1. 1 IASB Risk Disclosure Proposals Russell Picot Group Chief Accounting Officer HSBC Holdings plc

2. 2 IASB Risk Disclosure Proposals Outline of Presentation Existing IAS 30 IFRS 7 Timetable Implementation challenges

3. 3 IASB Risk Disclosure Proposals Existing IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions Prescriptive Applied only to banks and similar financial institutions Not risk-based To be superseded by IFRS 7

4. 4 IASB Risk Disclosure Proposals Financial Activities Advisory Committee Consists of preparers, auditors, financial analysts and regulators Met quarterly Active forum for debating issues with IASB staff

5. 5 IASB Risk Disclosure Proposals IFRS 7 Financial Instruments:Disclosures IFRS 7’s principles complement those for recognising, measuring and presenting financial assets and liabilities in IAS 32 and IAS 39 Scope - covers all entities that have financial instruments (same as IAS 32) Disclosure not measurement (which is covered by IAS 39) Principles-based Risk-based Flexible

6. 6 IASB Risk Disclosure Proposals IFRS 7: Significance of Financial Instruments for Financial Position and Performance Paragraph 7: “An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance”.

7. 7 IASB Risk Disclosure Proposals IFRS 7 Financial Risk Disclosure Principle: Paragraph 30: “An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date”.

8. 8 IASB Risk Disclosure Proposals Basis of Disclosure Qualitative information about financial risk exposures and risk management policies; and Quantitative data: basis is “through the eyes of management” i.e. based on information provided internally to the entity’s key management personnel

9. 9 IASB Risk Disclosure Proposals Minimum Risk Information Required About: Credit risk: –q uality of assets - past-due and impaired; Market risk (including interest rate risk) Liquidity risk

10. 10 IASB Risk Disclosure Proposals Credit Risk Disclosures required: –Amount that represents the maximum credit exposure at the balance sheet date; –Description of collateral; and –Information about credit quality of assets that are not past-due or impaired

11. 11 IASB Risk Disclosure Proposals Quality of Assets Information to include: –Analysis of credit exposures using an external or internal grading system; –Nature of the counterparty; and –Description of collateral held

12. 12 IASB Risk Disclosure Proposals Quality of Assets (Continued) Disclosure required of: –Ageing analysis of past-due unimpaired assets; and –Analysis of assets that are individually impaired

13. 13 IASB Risk Disclosure Proposals Liquidity Risk Maturity analysis for financial liabilities based on remaining contractual maturity Management discussion of how it manages the liquidity risk inherent in these liabilities Sets out the framework for the management discussion

14. 14 IASB Risk Disclosure Proposals Market Risk Disclosure required of: –Sensitivity analysis for each type of market risk including interest rate risk showing the effect of reasonably expected changes in the relevant risk variable; –Methods and assumptions used; and –Any changes

15. 15 IASB Risk Disclosure Proposals Other Areas: Operational risk: Advisory group’s recommended operational risk disclosure has become an input to the MD&A project Hedge accounting/fair value –comprehensive disclosures Note - Fair Value Option and day 1 profits

16. 16 IASB Risk Disclosure Proposals IAS 32 Amendment: Balance Sheet/Income Statement Should be based on the measurement basis of the financial asset and/or financial liability (IAS 39) Reconciliation of the allowance account for credit losses, when an allowance account is used Does not mandate formats or location of disclosure

17. 17 IASB Risk Disclosure Proposals Capital Disclosure (IAS 1) Principle in paragraph 124A: an entity shall disclose information that enables users of its financial statements to evaluate the entity’s capital Does not require disclosure of entity-specific capital requirements. The expectation is that such requirements would factor into how capital resources are managed.

18. 18 IASB Risk Disclosure Proposals Capital Disclosure (Continued) Does require disclosure where an entity has not complied with externally imposed capital requirements Disclose consequences of non- compliance (if not complied)

19. 19 IASB Risk Disclosure Proposals Timetable ED 7 published with final comment deadline of 22 October 2004 Standard to be published 15 July 2005 Proposed effective date 1 January 2007 with early adoption encouraged If adopted before 1 January 2006 not required to present comparative information in IFRS 7

20. 20 IASB Risk Disclosure Proposals Implementation Challenges Flexible but rigorous Comprehensive and all-embracing Management challenge both to identify and measure all risk Insurance business dealt with under IFRS 4 but IAS 39 has major impact

21. 21 IASB Risk Disclosure Proposals Implementation Challenges (Cont’d) Consistent of approach across all sites and risk areas Data quality up to audit standard Alignment of external/internal performance and risk monitoring