RBS 2012 Annual Report Download - page 371

RBS GROUP 2012
369
Goodwill
The Group capitalises goodwill arising on the acquisition of businesses,
as discussed in Accounting policy 6. The carrying value of goodwill as at
31 December 2012 was £11,266 million (2011 - £12,424 million; 2010 -
£12,528 million).
Goodwill is the excess of the cost of an acquired business over the fair
value of its net assets. The determination of the fair value of assets and
liabilities of businesses acquired requires the exercise of management
judgement; for example those financial assets and liabilities for which
there are no quoted prices, and those non-financial assets where
valuations reflect estimates of market conditions, such as property.
Different fair values would result in changes to the goodwill arising and to
the post-acquisition performance of the acquisition. Goodwill is not
amortised but is tested for impairment annually or more frequently if
events or changes in circumstances indicate that it might be impaired.
For the purposes of impairment testing, goodwill acquired in a business
combination is allocated to each of the Group’s cash generating units or
groups of cash-generating units expected to benefit from the
combination. Goodwill impairment testing involves the comparison of the
carrying value of a cash-generating unit or group of cash-generating units
with its recoverable amount. The recoverable amount is the higher of the
unit’s fair value and its value in use. Value in use is the present value of
expected future cash flows from the cash generating unit or group of
cash-generating units. Fair value is the amount obtainable for the sale of
the cash-generating unit in an arm’s length transaction between
knowledgeable, willing parties.
Impairment testing inherently involves a number of judgmental areas: the
preparation of cash flow forecasts for periods that are beyond the normal
requirements of management reporting; the assessment of the discount
rate appropriate to the business; estimation of the fair value of cash-
generating units; and the valuation of the separable assets of each
business whose goodwill is being reviewed. Sensitivity to changes in
assumptions is discussed in Note 17 on pages 423 and 424.
General insurance claims
The Group makes provision for the full cost of settling outstanding claims
arising from its general insurance business at the balance sheet date,
including claims estimated to have been incurred but not yet reported at
that date and claims handling expenses. General insurance claims
provisions amounted to £6,090 million at 31 December 2012 (2011 -
£6,219 million; 2010 - £6,726 million).
Provisions are determined by management based on experience of
claims settled and on statistical models which require certain
assumptions to be made regarding the incidence, timing and amount of
claims and any specific factors such as adverse weather conditions.
Management use the work of internal and external actuaries to assess
the level of gross and net outstanding claims provisions required to adopt
a measurement basis of reserves which result in a provision in excess of
actuarial best estimates. In order to calculate the total provision required,
the historical development of claims is analysed using statistical
methodology to extrapolate, within acceptable probability parameters, the
value of outstanding claims at the balance sheet date. Also included in
the estimation of outstanding claims are other assumptions such as the
inflationary factor used for bodily injury claims which is based on
historical trends and, therefore, allows for some increase due to changes
in common law and statute; and the incidence of periodical payment
orders and the rate at which payments under them are discounted. Costs
for both direct and indirect claims handling expenses are also included.
Outward reinsurance recoveries are accounted for in the same
accounting period as the direct claims to which they relate. The
outstanding claims provision is based on information available to
management and the eventual outcome may vary from the original
assessment. Actual claims experience may differ from the historical
pattern on which the estimate is based and the cost of settling individual
claims may exceed that assumed.
Provisions for liabilities
As set out in Note 22, at 31 December 2012 the Group recognised
provisions for liabilities in respect of Payment Protection Insurance, £895
million (2011 - £745 million; 2010 - nil), Interest Rate Hedging Products,
£676 million (2011 and 2010 - nil), LIBOR investigations, £381 million
(2011 and 2010 - nil) and other regulatory proceedings and litigation,
£368 million (2011 - £241 million; 2010 - £192 million). Provisions are
liabilities of uncertain timing or amount, and are recognised when there is
a present obligation as a result of a past event, the outflow of economic
benefit is probable and the outflow can be estimated reliably. Judgement
is involved in determining whether an obligation exists, and in estimating
the probability, timing and amount of any outflows. Where the Group can
look to another party such as an insurer to pay some or all of the
expenditure required to settle a provision, any reimbursement is
recognised when, and only when, it is virtually certain that it will be
received.
Payment Protection Insurance - the Group has established a provision for
redress payable in respect of the mis-selling of Payment Protection
Insurance policies. The provision is management’s best estimate of the
anticipated costs of redress and related administration expenses. The
determination of appropriate assumptions to underpin the provision
requires significant judgement by management. The principal
assumptions underlying the provision together with sensitivities to
changes in those assumptions are given in Note 22.
Interest Rate Hedging Products - the Group has agreed to a redress
exercise and past business reviews in relation to the sale of Interest Rate
Hedging Products to some small and medium sized businesses classified
as retail clients. The ultimate cost of this exercise to the Group is
uncertain. Estimating the liability depends on a number of assumptions.
These assumptions and the sensitivity of the provision to changes in
them are discussed in Note 22.