Part of the Consolidated Financial Statements as of 31 December 2007, which were audited by KPMG Deutsche Treuhand AG.

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[21] Goodwill and Other Intangible Assets

GOODWILL

CHANGES IN GOODWILL
The changes in the carrying amount of goodwill, as well as gross amounts and accumulated impairment losses of (Glossary)goodwill, by segment for the years ended December 31, 2007 and 2006 are shown below by segment.

in € m.

Corporate Banking & Securities

Global
Trans-
action
Banking

Asset and
Wealth
Mana-
gement

Private & Business Clients

Corporate
Invest-
ments

Total

1

Impairment losses of goodwill are recorded as impairment of intangible assets in the income statement.

2

Includes € 13 million of reduction in goodwill related to prior years held for sale write-downs.

Balance as of January 1, 2006

3,383

485

2,837

240

100

7,045

Goodwill acquired during
the year

171

–

419

235

33

858

Transfers

–

1

–

(1)

–

–

Goodwill related to dispositions without being classified as held for sale

–

–

(1)

(1)

–

(2)

Impairment losses1

–

–

–

–

(31)

(31)

Exchange rate changes/other

(326)

(38)

(218)

(3)

(15)2

(600)

Balance as of
December 31, 2006

3,228

448

3,037

470

87

7,270

Gross amount of goodwill

3,228

448

3,037

470

294

7,477

Accumulated
impairment losses

–

–

–

–

(207)

(207)

Balance as of January 1, 2007

3,228

448

3,037

470

87

7,270

Purchase accounting adjustments

–

–

–

(8)

–

(8)

Goodwill acquired during
the year

177

3

–

514

–

694

Goodwill related to dispositions without being classified as held for sale

–

–

(26)

–

(34)

(60)

Impairment losses1

–

–

–

–

(54)

(54)

Exchange rate changes/other

(329)

(35)

(242)

(5)

1

(610)

Balance as of
December 31, 2007

3,076

416

2,769

971

–

7,232

Gross amount of goodwill

3,076

416

2,769

971

261

7,493

Accumulated
impairment losses

–

–

–

–

(261)

(261)

In 2007, the main addition to goodwill in Private & Business Clients was € 508 million related to the acquisition of Berliner Bank. The main addition to goodwill in Corporate Banking & Securities was € 149 million related to MortgageIT Holdings Inc.

In 2006, the main addition to goodwill in Asset and Wealth Management was € 419 million related to the acquisition of Tilney Group Limited. In Private & Business Clients, the acquisition of norisbank resulted in a goodwill of € 230 million and in Corporate Banking & Securities, the acquisition of the remaining 60% of United Financial Group (UFG) added € 166 million to goodwill.

An impairment review of goodwill was triggered in the first quarter of 2007 in Corporate Investments after the division realized a gain of € 178 million related to its (Glossary)equity method investment in Deutsche Interhotel Holding GmbH & Co. KG. As a result of this review, a goodwill impairment loss totaling € 54 million was recognized.

In 2006, a goodwill impairment loss of € 31 million was recorded in Corporate Investments. This goodwill related to a (Glossary)private equity investment in Brazil, which was not integrated into the cash-generating unit. The impairment loss was triggered by changes in local law that restricted certain businesses. The (Glossary)fair value less costs to sell of the investment was determined using a discounted cash flow methodology.

GOODWILL IMPAIRMENT TEST
Goodwill is allocated to cash-generating units for the purpose of impairment testing, considering the business level at which goodwill is monitored for internal management purposes. On this basis, the Group’s goodwill carrying cash-generating units are Global Markets and (Glossary)Corporate Finance within the Corporate Banking & Securities segment, Global Transaction Banking, Asset Management and Private Wealth Management within the Asset and Wealth Management segment, Private & Business Clients and Corporate Investments. At year-end 2007, six out of seven cash-generating units carry goodwill. The carrying amounts of goodwill by cash-generating unit below the segment level for the years ended December 31, 2007 and 2006 are as follows.

in € m.

Global Markets

Corporate Finance

Total Corporate Banking & Securities

Asset Manage-
ment

Private Wealth Manage-
ment

Total Asset and Wealth Manage-
ment

At December 31, 2006

2,148

1,080

3,228

1,963

1,074

3,037

 

 

 

 

 

 

 

At December 31, 2007

2,098

978

3,076

1,794

975

2,769

The goodwill is tested for impairment annually in the fourth quarter by comparing the recoverable amount of each goodwill carrying cash-generating unit with its carrying amount. The carrying amount of a cash-generating unit is derived based on the amount of equity allocated to a cash-generating unit. The carrying amount also considers the amount of goodwill and unamortized intangible assets of a cash-generating unit. The recoverable amount is the higher of a cash-generating unit’s fair value less costs to sell and its value in use. The annual goodwill impairment tests in 2007 and 2006 did not result in an impairment loss as the recoverable amount for all cash-generating units was higher than their respective carrying amount.

