HSBC FY05 REL3; Pt5/5

HSBC Holdings PLC
06 March 2006

Appendix

Significant change in accounting policies

Basis of preparation

The Hong Kong Institute of Certified Public Accountants has issued a number of
new and revised Hong Kong Financial Reporting Standards ('HKFRSs'), which is a
collective term that includes all applicable individual Hong Kong Financial
Reporting Standards, Hong Kong Accounting Standards and Interpretations. These
are effective for accounting periods beginning on or after 1 January 2005.

Hang Seng Bank Limited ('the bank') and its subsidiaries ('the group') have
adopted these new HKFRSs in the financial statements in 2005 resulting in
various changes in accounting policies.

Comparative figures have been restated to conform with the new accounting
policies except for those that apply to financial instruments in accordance with
HKAS 39. The policies applied to financial instruments for 2004 and 2005 are
disclosed separately below.

The tables attached disclose the adjustments that have been made, in accordance
with the transitional provisions of the respective HKFRSs, to each of the line
items in the consolidated income statement for the year ended 31 December 2004
(Table A) and in the consolidated balance sheet at 31 December 2004 and the
opening balances at 1 January 2005 (Table B).

Significant changes in principal accounting policies are listed as follows:

HKFRS 2: Share-based payment ('HKFRS 2')

The group made awards of, and granted options in respect of, shares of HSBC
Holdings plc, as part of employees' compensation.

In prior years, no compensation cost was recognised for share options granted at
fair value or not more than 20 per cent discount to fair value. For share awards
made to employees as part of their annual bonus, the cost for acquisition of
shares for the conditional award was charged to 'staff cost' over the period in
respect of which the performance condition applied.

With effect from 1 January 2005, and in accordance with HKFRS 2, the group has
adopted a new policy for share-based payment. Under the new policy, where shares
are awarded to an employee of the group as bonuses with a vesting period, the
cost of shares awarded is amortised over the vesting period from the date the
shares are awarded. Shares purchased for such purpose are classified as
available-for-sale and reported under 'Financial investments'.

For share options, the compensation expense is spread over the vesting period
from the date they are granted. The compensation expense is determined by
reference to the fair value of the options on grant date, and the impact of any
non-market vesting conditions such as option lapses. Where the group is not
charged for this by HSBC Holdings plc, the corresponding amount is credited to
'Other reserves'.

The group has taken advantage of the transition provision in HKFRS 2
'Share-based payment' and applied the treatment described above to shares and
options granted after 7 November 2002 which had not yet been vested at 1 January
2005.

The change in accounting policy has been applied retrospectively by way of prior
year adjustment and restatement of comparative figures for 2004. The unamortised
cost of share compensation of HK$66 million at 31 December 2004 was adjusted to
retained profits. Staff costs for 2004 have been restated to recognise share
compensation cost of HK$47 million. Share compensation cost amounting to HK$64
million has been recognised in the current year's income statement.

HKFRS 3: Business combinations ('HKFRS 3')

Goodwill

In prior years, positive goodwill arising from the acquisition of subsidiary and
associated companies was amortised over its estimated life, usually taken as 20
years, on a straight-line basis in the income statement.

With effect from 1 January 2005, and in accordance with HKFRS 3, the group has
adopted a new policy for goodwill. Under the new policy, positive goodwill is
not amortised but is tested for impairment at each balance sheet date at the
cash-generating unit level by applying a fair-value-based test in accordance
with HKAS 36 'Impairment of Assets'.

The accounting policy on goodwill has been applied retrospectively by way of
prior year adjustment and restatement of comparative figures for 2004. The
positive goodwill at 31 December 2004 has been restated to reverse all
amortisation made prior to that date (HK$9 million) with a corresponding
adjustment through retained profit at 31 December 2004. No impairment loss has
been recognised in the current year.

