Barclays 2005 Annual Report Download - page 108

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. 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 usually based upon
discounting expected pre-tax cash flows at the Group’s cost of equity,
the determination of both of which requires the exercise of judgement.
The goodwill impairment testing in 2005 indicated that none of the
goodwill was impaired. The most significant amounts of goodwill relate
to the Absa and Woolwich acquisitions.
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.
On the acquisition of Absa, the value of intangible assets such as
brands, core deposit intangibles and customer lists was determined
using income approach methodologies, such as the discounted cash
flow method and the relief from royalty method that estimate net cash
flows attributable to an asset over its economic life and discount to
present value using an appropriate rate of return. These approaches
assume that the income derived from the asset will, to a large extent,
control its value. The discount rate used in the valuations was based on
the cost of equity adjusted for risk and ranges from 13.7% to 16.1%.
In the case of brands, the pre-tax royalty rates were estimated to be
1.5% based on similar financial services transactions, information
about marketing expenditure on the brands and consideration of the
unique factors relating to the brand that third parties would consider.
Cash flows for customer lists were based on historic revenues and
customer numbers adjusted for expected attrition and taking account
of applicable costs to determine expected margins. These margins
varied, depending on the nature of the customer relationships. A similar
approach was applied to core deposit intangibles with cash flows being
calculated by charging an appropriate cost to the identified spread, on a
historical margins basis. In all the calculations, the rate of tax was
estimated to be 31.6% of operating profit.
Further information on intangible assets is set out in Note 28 to
the accounts.
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 mortality, morbidity, investment returns and
expense inflation assumptions. 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 2005 was £2,879m
(2004: £2,464m). This comprises net recognised liabilities of £1,737m
(2004: £1,786m) and unrecognised actuarial losses of £1,142m
(2004: £678m). The net recognised liabilities comprises retirement
benefit liabilities of £1,823m (2004: £1,865m) relating to schemes
that are in deficit, and assets of £86m (2004: £79m) 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 2005 was £2,535m (2004: £2,220m). The estimated
actuarial funding position of the main UK pension scheme as at
31st December 2005, estimated from the triennial valuation in 2004,
was a surplus of £900m (2004: deficit of £50m).
Cash contributions to the Group’s schemes totalled £373m in
2005 (2004: £279m), including £354m to the main UK scheme
(2004: £255m).
Further information on retirement benefit obligations is set out in
Note 38 to the accounts.
Barclays PLC
Annual Report 2005
106
Financial review
Critical accounting estimates