The following sections describe how the Group determines the recoverable amount of its goodwill carrying cash-generating units and provides information on certain key assumptions on which management based its determination of the recoverable amount.

RECOVERABLE AMOUNT
The Group determines the recoverable amount of all cash-generating units on the basis of fair value less costs to sell. As observable market prices are ordinarily not available for the Group’s cash-generating units, the (Glossary)fair value is based on the best information available to reflect the amount the Group could obtain from a disposal in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. This consists of recent transactions and market values for similar assets or groups of assets in the relevant industry or market and valuation techniques, such as discounted cash flow (“DCF”) calculations.

The fair value for most of the Group’s cash-generating units is determined based on DCF calculations. For Asset Management, fair value is determined based on market multiples of a respective group of peer companies for various business-specific metrics (e.g., revenue and price/earnings multiples). In this case, fair value based on a DCF calculation is considered in validating the results of the multiples-based approach.

Under the DCF method, the Group employs a Dividend Discount Model (“DDM”), adjusted to reflect the specifics of the banking business and its regulatory environment. The model calculates the present value of the estimated future earnings that are distributable to shareholders after fulfilling the respective regulatory capital requirements.

The DDM uses earnings projections based on financial plans agreed by management for a three-year period. For purposes of the goodwill impairment test, the agreed plans are extrapolated for two additional years in order to derive a sustainable level of estimated future earnings, which are discounted to their present value. Estimating future earnings requires judgment, considering past and actual performance as well as expected developments in the respective markets and in the overall macro-economic environment. Earnings projections beyond the initial five-year period are assumed to increase by a constant rate using a long-term growth rate, which is based on expectations for the development of gross domestic product (GDP) and inflation, and are captured in the terminal value.

Fair values determined on this basis are further reviewed against the available market participants’ view, as evidenced by, for example, equity analysts’ valuations of the Group and its segments.

KEY ASSUMPTIONS AND SENSITIVITIES
The fair value of a cash-generating unit is sensitive to the discount rate applied to the earnings projections and, to a much lesser extent, to the long-term growth rate. The discount rates applied have been determined based on the capital asset pricing model which is comprised of a risk-free interest rate, a (Glossary)market risk premium and a factor covering the systematic market risk (beta factor). The values for the risk-free interest rate, the market risk premium and the beta factors are determined using external sources of information. Business-specific beta factors are determined based on a respective group of peer companies. Variations in all of these components might impact the calculation of the discount rates. Discount rates applied to cash-generating units in 2007 range from 9.6% to 10.5%.

SENSITIVITIES: In validating the fair values determined for the cash-generating units, the major value drivers of each cash-generating unit are being reviewed annually. In addition, key assumptions used in the DDM and market multiples models, for example the discount rate and the long-term growth rate, were sensitized to test the resilience of fair values. On this basis, management believes that reasonable changes in the key assumptions used to determine the recoverable amount of the Group’s cash-generating units will not result in an impairment situation.

OTHER INTANGIBLE ASSETS

Other intangible assets are separated into those that are internally generated, which consist only of internally generated software, and purchased intangible assets. Purchased intangible assets are further split into amortized and unamortized other intangible assets.

The changes of other intangible assets by asset class for the years ended December 31, 2007 and 2006 are as follows.

[Enlarge table]

 

Internally generated intangible assets

Purchased intangible assets

 

 

 

Amortized

Unamortized

 

in € m.

Software

Customer-related intangible assets

Value of business acquired

Other

Total amortized purchased intangible assets

Retail investment management agreements

Other

Total unamortized purchased intangible assets

Total other intangible assets

1

Of which € 75 million were included in general and administrative expenses and € 14 million were recorded in commissions and fee income. The latter related to the amortization of mortgage servicing rights.

2

Of which € 98 million were included in general and administrative expenses and € 15 million were recorded in commissions and fee income. The latter related to the amortization of mortgage servicing rights.

3

Of which € 74 million were recorded as impairment of intangible assets and € 5 million were included in general and administrative expenses.