HKFRS 4: Insurance contracts ('HKFRS 4')

In prior years, all policies issued by insurance subsidiaries on long-term
assurance contracts were accounted for as insurance contracts.

With effect from 1 January 2005, and in accordance with HKFRS 4, a contract
under which the group accepts significant insurance risk from another party, by
agreeing to compensate that party on the occurrence of a specified uncertain
future event, is classified as an insurance contract. Such an insurance
contract, which may also transfer financial risk, is accounted for as an
insurance contract in accordance with HKFRS 4.

Income generated from assets backing insurance contracts is reported in the
income statement on a line-by-line basis according to the classification of
assets. Claims incurred and movement in policyholder liabilities for insurance
contracts are reported as such in the income statement.

A contract issued by the group that transfers financial risk, without
significant insurance risk, is classified as an investment contract, and
accounted for as a financial instrument in accordance with HKAS 39. Customer
liabilities under unit-linked investment contracts and the linked financial
assets are measured at fair value, and the movements in fair value are
recognised in the income statement in 'Net income from financial instruments
designated at fair value'.

The change in accounting policy on insurance contracts has been applied
retrospectively by way of prior year adjustment and restatement of comparative
figures for 2004.

Net increases/(decreases) in the outstanding balances on restatement of the
balance sheet are as follows:

Figures in HK$m                                                   At 31Dec04

Liabilities and reserves
Other liabilities                                                       (905)
Liabilities to customers under insurance contracts                     8,656
Liabilities to policyholders under long-term assurance business       (8,291)
Liabilities to customers under investment contracts                      540
Retained profits                                                           2
Other reserves                                                             3

HKFRS 5: Non-current assets held for sale and discontinued operations ('HKFRS 5')

In prior years, collateral assets repossessed for recovery of non-performing
advances were reported as advances. The carrying value was adjusted to the net
realisable value of the repossessed assets and classified as non-performing
advances.

With effect from 1 January 2005, and in accordance with HKFRS 5, non-current
assets acquired in exchange for advances in order to achieve an orderly
realisation are reported in 'Other assets'. The asset acquired is recorded at
the lower of its fair value less costs to sell and the carrying value of the
advance disposed of, net of impairment allowances, at the date of the exchange.
No depreciation is provided in respect of such assets. Any subsequent write-down
of an asset to fair value less costs to sell is recorded as an impairment loss
and included in the income statement. Any subsequent increase in fair value less
costs to sell not in excess of any cumulative impairment loss, is recognised as
a gain in the income statement.

Debt securities or equities acquired in debt-to-debt/equity swaps are included
as 'Available-for-sale' securities following the implementation of HKAS 39.

The change in accounting policy has been applied retrospectively, with
restatement of comparative figures for 2004. At 31 December 2004, repossessed
assets of HK$320 million were reclassified from 'Customer advances' to
'Non-current assets held for sale'. Gains on disposal of HK$37 million in 2004
were re-classified from 'Net charge for bad and doubtful debts' to 'Other
operating income'. Gains on disposal of HK$1 million were recorded under 'Other
operating income' for the current year income statement.

HKAS 17: Leases ('HKAS 17')

Leasehold land for own use

In prior years, leasehold premises were stated at fair market value, as valued
by professionally qualified valuers. The apportionment of the value between the
land and building elements was made by estimating the net replacement cost of
the building as the value of the building element, and taking the residual
figures as the value of the land element.

With effect from 1 January 2005, and in accordance with HKAS 17, the group has
adopted a new policy for leasehold land and buildings held for own use. Under
the new policy, the leasehold interest in the land held for own use is accounted
for as being held under an operating lease. The fair value of the interest in
any buildings situated on the leasehold land could be measured separately from
the fair value of the leasehold interest in the land at the time the lease was
first entered into by the group, or taken over from the previous lessee, or at
the date of construction of those buildings. Lease premiums on operating leases
are accounted for as prepaid rentals, reported under 'Interest in leasehold land
held for own use under operating lease', and are amortised to the income
statement on a straight-line basis over the remaining lease term. The property
revaluation reserve has been restated to exclude prior years' revaluations on
such leases. Where the original cost of leasehold land and buildings cannot be
reliably split, both land and buildings are treated as being under finance
leases and are accounted for at fair value less subsequent depreciation.

