HSBC Holdings Regulatory News (HSBA)

6 Mar 2006 08:15

HSBC Holdings PLC06 March 2006 From 1 January 2004 to 31 December 2004 Loans were designated as non-performing as soon as management had doubts as tothe ultimate collectibility of principal or interest or when contractualpayments of principal or interest were 90 days overdue. When a loan wasdesignated as non-performing, interest was suspended (see below) and a specificprovision raised if required. However, the suspension of interest could be exceptionally deferred for up to 12 months in the following situations: - where cash collateral was held covering the total of principal and interest due and a legal right of set-off existed; or - where the value of net realisable tangible security was considered more than sufficient to cover the full repayment of all principal and interest due and credit approval had been given to the rolling-up or capitalisation of interest payments. There were two basic types of provision, specific and general, each of which wasconsidered in terms of the charge and the amount outstanding. Specific provisions Specific provisions represented the quantification of actual and expected lossesfrom identified accounts and were deducted from loans and advances in thebalance sheet. Other than where provisions on smaller balance homogenous loans were assessed ona portfolio basis, the amount of specific provision raised was assessed on acase by case basis. The amount of specific provision raised was the group'sconservative estimate of the amount needed to reduce the carrying value of theasset to the expected ultimate net realisable value, and in reaching a decisionconsideration was given, among other things, to the following factors: - the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the loan within an acceptable period and the extent of the group's other commitments to the same customer; - the realisable value of any security for the loan; - the costs associated with obtaining repayment and realisation of the security; - if loans were not in the local currency, the ability of the borrower to obtain the relevant foreign currency; and - the expected timeframe over which repayment would be made. Where specific provisions were raised on a portfolio basis, the level ofprovisioning took into account management's assessment of the portfolio'sstructure, past and expected credit losses, business and economic conditions,and any other relevant factors. The principal portfolios evaluated on this basiswere credit cards and other consumer lending products. General provisions General provisions augmented specific provisions and provided cover for loanswhich were impaired at the balance sheet date but which would not be identifiedas such until some time in the future. The group maintained a general provisionwhich was determined by taking into account the structure and riskcharacteristics of the loan portfolio. Historical levels of latent risk wereregularly reviewed to determine that the level of general provisioning continuedto be appropriate. Where entities of the group operated in a significantlyhigher risk environment, an increased level of general provisioning was appliedtaking into account local market conditions and economic and political factors.General provisions were deducted from loans and advances to customers in thebalance sheet. Loans on which interest was being suspended Provided that there was a realistic prospect of interest being paid at somefuture date, interest on non-performing loans was charged to the customer'saccount. However, the interest was not credited to the income statement but toan interest suspense account in the balance sheet which was netted against therelevant loan. On receipt of cash (other than from the realisation of security),suspended interest was recovered and taken to the income statement. Amountsreceived from the realisation of security were applied to the repayment ofoutstanding indebtedness, with any surplus used to release any specificprovisions and then suspended interest. Non-accrual loans Where the probability of receiving interest payments was remote, interest was nolonger accrued and any suspended interest balance was written off. Loans were not reclassified as accruing until interest and principal paymentswere up-to-date and future payments were reasonably assured. Loans and suspended interest were written off, either partially or in full, whenthere was no prospect of recovery of these amounts. Assets acquired in exchange for advances in order to achieve an orderlyrealisation continued to be reported as advances. The asset acquired wasrecorded at the carrying value of the advance disposed of at the date of theexchange, and provisions were based on any subsequent deterioration in itsvalue. e Trading assets and trading liabilities From 1 January 2005 Treasury bills, debt securities, structured deposits, equity shares, own debtissued and short positions in securities which have been acquired or incurredprincipally for the purpose of selling or repurchasing in the near term, or are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking, are classified as held-for-trading. Such financial assets or financial liabilities are recognised initially at fair value, with transaction