Part B – Consolidated Balance Sheet Assets
Section 13 – Intangible assets – Item
13.2 Intangible assets: annual changes (€ '000) Finite
Life Indefinite Life Finite Life Indefinite Life
A. Gross Opening Balance 22,927,113 907,877 - 7,153,150 1,071,023 32,059,163
A.1 Net reductions (2,499,040) (418,056) - (3,549,908) - (6,467,004)
A.2 Net opening balance 20,428,073 489,821 - 3,603,242 1,071,023 25,592,159
B. Increases 16,852 131,791 - 117,785 - 266,428
B.1 Purchases - 127,450 - 74,795 - 202,245
B.2 Increases in intangible assets
generated internally X 3,482 - 289 - 3,771
B.3 Write-backs X - - - - -
B.4 Increase in fair value - - - - -
- in equity X - - - - -
- through profit or loss X - - - - -
B.5 Positive exchange differences 16,852 171 - 7,359 - 24,382
B.6 Other changes - 688 - 35,342 - 36,030 C. Reductions 200,518 70,789 - 330,909 5,423 607,639 C.1 Disposals - 1,166 - 5,747 - 6,913 C.2 Write-downs - 57,957 - 277,597 - 335,554 - amortization X 57,957 - 277,597 - 335,554 - write-downs - - - - + in equity X - - - - -
+ through profit or loss - - - - - -
C.3 Reduction in fair value - - - - -
- in equity X - - - - -
- through profit or loss X - - - - -
C.4 Transfers to non-current assets
held for sale - 43 - 1,487 - 1,530
C.5 Negative exchange differences 200,495 1,229 - 23,743 5,423 230,890
C.6 Other changes 23 10,394 - 22,335 - 32,752
D. Net Closing Balance 20,244,407 550,823 - 3,390,118 1,065,600 25,250,948
D.1 Total net write-down (2,400,624) (569,284) - (3,648,503) - (6,618,411)
E. Closing balance 22,645,031 1,120,107 - 7,038,621 1,065,600 31,869,359
F. Carried at cost - - - - - -
Total Goodwill
Other Intangible Assets Changes in first half 2011
Generated Internally Other
The Group does not use the revaluation model (fair value) to measure intangible assets.
Other intangible assets – other – indefinite life include trademarks (brands). Intangible assets – other – definite life include:
Customer Relationship e Core Deposits of€2,614 million; Software of€560 million;
Information on intangible assets noted during business combinations
The application of IFRS 3 to the accounting for business combinations revealed significant amounts of intangible assets and goodwill. The following table shows the change in the values posted for the various intangible assets identified during the half-year, including the valuation effects described below.
(€ million) Intangible assets (except software) TOTAL 12.31.2010 Amortization Impairment (*) Other changes TOTAL 06.30.2011 Trademarks 1,071 (5) 1,066
Core deposits and customer
relationships
2,740 (117) (9) 2,614
Goodwill 20,428 (184) 20,244
TOTAL 24,239 (117) (198) 23,924
(*) due to the exchange rate effect.
Trademarks and goodwill are considered indefinite-life intangible assets. They are expected to contribute indefinitely to income flows.
The other intangible assets noted have finite useful lives, originally valued by discounting financial flows over the residual lifetime of the relationships in place on the date of the business combination from which they derive. Finite-life intangible assets are subject to amortization based on the associated useful life. The types of intangible assets noted as a result of business combinations and the methods used to determine their associated fair value on the acquisition date are indicated below.
Trademarks
The fair value of trademarks is determined using the "relief from royalty" method, which estimates their value based on the payments received for granting their use to third parties. Royalties are calculated by applying the royalty rate to the income flows (adjusted operating income of the items not associated with the trademarks themselves).
In summary, the method may be broken down into three stages:
determination of the royalty rate (based on a comparison with similar cases or calculated analytically);
application of the royalty rate to income flows;
determination of the present value of royalties after taxes, calculated by applying a discount rate that takes into account the risk context of the trademark being valued.
