|
|
· select suitable accounting policies and then apply them consistently;
|
|
|
· make judgements and estimates that are reasonable and prudent;
|
|
|
· state whether they have been prepared in accordance with IFRSs as endorsed by the EU; and
|
|
|
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. Since the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future, the financial statements continue to be prepared on the going concern basis.
|
|
|
· to the best of their knowledge, the consolidated financial statements, which have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the EU, have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
|
|
|
1 Other than Kathleen Casey who was not a Director at the time of approval of the Annual Report and Accounts 2013.
|
|
|
· to the best of their knowledge, the management report represented by the Report of the Directors includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
|
|
|
· they consider that the Annual Report and Accounts 2013, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
|
|
|
§ the financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2013 and of the Group's profit for the year then ended;
|
|
|
§ the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU);
|
|
|
§ the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
|
|
|
§ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
|
|
The risk
|
Our response
|
|
Impairment of loans and advances
Refer to the summary of critical accounting policies on pages 72 to 76, the Group Audit Committee Report on pages 348 to 352 and the disclosures of credit risk within the audited elements of the Risk section of the Financial Review on pages 134 to 297.
|
|
|
The impairment of loans and advances is estimated by the directors through the exercise of judgement and use of highly subjective assumptions.
Due to the significance of loans and advances and the related estimation uncertainty, this is considered a key audit risk.
The portfolios which give rise to the greatest uncertainty are typically those which are unsecured or subject to potential collateral shortfalls.
In 2013, we have focussed particularly on collective provisioning methodologies in the Group's loan portfolios with highest loss experience, including US mortgages and Brazilian personal and business lending loans, together with a small number of individually significant counterparties.
|
Our audit procedures included the assessment of controls including controls over the approval, recording and monitoring of loans and advances, testing the methodologies, inputs and assumptions used by the Group in calculating collectively assessed impairments and assessing the adequacy of impairment allowances for individually assessed loans and advances through forecast recoverable cash flows, including the realisation of collateral.
We compared the Group's assumptions for both collective and individual impairment allowances to externally available industry, financial and economic data and our own assessments in relation to key inputs such as historical default rates, recovery rates, collateral valuation, discount rates and economic factors and considered the sensitivity of these inputs on the assessment of impairment. We also assessed whether the financial statement disclosures, appropriately reflect the Group's exposure to credit risk.
|
|
The risk
|
Our response
|
|
Valuation of financial instruments
Refer to the summary of critical accounting policies on pages 72 to 76, the Group Audit Committee Report on pages 348 to 352, the disclosures of market risk within the audited elements of the Risk section of the Financial Review on pages 134 to 297 and the disclosures of fair values in Notes 13 to 19, 26 and 27 on the Financial Statements.
|
|
|
The fair value of financial instruments is determined through the application of valuation techniques which often involve the exercise of judgement by the directors and the use of assumptions and estimates.
Due to the significance of financial instruments and the related estimation uncertainty, this is considered a key audit risk.
Estimation uncertainty is particularly high for those instruments where significant valuation inputs are unobservable (i.e. Level 3 instruments).
In 2013, we have focussed particularly on industry-wide developments in the valuation of credit and collateral within derivative fair values and the methodologies applied by the Group.
|
Our audit procedures included the assessment of controls over the identification, measurement and management of valuation risk, and evaluating the methodologies, inputs and assumptions used by the Group in determining fair values.
We compared observable inputs into fair value models such as quoted prices to externally available market data and assessed whether valuation models and methodologies used by the Group were in line with accepted market practice.
For instruments with significant unobservable valuation inputs, we performed additional procedures on a sample basis and with the assistance of our own valuation specialists. We critically assessed the assumptions and models used or re-performed an independent valuation assessment, considering alternative methods available and sensitivities to key factors.
Additionally, we assessed whether the financial statement disclosures of fair value risks and sensitivities appropriately reflect the Group's exposure to valuation risk.
|
|
Litigation, regulatory actions and customer remediation
Refer to the summary of critical accounting policies on pages 72 to 76, the Group Audit Committee Report on pages 348 to 352, and the disclosures of provisions and contingent liabilities in Notes 31 and 43 on the Financial Statements.
|
|
|
The recognition and measurement of provisions and the measurement and disclosure of contingent liabilities in respect of litigation, regulatory actions and customer remediation (together 'legal and regulatory matters') requires significant judgement. Due to the significance of potential provisions and the difficulty in assessing and measuring obligations resulting from ongoing legal and regulatory matters, this is considered a key audit risk.
In 2013, we have focussed particularly on whether an obligation exists and the quantum of provisions for customer redress for past selling issues, particularly in the UK, and legal / regulatory losses on businesses and sold products.
|
Our audit procedures included the assessment of controls over the identification, evaluation and measurement of potential obligations arising from legal and regulatory matters. For matters identified, we considered whether an obligation exists, the appropriateness of provisioning and / or disclosure based upon the facts and circumstances available. In order to determine the facts and circumstances we performed a series of procedures including the examination of regulatory and litigation related documents and consultation with the Group's internal and external legal advisors. We then assessed the assumptions made and key judgements applied and we considered possible alternative outcomes.
