RBS 2012 Annual Report Download - page 516

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Additional information continued
Risk factors continued
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 2012, the Group carried goodwill
of £11.3 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.
The recoverability of certain deferred tax assets recognised by the Group
depends on the Group’s ability to generate sufficient future taxable profits
In accordance with IFRS, the Group has recognised deferred tax assets
on losses available to relieve future profits from tax only to the extent that
it is probable that they will be recovered. The deferred tax assets are
quantified on the basis of current tax legislation and accounting standards
and are subject to change in respect of the future rates of tax or the rules
for computing taxable profits and allowable losses. Failure to generate
sufficient future taxable profits or changes in tax legislation or accounting
standards may reduce the recoverable amount of the recognised
deferred tax assets. In April 2011, the UK Government commenced a
staged reduction in the rate of UK corporation tax from 28% to 23% over
a four-year period. Further rate reductions were announced in 2012
which will lead to a corporation tax rate of 21% by April 2014. Such
changes in the applicable tax rates will reduce the recoverable amount of
the recognised deferred tax assets.
Operational risks
Operational risks are inherent in the Group’s businesses
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events. 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. Ineffective management of operational risks could have a material
adverse effect on the Group’s business, financial condition and results of
operations.
The Group’s operations are highly dependent on its information
technology systems
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 proper
functioning of the Group’s payment systems, financial and sanctions
controls, risk management, credit analysis and reporting, accounting,
customer service and other information technology systems, as well as
the communication networks between its branches and main data
processing centres, are critical to the Group’s operations. Critical system
failure, any prolonged loss of service availability or any material breach of
data security, particularly involving confidential customer data, could
cause serious damage to the Group’s ability to service its clients, could
result in significant compensation costs, could breach regulations under
which the Group operates and could cause long-term damage to the
Group’s business and brand.
For example, failure to protect the Group’s operations from cyber attacks
could result in the loss of customer data or other sensitive information.
The threats are increasingly sophisticated and there can be no assurance
that the Group will be able to prevent all threats. In addition, in June
2012, a computer system failure prevented customers from accessing
accounts in both the UK and Ireland. Ongoing issues relating to the
failure continued for several months, requiring the Group to set aside a
provision for compensation to customers who suffered losses as a result
of the system failure, in addition to other related costs. See page 430.
The Group may suffer losses due to employee misconduct
The Group’s businesses are exposed to risk from potential non-
compliance with policies, employee misconduct or negligence and fraud,
which could result in regulatory sanctions and serious reputational or
financial harm to the Group. In recent years, a number of multinational
financial institutions have suffered material losses due to the actions of
‘rogue traders’ or other employees. It is not always possible to deter
employee misconduct and the precautions the Group takes to prevent
and detect this activity may not always be effective.