HSBC 2009 Annual Report Download - page 438

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 22
436
Key assumptions in VIU calculation and management’s approach to determining the values assigned to each key
assumption
2009 2008
Cash-generating unit
Goodwill at
1 July
2009
Discount
rate
Nominal
growth rate
beyond
initial
cash flow
projections
Goodwill at
31 December
2008
Discount
rate
Nominal
growth rate
beyond
initial
cash flow
projections
US$m % % US$m % %
Personal Financial Services – Europe ............... 4,507 11.0 3.1 4,422 10.0 3.5
Commercial Banking – Europe ......................... 3,480 11.0 3.1 3,427 10.0 3.5
Private Banking – Europe .................................. 4,483 11.0 3.1 4,470 9.0 3.5
Global Banking and Markets – Europe ............. 3,489 11.0 3.1 3,451 11.0 3.5
Personal Financial Services – North America ... – – –
–
13.6 3.9
Personal Financial Services – Latin America .... 2,350 15.0 8.0 2,189 16.8 8.8
Total goodwill in the CGUs listed above .......... 18,309 17,959
At 1 July 2009, aggregate goodwill of US$4,475 million (31 December 2008: US$3,896 million) 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: external data that reflects the market’s assessment of GDP and inflation for the
countries within which the CGU operates. The rates used for 2008 and 2009 are taken as an average of the last
10 years.
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 in the country concerned 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. In 2008,
the rates used in the impairment test for Personal Financial Services – Latin America were based on 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.
Personal Financial Services – Europe and Commercial Banking – Europe: the assumptions included in the cash
flow projections for Personal Financial Services – Europe and Commercial Banking – Europe reflect the economic
environment and financial outlook of the European countries within these two segments. Key assumptions include the
level of interest rates and the level and change in unemployment rates, particularly in the UK. While current
economic conditions in Europe continue to be challenging, management’s cash flow projections are based primarily
on these prevailing conditions. Although the prospects for near term economic growth are uncertain, management
does not expect these conditions to continue over the longer term. The downside risks to this assessment include the
risk of a prolonged economic downturn and the continuation of base rates at their current record low levels. Based on
the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key
assumptions described above would not cause an impairment to be recognised in respect of Personal Financial
Services – Europe or Commercial Banking – Europe.
Private Banking – Europe: the revenues in Private Banking – Europe are predominately generated through HSBC’s
client relationships. For 2010, a modest recovery in client risk appetite is expected, reducing the pressure on
brokerage and portfolio management fees. Thereafter, the nominal long-term growth rates described in the table
above have been used. Based on the conditions at the balance sheet date, management determined that a reasonably
possible change in any of the key assumptions described above would not cause an impairment to be recognised in
respect of Private Banking – Europe.