68 | FINANCIAL STATEMENTS | Notes to the Consolidated Financial Statements


13. Goodwill and other intangible assets continued The discount rate is based on the Group’s weighted average cost of capital to estimate a market relevant rate, calculated as at the year end, and takes into account the relative risks associated with the Group’s various revenue streams included in the respective operating segments. The discount rates disclosed above are the post-tax rates which have been applied in the projections; the pre-tax discount rates are 12.50% and 14.65% for F&C/F&C REIT and TRC respectively (2010: 10.85% and 13.00% respectively). All discount rates shown subsequently within this note are stated after tax.


Revenues are based on the budget for each operating segment, and management’s net business flow forecasts for the subsequent four years. Thereafter, revenues have been grown in line with the Group’s long-term view of market growth, consistent with that experienced historically, in the long-term, across the markets in which assets are invested. The different rates reflect the composite mix of assets held in each operating segment for each period. Net new business revenues are included at the levels assumed in the 2012 budget and management’s forecasts up to 2016 with no further net new business included thereafter. Additional costs associated with the increased revenues have been included in the projections, primarily to reflect variable remuneration costs. Where revenues earned from significant contracts with a fixed term are assumed to terminate at the end of the fixed term, the operating costs have been reduced by an amount which assumes associated profit margins of 50% (2010: 70%).


Projected operating costs for the first year are driven by the budgeted profit margins for each operating segment for 2012. Thereafter, both existing budgeted costs and, as noted above, further costs added associated with net new business revenue forecasts have been grown at inflation rates to accord with anticipated future salary and other cost increases.


Values in use are compared to the carrying values of goodwill, attributable management contracts and other intangible assets (net of associated deferred tax provisions), and property, plant and equipment in order to ascertain whether any impairment exists.


As this annual impairment review of goodwill indicated surpluses in all segments, no impairment has been recognised in the year in respect of goodwill (2010: £nil).


The key assumptions noted in the above table are those to which the calculated values in use are most sensitive. These assumptions, together with the inclusion in the projections of forecast net new business revenues and associated costs, result in the following surpluses of goodwill:


F&C £m


Excess of recoverable amount over carrying value 557.8


31 December 2011 F&C REIT


£m 16.8


TRC £m


94.4


F&C £m


787.8


31 December 2010 F&C REIT


£m 44.6


TRC £m


234.9


In order to assess the sensitivity of the key assumptions on the carrying values of goodwill, an analysis was conducted to ascertain the change that would be required to derive values in use which approximated to the carrying values of goodwill, and beyond which impairment would arise.


The absolute levels, on a standalone basis, of the key assumptions which most closely resulted in a match in the values in use to the carrying values of goodwill were as follows:


F&C Discount rate


Long-term market growth rate Inflation rate


Per cent. achievement of new business targets


1.67% 8.39%


31 December 2011 F&C REIT


TRC


3.49% (2.29)% 5.10% 11.83%


F&C


16.97% 11.02% 30.80% 16.19% 2.49% 7.38%


<0.00% 72.56% <0.00% <0.00%


31 December 2010 F&C REIT


10.36% 2.85% 6.74%


<0.00% TRC


39.84% (5.93)% 14.21% <0.00%


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