5th Jul 2005 09:05
HSBC Holdings PLC05 July 2005 HSBC Holdings plc 2004 IFRS Comparative Financial Information Page 1 Introduction 2 2 Financial highlights 2 3 Basis of preparation 4 4 Key impact analysis of IFRS on the financial results of 5 2004 5 IFRS consolidated financial information 10 6 Notes on the comparative financial information 18 •Accounting policies revised under IFRS applicable to 18 the comparative financial information (Notes 6.1 and 6.2) •Earnings and dividends per share (Note 6.3) 27 •Economic profit (Note 6.4) 27 •Summary segmental analysis (Note 6.5) 28 7 Special purpose audit and review reports of KPMG Audit plc 29 Appendices 33 Cautionary Statement Regarding Forward-Looking Statements The following analysis contains certain forward-looking statements with respect to the financial condition and results of HSBC in relation to the implementation of International Financial Reporting Standards as adopted by the European Union and as issued by the International Accounting Standards Board. Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential', 'reasonably possible' and variations of these words and similar expressions or variations on such expressions may be considered 'forward-looking statements'. Forward-looking statements speak only as of the day they are made, and it should not be assumed that they have been revised or updated in the light of new information or future events. Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. Certain Defined Terms Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC' or the 'Group' means HSBC Holdings together with its subsidiary and associated undertakings. When used in the terms 'shareholders' equity' and 'profit attributable to shareholders', 'shareholders' means holders of HSBC ordinary shares. Statutory Accounts The information in this document does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 ('the Act'). The statutory accounts for the year ended 31 December 2004 have been delivered to the Registrar of Companies in accordance with Section 242 of the Act. The auditor has reported on those accounts. Its report was unqualified and did not contain a statement under Section 237 (2) or (3) of the Act. 1 Introduction With effect from 1 January 2005, HSBC is required to prepare its financial statements in accordance with International Financial Reporting Standards ('IFRS') as endorsed by the European Union ('EU'). HSBC also intends to comply fully with IFRS as promulgated by the International Accounting Standards Board ('IASB'). HSBC's first results prepared under IFRS will be published in the Interim Report for the six months to 30 June 2005 ('Interim Report 2005'). HSBC's first set of financial statements prepared under IFRS will be published in the Annual Report and Accounts for the year ending 31 December 2005 ('Annual Report and Accounts 2005'). This document summarises the principal effects of IFRS on the comparative financial information for 2004 that will appear in HSBC's Interim Report 2005 and its Annual Report and Accounts 2005. It includes, on an IFRS basis: •HSBC's consolidated income statements for the year ended 31 December 2004, the first half of 2004 and the second half of 2004; •HSBC's consolidated balance sheets at 1 January 2004 (the 'date of transition'), 30 June 2004 and 31 December 2004; and •HSBC's consolidated statements of recognised income and expense for the year ended 31 December 2004, the first half of 2004 and the second half of 2004. HSBC's consolidated balance sheet at 1 January 2005 will differ from the closing balance sheet dated 31 December 2004 as the former will reflect first-time adoption of International Accounting Standards ('IAS') 32 'Financial Instruments: Disclosure and Presentation' ('IAS 32'), IAS 39 'Financial Instruments: Recognition and Measurement' ('IAS 39') and IFRS 4 'Insurance Contracts' ('IFRS 4'). This will be presented in the Interim Report 2005. HSBC has decided not to publish its IAS 32, IAS 39 and IFRS 4 - compliant consolidated balance sheet at 1 January 2005 at present since the IASB has only just published its document, 'Amendment to International Accounting Standard 39 Financial Instruments: Recognition and Measurement: The Fair Value Option' ('the Amendment'), which HSBC expects the EU to endorse. The Amendment allows HSBC to measure certain of its non-trading financial assets and liabilities at fair value, assuming that certain criteria are met. This is likely to have a significant impact on the way IAS 39 is applied. HSBC is currently evaluating the effect of the use of the fair value option on its financial statements and the extent to which it would seek to apply the fair value option. The appendices to this document essentially bridge prior financial statement disclosures under UK Generally Accepted Accounting Principles ('UK GAAP') and IFRS and are designed to assist the reader in understanding the nature and quantum of differences between them. Appendix I contains detailed reconciliations between previously reported UK GAAP income statements and balance sheets and their IFRS equivalents. Appendix II details the adjustments made to change HSBC's income statements and balance sheets from UK GAAP format to IFRS format. The most significant effects of the transition to IFRS on HSBC's restated comparative financial information are caused by differences in the accounting treatments of goodwill, retirement benefits and dividends. However, the transition to IFRS does not change HSBC's net cash flows, the underlying economics or the risks of its businesses. 