RNS Number : 0303H
HSBC Holdings PLC
07 March 2018
 

 





Financial Statements

 

Page

Consolidated income statement

176

Consolidated statement of comprehensive income

177

Consolidated balance sheet

178

Consolidated statement of cash flows

179

Consolidated statement of changes in equity

180

HSBC Holdings income statement

182

HSBC Holdings statement of comprehensive income

182

HSBC Holdings balance sheet

183

HSBC Holdings statement of cash flows

184

HSBC Holdings statement of changes in equity

185

 

 

Notes on the Financial

Statements

1

Basis of preparation and significant accounting policies

186

2

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

195

3

Insurance business

195

4

Operating profit

197

5

Employee compensation and benefits

197

6

Auditors' remuneration

203

7

Tax

203

8

Dividends

206

9

Earnings per share

206

10

Trading assets

207

11

Fair values of financial instruments carried at fair value

207

 





12

Fair values of financial instruments not carried at fair value

215

13

Financial assets designated at fair value

216

14

Derivatives

217

15

Financial investments

219

16

Assets pledged, collateral received and assets transferred

220

17

Interests in associates and joint ventures

221

18

Investments in subsidiaries

 

224

19

Structured entities

225

20

Goodwill and intangible assets

 

227

21

Prepayments, accrued income and other assets

229

22

Trading liabilities

229

23

Financial liabilities designated at fair value

230

24

Debt securities in issue

230

25

Accruals, deferred income and other liabilities

230

26

Provisions

231

27

Subordinated liabilities

232

28

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

235

29

Offsetting of financial assets and financial liabilities

239

30

Non-controlling interests

240

31

Called up share capital and other equity instruments

241

32

Contingent liabilities, contractual commitments

and guarantees

243

33

Lease commitments

243

34

Legal proceedings and regulatory matters

244

35

Related party transactions

250

36

Events after the balance sheet date

252

37

HSBC Holdings' subsidiaries, joint ventures and associates

252

 

 

 




HSBC Holdings plc  Annual Report and Accounts 2017

175

 

 

 

Financial Statements

 










Consolidated income statement

for the year ended 31 December

 

 

2017


2016


2015


 

Notes

$m


$m


$m


Net interest income

 

28,176


29,813


32,531


- interest income

 

40,995


42,414


47,189


- interest expense

 

(12,819

)

(12,601

)

(14,658

)

Net fee income

 

12,811


12,777


14,705


- fee income

 

15,853


15,669


18,016


- fee expense

 

(3,042

)

(2,892

)

(3,311

)

Net trading income

 

7,719


9,452


8,723


- trading income excluding net interest income

 

6,098


8,066


6,948


- net interest income on trading activities

 

1,621


1,386


1,775


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

2

3,698


(2,666

)

1,532


- changes in fair value of long-term debt and related derivatives

 

672


(3,975

)

863


- net income from other financial instruments designated at fair value

 

3,026


1,309


669


Gains less losses from financial investments

 

1,150


1,385


2,068


Dividend income

 

106


95


123


Net insurance premium income

3

9,779


9,951


10,355


Other operating income/(expense)

 

337


(971

)

1,055


Total operating income

 

63,776


59,836


71,092


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

3

(12,331

)

(11,870

)

(11,292

)

Net operating income before loan impairment charges and other credit risk provisions

 

51,445


47,966


59,800


Loan impairment charges and other credit risk provisions

4

(1,769

)

(3,400

)

(3,721

)

Net operating income

 

49,676


44,566


56,079


Employee compensation and benefits

5

(17,315

)

(18,089

)

(19,900

)

General and administrative expenses

 

(15,707

)

(16,473

)

(17,662

)

Depreciation and impairment of property, plant and equipment

 

(1,166

)

(1,229

)

(1,269

)

Amortisation and impairment of intangible assets

 

(696

)

(777

)

(937

)

Goodwill impairment of Global Private Banking - Europe

20

-


(3,240

)

-


Total operating expenses

 

(34,884

)

(39,808

)

(39,768

)

Operating profit

4

14,792


4,758


16,311


Share of profit in associates and joint ventures

17

2,375


2,354


2,556


Profit before tax

 

17,167


7,112


18,867


Tax expense

7

(5,288

)

(3,666

)

(3,771

)

Profit for the year

 

11,879


3,446


15,096


Attributable to:

 



 

 

- ordinary shareholders of the parent company

 

9,683


1,299


12,572


- preference shareholders of the parent company

 

90


90


90


- other equity holders

 

1,025


1,090


860


- non-controlling interests

 

1,081


967


1,574


Profit for the year

 

11,879


3,446


15,096



 

$


$


$


Basic earnings per ordinary share

9

0.48


0.07


0.65


Diluted earnings per ordinary share

9

0.48


0.07


0.64


 

 




176

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 









Consolidated statement of comprehensive income

for the year ended 31 December

 

2017


2016


2015


 

$m


$m


$m


Profit for the year

11,879


3,446


15,096


Other comprehensive income/(expense)

 

 

 

Items that will be reclassified subsequently to profit or loss when specific conditions are met:

 

 

 

Available-for-sale investments

146


(299

)

(3,072

)

- fair value gains/(losses)

1,227


475


(1,231

)

- fair value gains reclassified to the income statement

(1,033

)

(895

)

(2,437

)

- amounts reclassified to the income statement in respect of impairment losses

93


71


127


- income taxes

(141

)

50


469


Cash flow hedges

(192

)

(68

)

(24

)

- fair value (losses)/gains

(1,046

)

(297

)

704


- fair value losses/(gains) reclassified to the income statement

833


195


(705

)

- income taxes

21


34


(23

)

Share of other comprehensive income/(expense) of associates and joint ventures

(43

)

54


(9

)

- share for the year

(43

)

54


(9

)

Exchange differences

9,077


(8,092

)

(10,945

)

- foreign exchange gains reclassified to income statement on disposal of a foreign operation

-


1,894


-


- other exchange differences

8,939


(9,791

)

(11,112

)

- income tax attributable to exchange differences

138


(195

)

167


Items that will not be reclassified subsequently to profit or loss:

 

 

 

Remeasurement of defined benefit asset/liability

2,419


7


101


- before income taxes

3,440


(84

)

130


- income taxes

(1,021

)

91


(29

)

Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

(2,024

)

-


-


- before income taxes

(2,409

)

-


-


- income taxes

385


-


-


Other comprehensive income/(expense) for the year, net of tax

9,383


(8,398

)

(13,949

)

Total comprehensive income/(expense) for the year

21,262


(4,952

)

1,147


Attributable to:

 

 

 

- ordinary shareholders of the parent company

18,914


(6,968

)

(490

)

- preference shareholders of the parent company

90


90


90


- other equity holders

1,025


1,090


860


- non-controlling interests

1,233


836


687


Total comprehensive income/(expense) for the year

21,262


(4,952

)

1,147


 

 




HSBC Holdings plc  Annual Report and Accounts 2017

177

 

 

 

Financial Statements

 








Consolidated balance sheet

at 31 December

 

 

2017


2016


 

Notes

$m


$m


Assets

 

 

 

Cash and balances at central banks

 

180,624


128,009


Items in the course of collection from other banks

 

6,628


5,003


Hong Kong Government certificates of indebtedness

 

34,186


31,228


Trading assets

10

287,995


235,125


Financial assets designated at fair value

13

29,464


24,756


Derivatives

14

219,818


290,872


Loans and advances to banks

 

90,393


88,126


Loans and advances to customers

 

962,964


861,504


Reverse repurchase agreements - non-trading

 

201,553


160,974


Financial investments

15

389,076


436,797


Prepayments, accrued income and other assets

21

67,191


63,909


Current tax assets

 

1,006


1,145


Interests in associates and joint ventures

17

22,744


20,029


Goodwill and intangible assets

20

23,453


21,346


Deferred tax assets

7

4,676


6,163


Total assets at 31 Dec

 

2,521,771


2,374,986


Liabilities and equity

 

 

 

Liabilities

 

 

 

Hong Kong currency notes in circulation

 

34,186


31,228


Deposits by banks

 

69,922


59,939


Customer accounts

 

1,364,462


1,272,386


Repurchase agreements - non-trading

 

130,002


88,958


Items in the course of transmission to other banks

 

6,850


5,977


Trading liabilities

22

184,361


153,691


Financial liabilities designated at fair value

23

94,429


86,832


Derivatives

14

216,821


279,819


Debt securities in issue

24

64,546


65,915


Accruals, deferred income and other liabilities

25

45,907


44,291


Current tax liabilities

 

928


719


Liabilities under insurance contracts

3

85,667


75,273


Provisions

26

4,011


4,773


Deferred tax liabilities

7

1,982


1,623


Subordinated liabilities

27

19,826


20,984


Total liabilities at 31 Dec

 

2,323,900


2,192,408


Equity

 

 

 

Called up share capital

31

10,160


10,096


Share premium account

31

10,177


12,619


Other equity instruments

 

22,250


17,110


Other reserves

 

7,664


(1,234

)

Retained earnings

 

139,999


136,795


Total shareholders' equity

 

190,250


175,386


Non-controlling interests

30

7,621


7,192


Total equity at 31 Dec

 

197,871


182,578


Total liabilities and equity at 31 Dec

 

2,521,771


2,374,986


The accompanying notes on pages 186 to 261, the audited sections in 'Global businesses and regions' on pages 46 to 59, 'Risk' on
pages 63 to 116, 'Capital' on pages 117 to 120 and 'Directors' Remuneration Report' on pages 141 to 157 form an integral part of
these financial statements.

These financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by:





 

 


Mark E Tucker

 

 

Iain Mackay

Group Chairman

 

Group Finance Director

 




178

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 










Consolidated statement of cash flows

for the year ended 31 December


 

2017


2016


2015



Footnotes

$m


$m


$m


Profit before tax

 

17,167


7,112


18,867


Adjustments for non-cash items:

 





 

Depreciation, amortisation and impairment

 

1,862


5,212


2,181


Net gain from investing activities

 

(1,152

)

(1,215

)

(1,935

)

Share of profits in associates and joint ventures

 

(2,375

)

(2,354

)

(2,556

)

(Gain)/Loss on disposal of subsidiaries, businesses, associates and joint ventures

 

(79

)

1,743


-


Loan impairment losses gross of recoveries and other credit risk provisions

 

2,603


4,090


4,546


Provisions including pensions

 

917


2,482


3,472


Share-based payment expense

 

500


534


757


Other non-cash items included in profit before tax

 

(381

)

(207

)

(191

)

Elimination of exchange differences

1

(21,289

)

15,364


18,308


Changes in operating assets and liabilities

 





 

Change in net trading securities and derivatives

 

(10,901

)

4,395


24,384


Change in loans and advances to banks and customers

 

(108,984

)

52,868


32,971


Change in reverse repurchase agreements - non-trading

 

(37,281

)

(13,138

)

(3,011

)

Change in financial assets designated at fair value

 

(5,303

)

(1,235

)

2,394


Change in other assets

 

(6,570

)

(6,591

)

9,090


Change in deposits by banks and customer accounts

 

102,211


(8,918

)

(65,907

)

Change in repurchase agreements - non-trading

 

41,044


8,558


(26,481

)

Change in debt securities in issue

 

(1,369

)

(23,034

)

960


Change in financial liabilities designated at fair value

 

8,508


17,802


(10,785

)

Change in other liabilities

 

13,514


8,792


(4,549

)

Dividends received from associates

 

740


689


879


Contributions paid to defined benefit plans

 

(685

)

(726

)

(664

)

Tax paid

 

(3,175

)

(3,264

)

(3,852

)

Net cash from operating activities

 

(10,478

)

68,959


(1,122

)

Purchase of financial investments

 

(357,264

)

(457,084

)

(438,376

)

Proceeds from the sale and maturity of financial investments

 

418,352


430,085


399,636


Net cash flows from the purchase and sale of property, plant and equipment

 

(1,167

)

(1,151

)

(1,249

)

Net cash flows from disposal of customer and loan portfolios

 

6,756


9,194


2,023


Net investment in intangible assets

 

(1,285

)

(906

)

(954

)

Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures

2

165


4,802


8


Net cash from investing activities

 

65,557


(15,060

)

(38,912

)

Issue of ordinary share capital and other equity instruments

 

5,196


2,024


3,727


Cancellation of shares

 

(3,000

)

-


-


Net sales/(purchases) of own shares for market-making and investment purposes

 

(67

)

523


331


Purchase of treasury shares

 

-


(2,510

)

-


Redemption of preference shares and other equity instruments

 

-


(1,825

)

(463

)

Subordinated loan capital issued

 

-


2,622


3,180


Subordinated loan capital repaid

4

(3,574

)

(595

)

(2,157

)

Dividends paid to shareholders of the parent company and non-controlling interests

 

(9,005

)

(9,157

)

(8,195

)

Net cash from financing activities

 

(10,450

)

(8,918

)

(3,577

)

Net increase/(decrease) in cash and cash equivalents

 

44,629


44,981


(43,611

)

Cash and cash equivalents at 1 Jan

 

274,550


243,863


301,301


Exchange differences in respect of cash and cash equivalents

 

18,233


(14,294

)

(13,827

)

Cash and cash equivalents at 31 Dec

 

337,412


274,550


243,863


Cash and cash equivalents comprise:

3




 

- cash and balances at central banks

 

180,624


128,009


98,934


- items in the course of collection from other banks

 

6,628


5,003


5,768


- loans and advances to banks of one month or less

 

82,771


77,318


70,985


- reverse repurchase agreements with banks of one month or less

 

58,850


55,551


53,971


- treasury bills, other bills and certificates of deposit less than three months

 

15,389


14,646


19,843


- less: items in the course of transmission to other banks

 

(6,850

)

(5,977

)

(5,638

)

 

 

337,412


274,550


243,863


Interest received was $41,676m (2016: $42,586m; 2015: $47,623m), interest paid was $10,962m (2016: $12,027m; 2015: $14,559m) and dividends received were $2,225m (2016: $475m; 2015: $914m).



1

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



2

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



3

At 31 December 2017 $39,830m (2016: $35,501m) was not available for use by HSBC, of which $21,424m (2016: $21,108m) related to mandatory deposits at central banks.



4

Subordinated liabilities changes during the year are attributable to repayments of $(3.6)bn (2016: $(0.6)bn) of securities. Non-cash changes during the year included foreign exchange loss/gain ($0.6bn) (2016: $2.1bn) and fair value losses of ($1.2bn) (2016: ($0.3bn)).

 




HSBC Holdings plc  Annual Report and Accounts 2017

179

 

 

 

Financial Statements

 























Consolidated statement of changes in equity

for the year ended 31 December








Other reserves6







 

Called up share capital and share premium1


Other
equity
instru-ments2


Retained
earnings3, 4, 5


Available- for-sale fair value
reserve


Cash flow
hedging
reserve


Foreign
exchange
reserve


Merger
reserve7


Total
share-
holders'
equity


Non-
controlling
interests


Total
equity


 

$m


$m


$m


$m


$m


$m


$m


$m


$m


$m


At 1 Jan 2017

22,715


17,110


136,795


(477

)

(27

)

(28,038

)

27,308


175,386


7,192


182,578


Profit for the year

-


-


10,798


-


-


-


-


10,798


1,081


11,879


Other comprehensive income
(net of tax)

-


-


328


131


(194

)

8,966


-


9,231


152


9,383


- available-for-sale investments

-


-


-


131


-


-


-


131


15


146


- cash flow hedges

-


-


-


-


(194

)

-


-


(194

)

2


(192

)

- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

-


-


(2,024

)

-


-


-


-


(2,024

)

-


(2,024

)

- remeasurement of defined benefit asset/liability8

-


-


2,395


-


-


-


-


2,395


24


2,419


- share of other comprehensive income of associates and joint ventures

-


-


(43

)

-


-


-


-


(43

)

-


(43

)

- exchange differences

-


-


-


-


-


8,966


-


8,966


111


9,077


Total comprehensive income for the year

-


-


11,126


131


(194

)

8,966


-


20,029


1,233


21,262


Shares issued under employee remuneration and share plans

622


-


(566

)

-


-


-


-


56


-


56


Shares issued in lieu of dividends and amounts arising thereon

-


-


3,206


-


-


-


-


3,206


-


3,206


Capital securities issued

-


5,140


-


-


-


-


-


5,140


-


5,140


Dividends to shareholders

-


-


(11,551

)

-


-


-


-


(11,551

)

(660

)

(12,211

)

Cost of share-based payment arrangements

-


-


500


-


-


-


-


500


-


500


Cancellation of shares

(3,000

)

-


-


-


-


-


-


(3,000

)

-


(3,000

)

Other movements

-


-


489


(4

)

(1

)

-


-


484


(144

)

340


At 31 Dec 2017

20,337


22,250


139,999


(350

)

(222

)

(19,072

)

27,308


190,250


7,621


197,871


 

 

 

 

 

 

 

 

 

 

 

At 1 Jan 2016

22,263


15,112


143,976


(189

)

34


(20,044

)

27,308


188,460


9,058


197,518


Profit for the year

-


-


2,479


-


-


-


-


2,479


967


3,446


Other comprehensive income
(net of tax)

-


-


59


(271

)

(61

)

(7,994

)

-


(8,267

)

(131

)

(8,398

)

- available-for-sale investments

-


-


-


(271

)

-


-


-


(271

)

(28

)

(299

)

- cash flow hedges

-


-


-


-


(61

)

-


-


(61

)

(7

)

(68

)

- remeasurement of defined benefit asset/liability

-


-


5


-


-


-


-


5


2


7


- share of other comprehensive income of associates and joint ventures

-


-


54


-


-


-


-


54


-


54


- foreign exchange reclassified to income statement on disposal of a foreign operation

-


-


-


-


-


1,894


-


1,894


-


1,894


- exchange differences

-


-


-


-


-


(9,888

)

-


(9,888

)

(98

)

(9,986

)

Total comprehensive income for the year

-


-


2,538


(271

)

(61

)

(7,994

)

-


(5,788

)

836


(4,952

)

Shares issued under employee remuneration and share plans

452


-


(425

)

-


-


-


-


27


-


27


Shares issued in lieu of dividends and amounts arising thereon

-


-


3,040


-


-


-


-


3,040


-


3,040


Net increase in treasury shares

-


-


(2,510

)

-


-


-


-


(2,510

)

-


(2,510

)

Capital securities issued

-


1,998


-


-


-


-


-


1,998


-


1,998


Dividends to shareholders

-


-


(11,279

)

-


-


-


-


(11,279

)

(919

)

(12,198

)

Cost of share-based payment arrangements

-


-


534


-


-


-


-


534


-


534


Other movements

-


-


921


(17

)

-


-


-


904


(1,783

)

(879

)

At 31 Dec 2016

22,715


17,110


136,795


(477

)

(27

)

(28,038

)

27,308


175,386


7,192


182,578


 




180

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 























Consolidated statement of changes in equity (continued)

 

 

 

 

Other reserves6

 

 

 

 

Called up share capital and share premium1


Other

equity

instru-ments2


Retained

earnings3, 4, 5


Available- for-sale fair value

reserve


Cash flow

hedging

reserve


Foreign

exchange

reserve


Merger

reserve7


Total

share-

holders'

equity


Non-

controlling

interests


Total

equity


 

