Last checked at 18 Mar 2016 17:04
20 Goodwill and intangible assets
2015 | 2014 | |||
$m | $m | |||
Goodwill | 16,294 | 19,169 | ||
Present value of in-force long-term insurance business | 5,685 | 5,307 | ||
Other intangible assets | 2,626 | 3,101 | ||
At 31 December | 24,605 | 27,577 |
Goodwill
Accounting policy
Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquiree exceed the amount of the identifiable assets acquired and liabilities assumed. If the amount of the identifiable assets and liabilities acquired is greater, the difference is recognised immediately in the income statement. Goodwill is allocated to cash-generating units ('CGU's) for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC's CGU's are based on geographical regions subdivided by global business. Impairment testing is performed at least annually, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount. The carrying amount of a CGU is based on its assets and liabilities, including attributable goodwill. The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value in use. VIU is the present value of the expected future CGU cash flows. If the recoverable amount is less than the carrying value, an impairment loss is charged to the income statement. Goodwill is carried on the balance sheet at cost less accumulated impairment losses. Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained. At the date of disposal of a business, attributable goodwill is included in HSBC's share of net assets in the calculation of the gain or loss on disposal. |
Critical accounting estimates and judgements
Goodwill impairment The review of goodwill for impairment reflects management's best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows: · the future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management's view of future business prospects at the time of the assessment; and · the rates used to discount future expected cash flows can have a significant effect on their valuation and are based on the costs of capital assigned to individual CGUs. The cost of capital percentage is generally derived from a CAPM, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management's control, are subject to uncertainty and require the exercise of significant judgement. The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such circumstances, management retests goodwill for impairment more frequently than annually when indicators of impairment exist to ensure that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management's best estimate of future business prospects. |
Movement analysis of goodwill
Europe | Asia | MENA | North America | Latin America | Total | |||||||
$m | $m | $m | $m | $m | $m | |||||||
Gross amount | ||||||||||||
At 1 January 2015 | 13,207 | 1,009 | 54 | 7,815 | 3,007 | 25,092 | ||||||
Exchange differences | (1,237) | (73) | (4) | 4 | (300) | (1,610) | ||||||
Reclassified to held for sale1 | − | − | − | − | (1,319) | (1,319) | ||||||
Other | 1 | 59 | (5) | (30) | (1) | 24 | ||||||
At 31 December 2015 | 11,971 | 995 | 45 | 7,789 | 1,387 | 22,187 | ||||||
Accumulated impairment losses | ||||||||||||
At 1 January 2015 | − | − | − | (5,923) | − | (5,923) | ||||||
Other | − | − | − | 30 | − | 30 | ||||||
At 31 December 2015 | − | − | − | (5,893) | − | (5,893) | ||||||
Net carrying amount at 31 December 2015 | 11,971 | 995 | 45 | 1,896 | 1,387 | 16,294 | ||||||
Gross amount | ||||||||||||
At 1 January 2014 | 14,977 | 1,016 | 55 | 7,861 | 3,241 | 27,150 | ||||||
Disposals | (168) | − | − | − | − | (168) | ||||||
Exchange differences | (1,594) | (30) | (1) | 1 | (240) | (1,864) | ||||||
Reclassified to held for sale | (8) | − | − | − | 24 | 16 | ||||||
Other | − | 23 | − | (47) | (18) | (42) | ||||||
At 31 December 2014 | 13,207 | 1,009 | 54 | 7,815 | 3,007 | 25,092 | ||||||
Accumulated impairment losses | ||||||||||||
At 1 January 2014 | − | − | − | (5,971) | − | (5,971) | ||||||
Exchange differences | − | − | − | 1 | − | 1 | ||||||
Other | − | − | − | 47 | − | 47 | ||||||
At 31 December 2014 | − | − | − | (5,923) | − | (5,923) | ||||||
Net carrying amount at 31 December 2014 | 13,207 | 1,009 | 54 | 1,892 | 3,007 | 19,169 |
HSBC's impairment test in respect of goodwill allocated to each CGU is performed as at 1 July each year. A review for indicators of impairment is undertaken at each subsequent quarter end and, as at 31 December 2015, this review identified indicators of impairment for two CGUs, recognised as sensitive in the annual test performed as at 1 July. As a result, an impairment test has been performed for Global Private Banking - Europe and Global Banking and Markets - North America as at 31 December 2015 and the goodwill balances, key assumptions and results of this test are included in the disclosures below. For all other CGUs the annual test performed as at 1 July remains the latest impairment test and the disclosures given are as at 1 July. The testing at both 1 July and 31 December resulted in no impairment of goodwill.