The change in accounting policy is adopted retrospectively and reflected by way
of prior year adjustment and restatement of comparative figures.

Net increases/(decreases) in the outstanding balances on restatement of the
balance sheet are as follows:

Figures in HK$m                                                   At 31Dec04
Assets
Premises                                                              (2,511)
Interest in leasehold land held for own use under operating lease        609
Liabilities and reserves
Property revaluation reserve                                          (1,502)
Retained profits                                                         (66)
Deferred tax liabilities                                                (334)

Increases/(decreases) in the following items on restatement of the income statement

                                                                  Year ended
Figures in HK$m                                                      31Dec04
Depreciation                                                             (52)
Rental expense                                                            14
Net deficit of revaluation of properties (net of deferred tax)             2

Rental expense on leasehold land for the year of 2005 amounted to HK$15 million.

HKAS 19: Employee benefits ('HKAS 19')

In prior years, the group implemented HK SSAP 34 (which is materially equivalent
to HKAS 19) in relation to the accounting for pensions, and adopted the corridor
approach for the recognition of actuarial gains and losses.

With effect from 1 January 2005, and in accordance with HKAS 19, the group has
changed its policy to fully recognise actuarial gains and losses in the
statement of changes in equity.

To reflect the change in accounting policy, the balance of actuarial loss
amounting to HK$82 million has been adjusted through 'Retained profits' as at 31
December 2004. An actuarial gain of HK$158 million for the year of 2005 has been
recognised through retained profits.

HKAS 21: The effects of changes in foreign exchange rates ('HKAS 21')

In prior years, exchange differences arising from re-translation of the result
for the period from the average rate to the exchange rate ruling at the
period-end were accounted for as exchange difference under retained profits.

With effect from 1 January 2005, and in accordance with HKAS 21, exchange
differences arising from the re-translation of opening foreign currency net
investments and the related cost of hedging, if any, and exchange differences
arising from re-translation of the result for the period from the average rate to
the exchange rate ruling at the period-end, are accounted for in a separate
foreign exchange reserve in equity. Exchange differences on a monetary item that
is part of a net investment in a foreign operation are recognised in the income
statement of separate subsidiary financial statements. In the consolidated
financial statements, these exchange differences are recognised in the foreign
exchange reserve.

To reflect the change in accounting policy, an amount of HK$50 million has been
reclassified from 'Retained profits' to 'Other reserves' in 2005.

HKAS 27: Consolidated and separate financial statements ('HKAS 27')
HK(SIC) interpretation 12 'Consolidation - special purpose entities' ('HK(SIC)-Int 12')

Life insurance subsidiary

In prior years, on consolidation of the life insurance subsidiary, long-term
assurance assets and liabilities attributable to policyholders were recognised
in aggregate under 'Other assets' and 'Other liabilities' respectively. Income
from long-term assurance assets was reported together with net earned insurance
premiums, less net insurance claims and movement in policyholder liabilities, as
'Other operating income' in the income statement.

With effect from 1 January 2005, and in accordance with HKAS 27, life insurance
subsidiary accounts are consolidated line-by-line. Assets of the life insurance
subsidiary, including long-term assurance assets, are reported according to
asset type as presented in the group's consolidated balance sheet. Net earned
insurance premiums and net insurance claims are separately shown in the income
statement, with income on assets reported under the same income categories as in
the group's consolidated income statement.

The change in accounting policy has been adopted retrospectively and the
comparative figures of 2004 have been restated to reflect the aforesaid
reclassifications, except for the treatment of financial assets and the related
income, in accordance with the requirement of HKAS 39 as described below.

