Corporate information and statement of IFRS compliance [abstract]

Standards adopted during the year ended 31 December 2023

IFRS 17 ‘Insurance Contracts’

On 1 January 2023, the Group adopted the requirements of IFRS 17 ‘Insurance Contracts’ retrospectively with comparatives restated from the

transition date, 1 January 2022. At transition, the Group’s total equity reduced by $10,459m.

On adoption of IFRS 17, balances based on IFRS 4, including the present value of in-force long-term insurance business (‘PVIF’) asset in relation

to the upfront recognition of future profits of in-force insurance contracts, were derecognised. Insurance contract liabilities have been

remeasured under IFRS 17 based on groups of insurance contracts, which include the fulfilment cash flows comprising the best estimate of the

present value of the future cash flows (for example premiums and payouts for claims, benefits and expenses), together with a risk adjustment

for non-financial risk, as well as the contractual service margin (‘CSM’). The CSM represents the unearned profits that will be released and

systematically recognised in insurance revenue as services are provided over the expected coverage period.

In addition, the Group has made use of the option under the standard to re-designate certain eligible financial assets held to support insurance

contract liabilities, which were predominantly measured at amortised cost, as financial assets measured at fair value through profit or loss, with

comparatives restated from the transition date. The effects of adoption of IFRS 17 are set out in Note 38 with a description of the policy in Note

1.2(j).

The key differences between IFRS 4 and IFRS 17 are summarised in the following table:


	IFRS 4	IFRS 17
Balance sheet	–Insurance contract liabilities for non-linked life insurance contracts are calculated by local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, by reference to the value of the relevant underlying funds or indices. Grouping requirements follow local regulations. –An intangible asset for the PVIF is recognised, representing the upfront recognition of future profits associated with in-force insurance contracts.	–Insurance contract liabilities are measured for groups of insurance contracts at current value, comprising the fulfilment cash flows and the CSM. –The fulfilment cash flows comprise the best estimate of the present value of the future cash flows, together with a risk adjustment for non-financial risk. –The CSM represents the unearned profit.
Profit emergence/ recognition	–The value of new business is reported as revenue on Day 1 as an increase in PVIF. –The impact of the majority of assumption changes is recognised immediately in the income statement. –Variances between actual and expected cash flows are recognised in the period they arise.	–The CSM is systematically recognised in revenue as services are provided over the expected coverage period of the group of contracts (i.e. no Day 1 profit). –Contracts are measured using the general measurement model (‘GMM’) or the variable fee approach (‘VFA’) model for insurance contracts with direct participation features upon meeting the eligibility criteria. Under the VFA model, the Group’s share of the investment experience and assumption changes are absorbed by the CSM and released over time to profit or loss. For contracts measured under GMM, the Group’s share of the investment volatility is recorded in profit or loss as it arises. –Losses from onerous contracts are recognised in the income statement immediately.
Investment return assumptions (discount rate)	–PVIF is calculated based on long-term investment return assumptions based on assets held. It therefore includes investment margins expected to be earned in future.	–Under the market consistent approach, expected future investment spreads are not included in the investment return assumption. Instead, the discount rate includes an illiquidity premium that reflects the nature of the associated insurance contract liabilities.
Expenses	–Total expenses to acquire and maintain the contract over its lifetime are included in the PVIF calculation. –Expenses are recognised across operating expenses and fee expense as incurred and the allowances for those expenses are released from the PVIF simultaneously.	–Projected lifetime expenses that are directly attributable costs are included in the insurance contract liabilities and recognised in the insurance service result. –Non-attributable costs are reported in operating expenses.

Transition

In applying IFRS 17 for insurance contracts retrospectively, the full retrospective approach (‘FRA’) has been used unless it was impracticable.

When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use

either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The Group has applied the FRA for new business from

2018 at the earliest, subject to practicability, and the FVA for the majority of contracts for which the FRA is impracticable.

Under the FVA, the valuation of insurance liabilities on transition is based on the applicable requirements of IFRS 13 ‘Fair Value Measurement’.

This requires consideration of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date (an exit price). The CSM is calculated as the difference between what a market participant would

demand for assuming the unexpired risk associated with insurance contracts, including required profit, and the fulfilment cash flows that are

determined using IFRS 17 principles.