2 Financial highlights HSBC has historically judged its own performance by comparing returns before goodwill amortisation on cash invested as HSBC believed this gave an important measure of its underlying performance and facilitated comparison with its peer group. Profit before goodwill amortisation was derived by adjusting reported earnings to eliminate the impact of the amortisation of goodwill arising on acquisitions. The amounts for the period (excluding goodwill amortisation) disclosed in the table below, 'Effect of IFRS on the consolidated income statement', can be reconciled to the equivalent reported numbers by deducting goodwill amortisation of US$1,818 million for the year ended 31 December 2004 (first half of 2004: US$883 million; second half of 2004: US$935 million). Effect of IFRS on the consolidated income statement --------------- ------------------ ----------------- Year ended Half-year to Half-year to 31 December 2004 31 December 2004 30 June 2004 --------------- ------------------ ----------------- IFRS UK IFRS UK IFRS UK GAAP GAAP GAAP US$m US$m US$m US$m US$m US$m For the period (excluding goodwill amortisation) Net operating income 45,200 45,037 22,596 22,489 22,604 22,548 Profit before tax 18,943 19,426 8,823 9,175 10,120 10,251 Profit attributable to shareholders 12,918 13,658 5,978 6,429 6,940 7,229 For the period Net operating income 45,200 45,037 22,596 22,489 22,604 22,548 Profit before tax 18,943 17,608 8,823 8,240 10,120 9,368 Profit attributable to shareholders 12,918 11,840 5,978 5,494 6,940 6,346 US$ US$ US$ US$ US$ US$ Per ordinary share Earnings excluding goodwill amortisation 1.18 1.25 0.55 0.58 0.64 0.67 Basic 1.18 1.09 0.55 0.51 0.64 0.58 earnings Diluted earnings 1.17 1.07 0.54 0.49 0.63 0.58 Dividends 0.63 0.66 0.26 0.40 0.37 0.26 Net asset value at period end 7.66 7.75 7.66 7.75 7.00 7.19 The difference of US$1,335 million in profit before tax for the year ended 31 December 2004 (first half of 2004: US$752 million; second half of 2004: US$583 million) is mainly due to the removal of goodwill amortisation from the income statement. Effect of IFRS on the consolidated balance sheet ------------------ -------------------- ---------------------- At At At 31 December 2004 30 June 2004 1 January 2004 ------------------ -------------------- ---------------------- IFRS UK GAAP IFRS UK GAAP IFRS UK GAAP US$m US$m US$m US$m US$m US$mAtperiod-endTotal assets 1,279,978 1,276,778 1,157,108 1,153,932 1,037,721 1,034,216Totalshareholders'equity 85,522 86,623 77,066 79,259 73,748 74,473 The most significant adjustments to the total assets were the consolidation of conduit financing vehicles and certain investment funds. The decrease in total shareholders' equity of US$1,101 million (30 June 2004: US$2,193 million decrease; 1 January 2004: US$725 million decrease) was primarily due to: •the inclusion of pension deficits in the balance sheet; partly offset by •the exclusion from liabilities of dividends declared after the balance sheet date, and the removal of goodwill amortisation subsequent to 1 January 2004 from the income statement. Performance ratios ---------------- ----------------- ------------------ Year ended Half-year to Half-year to 31 December 2004 31 December 2004 30 June 2004 ---------------- ----------------- ------------------ IFRS UK IFRS UK IFRS UK GAAP GAAP GAAP % % % % % % Annualised Return on average invested capital(1) 15.0 15.2 13.3 14.0 16.7 16.5 Return on average total shareholders' equity 16.3 14.4 14.5 13.1 18.2 16.0 Post-tax return on average total 1.22 1.12 1.08 0.99 1.37 1.26 assets Post-tax return on average risk-weighted assets 2.13 1.96 1.89 1.74 2.41 2.21 Cost:income ratio(2) 47.3 51.1 48.2 52.9 46.4 49.3 (1) Return on average invested capital is defined on page 27. (2) The cost:income ratio is defined as total operating expenses (excluding goodwill amortisation for UK GAAP comparative data) divided by total operating income (net of insurance claims for UK GAAP comparative data). 3 Basis of preparation This document describes the derivation and reconciliation of the comparative information which HSBC expects to include, for the first time under IFRS, in its Interim Report 2005 and its Annual Report and Accounts 2005. No comparative financial information is given herein for periods other than those to be disclosed in the above Reports. The transition to IFRS has not affected HSBC's net cash flows or the underlying economics of its businesses, though the periods in which certain income and expenses are recognised may change. There are, additionally, no changes to estimates made under UK GAAP when applying IFRS (for example, to asset lives or actuarial assumptions). The information in this document has been prepared on the basis of IFRS which are expected to be endorsed by the EU and in effect for the year ending 31 December 2005 to the extent that