Cost of acquisition/manufacture:

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2006

391

215

–

436

651

978

8

986

2,028

Additions

9

30

–

39

69

–

–

–

78

Changes in the group of consolidated companies

–

174

–

15

189

–

–

–

189

Disposals

8

–

–

51

51

–

–

–

59

Reclassifications to held
for sale

–

–

–

–

–

–

–

–

–

Exchange rate changes

(23)

(19)

–

(22)

(41)

(101)

–

(101)

(165)

Other

–

–

–

–

–

–

–

–

–

Balance as of December 31, 2006

369

400

–

417

817

877

8

885

2,071

Additions

32

122

–

48

170

–

3

3

205

Changes in the group of consolidated companies

–

40

912

19

971

–

–

–

971

Disposals

–

–

–

28

28

–

–

–

28

Reclassifications to held
for sale

–

–

–

4

4

–

–

–

4

Exchange rate changes

(27)

(28)

(49)

(20)

(97)

(91)

–

(91)

(215)

Other

–

–

–

–

–

–

–

–

–

Balance as of December 31, 2007

374

534

863

432

1,829

786

11

797

3,000

Accumulated amortization and impairment:

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2006

329

82

–

321

403

–

–

–

732

Amortization for the year

28

28

–

33

61

–

–

–

891

Disposals

7

–

–

48

48

–

–

–

55

Reclassifications to held
for sale

–

–

–

–

–

–

–

–

–

Impairment losses

–

–

–

–

–

–

–

–

–

Reversals of impairment losses

–

–

–

–

–

–

–

–

–

Exchange rate changes

(16)

(7)

–

(14)

(21)

–

–

–

(37)

Other

–

–

–

–

–

–

–

–

–

Balance as of December 31, 2006

334

103

–

292

395

–

–

–

729

Amortization for the year

17

57

8

31

96

–

–

–

1132

Disposals

–

–

–

19

19

–

–

–

19

Reclassifications to held
for sale

–

–

–

3

3

–

–

–

3

Impairment losses

–

2

–

3

5

74

–

74

793

Reversals of impairment losses

–

–

–

–

–

–

–

–

–

Exchange rate changes

(23)

(13)

–

(14)

(27)

–

–

–

(50)

Other

–

–

–

–

–

–

–

–

–

Balance as of December 31, 2007

328

149

8

290

447

74

–

74

849

Carrying amount:

 

 

 

 

 

 

 

 

 

As of December 31, 2006

35

297

–

125

422

877

8

885

1,342

As of December 31, 2007

46

385

855

142

1,382

712

11

723

2,151

AMORTIZED INTANGIBLE ASSETS
The additions to other intangible assets are mainly due to the acquisition of Abbey Life Assurance Company Limited which resulted in the capitalization of a value of business acquired (“VOBA”) amounting to € 912 million. The VOBA represents the present value of the future cash flows of a (Glossary)portfolio of long-term insurance and investment contracts. It is amortized and its amortization period is expected to end in 2036 (for further details refer to Notes [1] and [40]).

In 2007, impairment losses relating to purchased software and customer-related intangible assets amounting to € 3 million and € 2 million, respectively were recognized as general and administrative expenses in the income statement. The impairment of the purchased software was recorded in Asset and Wealth Management and the impairment of the customer-related intangible assets was recorded in Global Transaction Banking.

Other intangible assets with finite useful lives are generally amortized over their useful lives based on the straight-line method (except for the VOBA, as explained in Notes [1] and [40], and for mortgage servicing rights). Mortgage servicing rights are amortized in proportion to and over the estimated period of net servicing revenues. The useful lives per asset class are as follows.

 

Useful lives in years

Internally generated intangible assets:

 

Software

1–3

Purchased intangible assets:

 

Customer-related intangible assets

1–20

VOBA

1–29

Other

1–30

UNAMORTIZED INTANGIBLE ASSETS
More than 98% of unamortized intangible assets relate to the Group's U.S. retail mutual fund business, amounting to € 712 million and are allocated to the Asset Management cash-generating unit. These retail investment management agreements are contracts that give DWS Scudder the exclusive right to manage a variety of mutual funds for a specified period. As the contracts are easily renewable, the cost of renewal is minimal, and they have a long history of renewal, these agreements are not expected to be terminated in the foreseeable future. The rights to manage the associated assets under management are expected to generate cash flows for an indefinite period of time. The intangible assets were valued at fair value based upon a third party valuation at the date of the acquisition of Zurich Scudder Investments, Inc. by the Group in 2002.

In the fourth quarter of 2007, impairment losses of € 74 million were recognized as impairment of intangible assets in the income statement. The impairment losses were related to retail investment management agreements and were recorded in Asset and Wealth Management. The impairment losses were due to declines in both current and projected operating results and cash flows of investment management agreements for certain closed end and variable annuity funds which had been acquired from Zurich Scudder Investments, Inc. The recoverable amounts of the assets were calculated at fair value less costs to sell. As market prices are not observable for such assets, fair value was based on the best information available to reflect the amount the Group could obtain from a disposal in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. Therefore, fair value was determined based on the income approach, using a post-tax discounted cash flow calculation (multi-period earnings excess method).