RBS 2008 Annual Report Download - page 223

RBS Group Annual Report and Accounts 2008222
Notes on the accounts continued
17 Intangible assets (continued)
In 2007, the recoverable amounts for all CGUs, except 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 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 exceeded their carrying value by over £15
billion. The recoverable amount for RBS Insurance exceeded its
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.
In light of the unprecedented market turmoil, fair value was increasingly
hard to appraise and consequently the Group has generally adopted
value in use tests for CGUs in 2008, based upon management’s latest
five year forecasts. The long-term growth rates have been based on
respective country GDP rates adjusted for inflation. The risk discount
rates are based on observable market long-term government bond
yields and average industry betas adjusted for an appropriate risk
premium based on independent analysis.
Goodwill in respect of Global Banking & Markets principally arose from
the acquisition of ABN AMRO in October 2007. The failure of a number
of banks and severe weakness in the global economy during the
second half of 2008 resulted in a fundamental reappraisal of business
forecasts, leading to the conclusion that the Global Banking & Markets
business at 31 December 2008 could support no goodwill allocated
from the ABN AMRO or NatWest acquisitions. In addition, impairments
were recognised in respect of intangible assets and certain property,
plant and equipment: the customer relationship intangible was impaired
by £0.9 billion and capitalised software was impaired by £0.4 billion.
The value in use was based on a 3% terminal growth rate and pre-tax
discount rate of 19.5%. The result was insensitive to reasonably
possible changes in key assumptions.
The recoverable amount of the Global Transaction Services business
based on a 3% terminal growth rate and 15.7% pre tax risk discount
rate exceeded its carrying value by more than 100% and was
insensitive to a reasonably possible change in key assumptions. The
goodwill arises principally from the global payments business acquired
through the ABN AMRO acquisition along with cash management and
corporate money transmission businesses previously in Citizens and
Regional businesses.
UK Retail and Commercial Banking was formed at the beginning of
2008 when the Group brought together the businesses that use its UK
branch network. It primarily comprised the UK Retail and Corporate
banks but excluded their transaction services business. The recoverable
amount was equal to the carrying amount including goodwill arising
from the NatWest acquisition. This is based on a 4% terminal growth
rate and 15.9% pre tax risk discount rate. A 1% change in discount rate
or the terminal growth rate would change the recoverable amount by
over £2 billion and £1 billion respectively. In addition, a 5% change in
forecast pre-tax earnings would change the recoverable amount by
approximately £1 billion.
The goodwill in Europe & Middle East Retail and Commercial Banking
arose from the Group’s interests in Ulster Bank Group principally arising
out of the acquisitions of NatWest and First Active. The Irish economy
stalled in 2008, with the Government providing rescue packages to local
banks, and forecasts within the eurozone economies have reduced
accordingly. The impairment review, based on a 3% terminal growth rate
and 14.1% pre-tax risk discount rate, showed all goodwill associated
with the business was impaired. The result was insensitive to reasonably
possible changes in key assumptions.
The Asia Retail and Commercial Banking business comprises much of
the Group’s Wealth management business and retail operations in Asia.
The outlook in the Asian economies has deteriorated and falling
investment values have reduced the yield from managed portfolios. The
allocated goodwill principally arising on the acquisition of ABN AMRO
was impaired by £862 million based on a 5% terminal growth rate and
14% pre-tax risk discount rate. A 1% change in the discount rate or
similar change in the terminal growth rate would change the recoverable
amount by approximately £200 million and £100 million respectively.
In addition, a 5% change in forecast pre-tax earnings would change
the recoverable amount by approximately £50 million.
Further developments in the Group’s US businesses have led to the
separation of the transaction services business, with the retail and
commercial business being managed as a single unit. The 2007
impairment review indicated the recoverable amount of Citizens
exceeded its carrying value by over £2.5 billion ($5 billion) using a
terminal growth rate of 5% and a pre tax discount rate of 16.5%. In
2008, rates of 5% and 18% were used respectively and the recoverable
amount indicated an impairment of £4.4 billion ($6.4 billion). A 1%
change in discount rate or the terminal growth rate would change the
recoverable amount and hence goodwill impairment by over £1 billion
($2 billion) and £0.7 billion ($1 billion) respectively. In addition, a 5%
change in forecast pre-tax earnings would change the recoverable
amount by approximately £0.5 billion ($0.8 billion).
The goodwill allocated to RBS Insurance principally arose from the
acquisition of Churchill in 2003. The recoverable amount based on a 3%
terminal growth rate and 14.6% pre tax risk discount rate exceeded the
carrying amount by over £3 billion, and was insensitive to reasonably
possible changes in key assumptions.