On occasions, the preparation of the financial statements included in IFRS consolidated financial statements requires estimates, which influence the level of the disclosed assets and debts, the disclosures of contingent liabilities and receivables, the income and expenses of the reporting period and the other disclosures in the consolidated financial statements. The actual values may deviate from the estimates.
The accounting policies applied are disclosed under Note 7. Significant discretionary decisions and estimates affect the following events:
MLP considers a lease agreement governing the commercial leasing of its building in Heidelberg, Forum 7, to be an operating lease, as the significant risks and rewards incident to ownership of the property was not transferred to the lessee. As of December 31, 2o11, the carrying amount of the property stood at € 7,481 thsd (previous year: € 11,178 thsd).
MLP classifies € 1o8,768 thsd (previous year: € 83,379 thsd) of financial instruments as “held
to maturity”. These financial instruments are fixed income securities. So far MLP has not sold
For the evaluation of pension obligations, MLP uses actuarial calculations to estimate future events for the calculation of the expenses, obligations and entitlements in connection with these plans. These calculations are based on assumptions regarding the discount rate and the growth rates of salaries and pensions. The interest rate used to discount post-employment benefit obliga- tions is derived from the interest rates of corporate bonds with an AA rating. As of December 31, 2o11, the present value of provisions for pensions and other post-employment benefits payable under defined benefit plans was €14,219 thsd (previous year: € 15,o45 thsd). Further details of pension provisions are given in Note 31.
Allowances for losses in the banking business are established on the basis of historical loss
rates. Specific allowances for bad debts are recognized if receivables are likely to be uncollectable. In addition, MLP forms allowances for bad debts on a portfolio basis for remaining accounts receivable based on the dunning level. Allowances for losses on individual account amount to € 6,558 thsd as of December 31, 2o11 (previous year: € 5,667 thsd). The impairment loss on portfolio basis as of December 31, 2o11 was € 9,52o thsd (previous year: € 9,763 thsd). Alongside the receivables deducted from the allowances for losses on the assets side of € 16,o78 thsd (pre- vious year: € 15,429 thsd), the allowances for losses on loans and advances include provisions for credit risks of € 1,1o1 thsd (previous year: € 1,572 thsd).
The allowances for other receivables and other assets essentially relate to receivables from branch office managers and consultants. Value adjustments on receivables from active consultants are recognized through the estimation of remaining terms and fluctuation rates, while value adjustments on receivables from former consultants are recognized on the basis of the factors of amount and age structure. In cases where MLP institutes enforcement or where insolvency proceedings are imminent or have already started, impairment losses are recognized on the basis of empirical values. The same applies to receivables which are disputed and where legal action is pending. MLP determines any impairment of receivables from active office manag- ers in individual offices on the basis of an experience-based reference balance. Impairment of receivables from office managers no longer active for the company are established individually. Allowances for losses on individual account amount to € 9,984 thsd as of December 31, 2o11 (previous year: € 9,979 thsd). The impairment loss on portfolio basis as of December 31, 2o11 was € 4,179 thsd (previous year: € 5,665 thsd).
Business combinations require estimates of the fair value of the assets acquired, assumed debts
and contingent liabilities purchased. Property, plant and equipment are usually assessed by inde- pendent experts, while marketable securities are shown at their stock market price. If intangible assets are to be valued, MLP either consults an independent external expert or calculates the fair value based on a suitable valuation method, generally discounted cash flows, depending on the type of asset and the complexity involved in calculating the value. Depending on the type of asset and the availability of information, various valuation techniques are applied (market- price-oriented, capital-value-oriented and cost-oriented methods). For instance, when valuing trademarks and licences, the relief-from-royalty method may be appropriate, whereby the value of intangible assets is assessed on the basis of royalties saved for trademarks and licences held by the company itself.
Within the scope of several business combinations variable purchase prices have been agreed: The variable purchase prices, the maximum cash outflows and the maturities of liabilities in connection with the acquisition of ZSH GmbH Finanzdienstleistungen (ZSH), Property Fund Research Ltd. (PFR asset deal), TPC THE PENSION CONSULTANCY GmbH (TPC) and Feri AG are disclosed in the table below.
Carrying amount Anticipated outflow
Maximum cash outflow Date/period of payment All figures in €’000 2011 2010 2011 2010 2011 2010 ZSH – 769 – 831 – 831 2010–2011 PFR (asset deal) – 112 – 128 – 771 2009–2013 TPC – – – – 29,000 29,000 2013 Feri AG – – – – 51,472 127,262 indefinite [Table 47]
The carrying amount of the purchase price liability for ZSH was finally fixed at € 521 thsd in 2o11 and then settled through payment.
Due to the reversal performed in 2o11, the carrying amount of the variable purchase price liability for PFR is € o thsd.
The variable purchase price component resulting from the purchase of TPC is calculated on the basis of the accumulated earnings of the purchased company for the financial years 2oo8 to 2o12. MLP does not expect any variable purchase price component to become due for payment. Since January 1, 2o1o, the variable purchase price component of Feri AG is valued at € o thsd. As of December 31, 2o11, the overall accrued liability from the fixed and variable purchase price component amounts to € 8o9 thsd (previous year: € 51,429 thsd). The remaining stake of 43.4 % in Feri AG was transferred to MLP AG by April 15, 2o11. The overall liability became due with the actual transfer of shares. The outstanding balance as of December 31, 2o11 reflects the interest on the purchase price liability. Please refer to Note 36 for further disclosures.
