Dear Sirs,

First-time Application of International Financial Reporting Standards (reference RIN 3235-AI92) (‘the proposals’)

We welcome the opportunity to comment on temporary accommodations included in the Securities and Exchange Commission’s proposals. We believe the proposed relief afforded to companies, in providing only two years of financial information in the first year of reporting under International Financial Reporting Standards (‘IFRS’), is important at a time when the transition to IFRS places significant pressure on a company’s reporting functions and a considerable demand on its resources. This pressure has been increased by the IASB’s issuance of a number of important and far-reaching standards during late 2003 and early 2004, with promise of yet further amendments and new standards to be published prior to 1 January 2005.

I would draw your attention to one area of the proposals with which we disagree. Section II.B.1 proposes that three years of condensed U.S. GAAP financial information be presented. Where publishing information as required by Items 17 and 18 of Form 20-F is appropriate in current filings, publishing a condensed U.S. GAAP income statement, consistent with that required by Article 10 of Regulations S-X, is far in excess of the information currently produced. We believe the cost and difficulty of preparing such information would outweigh the limited benefits to investors. First-time registrants are not required to present condensed U.S. GAAP financial information in their initial filing and we do not believe the provision of such information on the occasion of changing GAAP is justified on the grounds of investor benefit.

We believe the progress to date by the FASB and IASB in working towards a common set of high-quality standards means the SEC is in a position to accept financial statements prepared under IFRS without reconciliation to U.S. GAAP. IFRS and U.S. GAAP are now largely convergent in significant areas of accounting such as business combinations and goodwill, accounting for financial instruments and recognition of share-based payment transactions. We do not believe the remaining differences between IFRS and U.S. GAAP are of such a magnitude that they would confuse U.S. investors familiar with U.S. GAAP where the IFRS accounting policies are clearly explained in filings. We would strongly support such a move and urge the SEC to give this serious consideration.

Our detailed responses to published questions are attached.

Your faithfully,

Douglas Flint Group Finance Director

Appendix: HSBC responses to detailed questions

II. DISCUSSION OF PROPOSED ACCOMMODATION TO PERMIT OMISSION OF IFRS FINANCIAL STATEMENTS FOR THE THIRD FINANCIAL YEAR

A. Eligibility Requirements

Questions

  • Will the conversion to IFRS for year 2005 make it difficult for issuers to recast year 2003 results accurately? What specific issues will be encountered and how difficult will they be to address? What additional information would first-time adopters need to provide IFRS financial statements for the third-year back that they would not already have in connection with their reconciliation to U.S. GAAP? What other difficulties might the application of IFRS create for first-time adopters? Will first-time adopters in earlier or later years face similar issues? Are the proposed amendments appropriate to address those challenges? If not, what issues are not addressed by the proposed amendments? Should they be addressed, and, if so, how?

      The conversion to IFRS in 2005 would present significant difficulties to issuers recasting 2003 results accurately. A number of significant changes to IFRS have only been (or will be) finalised during the first quarter of 2004, for example, a new standard on business combinations. Further new or amended standards are expected prior to 2005.

      The most significant impact on banks such as HSBC are the significant amendments to IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’. These have far reaching systems consequences that require significant resources to meet the deadline for producing 2004 IFRS comparatives. Producing IFRS 2003 comparatives as well would materially add to this burden.

      It is not generally the case that Tthe information required to prepare IFRS financial statements for the third-year back will not necessarily already be available in connection with the reconciliation to U.S. GAAP.

      Hence, we welcome the main thrust of the SEC’s proposals and believe this will help ease the transition for issuers.

      First-time adopters in 2006 and 2007 will face similar issues, albeit of less significance owing to the additional time available for revising and developing systems.

  • Will any first-time adopters be required by their home country to publish financial statements prepared in accordance with IFRS for the third year back? If so, should we require their inclusion in SEC filings? Why or why not? If a company publishes IFRS financial statements for the third year back but is not required to do so, should we require inclusion of those financial statements in SEC filings?

