Barclays 2006 Annual Report Download - page 113

Barclays PLC
Annual Report 2006 109
Operating review
1
Goodwill
Management have to consider at least annually whether the current
carrying value of goodwill is impaired. The first step of the impairment
review process requires the identification of independent operating units,
by dividing the Group business into as many largely independent income
streams as is reasonably practicable. The goodwill is then allocated to
these independent operating units. The first element of this allocation is
based on the areas of the business expected to benefit from the
synergies derived from the acquisition. The second element reflects the
allocation of the net assets acquired and the difference between
the consideration paid for those net assets and their fair value. This
allocation is reviewed following business reorganisation. The carrying
value of the operating unit, including the allocated goodwill, is compared
to its fair value to determine whether any impairment exists. If the fair
value of an operating unit is less than its carrying value, goodwill will be
impaired. Detailed calculations may need to be carried out taking into
consideration changes in the market in which a business operates (e.g.
competitive activity, regulatory change). In the absence of readily
available market price data this calculation is based upon discounting
expected pre-tax cash flows at a risk adjusted interest rate appropriate
to the operating unit, the determination of both of which requires the
exercise of judgement. The estimation of pre-tax cash flows is sensitive
to the periods for which detailed forecasts are available and to
assumptions regarding the long-term sustainable cash flows. While
forecasts are compared with actual performance and external economic
data, expected cash flows naturally reflect management’s view of future
performance. The most significant amounts of goodwill relate to the
Absa and Woolwich acquisitions. The goodwill impairment testing
performed in 2006 indicated that none of the goodwill was impaired.
Intangible assets
Intangible assets that derive their value from contractual customer
relationships or that can be separated and sold and have a finite useful
life are amortised over their estimated useful life. Determining the
estimated useful life of these finite life intangible assets requires an
analysis of circumstances, and judgement by the Bank’s management.
At each balance sheet date, or more frequently when events or changes
in circumstances dictate, intangible assets are assessed for indications
of impairment. If indications are present, these assets are subject to an
impairment review. The impairment review comprises a comparison of
the carrying amount of the asset with its recoverable amount: the
higher of the assets’ or the cash-generating unit’s net selling price and
its value in use. Net selling price is calculated by reference to the amount
at which the asset could be disposed of in a binding sale agreement in
an arms-length transaction evidenced by an active market or recent
transactions for similar assets. Value in use is calculated by discounting
the expected future cash flows obtainable as a result of the asset’s
continued use, including those resulting from its ultimate disposal, at
a market-based discount rate on a pre-tax basis. The most significant
amounts of intangible assets relate to the Absa acquisition.
Retirement benefit obligations
The Group provides pension plans for employees in most parts of the
world. Arrangements for staff retirement benefits vary from country to
country and are made in accordance with local regulations and
customs. For defined contribution schemes, the pension cost
recognised in the profit and loss account represents the contributions
payable to the scheme. For defined benefit schemes, actuarial valuation
of each of the scheme’s obligations using the projected unit credit
method and the fair valuation of each of the scheme’s assets are
performed annually in accordance with the requirements of IAS 19.
The actuarial valuation is dependent upon a series of assumptions, the
key ones being interest rates, mortality, investment returns and expense
inflation. Mortality estimates are based on standard industry and
national mortality tables, adjusted where appropriate to reflect the
Group’s own experience. The returns on fixed interest investments are
set to market yields at the valuation date (less an allowance for risk) to
ensure consistency with the asset valuation. The returns on UK and
overseas equities are set relative to fixed interest returns by considering
the long-term expected equity risk premium. The expense inflation
assumption reflects long-term expectations of both earnings and retail
price inflation.
The difference between the fair value of the plan assets and the present
value of the defined benefit obligation at the balance sheet date,
adjusted for any historic unrecognised actuarial gains or losses and past
service cost, is recognised as a liability in the balance sheet. An asset
arising, for example, as a result of past over-funding or the performance
of the plan investments, is recognised to the extent that it does not
exceed the present value of future contribution holidays or refunds of
contributions. To the extent that any unrecognised gains or losses at the
start of the measurement year in relation to any individual defined
benefit scheme exceed 10% of the greater of the fair value of the
scheme assets and the defined benefit obligation for that scheme, a
proportion of the excess is recognised in the income statement.
The Group’s IAS 19 pension deficit across all pension and post-
retirement schemes as at 31st December 2006 was £817m (2005:
£2,879m). This comprises net recognised liabilities of £1,719m (2005:
£1,737m) and unrecognised actuarial gains of £902m (2005: losses of
£1,142m). The net recognised liabilities comprises retirement benefit
liabilities of £1,807m (2005: £1,823m) relating to schemes that are in
deficit, and assets of £88m (2005: £86m) relating to schemes that are in
surplus. The Group’s IAS 19 pension deficit in respect of the main UK
scheme as at 31st December 2006 was £0.5bn (2005: £2.5bn). The
estimated actuarial funding position of the main UK pension scheme as
at 31st December 2006, estimated from the triennial valuation in 2004,
was a surplus of £1.3bn (2005: £0.9bn). Cash contributions to the main
UK scheme were £351m (2005: £354m).
Further information on retirement benefit obligations, including
assumptions is set out in Note 35 to the accounts.