HSBC FY05 REL2; Pt6/7

HSBC Holdings PLC
06 March 2006


     From 1 January 2005, deferred tax relating to fair value re-measurement of
     available-for-sale investments and cash flow hedges, which are charged or
     credited directly to equity, is also credited or charged directly to equity
     and is subsequently recognised in the income statement when the deferred 
     fair value gain or loss is recognised in the income statement.

r Pension and other post-retirement benefits

The group operates a number of pension plans which include both defined benefit
and defined contribution plans.

Payments to defined contribution plans and state-managed retirement benefit
plans, where the group's obligations under the plans are equivalent to a defined
contribution plan, are charged as an expense as they fall due.

The costs recognised for funding defined benefit plans are determined using the
projected unit credit method, with annual actuarial valuations performed on each
plan. Actuarial differences that arise are recognised in shareholders' equity
and presented in the statement of changes in equity in the period they arise.
Past service costs are recognised immediately to the extent the benefits are
vested, and are otherwise recognised on a straight-line basis over the average
period until the benefits are vested. The current service costs and any past
service costs together with the expected return on plan assets less the
unwinding of the discount on the plan liabilities are charged to operating
expenses.

The net defined benefit asset recognised in the balance sheet represents the
excess of the fair value of plan assets over the present value of the defined
benefit obligations adjusted for unrecognised past service costs. The asset is
limited to unrecognised past service costs plus the present value of available
refunds and reductions in future contributions to the plan.

The group implemented HK SSAP 34 (which is materially equivalent to HKAS 19) in
relation to the accounting for pensions in 2003, and adopted the corridor
approach for the recognition of actuarial gains and losses. The group has
changed its policy in 2005 to recognise in full actuarial gains and losses in
the statement of changes in equity.

s Share based payments

The group grants shares of HSBC Holdings plc to certain employees under various
vesting conditions and the group has the obligation to acquire HSBC Holdings plc
shares to deliver to the employees upon vesting. The group's liability under
such arrangements is measured at fair value at each reporting date. The changes
in fair value are recognised as an expense in each period. The main kinds of
awards in this category are as follows:

-    shares awarded to an employee to join HSBC that are made available
     immediately, with no vesting period attached to the award, are expensed
     immediately;

-    when an inducement in the form of shares is awarded to an employee
     on commencement of employment with HSBC, and the employee must complete a
     specified period of service before the inducement vests, the expense is 
     spread over the period to vesting;

-    discretionary bonuses awarded in respect of service in the past,
     are expensed over the vesting period which, in this case, is the period 
     from the date the bonus is announced until the award vests.

For share options granted to employees of the group directly by HSBC Holdings
plc, the compensation expense to be spread over the vesting period is determined
by reference to the fair value of the options on grant date, and the impact of
any non-market vesting conditions such as option lapses. The expense is
recognised over the vesting period. The corresponding amount is credited to
'Other reserves'.

t Foreign currencies

(i)  Items included in each of the group's entities are measured using
     the currency of the primary economic environment in which the entity 
     operates ('the functional currency'). The group's financial statements 
     are presented in Hong Kong dollars.

     Transactions in foreign currencies are recorded in the functional currency
     at the rate of exchange prevailing on the date of the transaction. 
     Monetary assets and liabilities denominated in foreign currencies are 
     translated into the functional currency at the rate of exchange ruling 
     at the balance sheet date. Any resulting exchange differences are included
     in the income statement. Non-monetary assets and liabilities that are 
     measured in terms of historical cost in a foreign currency are translated
     into the functional currency using the rate of exchange at the date of the 
     initial transaction. Non-monetary assets and liabilities measured at fair 
     value in a foreign currency are translated into the functional currency 
     using the rate of exchange at the date the fair value was determined.

