HSBC 2015 Annual Report Download - page 410

Notes on the Financial Statements (continued)
20 – Goodwill and intangible assets
HSBC HOLDINGS PLC
408
Key assumptions in VIU calculation
Nominal
growth rate
Goodwill at: Discount beyond initial cash
1 Jul 2015 31 Dec 2015 rate flow projections
$m $m % %
Cash-generating unit
Retail Banking and Wealth Management
–
Europe 3,562 6.9 3.3
Global Private Banking
–
Europe 3,414 3,343 8.4 2.5
Global Banking and Markets
–
Europe 2,690 9.9 3.5
Commercial Banking
–
Europe 2,603 9.0 3.6
Global Banking and Markets
–
North America 929 931 10.0 4.3
Retail Banking and Wealth Management
–
Latin America 792 11.0 6.9
1 Jul 2014
$m
Cash-generating unit
Retail Banking and Wealth Management
–
Europe 4,298 9.1 4.5
Global Private Banking
–
Europe 3,808 7.1 3.4
Global Banking and Markets
–
Europe 3,296 11.0 4.2
Commercial Banking
–
Europe 3,214 10.1 4.2
Global Banking and Markets
–
North America 917 9.8 4.6
Retail Banking and Wealth Management
–
Latin America 1,762 12.8 7.9
At 1 July 2015, aggregate goodwill of $2,787m (1 July 2014: $3,610m) had been allocated to CGUs that were not considered
individually significant. The Group’s CGUs do not carry on their balance sheets any significant intangible assets with indefinite
useful lives, other than goodwill.
Management’s judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans
approved by the GMB.
Nominal long-term growth rate: this growth rate reflects GDP and inflation for the countries within which the CGU operates or
derives revenue from. The rates are based on IMF forecast growth rates as they represent an objective estimate of likely future
trends. The rates used for 2014 and 2015 do not exceed the long-term growth rates for the countries within which the CGUs
operate or derive revenue from.
Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is
derived using a CAPM. The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-
free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market’s
assessment of the economic variables and management’s judgement. The discount rates for each CGU are refined to reflect
the rates of inflation for the countries within which the CGU operates. In addition, for the purposes of testing goodwill for
impairment, management supplements this process by comparing the discount rates derived using the internally generated
CAPM with cost of capital rates produced by external sources for businesses operating in similar markets. For 2014 and 2015,
internal cost of capital rates were consistent with externally sourced rates. For the purpose of goodwill testing during 2015,
internal rates were adjusted to reflect the uncertainty of the cash flows used in the test.
Sensitivities of key assumptions in calculating VIU
At 1 July 2015 Global Banking and Markets – Europe, and as at 31 December Global Banking and Markets – North America and
Global Private Banking – Europe, were all sensitive to reasonably possible changes in the key assumptions supporting the
recoverable amount. In making an estimate of reasonably possible changes to assumptions management considers the
available evidence in respect of each input to the model such as: the external range of discount rates observable; historical
performance against forecast; and risks attaching to the key assumptions underlying cash flow projections.
For Global Banking and Markets – North America, a reasonably possible adverse change in any one of the discount rate,
growth rate or management’s projections of cash flows could cause an impairment to be recognised. For Global Private
Banking – Europe, a reasonably possible adverse change in management’s projections of cash flows, or changes in more than
one assumption, could cause an impairment to be recognised. Global Banking and Markets – Europe, would require reasonably
possible adverse changes in more than one assumption to cause an impairment.
The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for each
CGU; the key risks attaching to each; and details of a reasonably possible change to assumptions where, in the opinion of
management, these could result in an impairment.