Additionally we considered whether the Group's disclosures of the application of judgement in estimating provisions and contingent liabilities adequately reflected the uncertainties associated with litigation, regulatory actions and customer remediation.
|
|
The risk
|
Our response
|
|
Deferred tax assets
Refer to the summary of critical accounting policies on pages 72 to 76, the Group Audit Committee Report on pages 348 to 352 and the disclosures of deferred taxation in Note 9 on the Financial Statements.
|
|
|
The recognition of deferred tax assets relies on significant application of judgement by the directors in respect of assessing the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.
Due to the size of the Group's deferred tax assets and the associated uncertainty surrounding recoverability, this is considered a key audit risk.
The deferred tax assets giving rise to the greatest risks are those in the US, Brazil, UK and Mexico.
In 2013 we have considered each of these significant assets and our focus has included changes in tax legislation and practice in Mexico and, within the UK tax group, the ability of the parent company to generate sufficient future income to offset current year tax losses.
|
Our audit procedures included the assessment of controls over the recognition and measurement of deferred tax assets and the assessment of assumptions used in projecting the Group's future taxable profits in relevant jurisdictions. Assumptions tested included the Group's commitment to continue to invest sufficient capital in the US and evaluation of the expected impact of tax planning strategies that support the recoverability of deferred tax assets.
We compared key inputs used by the Group to forecast future profits to externally available data, e.g. economic forecasts, and the Group's own historical data. We used our own tax specialists to assess critically future tax planning strategies.
Where tax treatment may be uncertain, we have assessed the appropriateness of the Group's approach, which is often supported by external legal or tax advice, using our tax specialists and considered possible alternative scenarios.
Additionally, we assessed whether the Group's disclosures of the application of judgement in estimating recognised and unrecognised deferred tax asset balances appropriately reflect the Group's deferred tax position.
This risk also affected our parent company audit.
|
|
Goodwill impairment
Refer to the summary of critical accounting policies on pages 72 to 76, the Group Audit Committee Report on pages 348 to 352 and the disclosures of goodwill in Note 22 on the Financial Statements.
|
|
|
Goodwill impairment testing of cash generating units ('CGU's) utilises estimates of value-in-use from estimated future cash flows.
Due to the uncertainty of forecasting and discounting future cash flows and the significance of the Group's recognised goodwill, this is deemed a significant risk.
Uncertainty is typically highest for those CGUs where headroom between value-in-use and carrying value is limited and where the value-in-use is most sensitive to estimates of future cash flows.
In 2013, we continued to focus on businesses which are subject to structural reform or repositioning, particularly GPB businesses in Europe.
|
Our audit procedures included the assessment of controls over the recognition and measurement of goodwill impairment and assumptions used. Assumptions tested include the cash flow projections based on the plans approved by the Board and the discount rates used to discount them as part of the value-in-use models applied.
We assessed the reasonableness of cash flow projections and compared other key inputs to externally available industry, economic and financial data and the Group's own historical data and considered the sensitivity of significant CGUs to changes in value-in-use. With the assistance of our own specialists, we critically assessed the assumptions and methodologies used to forecast value-in-use for those CGUs where significant goodwill was found to be sensitive to changes in those assumptions.
Additionally we considered whether the Group's disclosures of the application of judgement in estimating CGU cash flows and the sensitivity of the results of those estimates in Note 22 on the financial statements adequately reflect the risks associated with goodwill impairment.
On an overall basis, we also compared aggregate values in use determined by the Group to external market valuations.
|
|
The risk
|
Our response
|
|
Interests in associates
Refer to the summary of critical accounting policies on pages 72 to 76, the Group Audit Committee Report on pages 348 to 352 and the disclosures of interests in associates in Note 21 on the Financial Statements.
|
|
|
The majority of HSBC's interests in associates relate to its 19.03% interest in Bank of Communications Co., Limited ('BoCom'), which is listed on the Hong Kong and Shanghai stock exchanges.
Under the equity method of accounting for associates, these interests are initially stated at cost, and are adjusted thereafter for the post-acquisition change in HSBC's share of the net assets of the associate less any impairment provisions.
In 2013, we focused on the possible impairment of BoCom indicated by the fact that its market value has been below its carrying amount for sustained periods of time in 2013, and the subsequent estimate of its recoverable amount based on its value-in-use (which was sensitive to the projected future cash flows and discount rates).
|
Our audit procedures included an assessment of the methodology to calculate the value-in-use and the assumptions used in this calculation.
We assessed the reasonableness of cash flow projections in the short to medium term and considered the appropriateness of long-term growth rates used to extrapolate these cash flows. We compared key inputs in the value-in-use model such as revenue growth rates, cost-to-income ratio and discount rate to externally available industry, economic and financial data, to consensus market forecasts and to BoCom's recent experience. We met with management of BoCom to understand their views on business performance and trends as part of our assessment of HSBC's future cash flow projections.
We also compared the results of the value-in-use calculations to market available price/earnings multiples for BoCom and other listed banks in mainland China and assessed the Group's analysis of the difference between the market value and the value-in-use of its interest in BoCom. This assessment included consideration of the valuation methodologies and assumptions used by other market participants.
