Barclays 2009 Annual Report Download - page 58

are in arrears and historical information on the eventual losses encountered
from such delinquent portfolios. There are many such models in use, each
tailored to a product, line of business or customer category. Judgement and
knowledge is needed in selecting the statistical methods to use when the
models are developed or revised. The impairment allowance reflected in the
financial statements for these portfolios is therefore considered to be
reasonable and supportable. The impairment charge reflected in the income
statement for these portfolios is £3,917m (2008: £2,333m) and amounts
to 53% (2008: 47%) of the total impairment charge on loans and advances
in 2009.
For larger accounts, impairment allowances are calculated on an
individual basis and all relevant considerations that have a bearing on
the expected future cash flows are taken into account, for example, the
business prospects for the customer, the realisable value of collateral,
the Group’s position relative to other claimants, the reliability of customer
information and the likely cost and duration of the work-out process. The
level of the impairment allowance is the difference between the value of the
discounted expected future cash flows (discounted at the loan’s original
effective interest rate), and its carrying amount. Subjective judgements are
made in the calculation of future cash flows. Furthermore, judgements
change with time as new information becomes available or as work-out
strategies evolve, resulting in frequent revisions to the impairment allowance
as individual decisions are taken. Changes in these estimates would result in
a change in the allowances and have a direct impact on the impairment
charge. The impairment charge reflected in the financial statements in
relation to larger accounts is £3,441m (2008: £2,580m) and amounts to
47% (2008: 53%) of the total impairment charge on loans and advances.
Further information on impairment allowances is set out in Note 7 on
page 214.
Goodwill
Management have to consider at least annually whether the current
carrying value of goodwill is impaired. The first step of the process requires
the identification of independent cash generating units and the allocation of
goodwill to these units. This allocation is based on the areas of the business
expected to benefit from the synergies derived from the acquisition. The
allocation is reviewed following business reorganisation. The carrying value
of the unit, including the allocated goodwill, is compared to its fair value to
determine whether any impairment exists. If the fair value of a 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
56 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Financial review
Additional financial disclosure
continued
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 UK Retail
Banking and GRCB – Absa, where goodwill impairment testing performed in
2009 indicated that this goodwill was not impaired. An analysis of goodwill
by cluster, together with key assumptions underlying the impairment
testing, is included in Note 21 on page 225.
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 Group’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
asset’s 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 arm’s 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 GRCB – Absa and Lehman Brothers North American businesses.
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