
reported in other income where they are matched with corresponding movements
in the amounts attributable to policyholders. No such gains and losses are
recognised under IFRSs and the costs of the shares remain deducted from
shareholders' equity.
Loan origination
IFRSs
From 1 January 2005
•Certain loan fee income and incremental directly attributable loan
origination costs are amortised to the profit and loss account over the life
of the loan as part of the effective interest calculation under IAS 39.
1 January 2004 to 31 December 2004
•Prior to 1 January 2005, fee and commission income was accounted for in
the period when receivable, except when charged to cover the costs of a
continuing service to, or risk borne for, the customer, or was interest in
nature. In these cases, income was recognised on an appropriate basis over
the relevant period. Loan costs associated with origination were generally
expensed as incurred.
US GAAP
•Certain loan fee income and direct but not necessarily incremental loan
origination costs, including an apportionment of overheads, are amortised to
the profit and loss account over the life of the loan as an adjustment to
interest income (SFAS 91 'Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases'.)
Impact
•A greater amount of costs are deferred and amortised under US GAAP, such
as an apportionment of base salaries. These are not incremental and directly
attributable to a specific loan origination and so would be written off in
the period they are incurred under IFRSs. This results in increased net
income and shareholders' equity under US GAAP since in the years presented
the extra cost deferral under US GAAP exceeds the amortisation of previously
deferred costs.
Securitisations
IFRSs
•The recognition of securitised assets is governed by a three-step
process. The process may be applied to the whole asset, or a part of an
asset:
- If the rights to the cash flows have been transferred to a third party,
those securitised assets should be derecognised.
- If the rights to the cash flows are retained but there is a contractual
obligation to pay the cashflows to another party, the securitised assets
should be derecognised if certain conditions are met, for example, where
there is no obligation to pay amounts to the eventual recipient unless an
equivalent amount is collected from the original asset.
- If it is determined that some significant risks and rewards of ownership
have been transferred, but some significant risks and rewards have also
been retained, it must be determined whether or not control has been
retained. If it has not been retained, the asset should be derecognised.
If control has been retained, an entity shall continue to recognise the
asset to the extent of its continuing involvement.
US GAAP
•SFAS 140 'Accounting for Transfers and Servicing of Finance Assets and
Extinguishments of Liabilities' requires that receivables that are sold to a
special purpose entity and securitised can only be derecognised and a gain
or loss on sale recognised if the originator has surrendered control over
those securitised assets.
•Control has been surrendered over transferred assets if and only if all
of the following conditions are met:
- The transferred assets have been put presumptively beyond the reach of
the transferor and its creditors, even in bankruptcy or other
receivership.
- Each holder of interests in the transferee (i.e. holder of issued notes)
has the right to pledge or exchange their beneficial interests, and no
condition constrains this right and provides more than a trivial benefit
to the transferor.
- The transferor does not maintain effective control over the assets
through either an agreement that obligates the transferor to repurchase
or to redeem them before their maturity or through the ability to
unilaterally cause the holder to return specific assets, other than
through a clean-up call.
- If these conditions are not met the securitised assets should continue to
be consolidated.
•Where HSBC retains an interest in the securitised assets, such as a
servicing right or the right to residual cash flows from the special purpose
entity, HSBC recognises this interest at fair value on sale of the assets.
Impact
•Gains on sale of assets to securitisation vehicles are recognised under
US GAAP in cases where no such gain is recognised under IFRSs. This will
result in higher US GAAP net income in periods where there is significant
securitisation activity. Since early 2004, HSBC has reduced securitisation
activity resulting in 'gain on sale' accounting under US GAAP. As a result,
net income is lower under US GAAP since the amortisation of HSBC's retained
interest in previous securitisations exceeds the gains on new transactions
where a gain is recognised, which largely represent replenishments of
short-term receivables to existing vehicles.
Consolidation of Special Purpose Entities or Variable Interest Entities
IFRSs
•Under the IASB's Standards Interpretations Committee ('SIC')
Interpretation 12, a special purpose entity ('SPE') should be consolidated
when the substance of the relationship between an enterprise and the SPE
indicates that the SPE is controlled by that enterprise.
US GAAP
•FASB Interpretation No. 46 (revised December 2003) 'Consolidation of
Variable Interest Entities' ('FIN 46R') requires consolidation of Variable
Interest Entities ('VIEs') in which HSBC is the primary beneficiary and
disclosures in respect of all other VIEs in which it has a significant
variable interest.