costs taken to the income statement, and are subsequently remeasured at fair value. All subsequent gains and losses from changes in the fair value of these assets and liabilities, together with related interest income and expense and dividends, are recognised in the income statement within 'Net trading income' as they arise. Financial assets and financial liabilities are recognised using trade date accounting. From 1 January 2004 to 31 December 2004 Treasury bills, debt securities, equity shares and short positions in securitiesheld for dealing purposes were included in 'Cash and short-term funds', 'Tradingassets' or 'Trading liabilities' in the balance sheet at market value. Changesin the clean market value of such assets and liabilities were recognised in theincome statement as 'Net trading income' as they arose. Related interest incomeand expense and dividends were recognised in 'Net interest income' and 'Dividendincome' respectively. f Financial instruments designated at fair value From 1 January 2005 A financial instrument, other than one held for trading, is classified in thiscategory if it meets the criteria set out below, and is so designated bymanagement. Financial assets and financial liabilities so designated are recognisedinitially at fair value, with transaction costs taken directly to the incomestatement, and are subsequently remeasured at fair value. This designation, oncemade, is irrevocable in respect of the financial instruments to which it ismade. Financial assets and financial liabilities are recognised using trade dateaccounting. Gains and losses from changes in the fair value of such assets and liabilitiesare recognised in the income statement as they arise, together with relatedinterest income and expense and dividends, within 'Net income from financialinstruments designated at fair value'. Gains and losses arising from the changes in fair value of derivatives that aremanaged in conjunction with financial assets or financial liabilities designatedat fair value are included in 'Net income from financial instruments designatedat fair value'. Where issued debt has been designated at fair value, and there is a relatedderivative, then the interest components of the debt and the derivative arerecognised in 'Interest expense'. The group may designate financial instruments at fair value where thedesignation: - eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial assets or financial liabilities or recognising the gains and losses on them on different bases; examples include unit-linked investment contracts, financial assets held to back certain insurance contracts, and certain portfolios of securities and debt issuances that are managed in conjunction with financial assets or liabilities measured on a fair value basis; or - applies to a group of financial assets, financial liabilities, or both, that is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and where information about that group of financial instruments is provided internally on that basis to key management personnel; examples include financial assets held to back certain insurance contracts and certain asset-backed securities; or - relates to financial instruments containing one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments, and which would otherwise be accounted for separately; examples include certain debt issuances and debt securities held. From 1 January 2004 to 31 December 2004 The category, 'Financial instruments designated at fair value' was introduced on1 January 2005 in accordance with HKAS 39. g Financial investments From 1 January 2005 Available-for-sale securities Treasury bills, debt securities and equity shares intended to be held on acontinuing basis are classified as available-for-sale securities unless theyhave been designated at fair value (see Note (f) above) or they are classifiedas held-to-maturity (see below). Available-for-sale securities are initiallymeasured at fair value (which is usually the same as the consideration paid)plus direct and incremental transaction costs. They are subsequently remeasuredat fair value. Changes in fair value are recognised in equity until the securities are eithersold or impaired. On the sale of available-for-sale securities, cumulative gainsor losses previously recognised in equity are recognised through the incomestatement and classified as 'Gains less losses from financial investments'. An assessment is made at each balance sheet date as to whether there is anyobjective evidence of impairment, i.e. circumstances where an adverse impact onestimated future cash flows of the financial asset or group of assets can bereliably estimated. If an available-for-sale security is determined to be impaired, the cumulativeloss (measured as the difference between the acquisition cost and the currentfair value, less any impairment loss on that financial asset previouslyrecognised in the income statement) is removed from equity and recognised in theincome statement. If, in a subsequent period, the fair value of a debtinstrument classified as available-for-sale increases and the increase can beobjectively related to an event occurring after the impairment loss wasrecognised in the income statement, the impairment loss is reversed through theincome statement. Impairment losses on equity instruments previously recognisedin the income statement that are no longer required are reversed throughreserves, not through the income statement. