UBI Banca Group

comparable transactions for corporate assets consisting of branches, was no longer considered
useable because the market, at least for transactions concerning small business units or
transactions between related parties, had become inactive.
The discounted cash flow criterion was used to estimate the value in use. This considers the
value of each CGU as the result of the sum of the following:
1) the present value of the cash flows forecast over the period for which the projections
were made (2012 – 2016) discounted at a rate that expresses the risk for those flows
(the opportunity cost of the equity); and
2) the present value of the cash flows that can be generated beyond the explicit forecast
period, obtained by capitalising the cash flow for the last year of the forecast (2016) at
a rate that results from the difference between the opportunity cost of the equity and
the expected long-term growth rate for the cash flows.
Discount rates
The discount rates were estimated using the same method as that used in previous
impairment tests, in compliance with IAS 36 and with the “Guidelines for impairment tests on
goodwill in contexts of financial and real crisis” issued by the Organismo Italiano di
Valutazione (OIV – Italian Valuation Body).
The estimate of the opportunity cost of equity as at 31.12.2011, net of the growth rate for
income assumed for the estimate of the terminal value was 9.45%, 1.45% higher than the
percentage assumed for impairment testing purposes in the previous year (8%). That increase,
which affected the reduction in value recorded for all CGUs the year before, was attributable
entirely to the increase in country risk: the one year average of daily yields to maturity on ten
year Italian instruments rose from 4.0% as at 31.12.2010 to 5.3% as at 31.12.2011, an
increase of 1.3%. For the purposes of estimating the opportunity cost of equity we report the
following:
a) a capital asset pricing model was used;
b) in accordance with IAS 36 § A18, the estimate of the cost of equity includes
country risk, which was incorporated into the estimate of the equity risk premium
– assumed to be 6% – and in the beta. These estimates were assumed in
compliance with the recommendations of the OIV guidelines mentioned (reported
in § LG35 b);
c) the specific yield to maturity of the interbank rate for each year of the forecast was
assumed as the risk free rate. The current yield curve requires the present value of
short term cash flows to be discounted at a short-term rate and long term cash
flows to be discounted with long term rates. This is to avoid discounting short-term
cash flows based on short-term rates and an excessively high rate. In this respect
appendix A of IAS 36 specifies the use of the term structure of interest rates (§
A21, IAS 36);
d) the risk free rate used to estimate the cost of equity is consistent with future
interest rates forecast by management and assumed for the estimate of future cash
flows used in the measurement. The risk free rate assumed in the terminal value
was the yield to maturity on the ten year interest rate swap, which was 3.11%.
That rate, although higher, is in line with the estimate of the future long-term rate
forecast by UBI Banca management;
e) for the network banks and for the Group as a whole (second level impairment test),
the method used to estimate the beta was the same as that used in previous years.
That beta is based on the historical volatility over one year of the UBI banca share
linked to the benchmark volatility of the Stoxx 600 European market index. The
beta estimate assumed was 1.39x and it was compared with beta estimates
calculated on the basis of historical returns for the share and the market over two
306