•A VIE is an entity in which equity investors do not hold an investment
with the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities. HSBC is
the primary beneficiary of a VIE if its variable interests absorb a majority
of the entity's expected losses. Variable interests are contractual,
ownership or other pecuniary interests in an entity that change with changes
in the fair value of an entity's net assets exclusive of variable interests.
If no party absorbs a majority of the entity's expected losses, HSBC
consolidates the VIE if it receives a majority of the expected residual
returns of the entity.
Impact
•Where HSBC is deemed the primary beneficiary under US GAAP, but does not
consolidate the vehicle under IFRSs, the assets and liabilities of that
vehicle are consolidated on the US GAAP balance sheet. This results in a
grossing up of the balance sheet but does not have a material impact on net
income for the period or on shareholders' equity.
•Where HSBC is deemed not to be the primary beneficiary under US GAAP of a
vehicle that is consolidated under IFRSs, the assets and liabilities of that
vehicle are de-consolidated in the US GAAP balance sheet. This results in a
netting down of the 2004 balance sheet but does not have a material impact
on net income for the periods or on shareholders' equity.
Restructuring provisions
IFRSs
•In accordance with IAS 37 'Provisions, contingent liabilities and
contingent assets', provisions are made for any direct costs and net future
operating losses arising from a business that management is committed to
restructure, sell or terminate, has a detailed formal plan to exit, and has
raised a valid expectation of carrying out that plan.
US GAAP
•SFAS 146 'Accounting for Costs Associated with Exit or Disposal
Activities', requires that the fair value of a liability for a cost
associated with an exit or disposal activity be recognised when the
liability is incurred. Accordingly, provisions are recognised upon the
implementation of the restructuring plan.
Impact
•HSBC has plans to restructure and streamline various operations. The
recognition of costs associated with such plans is earlier under IFRSs than
US GAAP, for example, where there is a time lag between developing and
communicating a formal plan, and putting it into practice. This has resulted
in higher net income and shareholders' equity under US GAAP in 2003. In 2004
and 2005, the impact on net income has reversed, as the provision is
recognised under US GAAP.
Loan impairment
IFRSs
•Where there is evidence of impairment, based on statistical models using
historic loss rates adjusted for economic conditions, portfolios of loans
are written down to their net recoverable amount. The net recoverable amount
is the present value of the estimated future recoveries discounted at the
portfolio's original effective interest rate and includes reasonably
estimable recoveries on loans individually identified for write-off pursuant
to HSBC's credit guidelines.
US GAAP
•Where the delinquency status of loans in a portfolio is such that there
is no realistic prospect of recovery of these amounts, the loans are written
off in full, or to recoverable value where collateral exists. The
delinquency status, for example, the number of days payment is overdue,
where write-off occurs is applied consistently across similar loan products
as described in HSBC's credit guidelines. Where local regulators mandate the
delinquency status at which write-off must occur for different retail loan
products and these reasonably reflect estimable recoveries on individual
loans, this basis of measuring loan impairment is reflected in US GAAP
accounting. Cash recoveries relating to pools of such written-off loans, if
any, are reported as loan recoveries upon collection.
Impact
•Under both IFRSs and US GAAP, Group policy and regulatory instruction
mandate that individual loans evidencing adverse credit characteristics,
which indicate no reasonably estimable prospect of recovery, are written
off. Where, on a portfolio basis, cash flows can reasonably be estimated in
aggregate from these written-off loans, an asset equal to the present value
of such future cash flows will continue to be recognised under IFRSs.
•No asset for future recoveries arising from written-off assets was
recognised in the balance sheet under IFRSs prior to 1 January 2005.
Interest recognition
IFRSs
•The calculation and recognition of the effective interest rate under IAS
39 requires all estimated fees and points that are an integral part of the
effective interest rate be included.
US GAAP
•FAS 91 also generally requires all fees and costs associated with
originating a loan be recognised as interest but, where the interest rate
increases during the term of the loan, prohibits the recognition of interest
income to the extent that the net investment in the loan would increase to
an amount greater than the amount at which the borrower could settle the
obligation.
Impact
•Where HSBC provides introductory incentives of either a low or nil
interest rate for the early period of a loan, interest income on such
products is recognised under IFRSs based on the overall effective interest
rate over the expected life of the product. No interest is recognised during
the incentive period under US GAAP.
