Update of the Registration Document Filed with the Autorité des Marchés Financiers on 29 June 2005 under reference number D.

Transcription

1 Update of the Registration Document Filed with the Autorité des Marchés Financiers on 29 June 2005 under reference number D Update filed with the Autorité des Marchés Financiers 21 November 2005 HSBC France Limited-liability company (société anonyme) with share capital of 374,010,730 SIREN RCS Paris Registered office: 103, avenue des Champs-Elysées Paris Cedex 08 Tel. : Telex: F

2 Important information In accordance with the decision taken in the company's extraordinary general meeting on 26 July 2005, CCF changed its corporate name to HSBC France on 1 November This document discusses information concerning a period prior to 1 November As a result, the corporate name used in this document is still CCF. This document was filed with the Autorités des Marchés Financiers on 21 November 2005 in accordance with Book II of the AMF's General Regulation. It updates the Annual Report and Accounts filed with the Autorité des Marchés Financiers on 29 June 2005 under reference number D It may be used in support of a financial transaction when supplemented by a Transaction Note that has received approval from the Autorités des Marchés Financiers. 2

3 CONTENTS Pages I. Update based on events taking place after 29 June 2005 (the date on which the Annual Report and Accounts were filed) 1. Consolidated financial statements as at Statutory auditors' report on the financial statements as at Management report on the first half of Events taking place after II. Update in accordance with European Commission regulation 809/ of 29 April. 60 III. Person responsible for the Registration Document and additional information 74 IV. Persons responsible for auditing the financial statements 75 V. Cross-reference table 76 3

4 I. Update based on events taking place after 29 June 2005 (the date on which the Annual Report and Accounts were filed) 1. Consolidated financial statements as at 2005 Consolidated income statement for the half-year to 2005 IFRS IFRS Except IAS 32, 39 IFRS Except IAS 32, 39 Half year to Half year to Full year to December Notes m m m Interest income... 1,314 1,412 2,750 Interest expense... (728) (881) (1,719) Net interest income ,031 Fee income ,091 Fee expense... (134) (112) (240) Net fee income Trading income Net income from financial instruments designated at fair value... (1) Gains less losses from financial investments Dividend income Other operating income Total operating income... 1,272 1,196 2,388 Loan impairment charges and other credit risk provisions (44) 27 Net operating income... 1,288 1,152 2,415 Employee compensation and benefits... (508) (502) (1,024) General and administrative expenses... (331) (283) (594) Depreciation of property, plant and equipment... (32) (49) (124) Amortisation of intangible assets and impairment of goodwill... (15) (14) (89) Total operating expenses... (886) (848) (1,831) Operating profit Share of profit in associates and joint ventures Profit before tax Tax expense... 6 (41) (43) (81) Profit for the period tributable to shareholders tributable to minority interests... 2 (1) Basic earnings per ordinary share Diluted earnings per ordinary share Dividend per ordinary share

5 Consolidated balance sheet at 2005 ASSETS IFRS IFRS Except IAS 32, 39 IFRS Except IAS 32, December 2005 Notes m m m Cash and balances at central banks Items in the course of collection from other banks... 1, Trading assets ,656 25,698 21,206 Financial assets designated at fair value... Derivatives ,998 2,366 3,334 Loans and advances to banks... 8,14 30,577 15,506 17,544 Loans and advances to customers... 9,14 34,136 31,028 31,969 Financial investments ,890 8,241 8,339 Interests in associates and joint ventures Goodwill and intangible assets Property, plant and equipment Other assets... 2,455 1,772 2,016 Prepayments and accrued income... 1,084 1,283 1,344 Total assets ,700 88,235 87,947 LIABILITIES AND EQUITY Liabilities Deposits by banks... 11, 14 34,665 22,752 20,987 Customer accounts... 12, 14 33,389 28,793 31,467 Items in the course of transmission to other banks... 1, Trading liabilities ,540 11,493 11,496 Financial liabilities designated at fair value Derivatives ,944 1,588 2,745 Debt securities in issue ,151 13,483 10,819 Retirement benefit liabilities Other liabilities... 1,920 3,292 3,656 Accruals and deferred income... 1, ,135 Provisions for liabilities and charges deferred tax other provisions Subordinated liabilities Total liabilities ,822 84,121 83,766 Equity Called up share capital Share premium account... 1,093 1,064 1,093 Reserves, Profit and losses... 3,397 2,669 2,701 Total shareholders equity ,864 4,105 4,168 Minority interests Total equity... 4,878 4,114 4,181 Total equity and liabilities ,700 88,235 87,947 5