In determining the fair value, the Group considered the estimated profit margin that a market participant would demand in return for assuming

the insurance liabilities with the consideration of the level of capital that a market participant would be required to hold, and the discount rate

with an allowance for an illiquidity premium that takes into account the level of ‘matching’ between the Group’s assets and related liabilities.

These assumptions were set taking into account the assumptions that a hypothetical market participant operating in each local jurisdiction

would consider.

Amendments to IAS 12 ‘International Tax Reform – Pillar Two Model Rules’

On 23 May 2023, the International Accounting Standards Board (‘IASB’) issued amendments to IAS 12 ‘International Tax Reform – Pillar Two

Model Rules’, which became effective immediately and were approved for adoption by all members of the UK Endorsement Board on 19 July

2023 and by the European Union on 8 November 2023. On 20 June 2023, legislation was substantively enacted in the UK to introduce the

OECD’s Pillar Two global minimum tax rules and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. The Group has

applied the IAS 12 exception from recognising and disclosing information on associated deferred tax assets and liabilities.

There were no other new standards or amendments to standards that had an effect on these financial statements.

Future accounting developments

Minor amendments to IFRS Accounting Standards

The IASB has published a number of minor amendments to IFRS Accounting Standards that are effective from 1 January 2024. HSBC expects

they will have an insignificant effect, when adopted, on the consolidated financial statements of HSBC and the separate financial statements of

HSBC Holdings. Additionally, in August 2023, the IASB published amendments to IAS 21 ‘Lack of Exchangeability’ effective from 1 January

2025. The Group is undertaking an assessment of the potential impact, which is not expected to be significant.

Critical estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent

uncertainties and the high level of subjectivity involved in the recognition or measurement of items, highlighted as the ‘critical estimates and

judgements’ in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management’s

estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of

these financial statements. Management’s selection of HSBC’s accounting policies that contain critical estimates and judgements reflects the

materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.

Management has considered the impact of climate-related risks on HSBC’s financial position and performance. While the effects of climate

change are a source of uncertainty, as at 31 December 2023 management did not consider there to be a material impact on our critical

judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular management

has considered the known and observable potential impacts of climate-related risks of associated judgements and estimates in our value in use

calculations.

Critical estimates and judgements


Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management’s best estimate of the future cash flows of the investment and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:
Judgements	Estimates
–The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests for impairment or reversal more frequently than once a year when indicators exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business prospects.	–The future cash flows of each investment are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment. –The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to the investment. The cost of equity percentage is generally derived from a capital asset pricing model and the market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control. –Key assumptions used in estimating impairment in subsidiaries and their reversal where relevant are described in Note 19.

Critical estimates and judgements


The review of goodwill and non-financial assets (see Note 1.2(n)) for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:
Judgements	Estimates
–The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests goodwill for impairment more frequently than once a year when indicators of impairment exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business prospects.	–The future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment. –The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to individual CGUs. The cost of equity percentage is generally derived from a capital asset pricing model and market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control. –Key assumptions used in estimating goodwill and non-financial asset impairment are described in Note 21.

Critical estimates and judgements


The most significant critical estimates relate to the assessment of impairment of our investment in Bank of Communications Co., Limited (‘BoCom’), which involves estimations of value in use:
Judgements	Estimates
	–The value in use calculation uses discounted cash flow projections based on management’s best estimate of future earnings available to ordinary shareholders prepared in accordance with IAS 36 ‘Impairment of Assets’. –Key assumptions used in estimating BoCom’s value in use and the sensitivity of the value in use calculations to different assumptions are described in Note 18.

Critical estimates and judgements


The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental:
Judgements	Estimates
–An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, greater than 5% of the instrument’s valuation is driven by unobservable inputs. –‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).	–Details on the Group’s Level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in Note 12.

