Annual Financial Report - Part 8

 Financial statements

The financial statements provide detailed information and notes on our income, balance sheet, cash flows and changes in equity, alongside a report from our independent auditors.

298 Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc

308 Financial statements

318 Notes on the financial statements

Making our cards more sustainable and accessible

We are ending single-use plastic in our payment cards. By the end of 2026, the approximately 23 million cards we issue each year will be made from recycled PVC plastic. This action is expected to reduce CO2 emissions by 161 tonnes and save 73 tonnes of plastic waste per year as part of our net zero strategy. We rolled out recycled PVC cards for 13 markets in 2021, issuing them for customers needing new or replacement cards.

Report on the audit of the financial statements

 Opinion

In our opinion, HSBC Holdings plc's group financial statements1 and company financial statements (the 'financial statements'):

• give a true and fair view of the state of the group's and of the company's affairs as at 31 December 2021 and of the group's and company's profit and the group's and company's cash flows for the year then ended;

• have been properly prepared in accordance with UK-adopted international accounting standards; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

Our opinion is consistent with our reporting to the Group Audit Committee ('GAC').

Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union

As explained in note 1.1(a) to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

In our opinion, the group and company financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Separate opinion in relation to IFRSs as issued by the IASB

As explained in note 1.1(a) to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB').

In our opinion, the group and company financial statements have been properly prepared in accordance with IFRSs as issued by the IASB.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)'), International Standards on Auditing issued by the International Auditing and Assurance Standards Board ('ISAs') and applicable law. Our responsibilities under ISAs (UK) and ISAs are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

During the period, we identified that PricewaterhouseCoopers provided an impermissible training service via a publicly available seminar in respect of the implementation of a new Indonesian IT security regulation. The attendees at this seminar included six members of staff from HSBC Indonesia. The HSBC staff who attended the course were not from the Finance function and were not in roles relevant to our audit. In addition, HSBC Indonesia is not within the scope of the group audit. We confirm that based on our assessment of the breach, nature and scope of the service and our communication with the GAC, that the provision of this service has not compromised our professional judgement or integrity and as such believe that an objective, reasonable and informed third party in possession of these facts would conclude that our integrity and objectivity has not been impaired and accordingly we remain independent for the purposes of the audit.

Other than the matter referred to above, to the best of our knowledge, we declare that no other non-audit services prohibited by the FRC's Ethical Standard were provided to the company or its controlled undertakings in the period under audit.

Other than those disclosed in Note 6, we have provided no non-audit services to the company or its controlled undertakings in the period under audit.

Our audit approach

Overview

Audit scope

• This was the third year that it has been my responsibility to form this opinion on behalf of PricewaterhouseCoopers LLP ('PwC'), who you first appointed on 31 March 2015 in relation to that year's audit. In addition to forming this opinion, in this report we have also provided information on how we approached the audit, how it changed from the previous year and details of the significant discussions that we had with the GAC.

1 We have audited the financial statements, included within the Annual Report and Accounts 2021 (the 'Annual Report'), which comprise: the consolidated and company balance sheets as at 31 December 2021, the consolidated and company income statements and the consolidated and company statements of comprehensive income for the year then ended, the consolidated and company statements of cash flows for the year then ended, the consolidated and company statements of changes in equity for the year then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain notes to the financial statements have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as '(Audited)'. The relevant disclosures are included in the Risk review section on pages 127 to 216 and the Directors' remuneration report disclosures on pages 268 to 276.

Key audit matters

• Expected credit losses - Impairment of loans and advances (group)

• Investment in associate - Bank of Communications Co., Ltd ('BoCom') (group)

• Impairment of investments in subsidiaries (parent)

• Valuation of defined benefit pensions obligations (group)

Materiality

• Overall group materiality: US$970m (2020: US$900m) based on 5% of adjusted profit before tax.

• Overall company materiality: US$920m (2020: US$855m) based on 0.75% of total assets. This would result in an overall materiality of US$2bn and was therefore reduced below the group materiality.

• Performance materiality: US$725m (2020: US$675m) (group) and US$690m (2020: US$641m) (company).

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.

Key audit matters

Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

Compared to last year the number of key audit matters has reduced from eight to four. The following are no longer considered to be key audit matters.

• Impact of Covid-19 (group and company) - Given the impact of Covid-19 on working practices and international travel, the majority of our interactions continued to be undertaken virtually, including those with the partners and teams for Significant Subsidiaries and operations centres, and with HSBC Board members and management. Similarly, a substantial part of our audit testing was performed remotely. We used established practices throughout 2021 for interacting and undertaking our audit testing virtually, consistent with the hybrid working models at both PwC network teams and HSBC.