6 Consolidated cash flow statement for the half-year to 2005 IFRS IFRS Except IAS 32, 39 Half year to Half year to Notes 2005 m m Cash flows from operating activities Profit before tax Adjustments for: Non-cash items included in net profit (42) 90 Change in operating assets (7,639) (7,195) Change in operating liabilities ,051 11,097 Elimination of exchange differences and transition adjustments... 1,818 (820) Net (gain)/loss from investing activities... (82) (21) Share of profits in associates and joint ventures (10) (15) Dividends received from associated undertakings Tax paid... (25) (52) Net cash from operating activities... 8,483 3,403 Cash flows from investing activities Purchase of financial investments... (2,161) (2,124) Proceeds from the sale of financial investments... 2,799 2,014 Purchase of property, plant and equipment... (33) (46) Proceeds from the sale of property, plant and equipment Purchase of intangible assets... (3) 3 Net cash outflow from acquisition of and increase in stake of subsidiary undertakings Net cash inflow from disposal of subsidiary undertakings Net cash outflow from acquisition of and increase in stake of associated undertakings Proceeds from disposal of associated undertakings Net cash from investing activities (139) Cash flows from financing activities Issue of ordinary share capital Net purchase and sales of own shares for market-making purposes Purchases of own shares to meet share awards and share option awards Own shares released on vesting of share awards and exercise of options (Increase)/Decrease in non equity minority interests Subordinated loan capital issued Subordinated loan capital repaid... (6) (182) Dividends paid... (231) (242) Dividends paid to minority interests equity non equity Net cash (outflow)/inflow from financing activities... (237) (274) Net increase/(decrease) in cash and cash equivalents... 8,868 2,990 Cash and cash equivalents at the beginning of the period... 15,258 10,765 Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the period ,147 13,761 6

7 1 Basis of preparation (a) For all periods up to and including the year ended 31 December, CCF prepared its consolidated financial statements in accordance with French Generally Accepted Accounting Policies ( French GAAP ). From 1 January 2005, CCF is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) as endorsed by the European Union ( EU ) and effective for CCF s reporting for the year ended 31 December IFRS comprises accounting standards issued by the International Accounting Standards Board ( IASB ) and its predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) and its predecessor body. IFRS in existence as at the date of these interim consolidated financial statements may differ from endorsed IFRS actually in effect at 31 December 2005 as a result of decisions taken by the EU on endorsement, interpretative guidance issued by the IASB and IFRIC, and the requirements of companies legislation. These factors may affect CCF s Annual Report and Accounts 2005 and the information contained within this document. These interim financial statements comply with all current IFRS and have been prepared in accordance with International Accounting Standard ( IAS ) 34 "Interim Financial Reporting on this basis. As referred to below, current IFRSs include certain amendments that have yet to be endorsed by the EU, but are expected to be endorsed. In preparing its interim consolidated financial statements, CCF has elected to take advantage of certain transitional provisions within IFRS 1 First time adoption of International Financial Reporting Standards which offer exemption from presenting comparative information or applying IFRS retrospectively. The most significant of these provisions is the exemption from presenting comparative information in accordance with IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts. Comparative information for financial instruments and insurance contracts has been prepared on the basis of CCF s previous accounting policies. The accounting policies applied to financial instruments for and 2005 are disclosed separately below. Transition to IFRS In addition to exempting companies from the requirement to restate comparatives for IAS 32, IAS 39 and IFRS 4, IFRS 1 grants certain exemptions from the full requirements of IFRS to companies adopting IFRS for the first time in the transition period. CCF has elected to take the following exemptions affecting comparative financial data: (i) Business combinations CCF has chosen not to restate business combinations that took place prior to the 1 January transition date. (ii) Fair value or revaluation as deemed cost A first-time adopter may elect to measure individual items of property at fair value at the date of transition to IFRS and use that fair value as deemed cost at that date. CCF has made this election. (iii) Employee benefits CCF has elected to apply the employee benefits exemption and has therefore recognised in equity at 1 January all cumulative actuarial gains and losses on retirement benefit obligations. (iv) Cumulative translation differences CCF has set the cumulative translation differences for all foreign operations to zero at 1 January. (v) Share-based payment transactions CCF has elected to undertake full retrospective application of IFRS 2 Share-based Payment. CCF has adopted the Amendment to IAS 39 Financial Instruments: Recognition and Measurement: The Fair Value Option (the Amendment ) with effect from 1 January 2005, ahead of its effective date, on the assumption that it will be endorsed by the EU (see 2(i)). CCF has also adopted the Amendment to IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures (Note 2(t)) and IFRIC 4 Determining whether an Arrangement contains a Lease (Note 2(r)), ahead of their required effective dates, on the assumption that they will be endorsed by the EU). 7