(ii) The results of branches, subsidiaries and associates not reporting
     in Hong Kong dollars are translated into Hong Kong dollars at the average
     rates of exchange for the reporting period. Exchange differences arising 
     from the retranslation of opening foreign currency net investments and 
     exchange differences arising from retranslation of the result for the 
     reporting period from the average rate to the exchange rate prevailing 
     at the period-end are accounted for in a separate foreign exchange reserve.
     Exchange differences on a monetary item that is part of a net investment 
     in a foreign operation are recognised in the income statement of the 
     separate subsidiary financial statements. In the consolidated financial 
     statements these exchange differences are recognised in the foreign
     exchange reserve in shareholders' equity. On disposal of a foreign 
     operation, exchange differences relating thereto and previously recognised
     in reserves are recognised in the income statement.

u Provisions

     Provisions for liabilities and charges are recognised when it is probable 
     that an outflow of economic benefits will be required to settle a present
     legal or constructive obligation arising from past events and a reliable 
     estimate can be made of the amount of the obligation.

v Insurance contracts

From 1 January 2005

Through its insurance subsidiaries, the group issues contracts to customers that
contain insurance risk, financial risk, or a combination thereof. A contract
under which the group accepts significant insurance risk from another party, by
agreeing to compensate that party on the occurrence of a specified uncertain
future event, is classified as an insurance contract. An insurance contract may
also transfer financial risk, but is accounted for as an insurance contract if
the insurance risk is significant.

Insurance contracts are accounted for as follows:

Premiums

Gross insurance premiums for general insurance business are reported as income
over the term of the insurance contract attributable to the risks borne during
the accounting period. The unearned premium or the proportion of the business
underwritten in the accounting year relating to the period of risk after the
balance sheet date is calculated on a daily or monthly pro-rata basis.

Premiums for life assurance are accounted for when receivable, except in
unit-linked business 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 to which they relate.

Claims and reinsurance recoveries

Gross insurance claims for general insurance business include paid claims and
movements in outstanding claims reserves. The outstanding claims reserves are
based on the estimated ultimate cost of all claims that have occurred but not
settled at the balance sheet date, whether reported or not, together with
related claim handling costs and a reduction for the expected value of salvage
and other recoveries. Reserves for claims incurred but not reported ('IBNR') 
are made on an estimated basis, using appropriate statistical techniques.

Gross insurance claims for life assurance 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. The technical reserves
for non-linked liabilities (long-term business provision) are calculated by each
life assurance operation based on local actuarial principles. The technical
reserves for linked liabilities are at least the element of any surrender or
transfer value which is calculated by reference to the relevant fund or funds or
index. Some insurance contracts may contain discretionary participation features
whereby the policyholder is entitled to additional payments whose amount and/or
timing is at the discretion of the issuer. The discretionary element of these
contracts is included in 'Liabilities under insurance contracts issued'.

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

Value of long-term assurance business

A value is placed on insurance contracts that are classified as long-term
assurance business, and are in force at the balance sheet date.

The value of in-force long-term assurance business is determined by discounting
future earnings expected to emerge from business currently in force, using
appropriate assumptions in assessing factors such as recent experience and
general economic conditions. Movements in the value of in-force long-term
assurance business are included in 'Other operating income' on a gross of tax
basis.

w Investment contracts

Customer liabilities under unit-linked investment contracts and the linked
financial assets are designated at fair value, and the movements in fair value
are recognised in the income statement in 'Net income from financial instruments
designated at fair value'.

Premiums receivable and amounts withdrawn are accounted for as increases or
decreases in the liability recorded in respect of investment contracts.

Investment management fees receivable are recognised in the income statement
over the period of the provision of the investment management services.

The incremental costs directly related to the acquisition of new investment
contracts or renewal of existing investment contracts are capitalised and
amortised over the period of the provision of the investment management
services.

x Dividends

Dividends proposed or declared after the balance sheet date are disclosed as a
separate component of shareholders' equity.

y Debt securities in issue and subordinated liabilities

From 1 January 2005

Debt securities issued for trading purposes or designated at fair value are
reported under the appropriate balance sheet captions. Other debt securities in
issue and subordinated liabilities are measured at amortised cost using the
effective interest rate method and are reported under 'Debt securities in issue'
or 'Subordinated liabilities'.