• IT access management (group) - Management has remediated a number of the control deficiencies in relation to IT access management.

• Valuation of financial instruments (group) - The financial instruments where significant pricing inputs are unobservable, the most material of which are the private equity investments held by Global Banking and Markets and the Insurance business, experienced reduced market volatility during the year that impacted the determination of the fair value.

• Impairment of goodwill and intangible assets (group) - The risk of impairment at the period end is reduced due to the significant surplus between the recoverable amounts and the carrying value for the goodwill and intangible asset balances at the year end, after the full impairment recognised for the WPB LatAm goodwill in 2021.

The remaining four key audit matters are consistent with last year.

How we tailored the audit scope

We performed a risk assessment, giving consideration to relevant external and internal factors, including Covid-19, climate change, geopolitical and economic risks, relevant accounting and regulatory developments, HSBC's strategy and the changes taking place across the group. We also considered our knowledge and experience obtained in prior year audits. As part of considering the impact of climate change in our risk assessment, we evaluated management's assessment of the impact of climate risk, which is set out on page 45, including their conclusion that there is no material impact on the financial statements. In particular, we considered management's assessment of the impact on ECL on loans and advances to customers, the financial statement line item we determined to be most likely to be impacted by climate risk. Management's assessment gave consideration to a number of matters, including the climate stress testing performed in 2021.

Using our risk assessment, we tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. We continually assessed risks and changed the scope of our audit where necessary.

Our risk assessment and scoping identified certain entities (collectively the Significant Subsidiaries) for which we obtained audit opinions. We obtained full scope audit opinions for the consolidated financial position and performance of Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, and HSBC North America Holdings Limited. We also obtained full scope audit opinions for the company financial position and performance of HSBC UK Bank plc, HSBC Bank Canada and HSBC Mexico S.A. We obtained audit opinions over specific balances for HSBC Bank Middle East Limited - UAE Operations. The audits for HSBC Bank plc and HSBC UK Bank plc were performed by other PwC teams in the UK. All other audits were performed by other PwC network firms.

We continued with our approach for rotating certain smaller locations in and out of scope over a number of reporting periods. These locations, which are subject to local external audits, are individually relatively small compared to the group. Notwithstanding their size, the rotational approach is designed to ensure that over time these locations are subject to audit work as part of the group audit. HSBC Bank Malaysia was removed from the scope of The Hongkong and Shanghai Banking Corporation Limited audit for 2021 and India was included.

Group-wide audit approach

HSBC has entity level controls that have a pervasive influence across the group, as well as other global and regional governance and controls over aspects of financial reporting, such as those operated by the Global Risk function for expected credit losses. A significant amount of IT and operational processes and controls relevant to financial reporting are undertaken in operations centres run by Digital Business Services ('DBS') across different locations. Financial reporting processes and controls are performed centrally in HSBC's Group Finance function and the four Finance operations centres, including the impairment assessment of goodwill and intangible assets, the consolidation of the group's results, the preparation of the financial statements, and management's oversight controls relevant to the group's financial reporting.

For these areas, we either performed audit work ourselves, or directed and provided oversight of the audit work performed by PwC teams in the UK, Poland, China, Sri Lanka, Malaysia, India and the Philippines. A substantial part of our audit testing in these locations was performed remotely. Some of this work was relied upon by the PwC teams auditing the Significant Subsidiaries. This audit work, together with analytical review procedures and assessing the outcome of local external audits, also mitigated the risk of material misstatement for balances in entities that were not part of a Significant Subsidiary.

Significant Subsidiaries audit approach

We asked the partners and teams reporting to us on the Significant Subsidiaries to work to assigned materiality levels reflecting the size of the operations they audited. The performance materiality levels ranged from US$48m to US$690m. Certain Significant Subsidiaries were audited to a local statutory audit materiality that was less than our overall group materiality.

We designed global audit approaches for the products and services that substantially make up HSBC's global businesses, such as lending, deposits and derivatives. These approaches were provided to the partners and teams performing audit testing for the Significant Subsidiaries.

We were in active dialogue throughout the year with the partners and teams responsible for the audits of the Significant Subsidiaries, including consideration of how they planned and performed their work. We attended Audit Committee meetings for some of the Significant Subsidiaries. We also attended meetings with management in each of these Significant Subsidiaries at the year-end. Given the impact of Covid-19 on working practices and international travel, the majority of our interactions continued to be undertaken virtually.