Additionally, we considered whether the Group's disclosures of the application of judgement in estimating the recoverable amount and the sensitivity of the results of those estimates in Note 21 on the financial statements adequately reflect the risks associated with impairment of interests in associates.
|
|
|
· Europe (7 components)
|
|
|
· Asia Pacific (8 components)
|
|
|
· North America (4 components)
|
|
|
· Middle East and North Africa (1 component)
|
|
|
· Latin America (3 components)
|
|
|
§ the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
|
|
|
§ the information given in the Strategic Report and Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
|
|
|
§ we have identified material inconsistencies between the knowledge we acquired during our audit and the directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy; or
|
|
|
§ the Corporate Governance section of the Annual Report and Accounts describing the work of the Group Audit Committee does not appropriately address matters communicated by us to the Group Audit Committee.
|
|
|
§ adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
|
|
|
§ the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
|
|
|
§ certain disclosures of directors' remuneration specified by law are not made; or
|
|
|
§ we have not received all the information and explanations we require for our audit.
|
|
|
§ the directors' statement, set out on page 367, in relation to going concern; and
|
|
|
§ the part of the Corporate Governance Statement relating to the company's compliance with the nine provisions of the UK Corporate Governance Code (2010) specified for our review.
|
|
Page
|
||
|
Financial Statements
|
||
|
Consolidated income statement ..........................
|
417
|
|
|
Consolidated statement of comprehensive income
|
418
|
|
|
Consolidated balance sheet ..................................
|
419
|
|
|
Consolidated statement of cash flows...................
|
420
|
|
|
Consolidated statement of changes in equity .......
|
421
|
|
|
HSBC Holdings balance sheet ..............................
|
424
|
|
|
HSBC Holdings statement of cash flows...............
|
425
|
|
|
HSBC Holdings statement of changes in equity ...
|
426
|
|
|
Notes on the Financial Statements
|
||
|
1
|
Basis of preparation ...................................
|
428
|
|
2
|
Summary of significant accounting policies
|
432
|
|
3
|
Net income/(expense) from financial
instruments designated at fair value ........
|
450
|
|
4
|
Net earned insurance premiums ..................
|
451
|
|
5
|
Net insurance claims incurred and movement
in liabilities to policyholders ...................
|
451
|
|
6
|
Operating profit .........................................
|
452
|
|
7
|
Employee compensation and benefits ........
|
453
|
|
8
|
Auditors' remuneration ..............................
|
465
|
|
9
|
Tax ............................................................
|
466
|
|
10
|
Dividends ...................................................
|
471
|
|
11
|
Earnings per share ......................................
|
471
|
|
12
|
Segmental analysis .....................................
|
472
|
|
13
|
Analysis of financial assets and liabilities
by measurement basis .............................
|
477
|
|
14
|
Trading assets ............................................
|
481
|
|
15
|
Fair values of financial instruments
carried at fair value .................................
|
482
|
|
16
|
Fair values of financial instruments
not carried at fair value ..........................
|
495
|
|
17
|
Financial assets designated at fair value ......
|
498
|
|
Page
|
||
|
18
|
Derivatives ................................................
|
499
|
|
19
|
Financial investments ................................
|
504
|
|
20
|
Transfers of financial assets .......................
|
506
|
|
21
|
Interests in associates and joint ventures ....
|
508
|
|
22
|
Goodwill and intangible assets .....................
|
512
|
|
23
|
Property, plant and equipment ...................
|
518
|
|
24
|
Investments in subsidiaries .........................
|
519
|
|
25
|
Assets held for sale and other assets ...........
|
521
|
|
26
|
Trading liabilities .......................................
|
522
|
|
27
|
Financial liabilities designated at fair value .
|
523
|
|
28
|
Debt securities in issue ................................
|
523
|
|
29
|
Liabilities of disposal groups held for sale
and other liabilities .................................
|
524
|
|
30
|
Liabilities under insurance contracts ...........
|
525
|
|
31
|
Provisions ..................................................
|
526
|
|
32
|
Subordinated liabilities ................................
|
528
|
|
33
|
Maturity analysis of assets, liabilities and off-balance sheet commitments.....................
|
532
|
|
34
|
Offsetting of financial assets and financial liabilities .................................................
|
540
|
|
35
|
Foreign exchange exposures .......................
|
542
|
|
36
|
Assets charged as security for liabilities and collateral accepted as security for assets .
|
542
|
|
37
|
Non-controlling interests ...........................
|
543
|
|
38
|
Called up share capital and other equity instruments ............................................
|
544
|
|
39
|
Notes on the statement of cash flows .........
|
546
|
|
40
|
Contingent liabilities, contractual commitments and guarantees ..................
|
548
|
|
41
|
Lease commitments ...................................
|
549
|
|
42
|
Structured entities ......................................
|
550
|
|
43
|
Legal proceedings and regulatory matters ...
|
554
|
|
44
|
Related party transactions ..........................
|
562
|
|
45
|
Events after the balance sheet date ............
|
564
|