Haitong: Accounting in Securities Margin Financing
This case explores how Haitong International Securities Group Limited (Haitong, the Group, or SEHK: 665) had been accounting for margin loans under the Hong Kong Financial Reporting Standard 9 Financial Instruments (HKFRS 9) since the mandatory adoption date on 1 January 2018. Haitong belonged to one of the largest financial groups listed on the Hong Kong Stock Exchange in terms of market capitalization. Because of the fame and size of the Group, the protagonist Nancy (regional CFO) made reference to this company in finding out the accounting issues that could potentially occur in starting margin financing business in Hong Kong. Haitong incurred 'impairment charges, net of reversal' (net impairment charges) of HKD238.8mn and HKD634.5mn respectively in the year ended 31 December 2018 (FY2018) and 31 December 2019 (FY2019). The portion attributable to advances to customers in margin financing (margin loans or margin loan receivables etc.) constituted HKD353.7mn (148.1%) and HKD532.3mn (83.9%) of the aforesaid net impairment charges in the respective years. The case seeks to highlight the advantages and disadvantages of entering the securities margin financing business when IFRS 9 is in place. Students will learn the classification of margin loans under IFRS 9 and the measurement of expected credit loss (ECL) of these assets by three "stages" as prescribed by IFRS 9. Students will also grapple with questions on formulating the internal controls in credit risk management under the context of securities margin financing.