Profit distributions to the owners of Feri shares not yet transferred with legal effect will be recog- nized as interest charge. An interest expense of € 1,74o thsd arising from such distributions had to be taken into account for the last time in the financial year 2o11 (previous year: € 653 thsd). MLP tests goodwill from business combinations for impairment at least once a year. For the purpose of the impairment test, goodwill is allocated to cash-generating units at the acquisition date. The impairment test compares the carrying amount of the cash-generating units with the recoverable amount. The recoverable amount is the higher amount of either the fair value less cost to sell or the value in use of the cash-generating unit. For the allocation of goodwill, MLP identified the business segments of financial services, occupational pension provision and ZSH (all three of which are included in the “financial services” reporting segment), as well as the operating segments Feri Asset Management Private Clients, Feri Asset Management Institutional Clients, Feri Consulting Private Clients, Feri Consulting Institutional Clients and Feri EuroRating Services (all of which are included in the “Feri” reporting segment).
The future cash flows are based on MLP planning. The calculation of the present value of antici- pated future cash flows is based on assumptions on the development of funds under manage- ment, future sales volumes and expenses. Cash flow estimates are based on detailed planning periods extending through to 2o15. For the period after that, the planning is based on an average growth rate of 1 % (previous year: 1 %). Cash flow figures for the detailed planning phase were discounted with weighted capital cost rates of 9.95 % - 1o.97 % (previous year: 7.1 % to 9.8 %) before tax. Taking account of the growth rates, the discount rates for the period after the detailed planning phase range between 8.95 % and 9.97 % (previous year: 6.1 % and 8.8 %) before taxes. Within the scope of calculating the shareholders’ equity costs, a beta factor is taken into account which is determined on the basis of capital market data of companies comparable with MLP. As of December 31, 2o11 a total goodwill of € 9o,613 thsd (previous year: € 91,227 thsd) had been capitalised. As in the previous year, the impairment test has confirmed the anticipated carrying amounts for goodwill.
Within the scope of its impairment testing MLP carried out sensitivity analyses. The effects of a 1% increase in the discount interest rates and the effects of a 25 % reduction in planned earnings before tax (EBT) relative to the approved corporate planning were investigated here. The sensitivity analyses showed that, from today’s perspective, there are no impairment losses for recorded goodwill at any cash-generating unit, even under these assumptions.
Cash-generating units were allocated the following goodwill values arising from business com- binations:
All figures in €’000 Dec. 31, 2011 Dec. 31, 2010
Financial services 22,042 22,042
Occupational pension provision 9,955 9,955
ZSH* 4,072 4,272
Financial services 36,069 36,269
Feri EuroRating Services* 6,812 7,226
Feri Asset Management - private clients 21,634 –
Feri Asset Management - institutional clients 23,291 –
Feri Consulting - private clients 2,068 –
Feri Consulting - institutional clients 739 –
Feri Family Trust – 23,702
Feri Institutional Advisors – 24,030
Feri 54,544 54,958
Total 90,613 91,227
[Table 48]
Indefinite-lived intangible assets are also to be tested for possible impairment on a yearly basis.
This concerns the “Feri” brand, which was acquired in 2oo6 within the scope of the business combination with the Feri Group. In view of the recognition of this brand, at present no definite end of its useful life can be specified. The carrying amount of the “Feri” brand is € 15,829 thsd (previous year: € 15,829 thsd). The brand is fully attributed to the group of cash-generating units of the “Feri” reporting segment. A fair value minus costs of disposal has been established for the “Feri” brand on the basis of the relief-from-royalty method. Since this value exceeds the carrying amount of the “Feri” brand, no impairment loss had to be recorded, as was the case in the previous year.
Definite-lived intangible assets need to be estimated with regard to the depreciation method.
Useful life periods are defined on the basis of empirical values. A change in underlying economic conditions might require the choice of a different method. This can have a significant effect on the amount of depreciation. At MLP this mainly concerns client relations and software. For the liability arising due to the premature loss of brokered insurance policies whereby commission that has been earned must be refunded in part, MLP sets up provisions for can-
celation risks. MLP estimates the cancelation rate by product group, tariff and the period the
underlying policy has been in place so far on the basis of empirical values. The period in which MLP is obliged to refund portions of the commissions due to the premature loss of a policy is determined either by the statutory provisions of the German Insurance Act or the distribution agreements that have been concluded with the product providers. MLP will use the longer of these periods. As of December 31, 2o11, the carrying amount of the provision amounts to € 36,482 thsd (previous year: € 34,49o thsd).
MLP has set up a share-based remuneration system for office managers, consultants and employ- ees. The recognition of the anticipated expenditure arising from this system demands that assumptions be made about turnover and exercise rates. As of December 31, 2o11, the carrying amount of the provision amounts to € 3,98o thsd (previous year: € 2,639 thsd). Further details on this participation program can be found in Note 3o.
Uncertainties exist with regard to the interpretation of complex tax regulations and the amount and the date of incurrence of taxable income. Based on reasonable estimates, MLP establishes provisions for potential effects of field tax audits.