RBS 2006 Annual Report Download - page 158
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RBS Group • Annual Report and Accounts 2006
Financial statements
Goodwill at 30 September
2006 2005
Basis £m £m
Global Banking & Markets Fair value less costs to sell 2,341 —
UK Corporate Banking Fair value less costs to sell 1,630 —
Corporate Markets Fair value less costs to sell — 3,966
Retail Fair value less costs to sell 4,365 4,365
Wealth Management Fair value less costs to sell 1,105 1,123
RBS Insurance Fair value less costs to sell 1,069 1,063
Citizens – Midstates Value in use 5,598 —
Charter One Value in use — 4,471
Mid-Atlantic Value in use — 1,450
Impairment review
The Group’s goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the
recoverable amount of each cash generating unit to which goodwill has been allocated with its carrying value. There was no
impairment recognised in 2006 or 2005.
Cash generating units where goodwill is significant were as follows:
On 1 January 2006 the Corporate Markets division was
reorganised into Global Banking & Markets and UK Corporate
Banking; Retail Markets was reorganised during the second half
of 2006 into Retail and Wealth Management; goodwill was
reallocated using relative fair values calculated as a weighted
average of headcount, risk-weighted assets and profitability.
The recoverable amounts for all CGU’s, except for Citizens –
Midstates were based on fair value less costs to sell. Fair value
was based upon a price-earnings methodology using current
earnings for each unit. Approximate price earnings multiples,
validated against independent analyst information were applied
to each CGU. The multiples used for both 2006 and 2005
were in the range 7.0 – 13.0 times earnings after charging
manufacturing costs.
The goodwill allocated to Global Banking & Markets, UK
Corporate Banking, Retail and Wealth Management arose from
the acquisition of NatWest in 2000. The recoverable amount of
these cash generating units exceeds their carrying value by
over £15 billion. The goodwill allocated to RBS Insurance
principally arose from the acquisition of Churchill in 2003. The
recoverable amount for RBS Insurance exceeds the carrying
value by over £2 billion. The multiples or earnings would have
to be less than half those used to cause the value in use of
the units to equal their carrying value.
Developments in Citizens, including the integration of Charter
One, acquired in 2004, have led to changes in its management
structure during 2006 resulting in the new Citizens Midstates
cash-generating unit. The recoverable amount was based on a
value in use methodology using management forecasts to
2014 (2005 – 2012). A projection period of greater than five
years was used reflecting Citizens’ sustained historical growth
rates, independently projected industry growth rates and the
execution of Citizens’ commercial banking strategy in the
Midstates operating area. A terminal growth rate of 5%
(2005 – 4%) and a discount rate of 10% (2005 – 10.7%) was
used. The recoverable amount of Citizens Midstates exceeds
its carrying value by over $4 billion. The profit growth rate would
have to be approximately half the projected rate to cause the
value in use of the unit to equal its carrying amount.