The audit of The Hongkong and Shanghai Banking Corporation Limited in Hong Kong relied upon work performed by other teams in Hong Kong and the PwC network firms in India, mainland China and Singapore. Similarly, the audit of HSBC Bank plc in the UK relied upon work performed by other teams in the UK and the PwC network firms in France and Germany. We considered how the audit partners and teams for the Significant Subsidiaries instructed and provided oversight to the work performed in these locations. Collectively, Significant Subsidiaries covered 85% of total assets and 75% of total operating income.

Using the work of others

We continued to make use of evidence provided by others. This included testing of controls performed by Global Internal Audit and management themselves in some low risk areas. We used the work of PwC experts, for example, economic experts for our work around the severity and probability weighting of macroeconomic variables used as part of the expected credit loss allowance and actuaries on the estimates used in determining pension liabilities. An increasing number of controls are operated on behalf of HSBC by third parties. We obtained audit evidence from work that is scoped and provided by other auditors that are engaged by those third parties. For example, we obtained a report evidencing the testing of external systems and controls supporting HSBC's payroll and HR processes.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to US$725m for the group financial statements and US$690m for the company financial statements.

In determining the performance materiality, we considered a number of factors, including the history of misstatements, our risk assessment and aggregation risk, and the effectiveness of controls. We concluded that an amount at the upper end of our normal range was appropriate.

We agreed with the GAC that we would report to them misstatements identified during our audit above US$48m (group audit) (2020: US$45m) and US$48m (company audit) (2020: US$45m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.

 Conclusions relating to going concern

Our evaluation of the directors' assessment of the group's and the company's ability to continue to adopt the going concern basis of accounting included:

• Performing a risk assessment to identify factors that could impact the going concern basis of accounting, including the impact of external risks including geopolitical, Covid-19 and climate change risks.

• Understanding and evaluating the group's financial forecasts and the group's stress testing of liquidity and regulatory capital, including the severity of the stress scenarios that were used.

• Understanding and evaluating credit rating agency ratings and actions.

• Reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's and the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the company's ability to continue as a going concern.

In relation to the directors' reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information, which includes reporting based on the Task Force on Climate-related Financial Disclosures ('TCFD') recommendations. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information, including the TCFD reporting and other information related to climate change, is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Strategic report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.

Strategic Report and Report of the Directors'

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Report of the Directors' for the year ended 31 December 2021 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.

In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Report of the Directors'.

Directors' Remuneration

In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

 Corporate governance statement

The Listing Rules require us to review the directors' statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to:

• The directors' confirmation that they have carried out an assessment of the emerging and principal risks;

• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated;

• The directors' statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the group's and company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;

• The directors' explanation as to their assessment of the group's and company's prospects, the period this assessment covers and why the period is appropriate; and

• The directors' statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Our review of the directors' statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the group and company and their environment obtained in the course of the audit.

In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:

• The directors' statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the group's and company's position, performance, business model and strategy;

• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and

• The section of the Annual Report describing the work of the GAC.

We have nothing to report in respect of our responsibility to report when the directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.

Responsibilities for the financial statements and the audit

Responsibilities of the directors for the financial statements

As explained more fully in the Directors' responsibility statement, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group's and the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.

Auditors' responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.

Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of financial crime laws and regulations and regulatory compliance, including regulatory reporting requirements and conduct of business, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce costs, creating fictitious trades to hide losses or to improve financial performance, and management bias in accounting estimates. The group engagement team shared this risk assessment with the Significant Subsidiaries auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included:

• Review of correspondence with and reports from the regulators, including the Prudential Regulation Authority ('PRA') and Financial Conduct Authority ('FCA');

• Reviewed reporting to the GAC and GRC in respect of compliance and legal matters;

• Review a sample of legal correspondence with legal advisors;

• Enquiries of management and review of internal audit reports, insofar as they related to the financial statements;

• Obtain legal confirmations from legal advisors relating to material litigation and compliance matters;

• Assessment of matters reported on the group's whistleblowing programmes and the results of management's investigation of such matters; insofar as they related to the financial statements.

• Challenging assumptions and judgements made by management in its significant accounting estimates, in particular in relation to the determination of expected credit losses, the impairment assessments of the investment in BoCom, valuation of defined benefit pensions obligations and investment in subsidiaries (see related key audit matters);

• Obtaining confirmations from third parties to confirm the existence of a sample of transactions and balances; and

• Identifying and testing journal entries, including those posted with certain descriptions, posted and approved by the same individual, backdated journals or posted by infrequent and unexpected users.

There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.

Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.