IFRS apply to comparatives under the transitional provisions. This may differ from IFRS actually in effect at that date as a result of decisions taken by the EU on endorsement, interpretative guidance issued by the IASB and the International Financial Reporting Interpretations Committee ('IFRIC'), and the requirements of companies legislation. These factors may affect HSBC's 2005 financial statements and the information contained within this document. HSBC intends to take advantage of the US Securities and Exchange Commission ('SEC') transition rule exempting the Group from disclosing a second year of comparatives in its Form 20-F when first adopting IFRS. Accordingly, HSBC's transition date and its opening IFRS balance sheet date are both 1 January 2004. HSBC intends to take advantage of the section in IFRS 1 'First time Adoption of International Financial Reporting Standards' which exempts companies from presenting comparative information in accordance with IAS 32, IAS 39 and IFRS 4. The information on financial instruments contained within this document has been prepared on the basis of the Group's previous accounting policies under UK GAAP. HSBC intends to adopt the 'Amendment to IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures' and IFRIC 4 'Determining whether an arrangement contains a lease' ahead of their proposed effective dates on the assumption that they will be endorsed by the EU. The balance sheets and income statements contained in this document are presented in accordance with IAS 1 'Presentation of Financial Statements'. HSBC currently intends to adopt ED 7 'Financial Instruments: Disclosures' ('ED 7') in 2005, ahead of its proposed effective date. However, the format and presentation adopted may change in the event that further guidance is issued and a consensus develops on best practice from which to draw. Transition to IFRS In addition to exempting companies from the requirement to restate comparatives under IAS 32, IAS 39 and IFRS 4, IFRS 1 grants certain exemptions from the full requirements of IFRS to companies adopting IFRS for the first time in the transition period. HSBC has elected to take the following exemptions affecting comparative financial data: (a) Business combinations HSBC has chosen not to restate business combinations that took place prior to the 1 January 2004 transition date. (b) Fair value or revaluation as deemed cost A first-time adopter may elect to measure individual items of property at fair value at the date of transition to IFRS and use that fair value as deemed cost at that date. HSBC has made this election. (c) Employee benefits HSBC has elected to apply the employee benefits exemption and has therefore recognised in equity at 1 January 2004 all cumulative actuarial gains and losses on retirement benefit obligations. Section 4, 'Key impact analysis of IFRS on the financial results of 2004', explains the effect of this exemption on the opening balance sheet. (d) Cumulative translation differences HSBC has set the cumulative translation differences for all foreign operations to zero at 1 January 2004. (e)Share-based payment transactions HSBC has elected to undertake full retrospective application of IFRS 2 'Share-based Payment'. The reconciliations included in Appendices I and II demonstrate the two-step process undertaken by HSBC in the preparation of its comparative financial information. This is as follows: (i)restate the UK GAAP numbers as IFRS numbers; and(ii)convert the UK GAAP financial statements into a format consistent with IFRS. 4 Key impact analysis of IFRS on the financial results of 2004 HSBC previously prepared its primary financial statements under UK GAAP, which differs in certain significant respects from IFRS. The following is a summary of the main differences applicable to HSBC: IFRS 3 'Business Combinations' ('IFRS 3') HSBC has applied IFRS 3 with effect from 1 January 2004 but, as permitted by IFRS 1, has not restated business combinations which occurred prior to 1 January 2004. The carrying value of goodwill existing at 31 December 2003 under UK GAAP is carried forward under IFRS 1 from 1 January 2004, subject to two adjustments. Firstly, previously unrecognised intangible assets that meet the recognition criteria under IAS 38 'Intangible Assets' in the financial statements of the acquired entity are reported separately to the extent that they are included in goodwill at the date of transition. Secondly, only adjustments to provisional fair values (and hence goodwill) made during the first 12 months after an acquisition are reflected in comparative information. Accordingly, goodwill adjustments made after the first 12 months in accordance with UK GAAP have been reversed. IFRS 3 requires that goodwill should not be amortised but should be tested for impairment on transition and at least annually at the cash-generating unit level by applying a fair-value-based test as described in IAS 36 'Impairment of Assets'. There was no impairment on transition or in any subsequent periods. Under IFRS 3, the acquirer only recognises adjustments to the provisional fair values of assets and liabilities acquired in a business combination within 12 months of the acquisition date, with