IAS 1 paras 122, 125, 129, judgements and estimates including sensitivities

Brewin Dolphin Holdings PLC – Annual report – 30 September 2020

Industry: financial services

4. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group’s accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.

a. Critical judgements in applying the Group’s accounting policies

i. Leases – determining the lease term

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend or terminate the lease. In making this judgement, the Group evaluates whether it is reasonably certain to exercise the option to renew or break the lease term.

That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal and the circumstances and facts for each lease including past experience to determine the likely lease term and whether the break option is likely to be exercised. This includes an assessment on the length of time remaining before the option is exercisable, current trading conditions and future trading forecasts on the ongoing profitability of the business.

After the lease commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (for example, a change in business strategy).

As at 30 September 2020, it has been assumed that all leases will be until the end of the lease term for the Group.

b. Key sources of estimation uncertainty

i. Acquisitions

As part of any business combination the Group recognises all assets acquired and liabilities assumed at their acquisition date fair values, including any separately identifiable intangible assets such as the client relationship intangibles recognised as part of the BDCIIL acquisition (as set out in note 35).

The value attributed to the client relationships affects the amount of goodwill recognised. This value together with the assessment of useful economic lives, which is based both on past experience and future expectations, determines the future amortisation charges. Further, the value determined for the client relationships asset impacts the deferred tax liability recognised by the Group.

The valuation gives rise to estimation uncertainty. Certain assumptions regarding the amount, timing and discounting of future cash flows have been adopted in order to determine these fair values. The Group has recognised £32.1m of separately identifiable client relationship intangible assets and goodwill of £2.0m; see notes 13 and 35 for further information.

The table below sets out the approximate impact on the value recognised for both goodwill and client relationships intangibles of an increase or decrease of 20% in the:

i. expected cash flows, applied equally over the cash flows in each period; and

ii. the discount rate.

ii. Impairment of goodwill, client relationships and brand

Impairment exists when the carrying value of an asset or cash-generating unit (‘CGU’) exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs to dispose (‘FVLCTD’) and its value in use (‘VIU’).

For the purposes of impairment testing, the Group has historically valued the recoverable amount of goodwill, client relationships and brand at the FVLCTD. The calculation of the FVLCTD is based on the valuation of the funds, which make up the relevant CGU where appropriate. A percentage is applied to the funds to determine the fair value. These percentages have been based on recent public transactions and adjusted to allow for the current economic uncertainty and volatility due to the COVID-19 pandemic.

However, recognising the challenge of estimating a reliable FVLCTD in the current uncertain economic environment due to greater volatility, the Group has also prepared VIU calculations.

For the VIU calculations, the recoverable amount is sensitive to assumptions applied to future cash flows and the discount rate. A sensitivity analysis is disclosed in note 13.

iii. Amortisation of client relationships

The useful economic life over which client relationships are amortised is determined by the expected duration of the client relationships which are determined with reference to past experience of account closures, in particular the average life of those relationships, and future expectations. During the year, client relationships were amortised over periods ranging from 5 to 15 years.

The amortisation for the year was £10,933,000 (2019: £6,789,000). A reduction in the average amortisation period by one year would increase the amortisation expense for the year by £1,862,000 (2019: £1,218,000).

iv. Leases – determination of the appropriate rate to discount the lease payments

The Group uses its incremental borrowing rate as the discount rate for determining its lease liabilities at the lease commencement date since the rate implicit in the lease cannot be readily determined. The calculation of the incremental borrowing rate involves estimation and has been obtained from the Group’s bank to determine the rate on a lease-by-lease basis that the Group would have to pay to borrow money to purchase the type of assets being leased. Rates applied are dependent on the entity leasing the asset and the following factors have been considered:

• Lease term;

• Credit risk of the entity; and

• Level of indebtedness of the entity.

The impact of an increase in the incremental borrowing rates used for calculating the discount rate in determining the lease liabilities for all entities on transition to IFRS 16 ‘Leases’ as at 1 October 2019 is set out below.

v. Defined benefit pension scheme

The calculation of the present value of the defined benefit pension scheme is determined by using actuarial valuations. Management makes key assumptions in determining the inputs into the actuarial valuations, which may differ from actual experience in the future. These assumptions are governed by IAS 19 Employee Benefits, and include the determination of the discount rate, life expectancies, inflation rates and future salary increases. Due to the complexities in the valuation, the defined benefit pension scheme obligation is highly sensitive to changes in these assumptions. The detailed assumptions, including a sensitivity analysis, are set out in note 18.

The defined benefit pension scheme has a surplus of £20,324,000 (2019: £17,373,000). See note 18 page 150 ‘Defined benefit pension scheme asset recognition basis’ for further detail.

vi. Share-based payments – Long Term Incentive Plan (‘LTIP’)

Awards are granted under the LTIP. The scheme includes performance-based vesting conditions, which impact the amount of benefit paid, such as

• Average annual net inflows in discretionary funds; and

• Growth in adjusted diluted EPS over the performance period.

Assumptions are made on the likelihood of meeting certain average and stretch targets over the remaining service periods in determining the expense in the year. The Directors consider that the LTIP is qualitatively material therefore this is highlighted as a key source of estimation uncertainty. The charge for the year was £747,000 (2019: £415,000).

If all of the performance conditions were assumed to be met, the charge for the year would increase by £3,105,000 (2019: £1,576,000); an increase of 10% in the vesting assumptions would increase the charge for the year by £443,000 (2019: £248,000).

Further information on the scheme is disclosed in note 31.