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturities that the group has the positiveintention and ability to hold until maturity. Held-to-maturity investments areinitially recorded at fair value plus any directly attributable transactioncosts, and are subsequently measured at amortised cost using the effectiveinterest rate method, less any impairment losses. On 1 January 2005, the group has re-designated certain debt securitiespreviously described as 'Long-term held-to-maturity investments' as'available-for-sale securities' following the implementation of HKAS 39. Financial investments are recognised using trade date accounting. From 1 January 2004 to 31 December 2004 Treasury bills, debt securities and equity shares were accounted for inaccordance with HK SSAP 24. Treasury bills and debt securities intended to be held on a continuing basiswere classified as 'Financial investments' and included in the balance sheet atcost, adjusted for amortisation of premium and discount on acquisition lessprovision for permanent diminution in value. Any gain or loss on realisation ofthese securities was recognised in the income statement as it arose and includedin 'Gains less losses from financial investments'. Equity shares intended to be held on a continuing basis were classified as'Financial investments' and included in the balance sheet at fair value. Gainsand losses arising from changes in fair value were accounted for as movements inthe 'Long-term equity investment revaluation reserve'. When an investment wasdisposed of, the cumulative profit or loss, including any amounts previouslyrecognised in the long-term equity investment revaluation reserve, was includedin the income statement for the year in 'Gains less losses from financialinvestments'. h Determination of fair value For trading instruments, available-for-sale securities and financial instrumentsdesignated at fair value that are quoted in active markets, fair values aredetermined by reference to the current quoted bid/offer price. Where independentprices are not available, fair values may be determined using valuationtechniques with reference to observable market data. These include comparison tosimilar instruments where market observable prices exist, discounted cash flowanalysis, option pricing models and other valuation techniques commonly used bymarket participants. The use of a valuation technique takes account of a number of factors asappropriate. These factors include adjustments for bid-offer spread, creditfactors, and servicing costs of portfolios. i Sale and repurchase agreements (including stock lending and borrowing) Where securities are sold subject to a commitment to repurchase them at apredetermined price ('repos') they remain on the balance sheet and a liabilityis recorded in respect of the consideration received. Conversely, securitiespurchased under commitments to sell ('reverse repos') are not recognised on thebalance sheet and the consideration paid is recorded in 'Cash and short termfunds', 'Placings with banks maturing after one month', or 'Advances tocustomers' as appropriate. The difference between the sale and repurchase price is treated as interest andrecognised over the life of the agreement. Securities lending and borrowing transactions are generally entered into on acollateralised basis, with securities or cash advanced or received ascollateral. The transfer of the securities to counterparties is not normallyreflected on the balance sheet. If cash collateral is advanced or received, anasset or liability is recorded at the amount of cash collateral advanced orreceived. Securities borrowed are not recognised on the balance sheet, unless they aresold to third parties, in which case the obligation to return the securities isrecorded as a trading liability and measured at fair value and any gains orlosses are included in 'Net trading income'. j Derivative financial instruments and hedge accounting From 1 January 2005 Derivatives are initially recognised at fair value from the date a derivativecontract is entered into and are subsequently re-measured at their fair value ateach reporting date. Fair values are obtained from quoted market prices in active markets, or byusing valuation techniques, including recent market transactions, where anactive market does not exist. Valuation techniques include discounted cash flowmodels and option pricing models as appropriate. All derivatives are classifiedas assets when their fair value is positive, or as liabilities when their fairvalue is negative. In the normal course of business, the fair value of a derivative on initialrecognition is considered to be the transaction price (i.e. the fair value ofthe consideration given or received). However, in certain circumstances the fairvalue of an instrument will be evidenced by comparison with other observablecurrent market transactions in the same instrument (i.e. without modification orrepackaging) or based on a valuation technique whose variables include only datafrom observable markets, including interest rate yield