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

Brewin Dolphin Holdings PLC – Annual report – 30 September 2019

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. Business combinations
The Group applies judgement in determining whether a transaction is a business combination, which includes consideration as to whether the Group has acquired a business or a group of assets. In making this judgement, the Group assesses the assets, liabilities, operations and processes that were the subject of the transaction against the definition of a business in IFRS 3.

The Group has during the year acquired the following:
• On 11 March 2019, the Group’s principal operating subsidiary, Brewin Dolphin Limited (‘BDL’), acquired 100% of the ordinary share capital of Aylwin Limited (‘Aylwin’), an unlisted company based in Hampshire which specialises in the provision of financial planning services.
• On 1 April 2019, BDL acquired 100% of the ordinary share capital of Mathieson Consulting Limited (‘MC’), a consultancy business, that provides an expert witness report service covering pensions.
• On 9 August 2019, BDL acquired the assets and staff of Epoch Wealth Management LLP (‘Epoch’), an IFA firm based in Bath.

It has been judged that all of the above acquisitions should be accounted for as business combinations. Separate legal entities were acquired for both Aylwin and MC, including control of processes, assets and liabilities assumed. Whilst a legal entity was not acquired for Epoch, the trade and assets purchased constituted a business rather than a group of assets.

See note 26 for additional information.

b. Key sources of estimation uncertainty
i. Business combinations
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 Aylwin and Epoch acquisitions and the brand intangible asset recognised as part of the MC acquisition (as set out in note 4.a.i. above).

The value attributed to the client relationships and brand affects the amount of goodwill recognised. This value together with the assessment of useful economic lives of these intangible assets determines the future amortisation charges.

The valuation of the client relationship and brand intangible assets 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 the following separately identifiable intangible assets in relation to each of the acquisitions:
brew1

See notes 13 and 26 for further information.

An increase of 10% in the expected cash flows, applied equally over the cash flows in each period, would increase intangible assets recognised by £7,680,000 approximately, whereas a decrease of 10% in the expected cash flows would reduce the intangible assets by £7,100,000 approximately. An increase or decrease of 10% in the discount rate would increase or decrease intangible assets by approximately £3,000,000, respectively.

ii. 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 £6,858,000 (2018: £7,619,000). A reduction in the average amortisation period by one year would increase the amortisation expense for the year by £1,218,000 (2018: £1,583,000).

iii. 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 17.

The defined benefit pension scheme has a surplus of £17,373,000 (2018: £11,408,000). See page 132 ‘Defined benefit pension scheme asset recognition basis’ for further detail.

iv. 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. The charge for the year was £415,000 (2018: £1,830,000).

If all of the performance conditions were assumed to be met, the charge for the year would increase by £1,576,000 (2018: £519,000); an increase of 10% in the vesting assumptions would increase the charge for the year by £248,000 (2018: £295,000).

Further information on the scheme is disclosed in note 28.

v. Provisions
Onerous leases
The Group recognises a provision for several onerous property leases of £4,840,000 (2018: £4,664,000). The valuation of an onerous lease is based on the best estimate of the likely future costs discounted to present value. Where the provision is in relation to premises and it is more likely than not that the premises will be sublet, an allowance for sublease income has been included in the valuation. The ultimate amount of the provision is dependent on the timing of any sublet and the associated terms of the sublet achieved.

If the assumptions regarding unconfirmed sublet income are removed, the provision would increase by £4,587,000 (2018: £3,917,000) to £9,427,000 (2018: £8,581,000). A delay of one year to the assumed sublets would increase the onerous lease provision and Income Statement expense for the year by £1,531,000 (2018: £1,259,000). Further information is disclosed in note 22.