Notes to the accounts
for the year ended 31 December 2007
2. Estimates and judgements
Estimates and judgements used in preparing the financial statements are periodically evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The resulting accounting estimates will seldom equal the related actual results. The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below.
Valuation of quoted financial assets where there is no active market.
From time to time quoted investments held by the Group may not be actively traded in financial markets. In such cases the Group applies appropriate valuation techniques, including the use of valuation models and data from third party market participants to determine fair value.
Valuation of financial assets where there is no quoted price
Such assets principally consist of investments in private equity, venture and buy-out funds and are valued in accordance with International Private Equity and Venture Capital Valuation Guidelines and, where appropriate, by independent professional valuers. This determination requires significant judgement particularly in determining changes in fair value since the last formal valuation by the fund manager. In making this judgement the Group evaluates among other factors the effect of cash distributions and changes in the business outlook for each fund due to the financial health and performance of individual investments within each fund.
Impairment of assets
Goodwill and other assets that have indefinite useful lives are tested annually to determine whether they have suffered any impairment. Other intangible assets which have a finite useful economic life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset or a cash-generating unit is determined based on value-in-use calculations prepared on the basis of management's assumptions and estimates.
Disclosure of the sensitivity of carrying amounts of goodwill to the methods, assumptions and estimates underlying the calculation is included in note 10 to the accounts.
Income taxes
The Group is subject to income taxes in numerous jurisdictions. Judgement is required in determining the worldwide provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Pension obligations
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions.
The assumptions used in determining the net charge/(credit) for pension costs include the expected long-term rate of return on the plans' assets and the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.
The expected return on plan assets assumption is determined on a uniform basis, taking into consideration long-term historical returns, asset allocation and future estimates of long-term investment returns.
The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Group considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.
The other key assumption that impacts the carrying value of the obligation is that of expected mortality rates. Any assumption made in this area is inherently uncertain. The Group's mortality assumptions are based on standard mortality tables projected forwards ten years for current pensioners and 20 years for future pensioners with the 'medium cohort' adjustment applied, augmented by underpinning to provide for a constant level of improvement in long-term mortality rates.
The Group reviews its assumptions annually in conjunction with its independent actuaries and considers this adjustment appropriate given the geographical and demographic profile of the scheme.
Other assumptions for pension obligations are based in part on current market conditions. Further information, including sensitivity analysis, is given in note 5 to the accounts.
Surplus space
The Group periodically reviews its space requirements and makes provisions where the Group has no current need for space to which the Group is already contractually committed under the terms of an operating lease agreement. The calculation of the required provision requires significant judgement, as the Group needs to estimate the provision based upon discounted future cash outflows due to be paid under the lease less any potential cash inflows from sub-letting arrangements that the Group is able to negotiate. These cash flows are then discounted for the remaining lease period. In estimating these cash flows, the Group consults with external advisors in the relevant location to understand the potential to sub-let the space, the rental rates which could be achieved and the potential amount and time period of any leasehold inducements which may need to be offered to successfully secure a sub-tenant.
Disclosure of the sensitivity of carrying amounts of provisions for surplus space to the methods, assumptions and estimates underlying their calculation is included in note 24 to the accounts.