8 The balance sheets and income statements in this document are presented in accordance with IAS 1 Presentation of Financial Statements. CCF currently intends to adopt ED 7 Financial Instruments: Disclosures ( ED 7 ) in 2005, ahead of its proposed effective date. However, the format and presentation adopted may change in the event that further guidance is issued and a consensus develops on best practice from which to draw. (b) The CCF group's consolidated financial statements consist of the financial statements of CCF, its subsidiaries and associates. (i) Acquisitions Acquired subsidiaries are consolidated from the date on which control passes to CCF until the date on which this control ends. As allowed under IFRS 1, CCF has opted not to restate business combinations that took place before 1 January, the date on which it adopted IFRS. CCF's acquisitions of subsidiaries are accounted for using the purchase method. The cost of an acquisition is recognised at fair value on the date on which CCF takes control, taking into account the costs directly attributable to the acquisition. Identifiable assets, liabilities and contingent liabilities are recognised at fair value on the acquisition date. The difference between the acquisition cost and fair value of the portion of identifiable net assets attributable to CCF is recognised as goodwill if positive and immediately taken to income if negative. (ii) Consolidation methods Companies controlled by the group are fully consolidated. Control over a subsidiary is determined by the ability to govern the subsidiary's financial and operating policies in order to benefit from its activities. Control results from: - The direct or indirect ownership of a majority of the subsidiary's voting rights - The power to appoint or remove a majority of members of the subsidiary's board of directors or equivalent governing bodies - The power to govern the financial and operating policies of the entity under a statute or an agreement. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Jointly controlled companies are reported using the equity method. CCF has joint control over a company when, as part of a contractual agreement, strategic financial and operating decisions relating to the company's activity require the consent of all the venturers sharing control. Companies over which CCF has significant influence are accounted for as associates. Significant influence is the power to participate in the financial and operating decisions of an entity without controlling it. Significant influence is assumed if 20% or more of an entity's voting rights are held. Finally, CCF consolidates distinct legal entities created specifically to manage a transaction or a group of similar transactions ("special purpose entities"), even if there is no capital link, provided that CCF controls the entities in substance, based on the following criteria: - The entity's activities are being conducted on behalf of CCF, such that CCF benefits from these activities. - CCF has decision-making powers to obtain the majority of benefits arising from the entity's ordinary activities. These powers include the ability to dissolve the entity, to change its charter or bylaws and to veto proposed changes of the SPE s charter or bylaws. These powers may have been delegated through an autopilot mechanism. - CCF is able to obtain the majority of the benefits from the entity and may therefore be exposed to risks arising from the entity's activities. - CCF retains the majority of the risks related to the entity in order to obtain benefits from its activity. Exceptions under French GAAP relating to the consolidation of special-purpose entities are no longer applicable. 8