From 1 January 2004 to 31 December 2004

Debt securities in issue were measured at cost adjusted for amortised premiums
and discounts, and were reported under 'Debt securities in issue' or
'Subordinated liabilities'.

z Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents include
highly liquid investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of change in value. Such
investments comprise cash and balances with banks maturing within one month, and
treasury bills and certificates of deposit with less than three months' maturity
from the date of acquisition.

aa Share capital

From 1 January 2005

Shares are classified as equity when the group has the unconditional right to
avoid transferring cash or other financial assets.

From 1 January 2004 to 31 December 2004

Share capital included preference shares issued by the group. These have been
reclassified as liabilities upon the adoption of HKAS 32.

2. Effect of changes in accounting policies

A description of the significant changes from accounting policies previously
applied by the group together with estimates, to the extent practicable, of the
amounts involved are set out below.

Changes in accounting policies have generally been applied retrospectively,
except as noted below. Retrospective application of a new accounting policy
involves restating the comparative figures and restating the opening balance
sheet as at 1 January 2004 as if the new policy had always been applied.

Some standards specify transitional provisions governing the initial application
of the standard. In some cases transitional provisions restrict the extent to
which a change in accounting policy may be applied retrospectively. The most
significant exception to retrospective application is HKAS 39.

a HKAS 32 - Financial instruments: disclosure and presentation

     Application of HKAS 32 has resulted in the reclassification of preference 
     shares issued by the group from share capital to liabilities. This has 
     had the effect of increasing liabilities and reducing equity at 
     31 December 2005 by HK$71,980 million (2004: HK$55,602 million). 
     In addition, dividends payable on those preference shares have been 
     reclassified as interest expense whereas they were previously dealt with 
     as an appropriation of retained earnings. This has reduced net interest 
     income and operating profit in 2005 by approximately HK$3,010 million
     (2004: HK$1,540 million).

     HKAS 32 also requires that financial assets and liabilities may only be 
     offset in the circumstances described in section 1 - Accounting policies 
     Note (l). This resulted in a grossing up of assets and liabilities by 
     approximately HK$57,718 million at 31 December 2005 
     (2004: HK$52,157 million). This adjustment had no effect on reported 
     profit or equity.

b HKAS 39 - Financial instruments: recognition and measurement

     HKAS 39 sets requirements for the classification, recognition, measurement 
     and derecognition of financial instruments as well as hedge accounting. 
     These requirements affect the measurement and timing of income and 
     expense associated with many of the activities of the group as well as 
     the carrying values of financial assets and liabilities in the balance sheet.

     The new accounting policies resulting from the application of HKAS 39 are 
     set out in section 1 above. Where the accounting policies have changed 
     as a result of the application of HKAS 39, the previous policies have 
     also been disclosed.

     The transitional provisions of HKAS 39 prohibit full retrospective 
     application of the standard and instead require the adjustments to the 
     carrying values of all financial instruments on initial application of 
     the standard to be made in the opening balance sheet at 1 January 2005. 
     This means that the recognition and measurement of certain financial 
     instruments, together with associated income and expense, for 2005 is 
     not necessarily consistent with the amounts reported for 2004.

     The more significant changes in the 2005 financial statements resulting 
     from HKAS 39 include (but are not limited to) the following:

     -  Effective interest rate method (section 1 - Accounting policies Notes
        (a)&(b))

        HKAS 39 requires the use of the effective interest rate method for 
        calculating interest income and the amount of amortisation of premiums, 
        discounts and transaction costs associated with debt instruments. 
        This affects the timing of recognition of certain types of fee income 
        and expense as well as their reclassification to 'Net interest income'.