$m


$m


$m


$m


$m


$m


$m


$m


$m


$m


At 1 Jan 2015

21,527


11,532


137,144


2,143


58


(9,265

)

27,308


190,447


9,531


199,978


Profit for the year

-


-


13,522


-


-


-


-


13,522


1,574


15,096


Other comprehensive income
(net of tax)

-


-


73


(2,332

)

(24

)

(10,779

)

-


(13,062

)

(887

)

(13,949

)

- available-for-sale investments

-


-


-


(2,332

)

-


-


-


(2,332

)

(740

)

(3,072

)

- cash flow hedges

-


-


-


-


(24

)

-


-


(24

)

-


(24

)

- remeasurement of defined benefit asset/liability

-


-


82


-


-


-


-


82


19


101


- share of other comprehensive income of associates and joint ventures

-


-


(9

)

-


-


-


-


(9

)

-


(9

)

- exchange differences

-


-


-


-


-


(10,779

)

-


(10,779

)

(166

)

(10,945

)

Total comprehensive income for
the year

-


-


13,595


(2,332

)

(24

)

(10,779

)

-


460


687


1,147


Shares issued under employee remuneration and share plans

736


-


(589

)

-


-


-


-


147


-


147


Shares issued in lieu of dividends and amounts arising thereon

-


-


3,162


-


-


-


-


3,162


-


3,162


Capital securities issued

-


3,580


-


-


-


-


-


3,580


-


3,580


Dividends to shareholders

-


-


(10,660

)

-


-


-


-


(10,660

)

(697

)

(11,357

)

Cost of share-based payment arrangements

-


-


757


-


-


-


-


757


-


757


Other movements

-


-


567


-


-


-


-


567


(463

)

104


At 31 Dec 2015

22,263


15,112


143,976


(189

)

34


(20,044

)

27,308


188,460


9,058


197,518




1

For further details refer to Note 31. In February 2017, HSBC announced a share buy-back of up to $1.0bn. Subsequently, HSBC completed a $1.0bn share buy-back in April 2017. In July 2017, HSBC announced a further share buy-back of up to $2.0bn. Subsequently, HSBC completed a $2.0bn share buy-back in November 2017.



2

During 2017, HSBC Holdings issued $3,000m, SGD1,000m and €1,250m of perpetual subordinated contingent convertible capital securities, on which there were $14m of external issuance costs, $37m of intra-group issuance costs and $10m of tax benefits. In 2016, HSBC Holdings issued $2,000m of perpetual subordinated contingent convertible capital securities, after issuance costs of $6m and tax benefits of $4m. In 2015, HSBC Holdings issued $2,450m and €1,000m of perpetual subordinated contingent convertible capital securities, on which there were $12m of external issuance costs, $25m of intra-group issuance costs and $19m of tax. Under IFRSs these issuance costs and tax benefits are classified as equity.



3

At 31 December 2017, retained earnings included 360,590,019 treasury shares (2016: 353,356,251; 2015: 81,580,180). In addition, treasury shares are also held within HSBC's Insurance business retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Markets.



4

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



5

At 1 January 2017, the cumulative changes in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of $1,672m.



6

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



7

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



8

An actuarial gain of $1,730m has arisen as a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension Scheme. Refer to Note 5 for
further detail.

 




HSBC Holdings plc  Annual Report and Accounts 2017

181

 

 

 

Financial Statements

 










HSBC Holdings income statement

for the year ended 31 December

 

 

2017


2016


2015


 

Notes

$m


$m


$m


Net interest expense

 

(383

)

(424

)

(438

)

- interest income

 

2,185


1,380


866


- interest expense

 

(2,568

)

(1,804

)

(1,304

)

Fee (expense)/income

 

2


(1

)

39


Net trading income/(expense)

 

(392

)

119


(349

)

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

2

314


(49

)

276


- changes in fair value of long term debt and related derivatives

 

103


(49

)

276


- net income from other financial instruments designated at fair value

 

211


-


-


Gains less losses from financial investments

 

154


-


-


Dividend income from subsidiaries

 

10,039


10,436


8,469


Other operating income

 

769


696


654


Total operating income

 

10,503


10,777


8,651


Employee compensation and benefits

5

(54

)

(570

)

(908

)

General and administrative expenses

 

(4,911

)

(4,014

)

(3,434

)

Impairment of subsidiaries

 

(63

)

-


(26

)

Total operating expenses

 

(5,028

)

(4,584

)

(4,368

)

Profit before tax

 

5,475


6,193


4,283


Tax credit

 

64


402


570


Profit for the year

 

5,539


6,595


4,853










HSBC Holdings statement of comprehensive income

for the year ended 31 December

 

2017


2016


2015


 

$m


$m


$m


Profit for the year

5,539


6,595


4,853


Other comprehensive income/(expense)







Items that will be reclassified subsequently to profit or loss when specific conditions are met:







Financial investments in HSBC undertakings

(53

)

(72

)

(57

)

- fair value gains/(losses)

(70

)

(83

)

(77

)

- income taxes

17


11


20


Items that will not be reclassified subsequently to profit or loss:







Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

 

(828

)

(896

)

-


- before income taxes

(1,007

)

(1,030

)

-


- income taxes

179


134


-


Other comprehensive income for the year, net of tax

(881

)

(968

)

(57

)

Total comprehensive income for the year

4,658


5,627


4,796


 

 




182

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 








HSBC Holdings balance sheet

at 31 December

 

 

2017


2016


 

Notes

$m


$m


Assets

 

 

 

Cash and balances with HSBC undertakings

 

1,985


247


Loans and advances to HSBC undertakings designated at fair value

 

11,944


-


Derivatives

14

2,388


2,148


Loans and advances to HSBC undertakings

 

76,627


77,421


Financial investments in HSBC undertakings

 

4,264


3,590


Prepayments, accrued income and other assets

 

369


503


Current tax assets

 

379


631


Investments in subsidiaries

18

92,930


95,850


Intangible assets

 

293


176


Deferred tax assets

 

555


232


Total assets at 31 Dec

 

191,734


180,798


Liabilities and equity

 

 

 

Liabilities

 

 

 

Amounts owed to HSBC undertakings

 

2,571


2,157


Financial liabilities designated at fair value

23

30,890


30,113


Derivatives

14

3,082


5,025


Debt securities in issue

24

34,258


21,805


Accruals, deferred income and other liabilities

 

1,269


1,651


Subordinated liabilities

27

15,877


15,189


Total liabilities

 

87,947


75,940


Equity

 

 

 

Called up share capital

31

10,160


10,096


Share premium account

 

10,177


12,619


Other equity instruments

 

22,107


17,004


Other reserves

 

37,440


37,483


Retained earnings

 

23,903


27,656


Total equity

 

103,787


104,858


Total liabilities and equity at 31 Dec

 

191,734


180,798


The accompanying notes on pages 186 to 261 and the audited sections in 'Global businesses and regions' on pages 46 to 59, 'Risk' on pages 63 to 116, 'Capital' on pages 117 to 120 and 'Directors' Remuneration Report' on pages 141 to 157 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by:

 





 

 


Mark E Tucker

 

 

Iain Mackay

Group Chairman

 

Group Finance Director

 

 




HSBC Holdings plc  Annual Report and Accounts 2017

183

 

 

 

Financial Statements

 









HSBC Holdings statement of cash flows

for the year ended 31 December

 

2017


2016


2015


 

 

(Restated)1


(Restated)1


 

$m


$m


$m


Profit before tax

5,475


6,193


4,283


Adjustments for non-cash items:

(17

)

48


114


- depreciation, amortisation and impairment

33


10


30


- (credit)/charge for share-based payment

(2

)

34


86


- other non-cash items included in profit before tax

(48

)

4


(2

)

Changes in operating assets and liabilities







Change in loans to HSBC undertakings

(1,122

)

(36,437

)

1,247


Change in loans and advances to HSBC undertakings designated at fair value

(11,944

)

-


-


Change in financial investments in HSBC undertakings

(1,775

)

612


(289

)

Change in net trading securities and net derivatives

(2,183

)

3,066


1,413


Change in other assets

134


(239

)

(141

)

Change in debt securities in issue2

1,020


(1,633

)

(49

)

Change in financial liabilities designated at fair value

954


(1,229

)

(1,228

)

Change in other liabilities

721


(693

)

(1,065

)

Tax received

443


646


470


Net cash from operating activities

(8,294

)

(29,666

)

4,755


Purchase of financial investments in HSBC undertakings

 

-


-


(276

)

Proceeds from the sale and maturity of financial investments in HSBC undertakings

1,165


610


-


Net cash outflow from acquisition of or increase in stake of subsidiaries

(89

)

(2,073

)

(2,118

)

Repayment of capital from subsidiaries

4,070


3,920


790


Net investment in intangible assets

(150

)

(109

)

(79

)

Net cash from investing activities

4,996


2,348


(1,683

)

Issue of ordinary share capital and other equity instruments

5,647


2,381


4,216


Purchase of treasury shares

-


(2,510

)

-


Cancellation of shares

(3,000

)

-


-


Subordinated loan capital issued

-


2,636


3,180


Subordinated loan capital repaid

(1,184

)

(1,781

)

(1,565

)

Debt securities issued

11,433


32,080


-


Debt securities repaid

-


-


-


Dividends paid on ordinary shares

(6,987

)

(7,059

)

(6,548

)

Dividends paid to holders of other equity instruments

(1,359

)

(1,180

)

(950

)

Net cash from financing activities

4,550


24,567


(1,667

)

Net increase/(decrease) in cash and cash equivalents

1,252


(2,751

)

1,405


Cash and cash equivalents at 1 January

3,697


6,448


5,043


Cash and cash equivalents at 31 Dec1

4,949


3,697


6,448


Cash and cash equivalents comprise:







- Cash at bank with HSBC undertakings

1,985


247


242


- Loans and advances to banks of one month or less

2,964


3,450


6,206


Interest received was $2,103m (2016: $1,329m; 2015: $792m), interest paid was $2,443m (2016: $1,791m; 2015: $1,289m) and dividends received were $10,039m (2016: $10,412m; 2015: $8,469m).



