9 Intangible assets
| Assets in
the course of
|1 January 2010|
|Accumulated amortisation and impairment||(361)||(109)||(470)|
|Net book value at 1 January 2010||11,331||141||697||63||12,232|
|Differences on exchange||574||1||(9)||1||567|
|– internal development||4||60||64|
|– separately acquired||12||5||7||24|
|31 December 2010|
|Accumulated amortisation and impairment||(417)||(217)||(634)|
|Net book value at 31 December 2010||11,656||134||585||83||12,458|
|1 January 2009|
|Accumulated amortisation and impairment||(251)||(53)||(304)|
|Net book value at 1 January 2009||11,391||137||705||85||12,318|
|Differences on exchange||(260)||(11)||(49)||6||(314)|
|– internal development||30||10||40|
|– acquisitions of subsidiaries and non-controlling interests||200||1||95||296|
|– separately acquired||24||7||43||74|
|31 December 2009|
|Accumulated amortisation and impairment||(361)||(109)||(470)|
|Net book value at 31 December 2009||11,331||141||697||63||12,232|
Included in computer software and assets in the course of development are internally developed assets with a carrying value of £150 million (2009: £138 million). The costs of internally developed assets include capitalised expenses of employees working full time on software development projects, third party consultants as well as software licence fees from third party suppliers.
Acquisitions of subsidiaries and non-controlling interests in 2009 relate to the acquisition of Bentoel as explained in note 26.
Included in the net book value of trademarks and licences are trademarks relating to the acquisition of ST £412 million (2009: £469 million), Tekel £61 million (2009: £113 million) and Bentoel £94 million (2009: £99 million).
As a result of a loss of volumes in 2010, the Tekel trademarks have been impaired by £44 million as explained in note 3(g). The recoverable amount of the Tekel trademarks has been determined on a value-in-use basis over their remaining useful economic lives applying the same assumptions used to determine the recoverable amount of the Group’s Turkey cash-generating unit as described below.
The impairment charges for computer software in 2010 and 2009 are explained in note 3(e).
Impairment testing for intangible assets with indefinite lives including goodwill
Goodwill of £11,656 million (2009: £11,331 million) included in intangible assets in the balance sheet is mainly the result of the following acquisitions: Rothmans Group £5,176 million (2009: £4,833 million); Imperial Tobacco Canada £2,576 million (2009: £2,370 million); ETI (Italy) £1,412 million (2009: £1,463 million); ST (principally Scandinavia) £1,062 million (2009: £1,103 million); Tekel (Turkey) £333 million (2009: £579 million) and Bentoel (Indonesia) £220 million (2009: £205 million). The principal allocations of goodwill in the Rothmans’ acquisition are to the cash-generating units of Eastern and Western Europe, and South Africa, with the remainder mainly relating to operations in the domestic and export markets in the United Kingdom and operations in Asia-Pacific. The goodwill on the ST transaction has been allocated between the cash-generating units of ST and Western Europe.
In 2010 and 2009, goodwill has been allocated for impairment testing purposes to 16 individual cash-generating units – four in Western Europe, one in Eastern Europe, two in Africa and Middle East, five in Asia-Pacific and four in the Americas.
The carrying amounts of goodwill allocated to the cash-generating units of Canada £2,576 million (2009: £2,370 million), Italy £1,419 million (2009: £1,471 million), Western Europe (includes Rothmans and other acquisitions) £1,214 million (2009: £1,208 million), Eastern Europe (includes Rothmans and other acquisitions) £1,070 million (2009: £1,062 million), ST (principally Scandinavia) £954 million (2009: £991 million), South Africa £1,069 million (2009: £932 million), Australia (includes Rothmans and other acquisitions) £877 million (2009: £746 million), Singapore £532 million (2009: £471 million), Malaysia £488 million (2009: £426 million) and Turkey £333 million (2009: £579 million) are considered significant in comparison with the total carrying amount of goodwill.
The recoverable amount of all cash-generating units has been determined on a value-in-use basis. The key assumptions for the recoverable amount of all units are the long-term growth rate and the discount rate. The long-term growth rate used is purely for the impairment testing of goodwill under IAS 36 (Impairment of Assets) and does not reflect long-term planning assumptions used by the Group for investment proposals or for any other assessments. The discount rate is based on the Group’s weighted average cost of capital, taking into account the cost of capital and borrowings, to which specific market-related premium adjustments are made. These adjustments are derived from external sources and are based on the spread between bonds (or credit default swaps or similar indicators) issued by the US or comparable governments and by the local government, adjusted for the Group’s own credit market risk. For ease of use and consistency in application, these results are periodically calibrated into bands based on internationally recognised credit ratings. These assumptions have been applied to the individual cash flows of each unit as compiled by local management in the different markets.
The valuations use cash flows based on detailed financial budgets prepared by management covering a one year period, with growth in year 2 of 6 per cent. Cash flows for the years 3 to 10 are extrapolated from year 2 cash flows at 5 per cent per annum, including 2 per cent inflation, whereafter a total growth rate of 2 per cent per annum has been assumed. The extrapolated growth rates are considered conservative given the Group’s history of growth, its well balanced portfolio of brands and the industry in which it operates. The long-term real growth does not exceed the expected long-term average growth rate for the combined markets in which the cash-generating units operate. In some instances, such as recent acquisitions or start-up ventures, the valuation is expanded to reflect the medium term plan of management, spanning five years or beyond. The recoverable amount of the Turkey cash-generating unit has been determined on a value-in-use basis using a 10 year cash flow forecast with cash flows after year 10 extrapolated as described above. A forecast period of 10 years is considered appropriate to take account of the assumptions of volume stabilisation in Turkey in the medium to longer term and the time period to improve the contribution of higher margin brands. In addition the forecast assumes no further unforeseen significant increases in excise and the compound annual growth over the 10 year period is 3.2 per cent. As explained in note 3(g), the carrying value of goodwill allocated to the Group’s cash-generating unit of Turkey has been impaired by £249 million in 2010.
Pre-tax discount rates of between 7.8 per cent and 18.7 per cent (2009: 7.9 per cent to 18.7 per cent) were used, based on the Group’s weighted average cost of capital, together with any premium applicable for economic and political risks.
The pre-tax discount rates used for the cash-generating units which are significant in comparison with the total carrying amount of goodwill are 9.7 per cent for Canada (2009: 9.7 per cent), 11.0 per cent for Italy (2009: 11.4 per cent), 9.3 per cent for Western Europe (2009: 9.3 per cent), 10.6 per cent for Eastern Europe (2009: 10.6 per cent), 8.7 per cent for ST (principally Scandinavia) (2009: 8.7 per cent), 11.5 per cent for South Africa (2009: 11.5 per cent), 9.3 per cent for Australia (2009: 9.3 per cent), 7.8 per cent for Singapore (2009: 7.9 per cent), 10.0 per cent for Malaysia (2009: 10.0 per cent) and 11.9 per cent for Turkey (2009: 13.1 per cent).
Other than the impairment charge recognised in respect of Tekel goodwill, no other goodwill impairment charges were recognised in 2010 or 2009. If discounted cash flows for the Turkey cash-generating unit should fall by 10 per cent, or the discount rate was increased at a post-tax rate of 1 per cent, there would be further impairment of £55 million and £69 million respectively. If discounted cash flows for any of the other cash-generating units should fall by 10 per cent, or the discount rate was increased at a post-tax rate of 1 per cent, there would be no impairment.