HKAS 38: Intangible assets ('HKAS 38')

In prior years, costs incurred for development of IT software for internal use
were expensed as incurred.

With effect from 1 January 2005, and in accordance with HKAS 38, the value of
in-force long-term assurance business ('embedded value') and computer software
are reported as 'Intangible assets'. Embedded value is stated at valuation
determined annually in consultation with independent actuaries. Computer
software is stated at cost less amortisation and is amortised over its useful
life. Costs incurred in the development phase of a project to produce
application software for internal use are capitalised and amortised over the
software's estimated useful life, usually five years. A periodic review is
performed on intangible assets to confirm that there has been no impairment such
that the carrying value of the asset needs to be reduced.

The change in accounting policy came into effect on 1 January 2005 and the
amount of costs capitalised for the year of 2005 amounted to HK$56 million. No
restatement of the 2004 income statement was made as the amount of software
development cost qualifying for capitalisation in 2004 was immaterial.

HKAS 39: Financial instruments - recognition and measurement ('HKAS 39')

(a) Interest income and expense

In prior years, interest income and expense for all interest-bearing financial
instruments were recognised in the income statement as they accrued, except in the
case of impaired advances. Interest on impaired advances was credited to an
interest suspense account in the balance sheet which was netted against the
relevant loan.

With effect from 1 January 2005, and in accordance with HKAS 39, interest income
and expense for all interest-bearing financial instruments, except those
classified as held for trading 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 that 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, the group 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 the group that are an
integral part of the effective interest rate, 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
impaired carrying amount.

(b) Loans and advances to banks and customers

In prior years, loans and advances to banks and customers were recognised when
cash was advanced to borrowers and were measured at amortised cost less
provisions for impairment.

With effect from 1 January 2005, and in accordance with HKAS 39, loans and
advances to banks and customers include all loans and advances originated by the
group which have not been classified as held for trading or designated at fair
value. They are initially recorded at fair value plus any transaction costs, and
are subsequently measured at amortised cost using the effective interest method.

(c) Impairment of loans and advances

In prior years, there were two basic types of provisions, specific and general.

Specific provisions represented the quantification of actual and inherent losses
from individually identified accounts and homogeneous portfolios of assets.
Specific provisions were deducted from loans and advances in the balance sheet.

General provisions augmented specific provisions and provided cover for loans
that were impaired at the balance sheet date but which would not be individually
identified as such until some time in the future.

With effect from 1 January 2005, and in accordance with HKAS 39, the group
provides allowances for impaired advances when objective evidence of impairment
exists and on a consistent basis, in accordance with established guidelines.
Impairment allowances, representing the quantification of incurred losses, can
be made on a collective portfolio basis or an individually assessed basis.
Impairment allowances are deducted from loans and advances in the balance sheet.
The methodologies used for the individual and collective assessment under HKAS
39 are in principle consistent with the approach used for loan provisioning in
the previous year.

(d) Financial instruments

In prior years, the group classified its financial instruments into 'Securities
held for dealing purposes' and 'Long-term investments'. All financial
instruments were carried at cost or amortised cost, net of impairment provisions
for diminution in value, except for securities held for trading purposes and
long-term equity investments which were carried at fair value. Gains and losses
from changes in fair value were recognised in the income statement in respect of
securities held for trading, and in the long-term equity investment revaluation
reserve in respect of long-term equity investments.

With effect from 1 January 2005 and in accordance with HKAS 39, financial
instruments are classified into the categories of: trading assets and
liabilities, financial instruments designated at fair value, available-for-sale
and held-to-maturity securities.

(i) Trading assets and trading liabilities

Financial instruments and short positions thereof, 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. Trading assets and
liabilities are recognised initially at fair value, with transaction costs taken
to the income statement, and are subsequently re-measured 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 'Net trading income' as they
arise. Upon disposal or repurchase, the difference between the net sale proceeds
or the net payment and the carrying value is included in the income statement.