1.

In 2017 cash and cash equivalents include loans and advances to HSBC undertakings of one month or less duration. The comparative figures have also been amended.



2.

Subordinated liabilities changes during the year $0.7bn (2016: $0.7bn) are wholly attributable to non-cash changes. During the year fair value losses amounted to $0.7bn (2016: gain$0.7bn).

 




184

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 



















HSBC Holdings statement of changes in equity

for the year ended 31 December

 

 

 

 

 

Other reserves

 

 

Called up

share

capital


Share

premium


Other

equity

instruments


Retained earnings1


Available-for-sale fair value reserve


Other

paid-in

capital2


Merger

and other

reserves


Total

share-

holders'

equity


 

$m


$m


$m


$m


$m


$m


$m


$m


At 1 Jan 2017

10,096


12,619


17,004


27,656


112


2,244


35,127


104,858


Profit for the year

-


-


-


5,539


-


-


-


5,539


Other comprehensive income (net of tax)

-


-


-


(828

)

(53

)

-


-


(881

)

- available-for-sale investments

-


-


-


-


(53

)

-


-


(53

)

- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

 

-


-


-


(828

)

-


-


-


(828

)

Total comprehensive income for the year

-


-


-


4,711


(53

)

-


-


4,658


Shares issued under employee share plans

38


584


-


(52

)

-


-


-


570


Shares issued in lieu of dividends and amounts arising thereon

190


(190

)

-


3,205


-


-


-


3,205


Cancellation of shares

(164

)

(2,836

)

-


-


-


-


-


(3,000

)

Capital securities issued

-




5,103


-


-


-


-


5,103


Dividends to shareholders

-


-


-


(11,551

)

-


-


-


(11,551

)

Cost of share-based payment arrangements

-


-


-


(2

)

-


-


-


(2

)

Other movements

-


-


-


(64

)

-


10


-


(54

)

At 31 Dec 2017

10,160


10,177


22,107


23,903


59


2,254


35,127


103,787


 

 

 

 

 

 

 

 

 

At 1 Jan 2016

9,842


12,421


15,020


32,224


183


2,597


35,127


107,414


Profit for the year

-


-


-


6,595


-


-


-


6,595


Other comprehensive income (net of tax)

-


-


-


(896

)

(72

)

-


-


(968

)

- available-for-sale investments

-


-


-


-


(72

)

-


-


(72

)

- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

 

-


-


-


(896

)

-


-


-


(896

)

Total comprehensive income for the year

-


-


-


5,699


(72

)

-


-


5,627


Shares issued under employee share plans

35


417


-


(51

)

-


-


-


401


Shares issued in lieu of dividends and amounts arising thereon

219


(219

)

-


3,040


-


-


-


3,040


Net increase in treasury shares

-


-


-


(2,510

)

-


-


-


(2,510

)

Capital securities issued

-




1,984


-


-


-


-


1,984


Dividends to shareholders

-


-


-


(11,279

)

-


-


-


(11,279

)

Cost of share-based payment arrangements

-


-


-


34


-


-


-


34


Other movements

-


-


-


499


1


(353

)

-


147


At 31 Dec 2016

10,096


12,619


17,004


27,656


112


2,244


35,127


104,858


 

 

 

 

 

 

 

 

 

At 1 Jan 2015

9,609


11,918


11,476


34,986


240


2,089


35,127


105,445


Profit for the year

-


-


-


4,853


-


-


-


4,853


Other comprehensive income (net of tax)

-


-


-


-


(57

)

-


-


(57

)

- available-for-sale investments

-


-


-


-


(57

)

-


-


(57

)

Total comprehensive income for the year

-


-


-


4,853


(57

)

-


-


4,796


Shares issued under employee share plans

45


691


-


(59

)

-


-


-


677


Shares issued in lieu of dividends and amounts arising thereon

188


(188

)

-


3,162


-


-


-


3,162


Capital securities issued

-


-


3,544


-


-


-


-


3,544


Dividends to shareholders

-


-


-


(10,660

)

-


-


-


(10,660

)

Cost of share-based payment arrangements

-


-


-


86


-


-


-


86


Other movements

-


-


-


(144

)

-


508


-


364


At 31 Dec 2015

9,842


12,421


15,020


32,224


183


2,597


35,127


107,414


Dividends per ordinary share at 31 December 2017 were $0.51 (2016: $0.51; 2015:$0.50).



1

At 31 December 2017, retained earnings included 326,843,840 ($2,542m) of treasury shares (2016: 325,499,152 ($2,499m); 2015: 67,881 ($1m)). The increase principally reflects the share buy-back initiative, with the purchase of 328.2m ordinary shares ($3,000m) all of which were cancelled during the year and used to reduce outstanding ordinary shares. In addition, treasury shares are held to fund employee share plans.



2

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

 

 




HSBC Holdings plc  Annual Report and Accounts 2017

185

 

 

 

Notes on the Financial Statements

 




1

Basis of preparation and significant accounting policies



1.1

Basis of preparation



(a)

Compliance with International Financial Reporting Standards

The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, and as endorsed by the European Union ('EU'). At 31 December 2017, there were no unendorsed standards effective for the year ended 31 December 2017 affecting these consolidated and separate financial statements, and HSBC's application of IFRSs results in no differences between IFRSs as issued by the IASB and IFRSs as endorsed by the EU.

Standards adopted during the year ended 31 December 2017

HSBC has adopted the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value from 1 January 2017 in the consolidated financial statements. As a result, the effects of changes in those liabilities' credit risk is presented in other comprehensive income with the remaining effect presented in profit or loss. As permitted by the transitional requirements of IFRS 9, comparatives have not been restated. Adoption increased profit after tax by $2,024m and basic and diluted earnings per share by $0.10 with the opposite effect on other comprehensive income and no effect on net assets. These requirements were adopted in the separate financial statements of HSBC Holdings in 2016.

There were no other new standards applied in 2017. However, during 2017, HSBC adopted a number of interpretations and amendments to standards which had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.



(b)

Differences between IFRSs and Hong Kong Financial Reporting Standards

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



(c)

Future accounting developments

Minor amendments to IFRSs

The IASB has published a number of minor amendments to IFRSs which are effective from 1 January 2018 and 2019, some of which have been endorsed for use in the EU. HSBC expects they will have an insignificant effect, when adopted, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. HSBC has not early adopted any of the amendments effective after 31 December 2017, except the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value which was adopted from 1 January 2017.

Major new IFRSs

The IASB has published IFRS 9 'Financial Instruments', IFRS 15 'Revenue from Contracts with Customers', IFRS 16 'Leases' and IFRS 17 'Insurance contracts'. IFRS 9 , IFRS 15 and IFRS 16 have been endorsed for use in the EU and IFRS 17 has not yet been endorsed.

IFRS 9 'Financial Instruments'

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

Classification and measurement

The classification and measurement of financial assets will depend on how these are managed (the entity's business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income ('FVOCI') or fair value through profit or loss ('FVPL'). The combined effect of the application of the business model and the contractual cash flow characteristics tests may result in some differences in the population of financial assets measured at amortised cost or fair value compared with IAS 39. In addition, on transition to IFRS 9 entities are required to revoke previous designations of financial assets and financial liabilities measured at fair value through profit or loss where the accounting mismatch no longer exists and are permitted to revoke such designations where accounting mismatches continue to exist.

Impairment

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

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

 




186

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 

Hedge accounting

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

Transitional impact

With the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted from 1 January 2017, the requirements of IFRS 9 'Financial Instruments' will be adopted from 1 January 2018. IFRS 9 includes an accounting policy choice to continue IAS 39 hedge accounting, which HSBC has exercised, although it will implement the revised hedge accounting disclosures required by the related amendments to IFRS 7 'Financial Instruments: Disclosures'. The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. HSBC does not intend to restate comparatives. For the consolidated financial statements of HSBC, adoption is expected to reduce net assets at 1 January 2018 by $1.0bn, with the classification and measurement changes increasing net assets by $0.9bn and impairment reducing net assets by $2.2bn, net of deferred tax of $0.3bn. As a consequence, common equity tier 1 capital is expected to increase by $1.2bn, applying regulatory transitional arrangements, and by $0.2bn on a fully loaded basis. For the separate financial statements of HSBC Holdings, adoption is expected to increase net assets at 1 January 2018 by $0.9bn, net of deferred tax, as a result of classification and measurement changes. These estimates are based on accounting policies, assumptions, judgements and estimation techniques that remain subject to change until the Group finalises its financial statements for the year ending 31 December 2018.

IFRS 15 'Revenue from Contracts with Customers'

In May 2014, the IASB issued IFRS 15 'Revenue from Contracts with Customers' and it is effective for annual periods beginning on or after 1 January 2018. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for performance obligations as they are satisfied. HSBC will adopt the standard on its mandatory effective date, and the standard will be applied on a retrospective basis, recognising the cumulative effect, if any, of initially applying the standard as an adjustment to the opening balance of retained earnings. HSBC has assessed the impact of IFRS 15 and expects that the standard will have no significant effect, when applied, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

IFRS 16 'Leases'

In January 2016, the IASB issued IFRS 16 'Leases' with an effective date for annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 'Leases'. Lessees will recognise a 'right of use' asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease, and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as under IAS 17. HSBC is currently assessing the impact of IFRS 16, and it is not practicable to quantify the effect at the date of the publication of these financial statements. Existing operating lease commitments are set out in Note 33.

