Business Segments

We have one reportable segment: Consumer. Our Consumer segment consists of our run-off Consumer Lending and Mortgage Services businesses. While these businesses are operating in run-off, they do not qualify to be reported as discontinued operations. There have been no changes in measurement or composition of our segment reporting as compared with the presentation in our 2014 Form 10-K.

Our segment results are presented in accordance with the Group Reporting Basis which apply IFRSs as issued by the IASB and endorsed by the EU, and, as a result, our segment results are prepared and presented using financial information prepared on the Group Reporting Basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees are primarily made on this basis. However, we continue to monitor liquidity, capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis.

We are currently in the process of re-evaluating the financial information used to manage our businesses, including the scope and content of the U.S. GAAP financial data being reported to our Management and our Board. To the extent we make changes to this reporting in 2016, we will evaluate any impact such changes may have on our segment reporting.

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

Net Interest Income

Effective interest rate - The calculation of effective interest rates under the Group Reporting Basis 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 the Group Reporting Basis.

Deferred loan origination costs and fees - Loan origination cost deferrals under the Group Reporting Basis are more stringent and generally resulted 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 the Group Reporting Basis 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 the Group Reporting Basis, 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 - For receivables transferred to held for sale subsequent to origination, the Group Reporting Basis 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 the Group Reporting Basis such loans continue to be accounted for and impairment continues to be measured in accordance with IAS 39, "Financial Instruments: Recognition and Measurement" ("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 and subsequently measured 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 $1,800 million in senior debt for $1,900 million in new fixed rate subordinated debt. Under the Group Reporting Basis, 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 the Group Reporting Basis compared with a small loss under U.S. GAAP. Under U.S. GAAP, we continue to account for a portion of this debt under the fair value option election and, therefore, changes in the fair market value are recognized in earnings under U.S. GAAP. Under the Group Reporting Basis, the debt is held at amortized cost.

Loan Impairment Charges (Provision for Credit Losses)

The Group Reporting Basis 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. Under U.S. GAAP, a discounted cash flow methodology on pools of homogeneous loans is applied only to the extent loans are considered TDR Loans. Also under the Group Reporting Basis, if the fair value on secured loans previously written down increases 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 the Group Reporting Basis, 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 the Group Reporting Basis. Under the Group Reporting Basis, 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.

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 the Group Reporting Basis.

Credit loss reserves on TDR Loans for U.S. GAAP are established based on the present value of expected future cash flows discounted at the loans' original effective interest rate. Under the Group Reporting Basis, 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. The Group Reporting Basis removes 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 measured on this basis for the remainder of their lives under U.S. GAAP.

Operating Expenses

Pension and other postretirement benefit costs - Pension expense under U.S. GAAP is generally higher than under the Group Reporting Basis as a result of the amortization of the amount by which actuarial losses exceeds the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the corridor). In addition, under the Group Reporting Basis, pension expense is determined using a finance cost component comprising the net interest on the net defined benefit liability, which does not reflect the benefit from the expectation of higher returns on plan assets. During 2015, the substantial majority of our postretirement benefit plans were amended relating to post-65 retirees which resulted in a reduction of our postretirement benefit liability as the amendment eliminated future health cost increases which were previously included in the liability. Under the Group Reporting Basis, the benefit from the amendment was recognized immediately while under U.S. GAAP the benefit is amortized to postretirement benefit expense over the remaining covered period for those affected.

Litigation expenses - Under U.S. GAAP litigation accruals are recorded when it is probable a liability has been incurred and the amount is reasonably estimable. Under the Group Reporting Basis, a present obligation and a probable outflow of economic benefits must exist for an accrual to be recorded. In certain cases, this creates differences in the timing of accrual recognition between the Group Reporting Basis and U.S. GAAP.

Securities - Under the Group Reporting Basis, HSBC shares held for stock plans are recorded in securities. Under the Group Reporting Basis, 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 shares are recorded in other assets and 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," under the Group Reporting 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 the Group Reporting Basis than under U.S. GAAP. The Group Reporting Basis 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 a legally enforceable netting agreement in place. 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 the Group Reporting Basis, these agreements do not necessarily meet the requirements for offset, and therefore such derivative receivables and payables are presented gross on the balance sheet.