3. Reconciliations from IFRSs to US GAAP
The following tables summarise the significant adjustments to consolidated
net income and shareholders' equity which would result from the application
of US GAAP:
Half-year Half-year Half-year Full year
to to to to
30 June 30 June 31 December 31 December
2005 2004 2004 2004
US$m US$m US$m US$m
Net income
Profit attributable to
shareholders of HSBC
(IFRSs) 7,596 6,940 5,978 12,918
Shareholders' interest
in long-term
assurance fund (55) (76) (26) (102)
Pension costs (82) (184) 110 (74)
Stock based
compensation 77 (62) (21) (83)
Intangible assets (189) (165) (158) (323)
Purchase accounting
adjustments (50) (277) 102 (175)
Derivatives and
hedge accounting (15) (255) 499 244
Foreign exchange
gains/losses on
available-for-sale
securities 2,210 1,695 (626) 1,069
Loan origination 199 109 34 143
Securitisations (333) (381) (716) (1,097)
Loan impairment (35) - - -
Interest
recognition (36) - - -
Other.......... (29) 60 (37) 23
Taxation, including on
reconciling items (25) 30 (107) (77)
Minority interest in
reconciling items (128) (96) 136 40
Net income (US GAAP) 9,105 7,338 5,168 12,506
US$ US$ US$ US$
Per share amounts (US
GAAP)
Basic earnings per
ordinary share 0.83 0.68 0.47 1.15
Diluted earnings
per ordinary share 0.82 0.67 0.46 1.13
30 June 30 June 31 December 2004
2005 2004
US$m US$m US$m
Shareholders' equity
Total shareholders' equity
(IFRSs) 86,713 77,066 85,522
Shareholders' interest in
long-term assurance fund (1,234) (1,509) (1,600)
Pension costs 750 1,019 1,557
Fair value adjustment for
securities available for
sale (561) 764 1,969
Goodwill 1,188 1,071 1,594
Revaluation of property (1,661) (1,340) (1,269)
Purchase accounting
adjustments 1,345 1,160 1,142
Intangibles 2,254 2,626 2,437
Derivatives and hedge
accounting 1,241 195 356
Loan origination 670 311 375
Securitisations (571) 354 (358)
Loan impairment (382) - -
Interest recognition (103) - -
Other.......... 86 (531) (385)
Taxation, including on
reconciling items (1,387) (520) (1,196)
Minority interest in
reconciling items 912 142 (62)
Total shareholders' equity
(US GAAP) 89,260 80,808 90,082
Half-year to Half-year to Half-year to Full-year
30 June 30 June 31 December 31 December
2005 2004 2004 2004
US$m US$m US$m US$m
Movement in total
shareholders'
equity (US GAAP)
Balance brought
forward 90,082 80,251 80,808 80,251
Net income 9,105 7,338 5,168 12,506
Dividends (4,575) (4,053) (2,879) (6,932)
Share options 102 117 117 234
Shares issued in
lieu of dividends 454 1,625 982 2,607
New share capital
subscribed net
of costs 71 86 495 581
Other, including
movements in own
shares held (198) (400) 252 (148)
Net change in net
unrealised gains/
losses on securities
available for sale,
net of tax effect (1,847) (2,118) 1,281 (837)
Net change in net
unrealised gains on
derivatives
classified as cash
flow hedges, net of
tax effect (119) (146) (203) (349)
Minimum pension
liability adjustment,
net of tax effect - - (195) (195)
Exchange and other
movements (3,815) (1,892) 4,256 2,364
Total Other
Comprehensive
Income (5,781) (4,156) 5,139 983
Balance carried
forward 89,260 80,808 90,082 90,082
Total assets
Total assets at 30 June 2005, incorporating adjustments arising from the
application of US GAAP, are estimated to be US$1,493,120 million; (30 June
2004: US$1,135,976 million; 31 December 2004: US$1,266,365 million).
Foreign exchange gains on available-for-sale securities
Within individual legal entities, HSBC holds securities in a number of
different currencies which are classified as available-for-sale. For
example, within the private bank in Switzerland, which has the US dollar as
its reporting currency, HSBC holds euro-denominated bonds which are funded
in euros and Swiss franc securities funded in Swiss francs. No foreign
exchange exposure arises from this because, although the value of the assets
in US dollar terms changes according to the exchange rate, there is an
identical offsetting change in the US dollar value of the related funding.
