building a STRONGER foundation - Cemex

J) IMPAIRMENT OF LONG LIVED ASSETS (notes 10 and 11)
CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements – (Continued)
As of December 31, 2010, 2009 and 2008
(Millions of Mexican pesos)
Property, machinery and equipment, intangible assets of definite life and other investments
According to MFRS C-15, “Impairment and disposal of long-lived assets” (“MFRS C-15”), property, machinery and equipment, intangible assets
of definite life and other investments are tested for impairment upon the occurrence of factors such as the occurrence of a significant adverse
event, changes in the operating environment in which CEMEX operates, changes in projected use or in technology, as well as expectations of
lower operating results for each cash generating unit, in order to determine whether their carrying amounts may not be recovered, in which case
an impairment loss is recorded in the income statements for the period when such determination is made within “Other expenses, net.” The
impairment loss results from the excess of the carrying amount over the net present value of estimated cash flows related to such assets.
Goodwill and intangible assets of indefinite life
Goodwill and other intangible assets of indefinite life are tested for impairment when needed and at least once a year, during the last quarter
of the period, by determining the value in use of the reporting units, which consists in the discounted amount of estimated future cash flows to
be generated by the reporting units to which those assets relate. CEMEX determines the discounted amount of estimated future cash flows
over a period of 5 years, unless a longer period is justified in a specific country considering its economic cycle and the situation of the
industry. A reporting unit refers to a group of one or more cash generating units. An impairment loss is recognized if the value in use is lower
than the net book value of the reporting unit.
The geographic segments reported by CEMEX (note 3A), each integrated by multiple cash generating units, also represent the reporting units
for purposes of testing goodwill for impairment, considering that: a) the operating components that comprise the reported segment have
similar economic characteristics; b) the reported segments are the level used by CEMEX to organize and evaluate its activities in its internal
information system; c) the homogeneous nature of the items produced and traded in each operative component, which are all used by the
construction industry; d) the vertical integration in the value chain of the products comprising each component; e) the type of clients, which
are substantially similar in all components; f) the operative integration among components; and g) the compensation system of a specific
country is based on the consolidated results of the geographic segment and not on the particular results of the components.
Impairment tests are significantly sensitive, among other factors, to the estimation of future prices of CEMEX’s products, the development of
operating expenses, local and international economic trends in the construction industry, the long-term growth expectations in the different
markets, as well as the discount rates and the growth rates in perpetuity applied. CEMEX uses specific after-tax discount rates for each
reporting unit, which are applied to after-tax cash flows. The amounts of estimated undiscounted future cash flows are significantly sensitive
to the growth rate in perpetuity applied. Likewise, the amounts of discounted estimated future cash flows are significantly sensitive to the
weighted average cost of capital (discount rate) applied. The higher the growth rate in perpetuity applied, the higher the amount obtained of
undiscounted future cash flows by reporting unit. Conversely, the higher the discount rate applied, the lower the amount obtained of
discounted estimated future cash flows by reporting unit.
K) FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS (note 12)
Financial liabilities
Financial liabilities such as bank loans and notes payable are recognized at their nominal amount. Interest accrued on financial instruments is
recognized in the balance sheet within “Other accounts payable and accrued expenses” against financial expense.
For the years ended December 31, 2010, 2009 and 2008, CEMEX does not have financial liabilities recognized voluntarily at fair value or
associated to fair value hedge strategies with derivative financial instruments.
Financial instruments with components of both liability and equity
Based on MFRS, when a financial instrument contains components of both liability and equity, such as a note that at maturity is convertible into
shares of CEMEX, each component is recognized separately in the balance sheet according to the specific characteristics of each transaction. In
the event of a mandatorily convertible instrument, the liability component represents the net present value of interest payments on the principal
amount using a market interest rate, without assuming any early conversion, and is recognized within “Other financial obligations,” whereas the
equity component represents the difference between the principal amount and the liability component, and is recognized within “Other equity
reserves” net of commissions. In the case of an instrument that is optionally convertible into a fixed number of shares, the liability component
represents the difference between the principal amount and the fair value of the call option premium, which reflects the equity component (note
2O).
Derivative financial instruments
In compliance with the guidelines established by its Risk Management Committee, CEMEX uses derivative financial instruments (“derivative
instruments”), mainly in order to change the risk profile associated with changes in interest rates, the exchange rates of debt, or both; as an
alternative source of financing, and as hedges of: (i) highly probable forecasted transactions and (ii) CEMEX’s net investments in foreign
subsidiaries.
F-12