HSBC Holdings Regulatory News (HSBA)

6 Mar 2006 08:15

HSBC Holdings PLC06 March 2006 Appendix Significant change in accounting policies Basis of preparation The Hong Kong Institute of Certified Public Accountants has issued a number ofnew and revised Hong Kong Financial Reporting Standards ('HKFRSs'), which is acollective term that includes all applicable individual Hong Kong FinancialReporting Standards, Hong Kong Accounting Standards and Interpretations. Theseare effective for accounting periods beginning on or after 1 January 2005. Hang Seng Bank Limited ('the bank') and its subsidiaries ('the group') haveadopted these new HKFRSs in the financial statements in 2005 resulting invarious changes in accounting policies. Comparative figures have been restated to conform with the new accountingpolicies except for those that apply to financial instruments in accordance withHKAS 39. The policies applied to financial instruments for 2004 and 2005 aredisclosed separately below. The tables attached disclose the adjustments that have been made, in accordancewith the transitional provisions of the respective HKFRSs, to each of the lineitems in the consolidated income statement for the year ended 31 December 2004(Table A) and in the consolidated balance sheet at 31 December 2004 and theopening balances at 1 January 2005 (Table B). Significant changes in principal accounting policies are listed as follows: HKFRS 2: Share-based payment ('HKFRS 2') The group made awards of, and granted options in respect of, shares of HSBCHoldings plc, as part of employees' compensation. In prior years, no compensation cost was recognised for share options granted atfair value or not more than 20 per cent discount to fair value. For share awardsmade to employees as part of their annual bonus, the cost for acquisition ofshares for the conditional award was charged to 'staff cost' over the period inrespect of which the performance condition applied. With effect from 1 January 2005, and in accordance with HKFRS 2, the group hasadopted a new policy for share-based payment. Under the new policy, where sharesare awarded to an employee of the group as bonuses with a vesting period, thecost of shares awarded is amortised over the vesting period from the date theshares are awarded. Shares purchased for such purpose are classified asavailable-for-sale and reported under 'Financial investments'. For share options, the compensation expense is spread over the vesting periodfrom the date they are granted. The compensation expense is determined byreference to the fair value of the options on grant date, and the impact of anynon-market vesting conditions such as option lapses. Where the group is notcharged for this by HSBC Holdings plc, the corresponding amount is credited to'Other reserves'. The group has taken advantage of the transition provision in HKFRS 2'Share-based payment' and applied the treatment described above to shares andoptions granted after 7 November 2002 which had not yet been vested at 1 January2005. The change in accounting policy has been applied retrospectively by way of prioryear adjustment and restatement of comparative figures for 2004. The unamortisedcost of share compensation of HK$66 million at 31 December 2004 was adjusted toretained profits. Staff costs for 2004 have been restated to recognise sharecompensation cost of HK$47 million. Share compensation cost amounting to HK$64million has been recognised in the current year's income statement. HKFRS 3: Business combinations ('HKFRS 3') Goodwill In prior years, positive goodwill arising from the acquisition of subsidiary andassociated companies was amortised over its estimated life, usually taken as 20years, on a straight-line basis in the income statement. With effect from 1 January 2005, and in accordance with HKFRS 3, the group hasadopted a new policy for goodwill. Under the new policy, positive goodwill isnot amortised but is tested for impairment at each balance sheet date at thecash-generating unit level by applying a fair-value-based test in accordancewith HKAS 36 'Impairment of Assets'. The accounting policy on goodwill has been applied retrospectively by way ofprior year adjustment and restatement of comparative figures for 2004. Thepositive goodwill at 31 December 2004 has been restated to reverse allamortisation made prior to that date (HK$9 million) with a correspondingadjustment through retained profit at 31 December 2004. No impairment loss hasbeen recognised in the current year. HKFRS 4: Insurance contracts ('HKFRS 4') In prior years, all policies issued by insurance subsidiaries on long-termassurance contracts were accounted for as insurance contracts. With effect from 1 January 2005, and in accordance with HKFRS 4, a contractunder which the group accepts significant insurance risk from another party, byagreeing to compensate that party on the occurrence of a specified uncertainfuture event, is classified as an insurance contract. Such an insurancecontract, which may also transfer financial risk, is accounted for