      We believe that an issuer required by their home country to publish financial statements prepared in accordance with IFRS for the third year back would also wish to include such information in their SEC filing since this information would already be in the public domain. This would be allowed under the SEC proposals. We have no comment on whether the SEC should mandate such presentation.

  • Is the proposed time frame, which provides the accommodation to companies that switch to IFRS for any financial year beginning no later than January 1, 2007, appropriate? Would this date create eligibility concerns for issuers that have a 52-week financial year? If so, how should we address those concerns?

    The proposed time frame appears reasonable.

  • Should the proposed accommodation be extended to apply in any other circumstances, such as for issuers that, either voluntarily or pursuant to a home country or other requirement, adopt IFRS for the first time for years after year 2007? Should the accommodation apply for an indefinite period? Are there other circumstances in which the proposed exception to the requirement to present three years of financial statements on a consistent basis should be considered? What are they?

      The proposed accommodation is appropriate if a jurisdiction mandated that IFRS would become that country’s primary GAAP within a short time scale. The SEC would need to consider as a separate exercise whether a similar proposed accommodation was appropriate.

  • Would extending the proposed accommodation to apply to issuers that adopt IFRS for the first time later than year 2007 encourage a broader use of IFRS? Why or why not?

      No comment.

      We believe the majority of companies will move to IFRS as a result of this being mandated by governments and local regulators.

  • If first-time adopters of IFRS were not able to avail themselves of the proposed accommodation, would they be likely to continue to include in their SEC filings financial statements prepared in accordance with Previous GAAP rather than preparing financial statements prepared in accordance with IFRS for the third financial year? What are the advantages and disadvantages of each approach?

      If the SEC does not provide the temporary accommodations in the proposals, we do not believe this would not be an a realistic option available to issuers. Companies could not support the cost of maintaining two sets of books for preparing consolidated accounts in accordance with EU regulations (IFRS) and financial statements for SEC filings (Previous GAAP).

    B. Primary Financial Statements

    Questions

  • Is the proposed amendment to permit two years of IFRS financial statements for foreign private issuers adopting IFRS through year 2007, coupled with the permitted exclusion of financial statements prepared on the basis of Previous GAAP, consistent with the best interests of investors? Will investors receive adequate information on which to base investment decisions if two rather than three years of statements of income, changes in shareholders’ equity and cash flows are presented on a consistent basis?

      We believe investors will be adequately served by presenting two years of statements of income, changes in shareholders’ equity and cash flows on a consistent basis, together with the disclosures as required by IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ which explain the impact of transition to IFRS.

  • Are there other alternatives that should be considered to address the challenges presented by the mandated use of IFRS? What are they?

      No comment. We do not believe so.

  • Would the presentation of three years of condensed U.S. GAAP financial information in a level of detail consistent with interim financial statements prepared under Article 10 of Regulation S-X create a significant burden to first-time adopters of IFRS? What would be the difficulties and costs of preparing that information? Would that level of information be useful to investors? What level of information would be useful to investors and not unduly burdensome to prepare?

      The presentation of three years of condensed U.S. GAAP financial information would present a significant burden to issuers that do not already provide such information in their 20-F filings.

      Where publishing information as required by Items 17 and 18 of Form 20-F is appropriate in current filings, publishing a condensed U.S. GAAP income statement, consistent with that required by Article 10 of Regulations S-X, is far in excess of the information currently produced. We believe the cost and difficulty of preparing such information would outweigh the limited benefits to investors.

      First-time registrants are not required, as a rule, to present condensed U.S. GAAP financial information in their initial filing (which in effect means that the SEC has concluded that the costs of preparing such information outweigh their benefit). We do not believe the provision of such information on the occasion of changing GAAP is justified on the grounds of investor benefit.

  • If a filing does not contain Previous GAAP financial statements or IFRS financial statements for the third year back, would the proposed requirement for three years of condensed U.S. GAAP information adequately address issues related to the different starting points and reconciling items used in the reconciliations from Previous GAAP to U.S. GAAP and from IFRS to U.S. GAAP?