curves, optionvolatilities and currency rates. When such evidence exists and results in avalue which is different from the transaction price, the group recognises atrading profit or loss on inception of the derivative. If observable market dataare not available, the initial change in fair value indicated by the valuationmodel, but based on unobservable inputs, is not recognised immediately in theincome statement but is recognised over the life of the transaction on anappropriate basis, or recognised in the income statement when the inputs becomeobservable, or when the transaction matures or is closed out. Certain derivatives embedded in other financial instruments, such as theconversion option in a convertible bond, are treated as separate derivativeswhen their economic characteristics and risks are not clearly and closelyrelated to those of the host contract, the terms of the embedded derivative arethe same as those of a stand-alone derivative, and the combined contract is notdesignated at fair value through profit and loss. These embedded derivatives aremeasured at fair value with changes in fair value recognised in the incomestatement. Derivative assets and liabilities on different transactions are only netted ifthe transactions are with the same counterparty, a legal right of set-offexists, and the cash flows are intended to be settled on a net basis. The method of recognising the resulting fair value gains or losses depends onwhether the derivative is held for trading, or is designated as a hedginginstrument, and if so, the nature of the risk being hedged. All gains and lossesfrom changes in the fair value of derivatives held for trading are recognised inthe income statement. Where derivatives are designated and highly effective ashedges, the group classifies them as either: (i) hedges of the change in fairvalue of recognised assets or liabilities or firm commitments ('fair valuehedge'); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ('cash flow hedge'); or (iii) hedges of net investments in a foreign operation('net investment hedge'). Hedge accounting is applied to derivatives designatedas hedging instruments in a fair value, cashflow or net investment hedge provided certain criteria are met. Hedge accounting It is the group's policy to document, at the inception of a hedgingrelationship, the relationship between the hedging instruments and hedged items,as well as its risk management objective and strategy for undertaking the hedge.Such policies also require documentation of the assessment, both at hedgeinception and on an ongoing basis, of whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in fair valuesor cash flows of hedged items attributable to the hedged risks. Interest ondesignated qualifying hedges is included in 'Net interest income'. Fair value hedge Changes in the fair value of derivatives (net of interest accrual) that aredesignated and qualify as fair value hedging instruments are recorded as 'Nettrading income' in the income statement, together with changes in the fair valueof the asset or liability that are attributable to the hedged risk. If the hedging relationship no longer meets the criteria for hedge accounting,the cumulative adjustment to the carrying amount of a hedged item for which theeffective interest method is used is amortised to the income statement over theresidual period to maturity in net interest income. Where the adjustment relatesto the carrying amount of a hedged available-for-sale equity security, thisremains in equity until the disposal of the equity security. Cash flow hedge The effective portion of changes in the fair value of derivatives (net ofinterest accrual) that are designated and qualify as cash flow hedges isrecognised in shareholders' equity. Any gain or loss relating to an ineffectiveportion is recognised immediately in the income statement within 'Net tradingincome' along with accrued interest. Amounts accumulated in shareholders' equity are recycled to the income statementin the periods in which the hedged item will affect profit or loss. However,when the forecast transaction that is hedged results in the recognition of anon-financial asset or a non-financial liability, the gains and lossespreviously deferred in equity are transferred from shareholders' equity andincluded in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing inshareholders' equity at that time remains in shareholders' equity until theforecast transaction is ultimately recognised in the income statement. When aforecast transaction is no longer expected to occur, the cumulative gain or lossthat was reported in shareholders' equity is immediately transferred to theincome statement. Net investment hedge Hedges of net investments in foreign operations are accounted for similarly tocash flow hedges. Any gain or loss on the hedging instrument relating to theeffective portion of the hedge is recognised in shareholders' equity; the gainor loss relating to the ineffective portion is recognised immediately in theincome statement. Gains and losses accumulated in equity are included in theincome statement when the foreign operation is disposed of. Hedge effectiveness testing To qualify for hedge accounting, HKAS 39 requires that at the inception of thehedge and