a corresponding adjustment to goodwill. These adjustments are made as if they had occurred at the acquisition date, i.e. the comparative information is adjusted. Adjustments to the fair value of assets, liabilities and contingent liabilities after the 12 month period are recognised only to correct errors or adjust deferred tax assets that could not be recognised separately at the date of acquisition. When such a deferred tax asset is recognised, goodwill is reduced to the amount that would have been recognised if the deferred tax asset had been recognised at the date of the acquisition. Any reduction in goodwill is recognised as an expense, offsetting the benefit taken in the tax charge for the recognition of the deferred tax asset. The effect of ceasing goodwill amortisation on operating profit for the year ended 31 December 2004 was US$1,814 million (first half of 2004: US$883 million; second half of 2004: US$931 million). The impact of other goodwill adjustments, essentially to adjust fair values on acquisition to the basis noted above, was a reduction in operating profit for the year ended 31 December 2004 of US$96 million (first half of 2004: US$34 million reduction; second half of 2004: US$62 million reduction). US$241 million of goodwill was reclassified to other intangible assets on 1 January 2004. IAS 19 'Employee Benefits' ('IAS 19') IAS 19 requires pension fund assets to be assessed at fair value and liabilities on the basis of current actuarial assumptions using the projected unit credit method. As permitted by an amendment to IAS 19 approved by the IASB and expected to be endorsed by the EU, HSBC has elected to recognise all actuarial gains and losses directly in retained earnings. The change in accounting has resulted in the recognition of a pension obligation of US$6,475 million at 31 December 2004 (30 June 2004: US$5,151 million; 1 January 2004: US$4,982 million). This, after adjustment for prospective tax relief and the portion of the deficit attributable to minority interests, reduced total shareholders' equity by US$4,470 million at 31 December 2004 (30 June 2004: US$3,551 million; 1 January 2004 US$3,529 million). The effect on operating profit in 2004 of the transition to IAS 19 was to increase the charge by US$170 million for the year ended 31 December 2004 (first half of 2004: US$45 million reduction in expense; second half of 2004: US$215 million additional charge). In the second half of 2004, there was a US$242 million charge relating to an increase in pension liability due to termination benefits attributable to members of the HSBC Bank (UK) Pension Scheme consequent upon a major staff reduction programme in that period. Under UK GAAP, the impact of the staff reduction programme on the pension scheme was spread over the remaining average life of the scheme. IAS 10 'Events after the Balance Sheet Date' ('IAS 10') Under IAS 10, equity dividends declared after the balance sheet date are not included as a liability at the balance sheet date. Accordingly, HSBC has reversed the liability for proposed dividends at each balance sheet date. This had the effect of increasing shareholders' equity at 31 December 2004, 30 June 2004 and 1 January 2004 by US$2,996 million, US$1,436 million, and US$2,627 million respectively. IAS 17 'Leases' ('IAS 17') IAS 17 requires that unearned income on finance leases be taken to income at a rate calculated to give a constant rate of return on the net investment in the lease, with no account taken in calculating the net investment of the tax effects of the lease. In general, this leads to a deferral of finance income compared with the pattern of recognition under UK GAAP, where income is recognised at a constant rate of return on the net cash investment in the lease including the effect of tax. Under UK GAAP, assets leased out under operating leases are depreciated over their useful lives so that, for each asset, rentals less depreciation are recognised at a constant periodic rate of return on the net cash invested in that asset. Under IFRS, operating leased assets are depreciated to ensure that in each period the depreciation charge is at least equal to that which would have arisen on a straight-line basis. The effect from both finance and operating leases on shareholders' equity at 31 December 2004, 30 June 2004 and 1 January 2004 is a decrease of US$503 million, US$430 million, and US$402 million respectively. The effect of the transition to IAS 17 is to decrease operating profit by US$90 million for the year ended 31 December 2004 (first half of 2004: US$35 million; second half of 2004: US$55 million). Under UK GAAP, leasehold land was separately identified within the valuation of land and buildings. For HSBC, this principally arose in Hong Kong, where all land is held by way of leases. IFRS generally requires leasehold land to be treated as held under an operating lease unless title is expected to pass to the lessee at the end of the lease. No revaluation is permitted in respect of such owner-occupied operating lease assets. HSBC has classified as operating leases all land and buildings held under leases whose unexpired portion is less than 500 years. As a result, leasehold land valued at