      We do not believe the proposed requirement would address the comparative information issues sufficiently to warrant the burden of producing this data; see our comments above.

  • Do our proposals contain sufficient guidance on the form and content of the condensed U.S. GAAP financial information to be provided? Should we require financial information beyond income statements and balance sheets from companies that would be required to provide condensed U.S. GAAP information? If so, what further information? Should we require that they include notes to the financial information in addition to the required reconciliation?

      We believe preparation of condensed U.S. GAAP financial information to be a significant and unwarranted burden. The requirement for further information would increase that burden.

  • Should foreign private issuers that do not use U.S. GAAP to prepare their primary financial statements in their initial registration statements filed with the SEC be required to present the additional condensed U.S. GAAP financial information in addition to the two-year reconciliation to U.S. GAAP? Why or why not? Would this be unduly burdensome?

      We believe the proposed exemption for foreign private issuers filing initial registration documents from filing additional condensed U.S. GAAP financial information should be applied to all foreign private issuers filing a 20-F.

  • Should issuers be prohibited from including Previous GAAP financial statements, financial information and textual discussions based thereon in a registration statement, prospectus or annual report prepared in accordance with Form 20-F?

      We agree that issuers should not be prohibited from including Previous GAAP financial information provided it is accompanied by suitable cautionary language. It may be appropriate in some circumstances to present such information in order to explain trends but such information should, generally, be kept to a minimum. We agree that issuers should determine the nature of the cautionary language according to their use of Previous GAAP financial information.

  • If we were to prohibit issuers from including Previous GAAP financial statements and financial information in a document, should we require, permit or prohibit the issuer to make reference to other SEC filings or other documents that include such financial statements and information?

      No comment.

      We believe current filings make it clear to investors what GAAP financial information is prepared under. An investor would not be confused by the absence of such a prohibition.

  • Is it appropriate to permit issuers to include, incorporate or refer to Previous GAAP financial information and, if so, for what periods and to what extent? If issuers elect to include or incorporate Previous GAAP financial information, should we require operating and financial review and prospects disclosure pursuant to Item 5 of Form 20-F related to that information?

      No comment.

      We believe it is appropriate to permit issuers to include, incorporate or refer to Previous GAAP financial information for any periods provided that information does not confuse investors. Issuers should not be required to provide operating and financial review disclosure related to that information.

  • Would Previous GAAP financial statements be useful to investors and should issuers be required to provide them? Should inclusion in previous annual reports filed with us on Form 20-F be sufficient in this regard? Would investors be likely to compare information based on IFRS with information based on Previous GAAP? If we require or permit financial statements and other information based on Previous GAAP, where should that information be located and how should it be formatted?

      No comment.

      We do not believe issuers should be required to provide Previous GAAP financial statements in their first IFRS filing; previous annual reports filed on Form 20-F should be sufficient.

      Investors are likely to compare Previous GAAP and IFRS financial statements and, hence, IFRS 1 mandates disclosures to alleviate confusion.

      Information based on Previous GAAP should be limited to the operating and financial review and should not form part of the financial statements and notes thereon.

  • Is inclusion of Previous GAAP financial information likely to cause investor confusion regarding the basis of accounting used in preparing financial information? How could any confusion or comparison be minimised? Should we provide more specific guidance on the location or substance of disclosure stating that a filing contains financial information based on Previous GAAP that is not comparable to financial information based on IFRS?

      No comment. Where the disclosure requirements of IFRS 1 and the guidance in the SEC proposals are followed, we believe this provides sufficient information to investors to alleviate confusion.

      We do not believe the SEC should issue further guidance in this regard. It is the responsibility of issuers to avoid investor confusion by determining the format of disclosures and cautionary language according to their use of Previous GAAP financial information.