9 (iii) Eliminations of internal transactions All transactions internal to the CCF group are eliminated on consolidation. (c) The preparation of financial information requires the use of estimates and assumptions about future conditions. Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the future may differ from those reported. In this regard, management believes that the critical accounting policies where judgement is necessarily applied are those which relate to loan impairment, goodwill impairment and the valuation of financial instruments. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of CCF s net income, financial position and cash flows for the interim periods have been made. 2 Principal accounting policies (a) Interest income and expense From 1 January 2005 Interest income and expense for all interest-bearing financial instruments except those classified as held-fortrading or designated at fair value are recognised in Interest income and Interest expense in the income statement using the effective interest rates of the financial assets or financial liabilities to which they relate. The effective interest rate is the rate at inception that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, CCF estimates cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation includes all amounts paid or received by CCF that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. Interest on impaired financial assets is recognised at the original effective interest rate of the financial asset applied to the carrying amount as reduced by any allowance for impairment. From 1 January to 31 December Interest income was recognised in the income statement as it accrued. (b) Non interest income (i) Fee income From 1 January 2005 CCF earns fee income from a diverse range of services it provides to its customers. Fee income is accounted for as follows: if the income is earned on the execution of a significant act, it is recognised as revenue when the significant act has been completed (for example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party, such as the arrangement for the acquisition of shares or other securities); if the income is earned as services are provided, it is recognised as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees); and if the income is an integral part of the effective interest rate of a financial instrument, it is recognised as an adjustment to the effective interest rate (for example, loan commitment fees) and recorded in Interest income (See Note 2(a)). From 1 January to 31 December Fee income was accounted for as follows: if the income was earned on the execution of a significant act, it was recognised as revenue when the significant act had been completed (for example, commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party, such as the arrangement for the acquisition of shares or other securities); 9

10 if the income was earned as services were provided, it was recognised as revenue as the services were provided (for example, asset management, portfolio and other management advisory and service fees); and if the income was interest in nature, it was recognised on an appropriate basis over the relevant period and recorded in Interest income (See Note 2(a)). (ii) Dividend income Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity securities. (iii) Net income from financial instruments designated at fair value From 1 January 2005 Net income from financial instruments designated at fair value comprises all gains and losses from changes in the fair value of financial assets and financial liabilities designated at fair value, together with interest income and expense and dividend income arising on those financial instruments. (iv) Trading income Trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with related interest income, expense and dividends. (c) Segment reporting CCF mainly operates in France. CCF manages its business through the following customer groups: Personal Financial Services, Commercial Banking, Corporate Investment Banking and Markets, and Private Banking. The reporting financial information by segment required by IAS 14 is disclosed in the Note 21. (d) Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to banks, and certificates of deposit. (e) Loans and advances to banks and customers From 1 January 2005 Loans and advances to banks and customers include loans and advances originated by CCF, which are not intended to be sold in the short term and have not been classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is advanced to borrowers. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less impairment losses. From 1 January to 31 December Loans and advances to banks and customers include loans and advances originated by CCF. Loans and advances are recognised when cash was advanced to borrowers. They are measured at amortised cost less provisions for impaired loans and advances. (f) Loan impairment From 1 January 2005 It is CCF s policy that each operating company will recognise losses for impaired loans promptly where there is objective evidence that impairment of a loan or portfolio of loans has occurred. There are two basic methods of calculating impairment losses, those calculated on individual loans and those losses assessed on a collective basis. Losses expected as a result of future events, no matter how likely, are not recognised. (i) Individually assessed loans Impairment losses on individually assessed accounts are determined by an evaluation of the exposures on a case-by-case basis. CCF assesses at each balance sheet date whether there is any objective evidence that a loan is impaired. This procedure is applied to all accounts that are considered individually significant. 10

