Business Segments

We have one reportable segment: Consumer. Our Consumer segment consists of our run-off Consumer Lending and Mortgage Services businesses. The Consumer segment provided real estate secured and personal non-credit card loans with both revolving and closed-end terms and with fixed or variable interest rates. Loans were originated through branch locations and direct mail. Products were also offered and customers serviced through the Internet. Prior to the first quarter of 2007, we acquired loans from correspondent lenders and prior to September 2007 we also originated loans sourced through mortgage brokers. While these businesses are operating in run-off, they have not been reported as discontinued operations because we continue to generate cash flow from the ongoing collections of the receivables, including interest and fees.

As previously discussed in Note 3, “Discontinued Operations,” during the second quarter we began reporting our Insurance and Commercial businesses, which had previously been included in the “All Other” caption, as discontinued operations. As our segment results are reported on a continuing operations basis, beginning in the second quarter 2012, the results of our Insurance and Commercial businesses are not included in our segment reporting.

The All Other caption includes our corporate and treasury activities, which includes the impact of FVO debt. Each of these falls below the threshold tests under segment reporting accounting principles for determining reportable segments. Certain fair value adjustments related to purchase accounting resulting from our acquisition by HSBC and related amortization have been allocated to Corporate, which is included in the “All Other” caption within our segment disclosure. With the sale of our Card and Retail Services business completed on May 1, 2012 and upon the completion of the sale of our Insurance business as more fully discussed in Note 3, “Discontinued Operations,” our corporate and treasury activities will solely be supporting our Consumer segment. As a result, beginning in 2013 we will report these activities within the Consumer Segment and no longer report an “All Other” caption within segment reporting.

We report financial information to our parent, HSBC, in accordance with International Financial Reporting Standards (“IFRSs”). Our segment results are presented in accordance with IFRSs (a non-U.S. GAAP financial measure) on a legal entity basis (“IFRSs Basis”) as operating results are monitored and reviewed and trends are evaluated on an IFRSs Basis. However, we continue to monitor liquidity and capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. There have been no significant changes in measurement or composition of our segment reporting other than the items discussed above as compared with the presentation in our 2011 Form 10-K.

For segment reporting purposes, intersegment transactions have not been eliminated. We generally account for transactions between segments as if they were with third parties.

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented below:

Net Interest Income

Effective interest rate - The calculation of effective interest rates under IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”), requires an estimate of changes in estimated contractual cash flows, including fees and points paid or received between parties to the contract that are an integral part of the effective interest rate be included. U.S. GAAP generally prohibits recognition of interest income to the extent the net investment in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation. Under U.S. GAAP, prepayment penalties are generally recognized as received. U.S. GAAP also includes interest income on loans originated as held for sale which is included in other operating revenues for IFRSs. During 2011, for IFRSs there was approximately $185 million of cumulative effective interest rate adjustments recognized to correct prior period errors.

Deferred loan origination costs and fees - Loan origination cost deferrals under IFRSs are more stringent and generally result in lower costs being deferred than permitted under U.S. GAAP. In addition, all deferred loan origination fees, costs and loan premiums must be recognized based on the expected life of the receivables under IFRSs as part of the effective interest calculation while under U.S. GAAP they may be recognized on either a contractual or expected life basis.

Net interest income - Under IFRSs, net interest income includes the interest element for derivatives which corresponds to debt designated at fair value. For U.S. GAAP, this is included in gain (loss) on debt designated at fair value and related derivatives which is a component of other revenues.

Other Operating Income (Total Other Revenues)

Loans held for sale - IFRSs requires loans originated with the intent to sell in the near term to be classified as trading assets and recorded at their fair value. Under U.S. GAAP, loans designated as held for sale are reflected as loans and recorded at the lower of amortized cost or fair value. Under IFRSs, the income and expenses related to receivables held for sale are reported in other operating income. Under U.S. GAAP, the income and expenses related to receivables held for sale are reported similarly to loans held for investment.

For receivables transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet when certain criteria are met which are generally more stringent than those under U.S. GAAP, but does not change the recognition and measurement criteria. Accordingly, for IFRSs purposes such loans continue to be accounted for and impairment continues to be measured in accordance with IAS 39 with any gain or loss recorded at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value. Under U.S. GAAP, the component of the lower of amortized cost or fair value adjustment related to credit risk at the time of transfer is recorded in the statement of income (loss) as provision for credit losses while the component related to interest rates and liquidity factors is reported in the statement of income (loss) in other revenues.

Extinguishment of debt - During the fourth quarter of 2010, we exchanged $1.8 billion in senior debt for $1.9 billion in new fixed rate subordinated debt. Under IFRSs, the population of debt exchanged which qualified for extinguishment treatment was larger than under U.S. GAAP which resulted in a gain on extinguishment of debt under IFRSs compared to a small loss under U.S. GAAP.