as aninsurance contract in accordance with HKFRS 4. Income generated from assets backing insurance contracts is reported in theincome statement on a line-by-line basis according to the classification ofassets. Claims incurred and movement in policyholder liabilities for insurancecontracts are reported as such in the income statement. A contract issued by the group that transfers financial risk, withoutsignificant insurance risk, is classified as an investment contract, andaccounted for as a financial instrument in accordance with HKAS 39. Customerliabilities under unit-linked investment contracts and the linked financialassets are measured at fair value, and the movements in fair value arerecognised in the income statement in 'Net income from financial instrumentsdesignated at fair value'. The change in accounting policy on insurance contracts has been appliedretrospectively by way of prior year adjustment and restatement of comparativefigures for 2004. Net increases/(decreases) in the outstanding balances on restatement of thebalance sheet are as follows: Figures in HK$m At 31Dec04 Liabilities and reservesOther liabilities (905)Liabilities to customers under insurance contracts 8,656Liabilities to policyholders under long-term assurance business (8,291)Liabilities to customers under investment contracts 540Retained profits 2Other reserves 3 HKFRS 5: Non-current assets held for sale and discontinued operations ('HKFRS 5') In prior years, collateral assets repossessed for recovery of non-performingadvances were reported as advances. The carrying value was adjusted to the netrealisable value of the repossessed assets and classified as non-performingadvances. With effect from 1 January 2005, and in accordance with HKFRS 5, non-currentassets acquired in exchange for advances in order to achieve an orderlyrealisation are reported in 'Other assets'. The asset acquired is recorded atthe lower of its fair value less costs to sell and the carrying value of theadvance disposed of, net of impairment allowances, at the date of the exchange.No depreciation is provided in respect of such assets. Any subsequent write-downof an asset to fair value less costs to sell is recorded as an impairment lossand included in the income statement. Any subsequent increase in fair value lesscosts to sell not in excess of any cumulative impairment loss, is recognised asa gain in the income statement. Debt securities or equities acquired in debt-to-debt/equity swaps are includedas 'Available-for-sale' securities following the implementation of HKAS 39. The change in accounting policy has been applied retrospectively, withrestatement of comparative figures for 2004. At 31 December 2004, repossessedassets of HK$320 million were reclassified from 'Customer advances' to'Non-current assets held for sale'. Gains on disposal of HK$37 million in 2004were re-classified from 'Net charge for bad and doubtful debts' to 'Otheroperating income'. Gains on disposal of HK$1 million were recorded under 'Otheroperating income' for the current year income statement. HKAS 17: Leases ('HKAS 17') Leasehold land for own use In prior years, leasehold premises were stated at fair market value, as valuedby professionally qualified valuers. The apportionment of the value between theland and building elements was made by estimating the net replacement cost ofthe building as the value of the building element, and taking the residualfigures as the value of the land element. With effect from 1 January 2005, and in accordance with HKAS 17, the group hasadopted a new policy for leasehold land and buildings held for own use. Underthe new policy, the leasehold interest in the land held for own use is accountedfor as being held under an operating lease. The fair value of the interest inany buildings situated on the leasehold land could be measured separately fromthe fair value of the leasehold interest in the land at the time the lease wasfirst entered into by the group, or taken over from the previous lessee, or atthe date of construction of those buildings. Lease premiums on operating leasesare accounted for as prepaid rentals, reported under 'Interest in leasehold landheld for own use under operating lease', and are amortised to the incomestatement on a straight-line basis over the remaining lease term. The propertyrevaluation reserve has been restated to exclude prior years' revaluations onsuch leases. Where the original cost of leasehold land and buildings cannot bereliably split, both land and buildings are treated as being under financeleases and are accounted for at fair value less subsequent depreciation. The change in accounting policy is adopted retrospectively and reflected by wayof prior year adjustment and restatement of comparative figures. Net increases/(decreases) in the outstanding balances on restatement of thebalance sheet are as follows: Figures in HK$m At 31Dec04AssetsPremises (2,511)Interest in leasehold land held for own use under operating lease 609Liabilities and reservesProperty revaluation reserve (1,502)Retained profits (66)Deferred tax liabilities (334) Increases/(decreases) in the following items on restatement of the income statement Year endedFigures in HK$m 31Dec04Depreciation (52)Rental expense 14Net deficit of revaluation of properties (net of deferred tax) 2 Rental expense on leasehold land for the year of 2005 amounted to HK$15 million. HKAS 19: Employee benefits ('HKAS 19') In prior years, the group implemented HK SSAP 34 (which is materially equivalentto HKAS 19) in relation to the accounting for pensions, and adopted the corridorapproach for the recognition of actuarial gains and losses. With effect from 1 January 2005, and in accordance with HKAS 19, the group haschanged its policy to fully recognise actuarial gains and losses in thestatement of changes in equity. To reflect the change in accounting policy, the balance of actuarial lossamounting to HK$82 million has been adjusted through 'Retained profits' as at 31December 2004. An actuarial gain of HK$158 million for the year of 2005 has beenrecognised through retained profits. HKAS 21: The effects of changes in foreign exchange rates ('HKAS 21') In prior years, exchange differences arising from re-translation of the resultfor the period from the average rate to the exchange rate ruling at theperiod-end were accounted for as exchange difference under retained profits. With effect from 1 January 2005, and in accordance with HKAS 21, exchangedifferences arising from the re-translation of opening foreign currency netinvestments and the related cost of hedging, if any, and exchange differencesarising from re-translation of the result for the period from the average rate tothe exchange rate ruling at the period-end, are accounted for in a separateforeign exchange reserve in equity. Exchange differences on a monetary item thatis part of a net investment in a foreign operation are recognised in the incomestatement of separate subsidiary financial statements. In the consolidatedfinancial statements, these exchange differences are recognised in the foreignexchange reserve. To reflect the change in accounting policy, an amount of HK$50 million has beenreclassified from 'Retained profits' to 'Other reserves' in 2005. HKAS 27: Consolidated and separate financial statements ('HKAS 27')HK(SIC) interpretation 12 'Consolidation - special purpose entities' ('HK(SIC)-Int 12') Life insurance subsidiary In prior years, on consolidation of the life insurance subsidiary, long-termassurance assets and liabilities attributable to policyholders were recognisedin aggregate under 'Other assets' and 'Other liabilities' respectively. Incomefrom long-term assurance assets was reported together with net earned insurancepremiums, less net insurance claims and movement in policyholder liabilities, as'Other operating income' in the income statement. With effect from 1 January 2005, and in accordance with HKAS 27, life insurancesubsidiary accounts are consolidated line-by-line. Assets of the life insurancesubsidiary, including long-term assurance assets, are reported according toasset type as presented in the group's consolidated balance sheet. Net earnedinsurance premiums and net insurance claims are separately shown in the incomestatement, with income on assets reported under the same income categories as inthe group's consolidated income statement. The change in accounting policy has been adopted retrospectively and thecomparative figures of 2004 have been restated to reflect the aforesaidreclassifications, except for the treatment of financial assets and the relatedincome, in accordance with the requirement of HKAS 39 as described below. HKAS 38: Intangible assets ('HKAS 38') In prior years, costs incurred for development of IT software for internal usewere expensed as incurred. With effect from 1 January 2005, and in accordance with HKAS 38, the value ofin-force long-term assurance business ('embedded value') and computer softwareare reported as 'Intangible assets'. Embedded value is stated at valuationdetermined annually in consultation with independent actuaries. Computersoftware is stated at cost less amortisation and is amortised over its usefullife. Costs incurred in the development phase of a project to produceapplication software for internal use are capitalised and amortised over thesoftware's estimated useful life, usually five years. A periodic review isperformed on intangible assets to confirm that there has been no impairment suchthat the carrying value of the asset needs to be reduced. The change in accounting policy came into effect on 1 January 2005 and theamount of costs capitalised for the year of 2005 amounted to HK$56 million. Norestatement of the 2004 income statement was made as the amount of softwaredevelopment cost qualifying for capitalisation in 2004 was immaterial. HKAS 39: Financial instruments - recognition and measurement ('HKAS 39') (a) Interest income and expense In prior years, interest income and expense for all interest-bearing financialinstruments were recognised in the income statement