Financial Statements
Notes to the consolidated accounts
16. Intangible assets
| Goodwill £m |
Acquired PVIF £m |
Investment management contracts £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|
| Cost | |||||
| At 1 January 2006 | 677 | 484 | 620 | 195 | 1,976 |
| Other additions | 4 | - | - | 18 | 22 |
| Disposals | (4) | - | (43) | - | (47) |
| Adjustment to consideration | (12) | - | - | - | (12) |
| Foreign exchange adjustments | (3) | (4) | (4) | (3) | (14) |
| At 31 December 2006 | 662 | 480 | 573 | 210 | 1,925 |
| Acquisition through business combinations | 37 | - | - | 32 | 69 |
| Other additions | 11 | - | - | 26 | 37 |
| Disposals | - | - | - | (13) | (13) |
| Adjustment to consideration (note 42(e)) | 10 | - | - | - | 10 |
| Foreign exchange adjustments | 13 | 19 | 12 | 12 | 56 |
| At 31 December 2007 | 733 | 499 | 585 | 267 | 2,084 |
| Amortisation and impairment | |||||
| At 1 January 2006 | - | 115 | 204 | 67 | 386 |
| Amortisation charge for year | - | 25 | 43 | 24 | 92 |
| Impairment charge | - | - | 58 | - | 58 |
| Disposals | - | - | (16) | - | (16) |
| At 31 December 2006 | - | 140 | 289 | 91 | 520 |
| Amortisation charge for year | - | 26 | 42 | 27 | 95 |
| Impairment charge | - | - | - | 20 | 20 |
| Disposals | - | - | - | (13) | (13) |
| Foreign exchange adjustments | - | 3 | - | 3 | 6 |
| At 31 December 2007 | - | 169 | 331 | 128 | 628 |
| Carrying amounts | |||||
| At 31 December 2006 | 662 | 340 | 284 | 119 | 1,405 |
| At 31 December 2007 | 733 | 330 | 254 | 139 | 1,456 |
16 (a) Goodwill
Goodwill is the only intangible asset which has an indefinite useful life. The goodwill has been allocated to the following cash-generating units:
| 2007 £m |
2006 £m |
|
|---|---|---|
| UK Life & Pensions | 192 | 191 |
| Lombard | 161 | 138 |
| Sesame | 8 | - |
| Pantheon Financial | 28 | - |
| Friends Provident International Limited | - | - |
| Asset Management | 344 | 333 |
| Total goodwill | 733 | 662 |
In accordance with IAS 36 Impairment of Assets, goodwill is assessed for possible impairment each year. This assessment takes place in December of each year and compares the carrying value of goodwill for each segment with its recoverable amount. The recoverable amount has been taken to be the segment's calculated value in use.
There has been no goodwill impairment charge in 2007 (2006: £nil).
The value in use for UK Life & Pensions and Lombard has been taken from their business plans. These projections reflect the long-term nature of the business and forecast the cash flows over the anticipated terms of the policies. The plans include forecast sales of new business for three years and other assumptions that take into account both past experience and market conditions. The key assumptions to which the calculated values in use are most sensitive are set out below:
- Investment market conditions: the plans assume modest investment growth.
- Policy lapses: the plans assume no change from recent experience.
- Sales and margins: the plans assume a modest reduction in margins but an increasing level of sales.
- Expenses: the plans assume that expenses will broadly increase in line with inflation.
- Discount rate: the discount rate applied to UK Life & Pensions is 8.1% and to Lombard is 7.7%.
The outcome of the impairment assessment has been that it is considered unlikely that goodwill in respect of UK Life & Pensions would be impaired given that the value in use is significantly higher than the carrying value of goodwill. The UK Life & Pensions segment is operated as a single group and so a single value in use has been prepared. For Lombard, acquired in January 2005, the levels of new business have indicated that there is no requirement for any impairment of goodwill. No goodwill has been allocated to FPI.
For the Asset Management segment, the value in use is calculated using a cash flow projection based on the latest annual financial budget approved by the Board of F&C Asset Management plc. The Asset Management segment is operated as a single group and so a single value in use has been prepared. The key assumptions to which the calculated values in use are most sensitive are set out below:
- Investment market conditions: the plans assume modest investment growth.
- Sales and margins: the plans assume modest sales and margin growth although operating margins have been capped as a measure of prudence.
- Expenses: the plans assume cost growth in excess of inflation recognising the impact of staff costs.
- Discount rate: the discount rate applied to the cash flow projections is 8.5% based on F&C's weighted average cost of capital.
The outcome of the impairment review is that there is no requirement for any impairment of goodwill in the Asset Management segment.