US$979 million at 1 January 2004 has been reclassified as operating lease assets on the date of transition to IFRS. This has resulted in the reversal of previously recognised revaluation surpluses amounting to US$627 million, and the inclusion of prepaid rentals of US$352 million in other assets as at 1 January 2004. IFRS 2 'Share-based Payment' ('IFRS 2') IFRS 2 requires companies to adopt a fair-value-based method of accounting for share-based compensation plans which takes into account vesting conditions related to market performance, for example total shareholder return. Under this method, compensation cost is measured at the date of grant based on the assessed value of the award and is recognised over the service period, which is usually the vesting period. In respect of other vesting conditions, an estimate of the number of options that will lapse before they vest is made at grant date and adjustments to this estimate are made over the service period. Accordingly, the expense recognised reflects, over time, the actual number of lapsed options for non-market performance-related conditions. There is no exemption under IFRS 2 for Save-As-You-Earn schemes, as existed under UK GAAP. HSBC has undertaken full retrospective application of IFRS 2, as permitted by IFRS 1, and recognised the fair value of share-based payments to employees whilst reversing charges made in respect of employee share schemes under UK GAAP. This resulted in a US$152 million reduction in operating profit for the year ended 31 December 2004 (first half of 2004: US$55 million; second half of 2004: US$97 million). At 31 December 2003, HSBC had a liability under UK GAAP in relation to certain sign-on and performance bonuses which were to be settled by the purchase of HSBC shares and had been expensed as incurred. Under IFRS 2, these transactions are treated as equity-settled share-based payments and are expensed over the vesting period. IAS 27 'Consolidated and Separate Financial Statements' ('IAS 27') IAS 27 requires that all entities be consolidated on a line-by-line basis. HSBC's insurance subsidiaries' third party assets, which were historically presented in aggregate on a single line 'Long-term assurance assets attributable to policyholders' within 'Other assets' on the consolidated balance sheet have, therefore, been included in appropriate headings for such assets. In addition, funds under management have been consolidated where the requirements of IAS 27 and Standard Interpretations Committee 12 'Consolidation - Special Purpose Entities' ('SIC-12') are met. SIC-12 also requires consolidation of special purpose entities ('SPEs') when the substance of the relationship between the SPE and the reporting entity indicates that the SPE is controlled by that entity. This has resulted in certain of the Group's securitisation and conduit vehicles that were off-balance-sheet under UK GAAP being consolidated under IFRS. The effect of consolidating funds under management and SPEs under IAS 27 and SIC-12 is to gross up the 31 December 2004 balance sheet by US$4,796 million (30 June 2004: US$5,361 million; 1 January 2004: US$5,075 million) with a minor impact on total shareholders' equity. The effect on attributable profit was an increase of US$12 million for the year ended 31 December 2004 (first half of 2004: US$15 million increase; second half of 2004: US$3 million decrease). IAS 12 'Income Taxes' ('IAS 12') Under IAS 12, deferred tax liabilities and assets are generally recognised in respect of all temporary differences except where expressly prohibited by the Standard, subject to an assessment of the recoverability of deferred tax assets. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. In addition, unremitted earnings from subsidiaries, associates and joint ventures operating in lower tax jurisdictions result in a deferred tax liability unless the reporting entity is able to control the timing of the reversal of temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Under IFRS, fair value adjustments made on acquisition are tax-effected in order to present profitability on a tax-equalised basis: under UK GAAP no tax adjustments were required for items which did not affect the amount of tax payable or recoverable. The IFRS balance sheet at 31 December 2004 includes an increase in the deferred tax asset of US$587 million (30 June 2004: US$538 million; 1 January 2004: US$813 million) and a decrease in the deferred tax liability of US$627 million (30 June 2004: US$673 million; 1 January 2004 US$559 million). The net change in deferred tax mainly arises from prospective tax relief on pension deficits, tax-effecting fair value adjustments on acquisitions, previously unrecognised tax-effecting of historical property revaluations, and an adjustment to the grossing up of the value of in-force long-term assurance business. The effect on the IFRS income statement is shown in Appendix I. The main item, in the 'other' column, is the deferred tax of US$274 million for the year ended 31 December 2004 (first half of 2004: US$116 million; second half of 2004: US$158 million) on the fair value adjustments arising on the acquisition of subsidiaries. IAS 38 'Intangible Assets' ('IAS 38') IAS 38 states that intangible assets should be recognised separately from goodwill in a business combination where they arise from contractual or other legal rights, or if separable, i.e. capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged in combination with a related contract, asset or liability. The effect of this is that certain intangible assets such as trademarks and customer relationships included as part of goodwill under UK GAAP are separately measured and recognised on business combinations. Where intangible assets have an indefinite useful life, or are not yet ready for use, they are tested for impairment annually. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. An intangible asset recognised during the current period is tested before the end of the current annual period. Presentationally, intangible assets recognised under UK GAAP, including mortgage servicing rights and the value of in-force long-term assurance business were reclassified from 'Other assets' to 'Intangible assets'. This resulted in additional intangible assets of US$308 million relating to mortgage servicing rights and US$1,874 million at 31 December 2004 (30 June 2004: US$437 million and US$1,640 million; 1 January 2004: US$506 million and US$1,579 million) relating to the value of in-force long-term assurance business. IAS 38 further requires costs incurred in the development phase of a project to produce application software for internal use to be capitalised and amortised over the software's estimated useful life if the software will generate probable future economic benefits, and such costs can be measured reliably. Under UK GAAP these costs were expensed as incurred. This policy change has resulted in US$760 million of software being capitalised as at 31 December 2004 (30 June 2004: US$687 million; 1 January 2004: US$718 million). The capitalisation of software previously expensed in full results in a decrease in general and administrative expenses and an increase in depreciation and amortisation charged in respect of capitalised software in the form of regular, ongoing amortisation and any impairment charge. The net impact is that expenses are US$25 million lower for the year ended 31 December 2004 (first half of 2004: US$42 million increased expense; second half of 2004: US$67 million lower expense). IAS 16 'Property, Plant and Equipment' ('IAS 16') HSBC has adopted the 'cost' model by which assets are carried at cost less any accumulated depreciation and impairment losses. HSBC has also applied the exemption in IFRS 1 which allows fair value at the date of transition to IFRS to be used as deemed cost for the value of property in most circumstances. No adjustments are required to restate property, plant and equipment in the IFRS opening balance sheet at 1 January 2004 as a result of changing from a policy of revaluation to one of depreciated cost. However, US$639 million was transferred out of the revaluation reserve to retained earnings on 1 January 2004. Leasehold land valued at US$979 million at 1 January 2004, which was previously capitalised under UK GAAP but does not meet the criteria for capitalisation as finance leased assets under IFRS, was reclassified as operating leased assets. Refer to the paragraph entitled 'IAS 17' above for further explanation of these adjustments. IAS 40 ' Investment Property' ('IAS 40') Investment properties have been measured at fair value with changes in fair value recognised in the income statement. This has resulted in a US$98 million increase in operating profit for the year ended 31 December 2004 (first half of 2004: US$59 million; second half of 2004: US$39 million). IAS 21 'The Effects of Changes in Foreign Exchange Rates' ('IAS 21') IAS 21 states that in consolidated financial statements, all exchange differences arising on the retranslation of foreign operations with functional currencies which differ from the entity's reporting currency should be recognised as a separate component of equity, in the foreign exchange reserve. On disposal of a foreign operation, the exchange differences previously recognised in reserves in relation to that operation are recognised in the income statement for the period. As permitted by IFRS 1, HSBC has deemed cumulative translation differences at 1 January 2004 to be zero. Reconciliation of previously reported profit attributable to shareholders under UK GAAP to profit attributable to shareholders under IFRS for the year ended 31 December 2004 and the half-years to 31 December 2004 and 30 June 2004 Year ended Half-year to 31 December ------------------------- 2004 31 December 30 June 2004 2004 2004 US$m US$m US$m PROFIT ATTRIBUTABLE TO SHAREHOLDERS Profit before tax under UK GAAP 17,608 8,240 9,368 Goodwill amortisation 1,818 935 883 -------- -------- -------- 19,426 9,175 10,251 Other goodwill adjustments (102) (60) (42) Retirement benefits (170) (215) 45 Leases (90) (55) (35) Share-based payments (152) (97) (55) Software capitalisation 25 67 (42) Property 106 41 65 Tax on associates (48) (37) (11) Other (52) 4 (56) -------- -------- -------- Profit before tax under IFRS 18,943 8,823 10,120 Tax - UK GAAP (4,507) (2,139) (2,368) Tax - IFRS adjustments (178) (33) (145) Minority