as they accrued, except in thecase of impaired advances. Interest on impaired advances was credited to aninterest suspense account in the balance sheet which was netted against therelevant loan. With effect from 1 January 2005, and in accordance with HKAS 39, interest incomeand expense for all interest-bearing financial instruments, except thoseclassified as held for trading or designated at fair value, are recognised in'Interest income' and 'Interest expense' in the income statement using theeffective interest rates of the financial assets or financial liabilities towhich they relate. The effective interest rate is the rate that discounts estimated future cashpayments or receipts through the expected life of the financial asset orfinancial liability or, where appropriate, a shorter period, to the net carryingamount of the financial asset or financial liability. When calculating theeffective interest rate, the group estimates cash flows considering allcontractual terms of the financial instrument but not future credit losses. Thecalculation includes all amounts paid or received by the group that are anintegral part of the effective interest rate, transaction costs and all otherpremiums or discounts. Interest on impaired financial assets is recognised atthe original effective interest rate of the financial asset applied to theimpaired carrying amount. (b) Loans and advances to banks and customers In prior years, loans and advances to banks and customers were recognised whencash was advanced to borrowers and were measured at amortised cost lessprovisions for impairment. With effect from 1 January 2005, and in accordance with HKAS 39, loans andadvances to banks and customers include all loans and advances originated by thegroup which have not been classified as held for trading or designated at fairvalue. They are initially recorded at fair value plus any transaction costs, andare subsequently measured at amortised cost using the effective interest method. (c) Impairment of loans and advances In prior years, there were two basic types of provisions, specific and general. Specific provisions represented the quantification of actual and inherent lossesfrom individually identified accounts and homogeneous portfolios of assets.Specific provisions were deducted from loans and advances in the balance sheet. General provisions augmented specific provisions and provided cover for loansthat were impaired at the balance sheet date but which would not be individuallyidentified as such until some time in the future. With effect from 1 January 2005, and in accordance with HKAS 39, the groupprovides allowances for impaired advances when objective evidence of impairmentexists and on a consistent basis, in accordance with established guidelines.Impairment allowances, representing the quantification of incurred losses, canbe made on a collective portfolio basis or an individually assessed basis.Impairment allowances are deducted from loans and advances in the balance sheet.The methodologies used for the individual and collective assessment under HKAS39 are in principle consistent with the approach used for loan provisioning inthe previous year. (d) Financial instruments In prior years, the group classified its financial instruments into 'Securitiesheld for dealing purposes' and 'Long-term investments'. All financialinstruments were carried at cost or amortised cost, net of impairment provisionsfor diminution in value, except for securities held for trading purposes andlong-term equity investments which were carried at fair value. Gains and lossesfrom changes in fair value were recognised in the income statement in respect ofsecurities held for trading, and in the long-term equity investment revaluationreserve in respect of long-term equity investments. With effect from 1 January 2005 and in accordance with HKAS 39, financialinstruments are classified into the categories of: trading assets andliabilities, financial instruments designated at fair value, available-for-saleand held-to-maturity securities. (i) Trading assets and trading liabilities Financial instruments and short positions thereof, which have been acquired orincurred principally for the purpose of selling or repurchasing in the nearterm, or are part of a portfolio of identified financial instruments that aremanaged together and for which there is evidence of a recent actual pattern ofshort-term profit-taking, are classified as held-for-trading. Trading assets andliabilities are recognised initially at fair value, with transaction costs takento the income statement, and are subsequently re-measured at fair value. Allsubsequent gains and losses from changes in the fair value of these assets andliabilities, together with related interest income and expense and dividends,are recognised in the income statement within 'Net trading income' as theyarise. Upon disposal or repurchase, the difference between the net sale proceedsor the net payment and the carrying value is included in the income statement. (ii) Financial instruments designated at fair value 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. The group may designate financial instruments at fair value wherethe designation: - 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; 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; or - relates to financial instruments containing one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments. 