(ii) Financial instruments designated at fair value

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. The group 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.

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 also included in 'Net income from financial instruments
designated at fair value'.

(iii) Available-for-sale and held-to-maturity securities

Financial instruments intended to be held on a continuing basis are classified
as available-for-sale securities, unless designated at fair value, or classified
as held-to-maturity.

Available-for-sale securities are initially measured at fair value plus direct
and incremental transaction costs. They are subsequently re-measured 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,
cumulative gains or losses previously recognised in equity are recognised
through the income statement and classified as 'Profit and loss on disposal of
fixed assets and financial investments'. Impairment allowances recognised in the
income statement on equity instrument are not reversed through the income
statement.

Held-to-maturity investments are non-derivative financial assets with fixed or
determinable payments and fixed maturities that the group has the positive
intention and ability to hold until maturity. Held-to-maturity investments are
initially recorded at fair value plus any directly attributable transaction
costs, and are subsequently measured at amortised cost using the effective
interest rate method, less any impairment allowances.

(e) Derivative financial instruments and hedge accounting

In prior years, accounting for derivatives was dependent upon whether the
transactions were undertaken for trading or non-trading purposes. Trading
transactions included transactions undertaken for market-making, to service
customers' needs, and for proprietary purposes, together with any related
hedges. Transactions were marked to market through the income statement as 'Net
trading income'. Non-trading transactions were those undertaken for hedging
purposes as part of the group's risk management strategy against cash flows,
assets, liabilities or net positions, and were accounted for on an equivalent
basis to the underlying assets, liabilities or net positions. The income and
expense of non-trading interest rate derivatives was recognised on an accrual
basis in 'Net interest income'.

With effect from 1 January 2005, and in accordance with HKAS 39, derivatives are
initially recognised at fair value from the date a derivative contract is
entered into, and are subsequently re-measured at their fair value. The method
of recognising the resulting fair value gain or loss depends on whether the
derivative is designated as a hedging instrument, and if so, the nature of the
item being hedged. The group designates certain derivatives as either: (i)
hedges of the fair value of recognised assets or liabilities or firm commitments
(fair value hedge); (ii) hedges of highly probable future cash flows
attributable to a recognised asset or liability, or a forecast transaction (cash
flow hedge). Hedge accounting is applied for derivatives designated as fair
value or cash flow hedge, provided certain criteria are met.

Fair value hedge

Changes in the fair value of derivatives that are designated and qualified as
fair value hedges are recorded as 'Net trading income' in the income statement,
together with any changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk. If the hedge no longer meets the
criteria for hedge accounting, the adjustment to the carrying amount of a hedged
item for which the effective interest method is used shall be amortised to the
income statement over the period to maturity.

Cash flow hedges

The effective portion of changes in the fair value of derivatives (net of
interest accrual) that are designated and qualified as cash flow hedges is
recognised in shareholders' equity. The gain or loss relating to the ineffective
portion is recognised immediately in the income statement within 'Net trading
income' along with accrued interest.

Amounts accumulated in shareholders' equity are recycled through the income
statement in the periods in which the hedged item will affect profit or loss.

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
shareholders' equity at that time remains in shareholders' equity and is
recognised when 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 shareholders' equity is immediately
transferred to the income statement.

Derivatives that do not qualify for hedge accounting

All gains and losses from changes in the fair value of any derivative instrument
that does not qualify for hedge accounting, are recognised immediately in the
income statement and reported in 'Net trading income', except where derivative
contracts are used 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'.

Embedded derivatives

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 clearly and closely
related to those of host contract, the terms of the embedded derivative are the
same as those of 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.

(f) Debt securities in issue and subordinated liabilities

In prior years, debt securities in issue were measured at cost adjusted for
amortised premiums and discounts, and were reported under 'Debt securities in
issue'.