     -  Derivatives and hedging (section 1 - Accounting policies Note (j)) 

        HKAS 39 requires all derivatives to be recognised on the balance sheet 
        at fair (market) value regardless of the purpose for which they are 
        held. In addition, the rules for applying hedge accounting under 
        HKAS 39 are more restrictive than the policies previously applied by 
        the group. This results in fewer transactions qualifying for hedge 
        accounting in 2005 compared to previously, while the gains and losses 
        on the derivatives are now generally recognised in 'Net trading income'.

     -  Acceptances and endorsements

        HKAS 39 requires that assets and liabilities associated with acceptances
        and endorsements related to trade finance should be recognised on the 
        balance sheet. This results in an increase in both 'Other assets' and
        'Other liabilities' of HK$22,744 million. Under the previous accounting 
        policy, these items had been disclosed as off-balance sheet contingent 
        liabilities and commitments. This change has no effect on profit for 
        the year.

     -  Fair value measurement

        HKAS 39 generally requires treasury bills and debt securities intended 
        to be held on a continuing basis to be carried at fair value in the 
        balance sheet. Unless the securities are designated under the 
        'fair value option' (see below), then the changes in fair value are 
        recognised in equity until the securities are sold. These securities 
        were previously carried at cost.

        In addition, the group has early-adopted the 'Amendment to 
        HKAS 39 - The fair value option' in 2005. This allows financial 
        assets and liabilities, under certain restricted circumstances, to be 
        designated at fair value with changes in fair value being recognised 
        in the income statement as they arise. This is described in 
        section 1 - Accounting policies Note (f). There was no such category 
        in 2004.

        Upon initial application of HKAS 39 in 2005, the following financial 
        assets and liabilities were designated at fair value under 
        the 'fair value option':

        Fair value at 01Jan05             HK$m

        Assets
        Customer advances                3,807
        Treasury bills                   1,318
        Debt securities                 15,976
        Equity shares                   14,971
                                        36,072
        Liabilities
        Customer deposits                1,252
        Deposits by banks                    1
                                         1,253

        Effect of HKAS 39 on the income statement

        To the extent practicable, management has estimated the effect of 
        applying HKAS 39 on the group's income statement in 2005 as follows:

        Estimated effect of applying HKAS 39:                      HK$m

        Increase in net interest income                           1,076
        Decrease in net fee income                                 (298)
        Decrease in net trading income                             (957)
        Net income from financial instruments 
          designated at fair value                                  372
        Increase in gains less losses from 
          financial investments                                     139
        Decrease in dividend income                                (105)
        Increase in impairment charges and 
          other credit risk provisions                              (53)
        Increase in net operating income                            174
        Decrease in operating expenses                              193
        Increase in profit before tax                               367


c HKFRS 4 - Insurance contracts

     HKFRS 4 introduced a formal definition of the term 'Insurance contract'.
     Application of this standard has materially affected the financial 
     statements in the manner set out below.

-    Certain contracts issued by the group which have the legal form of
     insurance contracts do not meet the definition of insurance contracts 
     in HKFRS 4. The assets, liabilities, income and expense associated with 
     such contracts are dealt with as investment contracts and from 
     1 January 2005, are accounted for under HKAS 39.

-    Reclassification of items relating to the insurance business

     -  Financial assets held by insurance subsidiaries were previously
        reported as 'Other assets'. These financial assets have been 
        disaggregated and classified into their respective categories. 
        Measurement of such assets is also in accordance with HKAS 39 with 
        effect from 1 January 2005.