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. 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 also included in 'Net income from financial instrumentsdesignated at fair value'. (iii) Available-for-sale and held-to-maturity securities Financial instruments intended to be held on a continuing basis are classifiedas available-for-sale securities, unless designated at fair value, or classifiedas held-to-maturity. Available-for-sale securities are initially measured at fair value plus directand incremental transaction costs. They are subsequently re-measured at fairvalue. Changes in fair value are recognised in equity until the securities areeither sold or impaired. On the sale of available-for-sale securities,cumulative gains or losses previously recognised in equity are recognisedthrough the income statement and classified as 'Profit and loss on disposal offixed assets and financial investments'. Impairment allowances recognised in theincome statement on equity instrument are not reversed through the incomestatement. 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 allowances. (e) Derivative financial instruments and hedge accounting In prior years, accounting for derivatives was dependent upon whether thetransactions were undertaken for trading or non-trading purposes. Tradingtransactions included transactions undertaken for market-making, to servicecustomers' needs, and for proprietary purposes, together with any relatedhedges. Transactions were marked to market through the income statement as 'Nettrading income'. Non-trading transactions were those undertaken for hedgingpurposes as part of the group's risk management strategy against cash flows,assets, liabilities or net positions, and were accounted for on an equivalentbasis to the underlying assets, liabilities or net positions. The income andexpense of non-trading interest rate derivatives was recognised on an accrualbasis in 'Net interest income'. With effect from 1 January 2005, and in accordance with HKAS 39, derivatives areinitially recognised at fair value from the date a derivative contract isentered into, and are subsequently re-measured at their fair value. The methodof recognising the resulting fair value gain or loss depends on whether thederivative is designated as a hedging instrument, and if so, the nature of theitem being hedged. The group designates certain derivatives as either: (i)hedges of the fair value of recognised assets or liabilities or firm commitments(fair value hedge); (ii) hedges of highly probable future cash flowsattributable to a recognised asset or liability, or a forecast transaction (cashflow hedge). Hedge accounting is applied for derivatives designated as fairvalue or cash flow hedge, provided certain criteria are met. Fair value hedge Changes in the fair value of derivatives that are designated and qualified asfair value hedges are recorded as 'Net trading income' in the income statement,together with any changes in the fair value of the hedged asset or liabilitythat are attributable to the hedged risk. If the hedge no longer meets thecriteria for hedge accounting, the adjustment to the carrying amount of a hedgeditem for which the effective interest method is used shall be amortised to theincome statement over the period to maturity. Cash flow hedges The effective portion of changes in the fair value of derivatives (net ofinterest accrual) that are designated and qualified as cash flow hedges isrecognised in shareholders' equity. The gain or loss relating to the ineffectiveportion is recognised immediately in the income statement within 'Net tradingincome' along with accrued interest. Amounts accumulated in shareholders' equity are recycled through the incomestatement in the periods in which the hedged item will affect profit or loss. 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 and isrecognised when the forecast transaction is ultimately recognised in the incomestatement. When a forecast transaction is no longer expected to occur, thecumulative gain or loss that was reported in shareholders' equity is immediatelytransferred to the income statement. 