throughout its life, each hedge must be expected to be highlyeffective (prospective effectiveness). Actual effectiveness (retrospectiveeffectiveness) must also be demonstrated on an ongoing basis. The documentation of each hedging relationship sets out how the effectiveness ofthe hedge is assessed. The method adopted for assessing hedge effectiveness willdepend on the risk management strategy. For fair value hedge relationships, the cumulative dollar offset method orregression analysis are used to test hedge effectiveness. For cash flow hedgerelationships, effectiveness is tested by applying the change in variable cashflow method or the cumulative dollar offset method using the hypotheticalderivative approach. For prospective effectiveness, the hedging instrument must be expected to behighly effective in achieving offsetting changes in fair value or cash flowsattributable to the hedged risk during the period for which the hedge isdesignated. For actual effectiveness, the changes in fair value or cash flows must offseteach other. The group considers that a hedge is highly effective when the offsetis within the range of 80 per cent to 125 per cent. Derivatives that do not qualify for hedge accounting All gains and losses from changes in the fair value of any derivative instrumentthat does not qualify for hedge accounting under HKAS 39 are recognisedimmediately in the income statement and reported in 'Net trading income', exceptwhere derivative contracts are used with financial instruments designated atfair value, in which case gains and losses are reported in 'Net income fromfinancial instruments designated at fair value'. From 1 January 2004 to 31 December 2004 Derivative financial instruments comprised futures, forward, swap and optiontransactions undertaken by the group in the foreign exchange, interest rate,equity, credit derivative, and commodity markets. Netting was applied where alegal right of set-off existed. Accounting for these instruments was dependent upon whether the transactionswere undertaken for trading or non-trading purposes. Trading transactions Trading transactions included transactions undertaken for market-making, toservice customers' needs and for proprietary purposes, as well as any relatedhedges. Transactions undertaken for trading purposes were marked-to-market and the netpresent value of any gain or loss arising was recognised in the income statementas 'Net trading income', after appropriate deferrals for unearned credit marginsand future servicing costs. Derivative trading transactions were valued byreference to an independent liquid price where this was available. For thosetransactions where there were no readily available quoted prices, whichpredominantly related to over-the-counter transactions, market values weredetermined by reference to independently sourced rates, using valuation models.Adjustments were made for illiquid positions where appropriate. Assets, including gains, resulting from derivative exchange rate, interest rate,equity, credit derivative and commodity contracts which were marked-to-marketwere included in 'Derivatives' on the assets side of the balance sheet.Liabilities, including losses, resulting from such contracts, were included in'Derivatives' on the liabilities side of the balance sheet. Non-trading transactions Non-trading transactions, which were those undertaken for hedging purposes aspart of the group's risk management strategy against cash flows, assets,liabilities or positions, were measured on an accrual basis. Non-tradingtransactions included qualifying hedges and positions that synthetically alteredthe characteristics of specified financial instruments. Non-trading transactions were accounted for on an equivalent basis to theunderlying assets, liabilities or net positions. Any gain or loss was recognisedon the same basis as that arising from the related assets, liabilities orpositions. To qualify as a hedge, a derivative was required effectively to reduce theprice, foreign exchange or interest rate risk of the asset, liability oranticipated transaction to which it was linked and designated as a hedge atinception of the derivative contract. Accordingly, changes in the market valueof the derivative were required to be highly correlated with changes in themarket value of the underlying hedged item at inception of the hedge and overthe life of the hedge contract. If these criteria were met, the derivative wasaccounted for on the same basis as the underlying hedged item. Derivatives usedfor hedging purposes included swaps, forwards and futures. Interest rate swapswere also used to alter synthetically the interest rate characteristics offinancial instruments. In order to qualify for synthetic alteration, aderivative instrument had to be linked to specific individual, or pools ofsimilar, assets or liabilities by the notional principal and interest rate risksof the associated instruments, and had to achieve a result that was consistentwith defined risk management objectives. If these criteria were met,accrual-based accounting was applied, i.e. income or expense was recognised andaccrued to the next settlement date in accordance with the contractual terms ofthe agreement. Any gain or loss arising on the termination of a