Securities - Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares held for stock plans are measured at fair value through other comprehensive income. If it is determined that these shares have become impaired, the unrealized loss in accumulated other comprehensive income is reclassified to profit or loss. There is no similar requirement under U.S. GAAP.

During the second quarter of 2009, under IFRSs we recorded income for the value of additional shares attributed to HSBC shares held for stock plans as a result of HSBC's rights offering earlier in 2009. During 2011, under IFRSs we recorded additional gains as these shares vest. The additional shares are not recorded under U.S. GAAP.

Other-than-temporary impairments - Under U.S. GAAP, a decline in fair value of an available-for-sale debt security below its amortized cost may indicate that the security is other-than-temporarily impaired under certain conditions. IFRSs do not have an “other than temporary” impairment concept. Under IFRSs, a decline in fair value of an available-for-sale debt security below its amortized cost is considered evidence of impairment if the decline can, at least partially, be attributed to an incurred loss event that impacts the estimated future cash flows of the security (i.e., a credit loss event). Thus a security may not be considered impaired if the decline in value is the result of events that do not negatively impact the estimated future cash flows of the security (e.g., an increase in the risk-free interest rate). However, until the entity sells the security, it will have to assess the security for credit losses at each reporting date.

Another difference between U.S. GAAP and IFRSs is the amount of the loss that an entity recognizes in earnings on an impaired (other-than-temporarily impaired for U.S. GAAP) available-for-sale debt security. Under U.S. GAAP, if an entity has decided to sell a debt security whose fair value has declined below its amortized cost, or will be more likely than not required to sell the debt security before it recovers its amortized cost basis, it will recognize an impairment loss in earnings equal to the difference between the debt security's carrying amount and its fair value. If the entity has not decided to sell the debt security and will not be more likely than not required to sell the debt security before it recovers its amortized cost basis, but nonetheless expects that it will not recover the security's amortized cost basis, it will bifurcate the impairment loss into a credit loss component and a non-credit loss component, and recognize the credit loss component in earnings and the non-credit loss component in other comprehensive income. Under IFRSs, the entity recognizes the entire decline in fair value below amortized cost in earnings.

REO expense - Other revenues under IFRSs include losses on sale and the lower of amortized cost or fair value of the collateral less cost to sell adjustments on REO properties which are classified as other expense under U.S. GAAP.

Loan Impairment Charges (Provision for Credit Losses)

IFRSs requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans which requires the discounting of cash flows including recovery estimates at the original effective interest rate of the pool of customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time, and is recognized in interest income. Also under IFRSs, if the recognition of a write-down to fair value on secured loans decreases because collateral values have improved and the improvement can be related objectively to an event occurring after recognition of the write-down, such write-down is reversed, which is not permitted under U.S. GAAP. Additionally under IFRSs, future recoveries on charged-off loans or loans written down to fair value less cost to obtain title and sell the collateral are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under IFRSs. Under IFRSs, interest on impaired loans is recorded at the effective interest rate on the customer loan balance net of impairment allowances, and therefore reflects the collectability of the loans.

As discussed above, under U.S. GAAP the credit risk component of the initial lower of amortized cost or fair value adjustment related to the transfer of receivables to held for sale is recorded in the statement of income (loss) as provision for credit losses. There is no similar requirement under IFRSs.

As previously discussed, in the third quarter of 2011 we adopted new guidance under U.S. GAAP for determining whether a restructuring of a receivable meets the criteria to be considered a TDR Loan. Credit loss reserves on TDR Loans are established based on the present value of expected future cash flows discounted at the loans' original effective interest rate.

Under IFRSs, impairment on the residential mortgage loans where we have granted the borrower a concession as a result of financial difficulty is measured based on the cash flows attributable to the credit loss events which occurred before the reporting date. HSBC's accounting policy under IFRSs is to remove such loans from the category of impaired loans after a defined period of re-performance, although such loans remain segregated from loans that were not impaired in the past for the purposes of collective impairment assessment to reflect their credit risk. Under U.S. GAAP, when a loan is impaired the impairment is measured based on all expected cash flows over the remaining expected life of the loan. Such loans remain impaired for the remainder of their lives under U.S. GAAP.

For loans collectively evaluated for impairment under U.S. GAAP, bank industry practice which we adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our credit loss reserves. Under IFRSs, we completed a review in the fourth quarter of 2012 which concluded that the estimated average period of time from current status to write-off for real estate secured loans collectively evaluated for impairment using a roll rate migration analysis was 10 months (previously a period of 7 months was used) which was also adopted in the fourth quarter of 2012.