Under IFRSs, both the assets and the liabilities are translated at closing
exchange rates and the differences between historical book value and current
value are reflected in foreign exchange trading income. This reflects the
economic substance of holding currency assets financed by currency
liabilities.
However, under US accounting rules, the change in value of the investments
classified as available-for-sale is taken directly to reserves while the
offsetting change in US dollar terms of the borrowing is taken to earnings.
This leads to an accounting result which does not reflect either the
underlying risk position or the economics of the transactions. It is also a
situation that will reverse on maturity of the asset or earlier sale.
A similar difference arises when foreign currency exposure on foreign
currency assets is covered using forward contracts but where HSBC does not
manage these hedges to conform with the detailed US hedge designation
requirements.
The result of this is that for the first half of 2005, US GAAP profits were
increased by some US$2.2 billion compared with IFRSs profits. There is no
difference in shareholders' equity between IFRSs and US GAAP as a result of
this item.
Approximately half of the adjustment for the first half of 2005 reflects the
reversal of adjustments in prior periods on the maturity or disposal of
securities. The other half of the adjustment reflects a strengthening of the
US dollar and the Hong Kong dollar against the principal currencies in which
HSBC holds 'available-for-sale securities'.
4. Pension and other post-retirement benefits
The components of net periodic benefit cost related to HSBC's defined
benefit pension plans and post- retirement benefits other than pensions
under US GAAP were as follows:
Pension benefits for half-year to Other post-retirement benefits for
half-year to
30 June 30 June 31 December 2004 30 June 30 June 31 December 2004
2005 2004 2005 2004
US$m US$m US$m US$m US$m US$m
Service cost 328 282 268 16 3 7
Interest 656 613 596 17 16 29
cost
Expected return
on plan assets (680) (637) (641) - - -
Amortisation
of transition
obligation - 1 (1) 6 5 7
Amortisation
of prior
service cost 2 2 5 (5) - -
Amortisation
of net loss 82 110 32 - 2 (2)
Curtailments (3) - 242 (1) - -
Net periodic
benefit cost 385 371 501 33 26 41
Employer contributions
HSBC Bank (UK) Pension Plan
During the six months ended 30 June 2005, US$119 million of contributions
have been made to the HSBC Bank (UK) Pension Plan. HSBC currently
anticipates contributing an additional US$114 million to the HSBC Bank (UK)
Pension Plan in 2005 for a total of US$233 million.
Other schemes
During the six months ended 30 June 2005, US$143 million of contributions
have been made to other plans. HSBC currently anticipates contributing an
additional US$66 million to the other pension plans in 2005 for a total of
US$209 million.
5. Future accounting developments (US GAAP)
The Financial Accounting Standards Board ('FASB') has issued the following
accounting standards, which will become fully effective in future financial
statements.
In May 2005 the FASB issued Statement of Financial Accounting Standards
('SFAS') No. 154 'Accounting Changes and Error Corrections'. In many, but
not all aspects, SFAS 154 converges with IAS 8 'Accounting Policies, Changes
in Accounting Estimates and Errors' in the accounting and reporting of
accounting changes and corrections of errors. SFAS 154 is effective for
fiscal years beginning after 15 December 2005. Adoption is not expected to
have a material impact on the US GAAP information in HSBC's financial
statements.
SFAS 123 (revised 2004) 'Share-Based Payment ('SFAS 123R') was issued in
December 2004 to replace SFAS 123 'Accounting for Stock Based Compensation'
('SFAS123'). SFAS 123R requires a fair value method of accounting for
stock-based compensation plans. HSBC had already elected to follow the fair
value method encouraged by SFAS 123. The other requirements of SFAS 123R and
impact are outlined in section 2 'Differences between IFRSs and US GAAP'.
HSBC has elected to adopt SFAS 123R from 1 July 2005.
In June 2005, the FASB Emerging Issues Task Force ('EITF') issued EITF 04-5
'Determining whether a General Partner, or General Partners as a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners
Have Certain Rights'. EITF 04-5 has a presumption that the general partner
in a limited partnership or similar entity, such as a limited liability
company, has control unless the limited partners have substantive kick-out
rights or participating rights. The guidance contained in the EITF is
effective after 29 June 2005 for all new partnerships formed and for
existing partnerships that are modified after that date, and for all other
existing partnerships it is effective no later than the beginning of the
first reporting period beginning after 15 December 2005. The impact of EITF
04-5 on the US GAAP information in HSBC's financial statements is currently
under review.