Critical estimates and judgements


The calculation of the Group’s ECL under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:
Judgements	Estimates
–Defining what is considered to be a significant increase in credit risk –Determining the lifetime and point of initial recognition of overdrafts and credit cards –Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions –Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected credit loss –Making management adjustments to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgements –Selecting applicable recovery strategies for certain wholesale credit-impaired loans	–The section ‘Measurement uncertainty and sensitivity analysis of ECL estimates’, marked as audited from page 192, sets out the assumptions used in determining ECL, and provides an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions

Critical estimates and judgements


The most significant critical estimates relate to the determination of key assumptions applied in calculating the defined benefit pension obligation for the principal plan.
Judgements	Estimates
	–A range of assumptions could be applied, and different assumptions could significantly alter the defined benefit obligation and the amounts recognised in profit or loss or OCI. –The calculation of the defined benefit pension obligation includes assumptions with regard to the discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. Management determines these assumptions in consultation with the plan’s actuaries. –Key assumptions used in calculating the defined benefit pension obligation for the principal plan and the sensitivity of the calculation to different assumptions are described in Note 5.

Critical estimates and judgements


The recognition of deferred tax assets depends on judgements and estimates.
Judgements	Estimates
–Specific judgements supporting deferred tax assets are described in Note 7.	–The recognition of deferred tax assets is sensitive to estimates of future cash flows projected for periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of cash flows thereafter, on which forecasts of future taxable profit are based, and which affect the expected recovery periods and the pattern of utilisation of tax losses and tax credits. See Note 7 for further detail.

Critical estimates and judgements


The recognition and measurement of provisions requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:
Judgements	Estimates
–Determining whether a present obligation exists. Professional advice is taken on the assessment of litigation and similar obligations. –Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous estimates as appropriate. At more advanced stages, it is typically easier to make estimates around a better defined set of possible outcomes.	–Provisions for legal proceedings and regulatory matters remain very sensitive to the assumptions used in the estimate. There could be a wider range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved.

Critical estimates and judgements


The review of goodwill and other non-financial assets for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as described in the ‘Critical estimates and judgements’ in Note 1.2(a).

Critical judgements

The classification as held for sale depends on certain judgements:

Judgements

Management judgement is required in determining whether the IFRS 5 held for sale criteria are met, including whether a sale is highly probable and

expected to complete within one year of classification. The exercise of judgement will normally consider the likelihood of successfully securing any

necessary regulatory or governmental approvals, which are almost always required for sales of banking businesses, and sanctions risk. For large and

complex plans, judgement will also include an assessment of the enforceability of any binding sale agreement, the nature and magnitude of any

disincentives for non-performance, and the ability of the counterparty to undertake necessary pre-completion preparatory work, comply with conditions

precedent, and otherwise be able to comply with contractual undertakings to achieve completion within the expected timescale. Once classified as

held for sale, judgement is required to be applied on a continuous basis to ensure that classification remains appropriate in future accounting periods.

Investments in subsidiaries

Where an entity is governed by voting rights, HSBC consolidates when it holds – directly or indirectly – the necessary voting rights to pass

resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors,

including having exposure to variability of returns, power to direct relevant activities, and whether power is held as agent or principal.

Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or

at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for each business

combination.

HSBC Holdings’ investments in subsidiaries are stated at cost less impairment losses.

Impairment testing is performed where there is an indication of impairment, by comparing the recoverable amount of the relevant investment to

its carrying amount. Indicators of impairment include both external and internal sources of information. Similarly, assessments are made as to

whether an impairment loss recognised in prior periods may no longer exist or may have decreased. Where this is the case, such an impairment

loss is reversed if there has been a change in the estimate used to determine the relevant recoverable amount since the last impairment loss

was recognised, and to the extent that it does not increase the carrying amount above that had no impairment loss been previously recognised.

Critical estimates and judgements


Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management’s best estimate of the future cash flows of the investment and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:
Judgements	Estimates
–The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests for impairment or reversal more frequently than once a year when indicators exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business prospects.	–The future cash flows of each investment are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment. –The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to the investment. The cost of equity percentage is generally derived from a capital asset pricing model and the market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control. –Key assumptions used in estimating impairment in subsidiaries and their reversal where relevant are described in Note 19.

HSBC sponsored structured entities

HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or

in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. HSBC is generally not considered a

sponsor if the only involvement with the entity is merely administrative.

Interest income and expense

Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are

recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an exception

to this, interest on debt instruments issued by HSBC for funding purposes that are designated under the fair value option to reduce an

accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.

