building a STRONGER foundation - Cemex
building a STRONGER foundation - Cemex
building a STRONGER foundation - Cemex
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
11B) ANALYSIS OF GOODWILL IMPAIRMENT<br />
CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES<br />
Notes to the Consolidated Financial Statements – (Continued)<br />
As of December 31, 2010, 2009 and 2008<br />
(Millions of Mexican pesos)<br />
Goodwill amounts are allocated to the multiple cash generating units, which together constitute a geographic operating segment commonly<br />
comprising all of the operations in each country. CEMEX’s geographic segments represent its reporting units for purposes of impairment<br />
testing. An impairment loss would be recognized for the amount that the carrying amount of the reporting unit exceeds the respective fair<br />
value, represented by the value in use (discounted cash flows) attributable to such reporting unit. Cash flow projection models include longterm<br />
economic variables. CEMEX believes that its discounted cash flow projections and the discount rates used reasonably reflect current<br />
economic conditions at the time of the calculations, considering that: a) the starting point of the future cash flow models is the operating cash<br />
flow for the previous period; b) the cost of capital reflects current risks and volatility in the markets; and c) the cost of debt represents<br />
CEMEX’s specific interest rates observed in recent transactions.<br />
Impairment tests are significantly sensitive to, among other factors, the estimation of future prices of CEMEX’s products, the development of<br />
operating expenses, local and international economic trends in the construction industry, long-term growth expectations in the different<br />
markets, as well as the discount rates and the rates of growth in perpetuity used. CEMEX uses after-tax discount rates, which are applied to<br />
after-tax cash flows for each reporting unit. Undiscounted cash flows are significantly sensitive to the growth rates in perpetuity used.<br />
Likewise, discounted cash flows are significantly sensitive to the discount rate used. The higher the growth rate in perpetuity applied, the<br />
higher the amount obtained of undiscounted future cash flows by reporting unit. Conversely, the higher the discount rate applied, the lower<br />
the amount obtained of discounted estimated future cash flows by reporting unit.<br />
During the last quarter of 2010, 2009 and 2008, CEMEX performed its annual goodwill impairment test. Based on these analyses, in 2010,<br />
CEMEX determined an impairment loss of goodwill for approximately Ps189 (US$15) associated with the reporting unit in Puerto Rico,<br />
whereas, in 2008, CEMEX determined impairment losses of goodwill for a total of approximately Ps18,314 (US$1,333), associated with<br />
CEMEX’s reporting units in the United States, Ireland and Thailand for approximately Ps16,790 (US$1,222), Ps233 (US$17) and Ps453<br />
(US$33), respectively. The estimated impairment loss in the United States in 2008 was mainly attributable to the acquisition of the Australian<br />
producer Rinker Materials Group finalized in 2007, and overall such losses were attributable to the economic environment described in the<br />
paragraph below. In addition, considering that CEMEX’s investment in Venezuela is expected to be recovered through different means other<br />
than use, CEMEX recognized in 2008 an impairment loss of approximately Ps838 (US$61) associated with the goodwill of this investment.<br />
For the year 2009, based on its goodwill impairment tests, CEMEX did not determine impairment losses of goodwill.<br />
Beginning in the last quarter of 2008, the global economic environment was negatively affected by the intensification of the turmoil in several<br />
major financial institutions, which caused a liquidity shortage for companies in almost all productive sectors and resulted in a significant<br />
decrease in overall economic activity and a worldwide downturn in the main stock markets. These situations generated a reduction of growth<br />
expectations in the countries in which CEMEX operates, motivated by the cancellation or deferral of several investment projects, affecting the<br />
construction industry. Although in 2009 and 2010 most global macroeconomic variables have stabilized, the construction industry has<br />
remained depressed in certain countries mainly as a result of the high level of inventories existing at the beginning of the financial crisis, and<br />
the lack of investment projects considering the reaction of investors to the liquidity problems in countries like Greece, Spain, Ireland and<br />
Portugal, among others.<br />
In 2010 and 2009, discount rates and growth rates in perpetuity used to determine the discounted cash flows in the reporting units with the<br />
main goodwill balances are as follows:<br />
Discount rates Growth rates<br />
Reporting units 2010 2009 2010 2009<br />
United States .......................................................................................... 8.7% 8.5% 2.5% 2.9%<br />
Spain....................................................................................................... 10.2% 9.4% 2.5% 2.5%<br />
Mexico ................................................................................................... 10.0% 10.0% 2.5% 2.5%<br />
Colombia................................................................................................ 10.0% 10.2% 2.5% 2.5%<br />
France..................................................................................................... 9.6% 9.6% 2.5% 2.5%<br />
United Arab Emirates............................................................................. 11.5% 11.4% 2.5% 2.5%<br />
United Kingdom..................................................................................... 9.7% 9.4% 2.5% 2.5%<br />
Egypt ...................................................................................................... 11.1% 10.0% 2.5% 2.5%<br />
Range of rates in other countries ............................................................ 10.3% – 13.9% 9.6% – 14.6% 2.5% 2.5%<br />
F-33