RBS 2011 Annual Report Download - page 463

RBS Group 2011 461
The Group’s results could be adversely affected in the event of goodwill
impairment
The Group capitalises goodwill, which is calculated as the excess of the
cost of an acquisition over the net fair value of the identifiable assets,
liabilities and contingent liabilities acquired. Acquired goodwill is
recognised initially at cost and subsequently at cost less any
accumulated impairment losses. As required by IFRS, the Group tests
goodwill for impairment annually, or more frequently when events or
circumstances indicate that it might be impaired. An impairment test
involves comparing the recoverable amount (the higher of the value in
use and fair value less cost to sell) of an individual cash generating unit
with its carrying value. At 31 December 2011, the Group carried goodwill
of £12.4 billion on its balance sheet. The value in use and fair value of the
Group’s cash generating units are affected by market conditions and the
performance of the economies in which the Group operates. Where the
Group is required to recognise a goodwill impairment, it is recorded in the
Group’s income statement, although it has no effect on the Group’s
regulatory capital position. Any significant write-down of goodwill could
have a material adverse effect on the Group’s results of operations and
the value of its securities.
The Group may be required to make further contributions to its pension
schemes if the value of pension fund assets is not sufficient to cover
potential obligations
The Group maintains a number of defined benefit pension schemes for
past and a number of current employees. Pensions risk is the risk that the
assets of the Group’s various defined benefit pension schemes which are
long-term in nature do not fully match the timing and amount of the
schemes’ liabilities, as a result of which the Group is required or chooses
to make additional contributions to the schemes. Pension scheme
liabilities vary with changes to long-term interest rates, inflation,
pensionable salaries and the longevity of scheme members as well as
changes in applicable legislation. The schemes’ assets comprise
investment portfolios that are held to meet projected liabilities to the
scheme members. Risk arises from the schemes because the value of
these asset portfolios, returns from them and any additional future
contributions to the schemes, may be less than expected and because
there may be greater than expected increases in the estimated value of
the schemes’ liabilities. In these circumstances, the Group could be
obliged, or may choose, to make additional contributions to the schemes,
and during recent periods, the Group has voluntarily made such
contributions to the schemes. Given the recent economic and financial
market difficulties and the prospect that they may continue over the near
and medium term, the Group may experience increasing pension deficits
or be required or elect to make further contributions to its pension
schemes and such deficits and contributions could be significant and
have an adverse impact on the Group’s results of operations or financial
condition or result in a loss of value in its securities. The most recent
funding valuation at 31 March 2010 was agreed during 2011. It showed
the value of liabilities exceeded the value of assets by £3.5 billion at 31
March 2010, a ratio of assets to liabilities of 84%.
In order to eliminate this deficit, the Group will pay additional
contributions each year over the period 2011 until 2018. These
contributions started at £375 million per annum in 2011, will increase to
£400 million per annum in 2013 and from 2016 onwards be further
increased in line with price inflation. These contributions are in addition to
the regular contributions of around £300 million for future accrual of
benefits.
Operational risks are inherent in the Group’s businesses
The Group’s operations are dependent on the ability to process a very
large number of transactions efficiently and accurately while complying
with applicable laws and regulations where it does business. The Group
has complex and geographically diverse operations and operational risk
and losses can result from internal and external fraud, errors by
employees or third parties, failure to document transactions properly or to
obtain proper authorisation, failure to comply with applicable regulatory
requirements and conduct of business rules (including those arising out
of anti-bribery, anti-money laundering and anti-terrorism legislation, as
well as the provisions of applicable sanctions programmes), equipment
failures, business continuity and data security system failures, natural
disasters or the inadequacy or failure of systems and controls, including
those of the Group’s suppliers or counterparties. Although the Group has
implemented risk controls and loss mitigation actions, and substantial
resources are devoted to developing efficient procedures, to identify and
rectify weaknesses in existing procedures and to train staff, it is not
possible to be certain that such actions have been or will be effective in
controlling each of the operational risks faced by the Group. Any
weakness in these systems or controls, or any breaches or alleged
breaches of such laws or regulations, could result in increased regulatory
supervision, enforcement actions and other disciplinary action, and have
an adverse impact on the Group’s business, applicable authorisations
and licences, reputation, results of operations and the price of its
securities. Notwithstanding anything contained in this risk factor, it should
not be taken as implying that the Group will be unable to comply with its
obligations as a company with securities admitted to the Official List of
the UK Listing Authority (the “Official List”) nor that it, or its relevant
subsidiaries, will be unable to comply with its or their obligations as
supervised firms regulated by the FSA.