Core Deposits
The value of the Core Deposit comes from the fact that part of the short-term deposits of a bank (current accounts and savings deposits) and current account overdrafts remains deposited in the accounts for significant periods of time.
The useful life of the relationship is longer than the contract duration. The spread between the actual cost of deposits by means of Core Deposits and the cost of deposits at interbank market rates (the markdown) represents the most significant value component associated with this intangible asset. The income planning used to determine the fair value of Core Deposits also takes into account the fee component, which contributes to the total income from these relationships.
The determination of the fair value of this asset is based on the discounting of cash flows that represent the income margins generated by the deposits over the residual duration of the relationships in place on the date of acquisition. Inasmuch as these are finite-life assets, the associated value is amortized on a straight line over the expected duration of their economic benefit.
The average residual useful life of Core Deposits is 20 years.
Customer Relationships
Assets under Management (AuM)
The value of this intangible asset comes mainly from the ability of the company to obtain a profit from the placement of products that are related to the assets managed with its own customers.
The income flows used to value this asset when first posted are: for the placement banks, the fees granted by the producers;
for the producers, the fees received from the customers, net of fees paid, mainly to the placement banks.
These fees are considered recurring, because they are tied to managed assets held by customers. The average residual useful life of these intangible assets is 19 years.
Assets under Custody (AuC)
The value of this intangible asset comes mainly from the ability of the company to obtain a profit from customer assets under administration.
The income flows used to value this asset when first posted consist of the fees received for the work associated with assets under administration. These fees are considered recurring, because they are generated by the normal activity of customers acting on their own portfolios.
The average residual useful life of these intangible assets is 10 years.
Life Insurance
The value of this intangible asset comes mainly from the ability of the company to obtain a profit from the placement of products related to the "bancassurance" business with its own customers.
The income flows used to value this asset when first posted consist of the fees received for the work associated with the bancassurance business. These fees are considered recurrent because, from the point of view of the investor, they are similar to the products of managed/administered deposits. The average residual useful life of these intangible assets is 25 years.
Products
This intangible asset relates to the profitability generated by trading on behalf of the asset management companies of the Group. The income flows used to evaluate this asset when first posted consist of the fees received for the brokerage work on behalf of the asset management companies themselves. These fees are considered recurring, because they are generated by the normal activity of the funds in which customers' deposits have been invested.
Furthermore, in some cases, the value of the asset is related to fees received for the disbursement of regional incentives.
Other
This intangible asset includes all other types of so-called customer relationships, including by way of example those deriving from the ability of the company to obtain placement fees on third-party bonds and from securities auctions.
The average residual useful life of these intangible assets is 14 years.
The Group does not hold intangible assets acquired through public grants or intangible assets pledged against liabilities.
Impairment testing of intangible assets during business combinations
In accordance with IAS 36, all indefinite-useful-life intangible assets, including goodwill, must be subjected at least annually to impairment testing to verify the recoverability of their value. For finite- useful-life intangible assets, possible loss of value must be determined each time indicators of loss appear.
Under IAS 36, impairment testing of intangible assets with indefinite lives must be performed at least annually and, in any case, whenever there is objective evidence of the occurrence of events that may have reduced their value. For UniCredit the trigger event is a market capitalization lower than shareholders’ equity.
Recoverable value is the greater of the value in use (present value of future cash flows generated by the asset being valued) and the associated fair value, net of sales costs.
The recoverable value of intangible assets subject to impairment testing must be determined for the individual assets, unless both the following conditions exist:
the value in use of the asset is not estimated to be close to the fair value, net of sales costs; the asset does not generate incoming cash flows largely independent of those coming from other
assets.
If these conditions exist, the impairment test is conducted at the level of the Cash Generating Unit (CGU), as required by the cited accounting principle.
The impairment testing performed by the UniCredit Group by way of the determination of the value in use of the Cash Generating Units (CGU) as described below, includes both indefinite-useful-life intangible assets (goodwill and trademarks) and finite-useful-life intangible assets (core deposits and customer relationships), whenever the loss indicators provided for by the accounting principle occur.