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, are recognised immediately in theincome statement and reported in 'Net trading income', except where derivativecontracts are used with financial instruments designated at fair value, in whichcase gains and losses are reported in 'Net income from financial instrumentsdesignated at fair value'. Embedded derivatives 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 host contract, the terms of the embedded derivative are thesame as those of stand-alone derivative, and the combined contract is notdesignated at fair value. These embedded derivatives are measured at fair valuewith changes in fair value recognised in the income statement. (f) Debt securities in issue and subordinated liabilities In prior years, debt securities in issue were measured at cost adjusted foramortised premiums and discounts, and were reported under 'Debt securities inissue'. With effect from 1 January 2005, and in accordance with HKAS 39, debt securitiesissued and subordinated liabilities are measured at amortised cost using theeffective interest rate method, and are reported under 'Debt securities inissue' or 'Subordinated liabilities', except for those issued for trading ordesignated at fair value, which are carried at fair value and reported under therespective balance sheet captions of 'Trading liabilities' and 'Financialliabilities designated at fair value'. (g) Offsetting financial instruments In prior years, netting was applied where a legal right of set-off existed. With effect from 1 January 2005, and in accordance with HKAS 39, financialassets and liabilities are offset and the net amount reported in the balancesheet when there is a legally enforceable right to offset the recognised amountsand there is an intention to settle on a net basis, or realise the asset andsettle the liability simultaneously. The change in accounting policies on adoption of HKAS 39 is applied with effectfrom 1 January 2005. The opening balance sheet has been restated and therelevant financial assets and liabilities re-classified to suit the newdefinitions and requirements of the accounting standard and disclosurerequirements. HKAS 40: Investment property ('HKAS 40')HKAS 12: Income taxes - HK(SIC) interpretation 21 'Income taxes - recovery ofrevalued non-depreciable assets' ('HK(SIC)-Int 21') In prior years, investment properties were carried at valuation assessed byprofessional valuers on the basis of open market value. Surpluses arising onrevaluation on a portfolio basis were credited to the investment propertyrevaluation reserve. Deficits arising on revaluation on a portfolio basis werefirstly set off against any previous revaluation surplus and thereafter taken tothe income statement. With effect from 1 January 2005, and in accordance with HKAS 40, investmentproperties are carried at fair value with the changes in fair value reporteddirectly in the income statement 'Net surplus on property revaluation'. Deferredtax is provided on revaluation surplus of investment properties in accordancewith HK(SIC)-Int 21 on HKAS 12. The change in accounting policy has been reflected by way of prior yearadjustment and as permitted by HKAS 40, no restatement of comparative figures of2004 has been made. At 31 December 2004, the balance of investment revaluationsurplus reserves of HK$3,283 million, after deducting deferred tax of HK$574million, was transferred to retained profit. The revaluation gain for the yearof 2005 was HK$1,296 million and the related deferred tax amounted to HK$227million. Change in presentation (HKAS 1, Presentation of financial statement ('HKAS 1') andHKAS 30, Disclosure in financial statements of banks and similar financial institutions ('HKAS 30')) In prior years, there were no specific accounting standards governing thepresentation of the financial statements of banks. Management, having regard tothe overall clarity and the disclosure requirements of the Hong Kong MonetaryAuthority, exercised its judgement in deciding on the relative prominence givento each item presented on the face of the income statement and balance sheets. With effect from 1 January 2005, and in accordance with HKAS 1 and HKAS 30, thegroup has changed its presentation of certain items on the face of the incomestatement and the balance sheets: - share of profit of associates is stated net of tax to arrive at the group's profit and loss before tax. - treasury bills (including exchange fund bills) and certificates of deposit held are included in the respective categories of financial instruments under HKAS 39. - placements with banks and other financial institutions maturing within one month are included in placements with banks and other financial institutions. - interest income, interest expense, and dividend income arising from trading assets and trading liabilities are reclassified from 'Interest income', 'Interest expense', 'Other operating income' and 'Fee and commission' respectively to 'Net trading income'. Similar income and expenses arising from financial instruments designated at fair value are reclassified from the relevant captions to 'Net income from financial instruments designated at fair value'. These changes in presentation have been applied retrospectively except for thoseunder HKAS 39. Table A Hang Seng Bank and its subsidiariesConsolidated income statement for the year ended 31 December 2004 Effect of changes in accounting policies for 2004 Figures in As HKFRS2 HKAS17 HKAS38 Others^ Change in Restated HK$m reported presentation HKAS27/ HKAS30 Interest income 