Interest on credit-impaired financial assets is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount

of the asset less allowance for expected credit losses).

Valuation of financial instruments

(c)Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial

recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference

between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a

valuation technique that uses only data from observable markets, HSBC recognises the difference as a trading gain or loss at inception (a ‘day 1

gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction

until the transaction matures, is closed out, the valuation inputs become observable or HSBC enters into an offsetting transaction. The fair value

of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of financial assets and

liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but

the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria.

Critical estimates and judgements


The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental:
Judgements	Estimates
–An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, greater than 5% of the instrument’s valuation is driven by unobservable inputs. –‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).	–Details on the Group’s Level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in Note 12.

Valuation

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date. This may be different from the theoretical economic value attributed from an instrument’s cash

flows over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market

prices are available may differ from those of other companies.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated into portfolios of similar characteristics. Fair

values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation

models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-

the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using

assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; recent origination

pricing for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time,

we may engage a third-party valuation specialist to measure the fair value of a pool of loans.

The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations of credit

losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit-impaired loans,

fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are

determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying amount. For deposits with longer-term maturities, fair values are

estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values in debt securities in issue and subordinated liabilities are determined using quoted market prices at the balance sheet date where

available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements – non-trading

Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts. This is

due to the fact that balances are generally short dated.

Financial assets and equity securities measured at fair value through other comprehensive income

(e)Financial assets measured at fair value through other comprehensive income

Financial assets managed within a business model that is achieved by both collecting contractual cash flows and selling and which contain

contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value

through other comprehensive income (‘FVOCI’). These comprise primarily debt securities. They are recognised on trade date when HSBC enters

into contractual arrangements to purchase and are generally derecognised when they are either sold or redeemed. They are subsequently

remeasured at fair value with changes therein (except for those relating to impairment, interest income and foreign currency exchange gains

and losses) recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other

comprehensive income are recognised in the income statement as ‘Gains less losses from financial instruments’. Financial assets measured at

FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss.

(f)Equity securities measured at fair value with fair value movements presented in other comprehensive income

The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar

investments where HSBC holds the investments other than to generate a capital return. Dividends from such investments are recognised in

profit or loss. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Otherwise, equity securities are

measured at fair value through profit or loss.

Derivatives

(h) Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices.

Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when

their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are

bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value where doing so reduces an accounting

mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.

Hedge accounting

When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge

accounting relationships where the required criteria for documentation and hedge effectiveness are met. HSBC uses these derivatives or,

where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign

operations as appropriate to the risk being hedged.

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in

recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in

the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the

cumulative adjustment to the carrying amount of a hedged item for which the effective interest rate method is used is amortised to the income

statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income

statement immediately.

Cash flow hedge

The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of

the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the

income statement within ‘Net income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains and

losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item

affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other

comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no

longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the

income statement.

Net investment hedge

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. The effective portion of gains and

losses on the hedging instrument is recognised in other comprehensive income and other gains and losses are recognised immediately in the

income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the

disposal, or part-disposal, of the foreign operation.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

Insurance contracts

(j) Insurance contracts

A contract is classified as an insurance contract where the Group accepts significant insurance risk from another party by agreeing to

compensate that party if it is adversely affected by a specified uncertain future event. An insurance contract may also transfer financial risk, but

is accounted for as an insurance contract if the insurance risk is significant. In addition, the Group issues investment contracts with DPF, which

are also accounted under IFRS 17 ’Insurance Contracts’.

Aggregation of insurance contracts

Individual insurance contracts that are managed together and subject to similar risks are identified as a portfolio. Contracts that are managed

together usually belong to the same product group, and have similar characteristics such as being subject to a similar pricing framework or

similar product management, and are issued by the same legal entity. If a contract is exposed to more than one risk, the dominant risk of the

contract is used to assess whether the contract features similar risks. Each portfolio is further separated by the contract’s expected profitability.

The portfolios are split by their profitability into: (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have no

significant possibility of becoming onerous subsequently; and (iii) the remaining contracts. These profitability groups are then divided by issue

date, with most contracts the Group issues after the transition date being grouped into calendar quarter cohorts. For multi-currency groups of

contracts, the Group considers its groups of contracts as being denominated in a single currency.