6. Supplementary information on transition to IFRSs
In addition to exempting companies from the requirement to restate
comparatives for IAS 32, IAS 39 and IFRS 4, IFRS 1 grants certain exemptions
from the full requirements of IFRSs to companies adopting IFRSs for the
first time in the transition period.
HSBC has elected to take the following exemptions affecting comparative
financial data:
(i)Business combinations
HSBC has elected not to restate business combinations that took place
prior to the 1 January 2004 transition date. The main difference of not
applying this exemption would have been to recognise deferred tax on
fair value adjustments at the date of acquisition. This would result in
different amounts of goodwill and retained earnings at 1 January 2004.
There would be no impact on net income going forward (unless any
additional goodwill recognised triggered an impairment loss).
The recognition of additional intangibles if HSBC had restated prior
business combinations, with a reduction in goodwill, net of deferred
tax, would have reduced shareholders' equity and resulted in lower IFRSs
net income due to the amortisation of intangibles with a definite life.
(ii)Fair value or revaluation as deemed cost
A first-time adopter may elect to measure individual items of property
at fair value at the date of transition to IFRSs and use that fair value
as deemed cost at that date. HSBC has made this election.
If HSBC had continued to revalue properties, this would have led to
tangible fixed assets increasing as at 31 December 2004 with a
corresponding increase in other reserves (net of deferred tax
liabilities). There would be a slightly increased depreciation charge
and reduced net income going forward.
If HSBC had reverted to original cost as the basis for carrying
properties, IFRSs net income would have been higher for 2004 and 2005
due to a reduced depreciation charge and shareholders' equity would be
lower.
(iii)Employee benefits
HSBC has elected to apply the employee benefits exemption and has,
therefore, recognised in equity at 1 January 2004 all cumulative
actuarial gains and losses on retirement benefit plans. Recognising
certain actuarial gains and losses under a corridor approach would have
reduced liabilities and increased retained earnings at 1 January 2004.
HSBC has not elected to adopt a corridor approach going forward under
IAS 19.
(iv) Cumulative translation differences
HSBC has set the cumulative translation differences for all foreign
operations to zero at 1 January 2004. Retrospective application of IAS
21 would have resulted in a re-allocation between retained earnings and
other reserves as at 1 January 2004 but no impact on total equity.
(v)Share-based payment transactions
HSBC has elected to undertake full retrospective application of IFRS 2
'Share-based Payment'. Excluding share options issued before 7 November
2002, as permitted by IFRS 1, would have slightly reduced administrative
expenses and increased net income in 2004. There would have been no
impact on retained earnings or total equity.
7.Ratio of earnings to combined fixed charges and preference share dividends
The ratios of earnings to combined fixed charges and preference share
dividends for the periods indicated, using financial information calculated
in accordance with IFRSs, UK GAAP and estimated financial information
adjusted to reflect US GAAP, are:
6 months to Year ended 31 December
30 June 2005 2004 2003 2002 2001 2000
Ratios in
accordance
with IFRSs
Excluding
interest on
deposits 8.65 8.64 N/A N/A N/A N/A
Including
interest on
deposits 1.61 1.86 N/A N/A N/A N/A
Ratios in
accordance
with UK GAAP
Excluding
interest on
deposits N/A 8.07 7.41 6.57 4.90 5.83
Including
interest on
deposits N/A 1.81 1.80 1.66 1.35 1.38
Ratios in
accordance
with US GAAP
Excluding
interest on
deposits 9.91 8.49 6.33 5.42 4.90 5.67
Including
interest on
deposits 1.71 1.85 1.67 1.53 1.34 1.37
For the purpose of calculating the ratios of earnings to combined fixed
charges and preference share dividends, earnings consist of income from
continuing operations before taxation and minority interests, plus fixed
charges and after deduction of the unremitted pre-tax income of associated
undertakings. Fixed charges consist of total interest expense, including or
excluding interest on deposits, as appropriate, preference share dividends,
as applicable, and the proportion of rental expense deemed representative of
the interest factor. This includes interest expense arising on trading
liabilities and liabilities designated at fair value under IFRSs.
The above table contains ratios based on UK GAAP, HSBC's previous primary
GAAP, which is not comparable to financial information based upon IFRS, as
explained when HSBC published its 2004 IFRS Comparative Financial
Information on 5 July 2005.
This information is provided by RNS
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