Year ended 31 December 2012
13
In addition, some financial liabilities used to fund specific financial assets measured at fair value
through profit or loss are designated under the fair value option when doing so eliminates or
significantly reduces measurement or recognition inconsistencies that would otherwise arise. Please
refer to Note 30 for details on these financial liabilities in the Group
’s financial statements. Realised or unrealised gains or losses on financial
liabilities held for trading and financial liabilities designated under the fair value option, except
interest expense , are taken to “Net trading income”
and “Net income from financial instruments designated at fair value” respectively in the income
statement in the period they arise. Derivative liabilities are treated consistently with
derivative assets. Please refer to Note 2.8 for the accounting policy on derivatives.
Other financial liabilities are carried at amortised cost using the effective interest method. These
comprise predominantly the Group ’s deposit
portfolio under “Due to non-bank customers” and
“Due to banks”, and those under “Other liabilities”. Please refer to Note 15 for further details on the types
of financial liabilities classified and measured as above. Determination of fair value
The fair value of financial liabilities is the amount the liability can be settled at. The fair value is estimated by
discounting the future contractual cash flows at the current market interest rate that is available to the
Group for similar financial instruments. Where applicable, a valuation reserve or pricing adjustment is
applied to arrive at the fair value. Please refer also to Note 42.1 for further fair value
measurement disclosures. Derecognition
A financial liability is derecognised from the balance sheet when the obligation specified in the contract is
discharged, cancelled or expired. 2.15 Loan Commitments, Letters of Credit and
Financial Guarantees Loan Commitments
Loan commitments are typically not financial instruments and are not recognised on balance sheet
but are disclosed off-balance sheet in accordance with FRS 37 Provisions, Contingent Liabilities and
Contingent Assets. They form part of the disclosures in Note 38. Upon a loan draw-down by the counterparty,
the amount of the loan is generally accounted for under
“loans and receivables” as described in Note 2.8.
Letters of Credit Letters of credit are recorded off-balance sheet as
contingent liabilities upon issuance, and the corresponding payablesreceivables tofrom the
beneficiariesapplicants are recorded upon acceptance of the underlying documents.
Financial Guarantees A financial guarantee is initially recognised in the
financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition,
the Group
’s liability under each guarantee is measured at the higher of the initial measurement less
amortisation and the best estimate of the expenditure required to settle any financial obligation arising at the
balance sheet date. The exposure to potential losses associated with a
financial guarantee is monitored periodically. When there is objective evidence indicating probable losses,
a provision is recognised for the financial guarantee. 2.16 Provisions and other liabilities
Provisions are recognised when:
the Group 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. The amount recognised as a provision is the best
estimate of the expenditure required to settle the present obligation at the balance sheet date.
2.17 Share capital Ordinary shares and preference shares which do not
result in the Group having a contractual obligation to deliver cash or another financial asset, or to exchange
financial assets or financial liabilities with the holder under conditions that are potentially unfavourable to the
Group, are classified as equity. Incremental external costs directly attributable to the issuance of new shares
are deducted against share capital. Dividends are recorded during the financial year in
which they are approved by the Board of Directors and declared payable.
D Other Specific Topics 2.18 Hedging and hedge accounting
The Group uses derivative contracts as part of its hedging strategies for hedging interest rate risk arising
from maturity mismatches or for hedging currency risk from currency mismatch and cash flows in foreign
currencies.
