Year Ended December 31, 2005
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Reverse repurchase agreements “Reverse repos” are treated as collateralised lending. The amount lent is
reflected as an asset either as “Loans and advances to customers” or “Due from banks”.
Amounts paid and received on the repos and reverse repos are amortised as interest expense and interest
income respectively on an effective interest basis. 2.10 Properties and other fixed assets
Properties and other fixed assets are stated at cost less accumulated depreciation and impairment losses. The
basis of depreciation is as follows:
Properties Leasehold land, where the balance of the leasehold
period is 100 years or less, is amortised over the remaining period of the lease. No amortisation is made
on leasehold land where the unexpired lease period is more than 100 years.
Buildings are depreciated on a straight-line basis over their useful lives estimated at 50 years or over the
remaining lease period, whichever is shorter. Other fixed assets
Depreciation is calculated using the straight line method to write down the cost of other fixed assets to
their residual values over their estimated useful life as follows:
Computer
software 3 -
5 years
Office equipment 5 - 8 years
Furniture and fittings 5 - 8 years
2.11 Impairment The carrying values of assets are reviewed for
impairment at each balance sheet date to determine if events or changes in circumstances indicate that the
carrying value may not be recoverable. If such an indication exists, the carrying values of the assets are
written down to their recoverable amount. The impairment loss is charged to the income statement
unless it reverses a previous revaluation credited to equity in which case it is charged to equity.
When there is objective evidence that a decline in the fair value of an available-for-sale financial asset is due
to an impairment, the cumulative loss – measured as the difference between the acquisition cost and the
current fair value, less any impairment loss previously recognised in the income statement – is removed from
equity and recognised in the income statement. A subsequent recovery in the value of an available-for-
sale equity instrument that has been impaired is reversed through equity. A subsequent recovery in the
value of an available-for-sale debt instrument whose value is impaired is reversed through the income
statement if there has been an identifiable event that led to the recovery.
2.12 Financial
liabilities
The Bank classifies its financial liabilities in the following categories: a financial liabilities at fair value
through profit or loss; and b non-trading liabilities. Financial liabilities classified at fair value through profit
or loss are carried at fair value, with gains and losses from change in fair value recognised through the
income statement. Non-trading liabilities are carried at amortised cost using the effective interest method.
A financial liability is removed or derecognised from the balance sheet when the obligation specified in the
contract is discharged, cancelled or expired. 2.13 Provisions and other liabilities
Provisions are recognised when the Bank has a present legal or constructive obligation as a result of
past events, it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation, and a reliable estimate of the amount of the obligation can be made.
2.14 Derivative financial instruments and hedge accounting
Derivatives are initially recognised at fair value at the date on which a derivative contract is entered into and
are subsequently remeasured at fair value. All derivatives are classified in assets when the fair value
is positive and as liabilities when the fair value is negative. Changes in the fair value of derivatives other
than those designated as cash flow hedges or hedges of net investments in foreign operations are included in
net trading income. Certain derivatives embedded in other financial
instruments are treated as separate derivatives when their economic characteristics and risks are not closely
related to those of the host contract and the host contract is not carried at fair value through profit or loss.
These embedded derivatives are measured at fair value with changes in fair value recognised in net
trading income. For financial instruments designated as hedging
instruments, the Bank documents at the inception the relationship between hedging instruments and hedged
items, as well as its risk management objective for undertaking various hedge transactions. The Bank also
documents its assessment, both at hedge inception and on an ongoing basis, of whether the financial
instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or
cash flows of hedged items. a Fair
value hedge
For an effective hedge of an exposure to changes in the fair value, the changes in the fair value of the derivatives
are recorded in the income statement, together with any changes in the fair value of the hedged item attributable
to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the
carrying amount of a hedged item for which the effective interest method is used, is amortised to profit or loss over
the period to maturity of the hedged item. b
Cash flow hedge
The changes in the fair value of derivatives designated and qualified as hedges of future cash flows are
Year Ended December 31, 2005
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recognised directly in equity, and taken to the income statement in the periods when the hedged item affects
profit or loss. The ineffective portion of the gain or loss is recognised immediately in the income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss existing in equity remains until the forecast transaction is ultimately recognised in the
income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss in
equity is recognised immediately in the income statement. c
Hedge of net investment in a foreign operation
Financial instruments designated as foreign currency hedges of net investments in the Bank’s foreign operations
are accounted for similarly to cash flow hedges. The foreign exchange gains or losses from the hedging
instruments are recognised directly in equity, until disposal of the foreign operation, whereby it is recognised in the
income statement. 2.15 Employee benefits
Personnel expenses on base pay, cash bonuses, contributions to defined contribution plans, e.g., the
Central Provident Fund and other staff-related allowances are recognised in the income statement
once incurred. For defined contribution plans, contributions are made to publicly or privately
administered funds on a mandatory, contractual or voluntary basis. Once the contributions have been
paid, the Bank has no further payment obligations. Employee entitlement to annual leave is recognised
when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of
services rendered by employees up to the balance sheet date.
2.16 Share-based compensation Personnel expenses also include share-based
