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

Brewin Dolphin Holdings PLC – Annual report – 30 September 2017

Industry: financial services

  1. 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.

On 10 May 2017, the Group’s principal operating subsidiary (Brewin Dolphin Limited) acquired 100% of the ordinary share capital of Duncan Lawrie Asset Management Limited (‘DLAM’). It has been judged that the acquisition should be accounted for as a business combination given control of a separate legal entity was acquired and all of the value of the business was transferred.

See note 27 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 intangibles assets such as the client relationship intangibles recognised as part of the DLAM acquisition (as set out in note 4.a.i. above).

The value attributed to the client relationships affects the amount of goodwill recognised, this value together with the assessment of useful economic lives determines future amortisation charges.

The valuation of the client relationship intangible asset 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 client relationship intangibles of £25,500,000 (see note 14 and 27), arising from the DLAM business’ relationship with its clients.

If the fair value of the assets acquired moved by 10% then the value of the client relationship intangibles acquired would decrease/increase by £2,500,000 resulting in the recognition of either goodwill or a gain on bargain purchase.

ii. Goodwill and client relationships

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 a 7 to 15 year period.

The amortisation for the year was £6,650,000 (2016: £6,287,000). A reduction in the average amortisation period by one year would increase the amortisation expense for the year by £2,154,000 (2016: £2,144,000).

Impairment of goodwill and client relationships

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 of disposal and its value in use.

For the purposes of impairment testing, the Group values the recoverable amount of goodwill and client relationships at the fair value less costs of disposal. The calculation of the fair value less costs of disposal is based on the valuation of the funds, which make up the relevant intangible asset. A percentage is applied to funds (3% for discretionary funds and 1% for advisory funds) to determine the fair value. These percentages have been based on recent public transactions.

Therefore, the recoverable amount is sensitive to movements in the valuation of funds. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in note 14.

Note 3.u explains the accounting policy with respect to the impairment of intangible assets.

iii. Defined benefit pension scheme

The calculation of the present value of the defined benefit pension scheme is determined by using actuarial valuations. Management make key assumptions in determining the inputs into the actuarial valuations, which may differ from actual developments 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.

During the year, the defined benefit pension scheme has moved from a deficit of £6,952,000 to a surplus of £4,487,000. See note 18 page 112 ‘Defined benefit pension scheme asset recognition basis’ for further detail.

iv. Share-based payments

Long Term Incentive Plan (‘LTIP’)

The Group grants awards under the LTIP. The scheme includes performance based vesting conditions, which impacts the amount of benefit paid. The Group has made assumptions on the likelihood of meeting the performance conditions in determining the expense in the year. The LTIP charge for the year was £795,000 (2016: £337,000).

If all of the performance conditions were assumed to be met; the charge for the year would increase by £637,000 (2016: £1,692,000); an absolute increase of 10% in the vesting assumptions would increase the charge for the year by £225,000 (2016: £300,000).

Further information on the scheme is disclosed in note 29.

v. Provisions

Onerous leases

The Group recognises a provision for several onerous property leases of £5,367,000 (2016: £4,135,000). 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 £7,958,000 (2016: £6,355,000) to £12,094,000 (2016: £10,490,000). A delay of one year to the assumed sublets would increase the onerous lease provision and Income Statement expense for the year by £973,000. Further information is disclosed in note 23.