In addition, the fair value of the Group's holding in F&C, at 31 December 2007, based on the quoted bid price of F&C's listed ordinary shares was £497m (2006: £531m). This was in excess of the carrying value of the Group's holding in the Asset Management business at this date.
16 (b) Acquired PVIF
Acquired PVIF is amortised over the lifetime of the in-force policies and is analysed as follows:
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| Cost £m |
Cumulative amortisation £m |
Net £m |
Cost £m |
Cumulative amortisation £m |
Net £m |
|
| UK Life & Pensions | 184 | 109 | 75 | 184 | 100 | 84 |
| International Life & Pensions | 315 | 60 | 255 | 296 | 40 | 256 |
| Total acquired PVIF | 499 | 169 | 330 | 480 | 140 | 340 |
In 2007 there was no indication that PVIF has been impaired.
16 (c) Investment management contracts
During 2006 F&C experienced a level of fund outflows which was higher than anticipated. This level of lost business had a notable impact on revenues and was significant enough to be considered an indicator of potential impairment of certain intangible assets, namely the related investment management contracts. No such indicators of impairment existed in 2007 and therefore no impairment review of intangible assets with finite lives has been undertaken this year. The information which follows is the disclosure in relation to the comparative period.
The 2006 review resulted in an impairment being recognised (included within Administrative and other expenses in the income statement) in respect of investment management contracts as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| F&C Investment Trust contracts | - | 22 |
| F&C Institutional contracts | - | 36 |
| Total impairment recognised in the income statement | - | 58 |
The above contracts relate to the investment trust management contracts and institutional fund management contracts acquired as a result of the creation of F&C Asset Management plc following the business combination of ISIS Asset Management plc and F&C Group (Holdings) Limited on 11 October 2004.
The recoverable amounts of the assets have been determined based on value in use calculations using cash flow projections based on the latest annual financial budget approved by the F&C board.
The discount rate applied to the cash flow projections as at 31 December 2006 was 9.4% for institutional contracts with no fixed term and 8.4% for fixed term institutional contracts. These rates reflect the varying risks and uncertainties inherent in the revenues from the underlying assets, using F&C's weighted average cost of capital of 8.9% as at 31 December 2006.
Revenues in the projections have been grown at 5.75% (2006: 5.75%) per annum in line with F&C's long-term view of market growth, which is consistent with that experienced over the last 16 years across the markets in which the managed assets are invested. The revenue projections are derived using the estimated useful lives of the underlying contracts and assume a constant loss of revenues over the projection periods.
Costs for the first year of the projections are driven by the budgeted F&C operating margin for 2007. Thereafter costs are driven by F&C's projected operating profit margins, as determined for the purposes of the goodwill impairment review.
Impairment has been determined by comparing the results of the value in use calculations in respect of the remaining contracts at the year end to the carrying value (cost less aggregate amortisation and prior impairment) of the assets at 31 December 2007, with any deficits arising constituting impairment to be recognised for the year.
F&C continues to monitor the level of investment contracts under management and to assess any impact on the expected lives of the related assets. Following further business outflows in the second half of 2006, the Board revisited the useful life estimates of the affected assets at the year-end and as a result, with effect from 1 January 2007, the remaining life of non-fixed term institutional contracts is now assessed as being 4 years.
The revised useful lives represent a change in the accounting estimate and will accelerate the amortisation of the remaining value of the assets. The effect of these changes increased the amortisation charge in the second half of 2006 by £1.7m and the charge in 2007 and beyond is increased by £2.6m per annum compared to continuing to amortise over the lives assigned from 1 July 2006, until such time as the assets become fully amortised.
16 (d) Other intangible assets
Other intangible assets mainly consist of distribution channel relationships and software development which are amortised over their anticipated useful lives of between 3 and 15 years. The analysis for each segment is as follows:
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| Cost £m |
Cumulative amortisation and impairment £m |
Net £m |
Cost £m |
Cumulative amortisation £m | Net £m |
|
| UK Life & Pensions | 130 | 92 | 38 | 90 | 69 | 21 |
| International Life & Pensions | 132 | 32 | 100 | 116 | 19 | 97 |
| Asset Management | 5 | 4 | 1 | 4 | 3 | 1 |
| Total other intangible assets | 267 | 128 | 139 | 210 | 91 | 119 |
Included in amortisation is £11m (2006: £7m) in respect of Life & Pensions acquired intangible assets.
At 31 December 2007 management assessed the value attributed to other intangibles. The review has resulted in an impairment of £17m (2006: £nil) relating to UK Life & Pensions development and software intangibles. Separately a review of International Life & Pensions software intangibles has resulted in an impairment charge of £3m (2006: £nil).