With effect from 1 January 2005, and in accordance with HKAS 39, debt securities
issued and subordinated liabilities are measured at amortised cost using the
effective interest rate method, and are reported under 'Debt securities in
issue' or 'Subordinated liabilities', except for those issued for trading or
designated at fair value, which are carried at fair value and reported under the
respective balance sheet captions of 'Trading liabilities' and 'Financial
liabilities designated at fair value'.

(g) Offsetting financial instruments

In prior years, netting was applied where a legal right of set-off existed.

With effect from 1 January 2005, and in accordance with HKAS 39, financial
assets and 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.

The change in accounting policies on adoption of HKAS 39 is applied with effect
from 1 January 2005. The opening balance sheet has been restated and the
relevant financial assets and liabilities re-classified to suit the new
definitions and requirements of the accounting standard and disclosure
requirements.

HKAS 40: Investment property ('HKAS 40')
HKAS 12: Income taxes - HK(SIC) interpretation 21 'Income taxes - recovery of
revalued non-depreciable assets' ('HK(SIC)-Int 21')

In prior years, investment properties were carried at valuation assessed by
professional valuers on the basis of open market value. Surpluses arising on
revaluation on a portfolio basis were credited to the investment property
revaluation reserve. Deficits arising on revaluation on a portfolio basis were
firstly set off against any previous revaluation surplus and thereafter taken to
the income statement.

With effect from 1 January 2005, and in accordance with HKAS 40, investment
properties are carried at fair value with the changes in fair value reported
directly in the income statement 'Net surplus on property revaluation'. Deferred
tax is provided on revaluation surplus of investment properties in accordance
with HK(SIC)-Int 21 on HKAS 12.

The change in accounting policy has been reflected by way of prior year
adjustment and as permitted by HKAS 40, no restatement of comparative figures of
2004 has been made. At 31 December 2004, the balance of investment revaluation
surplus reserves of HK$3,283 million, after deducting deferred tax of HK$574
million, was transferred to retained profit. The revaluation gain for the year
of 2005 was HK$1,296 million and the related deferred tax amounted to HK$227
million.

Change in presentation (HKAS 1, Presentation of financial statement ('HKAS 1') and
HKAS 30, Disclosure in financial statements of banks and similar financial 
institutions ('HKAS 30'))

In prior years, there were no specific accounting standards governing the
presentation of the financial statements of banks. Management, having regard to
the overall clarity and the disclosure requirements of the Hong Kong Monetary
Authority, exercised its judgement in deciding on the relative prominence given
to each item presented on the face of the income statement and balance sheets.

With effect from 1 January 2005, and in accordance with HKAS 1 and HKAS 30, the
group has changed its presentation of certain items on the face of the income
statement and the balance sheets:

- share of profit of associates is stated net of tax to arrive at the group's
  profit and loss before tax.

- treasury bills (including exchange fund bills) and certificates of deposit
  held are included in the respective categories of financial instruments under
  HKAS 39.

- placements with banks and other financial institutions maturing within one
  month are included in placements with banks and other financial institutions.

- interest income, interest expense, and dividend income arising from trading
  assets and trading liabilities are reclassified from 'Interest income',
  'Interest expense', 'Other operating income' and 'Fee and commission'
  respectively to 'Net trading income'. Similar income and expenses arising from
  financial instruments designated at fair value are reclassified from the
  relevant captions to 'Net income from financial instruments designated at fair
  value'.

These changes in presentation have been applied retrospectively except for those
under HKAS 39.