Year ended 31 December 2012
14
In some cases these hedges are designated as such for accounting purposes in order to modify the timing of
the recognition of the profit or loss from the instruments in accordance with the items they are intended to
hedge. Such designation requires the Group to meet strict requirement for documentation and hedge
effectiveness as set out in FRS 39. For such hedge accounting relationships each entity within the Group
documents at the inception the relationship between the hedging instrument and hedged item, including the
risk management objective for undertaking various hedge transactions and methods used to assess the
effectiveness of the hedge. Each entity within the Group also documents its assessment, both at hedge
inception and on an ongoing basis, of whether the derivative is highly effective in offsetting changes in the
fair value or cash flows of the hedged item. Specifically hedge accounting is applied in the following
types of hedge relationships. Fair value hedge
The Group
’s fair value hedges consist principally of interest rate swaps used for managing the interest rate
gaps that naturally arise from its purchases or issues of debt securities, and where a mismatch in the
measurement between the hedging derivative measured at fair value through profit or loss and the
hedged item measured at amortised cost exists. Such hedges are used in the
“Treasury” and “Others” segments.
For a qualifying fair value hedge, the changes in the fair value of the hedging derivatives are recorded in the
income statement, together with any changes in the fair value of the hedged item attributable to the hedged risk.
Gain or loss arising from hedge ineffectiveness is recognised in the income statement.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a
hedged item is amortised to the income statement over its remaining maturity, using the effective interest method.
Cash flow hedge Cash flow hedge accounting is employed principally for
hedges against variability in exchange rates from highly probable forecast transactions including interest cash
flows expected to occur at various future dates. In addition, cash flow hedge accounting is applied to
currency swaps used to hedge foreign currency cash flows of purchased bonds to avoid volatility from the
recognition of changes in forward points in the currency swaps that
is inconsistent with the management’s strategy. Such hedging is performed mainly by funding
management unit in “Others” segment.
The effective portion of changes in the fair value of a derivative designated and qualifying as a hedge of future
cash flows is recognised in other comprehensive income and accumulated under the cash flow hedge reserve in
equity, and reclassified to the income statement in the periods when the hedged forecast cash flows affect the
income statement. The ineffective portion of the gain or loss is recognised immediately in the income statement
under “Net trading income”. 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 the cash flow
hedge reserve 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 the cash flow hedge reserve is
reclassified from equity to the income statement. Net investment hedge
Net investment hedging is applied to hedge investments which comprise certain subsidiaries,
branches, associates and joint ventures with a functional currency different from that of the Group.
Under the Group’s hedging strategy, the carrying amount of these investments could be fully hedged,
partially hedged or fully opened. Hedges of net investments in the Group
’s foreign operations are accounted for in a manner similar to cash
flow hedges. The gain or loss from the derivative relating to the effective portion of the hedge is recognised in other
comprehensive income and accumulated under the capital reserves in equity. The gain or loss relating to the
ineffective portion of the hedge is recognised immediately in the
income statement under “Net trading income”. On disposal of the foreign operations, the cumulative gain or
loss in the capital reserves is reclassified to the income statement under “Net trading income”.
Economic hedges which do not qualify for hedge accounting
Some hedging instruments serve as fully or partially effective economic hedges but do not qualify for hedge
accounting given the exact nature of the derivatives or due to the inability to prove expected effectiveness of
the hedging relationship within the strict requirements outlined by FRS 39. This includes entering into swaps
and other derivatives e.g. futures, options to manage interest rate, foreign exchange and other risks. Such
hedges are treated in the same way as derivative instruments used for trading purposes, i.e. realised and
unrealised gains and losses are recognised in “Net trading income
”. Similarly, the hedged exposures are typically recorded at fair value through profit or loss,
thereby achieving some measure of offset in the income statement.
Derivatives that do not qualify for hedge accounting include some hedges entered into as part of
documented interest rate management strategies. The size and direction of changes in fair value of non-
qualifying hedges can be volatile from year to year, but do not alter the cash flows expected as part of the
documented management strategies for both the non- qualifying hedge instruments and the assets and
liabilities to which the documented interest rate strategies relate. Non-qualifying hedges therefore
operate as economic hedges of the related assets and liabilities.
Year ended 31 December 2012
15
Please refer to Note 39.2 for disclosures on hedging derivatives.
2.19 Employee benefits Employee benefits, which include base pay, cash