IFRS 17 'Insurance contracts'

IFRS 17 'Insurance contracts' was issued in May 2017, and sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. IFRS 17 is effective from 1 January 2021, and HSBC is considering its impact.



(d)

Foreign currencies

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

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

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



(e)

Presentation of information

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



segmental disclosures are included in the 'Report of the Directors: Financial Review' on pages 32 to 62;



disclosures concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in the 'Report of the Directors: Risk' on pages 63 to 116;



capital disclosures are included in the 'Report of the Directors: Capital' on pages 117 to 120; and



disclosures relating to HSBC's securitisation activities and structured products are included in the 'Report of the Directors: Risk' on pages 63 to 116.

In accordance with its policy to provide disclosures that help investors and other stakeholders understand the Group's performance, financial position and changes to them, the information provided in the Notes on the Financial Statements and the Report of the Directors goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In addition, HSBC follows the UK Finance Disclosure Code ('the UKF Disclosure Code'). The UKF Disclosure Code aims to increase the quality and comparability of UK banks' disclosures and sets out five disclosure principles together with supporting guidance agreed in 2010. In line with the principles of the UKF Disclosure Code, HSBC assesses good practice recommendations issued from time to time by relevant

 




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regulators and standard setters, and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.



(f)

Critical accounting estimates and judgements

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



(g)

Segmental analysis

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

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



(h)

Going concern

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



1.2

Summary of significant accounting policies



(a)

Consolidation and related policies

Investments in subsidiaries

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

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

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

Goodwill

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

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

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

Critical accounting estimates and judgements  



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

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

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

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

HSBC sponsored structured entities

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

Interests in associates and joint arrangements

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

HSBC recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates are

 




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included in the consolidated financial statements of HSBC based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.

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

Critical accounting estimates and judgements  



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



(b)

Income and expense

Operating income

Interest income and expense

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

Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Non-interest income and expense

Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is accounted for as follows:



Income earned on the execution of a significant act is recognised as revenue when the act is completed (for example, fees arising from negotiating a transaction, such as the acquisition of shares, for a third party); and



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

Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with the related interest income, expense and dividends.

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

'Net income/(expense) from financial instruments designated at fair value' includes all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value through profit or loss, including derivatives that are managed in conjunction with those financial assets and liabilities, and liabilities under investment contracts. Interest income, interest expense and dividend income in respect of those financial instruments are also included, except for interest arising from debt securities issued by HSBC and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

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



(c)

Valuation of financial instruments

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

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

Critical accounting estimates and judgements  



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



(d)

Financial instruments measured at amortised cost

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

 




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

Impairment of loans and advances

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

Individually assessed loans and advances

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

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

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

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

Collectively assessed loans and advances

Impairment is assessed collectively to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment or for homogeneous groups of loans that are not considered individually significant, which are generally retail lending portfolios.

Incurred but not yet identified impairment

Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for a collective impairment assessment. This assessment captures impairment losses that HSBC has incurred as a result of events occurring before the balance sheet date that HSBC is not able to identify on an individual loan basis, and that can be reliably estimated. When information becomes available that identifies losses on individual loans within a group, those loans are removed from the group and assessed individually.

Homogeneous groups of loans and advances

Statistical methods are used to determine collective impairment losses for homogeneous groups of loans not considered individually significant. The methods used to calculate collective allowances are set out below:



When appropriate empirical information is available, HSBC utilises roll-rate methodology, which employs statistical analyses of historical data and experience of delinquency and default to reliably estimate the amount of the loans that will eventually be written off as a result of events occurring before the balance sheet date. Individual loans are grouped using ranges of past due days, and statistical estimates are made of the likelihood that loans in each range will progress through the various stages of delinquency and become irrecoverable. Additionally, individual loans are segmented based on their credit characteristics, such as industry sector, loan grade or product. In applying this methodology, adjustments are made to estimate the periods of time between a loss event occurring, for example because of a missed payment, and its confirmation through write-off (known as the loss identification period). Current economic conditions are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed markets, models also take into account behavioural and account management trends as revealed in, for example, bankruptcy and rescheduling statistics.



When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, HSBC adopts a basic formulaic approach based on historical loss rate experience, or a discounted cash flow model. Where a basic formulaic approach is undertaken, the period between a loss event occurring and its identification is estimated by local management, and is typically between six and 12 months.

Write-off of loans and advances

Loans and the related impairment allowance accounts are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Reversals of impairment

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

Assets acquired in exchange for loans

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

Renegotiated loans

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up-to-date loans for measurement purposes once a minimum number of required payments has been received. Where collectively assessed loan portfolios include significant levels of renegotiated loans, these loans are segregated from other parts of the loan portfolio for the purposes of collective impairment assessment to reflect their risk profile. Loans subject to individual impairment

 




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assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or derecognition.

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

Critical accounting estimates and judgements  



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

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

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

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

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

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

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

 

Non-trading reverse repurchase, repurchase and similar agreements

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

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



(e)

Financial instruments measured at fair value

Available-for-sale financial assets

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

Impairment of available-for-sale financial assets

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

Available-for-sale debt securities

In assessing objective evidence of impairment at the reporting date, HSBC considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in the recovery of future cash flows. A subsequent decline in the fair value of the instrument is recognised in the income statement when there is objective evidence of impairment as a result of decreases in the estimated future cash flows. Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, or the instrument is no longer impaired, the impairment loss is reversed through the income statement.

Available-for-sale equity securities

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

 




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prolonged, the decline is evaluated against the continuous period in which the fair value of the asset has been below its original cost at initial recognition.

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

Financial instruments designated at fair value

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



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



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



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

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

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

Long-term debt issues

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

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

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

Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value, with changes in fair value generally recorded in the income statement. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative; this includes embedded derivatives which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis and are required by IFRSs to be accounted for separately from the host contract.

Gains and losses from changes in the fair value of derivatives that do not qualify for hedge accounting are reported in 'Net trading income'. Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in 'Net income from financial instruments designated at fair value' together with the gains and losses on the economically hedged items. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

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

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.

Cash flow hedge

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

 




192

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 

Net investment hedge

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

Derivatives that do not qualify for hedge accounting

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



(f)

Insurance contracts

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

Net insurance premium income

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

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

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

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

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

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

Liabilities under insurance contracts

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

Future profit participation on insurance contracts with DPF

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

Investment contracts with DPF

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

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

Present value of in-force long-term insurance business

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



(g)

Employee compensation and benefits

Share-based payments

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

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

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

 




HSBC Holdings plc  Annual Report and Accounts 2017

193

 

 

 

Notes on the Financial Statements

 

Post-employment benefit plans

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

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

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

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

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



(h)

Tax

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

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

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

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

Critical accounting estimates and judgements  



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



(i)

Provisions, contingent liabilities and guarantees

Provisions

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

Critical accounting estimates and judgements  



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

Contingent liabilities, contractual commitments and guarantees  

Contingent liabilities

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

Financial guarantee contracts

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

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

 




194

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 




2

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










 

 

2017


2016


2015


 

Footnote

$m


$m


$m


Net income/(expense) arising on:

 

 

 

 

Financial assets

 

 

 

 

Financial assets held to meet liabilities under insurance and investment contracts

 

3,211


1,480


531


Other financial assets designated at fair value

 

198


90


89


Derivatives managed with other financial assets designated at fair value

 

(9

)

(43

)

13


 

 

3,400


1,527


633


Financial liabilities

 



 

 

Liabilities to customers under investment contracts

 

(375

)

(218

)

34


HSBC's long-term debt issued and related derivatives

 

672


(3,975

)

863


- changes in own credit spread on long-term debt

1

-


(1,792

)

1,002


- derivatives managed in conjunction with HSBC's issued debt securities

 

(273

)

(1,367

)

(1,997

)

- other changes in fair value

 

945


(816

)

1,858


Other financial liabilities designated at fair value

 

1


(6

)

3


Derivatives managed with other financial liabilities designated at fair value

 

-


6


(1

)

 

 

298


(4,193

)

899


Year ended 31 Dec

 

3,698


(2,666

)

1,532




1

From 1 January 2017, HSBC Holdings plc adopted, in its consolidated financial statements, the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value. As a result, changes in fair value attributable to changes in own credit risk are presented in other comprehensive income with the remaining effect presented in profit or loss.

HSBC Holdings










Net income/(expense) arising on HSBC Holdings' long-term debt issued and related derivatives

 

 

2017


2016


2015


 

Footnote

$m


$m


$m


Net income/(expense) arising on:

 

 

 

 

Financial assets:

 

211


-


-


- other financial assets designated at fair value

 

161


-


-


- derivatives managed with other financial assets designated at fair value

 

50


-


-


Financial liabilities

 

103


(49

)

276


- changes in own credit spread on long-term debt

1

-


-


348


- derivatives managed in conjunction with HSBC Holdings issued debt securities

 

292


(642

)

(927

)

- other changes in fair value

 

(189

)

593


855


Year ended 31 Dec

 

314


(49

)

276




1

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




3

Insurance business











Net insurance premium income

 

Non-linked

insurance


Linked life

insurance


Investment contracts

with DPF1


Total


 

$m


$m


$m


$m


Gross insurance premium income

8,424


351


2,027


10,802


Reinsurers' share of gross insurance premium income

(1,016

)

(7

)

-


(1,023

)

Year ended 31 Dec 2017

7,408


344


2,027


9,779


 

 

 

 

 

Gross insurance premium income

8,036


675


1,877


10,588


Reinsurers' share of gross insurance premium income

(629

)

(8

)

-


(637

)

Year ended 31 Dec 2016

7,407


667


1,877


9,951


 

 

 

 

 

Gross insurance premium income

7,506


1,409


2,097


11,012


Reinsurers' share of gross insurance premium income

(648

)

(9

)

-


(657

)

Year ended 31 Dec 2015

6,858


1,400


2,097


10,355




1

Discretionary participation features.