11 In determining such impairment losses on individually assessed accounts, the following factors are considered: CCF s aggregate exposure to the customer; the viability of the customer s business model and capability to trade successfully out of financial difficulties and generate sufficient cash flow to service their debt obligations; the likely dividend available on liquidation or bankruptcy; the extent of other creditors commitments ranking ahead of, or pari passu with, CCF and the likelihood of other creditors continuing to support the company; the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident; the amount and timing of expected receipts and recoveries; the realisable value of security (or other credit mitigants) and likelihood of successful repossession; the likely deduction of any costs involved in recovery of amounts outstanding; the ability of the borrower to obtain and make payments in the relevant foreign currency if loans are not in local currency; and where available, the secondary market price for the debt. Impairment loss is calculated by comparing the present value of the expected future cash flows, discounted at the original effective interest rate of the loan, with its current carrying value and the amount of any loss is charged in the income statement. The carrying amount of impaired loans is reduced through the use of an allowance account. (ii) Collectively assessed loans Where loans have been individually assessed and no evidence of loss has been identified, these loans are grouped together on the basis of similar credit risk characteristics for the purpose of calculating a collective impairment loss. This loss covers loans that are impaired at the balance sheet date but which will not be individually identified as such until some time in the future. The collective impairment loss is determined after taking into account: historical loss experience in portfolios of similar risk characteristics (for example, by industry sector, loan grade or product); the estimated period between a loss occurring and that loss being identified and evidenced by the establishment of an allowance against the loss on an individual loan; and management s experienced judgement as to whether the current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. (iii) Reversals of impairment If, in a subsequent period, the amount of an impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent it is now excessive by reducing the loan impairment allowance account. The amount of any reversal is recognised in the income statement. From 1 January to 31 December Provisions for bad and doubtful debts recognised in the income statement were determined each year in light of estimated potential losses and were based on an individual analysis of each loan concerned. All loans were classified as bad and doubtful debts, even if secured by a guarantee, where there was a probability or certainty of total or partial non-recovery, or where amounts had been in arrears for more than three months in the case of most loans and operating leases, or more than six months in the case of property loans or leasing, or more than nine months in the case of local authority loans. Loans were also deemed to be at risk where legal proceedings were already in progress (e.g. receivership, court-ordered liquidation, personal bankruptcy, etc.), or where it was likely that the borrower would be unable to meet their obligations. 11

12 Loans to property developers were assessed on a case-by-case basis utilising various criteria, including the likely outcome of the project, the capacity of partners to contribute the necessary equity as well as their solvability. In this context, all interests on doubtful property loans booked as operating income were fully provided for. Moreover, provisions made against the principal outstanding were also based on a case-bycase assessment using various criteria, including the credibility of the project s intended sale price, its rental income potential, the soundness of the investor pool and the value of any guarantees received. Specific provisions were established for restructured loans and bad debts. Loans restructured on off-market terms were identified separately and a discount recognised representing the difference between the new interest rate and the lower of the original interest rate of the loan and the market rate prevailing at the time of restructuring, applied to future expected cash flows. This discount was booked as a provision for bad and doubtful debts and written back to net interest income over the remaining term of the loan. Bad debts included debts which had become accelerated as a result of certain events, restructured debts which are in default and debts classified as doubtful for more than one year, where they were in arrears and not accompanied by guarantees covering virtually the entire amount and would later be booked as losses. In compliance with standard banking practice, CCF established country risk provisions against exposure in certain countries generally considered by the banking industry as involving a high degree of risk. (g) Trading assets and trading liabilities From 1 January 2005 Treasury bills, debt securities, equity shares and short positions in securities which have been acquired or incurred principally for the purpose of selling or repurchasing in the near term or are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking are classified as held for trading. Such financial assets or financial liabilities are recognised initially at fair value, with transaction costs taken to the income statement, and are subsequently remeasured at fair value. All subsequent gains and losses from changes in the fair value of these assets and liabilities, together with related interest income and expense and dividends, are recognised in the income statement within Trading income as they arise. Financial assets and financial liabilities are recognised using trade date accounting. From 1 January to 31 December Trading securities were carried at cost (including accrued interest in the case of fixed interest securities) and they were marked to market at the year-end. Change in the market value of such assets and liabilities were recognised in the income statement as Trading income and related interest income and expense and dividends were recognised in the income statement (as they arose separately from Trading income ) and aggregated with similar amounts arising from other activities. (h) Financial instruments designated at fair value From 1 January 2005 A financial instrument, other than one held for trading, is classified in this category if it meets the criteria set out below, and is so designated by management. CCF may designate financial instruments at fair value where the 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 recognised initially at fair value, with transaction costs taken directly to the income statement, and are subsequently remeasured at fair value. This designation, once made, is irrevocable in respect of the financial instruments to which it is made. Financial assets and financial liabilities are recognised using trade date accounting. 12

