RBS 2007 Annual Report Download - page 165

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RBS Group • Annual Report and Accounts 2007
Financial statements
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 (CGU) to which goodwill has been allocated with its carrying value.
The Group recognised goodwill of £23.3 billion following the preliminary allocation of fair values since acquiring ABN AMRO on
17 October 2007 (Note 35). Subsequent events have not significantly affected the assumptions and estimates supporting the
consortium’s investment decision and the Group has therefore concluded that there is no impairment of the goodwill recognised
at 31 December 2007.
Other CGUs where goodwill is significant were as follows:
Goodwill at 30 September
2007 2006
Recoverable amount based on: £m £m
Global Banking & Markets Fair value less costs to sell 2,346 2,341
UK Corporate Banking Fair value less costs to sell 1,630 1,630
Retail Fair value less costs to sell 4,278 4,365
Wealth Management Fair value less costs to sell 1,100 1,105
RBS Insurance Fair value less costs to sell 1,064 1,069
Citizens – Retail Banking Value in use 2,067 —
Citizens – Commercial Banking Value in use 2,274 —
Citizens – Consumer Financial Services Value in use 1,701 —
Citizens – Midstates Value in use — 5,598
The recoverable amounts for all CGUs, except for Citizens 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 2007 and 2006
were in the range 9.5 – 13.0 times earnings after charging
manufacturing costs.
The goodwill allocated to Global Banking & Markets, UK
Corporate Banking, Retail and Wealth Management principally
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 £1.5 billion. The multiples or earnings
would have to be less than one third of those used to cause
the value in use of the units to equal their carrying value.
Further developments in the Group’s US businesses have led
to divisionalisation on a product basis instead of the
geographical basis used in 2006. The recoverable amount was
based on a value in use methodology using management
forecasts to 2012 (2006 – 2014). A terminal growth rate of 5%
(2006 – 5%) and a discount rate of 11% (2006 – 10%) was
used. The recoverable amount of Citizens exceeds its carrying
value by over $5 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.