 




HSBC Holdings plc  Annual Report and Accounts 2017

195

 

 

 

Notes on the Financial Statements

 











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

 

Non-linked

insurance


Linked life

insurance


Investment

contracts

with DPF1


Total


 

$m


$m


$m


$m


Gross claims and benefits paid and movement in liabilities

8,894


1,413


2,901


13,208


- claims, benefits and surrenders paid

2,883


1,044


2,002


5,929


- movement in liabilities

6,011


369


899


7,279


Reinsurers' share of claims and benefits paid and movement in liabilities

(942

)

65


-


(877

)

- claims, benefits and surrenders paid

(297

)

(223

)

-


(520

)

- movement in liabilities

(645

)

288


-


(357

)

Year ended 31 Dec 2017

7,952


1,478


2,901


12,331


 

 

 

 

 

Gross claims and benefits paid and movement in liabilities

8,778


1,321


2,409


12,508


- claims, benefits and surrenders paid

2,828


749


2,017


5,594


- movement in liabilities

5,950


572


392


6,914


Reinsurers' share of claims and benefits paid and movement in liabilities

(560

)

(78

)

-


(638

)

- claims, benefits and surrenders paid

(112

)

(14

)

-


(126

)

- movement in liabilities

(448

)

(64

)

-


(512

)

Year ended 31 Dec 2016

8,218


1,243


2,409


11,870


 

 

 

 

 

Gross claims and benefits paid and movement in liabilities

7,746


1,398


2,728


11,872


- claims, benefits and surrenders paid

3,200


1,869


2,101


7,170


- movement in liabilities

4,546


(471

)

627


4,702


Reinsurers' share of claims and benefits paid and movement in liabilities

(575

)

(5

)

-


(580

)

- claims, benefits and surrenders paid

(153

)

(64

)

-


(217

)

- movement in liabilities

(422

)

59


-


(363

)

Year ended 31 Dec 2015

7,171


1,393


2,728


11,292




1

Discretionary participation features.












Liabilities under insurance contracts

 

 

Non-linked

insurance


Linked life

insurance


Investment

contracts

with DPF1


Total


 

Footnotes

$m


$m


$m


$m


Gross liabilities under insurance contracts at 1 Jan 2017

 

46,043


6,949


22,281


75,273


Claims and benefits paid

 

(2,883

)

(1,044

)

(2,002

)

(5,929

)

Increase in liabilities to policyholders

 

8,894


1,413


2,901


13,208


Exchange differences and other movements

2

58


230


2,827


3,115


Gross liabilities under insurance contracts at 31 Dec 2017

 

52,112


7,548


26,007


85,667


Reinsurers' share of liabilities under insurance contracts

 

(2,203

)

(268

)

-


(2,471

)

Net liabilities under insurance contracts at 31 Dec 2017

 

49,909


7,280


26,007


83,196


 

 

 

 

 

 

Gross liabilities under insurance contracts at 1 Jan 2016

 

40,538


6,791


22,609


69,938


Claims and benefits paid

 

(2,828

)

(749

)

(2,017

)

(5,594

)

Increase in liabilities to policyholders

 

8,778


1,321


2,409


12,508


Exchange differences and other movements

2

(445

)

(414

)

(720

)

(1,579

)

Gross liabilities under insurance contracts at 31 Dec 2016

 

46,043


6,949


22,281


75,273


Reinsurers' share of liabilities under insurance contracts

 

(1,500

)

(320

)

-


(1,820

)

Net liabilities under insurance contracts at 31 Dec 2016

 

44,543


6,629


22,281


73,453




1

Discretionary participation features.



2

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

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

 




196

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 




4

Operating profit

Operating profit is stated after the following items:  









 

2017


2016


2015


 

$m


$m


$m


Income

 

 



Interest recognised on impaired financial assets

261


574


934


Fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate)

7,577


7,732


8,736


Fees earned on trust and other fiduciary activities

2,691


2,543


3,052


Expense







Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at
fair value

(10,912

)

(11,858

)

(13,680

)

Fees payable on financial liabilities that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate)

(1,475

)

(1,214

)

(1,251

)

Fees payable relating to trust and other fiduciary activities

(134

)

(129

)

(166

)

Payments under lease and sublease agreements

(936

)

(969

)

(1,190

)

- minimum lease payments

(911

)

(945

)

(1,058

)

- contingent rents and sublease payments

(25

)

(24

)

(132

)

UK bank levy

(916

)

(922

)

(1,421

)

Restructuring provisions

(204

)

(415

)

(430

)

Gains/(losses)







Impairment of available-for-sale equity securities

(98

)

(36

)

(111

)

Gains/(losses) recognised on assets held for sale

195


(206

)

(244

)

Gains on the partial sale of shareholding in Industrial Bank

-


-


1,372


Gain/(loss) on disposal of Brazilian operations

19


(1,743

)

-


Loan impairment charges and other credit risk provisions

(1,769

)

(3,400

)

(3,721

)

- net impairment charge on loans and advances

(1,992

)

(3,350

)

(3,592

)

- release of impairment on available-for-sale debt securities

190


63


17


- other credit risk provisions

33


(113

)

(146

)

 

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










 

 

2017


2016


2015


 

Footnote

$m


$m


$m


External net operating income by country

1

51,445


47,966


59,800


- UK


11,057


9,495


14,132


- Hong Kong


14,992


12,864


14,447


- US


4,573


5,094


5,541


- France


2,203


2,571


2,706


- other countries


18,620


17,942


22,974


- of which: Brazil


60


(204

)

3,546




1

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




5

Employee compensation and benefits









 

2017


2016


2015


 

$m


$m


$m


Wages and salaries

15,227


15,735


17,245


Social security costs

1,419


1,312


1,600


Post-employment benefits

669


1,042


1,055


Year ended 31 Dec

17,315


18,089


19,900










Average number of persons employed by HSBC during the year by global business


2017


2016


2015


Retail Banking and Wealth Management

134,021


137,234


155,859


Commercial Banking

46,716


45,912


51,007


Global Banking and Markets

49,100


47,623


49,912


Global Private Banking

7,817


8,322


8,934


Corporate Centre

7,134


7,842


2,721


Year ended 31 Dec

244,788


246,933


268,433


 




HSBC Holdings plc  Annual Report and Accounts 2017

197

 

 

 

Notes on the Financial Statements

 









Average number of persons employed by HSBC during the year by geographical region

 

2017


2016


2015


Europe

70,301


71,196


68,408


Asia

125,004


122,282


121,438


Middle East and North Africa

10,408


12,021


14,467


North America

18,610


20,353


21,506


Latin America

20,465


21,081


42,614


Year ended 31 Dec

244,788


246,933


268,433










Reconciliation of total incentive awards granted to income statement charge


2017


2016


2015



$m


$m


$m


Total incentive awards approved for the current year

3,303


3,035


3,462


Less: deferred bonuses awarded, expected to be recognised in future periods

(337

)

(323

)

(387

)

Total incentives awarded and recognised in the current year

2,966


2,712


3,075


Add: current year charges for deferred bonuses from previous years

336


371


483


Other

(78

)

(128

)

(40

)

Income statement charge for incentive awards

3,224


2,955


3,518














Year in which income statement is expected to reflect deferred bonuses


Charge recognised

Expected charge


2017


2016


2015


2018


2019 and beyond



$m


$m


$m


$m


$m


Variable compensation from 2017 bonus pool

162


-


-


162


175


Variable compensation from 2016 bonus pool

126


152


-


109


84


Variable compensation from 2015 bonus pool and earlier

210


168


253


82


21


Total

498


320


253


353


280


Cash awards

184


114


67


117


99


Equity awards

314


206


186


236


181


Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which $500m were equity settled (2016: $534m; 2015: $757m), as follows:  






 

2017

2016

2015

 

$m

$m

$m

Restricted share awards

520

591

748

Savings-related and other share award option plans

26

33

43

Year ended 31 Dec

546

624

791




HSBC share awards

Deferred share awards (including annual incentive awards, LTI awards delivered in shares) and GPSP

•    An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted.
•    Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date.
•    Deferred share awards generally vest over a period of three, five or seven years.
•    Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of employment.
•    Awards granted from 2010 onwards are subject to a malus provision prior to vesting.
•    Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post vesting.

International Employee Share Purchase Plan ('ShareMatch')

•    The plan was first introduced in Hong Kong in 2013 and now includes employees based in 27 jurisdictions.
•    Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.
•    Matching awards are added at a ratio of one free share for every three purchased.
•    Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.







Movement on HSBC share awards

 

2017


2016


 

Number


Number


 

(000s)


(000s)


Restricted share awards outstanding at 1 Jan

123,166


118,665


Additions during the year

62,044


94,981


Released in the year

(76,051

)

(76,552

)

Forfeited in the year

(4,634

)

(13,928

)

Restricted share awards outstanding at 31 Dec

104,525


123,166


Weighted average fair value of awards granted ($)

7.09


7.25


 




198

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 




HSBC share option plans

Savings-related share option plans ('Sharesave')

•    Two plans: the UK Plan and the International Plan. The last grant of options under the International Plan was in 2012.
•    From 2014, eligible employees can save up to £500 per month with the option to use the savings to acquire shares.
•    Exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively.
•    The exercise price is set at a 20% (2016: 20%) discount to the market value immediately preceding the date of invitation.