13 Gains and losses from changes in the fair value of such assets and liabilities are recognised in the income statement as they arise, together with related interest income and expense and dividends, within Net income from financial instruments designated at fair value. Gains and losses arising from the changes in fair value of derivatives that are managed in conjunction with financial assets or financial liabilities designated at fair value are presented in Net income from financial instruments designated at fair value. (i) Financial investments From 1 January 2005 Treasury bills, debt securities and equity shares intended to be held on a continuing basis are classified as available-for-sale securities unless designated at fair value (see Note 2(h)) or classified as held-to-maturity. Available-for-sale securities are initially measured at fair value plus direct and incremental transactions costs. They are subsequently remeasured at fair value. Changes in fair value are recognised in equity until the securities are either sold or impaired. On the sale of available-for-sale securities, gains or losses held within equity are recycled through the income statement and classified as Gains less losses from financial investments. Interest income is recognised on such securities using the effective interest method, calculated over the asset s expected life. Where dated investment securities have been purchased at a premium or discount, these premiums and discounts are recognised as an adjustment to the effective interest rate. Dividends are recognised in the income statement when the right to receive payment has been established. An assessment is made at each balance sheet date as to whether there is any objective evidence of impairment being circumstances where an adverse impact on estimated future cash flows of the financial asset or group of assets can be reliably estimated. If an available-for-sale financial asset is determined to be impaired, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement) is removed from equity and recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. From 1 January to 31 December Treasury bills, debt securities and equity shares intended to be held on a continuing basis were classified as financial investments and included into the following categories: - available-for-sale securities - held-to-maturity securities - portfolio securities - other long term securities - other participating interests Specific accounting methods applied to each of these categories : - Available-for-sale securities: Securities acquired for their yield, but held principally with the intention of reselling them in the relatively short term were considered to be available-for-sale. On the acquisition date, they were recorded at cost (less accrued interest at the time of purchase in the case of fixed interest securities). Premiums and discounts were amortised on a straight-line basis over the remaining life of the securities. the year-end, they were valued on a line-by-line basis at the lower of cost or market value. In the case of equities, market value was the price on December 31 for listed securities and the anticipated resale price for unlisted securities. In the case of fixed interest securities, market value was the price quoted on the last working day of the year. Actual or unrealised gains or losses on hedging instruments were recognised on a line-by-line basis, and a provision for impairment made where necessary. 13