interests - UK GAAP (1,261) (607) (654) Minority interests - IFRS adjustments (79) (66) (13) -------- -------- -------- Profit attributable to shareholders under IFRS 12,918 5,978 6,940 -------- -------- -------- Reconciliation of previously reported shareholders' funds under UK GAAP to total shareholders' equity under IFRS at 31 December 2004, 30 June 2004 and 1 January 2004 At At At 31 December 30 June 1 January 2004 2004 2004 US$m US$m US$m SHAREHOLDERS' EQUITY Shareholders' funds as previously 86,623 79,259 74,473 reported under UK GAAP Goodwill 1,869 961 (22) -------- -------- -------- 88,492 80,220 74,451 Retirement benefits (4,470) (3,551) (3,529) Dividends 2,996 1,436 2,627 Leases (503) (430) (402) Share-based payments 198 125 211 Software capitalisation 551 501 518 Property (1,607) (1,194) - Long leasehold land (495) (489) (755) Other 42 50 245 Tax 318 398 382 -------- -------- -------- Total shareholders' equity under IFRS 85,522 77,066 73,748 -------- -------- -------- To help explain further how the consolidated financial statements of the Group are affected by the adoption of IFRS, detailed reconciliations of UK GAAP to IFRS are presented in Appendices I and II. The reconciliations include: - income statement for the year ended 31 December 2004 and balance sheet at that date; - income statement for the half-year to 31 December 2004; - income statement for the half-year to 30 June 2004 and balance sheet at that date; and - opening balance sheet at 1 January 2004. 5 IFRS consolidated financial information Consolidated income statement Half-year to Year ended ------------------------- 31 December 31 December 30 June 2004 2004 2004 US$m US$m US$m Interest income 50,471 26,855 23,616 Interest expense (19,372) (10,886) (8,486) -------- -------- -------- Net interest income 31,099 15,969 15,130 -------- -------- -------- Fee income 15,672 8,040 7,632 Fee expense (2,954) (1,532) (1,422) -------- -------- -------- Net fee income 12,718 6,508 6,210 Trading income 2,619 1,219 1,400 Net investment income on assets backing policyholder liabilities 1,012 818 194 Gains less losses from financial investments 773 443 330 Dividend income 622 283 339 Net earned insurance premiums 5,368 2,904 2,464 Other operating income 1,815 713 1,102 -------- -------- -------- Total operating income 56,026 28,857 27,169 Loan impairment charges and other credit risk provisions (6,191) (3,451) (2,740) Net insurance claims incurred and movement in policyholder liabilities (4,635) (2,810) (1,825) -------- -------- -------- Net operating income 45,200 22,596 22,604 Employee compensation and benefits (14,612) (7,649) (6,963) General and administrative expenses (9,688) (5,149) (4,539) Depreciation of property, plant and equipment (1,731) (932) (799) Amortisation of intangible assets and impairment of goodwill (494) (193) (301) -------- -------- -------- Total operating expenses (26,525) (13,923) (12,602) -------- -------- -------- Operating profit 18,675 8,673 10,002 Share of profit in associates and joint ventures 268 150 118 -------- -------- -------- Profit before tax 18,943 8,823 10,120 Tax expense (4,685) (2,172) (2,513) -------- -------- -------- Profit for the period 14,258 6,651 7,607 Profit attributable to minority interests (1,340) (673) (667) -------- -------- -------- Profit attributable to shareholders 12,918 5,978 6,940 -------- -------- -------- US$ US$ US$ Basic earnings per ordinary share 1.18 0.55 0.64 Diluted earnings per ordinary share 1.17 0.54 0.63 Dividends per ordinary share 0.63 0.26 0.37 Consolidated statement of recognised income and expense Half-year to Year ended ----------------------- 31 December 31 December 30 June 2004 2004 2004 US$m US$m US$m Exchange translation differences 3,336 4,139 (803) Actuarial loss on retirement benefits (390) (364) (26) -------- -------- -------- Net income recognised directly in equity 2,946 3,775 (829) Profit for the period 14,258 6,651 7,607 -------- -------- -------- Total recognised income for the period 17,204 10,426 6,778 -------- -------- -------- Attributable to minority interests 1,866 1,278 588 Attributable to shareholders 15,338 9,148 6,190 -------- -------- -------- 17,204 10,426 6,778 -------- -------- -------- Consolidated income statement for the year ended 31 December 2004 Effect of UK GAAP transition IFRS format to IFRS IFRS US$m US$m US$m Interest income 50,203 268 50,471 Interest expense (19,179) (193) (19,372) -------- -------- -------- Net interest income 31,024 75 31,099 -------- -------- -------- Fee income 15,877 (205) 15,672 Fee expense (2,784) (170) (2,954) -------- -------- -------- Net fee income 13,093 (375) 12,718 Trading income 2,566 53 2,619 Net investment income on assets backing policyholder liabilities - 1,012 1,012 Gains less losses from financial investments 770 3 773 Dividend income 601 21 622 Net earned insurance premiums - 5,368 5,368 Other operating income 3,335 (1,520) 1,815 -------- -------- -------- Total operating income 51,389 4,637 56,026 Loan impairment charges and other credit risk provisions (6,352) 161 (6,191) Net insurance claims incurred and movement in policyholder liabilities - (4,635) (4,635) -------- -------- -------- Net operating income 45,037 