Impairment testing for intangible assets with indefinite lives including goodwill
Goodwill of £11,331 million (2008: £11,391 million) included in intangible assets in the balance sheet is mainly the result of the following acquisitions: Rothmans Group £4,833 million (2008: £4,974 million); Imperial Tobacco Canada £2,370 million (2008: £2,261 million); ETI (Italy) £1,463 million (2008: £1,591 million); ST (principally Scandinavia) £1,103 million (2008: £1,200 million); Tekel (Turkey) £579 million (2008: £619 million) as well as £205 million relating to the Bentoel (Indonesia) acquisition in 2009. The principal allocations of goodwill in the Rothmans’ acquisition are to the cash-generating units of Eastern and Western Europe, and South Africa (2008: Europe and South Africa), with the remainder mainly relating to operations in the domestic and export market in the United Kingdom and operations in Asia-Pacific.
As a consequence of the Group’s new regional structure effective 1 January 2009, goodwill allocated to the Europe cash-generating unit (2008: £2,293 million) has been apportioned between the new cash-generating units of Western Europe and Eastern Europe. The goodwill on the ST transaction has been allocated between the cash-generating units of ST and Western Europe.
In 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. In 2008, goodwill was allocated for impairment testing purposes to 15 individual cash-generating units – five in Europe, two in Africa and Middle East, three in Asia-Pacific, three in Latin America and two in America-Pacific.
In 2009, the carrying amounts of goodwill allocated to the cash-generating units of Canada £2,370 million, Italy £1,471 million, Western Europe (includes Rothmans and other acquisitions) £1,208 million, Eastern Europe (includes Rothmans and other acquisitions) £1,062 million, ST (principally Scandinavia) £991 million, South Africa £932 million, Australia (includes Rothmans and other acquisitions) £746 million, Turkey £579 million, Singapore £471 million and Malaysia £426 million are considered significant in comparison with the total carrying amount of goodwill.
In 2008, the carrying amounts of goodwill allocated to the cash-generating units of Europe (includes Rothmans and other acquisitions) £2,293 million, Canada £2,261 million, Italy £1,600 million, South Africa £833 million, Australia (includes Rothmans and other acquisitions) £650 million, Singapore £516 million, Malaysia £474 million and in respect of the acquisitions made during 2008, ST (principally Scandinavia) £1,200 million and Turkey £619 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 assumptions have been applied to the individual cash flows of each unit as compiled by local management in the different markets.
The valuation uses cash flows based on detailed financial budgets prepared by management covering a one year (2008: two 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 (2008: 3 per cent), including 2 per cent inflation, whereafter a total growth rate of 2 per cent per annum (2008: zero per cent) has been assumed.
The amendments to the approach in 2009 reflect changes in the Group’s management reporting processes and greater consistency between the basis for the projected cash flows and the related discount rates.
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, with the cash flow beyond these years to year 10, extrapolated by growth of 5 per cent, as above.
Pre-tax discount rates of between 7.9 per cent and 18.7 per cent (2008: 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 (2008: 9.7 per cent), 11.4 per cent for Italy (2008: 9.8 per cent), 9.3 per cent for Western Europe, 10.6 per cent for Eastern Europe (2008: combined Europe 9.3 per cent), 8.7 per cent for ST (principally Scandinavia) (2008: 8.7 per cent), 11.5 per cent for South Africa (2008: 11.5 per cent), 9.3 per cent for Australia (2008: 9.3 per cent), 13.1 per cent for Turkey (2008: 13.1 per cent), 7.9 per cent for Singapore (2008: 7.9 per cent) and 10.0 per cent for Malaysia (2008: 10.1 per cent).
No goodwill impairment charges were recognised in 2009 or 2008. If discounted cash flows per cash-generating unit should fall by 10 per cent, or the discount rate was increased at an after tax rate of 1 per cent, there would be no impairment.