14 - Held-to-maturity securities: These were fixed interest securities acquired with the intention of holding them over the long term, in principle, until maturity. They were carried at cost and any premium or discount was amortised over their residual life. A provision for impairment could be taken to cover counterparty risk. Securities purchased for their yield or held for regulatory reasons by certain foreign subsidiaries or branches were classified as held-to-maturity securities. - Portfolio securities Portfolio securities comprised investments purchased with the intention of realising a medium term capital gain, but with no intention of investing in the business on a long-term basis. This was notably the case for securities held as part of a venture capital business. Portfolio securities were carried at the lower of cost or fair value, determined by taking account of the issuer s general prospects and the forecast holding period. - Other long term securities Other long term securities comprised equities and similar securities acquired with the intention of achieving a satisfactory return in the relatively long term by building an ongoing business relationship with the issuing company, but with no influence over its management. These securities were accounted for on a line-by-line basis and they were carried at the lower of cost or fair value. - Other participating interests Other participating interests comprised the securities held with a long-term. They are valued at the lower of cost or fair value. Fair value for portfolio securities, other long-term securities and other participating interests is determined on a multi-criteria approach, as follow: - economic and financial appraisal of the company based primarily on net asset value; - market appraisal based on financial analyst s reports; - share price performance for listed companies, taking account of any specific relationships existing between CCF and each of the companies concerned. Gains or losses Gains or losses on disposal and movements in provisions were recorded on the income included in Gains less losses from financial investments. (j) Determination of fair value The fair values for quoted investments in active markets are determined by reference to the current quoted bid price. Fair values for short positions in quoted investments are determined with reference to quoted offer prices. Where independent prices are not available, fair values may be determined using valuation techniques with reference to observable market data. These include comparison to similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. (k) Sale and repurchase agreements Where securities are sold subject to a commitment to repurchase them at a predetermined price ( repos ) or are the subject of a stock lending agreement, they remain on the balance sheet and a liability is recorded in respect of the consideration received. Conversely, securities purchased under analogous commitments to resell ( reverse repos ) are not recognised on the balance sheet and the consideration paid is recorded in Loans and advances to banks or Loans and advances to customers as appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the life of the agreement using the effective interest method. Securities borrowed are not recognised on the balance sheet, unless control of the contractual rights that comprise these securities is obtained and the securities are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in Trading income, and the obligation to return them is recorded as a trading liability and measured at fair value. 14

15 (l) Derivatives and hedge accounting From 1 January 2005 Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values are obtained from quoted market prices in active markets, or by using valuation techniques, including recent market transactions, where an active market does not exist. Valuation techniques include discounted cash flow models and option pricing models as appropriate. All derivatives are classified as assets when their fair value is positive, or as liabilities when their fair value is negative. In the normal course of business, the fair value of a derivative at initial recognition is considered to be the transaction price (i.e. the fair value of the consideration given or received). However, in certain circumstances the fair value of an instrument will be evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, including interest rate yield curves, option volatilities and currency rates. When such evidence exists, CCF recognises a trading profit or loss on inception of the derivative. If observable market data are not available, the initial increase in fair value indicated by the valuation model, but based on unobservable inputs, is not recognised immediately in the income statement but is recognised over the life of the transaction on an appropriate basis, or recognised in the income statement when the inputs become observable, or when the transaction matures or is closed out. Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Derivatives embedded in home purchase savings products (PEL/CEL) are some of the main embedded derivatives identified by CCF, and have therefore been valued using a CCF-specific model (see note 20). Derivative assets and liabilities on different transactions are only netted if the transactions are with the same counterparty, a legal right of set-off exists, and the cash flows are to be settled on a net basis. The method of recognising the resulting fair value gains or losses depends on whether the derivative is held for trading, or is designated as a hedging instrument, and if so, the nature of the risk being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement. Where derivatives are designated as hedges CCF classifies them as derivatives as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments ( fair value hedge ); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ( cash flow hedge ); or (iii) hedges of net investments in a foreign operation ( net investment hedge ). Hedge accounting is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge provided certain criteria are met. Hedge accounting Following HSBC Group policy, CCF is not using the carve out arrangements contained in the European regulation no. 2086/ in relation to the accounting for macro-hedging operations. It is CCF s policy to document, at the inception of a hedging relationship, the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge. Such policies also require documentation of the assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risks. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, together with any changes in the fair value of the asset or liability or group thereof that are attributable to the hedged risk. If the hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the residual period to maturity. Where the adjustment relates to the carrying amount of a hedged equity security, this remains in retained earnings until the disposal of the equity security. 15