     -  The income statement captions 'Net earned insurance premiums' and 'Net
        insurance claims incurred and movement in policyholders' liabilities' 
        now include only the amounts relating to insurance contracts as 
        defined under HKFRS 4. Income and expense relating to contracts which 
        are, in substance, investment contracts are included in other income 
        statement captions according to their nature. Income from related 
        assets is included in 'Net interest income' and 'Net income from 
        financial instruments designated at fair value'. The related assets are 
        included in the balance sheet under 'Financial assets designated at 
        fair value' and 'Financial investments'. The liabilities related to 
        these contracts are included in 'Financial liabilities designated at 
        fair value'.

     -  Previously all income and expense related to the insurance business
        was included in 'Other operating income'. The comparative figures 
        disclosed in the financial statements have been reclassified to show 
        net earned insurance premiums and net insurance claims incurred. 
        However, in accordance with the transitional provisions of HKAS 39, the 
        comparative figures have not been remeasured. These reclassifications 
        have no impact on operating profit.

d HKFRS 2 - Share-based payment

     HKFRS 2 requires an expense to be recognised by the group where employees 
     are awarded options over shares in HSBC Holdings plc and where the group 
     awards shares to employees in compensation for services rendered to the 
     group. The group recognises an expense in all cases where equity 
     instruments of HSBC Holdings plc are granted to employees for services 
     rendered to the group, regardless of whether the equity instruments are 
     granted directly by HSBC Holdings plc or by the group. The expense is 
     recognised over the vesting period relevant to each type
     of award. Details of the new accounting policy are set out in 
     section 1 - Accounting policies Note (s).

     Prior to the adoption of HKFRS 2, share options that were awarded by HSBC
     Holdings plc directly to employees of the group were not recognised in the
     group's financial statements. When the group awarded its employees shares
     of HSBC Holdings plc the amount payable by the group to acquire the 
     shares was recorded as an expense.

     In accordance with the transitional rules of HKFRS 2, the group has 
     applied the new accounting policy retrospectively to all share-based 
     payment transactions where the grant date was after 7 November 2002 
     and which had not vested by 31 December 2004.

     The change in accounting policy has resulted in share-based payment 
     expenses being recognised in 2005 of HK$876 million (2004: HK$466 million).
     At 31 December 2005 the reserve arising from the grant of share options 
     to the group's employees was HK$629 million (2004: HK$322 million) and the 
     liability recognised for share awards made by the group was HK$576 
     million (2004: HK$211 million).

e HKAS 17 - Leases

     HKAS 17 requires leasehold land to be classified as held under operating 
     leases. With some exceptions, as described in section 1 - Accounting 
     policies Note (o), this has resulted in the remeasurement of certain 
     interests in land (principally held in Hong Kong) from a fair value 
     basis to a historical cost basis. Such interests in land have been removed 
     from 'Property, plant & equipment' and reclassified as 'Other assets'. This
     has resulted in a decrease in assets and a decrease in previously reported
     revaluation reserves.

     If the previous accounting policy had been applied in 2005, total assets 
     and equity would have been increased by approximately HK$15,061 million 
     and HK$12,425 million respectively at 31 December 2005 (2004: HK$10,746 
     million and HK$9,352 million respectively). The deferred tax liability 
     would have been increased by HK$2,636 million (2004: HK$1,394 million). 
     In addition, operating profit in 2005 would have been reduced by the 
     additional depreciation charge attributable to the revaluation of 
     approximately HK$420 million (2004: HK$245 million).

     In the group's interim news release for the six months ended 30 June 2005,
     leases of land exceeding 500 years to expiry at inception were recognised 
     as finance leases and were included in the balance sheet 
     as 'Property, plant & equipment' at fair value less accumulated 
     depreciation. Following the publication of a summary of a meeting of 
     the International Financial Reporting Interpretations Committee in 
     December 2005, at which a related issue had been discussed, the group 
     considered it would be appropriate to classify all leases of land as 
     operating leases, regardless of the length of the lease, unless the 
     specific conditions described in section 1 - Accounting policies 
     Note (o) are met.

f HKAS 40 - Investment properties (section 1 - Accounting 
  policies Note (o)(iii))

     HKAS 40 requires unrealised revaluation gains and losses on investment
     properties to be recognised directly in the income statement as they arise.
     Prior to the implementation of this standard, revaluation gains on 
     investment properties were recognised in equity until the investment 
     properties were sold, at which point the cumulative revaluation gains or 
     losses would be included in the calculation of the gain or loss on 
     disposal. The new policy increases operating profit for 2005 
     by HK$1,167 million.

