HSBC 2015 Annual Report Download - page 331

HSBC HOLDINGS PLC
329
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Goodwill and intangible assets
Nature of the area of focus Matters discussed with the GAC
Goodwill of $16.3bn has arisen from a number of historic
acquisitions. The largest balances are in Europe, North America and
Latin America.
An assessment is required annually to establish whether this
goodwill should continue to be recognised, or if any impairment is
required. The assessment was performed for each global business
within a region, which is the lowest level at which HSBC could
allocate and assess goodwill, which is referred to as a cash
generating unit (‘CGU’).
The impairment assessment relied on the calculation of a value-in-
use for each of the CGUs. This calculation was based on estimated
future cash flows for each CGU discounted at an appropriate cost of
equity rate. HSBC used its Annual Operating Plan as the basis for the
first 5 years of cash flows and then extrapolated returns into
perpetuity using a terminal growth factor. Cost of equity discount
rates were based on the investment rates used within the global
business and approved by the Board of Directors.
The estimation of future cash flows and the level to which they are
discounted is inherently uncertain and requires significant
judgement. The extent of judgement and the size of the goodwill,
resulted in this matter being identified as an area of audit focus.
The judgements used by management were most important when the
calculated value-in-use was close to the carrying value of the CGU.
Reasonably possible alternative assumptions were considered to
identify those CGU’s which were most sensitive to a change in value
in use. During the third quarter, goodwill for GB&M in North America,
Latin America and Europe, together with the Global Private Bank in
Europe were of most interest in the discussion with the GAC as these
four CGUs have low levels of headroom as a proportion of carrying
value. Subsequently, at 31 December the goodwill for Global Private
Bank Europe and GB&M North America was retested as a result of
indications of impairment being present.
The discussion with the GAC focused on the key assumptions, both
individually and when combined together. During these discussions,
management confirmed their view that the forecasts for each CGU
remained appropriate.
As disclosed on page 410, a small deterioration in either performance
or long term growth forecasts, or an increase in the discount rate may
lead to impairment in one or more of the CGUs identified.
Procedures performed to support our discussions and conclusions
• PwC’s independent valuation experts critically assessed the discount rate and terminal growth rates used in the discounted cashflow
models. The critical challenge was focused on the methodology used to reconcile the discount rates used by each CGU to the overall
calculated cost of capital for HSBC; and whether the use of the country GDP growth rates was the most appropriate in determining the
terminal growth of cash flows for each CGU.
• The calculations used in the model were re-performed to check accuracy and the key inputs in the model were agreed to approved
sources.
• Management’s strategic cash flow forecasts used in the model were assessed by:
– testing that the forecasts agreed to the 2015 Annual Operating Plan, which had been approved by the Board of Directors and
considering how plans announced in HSBC’s strategy update to investors on 9 June 2015 impacted that plan. For Global Private
Banking Europe and GB&M North America flows in the forecasted 2016 Annual Operating Plan were agreed to the retest of
impairment at 31 December;
– considering current year performance against plan and the reasons for any deviation. This was discussed with management of the
Global Businesses for each sensitive CGU; and
– reviewing the historical achievement of the Annual Operating Plan. Given the uncertainties in forecasting, this identified that
forecasts have been less accurate for prior periods, and we considered if this was appropriately factored into the discount rates used.
• Independent sensitivity analysis was performed, making adjustments to a number of modelled assumptions simultaneously to identify
any further CGUs with a risk of impairment. This identified more CGU’s requiring consideration than initially identified by management.
• The appropriateness of disclosures made in relation to goodwill was also reviewed.
Relevant references in the Annual Report and Accounts 2015
GAC Report, page 262.
Note 20: Goodwill and intangible assets, page 406.