Calculation of fair values

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








Movement on HSBC share option plans

 

 

Savings-related
share option plans

 

 

Number


WAEP1


 

Footnotes

(000s)


£


Outstanding at 1 Jan 2017

 

70,027


4.30


Granted during the year

2

10,447


5.96


Exercised during the year

3

(9,503

)

4.83


Expired during the year

 

(3,902

)

4.45


Forfeited during the year

 

(2,399

)

4.27


Outstanding at 31 Dec 2017

 

64,670


4.49


Of which exercisable

 

1,129


5.00


Weighted average remaining contractual life (years)

 

2.42


 

 

 

 

 

Outstanding at 1 Jan 2016

 

74,775


4.36


Granted during the year

2

15,044


4.40


Exercised during the year

3

(4,354

)

5.02


Expired during the year

 

(13,243

)

4.49


Forfeited during the year

 

(2,195

)

4.34


Outstanding at 31 Dec 2016

 

70,027


4.30


Of which exercisable

 

1,086


5.25


Weighted average remaining contractual life (years)

 

2.91


 



1

Weighted average exercise price.



2

The weighted average fair value of options granted during the year was $1.29 (2016: $1.28).



3

The weighted average share price at the date the options were exercised was $9.93 (2016: $6.98).

Post-employment benefit plans

The Group operates pension plans throughout the world for its employees. 'Pension risk management' on page 80 contains details of the policies and practices associated with these pension plans. Some are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan').

The principal plan

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

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

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

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

To meet the requirements of the Banking Reform Act, it is currently planned that from 1 July 2018, the main employer of the plan will change from HSBC Bank plc to HSBC UK Bank plc, with additional support from HSBC Holdings plc. At the same time, non-ring fenced entities including HSBC Bank plc will exit the section of the plan for ring-fenced entities and join a newly created section for the future defined benefit and defined contribution pension benefits of their employees (approximately 0.2% of the total plan). These changes are not expected to materially affect the funding position of the plan.

 




HSBC Holdings plc  Annual Report and Accounts 2017

199

 

 

 

Notes on the Financial Statements

 

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



Future benefit payments ($bn)

 

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









Income statement charge

 

2017


2016


2015


 

$m


$m


$m


Defined benefit pension plans

100


218


256


Defined contribution pension plans

603


783


793


Pension plans

703


1,001


1,049


Defined benefit and contribution healthcare plans

(34

)

41


6


Year ended 31 Dec

669


1,042


1,055












Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans

 

Fair value of
plan assets


Present value of defined benefit
obligations


Effect of
limit on plan
surpluses


Total


 

$m


$m


$m


$m


Defined benefit pension plans

47,265


(40,089

)

(37

)

7,139


Defined benefit healthcare plans

124


(663

)

-


(539

)

At 31 Dec 2017

47,389


(40,752

)

(37

)

6,600


Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')







(2,152

)

Total employee benefit assets (within 'Prepayments, accrued income and other assets')







8,752


 

 

 

 

 

Defined benefit pension plans

42,397


(39,747

)

(24

)

2,626


Defined benefit healthcare plans

118


(711

)

-


(593

)

At 31 Dec 2016

42,515


(40,458

)

(24

)

2,033


Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')

 

 

 

(2,681

)

Total employee benefit assets (within 'Prepayments, accrued income and other assets')

 

 

 

4,714


HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2017 amounted to $54m (2016: $570m). The average number of persons employed during 2017 was 55 (2016: 1,660). Employees who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions determined by the trustees of the plans and recognises these contributions as an expense as they fall due.

From 1 July 2016 employment costs of most employees are recognised by the ServCo group and the ServCo group started providing services to HSBC Holdings. HSBC Holdings recognised a management charge of $2,240m (2016 :$406m) for these services which is included under 'General and administrative expenses'.

 




200

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 

Defined benefit pension plans



















Net asset/(liability) under defined benefit pension plans

 

Fair value of plan assets

Present value of defined benefit obligations

Effect of the asset ceiling

Net defined benefit asset/(liability)

 

Principal

plan


Other

plans


Principal

plan


Other

plans


Principal

plan


Other

plans


Principal

plan


Other

plans


 

$m


$m


$m


$m


$m


$m


$m


$m


At 1 Jan 2017

33,442


8,955


(29,279

)

(10,468

)

-


(24

)

4,163


(1,537

)

Current service cost

-


-


(65

)

(160

)

-


-


(65

)

(160

)

Past service cost and gains/(losses) from settlements

-


(833

)

(231

)

1,051


-


-


(231

)

218


Service cost

-


(833

)

(296

)

891


-


-


(296

)

58


Net interest income/(cost) on the net defined benefit asset/(liability)

864


272


(750

)

(300

)

-


(1

)

114


(29

)

Re-measurement effects recognised in other comprehensive income

1,410


784


1,730


(486

)

-


(9

)

3,140


289


- return on plan assets (excluding interest income)

1,410


784


-


-


-


-


1,410


784


- actuarial gains/(losses)

-


-


954


(491

)

-


(9

)

954


(500

)

- other changes

-


-


776


5


-


-


776


5


Exchange differences

3,292


239


(2,723

)

(306

)

-


(3

)

569


(70

)

Contributions by HSBC

449


236


-


-


-


-


449


236


- normal

58


215


-


-


-


-


58


215


- special

391


21


-


-


-


-


391


21


Contributions by employees

-


27


-


(27

)

-


-


-


-


Benefits paid

(1,143

)

(663

)

1,143


716


-


-


-


53


Administrative costs and taxes paid by plan

(49

)

(17

)

49


17


-


-


-


-


At 31 Dec 2017

38,265


9,000


(30,126

)

(9,963

)

-


(37

)

8,139


(1,000

)

Present value of defined benefit obligation relating to:

 

 

 

 

 

 

 

 

- actives





(5,837

)

(5,084

)









- deferreds





(8,745

)

(1,663

)









- pensioners





(15,544

)

(3,216

)









 

 

 

 

 

 

 

 

 

At 1 Jan 2016

32,670


8,754


(27,675

)

(10,651

)

-


(14

)

4,995


(1,911

)

Current service cost

-


-


(70

)

(235

)

-


-


(70

)

(235

)

Past service cost and gains/(losses) from settlements

-


(1

)

-


(39

)

-


-


-


(40

)

Service cost

-


(1

)

(70

)

(274

)

-


-


(70

)

(275

)

Net interest income/(cost) on the net defined benefit asset/(liability)

1,085


294


(914

)

(337

)

-


(1

)

171


(44

)

Re-measurement effects recognised in other comprehensive income

6,449


671


(6,886

)

(299

)

-


(8

)

(437

)

364


- return on plan assets (excluding interest income)

6,449


671


-


-


-


-


6,449


671


- actuarial gains/(losses)

-


-


(7,029

)

(152

)

-


(8

)

(7,029

)

(160

)

- other changes

-


-


143


(147

)

-


-


143


(147

)

Exchange differences

(6,097

)

(534

)

5,254


410


-


(1

)

(843

)

(125

)

Contributions by HSBC

347


379


-


-


-


-


347


379


- normal

64


207


-


-


-


-


64


207


- special

283


172


-


-


-


-


283


172


Contributions by employees

-


30


-


(30

)

-


-


-


-


Benefits paid

(970

)

(623

)

970


698


-


-


-


75


Administrative costs and taxes paid by plan

(42

)

(15

)

42


15


-


-


-


-


At 31 Dec 2016

33,442


8,955


(29,279

)

(10,468

)

-


(24

)

4,163


(1,537

)

Present value of defined benefit obligation relating to:

 

 

 

 

 

 

 

 

- actives

 

 

(7,066

)

(5,066

)

 

 

 

 

- deferreds

 

 

(9,219

)

(2,306

)

 

 

 

 

- pensioners

 

 

(12,994

)

(3,096

)

 

 

 

 

HSBC expects to make $278m of contributions to defined benefit pension plans during 2018. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:  
















Benefits expected to be paid from plans

 

 

 

2018


2019


2020


2021


2022


2023-2027


 

Footnote

$m


$m


$m


$m


$m


$m


The principal plan

1

1,241


1,279


1,320


1,360


1,402


7,692


Other plans

1

443


508


511


527


520


2,307




1

The duration of the defined benefit obligation is 17.4 years for the principal plan under the disclosure assumptions adopted (2016: 19.0 years) and 12.9 years for all other plans combined (2016: 13.9 years).

 




HSBC Holdings plc  Annual Report and Accounts 2017

201

 

 

 

Notes on the Financial Statements

 



















Fair value of plan assets by asset classes

 

31 Dec 2017

31 Dec 2016

 

Value


Quoted
market price
in active
market


No quoted
market price
in active
market


Thereof
HSBC1


Value


Quoted
market price
in active
market


No quoted
market price
in active
market


Thereof
HSBC1


 

$m


$m


$m


$m


$m


$m


$m


$m


The principal plan

 

 

 

 

 

 

 

 

Fair value of plan assets

38,265


33,624


4,641


1,006


33,442


29,379


4,063


878


- equities

6,131


5,503


628


-


5,386


4,722


664


-


- bonds

26,591


26,591


-


-


23,426


23,426


-


-


- derivatives

2,398


-


2,398


1,006


2,107


-


2,107


878


- other

3,145


1,530


1,615


-


2,523


1,231


1,292


-


Other plans









 

 

 

 

Fair value of plan assets

9,000


7,737


1,263


114


8,955


7,631


1,324


239


- equities

2,005


1,340


665


-


2,255


1,502


753


-


- bonds

5,871


5,714


157


7


5,811


5,592


219


5


- derivatives

-


39


(39

)

-


(89

)

44


(133

)

(85

)

- other

1,124


644


480


107


978


493


485


319




1

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

Post-employment defined benefit plans' principal actuarial financial assumptions

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







Key actuarial assumptions for the principal plan

 

Discount rate

Inflation rate

Rate of increase for pensions

Rate of pay increase

 

%

%

%

%

UK

 

 

 

 

At 31 Dec 2017

2.60

3.40

3.10

3.88

At 31 Dec 2016

2.50

3.50

3.20

4.00

At 31 Dec 2015

3.70

3.20

3.00

3.70








Mortality tables and average life expectancy at age 65 for the principal plan

 

Mortality

table

Life expectancy at age 65 for

a male member currently:

Life expectancy at age 65 for

a female member currently:

 

 

Aged 65

Aged 45

Aged 65

Aged 45

UK

 

 

 

 

 

At 31 Dec 2017

SAPS S21

22.2

23.6

24.4

25.9

At 31 Dec 2016

SAPS S22

22.4

24.1

24.7

26.6



1

Self-administered pension scheme ('SAPS') S2 table (males: 'All Pensioners' version; females: 'Normal Pensions' version) with a multiplier of 0.98 for both male and female pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') core projection model 2016 with a long-term rate of improvement of 1.25% per annum. Separate tables assuming lighter mortality have been applied to higher paid pensioners.



