HSBC 2012 Annual Report Download - page 466

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
23 – Goodwill and intangible assets
464
Basis of the recoverable amount – value in use or fair value less costs to sell
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective
testing date for 2011 and 2012.
For each significant CGU, the VIU is calculated by discounting management’s cash flow projections for the CGU.
The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the
CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term
perspective within the Group of the business units making up the CGUs. In 2012, management’s cash flow
projections until the end of 2014 were used.
Key assumptions in VIU calculation and management’s approach to determining the values assigned to each key
assumption
2012 2011
Goodwill at
1 July
2012
Discount
rate
Nominal
growth rate
beyond
initial
cash flow
projections
Goodwill at
1 July
2011
Discount
rate
Nominal
growth rate
beyond
initial
cash flow
projections
US$m % % US$m % %
Cash-generating unit
Retail Banking and Wealth Management
– Europe ...................................................... 4,054 10.0 3.9 4,794 10.0 4.7
Commercial Banking – Europe ....................... 2,968 10.2 3.7 3,574 10.1 4.5
Global Private Banking – Europe .................... 4,139 9.1 3.2 4,456 10.0 4.3
Global Banking and Markets – Europe ........... 3,016 10.2 3.5 3,139 10.2 4.4
Retail Banking and Wealth Management
– Latin America ........................................... 1,994 15.3 8.7 2,537 16.0 9.3
Total goodwill in the CGUs listed above ........ 16,171 18,500
At 1 July 2012, aggregate goodwill of US$4,741m (1 July 2011: US$5,091m) had been allocated to CGUs that were
not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible
assets with indefinite useful lives, other than goodwill.
Nominal long-term growth rate: this growth rate reflects GDP and inflation for the countries within which the CGU
operates. The rates are based on IMF forecast growth rates as these rates are regarded as the most relevant estimate of
likely future trends. The rates used for 2011 and 2012 do not exceed the long-term growth rate for the countries
within which the CGU operates.
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 Capital Asset Pricing Model (‘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. 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. HSBC uses externally-sourced cost of capital rates where, in management’s judgement,
those rates reflect more accurately the current market and economic conditions. For 2012 and 2011, internal costs of
capital rates were consistent with externally-sourced rates.
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 Group Management Board. The key assumptions in addition to the discount rate and
nominal long-term growth rate for each significant CGU are discussed below.
Retail Banking and Wealth Management – Europe and Commercial Banking – Europe: the assumptions included in
the cash flow projections for RBWM – Europe and CMB – Europe reflect the economic environment and financial
outlook of the European countries within these two CGUs. Key assumptions include the level of interest rates and the
level and change in unemployment rates. While current economic conditions in Europe continue to be challenging,
management’s cash flow projections are based primarily on these prevailing conditions. Risks include a further
recession in the UK and an uncertain regulatory environment. RBWM – Europe specifically, is sensitive to further
customer remediation costs in relation to PPI. Based on the conditions at the balance sheet date, management