163 45,200 Employee compensation and benefits (14,492) (120) (14,612) General and administrative expenses (9,723) 35 (9,688) Depreciation of property, plant and equipment (1,664) (67) (1,731) Amortisation of intangible assets and impairment of goodwill (1,842) 1,348 (494) -------- -------- -------- Total operating expenses (27,721) 1,196 (26,525) -------- -------- -------- Operating profit 17,316 1,359 18,675 Share of profit in associates and joint ventures 292 (24) 268 -------- -------- -------- Profit before tax 17,608 1,335 18,943 Tax expense (4,507) (178) (4,685) -------- -------- -------- Profit for the year 13,101 1,157 14,258 Profit attributable to minority interests (1,261) (79) (1,340) -------- -------- -------- Profit attributable to shareholders 11,840 1,078 12,918 -------- -------- -------- Consolidated statement of recognised income and expense for the year ended 31 December 2004 Effect of UK GAAP transition IFRS format to IFRS IFRS US$m US$m US$m Unrealised surplus on revaluation of investment properties 94 (94) - Unrealised surplus on revaluation of land and buildings (excluding investment properties) 1,158 (1,158) - Exchange translation differences 3,404 (68) 3,336 Actuarial loss on retirement - (390) (390) benefits -------- -------- -------- Net income recognised directly in equity 4,656 (1,710) 2,946 Profit for the year 13,101 1,157 14,258 -------- -------- -------- Total recognised income for the year 17,757 (553) 17,204 -------- -------- -------- Attributable to minority interests 1,918 (52) 1,866 Attributable to shareholders 15,839 (501) 15,338 -------- -------- -------- 17,757 (553) 17,204 -------- -------- -------- Consolidated income statement for the half-year to 31 December 2004 Effect of UK GAAP transition IFRS format to IFRS IFRS US$m US$m US$m Interest income 26,725 130 26,855 Interest expense (10,807) (79) (10,886) -------- -------- -------- Net interest income 15,918 51 15,969 -------- -------- -------- Fee income 8,161 (121) 8,040 Fee expense (1,432) (100) (1,532) -------- -------- -------- Net fee income 6,729 (221) 6,508 Trading income 1,183 36 1,219 Net investment income on assets backing policyholder liabilities - 818 818 Gains less losses from financial investments 437 6 443 Dividend income 272 11 283 Net earned insurance premiums - 2,904 2,904 Other operating income 1,468 (755) 713 -------- -------- -------- Total operating income 26,007 2,850 28,857 Loan impairment charges and other credit risk provisions (3,518) 67 (3,451) Net insurance claims incurred and movement in policyholder liabilities - (2,810) (2,810) -------- -------- -------- Net operating income 22,489 107 22,596 Employee compensation and benefits (7,448) (201) (7,649) General and administrative expenses (5,153) 4 (5,149) Depreciation of property, plant and equipment (870) (62) (932) Amortisation of intangible assets and impairment of goodwill (947) 754 (193) -------- -------- -------- Total operating expenses (14,418) 495 (13,923) -------- -------- -------- Operating profit 8,071 602 8,673 Share of profit in associates and joint ventures 169 (19) 150 -------- -------- -------- Profit before tax 8,240 583 8,823 Tax expense (2,139) (33) (2,172) -------- -------- -------- Profit for the period 6,101 550 6,651 Profit attributable to minority interests (607) (66) (673) -------- -------- -------- Profit attributable to shareholders 5,494 484 5,978 -------- -------- -------- Consolidated statement of recognised income and expense for the half-year to 31 December 2004 Effect of UK GAAP transition IFRS format to IFRS IFRS US$m US$m US$m Unrealised surplus on revaluation of investment properties 34 (34) - Unrealised surplus on revaluation of land and buildings (excluding investment properties) 375 (375) - Exchange translation differences 4,193 (54) 4,139 Actuarial loss on retirement benefits - (364) (364) -------- -------- -------- Net income recognised directly in equity 4,602 (827) 3,775 Profit for the period 6,101 550 6,651 -------- -------- -------- Total recognised income for the period 10,703 (277) 10,426 -------- -------- -------- Attributable to minority interests 1,258 20 1,278 Attributable to shareholders 9,445 (297) 9,148 -------- -------- -------- 10,703 (277) 10,426 -------- -------- -------- Consolidated income statement for the half-year to 30 June 2004 Effect of UK GAAP transition IFRS format to IFRS IFRS US$m US$m US$m Interest income 23,478 138 23,616 Interest expense (8,372) (114) (8,486) -------- -------- -------- Net interest income 15,106 24 15,130 -------- -------- -------- Fee income 7,716 (84) 7,632 Fee expense (1,352) (70) (1,422) -------- -------- -------- Net fee income 6,364 (154) 6,210 Trading income 1,383 17 1,400 Net investment income on assets backing policyholder liabilities - 194 194 Gains less losses from financial investments 333 (3) 330 Dividend income 329 10 339 Net earned insurance premiums - 2,464 2,464 Other operating income 1,867 (765) 1,102 -------- -------- -------- Total operating income 25,382 1,787 27,169 Loan impairment charges and other credit risk provisions (2,834) 94 (2,740) Net insurance claims incurred and movement in policyholderRelated Shares:
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