2

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











The effect of changes in key assumptions on the principal plan

 

Impact on HSBC Bank (UK) Pension Scheme Obligation

 

Financial impact of increase

Financial impact of decrease

 

2017


2016


2017


2016


 

$m


$m


$m


$m


Discount rate - increase/decrease of 0.25%

(1,246

)

(1,322

)

1,333


1,419


Inflation rate - increase/decrease of 0.25%

850


735


(837

)

(1,048

)

Pension payments and deferred pensions - increase/decrease of 0.25%

1,077


1,305


(1,021

)

(1,255

)

Pay - increase/decrease of 0.25%

62


143


(61

)

(139

)

Change in mortality - increase of 1 year

1,332


1,326


n/a


n/a


Directors' emoluments

Details of Directors' emoluments, pensions and their interests are disclosed in the Directors' Remuneration Report on page 141.

 




202

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 




6

Auditors' remuneration







 

 

2017

2016

2015

 

Footnote

$m

$m

$m

Audit fees payable to PwC

1

84.8

65.7

62.0

Other audit fees payable

 

1.2

1.6

1.2

Year ended 31 Dec

 

86.0

67.3

63.2










Fees payable by HSBC to PwC

 

 

 

 

 

 

2017


2016


2015


 

Footnotes

$m


$m


$m


Fees for HSBC Holdings' statutory audit

2

15.1


14.0


13.1


Fees for other services provided to HSBC

 

114.6


97.1


85.1


- audit of HSBC's subsidiaries

3

69.7


51.7


48.9


- audit-related assurance services

4

22.5


20.6


16.6


- taxation compliance services

 

1.2


1.9


1.0


- taxation advisory services

 

-


0.4


0.9


- other assurance services

5

3.9


4.5


2.8


- other non-audit services

5

17.3


18.0


14.9


Year ended 31 Dec

 

129.7


111.1


98.2


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










Fees payable by HSBC's associated pension schemes to PwC

 

 

2017


2016


2015


 

 

$000


$000


$000


Audit of HSBC's associated pension schemes

 

260


208


352


Audit related assurance services

 

4


4


5


Year ended 31 Dec

 

264


212


357




1

The 2016 audit fees payable amount includes $4.2m related to the prior year audit in respect of overruns.



2

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



3

Fees payable for the statutory audit of the financial statements of HSBC's subsidiaries, including the 2017 and 2016 changes in scope and additional procedures performed due to the technology systems and data access controls matter as described on page 166.



4

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



5

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

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

In addition to the above, the estimated fees paid to PwC by third parties associated with HSBC amount to $3.5m (2016: $4.3m; 2015: $2.4m). In these cases, HSBC is connected with the contracting party and may therefore be involved in appointing PwC. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

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




7

Tax










Tax expense

 

 

2017


2016


2015


 

Footnote

$m


$m


$m


Current tax

1

4,264


3,669


3,797


- for this year

 

4,115


3,525


3,882


- adjustments in respect of prior years

 

149


144


(85

)

Deferred tax

 

1,024


(3

)

(26

)

- origination and reversal of temporary differences

 

(228

)

(111

)

(153

)

- effect of changes in tax rates

 

1,337


(4

)

110


- adjustments in respect of prior years

 

(85

)

112


17


Year ended 31 Dec

 

5,288


3,666


3,771




1

Current tax included Hong Kong profits tax of $1,350m (2016: $1,118m; 2015: $1,294m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2016: 16.5%; 2015: 16.5%).

 




HSBC Holdings plc  Annual Report and Accounts 2017

203

 

 

 

Notes on the Financial Statements

 

Tax reconciliation

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
















2017

2016

2015


$m


%


$m


%


$m


%


Profit before tax

17,167




7,112




18,867




Tax expense













Taxation at UK corporation tax rate of 19.25% (2016: 20.0%;
2015: 20.25%)

3,305


19.25


1,422


20.00


3,821


20.25


Impact of differently taxed overseas profits in overseas locations

407


2.3


43


0.6


71


0.4


Items increasing tax charge in 2017 not in 2016:













- deferred tax remeasurement due to US federal tax rate reduction

1,288


7.5


-


-


-


-


Other items increasing tax charge in 2017:













- local taxes and overseas withholding taxes

618


3.6


434


6.1


416


2.2


- other permanent disallowables

400


2.3


438


6.2


421


2.2


- bank levy

180


1.0


170


2.4


286


1.5


- non-deductible UK customer compensation

166


1.0


162


2.3


87


0.5


- UK banking surcharge

136


0.8


199


2.8


-


-


- UK tax losses not recognised

70


0.4


305


4.3


-


-


- adjustments in respect of prior period liabilities

64


0.4


256


3.6


(68

)

(0.4

)

- change in tax rates

49


0.3


(4

)

(0.1

)

110


0.6


- non-UK tax losses not recognised

33


0.2


147


2.1


-


-


- non-deductible goodwill write-down

-


-


648


9.1


-


-


- non-deductible loss and taxes suffered on Brazil disposal

-


-


464


6.5


-


-


Items reducing tax charge in 2017:













- non-taxable income and gains

(766

)

(4.4

)

(577

)

(8.1

)

(501

)

(2.7

)

- effect of profits in associates and joint ventures

(481

)

(2.8

)

(461

)

(6.5

)

(508

)

(2.7

)

- non-deductible regulatory settlements

(132

)

(0.8

)

20


0.3


184


1.0


- other deferred tax temporary differences previously not recognised

(49

)

(0.3

)

-


-


(21

)

(0.1

)

- non-taxable income and gains - Industrial Bank

-


-


-


-


(227

)

(1.2

)

- US deferred tax temporary differences previously not recognised

-


-


-


-


(184

)

(1.0

)

- other items

-


-


-


-


(116

)

(0.6

)

Year ended 31 Dec

5,288


30.8


3,666


51.6


3,771


20.0


The Group's profits are taxed at different rates depending on the country in which the profits arise. The key applicable tax rates for 2017 include Hong Kong (16.5%), the USA (35%) and the UK (19.25%). If the Group's profits were taxed at the statutory rates of the countries in which the profits arose then the tax rate for the year would have been 21.15% (2016: 20.60%). The effective tax rate for the year was 30.8% (2016: 51.6%) and includes a charge of $1.3bn relating to the remeasurement of US deferred tax balances to reflect the reduction in the US federal tax rate to 21% from 2018. The effective tax rate for 2017 was significantly lower than for 2016 as 2016 included the impact of a non-deductible goodwill write-down and loss on disposal of our operations in Brazil, tax losses not recognised and adjustments in respect of prior periods.

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

 




204

HSBC Holdings plc  Annual Report and Accounts 2017

 

 

 


















Movement of deferred tax assets and liabilities

 

 

Loan
impairment
provisions


Unused tax
losses and
tax credits


Derivatives,
FVOD1
and other
investments


Insurance
business


Expense
provisions


Other


Total


 

Footnote

$m


$m


$m


$m


$m


$m


$m


Assets

 

950


2,212


1,441


-


893


1,857


7,353


Liabilities

 

-


-


(274

)

(1,170

)

-


(1,369

)

(2,813

)

At 1 Jan 2017

 

950


2,212


1,167


(1,170

)

893


488


4,540


Income statement

 

(235

)

(873

)

(397

)

12


(269

)

738


(1,024

)

Other comprehensive income

 

3


(6

)

368


-


-


(1,255

)

(890

)

Equity

 

-


-


-


-


-


29


29


Foreign exchange and other adjustments

 

(5

)

40


51


(24

)

19


(42

)

39


At 31 Dec 2017

 

713


1,373


1,189


(1,182

)

643


(42

)

2,694


Assets

2

713


1,373


1,282


-


643


2,313


6,324


Liabilities

2

-


-


(93

)

(1,182

)

-


(2,355

)

(3,630

)

 

 

 

 

 

 

 

 

 

Assets

 

1,351


1,388


1,400


-


1,271


1,050


6,460


Liabilities

 

-


-


(230

)

(1,056

)

-


(883

)

(2,169

)

At 1 Jan 2016

 

1,351


1,388


1,170


(1,056

)

1,271


167


4,291


Income statement

 

(279

)

876


18


(123

)

(370

)

(314

)

(192

)

Other comprehensive income

 

-


-


28


-


-


259


287


Equity

 

-


-


-


-


-


20


20


Foreign exchange and other adjustments

 

(122

)

(52

)

(49

)

9


(8

)

356


134


At 31 Dec 2016

 

950


2,212


1,167


(1,170

)

893


488


4,540


Assets

2

950


2,212


1,441


-


893


1,857


7,353


Liabilities

2

-


-


(274

)

(1,170

)

-


(1,369

)

(2,813

)