  • Should Previous GAAP financial information be presented in a “side-by-side” format with IFRS financial information? What additional disclosure would be necessary, if any? Should it be accompanied by a legend stating that the information is not comparable to financial information based on IFRS? If so, where should the legend be located? Would a “side-by-side” format present difficulties relating to disclosure contained in audit reports relating to the different bases of GAAP used? Similarly, how would the notes to the financial statements be presented in a clear manner if different GAAPs were presented therein?

      No comment. As noted above, we believe it should be left to issuers to determine the most appropriate format of disclosures and cautionary language.

  • If issuers include, incorporate or refer to Previous GAAP financial statements or financial information in a disclosure document, should we require specific legends or other language? Should any Previous GAAP information included be presented in a separate section of the disclosure document?

      No comment.

    C. Selected Financial Data

    Questions

  • Should five years of selected financial data based on U.S. GAAP be required in a separate section of the document, rather than with the IFRS selected data?

      We believe issuers should determine the format of presentation of information. If U.S. GAAP and IFRS selected data are published close together, issuers should make it clear to investors which information is presented under each GAAP.

  • Should we require selected financial data based on Previous GAAP? If so, where should it be located? Should we expressly prohibit a “side-by-side” disclosure format for selected financial data based on Previous GAAP and IFRS? Conversely, should we permit or require such a disclosure format? Would inclusion of Previous GAAP selected financial data, whether presented in a “side-by-side” format or otherwise, be likely to cause investor confusion regarding the basis of accounting used? If so, how could any confusion or the likelihood of comparison be minimised?

      As noted in our response to questions in section B, we believe issuers should determine the format of presentation of information, provided it is clear to investors where information is presented under different GAAPs.

    D. Operating and Financial Review and Prospects

    Questions

  • Is there additional information that would be useful to investors that should be included in the disclosure of operating and financial review and prospects? If so, what is it?

      We do not believe there is any such information that should be mandatorily disclosed.

  • Should we require that disclosure of operating and financial review and prospects based on Previous GAAP financial information, if included, refer to the reconciliation to U.S. GAAP? If so, why? How is that information likely to benefit investors? Would requiring that information create undue burdens for issuers?

      We do not believe the SEC should prescribe that discussion based on previous GAAP included in the disclosure of operating and financial review and prospects be referred to the reconciliation to U.S. GAAP. It is important that cautionary language is used but the form of this should be determined by the issuer. For example, it may be appropriate to refer to the reconciliations between Previous GAAP and IFRS as mandated by IFRS 1.

      Referring all such discussion to the U.S. GAAP reconciliations may be unduly burdensome to companies.

    E. Other Disclosures

  • Business and Derivatives Disclosure: comment on whether the proposed requirement, which clarifies that companies preparing their financial statements under IFRS should also base their Item 4 company information and Item 11 derivatives disclosure on IFRS, is sufficient. If the proposal is not sufficient, comment on what additional information related to business operations and the use of derivatives should be required.

      We agree with the proposal and believe it is sufficient.

  • Disclosure Pursuant to Industry Guides: comment on whether amendments would be appropriate to address the information required under Industry Guide 3 or Industry Guide 6 in the context of first-time adopters changing their basis of accounting to IFRS. We agree that no amendment is required to these Industry Guides and that issuers will be able to continue to present all essential and material information to investors under IFRS.

      We believe the SEC should permit companies to present only two years’ of the information required by Industry Guide 3 or Industry Guide 6 under IFRS, consistent with the presentation of their primary financial statements. Such information is not necessarily purely statistical, for example, assets and liabilities may currently be measured and classified under Previous GAAP rather than U.S. GAAP.

      Data required under Securities Act Guide 3 where measurements and/or classifications may differ from U.S. GAAP, and it would be an unreasonable burden to restate the earliest year of three (or earliest three years of five in the case of Loan Portfolio) under IFRS, includes aspects of:

      • Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential.

      • Return on Equity and Assets.

      • Loan Portfolio.