16 Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. Any gain or loss relating to an ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed. Hedge effectiveness testing To qualify for hedge accounting, IAS 39 requires the hedge to be highly effective. the inception of the hedge and throughout its life, each hedge must be expected to be highly effective (prospective effectiveness). Actual effectiveness (retrospective effectiveness) must also be demonstrated on an ongoing basis. The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method an CCF entity adopts for assessing hedge effectiveness will depend on its risk management strategy. In assessing effectiveness, the changes in the fair value or the cash flows of the hedged item and the hedging instrument must be expected to, or must almost fully, offset each other. For prospective effectiveness, the changes in fair value or cash flows must be expected to offset each other in the range of 90 per cent to 110 per cent. For actual effectiveness, the changes in fair value or cash flows must offset each other in the range of 80 per cent to 125 per cent for the hedge to be deemed effective. Derivatives that do not qualify for hedge accounting All gains and losses from changes in the fair value of any derivative that does not qualify for hedge accounting are recognised immediately in the income statement. These gains and losses are reported in Trading income, except where derivatives are managed in conjunction with financial instruments designated at fair value, in which case gains and losses are reported in Net income from financial instruments designated at fair value. From 1 January to 31 December Derivative financial instruments comprised futures, forward, swap and option transactions undertaken by CCF in the foreign exchange, interest rate, equity, credit derivative, and commodity markets that were held off-balance sheet. Accounting for these instruments was dependent upon whether the transactions were undertaken for trading or non-trading purposes. However, certain general rules apply to all market positions, while others are specific to certain categories of instruments. - Foreign currency and interest rate options: the origination of the options contract, the notional amount of the underlying was recognised as an offbalance sheet item. For income and expenses, a distinction was made between hedging transactions and trading or arbitrage transactions: - Income and expense items related to hedging transactions were recognised symmetrically with those arising on the hedged item; 16

17 - In the case of trading transactions, positions were marked to market at the year-end. For transactions on an organised market or an equivalent market defined in Regulation CRB 88-02, changes in the value of the position were booked to the income statement either by means of margin calls or, in the case of unlisted options, directly by means of a mathematical calculation. - Index and equity options Index and equity options were entered into for trading purposes. Changes in the value of options outstanding at the year-end were booked directly to the income statement. - Interest rate futures The accounting treatment was identical to that which is described above for options. - Currency and/or interest rate swaps (swaps, FRAs) Foreign currency and interest-rate were accounted for differently if their purpose was : - to maintain isolated open positions in order to benefit from changes in interest rates, if and when they occur; - to hedge interest-rate risk on a specific item or homogeneous group of items, - to allow for specialised management of a trading book, - to hedge and manage the bank s structural interest-rate risk on all its assets, liabilities and offbalance sheet items, except for those transactions referred to above. Accounting treatments differed depending on whether the transaction was entered into for hedging or trading purposes. Gains or losses on instruments designed to hedge assets or liabilities were booked to the income statement on an accrual basis, unless the hedged items were themselves marked to market in the balance sheet. This applied in particular to swaps traded for Asset and Liability Management purposes. Gains or losses on positions managed as part of a swap trading book were booked to the income statement at their present value, after deducting a percentage for counterparty risk and future management costs. Trading transactions were marked to market on the day of the trade. The corresponding liability was recorded as an off-balance sheet item from the date of the trade to the value date. The value date generally corresponded to the date on which an exchange of monetary flows took place that was normally booked to the balance sheet. Notional amounts were recorded off-balance sheet whether they were actually swapped or simply used as a benchmark. Currency swaps which were not hedged by spot transactions were valued at the forward rate prevailing for the remainder of their term. (m) Derecognition of financial assets and liabilities Financial assets are derecognised when the rights to receive cash flows from the assets have expired; or where CCF has transferred its contractual rights to receive the cash flows of the financial assets and has transferred substantially all the risks and rewards of ownership; or where control is not retained. Financial liabilities are derecognised when they are extinguished, i.e. when the obligation is discharged or cancelled or expired. (n) Offsetting financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (o) Associates and joint ventures (i) Investments in associates and interests in joint ventures are initially stated at cost, including attributable goodwill, and adjusted thereafter for the post-acquisition change in CCF s share of net assets. (ii) Unrealised gains on transactions between CCF and its associates and jointly controlled entities are eliminated to the extent of CCF s interest in the associate or joint venture. Unrealised losses are also eliminated to the extent of CCF s interest in the associate or joint venture unless the transaction provides evidence of an impairment of the asset transferred. 17