The following table reconciles our segment results on the Group Reporting Basis to the U.S. GAAP consolidated totals:



	Group Reporting Basis Consumer Segment Totals			Group Reporting Basis Adjustments⁽¹⁾			Group Reporting Basis Reclassifications⁽²⁾			U.S. GAAP Consolidated Totals
	(in millions)
Year Ended December 31, 2015
Net interest income	$	1,018		$	(134	)	$	(181	)	$	703
Other operating income (Total other revenues)	(192		)	97			186			91
Total operating income (loss)	826			(37		)	5			794
Loan impairment charges (Provision for credit losses)	65			185			—			250
Net interest income and other operating income less loan impairment charges	761			(222		)	5			544
Operating expenses	1,352			52			5			1,409
Profit (loss) before tax	$	(591	)	$	(274	)	$	—		$	(865	)
Depreciation and amortization	6			—			1			7
Expenditures for long-lived assets	—			—			—			—
Balances at end of period:
Customer loans (Receivables)	$	18,518		$	(9,339	)	$	(23	)	$	9,156
Assets	25,468			(1,336		)	—			24,132

Year Ended December 31, 2014:
Net interest income	$	1,376		$	(254	)	$	(254	)	$	868
Other operating income (Total other revenues)	(65		)	54			237			226
Total operating income (loss)	1,311			(200		)	(17		)	1,094
Loan impairment charges (Provision for credit losses)	33			(398		)	—			(365		)
Net interest income and other operating income less loan impairment charges	1,278			198			(17		)	1,459
Operating expenses	700			5			(17		)	688
Profit (loss) before tax	$	578		$	193		$	—		$	771
Depreciation and amortization	9			(1		)	1			9
Expenditures for long-lived assets	—			—			—			—
Balances at end of period:
Customer loans (Receivables)	$	23,554		$	(853	)	$	(31	)	$	22,670
Assets	32,966			(1,069		)	—			31,897

Year Ended December 31, 2013:
Net interest income	$	2,031		$	(643	)	$	(320	)	$	1,068
Other operating income (Total other revenues)	(413		)	966			328			881
Total operating income (loss)	1,618			323			8			1,949
Loan impairment charges (Provision for credit losses)	711			(732		)	—			(21		)
Net interest income and other operating income less loan impairment charges	907			1,055			8			1,970
Operating expenses	857			67			8			932
Profit (loss) before tax	$	50		$	988		$	—		$	1,038
Depreciation and amortization	5			2			1			8
Expenditures for long-lived assets	6			—			—			6
Balances at end of period:
Customer loans (Receivables)	$	29,262		$	(2,644	)	$	(34	)	$	26,584
Assets	39,503			(1,796		)	—			37,707


⁽¹⁾	Group Reporting Basis 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, 2015:
Derivatives and hedge accounting	$	2		$	—		$	—		$	—		$	2		$	—		$	(6	)
Purchase accounting	—			(15		)	18			—			(33		)	18			11
Deferred loan origination costs and premiums	(21		)	—			—			—			(21		)	50			37
Credit loss impairment provisioning	(132		)	—			72			—			(204		)	(1,087		)	(906		)
Loans held for sale	14			95			95			1			13			(8,325		)	320
Interest recognition	—			—			—			—			—			5			23
Other	3			17			—			51			(31		)	—			(815		)
Total	$	(134	)	$	97		$	185		$	52		$	(274	)	$	(9,339	)	$	(1,336	)
Year Ended December 31, 2014:
Derivatives and hedge accounting	$	2		$	—		$	—		$	—		$	2		$	—		$	(6	)
Purchase accounting	3			(5		)	(8		)	—			6			33			32
Deferred loan origination costs and premiums	(17		)	—			—			—			(17		)	81			51
Credit loss impairment provisioning	(243		)	—			(36		)	—			(207		)	(1,088		)	(842		)
Loans held for sale	3			76			(354		)	—			433			116			367
Interest recognition	(5		)	—			—			—			(5		)	6			23
Other	3			(17		)	—			5			(19		)	(1		)	(694		)
Total	$	(254	)	$	54		$	(398	)	$	5		$	193		$	(853	)	$	(1,069	)
Year Ended December 31, 2013:
Derivatives and hedge accounting	$	5		$	—		$	—		$	—		$	5		$	—		$	(6	)
Purchase accounting	—			16			43			—			(27		)	35			29
Deferred loan origination costs and premiums	(15		)	4			—			—			(11		)	97			63
Credit loss impairment provisioning	(649		)	250			(110		)	—			(289		)	(911		)	(719		)
Loans held for sale	4			671			(665		)	(5		)	1,345			(1,871		)	94
Interest recognition	9			8			—			—			17			7			27
Other	3			17			—			72			(52		)	(1		)	(1,284		)
Total	$	(643	)	$	966		$	(732	)	$	67		$	988		$	(2,644	)	$	(1,796	)


⁽²⁾	Represents differences in balance sheet and income statement presentation between U.S. GAAP and the Group Reporting Basis.