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Escher Group Holdings plc
Annual report 2011
44
Notes to the consolidated financial statements
continued
for the year ended 31 December 2011
12. Intangible assets
continued
Impairment test of goodwill and other indefinite life assets continued
Key assumptions
The key assumptions are based on past experience, adjusted for expected changes in future conditions. Key assumptions
involved in the calculation of value-in-use include management’s estimates of future operating cash flows, replacement capital
expenditure requirements, tax considerations, discount rates and long-term growth rates. The key assumptions in relation to
long-term growth rates and discount rates were evaluated with regard to external information on comparable companies in
similar markets.
The Group considers the business plan and long-term projections to be reasonable in view of the anticipated long-term
performance of the global economy.
The key assumptions used for value-in-use calculations are as follows:
2011
%
2010
%
Discount rate (pre-tax)
16.0
14.1
Terminal growth rate
2.5
2.5
Growth rates
The growth rates are determined based on the long-term historical growth rates of the sectors in which the CGUs operate,
and reflect an assessment of the growth prospects of the sector as well as further individual significant contract wins.
The growth rates have been benchmarked against external data for the relevant markets. None of the growth rates
applied exceed the long-term historical average growth rates for those markets or sectors.
Discount rates
The discount rate used is pre‑tax and reflect specific risks relating to the CGUs. The discount rate applied to the cash flows
of the Group’s segment is based on the risk‑free rate for ten year plus US government bonds. In estimating the discount rate,
inputs required are the equity market risk premium (that is, the excess return required over and above a risk free rate by an
investor who is investing in the market as a whole) and the risk adjustment, beta, applied to reflect the risk of the specific
CGU’s operations relative to the market as a whole. In determining the risk adjusted discount rate, management has applied
an adjustment for the risk of the Group’s CGUs determined using an average of the betas of comparable companies. If the
estimated discount rate used in the impairment calculations was 26%, the value in use would equal the net carrying amount.
Impairment test results
No impairment has been identified.
The percentages shown in the table below represent the increase or decrease in the individual sensitivity factors that would
lead to the recoverable amount equalling the carrying value of the assets.
2011
%
Discount rate (pre-tax) (absolute increase)
12
Business plan EBITDA (relative decrease)
37
Any adverse changes in a key assumption underpinning the value-in-use calculation may cause an impairment loss to be
recognised in future periods. The Group’s revenue projections are relatively concentrated on a small number of significant
customers. The loss of a small number of customers without replacement or failure to achieve expected new contract wins
may result in a significant change to the estimated net future cash flows used in the above calculations.
13. Investment in subsidiaries
Cost of
investment
US$’000
Capital
contribution
US$’000
Total
US$’000
At 1 January 2010
1,115
158
1,273
Capital contribution in respect of employee share based payments (see note 6)
—
267
267
At 31 December 2010
1,115
425
1,540
At 31 December 2011
1,115
425
1,540