      Where Industry Guide disclosures are presented under a Previous GAAP which differs from IFRS, issuers should make this clear by using appropriate cautionary language. We do not believe investors would gain any significant benefit from companies restating the earliest year(s) under IFRS measurement and classification rules.

    F. Financial Statements and Information for Interim Periods for the Transition Year

    Questions

  • To comply with these requirements, issuers may be required to maintain financial statements prepared in accordance with both Previous GAAP and IFRS for interim periods of the Transition Year. Would it be unduly burdensome to maintain books and records in accordance with both Previous GAAP and IFRS during this time? What costs and other burdens will this impose on issuers? Are companies that are mandated to switch to IFRS prohibited from continuing to publish financial statements prepared in accordance with Previous GAAP during their Transition Year? If so, who or what prohibits it?

      It would be extremely burdensome to companies to maintain books and records and parallel running of systems during the Transition Year. For a multinational company, many of the subsidiaries will currently be maintaining books and records under:

      • their local GAAP, for local tax and statutory reporting purposes;

      • the Previous GAAP of the parent company, for the purpose of producing the consolidated financial information of their parent; and

      • U.S. GAAP, in order to produce the reconciliations required in the parent company’s 20-F filings.

      For EU regulated companies, resources will be focussed in 2004 and 2005 on moving the presentation of financial information from Previous GAAP to IFRS. Financial information prepared under IFRS will be the focus of management from 2005. We do not believe companies should be required to continue to maintain Previous GAAP records, with the accompanying resource requirements, simply because the parent company may file a prospectus with the SEC during 2005.

      We believe, as an alternative, that where an entity is in the year of transition to IFRS, filings made with the SEC contain financial statements prepared in accordance with IFRS for the last full financial year, with unaudited IFRS financial statements for interim periods in both years.

      We are not aware of any prohibition from the EU from continuing to publish financial statements prepared in accordance with Previous GAAP during the Transition Year.

  • Will foreign issuers be likely to avoid registering securities under the Securities Act and the Exchange Act during the latter months of a Transition Year and early months of the year after in order to avoid being required to include interim financial statements in a disclosure document, and therefore be required to publish interim financial information in accordance with Previous GAAP? How can we reduce any impediment to foreign companies undertaking registered offerings during a Transition Year while ensuring that investors receive clear, sufficient, up-to-date information?

      We believe that, after considering the costs and benefits, companies may decide to postpone the registration of securities in order to avoid the production of interim financial statements prepared under Previous GAAP during the Transition Year. Allowing preparation of interim financial statements under IFRS would reduce this impediment.

  • Are investors likely to be confused with the presentation of interim financial statements using two bases of accounting covering the same periods? If so, what steps could be taken to minimise this confusion?

      We believe that the following circumstance may be confusing to investors:

      • a company, with a calendar year-end, filing a Report on 6-K for the six-month period to 30 June 2005 prepared under IFRS; followed by

      • the filing of a prospectus in November 2005 presenting financial information prepared under Previous GAAP (which had not previously been published) for the six months to 30 June 2005.

      As noted, above, we also believe the maintenance of Previous GAAP book and records is overly burdensome.

  • As proposed, an issuer must include in its SEC filings both IFRS financial statements and Previous GAAP financial statements for current and prior year interim periods, when both are available. Should we provide issuers with a choice of whether to provide interim financial statements prepared under Previous GAAP or under IFRS, when both are available?

      We believe issuers should have the choice of providing interim financial statements prepared under IFRS or Previous GAAP only.

  • When the Transition Year is year 2004 or 2005, in lieu of requiring both Previous GAAP and available IFRS interim financial statements for two years, would it be preferable to require audited financial statements prepared in accordance with IFRS for the last full financial year, with unaudited IFRS financial statements for interim periods in both years? This approach would not be in technical compliance with IFRS 1, which requires that first-time adopters include one year of comparative information under IFRS. Should we permit audit reports that are qualified as to this provision of IFRS 1? Should we make similar accommodations when an issuer’s Transition Year is later than year 2005? Why or why not?