Operating Expenses

Pension and other postretirement benefit costs - Pension expense under U.S. GAAP is generally higher than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeded the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the “corridor.”). In 2012, amounts include a higher pension curtailment benefit under U.S. GAAP as a result of the decision in the third quarter to cease all future contributions under the Cash Balance formula of the HSBC North America Pension Plan and freeze the plan effective January 1, 2013. During the fourth quarter of 2011, an amendment was made to the benefit formula associated with services provided by certain employees in past periods. Under IFRSs, the financial impact of this amendment of $31 million was immediately recognized in earnings. Under U.S. GAAP, the financial impact was recorded in accumulated other comprehensive income and will be amortized to net periodic pension costs over the remaining life expectancy of the participants. Additionally, during the fourth quarter of 2011, under IFRSs we recorded a curtailment gain of $52 million related to our decision to sell our Card and Retail Services business, as previously discussed. Under U.S. GAAP, the curtailment gain was recorded upon completion of the transaction in the second quarter of 2012.

Furthermore, in 2010 changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under U.S. GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Litigation accrual – A litigation accrual was recorded at December 31, 2011 related to a potential settlement of a legal matter where the loss criteria have been met and an accrual can be estimated for U.S. GAAP. Under IFRSs, apart from the likelihood of a potential settlement, it was determined that a present obligation does not exist at December 31, 2011 and, therefore, a liability was not recognized.

Share-based bonus arrangements - Under IFRSs, the recognition of compensation expense related to share-based bonuses begins on January 1 of the current year for awards expected to be granted in the first quarter of the following year. Under U.S. GAAP, the recognition of compensation expense related to share-based bonuses does not begin until the date the awards are granted.

Assets

Customer loans (Receivables) - As discussed more fully above under "Other Operating Income (Total Other Revenues) - Loans held for sale," on an IFRSs basis, loans designated as held for sale at the time of origination and accrued interest are classified as trading assets. However, the accounting requirements governing when receivables previously held for investment are transferred to a held for sale category are more stringent under IFRSs than under U.S. GAAP. Unearned insurance premiums are reported as a reduction to receivables on a U.S. GAAP basis but are reported as insurance reserves for IFRSs. IFRSs also allows for reversals of write-downs to fair value on secured loans when collateral values have improved which is not permitted under U.S. GAAP.

Derivatives - Under U.S. GAAP, derivative receivables and payables with the same counterparty may be reported on a net basis in the balance sheet when there is an executed International Swaps and Derivatives Association, Inc. (“ISDA”) Master Netting Arrangement. In addition, under U.S. GAAP, fair value amounts recognized for the obligation to return cash collateral received or the right to reclaim cash collateral paid are offset against the fair value of derivative instruments. Under IFRSs, these agreements do not necessarily meet the requirements for offset, and therefore such derivative receivables and payables are presented gross on the balance sheet.

Reconciliation of our IFRS Basis segment results to the U.S. GAAP consolidated totals are as follows:



	Consumer			All Other			Adjustments/ Reconciling Items⁽¹⁾			IFRS Basis Consolidated Totals			IFRS Adjustments⁽²⁾			IFRS Reclassifications⁽³⁾			U.S. GAAP Consolidated Totals
	(in millions)
Year Ended December 31, 2012:
Net interest income	$	2,350		$	190		$	—		$	2,540		$	(500	)	$	(394	)	$	1,646
Other operating income (Total other revenues)	(11		)	(942		)	(7		)	(960		)	(1,609		)	450			(2,119		)
Total operating income (loss)	2,339			(752		)	(7		)	1,580			(2,109		)	56			(473		)
Loan impairment charges (Provision for credit losses)	2,556			—			—			2,556			(332		)	—			2,224
	(217		)	(752		)	(7		)	(976		)	(1,777		)	56			(2,697		)
Operating expenses	984			37			(7		)	1,014			44			56			1,114
Profit (loss) before tax	$	(1,201	)	$	(789	)	$	—		$	(1,990	)	$	(1,821	)	$	—		$	(3,811	)
Intersegment revenues	6			1			(7		)	—			—			—			—
Depreciation and amortization	1			12			—			13			—			(6		)	7
Expenditures for long-lived assets	—			3			—			3			—			—			3
Balances at end of period:																			—
Customer loans (Receivables)	$	37,496		$	60		$	—		$	37,556		$	(4,557	)	$	(60	)	$	32,939
Assets	40,215			7,605			—			47,820			(3,074		)	—			44,746
Year Ended December 31, 2011:
Net interest income	$	2,456		$	425		$	—		$	2,881		$	(522	)	$	(583	)	$	1,776
Other operating income (Total other revenues)	(48		)	(504		)	(25		)	(577		)	3			714			140
Total operating income (loss)	2,408			(79		)	(25		)	2,304			(519		)	131			1,916
Loan impairment charges (Provision for credit losses)	4,911			2			—			4,913			(495		)	—			4,418
	(2,503		)	(81		)	(25		)	(2,609		)	(24		)	131			(2,502		)
Operating expenses	1,021			168			(25		)	1,164			(40		)	131			1,255
Profit (loss) before tax	$	(3,524	)	$	(249	)	$	—		$	(3,773	)	$	16		$	—		$	(3,757	)
Intersegment revenues	70			(45		)	(25		)	—			—			—			—
Depreciation and amortization	1			14			—			15			8			(4		)	19
Expenditures for long-lived assets	—			4			—			4			—			—			4
Balances at end of period:
Customer loans (Receivables)	$	48,075		$	60		$	—		$	48,135		$	(162	)	$	(61	)	$	47,912
Assets	46,859			6,671			—			53,530			(2,974		)	110			50,666
Year Ended December 31, 2010:
Net interest income	$	2,326		$	743		$	—		$	3,069		$	(261	)	$	(772	)	$	2,036
Other operating income (Total other revenues)	(30		)	(328		)	(22		)	(380		)	(69		)	933			484
Total operating income (loss)	2,296			415			(22		)	2,689			(330		)	161			2,520
Loan impairment charges (Provision for credit losses)	5,692			(5		)	—			5,687			(341		)	—			5,346
	(3,396		)	420			(22		)	(2,998		)	11			161			(2,826		)
Operating expenses	883			110			(22		)	971			44			161			1,176
Profit (loss) before tax	$	(4,279	)	$	310		$	—		$	(3,969	)	$	(33	)	$	—		$	(4,002	)
Intersegment revenues	73			(51		)	(22		)	—			—			—			—
Depreciation and amortization	2			17			—			19			3			—			22
Expenditures for long-lived assets	—			10			—			10			—			—			10
Balances at end of period:
Customer loans (Receivables)	$	56,725		$	2,250		$	—		$	58,975		$	(270	)	$	(2,249	)	$	56,456
Assets	57,531			10,282			—			67,813			(3,408		)	(60		)	64,345


