RBS 2013 Annual Report Download - page 538
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Additional information
536
Risk factors continued
In the UK and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other
authorised financial services firms that are unable to meet their
obligations to customers
In the UK, the Financial Services Compensation Scheme (FSCS) was
established under the FSMA and is the UK’s statutory fund of last resort
for customers of authorised financial services firms. The FSCS can pay
compensation to customers if a firm is unable or likely to be unable, to
pay claims against it and may be required to make payments either in
connection with the exercise of a stabilisation power or in exercise of the
bank insolvency procedures under the Banking Act 2009. The FSCS is
funded by levies on firms authorised by the FCA, including the Group. In
the event that the FSCS raises funds from the authorised firms, raises
those funds more frequently or significantly increases the levies to be
paid by such firms, the associated costs to the Group may have an
adverse impact on its results of operations and financial condition. In
addition, the RRD will require the establishment of national resolution
funds, which will require ex ante levies on banks and investment firms to
ensure that the resolution tools contemplated by the RRD can be applied
effectively.
To the extent that other jurisdictions where the Group operates have
introduced or plan to introduce similar compensation, contributory or
reimbursement schemes (such as in the US with the Federal Deposit
Insurance Corporation), the Group may make further provisions and may
incur additional costs and liabilities, which may have an adverse impact
on its financial condition and results of operations.
The value of certain financial instruments recorded at fair value is
determined using financial models incorporating assumptions,
judgements and estimates that may change over time or may ultimately
not turn out to be accurate
Under International Financial Reporting Standards (IFRS), the Group
recognises at fair value: (i) financial instruments classified as held-for-
trading or designated as at fair value through profit or loss; (ii) financial
assets classified as available-for-sale; and (iii) derivatives.
Generally, to establish the fair value of these instruments, the Group
relies on quoted market prices or, where the market for a financial
instrument is not sufficiently active, internal valuation models that utilise
observable market data.
In certain circumstances, the data for individual financial instruments or
classes of financial instruments utilised by such valuation models may not
be available or may become unavailable due to prevailing market
conditions. In such circumstances, the Group’s internal valuation models
require the Group to make assumptions, judgements and estimates to
establish fair value, which are complex and often relate to matters that
are inherently uncertain. These assumptions, judgements and estimates
will need to be updated to reflect changing facts, trends and market
conditions. The resulting change in the fair values of the financial
instruments has had and could continue to have a material adverse effect
on the Group’s earnings and financial condition.
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 2013, the Group carried goodwill
of £10.1 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 and further rate reductions were announced in 2012
and 2013 which will lead to a corporation tax rate of 20% by April 2015.
Such changes in the applicable tax rates will reduce the recoverable
amount of the recognised deferred tax assets.