Full Annual Report - Inchcape

Financial statements
Notes to the accounts continued
11 Intangible assets continued
a. Goodwill
Goodwill acquired in a business combination is allocated to the cash generating units (CGUs) that are expected to benefit from that
business combination. These are independent sources of income streams and represent the lowest level within the Group at which
the associated goodwill is monitored for management purposes. This may be at country, regional or brand level.
The carrying amount of goodwill has been allocated to the following operating segments:
United Kingdom 264.6 264.8
Russia and Emerging Markets 216.5 214.8
South Asia 17.9 19.6
Australasia 11.0 9.7
510.0 508.9
Goodwill additions in 2009 arise mainly from adjustments to the purchase price of the Musa Motors group under certain earn out
arrangements (see note 27).
Goodwill is subject to impairment testing annually, or more frequently where there are indications that the goodwill may be impaired.
Impairment tests were performed for all CGUs during the year ended 31 December 2009.
The recoverable amounts of all CGUs were determined based on value in use calculations. These calculations use cash flow projections
based on five year financial forecasts prepared by management. The key assumptions for these forecasts are those relating to revenue
growth / decline, operating margins and the level of working capital required to support trading, which have been based on past
experience, recent trading and expectations of future changes in the relevant markets. They also reflect expectations about continuing
relationships with key brand partners.
Cash flows after the five year period are extrapolated at an estimated average long-term growth rate for each market. These growth
rates reflect the long-term growth prospects of the markets in which the CGUs operate. The growth rates used vary between 0% and 5%
and are consistent with appropriate external sources for the relevant markets.
Cash flows are discounted back to present value using a risk adjusted discount rate. The discount rate assumptions are based on an
estimate of the Group’s weighted average cost of capital adjusted for a risk premium attributable to the relevant CGU. The pre-tax
discount rates used vary between 10% and 12%, and reflect long-term country risk.
The assumptions used with regards to pre-tax discount rates and long-term growth rates in those segments with material goodwill
balances were as follows:
Discount rate
Long-term growth rate
United Kingdom 11% 2%
Russia and Emerging Markets 11% to 12% 5%
South Asia 10% 1%
Australasia 11% 2%
Impairment
No impairment charge has been recognised during the year ended 31 December 2009. In the year ended 31 December 2008, the
goodwill in relation to the Group’s businesses in Latvia (reported in the Russia and Emerging Markets segment) was impaired by
£46.8m following a significant deterioration in the automotive sector in that market which adversely affected revenue and trading
profit. In addition, goodwill of £7.4m related to sites in the UK which were sold or closed was impaired in 2008.
Sensitivities
The Group’s value in use calculations are sensitive to a change in the key assumptions used, most notably the discount rates and the
long-term growth rates. With the exception of the Musa Motors group in Russia and the Group’s business in Lithuania, a reasonably
possible change in a key assumption will not cause an impairment in any of the other CGUs.
2009
£m
2008
£m
110
Inchcape plc ¦ Annual Report and Accounts 2009