We believe that core deposits and customer relationships cannot be subjected to separate impairment testing, because these assets do not generate cash flows independent of the cash flows from other assets.
To determine the value in use of intangible assets subject to impairment testing, IAS 36 requires that reference be made to cash flows for the assets under conditions that were current on the test date. For the impairment testing, the value in use of the Cash Generating Units (CGU) to which these intangible assets are assigned must be calculated taking into account the cash flows for all assets and liabilities included in the CGU and not only those for which goodwill and/or the intangible asset were recorded when applying IFRS 3.
Definition of Cash Generating Units (CGU)
Estimating the value in use for the purposes of any impairment testing of intangible assets, including goodwill, which do not generate cash flows except in conjunction with other business assets, requires that these assets first be attributed to operating units that are relatively autonomous in the business context (from the points of view of independent cash flows generated and of internal planning and reporting). These operating units are defined as Cash Generating Units (CGU).
In accordance with the provisions of IFRS 3 and IAS 36, for the purposes of impairment testing, goodwill has been allocated to the following operational Divisions of the Group, identified as CGUs:
F&SME Networks (Italy, Germany, Austria and Poland), which includes Mass Market, Affluent,
Small Business and SME clients, grouped according to their geographical location;
F&SME Factories which includes, regardless of their geographical location, the following product
lines: Leasing, Factoring, Asset Gathering and Consumer Finance;
Corporate & Investment Banking (formerly Corporate and Markets & Investment Banking):
which includes
businesses with minimum annual revenues of€50 million;
the assets of the Group on financial markets and in Investment Banking (e.g., trading, distribution, structured derivatives, lending and syndication assets, mergers and acquisitions, private equity portfolio management, direct investment in the equity of listed and unlisted businesses); Private Banking, which includes private clientele with medium-high financial liquidity, to whom we
provide advisory and asset management services. The division uses traditional channels that are typical for this customer segment (private bankers) and innovative distribution models (networks of financial consultants and online banking and trading services);
Asset Management, which specializes in protecting and increasing the value of customer
investments through a series of innovative financial solutions (UCITs, asset management, institutional investor portfolios, etc.);
Central Eastern Europe (CEE), which includes the businesses of the Group in the countries of
Central and Eastern Europe (except Poland), including assets in Kazakhstan and Ukraine, which are subject to specific assessment;
Parent Company and other companies.
The CGU is the lowest level for Group-level goodwill monitoring. The identified CGUs correspond to the organizational business units through which the Group develops its own activity and for which it provides segment reporting.
In the CGU “Central Eastern Europe” (CEE), additional tests were performed for each country where the Group operates. The allocation methodology adopted took into account synergies and expected results by the above organizational units.
The allocation of goodwill to the various CGUs called for two distinct phases:
the first phase identified goodwill as the difference between the fair value of the purchase posted in the individual financial statement of the purchaser and the shareholders’ equity at fair value after applying the purchase price method to the assets, liabilities and potential liabilities of the financial statement of the entity acquired (net of minority interests), assessed at fair value. This phase also took into consideration all fair value from transfers of companies or branches within the Group which took place as long as the purchase price agreement was provisional;
the second phase allocated residual goodwill to the various CGUs, weighting them according to their respective fair value.
The book value of the CGUs
The book value of the CGUs is determined in accordance with the criterion used to determine their recoverable value. The recoverable value of the CGUs includes flows from their respective financial assets and liabilities, so the book value must also include the financial assets and liabilities generating those flows.
The book value of each CGU is determined based on its contribution to consolidated shareholders’ equity, including minority interests. Specifically, the book value of the CEE CGUs is determined via the
summation of the individual book values of each company in the consolidated financial statement (corresponding to their book shareholders’ equity), taking into account any intangible assets noted at the time of purchase (net of later amortization and impairment) and the consolidation entries.
Because it would be excessively complex to determine the carrying amount of the other CGUs based on book values, it is necessary to use operational factors to break them down correctly. These factors are determined by the Capital Management operating unit of the Finance and Administration Planning Department. In any case, intangible assets are attributed to the CGUs in accordance with the available accounting information.
