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Accounting policies
387
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 2013 was £10,139 million (2012 - £11,266 million; 2011 -
£12,424 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 are discussed in Note 17 on page 445.
Provisions for liabilities
As set out in Note 22, at 31 December 2013 the Group recognised
provisions for liabilities in respect of Payment Protection Insurance, £926
million (2012 - £895 million; 2011 - £745 million), Interest Rate Hedging
Products, £1,077 million (2012 - £676 million; 2011 - nil), LIBOR
investigations, £416 million (2012 - £381 million; 2011 - nil) and other
regulatory proceedings and litigation, £2,168 million (2012 - £368 million;
2011 - £241 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.
Provisions for litigation - the Group and members of the Group are party
to legal proceedings in the United Kingdom, the United States and other
jurisdictions, arising out of their normal business operations. The
measurement and recognition of liabilities in respect of litigation involves
a high degree of management judgement. Before the existence of a
present obligation as the result of a past event can be confirmed,
numerous facts may need to be established, involving extensive and
time-consuming discovery, and novel or unsettled legal questions
addressed. Once it is determined there is an obligation, assessing the
probability of economic outflows and estimating the amount of any liability
can be very difficult. In many proceedings, it is not possible to determine
whether any loss is probable or to estimate the amount of any loss.
Furthermore, for an individual matter, there can be a wide range of
possible outcomes and often it is not practicable to quantify a range of
such outcomes. The Group’s outstanding litigation is periodically
assessed in consultation with external professional advisers, where
appropriate, to determine the likelihood of the Group incurring a liability. A
detailed description of the Group’s material legal proceedings and a
discussion of the nature of the associated uncertainties are given in Note
32.
Tax contingencies - determining the Group’s income tax charge and its
provisions for income taxes necessarily involves a significant degree of
estimation and judgement. The tax treatment of some transactions is
uncertain and tax computations are yet to be agreed with the tax
authorities in a number of jurisdictions. The Group recognises anticipated
tax liabilities based on all available evidence and, where appropriate, in
the light of external advice. Any difference between the final outcome and
the amounts provided will affect current and deferred income tax assets
and liabilities in the period when the matter is resolved.