The measurement of the insurance contract liability is based on groups of insurance contracts as established at initial recognition, and will

include fulfilment cash flows as well as the CSM representing the unearned profit. The Group has elected to update the estimates used in the

measurement on a year-to-date basis.

Fulfilment cash flows

The fulfilment cash flows comprise the following:

Best estimates of future cash flows

The cash flows within the contract boundary of each contract in the Group include amounts expected to be collected from premiums and

payouts for claims, benefits and expenses, and are projected using a range of scenarios and assumptions in an unbiased way based on the

Group’s demographic and operating experience along with external mortality data where the Group’s own experience data is not sufficiently

large in size to be credible.

Adjustment for the time value of money and financial risks associated with the future cash flows

The estimates of future cash flows are adjusted to reflect the time value of money (i.e. discounting) and the financial risks to derive an expected

present value. The Group generally makes use of stochastic modelling techniques in the estimation for products with options and guarantees.

A bottom-up approach is used to determine the discount rate to be applied to a given set of expected future cash flows. This is derived as the

sum of the risk-free yield and an illiquidity premium. The risk-free yield is determined based on observable market data, where such markets are

considered to be deep, liquid and transparent. When information is not available, management judgement is applied to determine the

appropriate risk-free yield. Illiquidity premiums reflect the liquidity characteristics of the associated insurance contracts.

Risk adjustment for non-financial risk

The risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of future cash flows that arises

from non-financial risk. It is calculated as a 75th percentile level of stress over a one-year period. The level of the stress is determined with

reference to external regulatory stresses and internal economic capital stresses.

For the main insurance manufacturing entity in these locations, the one-year 75th percentile level of stress corresponds to the following

percentiles based on an ultimate view of risk over all future years:

–Asia-Pacific (Hong Kong): 60th percentile (2022: 59th percentile).

–Europe (France): 60th percentile (2022: 60th percentile).

–Latin America (Mexico): 65th percentile (2022: 66th percentile).

The Group does not disaggregate changes in the risk adjustment between insurance service result (comprising insurance revenue and insurance

service expense) and insurance finance income or expenses. All changes are included in the insurance service result.

Measurement models

The variable fee approach (‘VFA’) measurement model is used for most of the contracts issued by the Group, which is mandatory upon meeting

the following eligibility criteria at inception:

–the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;

–the Group expects to pay to the policyholder a substantial share of the fair value returns on the underlying items. The Group considers that a

substantial share is a majority of returns; and

–the Group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value

of the underlying items. The Group considers that a substantial proportion is a majority proportion of change on a present value probability-

weighted average of all scenarios.

For some contracts measured under VFA, the other comprehensive income (‘OCI’) option is used. The OCI option is applied where the

underlying items held by the Group are not accounted for at fair value through profit or loss. Under this option, only the amount that matches

income or expenses recognised in profit or loss on underlying items is included in finance income or expenses for these insurance contracts,

and hence results in the elimination of accounting mismatches. The remaining amount of finance income or expenses for these insurance

contracts issued for the period is recognised in OCI. In addition, the risk mitigation option is used for a number of economic offsets against the

instruments that meet specific requirements.

The remaining contracts issued and the reinsurance contracts held are accounted for under the general measurement model (‘GMM’).

CSM and coverage units

The CSM represents the unearned profit and results in no income or expense at initial recognition when the group of contracts is profitable. The

CSM is adjusted at each subsequent reporting period for changes in fulfilment cash flows relating to future service (e.g. changes in non-

economic assumptions, including mortality and morbidity rates). For initial recognition of onerous groups of contracts and when groups of

contracts become onerous subsequently, losses are recognised in insurance service expense immediately.

For groups of contracts measured using the VFA, changes in the Group’s share of the underlying items, and economic experience and economic

assumption changes adjust the CSM, whereas these changes do not adjust the CSM under the GMM, but are recognised in profit or loss as

they arise. However, under the risk mitigation option for VFA contracts, the changes in the fulfilment cash flows and the changes in the Group’s

share in the fair value return on underlying items that the instruments mitigate are not adjusted in CSM but recognised in profit or loss. The risk

mitigating instruments are primarily reinsurance contracts held.

