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IMI plc
3.2.2 Goodwill impairment testing
Goodwill is not subject to an annual amortisation charge, instead, its carrying value is assessed annually by comparison to the future cash flows of the
business to which it relates (the cash generating unit, or CGU). These cash flows are discounted to reflect the time value of money and this discount rate,
together with the growth rates assumed in the cash flow forecasts, are the key assumptions in this impairment testing process.
Goodwill is allocated to cash generating units (‘CGUs’) based on the synergies
expected to be derived from the acquisition upon which the goodwill arose.
The Group has 24 cash generating units to which goodwill is allocated.
Where our businesses operate closely with each other we will continue
to review whether they should be treated as a single or combined CGU.
Goodwill is tested annually for impairment as part of the overall assessment of
assets against their recoverable amounts. The recoverable amount of a CGU is
the higher of its fair value less costs to sell and its value in use. Value in use is
determined using cash flow projections from financial budgets, forecasts and
plans approved by the Board covering a five-year period. The projected cash
flows reflect the latest expectation of demand for products and services.
The key assumptions in these calculations are the long-term growth rates and
the discount rates applied to forecast cash flows in addition to the achievement
of the forecasts themselves. Long-term growth rates are based on long-term
economic forecasts for growth in the manufacturing sector in the geographical
regions in which the cash generating unit operates. Pre-tax discount rates
specific to each cash generating unit are calculated by adjusting the Group
post-tax weighted average cost of capital (‘WACC’) of 9% for the tax rate
relevant to the jurisdiction before adding risk premia for the size of the unit,
the characteristics of the segment in which it resides, and the geographical
regions from which the cash flows are derived.
This exercise resulted in the use of the following ranges of values for the
key assumptions:
2014
2013
%
%
Pre-tax discount rate
9.8 - 16.4
10.6 - 14.6
Long-term growth rate
1.0 - 3.8
1.6 - 3.6
Following our impairment review, the goodwill associated with the Remosa
CGU, within the IMI Critical Engineering division was considered to be impaired.
This impairment has arisen due to a deterioration in the current trading base
of Remosa. A value in use calculation was used to determine the £48.4m
recoverable amount of the Remosa CGU, which used a discount rate of
13.8%. As a result the Group has recognised an exceptional impairment
loss of £26.9m.
As reported at the half-year and prior to disposal in October 2014, the Group
carried out a review of the recoverable amount of the AFP business due
to reduced expectations. This included a reassessment of the business’s
performance in the three to five years following the acquisition. This review
led to the recognition of an exceptional impairment loss of £10.8m, of which
£0.9m was against goodwill, partially offset by a deferred tax credit of £3.8m.
No amounts of goodwill that are significant in the context of the Group’s
total goodwill balance used the same key assumptions for the purposes of
impairment testing in either this year or the last. For the purpose of assessing
the significance in this context, the Group uses a threshold of 20% of the total
goodwill balance.
The aggregate amount of goodwill arising from acquisitions prior to 1 January
2004 which had been deducted from the profit and loss reserves and
incorporated into the IFRS transitional balance sheet as at 1 January 2004,
amounted to £364m. The cumulative impairment recognised in relation to
goodwill is £34m (2013: £6m).
The cumulative acquired intangible amortisation is £149.6m (2013: £136.0m).
SECTION 3 – OPERATING ASSETS AND LIABILITIES
Continued