Table A

Hang Seng Bank and its subsidiaries
Consolidated income statement for the year ended 31 December 2004

Effect of changes in accounting policies for 2004

Figures in                 As   HKFRS2   HKAS17   HKAS38   Others^     Change in    Restated  
      HK$m           reported                                       presentation 
                                                                         HKAS27/  
                                                                          HKAS30  

Interest income        12,471        -        -        -         5           306      12,782  
Interest expense       (2,781)       -        -        -         -             4      (2,777)  

Net interest income     9,690        -        -        -         5           310      10,005  

Fee income              3,749        -        -        -       (19)          111       3,841  
Fee expense              (409)       -        -        -        (1)           (6)       (416)  

Net fee income          3,340        -        -        -       (20)          105       3,425  

Dealing profits         1,025        -        -        -         -        (1,025)          -  
Net trading income          -        -        -        -       (16)        1,129       1,113  
Insurance underwriting
  profits               1,310        -        -        -         -        (1,310)          -  
Dividend income            96        -        -        -       (22)           15          89  
Net earned insurance
  premiums                  -        -        -        -       (52)        4,472       4,420  
Other operating income    592        -        -        -        37           144         773  
Total operating income 16,053        -        -        -       (68)        3,840      19,825  

Net insurance claims 
  incurred and movement 
  in policyholder
  liabilities               -        -        -        -        68        (3,840)     (3,772)  

Net operating income
  before loan 
  impairment 
  (charges)/releases
  and other credit 
  risk provisions      16,053        -        -        -         -             -      16,053  

Loan impairment 
  (charges)/releases 
  and other credit 
  risk provisions         814        -        -        -       (37)            -         777  

Net operating income   16,867        -        -        -       (37)            -      16,830  

Employee compensation
  and benefits         (2,187)     (47)       -        -         -             -      (2,234)  
General and 
  administrative
  expenses                  -        -      (15)       -         -        (1,719)     (1,734)  
Depreciation of 
  premises, plant
  and equipment          (317)       -       53         8        -             -        (256)  
Amortisation of 
  intangible assets         -        -        -        (8)       -             -          (8)  
Operating expenses     (1,719)       -        -         -        -         1,719           -  

Total operating
  expenses             (4,223)     (47)      38         -        -             -      (4,232)  

Operating profit       12,644      (47)      38         -      (37)            -      12,598  

Profit on disposal 
  of fixed assets
  and financial
  investments             432        -        -         -       10             -         442  
Net surplus on
  property revaluation    148        -       (2)        -        -             -         146  
Share of profits from
  associates              143        -        -         -        9           (55)         97

Profit before tax      13,367      (47)      36         -      (18)          (55)     13,283  

Tax expenses           (1,764)       -       (5)        -        3            55      (1,711)  

Profit for the year    11,603      (47)      31         -      (15)            -      11,572  

Profit attributable 
  to minority
  interests              (208)       -        -         -        -             -        (208)  
 
Profit attributable
  to shareholders      11,395      (47)      31         -      (15)            -      11,364  

^Others includes HKFRS 3, HKFRS 4, HKFRS 5, HKAS 19 and others.

Table B

Hang Seng Bank and its subsidiaries
Consolidated balance sheet as at 31 December 2004


Effect of changes in accounting policies for the balances at 31 December 2004

Figures in          As   HKFRS2   HKAS17   HKAS38      HKAS40/ Others^    Change in   Restated   HKAS39   Opening  
      HK$m    reported                              HKAS-Int21         presentation                       balance  
                                                                            HKAS27/                          at 1  
                                                                             HKAS30                       January  
                                                                                                             2005  
Assets