The CSM is systematically recognised in insurance revenue to reflect the insurance contract services provided, based on the coverage units of

the group of contracts. Coverage units are determined by the quantity of benefits and the expected coverage period of the contracts.

The Group identifies the quantity of the benefits provided as follows:

–Insurance coverage: This is based on the expected net policyholder insurance benefit at each period after allowance for decrements, where

net policyholder insurance benefit refers to the amount of sum assured less the fund value or surrender value.

–Investment services (including both investment-return service and investment-related service): This is based on a constant measure basis

which reflects the provision of access for the policyholder to the facility.

For contracts that provide both insurance coverage and investment services, coverage units are weighted according to the expected present

value of the future cash outflows for each service.

Insurance service result

Insurance revenue reflects the consideration to which the Group expects to be entitled in exchange for the provision of coverage and other

insurance contract services (excluding any investment components). Insurance service expenses comprise the incurred claims and other

incurred insurance service expenses (excluding any investment components), and losses on onerous groups of contracts and reversals of such

losses.

Insurance finance income and expenses

Insurance finance income and expenses comprise the change in the carrying amount of the group of insurance contracts arising from the

effects of the time value of money, financial risk and changes therein. For VFA contracts, changes in the fair value of underlying items (excluding

additions and withdrawals) are recognised in insurance finance income or expenses.

Tax

(l) Tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to

items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement as the related

item appears.

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years.

HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the

amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods

in which the assets will be realised or the liabilities settled.

In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support the recognition

of deferred tax assets, taking into account the inherent risks in long-term forecasting, including climate change-related, and drivers of recent

history of tax losses where applicable. Management also considers the future reversal of existing taxable temporary differences and tax

planning strategies, including corporate reorganisations.

Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

Critical estimates and judgements


The recognition of deferred tax assets depends on judgements and estimates.
Judgements	Estimates
–Specific judgements supporting deferred tax assets are described in Note 7.	–The recognition of deferred tax assets is sensitive to estimates of future cash flows projected for periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of cash flows thereafter, on which forecasts of future taxable profit are based, and which affect the expected recovery periods and the pattern of utilisation of tax losses and tax credits. See Note 7 for further detail.

Contingent liabilities

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to

legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is

remote.

Impairment of non-financial assets

(n)Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets are property, plant and equipment, intangible

assets (excluding goodwill) and right-of-use assets. They are tested for impairment at the individual asset level when there is indication of

impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition,

impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the

principal operating legal entities divided by global business.

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair

value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying amount of its assets and liabilities,

including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent

basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The

recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and

qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs (see Note 21).

When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the

extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of

their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.

Impairment losses recognised in prior periods for non-financial assets are reversed when there has been a change in the estimate used to

determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not

exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior

periods.

Critical estimates and judgements


The review of goodwill and other non-financial assets for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as described in the ‘Critical estimates and judgements’ in Note 1.2(a).

The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of goodwill and non-financial assets in

the next financial year, but does consider this to be an area that is inherently judgemental.

Hyperinflationary accounting

Hyperinflationary accounting is applied to those subsidiary operations in countries where the three-year cumulative inflation rate is approaching

or exceeding 100%. In 2023, this affected the Group’s operations in Argentina and Türkiye. The Group applies IAS 29 to the underlying financial

information of relevant subsidiaries to restate their local currency results and financial position so as to be stated in terms of the measuring unit

current at the end of the reporting period. Those restated results are translated into the Group’s presentation currency of US dollars for

consolidation at the closing rate at the balance sheet date. Group comparatives are not restated for inflation and consequential adjustments to

the opening balance sheet in relation to hyperinflationary subsidiaries are presented in other comprehensive income. The hyperinflationary gain

or loss in respect of the net monetary position of the relevant subsidiary is included in profit or loss.

When applying hyperinflation accounting for the first time, the underlying financial information is restated in terms of the measuring unit current

at the end of the reporting period as if the relevant economy had always been hyperinflationary. Group comparatives are not restated for such

historical adjustments.