A further description of our responsibilities for the audit of the financial statements in accordance with ISAs (UK) is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's and company's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's and company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group and company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group and company audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Use of this report

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting

 Companies Act 2006 exception reporting

Under the Companies Act 2006 we are required to report to you if, in our opinion:

• we have not obtained all the information and explanations we require for our audit; or

• adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or

• certain disclosures of directors' remuneration specified by law are not made; or

• the company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

 Appointment

Following the recommendation of the GAC, we were appointed by the members on 31 March 2015 to audit the financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement is seven years, covering the years ended 31 December 2015 to 31 December 2021.

 Other matter

As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard ('ESEF RTS'). This auditors' report provides no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.

Scott Berryman (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

London

22 February 2022

* For Notes on the financial statements, see page 318.

1 Interest income includes $30,916m (2020: $35,293m) of interest recognised on financial assets measured at amortised cost and $4,337m (2020: $5,614m) of interest recognised on financial assets measured at fair value through other comprehensive income.

2 Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income.

3 Interest expense includes $8,227m (2020: $12,426m) of interest on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value.

4 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

5 Includes depreciation of the right-of-use assets of $878m (2020: $1,029m).

* For Notes on the financial statements, see page 318.

The accompanying notes on pages 318 to 396 and the audited sections in 'Risk' on pages 120 to 216 (including 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 144 to 152), and 'Directors' remuneration report' on pages 254 to 287 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 February 2022 and signed on its behalf by:

Interest received was $40,175m (2020: $45,578m; 2019: $58,627m), interest paid was $12,695m (2020: $17,740m; 2019: $27,384m) and dividends received (excluding dividends received from associates, which are presented separately above) were $1,898m (2020: $1,158m; 2019: $2,369m).

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 Subordinated liabilities changes during the year are attributable to repayments of $(0.9)bn (2020: $(3.5)bn; 2019: $(4.2)bn) of securities. Non-cash changes during the year included foreign exchange gains/(losses) of $(0.3)bn (2020: $0.5bn; 2019: $0.6bn) and fair value gains/(losses) of $(1.0)bn (2020: $1.1bn; 2019: $1.4bn).

3 At 31 December 2021 $33,634m (2020: $41,912m; 2019: $35,735m) was not available for use by HSBC, of which $15,357m (2020: $16,935m; 2019: $19,353m) related to mandatory deposits at central banks.

1 During 2021, HSBC Holdings issued $2,000m of additional tier 1 instruments on which there were $4m of external issue costs. In 2020, HSBC Holdings issued $1,500m of perpetual subordinated contingent convertible capital securities.

2 During 2021, HSBC Holdings redeemed $2,000m 6.875% perpetual subordinated contingent convertible capital securities. For further details, see Note 31 in the Annual Report and Accounts 2021. In 2020, HSBC Holdings called and later redeemed $1,450m 6.20% non-cumulative US dollar preference shares. In 2019, HSBC Holdings redeemed $1,500m 5.625% perpetual subordinated capital securities on which there were $12m of external issuance costs. Under IFRSs external issuance costs are classified as equity.

3 At 31 December 2021, retained earnings included 558,397,704 treasury shares (2020: 509,825,249; 2019: 432,108,782). 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 and Security Services.

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 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 Continental Europe 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 Continental Europe 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.

6 Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. In the comparative periods, impairments (2020: $435m; 2019: $2,475m) were recognised and a permitted transfer of these amounts was made from the merger reserve to retained earnings. During 2021, a part reversal of these impairments resulted in a transfer from retained earnings back to the merger reserve of $3,065m.

7 For further details, see Note 31 in the Annual Report and Accounts 2021. In October 2021, HSBC announced a share buy-back of up to $2.0bn, which will be completed no later than April 2022. At 31 December 2021, 120,366,714 ordinary shares had been purchased and cancelled representing a nominal value of $60m, which has been transferred from share capital to capital redemption reserve within merger and other reserves. In August 2019, HSBC announced a share buy-back of up to $1.0bn, which was completed in September 2019.

* For Notes on the financial statements, see page 318.

1 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

* For Notes on the financial statements, see page 318. 

The accompanying notes on pages 318 to 396 and the audited sections in 'Risk' on pages 120 to 216 (including 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 144 to 152), and 'Directors' remuneration report' on pages 254 to 287 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 February 2022 and signed on its behalf by:

Interest received was $1,636m (2020: $1,952m; 2019: $2,216m), interest paid was $2,724m (2020: $3,166m; 2019: $3,819m) and dividends received were $11,404m (2020: $8,156m; 2019: $15,117m).