Cash and
  short-term
  funds         68,198        -        -        -            -       -      (68,198)         -        -         -  
Cash and
  balances 
  with banks 
  and other 
  financial
  institutions       -        -        -        -            -       -        7,248      7,248        -     7,248  
Placings with
  banks
  maturing
  after one
  month         16,231        -        -        -            -       -      (16,231)         -        -         - 
Placings with
  and advances
  to banks and
  other
  financial
  institutions       -        -        -        -            -       -       75,079     75,079        -    75,079  
Certificates
  of deposit    33,590        -        -        -            -       -      (33,590)         -        -         -  
Securities
  held for
  dealing
  purposes       1,866        -        -        -            -       -       (1,866)         -        -         -  
Trading assets       -        -        -        -            -       -        4,232      4,232   12,505    16,737  
Financial
  assets
  designated at 
  fair value         -        -        -        -            -       -            -          -    4,292     4,292  
Derivative
  financial
  instruments        -        -        -        -            -       -        1,684      1,684       94     1,778  
Advances to
  customers    251,873        -        -        -            -    (320)           -    251,553      293   251,846  
Amounts due
  from
  immediate
  holding
  company and
  fellow
  subsidiaries   4,598        -        -        -            -       -       (4,598)         -        -         -  
Long-term
  investments  138,025        -        -        -            -       -     (138,025)         -        -         -  
Financial
  investments        -        -        -        -            -     (36)     184,742    184,706  (15,791)  168,915  
Investments in
associates       2,397        -        -        -         (107)      9            -      2,299        -     2,299  
Tangible fixed
assets          11,469        -        -        -            -       -      (11,469)         -        -         -  
Investment
  properties         -        -        -        -            -       -        3,383      3,383        -     3,383  
Premises,
  plant and
  equipment          -        -   (2,511)     (17)           -       -        8,086      5,558        -     5,558  
Interest in
  leasehold
  land held
  for own use 
  under 
  operating
  lease              -        -      609        -            -       -            -        609        -       609  
Intangible
  assets             -        -        -       17            -       -        1,249      1,266        -     1,266  
Others assets   20,378        -        -        -            -     174      (11,222)     9,330     (256)    9,074  
               548,625        -   (1,902)       -         (107)   (173)         504    546,947    1,137   548,084  

Liabilities
Current,                      
  savings and
  other
  deposit
  accounts     463,416        -        -        -            -       -      (15,956)   447,460   (7,276)  440,184  
Deposits from
  banks          8,631        -        -        -            -       -        3,303     11,934        -    11,934  
Trading
  liabilities        -        -        -        -            -       -        5,840      5,840   10,701    16,541  
Derivative
  financial
  instruments        -        -        -        -            -       -        1,273      1,273      977     2,250  
Certificates
  of deposit
  and other
  debt
  securities in
  issue              -        -        -        -            -       -       16,055     16,055   (3,443)   12,612  
Amounts due
  to immediate
  holding
  company and
  fellow
  subsidiaries   3,928        -        -        -            -       -       (3,928)         -        -         -  
Other
  liabilities   28,613        -        -        -            -  (9,235)      (7,638)    11,740   (1,075)   10,665  
Liabilities
  to customers
  under
  investment
  contracts          -        -        -        -            -     540            -        540        -       540  
Liabilities
  to customers
  under
  insurance
  contracts          -        -        -        -            -   8,656            -      8,656        -     8,656  
Deferred tax
  and current 
  tax
  liabilities        -        -     (333)       -          467     (21)       1,555      1,668      202     1,870  
               504,588        -     (333)       -          467     (60)         504    505,166       86   505,252  

Capital 
  resources
Minority
  interests        852        -        -        -            -       -            -        852      (14)      838  
Share capital    9,559        -        -        -            -       -            -      9,559        -     9,559  
Retained
  profits       21,395      (66)     (66)       -        2,709    (116)           -     23,856      533    24,389  
Other reserves   8,598       66   (1,503)       -       (3,283)      3            -      3,881      532     4,413  
Proposed
  dividends      3,633        -        -        -            -       -            -      3,633        -     3,633  
Shareholders'
  funds         43,185        -   (1,569)       -         (574)   (113)           -     40,929    1,065    41,994  
                44,037        -   (1,569)       -         (574)   (113)           -     41,781    1,051    42,832  
               548,625        -   (1,902)       -         (107)   (173)         504    546,947    1,137   548,084  

^Others includes HKFRS 3, HKFRS 4, HKFRS 5, HKAS 19 and others.



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