     In accordance with the transitional provisions of HKAS 40, the 2004 
     income statement has not been restated to conform to the new 
     accounting policy.

g HKFRS 3 - Business combinations

     HKFRS 3 has been applied with effect from 1 January 2004, in accordance 
     with the transitional provisions of the standard. The principal effect 
     of this is that previously recognised goodwill has been frozen at 
     its carrying value (cost less accumulated amortisation and impairment) 
     as at 1 January 2004. Thereafter, goodwill is not amortised, but is 
     tested annually for impairment. Prior to this change of accounting 
     policy, goodwill was amortised over its estimated useful life.

     HKFRS 3 also requires intangible assets to be recognised upon acquisition 
     of a subsidiary or an associate. As a result of this, intangible assets 
     have been reclassified from goodwill.

     No impairment losses have been recognised as a result of applying the 
     new policy for 2004 and 2005. The comparative figures for 2004 have 
     been restated to comply with the new policy.

     The cessation of goodwill amortisation has resulted in an increase in 
     profit before tax for 2005 of HK$145 million (2004: HK$43 million). 
     The carrying amount of goodwill in the balance sheet has therefore 
     not been reduced by the same amount.

     The net effect of ceasing the amortisation of goodwill and the additional
     amortisation charged on intangible assets leads to a decrease in profit 
     before tax of HK$44 million in 2005. For 2004, the net effect was an 
     increase in profit before tax of HK$43 million.

h HKAS 38 - Intangible assets

     The application of HKAS 38 has resulted in the recognition of internally
     developed software as an asset in 2005 of approximately HK$628 million. 
     Under the group's previous accounting policy, software development costs 
     were recognised as expenses as they were incurred.

     The effect of the new policy is to increase operating profit for 2005 by
     approximately HK$590 million, representing the capitalised internally 
     developed software, less amortisation for the year.

3. Critical accounting estimates and judgements in applying accounting policies

The preparation of financial statements requires the group to make certain
estimates and to form judgments about the application of its accounting
policies. The most significant areas where estimates and judgments have been
made are set out below.

Fair value estimation

As disclosed in section 1 - Accounting policies, a significant proportion of the
group's financial assets and liabilities are stated in the balance sheet at fair
value. Fair value is defined as the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an
arm's length transaction.

Where there is an active market for financial assets and liabilities and quoted
prices are available, then such prices are the best indicator of fair value. In
the normal course of business, however, the group also holds financial assets
and liabilities, including certain non-exchange traded derivatives, where quoted
prices in an active market are not available. The group uses valuation
techniques to determine the fair value of such financial instruments. The
valuation techniques used for different financial instruments are selected to
reflect how the market would be expected to price the instruments, using inputs
that reasonably reflect the risk-return factors inherent in the instruments.
Depending upon the characteristics of the financial instruments concerned,
observable market factors are available for use in most valuations, while others
involve a greater degree of judgment and estimation.

In the case of trading assets and liabilities, derivatives, and financial assets
and liabilities designated at fair value, the estimation of fair value at the
reporting date affects profit for the year. The group has, and maintains, a
substantial pool of expertise in the valuation of financial instruments and
valuation estimates are benchmarked against actual outcomes, where practicable,
to ensure that the valuation techniques reflect actual market activity.

