17. Intangible assets
| Group | |||||
| 2006 | Goodwill £m |
Core deposit intangibles £m |
Other purchased intangibles £m |
Internally generated software £m |
Total £m |
| Cost: | |||||
| At 1 January 2006 | 18,823 | 299 | 325 | 2,294 | 21,741 |
| Currency translation and other adjustments | (924) | (34) | (47) | (1) | (1,006) |
| Additions | — | — | 19 | 382 | 401 |
| Disposal of subsidiaries | (10) | — | (1) | — | (11) |
| Disposals and write-off of fully amortised assets | — | — | (21) | (33) | (54) |
| At 31 December 2006 | 17,889 | 265 | 275 | 2,642 | 21,071 |
| Accumulated amortisation and impairment: | |||||
| At 1 January 2006 | — | 85 | 64 | 1,660 | 1,809 |
| Currency translation and other adjustments | — | (12) | (7) | — | (19) |
| Disposals and write-off of fully amortised assets | — | — | — | (8) | (8) |
| Charge for the year | — | 54 | 40 | 291 | 385 |
| At 31 December 2006 | — | 127 | 97 | 1,943 | 2,167 |
| Net book value at 31 December 2006 | 17,889 | 138 | 178 | 699 | 18,904 |
| 2005 | |||||
| Cost: | |||||
| At 1 January 2005 | 18,032 | 268 | 261 | 2,089 | 20,650 |
| Currency translation and other adjustments | 786 | 31 | 30 | — | 847 |
| Acquisitions of subsidiaries | 113 | — | — | — | 113 |
| Additions | — | — | 34 | 329 | 363 |
| Disposals and write-off of fully amortised assets | (108) | — | — | (124) | (232) |
| At 31 December 2005 | 18,823 | 299 | 325 | 2,294 | 21,741 |
| Accumulated amortisation and impairment: | |||||
| At 1 January 2005 | — | 22 | 22 | 1,364 | 1,408 |
| Currency translation and other adjustments | — | 5 | 3 | — | 8 |
| Disposals and write-off of fully amortised assets | — | — | — | (106) | (106) |
| Charge for the year | — | 58 | 39 | 402 | 499 |
| At 31 December 2005 | — | 85 | 64 | 1,660 | 1,809 |
| Net book value at 31 December 2005 | 18,823 | 214 | 261 | 634 | 19,932 |
The weighted average amortisation period of purchased intangible assets, other than goodwill, subject to amortisation are:
| Years | |
| Core deposit intangibles | 6 |
| Other purchased intangibles | 6 |
The amortisation expense in respect of core deposit intangibles and other purchased intangibles for each of the next five years is currently estimated to be:
| £m | |
| 2007 | 95 |
| 2008 | 95 |
| 2009 | 71 |
| 2010 | 17 |
| 2011 | 15 |
Impairment review
The Group’s goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash generating unit to which goodwill has been allocated with its carrying value. There was no impairment recognised in 2006 or 2005.
Cash generating units where goodwill is significant were as follows:
| Goodwill at 30 September | |||
| Basis | 2006 £m |
2005 £m |
|
| Global Banking & Markets | Fair value less costs to sell | 2,341 | — |
| UK Corporate Banking | Fair value less costs to sell | 1,630 | — |
| Corporate Markets | Fair value less costs to sell | — | 3,966 |
| Retail | Fair value less costs to sell | 4,365 | 4,365 |
| Wealth Management | Fair value less costs to sell | 1,105 | 1,123 |
| RBS Insurance | Fair value less costs to sell | 1,069 | 1,063 |
| Citizens – Midstates | Value in use | 5,598 | — |
| Charter One | Value in use | — | 4,471 |
| Mid-Atlantic | Value in use | — | 1,450 |
On 1 January 2006 the Corporate Markets division was reorganised into Global Banking & Markets and UK Corporate Banking; Retail Markets was reorganised during the second half of 2006 into Retail and Wealth Management; goodwill was reallocated using relative fair values calculated as a weighted average of headcount, risk-weighted assets and profitability.
The recoverable amounts for all CGU’s, except for Citizens – Midstates were based on fair value less costs to sell. Fair value was based upon a price-earnings methodology using current earnings for each unit. Approximate price earnings multiples, validated against independent analyst information were applied to each CGU. The multiples used for both 2006 and 2005 were in the range 7.0 – 13.0 times earnings after charging manufacturing costs.
The goodwill allocated to Global Banking & Markets, UK Corporate Banking, Retail and Wealth Management arose from the acquisition of NatWest in 2000. The recoverable amount of these cash generating units exceeds their carrying value by over £15 billion. The goodwill allocated to RBS Insurance principally arose from the acquisition of Churchill in 2003. The recoverable amount for RBS Insurance exceeds the carrying value by over £2 billion. The multiples or earnings would have to be less than half those used to cause the value in use of the units to equal their carrying value.
Developments in Citizens, including the integration of Charter One, acquired in 2004, have led to changes in its management structure during 2006 resulting in the new Citizens Midstates cash-generating unit. The recoverable amount was based on a value in use methodology using management forecasts to 2014 (2005 – 2012). A projection period of greater than five years was used reflecting Citizens’ sustained historical growth rates, independently projected industry growth rates and the execution of Citizens’ commercial banking strategy in the Midstates operating area. A terminal growth rate of 5% (2005 – 4%) and a discount rate of 10% (2005 – 10.7%) was used. The recoverable amount of Citizens Midstates exceeds its carrying value by over $4 billion. The profit growth rate would have to be approximately half the projected rate to cause the value in use of the unit to equal its carrying amount.
© 2007