      We believe such an accommodation is preferable. Where an issuer chooses to present interim financial statements prepared under IFRS, we believe that the information for all periods should be audited.

  • When the Transition Year is year 2004 or 2005, would it be appropriate instead to require three years of audited financial statements prepared in accordance with Previous GAAP and unaudited financial statements prepared in accordance with IFRS for interim periods in two years with the same level of disclosure as in annual financial statements? Would issuers be likely to prepare full IFRS financial statements for interim periods? If not, why not? Should an issuer’s first set of IFRS financial statements filed with the SEC be audited if they are for two years of interim periods? Why or why not? How would issuers assess and prepare disclosure of their operating and financial review and prospects? What other specific issues would companies face in presenting financial statements under both Previous GAAP and IFRS? How could those issues be addressed? Should we make similar accommodations when an issuer’s Transition Year is later than year 2005?

      No comment. See comment above.

    III. DISCLOSURES ABOUT FIRST-TIME ADOPTION OF IFRS

    A. Disclosure about Exceptions to IFRS

    Questions

    • Should first-time adopters be required to provide the additional information proposed under Item 5 of Form 20-F? Will this information be useful for investors, and will it be unduly burdensome for issuers to provide? In either case, commenters should provide supporting information relating to the utility of the information (or lack thereof) and the costs and difficulties associated with disclosing this information.

      • We believe the discussion of the use of exemptions allowed by IFRS 1, where material, would already be required under the general requirement of paragraph 38 of IFRS 1 on ‘Explanation of transition to IFRSs’. We agree with the SEC proposals to make this explicit.

        Paragraph 44 of IFRS 1 already includes limited disclosure requirements in respect of the use of the ‘fair value as deemed cost’ exemption for property, plant and equipment, investment property or intangible assets.

    • Should issuers be required to disclose more information with respect to the mandatory or elective exceptions? If so, what information would that be, what usefulness would this information have to investors, and what burdens would be imposed on issuers to disclose this information?

      • No comment. We believe the proposed information to be disclosed is appropriate.

    • Have we given sufficient guidance with respect to the information to be disclosed under the proposed amendment to Item 5? Should there be greater specificity relating to the required information? Are the proposals regarding the information to be provided in Item 5 and in the notes to the primary financial statements about IFRS exceptions sufficiently clear so as to avoid duplicative disclosure? If not, what further clarification is necessary?

    • No comment. We believe issuers should determine what disclosure is required depending on what is most useful to investors.

    B. Reconciliation from Previous GAAP

    Questions
    • Should we specify the form and content of the reconciliation from Previous GAAP to IFRS? For example, should we require that the information included in the reconciliation be similar in form and content to that in the example provided in IG63? Should we require a level of contentdifferent from that set out in IG63? If so, what level of information would be appropriate?

        We believe the issuer should determine the format of the reconciliations. The form and content will be dependent on the number and complexity of the reconciling items. We agree with the approach in IFRS 1 where the example given (IG63) is described as being only one way of satisfying the overall requirements.

    • Would providing a reconciliation from Previous GAAP to IFRS that is substantially similar in form and content to the example set forth in IG63 as best practice be unduly burdensome to issuers? If so, what specific difficulties would issuers face in providing that level of information? How could they be addressed?

        We believe the provision of the level of information in IG63 would not be unduly burdensome; such information would be available to issuers as a result of the process of having determined the nature and amount of the reconciling items. However, as noted above, we believe the issuer should determine the format of the reconciliations.

    • Would investors find the reconciliation information as proposed more useful in comparing different registrants than information required under IFRS alone? If not, why not? What additional information should be required, if any?
      ation is required.

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    HSBC Holdings plc
    Registered Office: 8 Canada Square, London E14 5HQ, United Kingdom
    Registered Number 617987

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    HSBC Holdings plc
    Registered Office: 8 Canada Square, London E14 5HQ, United Kingdom
    Registered Number 617987

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