The carrying amount of the CGUs as of June 30, 2011, determined as described above, and the portions of goodwill and other intangible assets allocated to each of them are shown below. The values refer to the situation after impairment testing.
(€ million)
Cash Generating Unit (CGU) VALUE AS AT
06.30.2011 OF WICH GOODWILL (GROUP SHARE) OF WHICH OTHER INTANGIBLE ASSETS(*) Retail 19,874 8,261 225 of which: Network Italy 9,033 4,512 114 Network Germany 1,446 296 12 Network Austria 1,602 554 46 Network Poland 1,776 689 0 Factory 6,017 2,210 52 Private Banking 975 567 54 Asset Management 1,871 1,715 0
Corporate & Investment Banking (CIB) 21,813 5,657 261
Central Eastern Europe (CEE) 17,008 3,997 221
of which:
Kazakhstan 890 449 36
Ukraina 1,005 458 19
Group parent and other companies 7,833 47 1,728
TOTAL 69,374 20,244 2,489
Any discrepancies in this table and between data given in the above table and other information in Explanatory Notes are due to the effect of rounding. (*) Stated amounts are net of deferred taxes.
Estimating cash flows to determine the value in use of the CGUs
As noted, based on IAS 36, the impairment test for indefinite-life intangible assets must be performed at least annually and in any case whenever there is any indication that their value may be impaired. The referenced accounting principles require that the impairment test be carried out by comparing the book value of each CGU with its recoverable value. When the latter proves to be less than the book value, a write-down must be recorded in the financial statement. The recoverable value of the CGU is the greater of its fair value (net of sales costs) and the related value in use.
The recoverable amount relating to each CGU is the value in use and is determined on the basis of future cash flows expected from each CGU to which the goodwill has been allocated. These cash flows are estimated based on:
updated macroeconomic scenarios;
the 2011 Budget approved by the Board of Directors on January 20, 2011or, if available, the latest forecast in December 2011;
financial projections for 2012-2015 approved by the Board of Directors on March, 22 2011. Projections of future profits were extended to 2020, in order to obtain an assessment of the earning capability of the Group and its ability to create value over time, notwithstanding the current
macroeconomic downturn. These projections were developed by extrapolation for all CGUs and for the individual CEE countries.
Expected cash flow for 2020 represents the basis for calculating the Terminal Value, which represents the ability of the CGUs to generate future cash flows beyond that year. Based on the adopted methodology, Terminal Value is calculated as a perpetual income estimated on the basis of a normalized, economically sustainable cash flow, consistent with a constant or decreasing long-term growth rate ("g"), as required by the IAS/IFRS accounting standards.
The value in use is determined by discounting the financial flows at a rate that takes into account present market rates and the specific risks of the asset. Taking into consideration the different risk levels of their respective operating environments, we used different risk premiums for each CGU which were specific to the individual entity or operating sector. The discount rates included a component related to country risk. The Board of Directors has approved the valuation procedure (impairment test) based on the financial flow estimates and additional assumptions, developed by the Management.
The following tables summarize the estimates of the main macroeconomic indicators, relative to the markets where the Group operates, used to validate the estimates of future financial flows.