Accounting standards also require disclosure of the estimated fair value of
certain financial instruments that are stated in the balance sheet at amortised
cost. These disclosures, which are made in the notes on the financial
statements, affect neither the profit for the year nor the carrying amounts of
any assets or liabilities in the balance sheet. The estimation of fair value of
some of these classes of assets and liabilities is performed in the absence of
active markets for instruments with similar characteristics. The amounts
disclosed, therefore, may involve a higher degree of judgment and estimation
than is the case for most of the assets and liabilities which are carried at
fair value on the balance sheet.

Loan impairment

Application of the group's methodology for assessing loan impairment, as set out
in section 1 - Accounting policies Note (d), involves considerable judgment and
estimation.

For individually significant loans, judgment is required in determining first,
whether there are indications that an impairment loss may have already been
incurred, and then estimating the amount and timing of expected cash flows,
which form the basis of the impairment loss that is recorded.

For collectively assessed loans, judgment is involved in selecting and applying
the criteria for grouping together loans with similar credit characteristics, as
well as in selecting and applying the statistical and other models used to
estimate the losses incurred for each group of loans in the reporting period.
The benchmarking of loss rates and the ongoing refinement of modelling
methodologies provide a means of identifying changes that may be required, but
the process is inherently one of estimation.

Special purpose entities

In the normal course of business, the group participates, in a variety of ways,
in financial structures involving special purpose entities. Judgment is required
in determining whether the rights and obligations taken on result in the group
having control of the special purpose entity and whether it should be included
in the consolidated financial statements as a subsidiary.

Impairment of available-for-sale financial investments

Judgment is required in determining whether or not a decline in fair value of an
available-for-sale financial investment below its original cost is of such a
nature as to constitute impairment, and thus whether an impairment loss needs to
be recognised under HKAS 39.

Liabilities under investment contracts

Estimating the liabilities for long-term investment contracts where the group
has guaranteed a minimum return involves the use of statistical techniques. The
selection of these techniques and the assumptions used about future interest
rates and rates of return on equity, as well as behavioural and other future
events, have a significant impact on the amount recognised as a liability.

Insurance contracts

Classification

HKFRS 4 and HKAS 39 require the group to determine whether an insurance contract
that transfers both insurance risk and financial risk is classified as an
insurance contract under HKFRS 4, or as a financial instrument, or whether the
insurance and non-insurance elements of the contract should be accounted for
separately. This process involves judgment and estimation of the amounts of
different types of risks that are transferred or assumed under a contract. The
estimation of such risks often involves the use of assumptions about future
events and is thus subject to a degree of uncertainty.

Present value of in-force long-term assurance business ('PVIF')

The value of PVIF, which is recorded as an intangible asset, depends upon
assumptions regarding future events. The assumptions are reassessed at each
reporting date and changes in the estimates which affect the value of PVIF are
reflected in the income statement.

Insurance liabilities

The estimation of insurance claims liabilities involves selecting statistical
models and making assumptions about future events which need to be frequently
calibrated against experience and forecasts.

Income taxes

The group is subject to income taxes in many jurisdictions and significant
judgment is required in estimating the group's provision for income taxes. There
are many transactions and interpretations of tax law for which the final outcome
will not be established until some time later. The group recognises liabilities
for taxation based on estimates of whether additional taxes will be payable. The
estimation process includes seeking expert advice where appropriate. Where the
final liability for taxation is different from the amounts that were initially
recorded, these differences will affect the income tax and deferred tax
provisions in the period in which the estimate is revised or the final liability
is established.

Held to maturity securities

As indicated in section 1 - Accounting policies Note (g), certain debt
instruments within the 'Financial investments' category are classified as
held-to-maturity investments. In order to be able to use this classification,
the group needs to exercise judgment upon initial recognition of the investments
as to whether it has the positive intention and ability to hold them until
maturity. A failure to hold these investments to maturity, in all but a limited
number of circumstances, would result in the entire held-to-maturity category
being reclassified as 'available-for-sale'. They would then be measured at fair
value.



                      This information is provided by RNS
            The company news service from the London Stock Exchange