HSBC 2015 Annual Report Download - page 408

Notes on the Financial Statements (continued)
20 – Goodwill and intangible assets
HSBC HOLDINGS PLC
406
Movements in interests in associates and joint ventures
2015 2014
$m $m
At 1 January 18,181 16,640
Additions 3 30
Disposals (8) (133)
Share of results 2,556 2,532
Dividends (879) (757)
Exchange differences (718) (212)
Share of other comprehensive income of associates and joint ventures (9) 78
Other movements 13 3
At 31 December1 19,139 18,181
1 Includes goodwill of $593m (2014: $621m).
20 Goodwill and intangible assets
2015 2014
$m $m
Goodwill 16,294 19,169
Present value of in-force long-term insurance business 5,685 5,307
Other intangible assets 2,626 3,101
At 31 December 24,605 27,577
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
acquired and liabilities assumed. If the amount of the identifiable assets and liabilities acquired is greater, the difference is recognised
immediately in the income statement.
Goodwill is allocated to cash-generating units (‘CGU’s) for the purpose of impairment testing, which is undertaken at the lowest level at
which goodwill is monitored for internal management purposes. HSBC’s CGU’s are based on geographical regions subdivided by global
business. 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 a CGU is the higher of its fair value less cost to sell and its value in use. VIU 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 the balance sheet at cost less accumulated impairment losses.
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.
At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the calculation of the gain or loss on
disposal.
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 CAPM, 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 judgement.
The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such circumstances, management
retests goodwill for impairment more frequently than annually when indicators of impairment exist 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.