Basis of the recoverable amountThe recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective testing date for 2014 and 2015.
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. For the goodwill impairment test conducted at 1 July 2015, management's cash flow projections until the end of 2019 were used. For the goodwill impairment test conducted at 31 December 2015, management's cash flow projections until the end of 2020 were used.
Key assumptions in VIU calculation
Nominal | ||||||||
growth rate | ||||||||
Goodwill at: | Discount | beyond initial cash | ||||||
1 Jul 2015 | 31 Dec 2015 | rate | flow projections | |||||
$m | $m | % | % | |||||
Cash-generating unit | ||||||||
Retail Banking and Wealth Management - Europe | 3,562 | 6.9 | 3.3 | |||||
Global Private Banking - Europe | 3,414 | 3,343 | 8.4 | 2.5 | ||||
Global Banking and Markets - Europe | 2,690 | 9.9 | 3.5 | |||||
Commercial Banking - Europe | 2,603 | 9.0 | 3.6 | |||||
Global Banking and Markets - North America | 929 | 931 | 10.0 | 4.3 | ||||
Retail Banking and Wealth Management - Latin America | 792 | 11.0 | 6.9 | |||||
1 Jul 2014 | ||||||||
$m | ||||||||
Cash-generating unit | ||||||||
Retail Banking and Wealth Management - Europe | 4,298 | 9.1 | 4.5 | |||||
Global Private Banking - Europe | 3,808 | 7.1 | 3.4 | |||||
Global Banking and Markets - Europe | 3,296 | 11.0 | 4.2 | |||||
Commercial Banking - Europe | 3,214 | 10.1 | 4.2 | |||||
Global Banking and Markets - North America | 917 | 9.8 | 4.6 | |||||
Retail Banking and Wealth Management - Latin America | 1,762 | 12.8 | 7.9 | |||||
At 1 July 2015, aggregate goodwill of $2,787m (1 July 2014: $3,610m) had been allocated to CGUs that were not considered individually significant. The Group's CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.
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 GMB.
Nominal long-term growth rate: this growth rate reflects GDP and inflation for the countries within which the CGU operates or derives revenue from. The rates are based on IMF forecast growth rates as they represent an objective estimate of likely future trends. The rates used for 2014 and 2015 do not exceed the long-term growth rates for the countries within which the CGUs operate or derive revenue from.
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 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. The discount rates for each CGU are refined to reflect the rates of inflation for the countries within which the CGU operates. 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 for businesses operating in similar markets. For 2014 and 2015, internal cost of capital rates were consistent with externally sourced rates. For the purpose of goodwill testing during 2015, internal rates were adjusted to reflect the uncertainty of the cash flows used in the test.
Sensitivities of key assumptions in calculating VIUAt 1 July 2015 Global Banking and Markets - Europe, and as at 31 December Global Banking and Markets - North America and Global Private Banking - Europe, were all sensitive to reasonably possible changes in the key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions management considers the available evidence in respect of each input to the model such as: the external range of discount rates observable; historical performance against forecast; and risks attaching to the key assumptions underlying cash flow projections.
For Global Banking and Markets - North America, a reasonably possible adverse change in any one of the discount rate, growth rate or management's projections of cash flows could cause an impairment to be recognised. For Global Private Banking - Europe, a reasonably possible adverse change in management's projections of cash flows, or changes in more than one assumption, could cause an impairment to be recognised. Global Banking and Markets - Europe, would require reasonably possible adverse changes in more than one assumption to cause an impairment.
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