HSBC 2014 Annual Report Download - page 163

HSBC BANK PLC
Notes on the Financial Statements (continued)
161
Goodwill
Accounting policy
Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration transferred, the amount of
any non-controlling interest and the fair value of any previously held equity interest in the acquiree exceed the amount of the
identifiable assets and liabilities acquired. If the amount of the identifiable assets and liabilities acquired is greater, the difference is
recognised immediately in the income statement.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual or other legal rights, and
their fair value can be measured reliably.
Goodwill is allocated to cash-generating units (‘CGUs) for the purpose of impairment testing, which is undertaken at the lowest level at
which goodwill is monitored for internal management purposes. The group’s CGUs are based on global businesses. Impairment testing
is performed at least annually, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with
its carrying amount. The carrying amount of a CGU is based on its assets and liabilities, including attributable goodwill. The recoverable
amount of an asset is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of the expected
future CGU cash flows. If the recoverable amount is less than the carrying value, an impairment loss is charged to the income
statement. Goodwill is carried on balance sheet at cost less accumulated impairment losses.
At the date of disposal of a business, attributable goodwill is included in the group’s share of net assets in the calculation of the gain or
loss on disposal.
Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within
such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation
disposed of and the portion of the CGU retained.
Critical accounting estimates and judgements
Goodwill impairment
The review of goodwill for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to
discount these cash flows, both of which are subject to uncertain factors as follows:
• the future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available
and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual
performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the
assessment; and
• the rates used to discount future expected cash flows can have a significant effect on their valuation and are based on the costs of
capital assigned to individual CGUs. The cost of capital percentage is generally derived from a Capital Asset Pricing Model, which
incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country
concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market
rates and economic conditions beyond management’s control, are subject to uncertainty and require the exercise of significant
judgment.
A decline in a CGU’s expected cash flows and/or an increase in its cost of capital reduces the CGU’s estimated recoverable amount. If
this is lower than the carrying value of the CGU, a charge for impairment of goodwill is recognised in our income statement for the
year.
The accuracy of forecasted cash flows is subject to a high degree of uncertainty in volatile market conditions. In such market
conditions, management retests goodwill for impairment more frequently than annually to ensure that the assumptions on which the
cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business
prospects.
During 2014, no impairment of goodwill was identified (2013: nil). In addition to the annual impairment test which was performed as
at 1 July 2014, management reviewed the current and expected performance of the CGUs as at 31 December 2014 and determined
that there was no indication of impairment of the goodwill allocated to them.
The group
2014
2013
£m
£m
Gross amount and Carrying amount
At 1 January
6,526
6,399
Acquisitions/(disposals)
(5)
14
Exchange differences
(381)
113
At 31 December
6,140
6,526
The bank
2014
2013
£m
£m
At 1 January
298
298
Acquisitions/(disposals)
49
-
Other changes
(5)
-
At 31 December
342
298