12,471 - - - 5 306 12,782 Interest expense (2,781) - - - - 4 (2,777) Net interest income 9,690 - - - 5 310 10,005 Fee income 3,749 - - - (19) 111 3,841 Fee expense (409) - - - (1) (6) (416) Net fee income 3,340 - - - (20) 105 3,425 Dealing profits 1,025 - - - - (1,025) - Net trading income - - - - (16) 1,129 1,113 Insurance underwriting profits 1,310 - - - - (1,310) - Dividend income 96 - - - (22) 15 89 Net earned insurance premiums - - - - (52) 4,472 4,420 Other operating income 592 - - - 37 144 773 Total operating income 16,053 - - - (68) 3,840 19,825 Net insurance claims incurred and movement in policyholder liabilities - - - - 68 (3,840) (3,772) Net operating income before loan impairment (charges)/releases and other credit risk provisions 16,053 - - - - - 16,053 Loan impairment (charges)/releases and other credit risk provisions 814 - - - (37) - 777 Net operating income 16,867 - - - (37) - 16,830 Employee compensation and benefits (2,187) (47) - - - - (2,234) General and administrative expenses - - (15) - - (1,719) (1,734) Depreciation of premises, plant and equipment (317) - 53 8 - - (256) Amortisation of intangible assets - - - (8) - - (8) Operating expenses (1,719) - - - - 1,719 - Total operating expenses (4,223) (47) 38 - - - (4,232) Operating profit 12,644 (47) 38 - (37) - 12,598 Profit on disposal of fixed assets and financial investments 432 - - - 10 - 442 Net surplus on property revaluation 148 - (2) - - - 146 Share of profits from associates 143 - - - 9 (55) 97 Profit before tax 13,367 (47) 36 - (18) (55) 13,283 Tax expenses (1,764) - (5) - 3 55 (1,711) Profit for the year 11,603 (47) 31 - (15) - 11,572 Profit attributable to minority interests (208) - - - - - (208) Profit attributable to shareholders 11,395 (47) 31 - (15) - 11,364 ^Others includes HKFRS 3, HKFRS 4, HKFRS 5, HKAS 19 and others. Table B Hang Seng Bank and its subsidiariesConsolidated balance sheet as at 31 December 2004 Effect of changes in accounting policies for the balances at 31 December 2004 Figures in As HKFRS2 HKAS17 HKAS38 HKAS40/ Others^ Change in Restated HKAS39 Opening HK$m reported HKAS-Int21 presentation balance HKAS27/ at 1 HKAS30 January 2005 Assets Cash and short-term funds 68,198 - - - - - (68,198) - - - Cash and balances with banks and other financial institutions - - - - - - 7,248 7,248 - 7,248 Placings with banks maturing after one month 16,231 - - - - - (16,231) - - - Placings with and advances to banks and other financial institutions - - - - - - 75,079 75,079 - 75,079 Certificates of deposit 33,590 - - - - - (33,590) - - - Securities held for dealing purposes 1,866 - - - - - (1,866) - - - Trading assets - - - - - - 4,232 4,232 12,505 16,737 Financial assets designated at fair value - - - - - - - - 4,292 4,292 Derivative financial instruments - - - - - - 1,684 1,684 94 1,778 Advances to customers 251,873 - - - - (320) - 251,553 293 251,846 Amounts due from immediate holding company and fellow subsidiaries 4,598 - - - - - (4,598) - - - Long-term investments 138,025 - - - - - (138,025) - - - Financial investments - - - - - (36) 184,742 184,706 (15,791) 168,915 Investments inassociates 2,397 - - - (107) 9 - 2,299 - 2,299 Tangible fixedassets 11,469 - - - - - (11,469) - - - Investment properties - - - - - - 3,383 3,383 - 3,383 Premises, plant and equipment - - (2,511) (17) - - 8,086 5,558 - 5,558 Interest in leasehold land held for own use under operating lease - - 609 - - - - 609 - 609 Intangible assets - - - 17 - - 1,249 1,266 - 1,266 Others assets 20,378 - - - - 174 (11,222) 9,330 (256) 9,074 548,625 - (1,902) - (107) (173) 504 546,947 1,137 548,084 LiabilitiesCurrent, savings and other deposit accounts 463,416 - - - - - (15,956) 447,460 (7,276) 440,184 Deposits from banks 8,631 - - - - - 3,303 11,934 - 11,934 Trading liabilities - - - - - - 5,840 5,840 10,701 16,541 Derivative financial instruments - - - - - - 1,273 1,273 977 2,250 Certificates of deposit and other debt securities in issue - - - - - - 16,055 16,055 (3,443) 12,612 Amounts due to immediate holding company and fellow subsidiaries 3,928 - - - - - (3,928) - - - Other liabilities 28,613 - - - - (9,235) (7,638) 11,740 (1,075) 10,665 Liabilities to customers under investment contracts - - - - - 540 - 540 - 540 Liabilities to customers under insurance contracts - - - - - 8,656 - 8,656 - 8,656 Deferred tax and current tax liabilities - - (333) - 467 (21) 1,555 1,668 202 1,870 504,588 - (333) - 467 (60) 504 505,166 86 505,252 Capital resourcesMinority interests 852 - - - - - - 852 (14) 838 Share capital 9,559 - - - - - - 9,559 - 9,559 Retained profits 21,395 (66) (66) - 2,709 (116) - 23,856 533 24,389 Other reserves 8,598 66 (1,503) - (3,283) 3 - 3,881 532 4,413 Proposed dividends 3,633 - - - - - - 3,633 - 3,633 Shareholders' funds 43,185 - (1,569) - (574) (113) - 40,929 1,065 41,994 44,037 - (1,569) - (574) (113) - 41,781 1,051 42,832 548,625 - (1,902) - (107) (173) 504 546,947 1,137 548,084 ^Others includes HKFRS 3, HKFRS 4, HKFRS 5, HKAS 19 and others. 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