⁽¹⁾	Eliminates intersegment revenues.


⁽²⁾	IFRS Adjustments, which have been described more fully above, consist of the following:



	Net Interest Income			Other Revenues			Provision For Credit Losses			Total Costs and Expenses			Profit (Loss) Before Tax			Receivables			Total Assets
	(in millions)
Year Ended December 31, 2012:
Derivatives and hedge accounting	$	15		$	—		$	—		$	—		$	15		$	—		$	(4	)
Purchase accounting	(5		)	3			14			—			(16		)	19			46
Deferred loan origination costs and premiums	(15		)	(5		)	—			—			(20		)	125			70
Credit loss impairment provisioning	(535		)	(14		)	15			—			(564		)	(222		)	(533		)
Loans held for resale	4			(1,523		)	(361		)	5			(1,162		)	(4,487		)	(768		)
Interest recognition	34			—			—			—			34			8			16
Other	2			(70		)	—			39			(108		)	—			(1,901		)
Total	$	(500	)	$	(1,609	)	$	(332	)	$	44		$	(1,821	)	$	(4,557	)	$	(3,074	)
Year Ended December 31, 2011:
Derivatives and hedge accounting	$	5		$	—		$	—		$	—		$	5		$	—		$	—
Goodwill and intangible assets	—			—			—			—			—			—			(111		)
Purchase accounting	(4		)	32			14			—			14			21			57
Deferred loan origination costs and premiums	(30		)	—			—			—			(30		)	143			83
Credit loss impairment provisioning	(499		)	—			(506		)	—			7			(300		)	(170		)
Loans held for resale	6			—			—			—			6			(36		)	(23		)
Interest recognition	(2		)	—			—			—			(2		)	10			(6		)
Other	2			(29		)	(3		)	(40		)	16			—			(2,804		)
Total	$	(522	)	$	3		$	(495	)	$	(40	)	$	16		$	(162	)	$	(2,974	)
Year Ended December 31, 2010:
Derivatives and hedge accounting	$	12		$	—		$	—		$	—		12			$	—		$	—
Goodwill and intangible assets	—			—			—			5			(5		)	—			—
Purchase accounting	2			(10		)	23			—			(31		)	(7		)	48
Deferred loan origination costs and premiums	(68		)	—			—			—			(68		)	175			102
Credit loss impairment provisioning	(213		)	—			(369		)	—			156			(413		)	(175		)
Loans held for resale	8			3			3			—			8			(42		)	(27		)
Interest recognition	(2		)	—			—			5			(7		)	17			(5		)
Other	—			(62		)	2			34			(98		)	—			(3,351		)
Total	$	(261	)	$	(69	)	$	(341	)	$	44		$	(33	)	$	(270	)	$	(3,408	)


(3)	Represents differences in balance sheet and income statement presentation between IFRS and U.S. GAAP.