CEE countries
CAGR 2010-2015 Real GDP Inflation
2012 2015 2012 2015 Bosnia-H. 3,0% 2,5% 1,6 1,6 2,0 2,0 Bulgaria 3,3% 3,5% 0,5 3,5 2,0 2,0 Croatia 1,9% 2,8% 3,0 3,9 7,3 7,4 Czech Rep. 3,1% 2,1% 3,2 3,6 24,0 24,0 Estonia 3,7% 2,6% n.m. n.m. n.m. n.m. Hungary 3,4% 2,8% 5,1 4,6 270,0 255,0 Kazakhstan 6,2% 7,1% 7,0 7,5 176,9 151,2 Latvia 3,8% 2,3% 2,8 3,6 0,7 0,7 Lithuania 3,4% 2,3% 3,4 3,6 3,5 3,5 Poland 3,7% 3,1% 5,0 4,7 3,8 3,6 Romania 3,9% 3,2% 4,7 4,2 4,1 3,8 Russia 3,7% 6,2% 6,5 5,0 40,1 37,3 Serbia 3,5% 5,8% 9,5 6,7 112,0 110,0 Slovakia 3,1% 1,9% n.m. n.m. n.m. n.m. Slovenia 2,6% 2,6% n.m. n.m. n.m. n.m. Turkey 5,3% 6,1% 9,1 8,6 2,0 1,9 Ukraine 4,7% 9,7% 8,3 7,0 9,0 8,8
Interbank rate Exchange rate (vs EUR)
Eurozone and USA
3
The calculation of the utility value for impairment testing purposes was conducted using a Discounted Cash Flow model (DCF). The cash flows were determined by subtracting from net profit (net of minority interests) the annual capital requirement generated by changes in risk-weighted assets. This capital requirement is defined as the level of capitalization that the Group aspires to achieve in the long term. The Discounted Cash Flow method used by the Group is based on three stages:
First stage - from 2011 to 2015 - which uses:
2011: Group Budget data as approved by the Board of Directors or, if available, the latest forecast in December 2011
2012-2015: internal cash-flow projections approved by the Board of Directors
Intermediate period from 2016 to 2020: cash flows are extrapolated starting from the last period of explicit forecast (2015) using reducing growth rates up to those of the Terminal Value, applying ceiling to profits such that the 2015 ratio of Net Profit to RWAs registrato is maintained.
“Terminal Value” calculated using a nominal growth rate of 2%. The euro area’s nominal GDP growth rate from 1996 to 2010 was 3.3% (1.7% real growth and ~1.6% inflation). The choice of nominal 2%, corresponding to ~ 0% real growth, was made for prudential reasons.
For JSC ATF Bank , in light of the continuing specific crisis in Kazakhstan and the consequent structural reduction in expected profit margins as confirmed by back tests based on the differences between past plans and actual outcomes, profit and loss projections for 2011-2020 have been prudently revised by applying a correction factor of minus 22.5% to the profit figure given in the base scenario (budget 2011 and cash-flow projections to 2015).
Real GDP 2010 2011 2012 2013 2014 2015 y/y % changes USA 2,6 1,9 2,3 2,5 2,5 2,5 Eurozone 1,6 1,3 1,8 2,0 1,9 1,3 Austria 1,9 1,6 1,8 1,9 1,8 1,7 Germany 3,2 1,9 1,6 1,7 1,6 1,7 Italy 1,0 1,1 1,4 1,6 1,3 0,9 Inflation 2010 2011 2012 2013 2014 2015 y/y % changes USA (CPI) 1,7 1,8 2,5 2,6 2,3 2,3 Eurozone (HICP) 1,5 1,7 2,0 2,1 2,0 1,8 Austria (CPI) 1,8 2,0 1,9 1,9 1,9 1,9 Germany (CPI) 1,2 1,5 1,8 1,7 1,9 1,8 Italy (CPI) 1,5 1,9 2,1 2,2 2,1 1,9 Financial Indicators 2010 2011 2012 2013 2014 2015
Short term interest rates (%)
USA - Federal Fund (eop) 0,25 0,25 2,25 4,00 4,25 4,25
EU - 16 - Refi BCE (eop) 1,00 1,25 2,25 3,50 4,00 3,50
Euribor 3m (eop) 1,00 1,55 2,55 3,80 4,10 3,55
10Y Govt bond yields (%)
Eurozone (eop) 2,25 3,08 3,50 4,00 4,30 3,80
EUR-USD (eop) 1,43 1,46 1,37 1,32 1,30 1,26
Moreover, another prudential factor was introduced with refernce to Ukraine considering a possibile alignment of the long-term profitability (Terminal value) with figures in line with CEE average data. To take into account the continuing high volatility of the financial markets and the regulatory uncertainty