Intangible assets, such as internally generated software and goodwill generated on business combinations are not physical in nature. This note presents the cost of the assets, which is the amount NatWest Group initially paid or incurred, additions and disposals during the year, and any amortisation or impairment. Amortisation is a charge that reflects the usage of the asset and impairment is a reduction in value arising from specific events identified during the year.

Intangible assets and goodwill are reviewed for indicators of impairment. In 2021 £85 million of goodwill was impaired due to a reduction in the recoverable value.

NatWest Group’s goodwill acquired in business combinations analysed by reportable segment is in Note 4 Segmental analysis. It is reviewed annually at 31 December for impairment. In 2021 goodwill in the Retail segment was impaired by £85 million. No other impairment was indicated at 31 December 2021 or 2020.

Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) with its recoverable amount. The carrying values of the segments reflect the equity allocations made by management, which are consistent with NatWest Group’s capital targets. Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. Value in use is the present value of expected future cash flows from the CGU. The recoverable amounts for all CGUs at 31 December 2021 were based on value in use, using management's latest five-year revenue and cost forecasts. These are discounted cash flow projections over five years. The forecast is then extrapolated in perpetuity using a long-term growth rate to compute a terminal value, which comprises the majority of the value in use. The long-term growth rates have been based on expected growth of the CGUs. The pre-tax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.

Critical accounting policy: Goodwill

Critical estimates

Impairment testing involves a number of judgments. The key judgments are the five-year cash flow forecast, the long-term growth rate used to derive the terminal value, and the discount rate. Future value in use is primarily affected by changes in profitability and changes in discount rate. Adverse changes could lead to value in use falling below carrying value. The most likely cause for this would be a failure to meet budgets, including cost targets, or external downgrades in the UK economy.

17 Intangible assets continued

The impact of reasonably possible changes to the more significant variables in the value in use calculations is presented below. This reflects the sensitivity of the VIU to each key assumption on its own. It is possible that more than one change may occur at the same time.

Consequential impact of 1%

Consequential impact of 5%

Assumptions

Recoverable

adverse movement

Terminal

Pre-tax

Cost:

amount exceeded

Discount

Terminal

Forecast

Goodwill

growth rate

discount rate

income ratio (1)

carrying value

rate

growth rate

Income

cost

31 December 2021

£bn

Retail Banking

2.6

1.6

13.9

51.6

6.8

(1.8)

(0.8)

(2.1)

(1.0)

Commercial Banking

2.6

1.6

13.9

52.3

6.3

(1.9)

(0.8)

(2.0)

(1.0)

RBS International

0.3

1.6

12.1

37.0

2.6

(0.6)

(0.3)

(0.4)

(0.1)

31 December 2020

Retail Banking

2.7

1.6

13.7

48.3

5.9

(1.8)

(0.8)

(2.0)

(0.9)

Commercial Banking

2.6

1.6

13.7

53.7

1.5

(1.5)

(0.5)

(1.8)

(0.9)

RBS International

0.3

1.6

12.1

42.7

1.1

(0.4)

(0.2)

(0.3)

(0.1)

(1)	Average Cost:income ratio % over the 5-year forecast period

The following table gives the percentage change in key assumptions that would reduce the headroom of CGUs to nil.

2021

2020

Terminal

Pre-tax

Forecast

Terminal

Pre-tax

Forecast

growth rate

discount rate

income

cost

growth rate

discount rate

income

cost

Change in key assumptions to reduce headroom to nil (%)

Retail Banking

(139.2)

8.1

(16.1)

32.7

(25.4)

6.2

(14.6)

33.9

Commercial Banking

(47.0)

6.6

(15.7)

32.8

(4.0)

1.3

(4.1)

8.2

RBS International

(85.2)

10.3

(30.3)

87.2

(10.8)

4.4

(18.6)

52.8