qualifying derivative wasdeferred and amortised to earnings over the original life of the terminatedcontract. Where the underlying asset, liability or position was sold orterminated, the qualifying derivative was immediately marked-to-market and anygain or loss arising was taken to the income statement. k Derecognition of financial assets and liabilities Financial assets are derecognised when the rights to receive cash flows from theassets have expired; or where the group has transferred its contractual rightsto receive the cash flows of the financial assets and has transferredsubstantially all the risks and rewards of ownership; or where both control andsubstantially all the risks and rewards are not retained. Financial liabilities are derecognised when they are extinguished, i.e. when theobligation is discharged or cancelled or expires. l Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in thebalance sheet when there is a legally enforceable right to offset the recognisedamounts and the group intends to settle on a net basis, or realise the asset andsettle the liability simultaneously. In 2004, netting was applied where a legalright of set-off existed. m Subsidiaries and associates Subsidiaries are companies in which the group, directly or indirectly, holdsmore than half of the issued share capital or controls more than half of thevoting power or controls the composition of the board of directors. Subsidiariesare controlled if the group has the power to govern their financial andoperating policies so as to obtain benefits from their activities. Subsidiariesare consolidated in the group's financial statements from the date on which thegroup obtains control until control ceases. Balances and transactions between entities that comprise the group, togetherwith unrealised gains and losses thereon, are eliminated in the consolidatedfinancial statements. Minority interests represent the portion of the profit orloss and net assets of subsidiaries attributable to equity interests in thosesubsidiaries that are not held by the group. Associates are entities over which the group has significant influence but notcontrol or joint control. Investments in associates in the consolidated balancesheet are stated at the group's attributable share of the net assets of theassociates using the equity method of accounting. 'Share of profit in associates' is stated in the income statement net of tax. n Goodwill and intangible assets (i) Goodwill arises on business combinations, including the acquisition of subsidiaries or associates, when the cost of acquisition exceeds the fair value of the group's share of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill on acquisitions of associates is included in 'Interests in associates'. Goodwill is tested for impairment annually by comparing the present value of the expected future cash flows from a business with the carrying value of its net assets, including attributable goodwill. Goodwill is allocated to cash-generating units for the purposes of impairment testing. Goodwill is tested for impairment at the lowest level at which it is monitored for internal management purposes. Goodwill is stated at cost less accumulated impairment losses which are charged to the income statement. Negative goodwill is recognised immediately in the income statement as it arises. At the date of disposal of a business, attributable goodwill is included in the group's share of the net assets in the calculation of the gain or loss on disposal. (ii) Intangible assets include the value of in-force long-term assurance business, computer software, trade names, customer relationships and core deposit relationships. Intangible assets that have an indefinite useful life, or are not yet ready for use, are tested for impairment annually. Intangible assets that have a finite useful life, except for the value of in-force long-term assurance business, are stated at cost less amortisation and accumulated impairment losses and are amortised over their estimated useful lives. Estimated useful life is the lower of legal duration and expected economic life. Intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount may not be recoverable. The accounting policy on the value of the in-force long-term assurance business is set out in Note (v) below. o Property, plant and equipment (i) Premises Premises held for own use, comprising freehold land and buildings, and leasehold land and buildings where the value of the land cannot be reliably separated from the value of the building at inception of the lease and the premises are not clearly held under an operating lease, are stated at valuation less accumulated depreciation and impairment losses. Such premises are revalued by professionally qualified valuers with sufficient regularity to ensure that the net carrying amount does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement to the extent of any deficits arising on revaluation previously charged to the income statement in respect of the same premises, and are thereafter taken to the 'Property revaluation reserve'. Deficits arising on revaluation are firstly set off against any previous revaluation surpluses included in the 'Property revaluation reserve' in respect of the same premises, and