Included in computer software and assets in the course of development above are internally developed assets with a carrying value of £80 million (2005: £64 million). The costs of internally developed assets include capitalised expenses of third party consultants as well as software licence fees from third party suppliers.
Impairment testing for intangible assets with indefinite lives including goodwill
Goodwill of £7,350 million (2005: £7,887 million) included in intangible assets in the balance sheet is mainly the result of the following acquisitions: Rothmans Group £3,889 million (2005: £4,206 million); Imperial Tobacco Canada £1,768 million (2005: £2,004 million); and ETI (Italy) £1,113 million (2005: £1,135 million). The principal allocations of goodwill in the Rothmans' acquisition are to the cash-generating units of Continental 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.
Goodwill has been allocated for impairment testing purposes to 13 (2005: 12) individual cash-generating units - four in Europe, one in Africa and Middle East, three in Asia-Pacific, three (2005: two) in Latin America and two in America-Pacific. The carrying amounts of goodwill allocated to the cash-generating units of South Africa (£803 million, 2005: £1,017 million), Continental Europe (£1,020 million, 2005: £1,040 million), Canada (£1,768 million, 2005: £2,004 million) and Italy (£1,119 million, 2005: £1,141 million) are considered significant in comparison with the total carrying amount of goodwill. A further cash-generating unit was established in 2006 with the purchase of minority interests in Chile (note 26).
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 is a nominal rate used purely for the impairment testing of goodwill under IAS36 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 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 flow projections based on detailed financial budgets approved by management covering a two year period, with cash flow beyond two years extrapolated by a nominal growth rate of 3 per cent per annum for the years three to 10, whereafter a zero per cent growth rate has been assumed (2005: 3 per cent growth rate in perpetuity). This long term growth rate used does not exceed the expected long term average growth rate for the 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 the growth rate of 3 per cent, as above.
Pre-tax discount rates of between 8.1 per cent and 17.9 per cent (2005: 8.1 per cent to 15.7 per cent) were used, based on the Group's weighted average cost of capital, together with any premium applicable for country/area inflation and economical 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 12.1 per cent for South Africa (2005: 12.1 per cent), 9.8 per cent for Continental Europe (2005: 9.8 per cent), 10 per cent for Canada (2005: 11 per cent) and 10.7 per cent for Italy (2005: 10.7 per cent).
No impairment charges were recognised in 2006 (2005: £nil). 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.