are thereafter taken to the income statement. Buildings held for own use which are situated on leasehold land where it is possible to reliably separate the value of the building from the value of the leasehold land at inception of the lease are stated at valuation less accumulated depreciation and impairment losses. Depreciation on premises is calculated to write off the assets over their estimated useful lives as follows: - freehold land is not depreciated;- leasehold land is depreciated over the unexpired terms of the leases; and- buildings and improvements thereto are depreciated at the greater of 2 per cent per annum on the straight line basis or over the unexpired terms of the leases or over the remaining useful lives of the buildings. (iii)Other plant and equipment Equipment, fixtures and fittings (including equipment on operating leases where the group is the lessor) are stated at cost less any impairment losses. Depreciation is calculated on a straight-line basis to write off the assets over their useful lives, which are generally between five and 20 years. (iv) Investment properties The group holds certain properties as investments to earn rentals, or for capital appreciation, or both. Investment properties are stated at fair value with changes in fair value being recognised in the income statement (in 'Other operating income') with effect from 1 January 2005. Previously, the change in the fair value of investment properties was recognised in the property revaluation reserve. The comparative income statement for 2004 has not been adjusted to reflect the revaluation of investment properties, as permitted by HKAS 40. Fair values are determined by independent professional valuers who apply recognised valuation techniques. Property, plant and equipment is subject to review for impairment if there are events or changes in circumstances that indicate that the carrying amount may not be recoverable. p Finance and operating leases (i) Assets leased to customers under agreements which transfer substantially all the risks and rewards associated with ownership, other than legal title, are classified as finance leases. Where the group is a lessor under finance leases the amounts due under the leases, after deduction of unearned charges, are included in 'Advances to customers' as appropriate. Finance income receivable is recognised over the periods of the leases so as to give a constant rate of return on the net investment in the leases. (ii) Where the group is a lessee under finance leases the leased assets are capitalised and included in 'Property, plant and equipment' and the corresponding liability to the lessor is included in 'Other liabilities'. The finance lease and corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of the minimum lease payments. Finance charges payable are recognised over the periods of the leases based on the interest rates implicit in the leases so as to give a constant rate of interest on the remaining balance of the liability. (iii)All other leases are classified as operating leases. Where the group is the lessor, the assets subject to the operating leases are included in 'Property, plant and equipment' and accounted for accordingly. Impairment losses are recognised to the extent that the carrying value of equipment is impaired through residual values not being fully recoverable. Where the group is the lessee, the leased assets are not recognised on the balance sheet. Rentals payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the leases and are included in 'General and administrative expenses' and 'Other operating income' respectively. (iv) There are no freehold interests in land in Hong Kong. Accordingly all such land is considered to be held under operating leases. Unless it qualifies for inclusion in 'Property, plant and equipment' (as described in Note (o) above), such land is included under 'Other assets' in the balance sheet and is stated at cost less amortisation and impairment losses. Amortisation is calculated to write off the cost of the land on a straight-line basis over the terms of the leases, which are generally between 20 and 999 years. q Income tax (i) Income tax for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in reserves, in which case it is recognised in reserves. (ii) Current tax is the expected tax payable on the taxable income for the year, calculated using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when the group intends to settle on a net basis and the legal right to set-off exists. (iii)Deferred tax is recognised on temporary differences between the carrying amount of assets and liabilities in the balance sheet and the amount attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply in the periods in which the assets will be realised or the liabilities settled. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group, relate to income taxes levied by the same taxation authority, and a legal right to set-off exists in the entity. Deferred tax relating to actuarial gains and losses arising from post-employment benefit plans which are recognised directly in equity, is also credited or charged directly to equity. This information is provided by RNS The company news service from the London Stock Exchange