Punch Taverns plc 2011 Annual Report

More documents

Recommendations

Info

72 Punch Taverns plc Annual Report and Financial Statements 2011 Notes to the financial statements continued for the 52 weeks ended 21 August 2011 14 Impairment losses Property, plant and equipment and operating leases When any indicators of impairment are identified, property, plant and equipment and operating leases are reviewed for impairment based on each cash-generating unit (CGU). The cash-generating units are individual pubs. The carrying values of these individual pubs are compared to the recoverable amount of the CGUs, which is the higher of value in use and fair value less costs to sell. During the current period, the Group commissioned independent market research on the UK eating and drinking out market and its position in it. This review was undertaken as part of a comprehensive review of the Group’s strategy, operating performance and capital structure, the outcome of which was announced on 22 March 2011. This review reinforced the Group’s view that the long-term decline in drinking out in pubs will continue, driven by changing consumer behaviour, relative price positioning and the impact of regulation. Conversely, the long-term growth in eating out in pubs will continue, driven by economic growth, changing consumer behaviour and improvements in the quality, service and value for money offering in the pub industry. The outcome of this review has led the Group to conclude that, given the structural challenges faced by the leased estate, a more aggressive reduction in the estate size is required. This will enable the Group to move more quickly to a position from which we can deliver sustainable growth in profits and cash flow. This analysis led to the conclusion that our turnaround estate, comprising those properties that can generate more value through disposal than retention, was around 2,400 pubs at the time of the review. It is expected that these pubs will be disposed of over a five-year period. The values of these non-core pubs have been reviewed, with the carrying value of these individual pubs being written down to the higher of their fair value less costs to sell (FVLCS) and their value in use (VIU). As a result, a £306.6m impairment charge has been charged in the period. In addition, a £60.4m impairment charge has been incurred on the Spirit leased estate in the period. There are no indicators of impairment in the core estate. The impairments recognised in the current and prior periods are as follows: 52 weeks to 20 August 2011 £m 52 weeks to 21 August 2010 £m Property, plant and equipment 359.1 217.6 Operating leases 7.9 – 367.0 217.6 Cash flows used in the value-in-use calculation of non-core pubs are based on earnings before interest and taxation. Since non-core pubs have been identified as not having a viable future to Punch as a pub, their value in use has been calculated by using the earnings of these pubs as included in the Group business plan for a period of three years, and then using the fair value less costs to sell at that time as the terminal value at the end of year three. Within the turnaround division cash flow forecasts used in the Group business plan assume an ongoing trading decline. The business plan has been formulated by management based on the current strategies for each division and taking into account the views of the operating teams in those divisions and their expected future performance. The pre-tax risk-adjusted discount rate applied to cash flow projections is 8.0% (August 2010: 8.0%). In practice, due to the projected decline in profits in the turnaround estate, the majority of pubs were written down to their FVLCS as their VIU is below this level. Estimates of FVLCS were based on valuations undertaken by in-house property experts. Included within the above are reversals of impairment losses of property, plant and equipment of £27.4m. The impairment reversals were primarily due to the identification of pubs where expected future cash flows have risen to a level such that their value in use is now above carrying value.
Punch Taverns plc Annual Report and Financial Statements 2011 73 14 Impairment losses continued Sensitivity to changes in assumptions The Group has recognised a total impairment of £306.6m on the Punch leased estate. The level of impairment is predominantly dependent upon judgements used in arriving at projected disposal values, future growth rates and the discount rate applied to cash flow projections. Key drivers to future growth rates are dependent on the Group’s ability to maintain drinks, rental and gaming machine profit streams. The impact on the impairment charge of applying different assumptions to the disposal values, growth rates used in the five-year financial forecasts and in the pre-tax discount rates would be as follows: Total £m Impact if disposal value was: increased by 10% (44.2) decreased by 10% 46.1 Impact if discount rate was: increased by 1% 6.4 decreased by 1% (7.6) Impact if business plan growth rates were: increased by 2% in each year (2.0) decreased by 2% in each year (1.9) Goodwill Goodwill represents the synergistic benefits of operating a large pub estate and is allocated to groups of CGUs. In the prior period, the leased estate was reorganised from one group of CGUs to separate core and turnaround property structures. The allocation of leased goodwill between core and turnaround indicated that no goodwill should be allocated to the turnaround estate given the low value of the properties in the estate and the low level of synergistic benefits. During the current period following the strategic review, a further c.1,400 pubs have been transferred in to the turnaround estate, and at that stage goodwill of £72.4m was reallocated to the turnaround estate. The intention to dispose of these non-core properties in the medium term triggered an impairment review and an impairment charge of £82.7m was taken against this goodwill, which includes a £10.3m charge on goodwill allocated to pubs in the Spirit leased estate. For goodwill impairment purposes, the recoverable amount of the non-core group of CGUs was based on an aggregate of the higher of the FVLCS and the VIU for the non-core pubs. The basis of these calculations is set out in the property, plant and equipment and operating lease impairment disclosures above. In addition during the year, a review for impairment was carried out on the remaining goodwill allocated to pubs in the core estate. This review compared the carrying amount of the goodwill to the net realisable value, being the higher of the FVLCS and VIU. Cash flows used in the VIU calculation are based on earnings before interest and taxation, and use the forecasted cash flows included within the Group business plan for the first five years, and then the cash flows are extrapolated for a further 45 years, applying a multiple of ten as the terminal value. The pre-tax risk-adjusted discount rate applied to cash flow projections is 8.0%. The growth rate applied to cash flows over the 45-year period is 2.25%. Based on this review, no impairment of goodwill on the core estate has been identified. Neither a 2% decrease in the growth rate nor a 1% increase in the discount rate would have led to an impairment in the current period. Governance Business review Financial statements
Page 1 and 2:
Focus on leased pubs Punch Taverns
Page 3 and 4:
Punch Taverns plc Annual Report and
Page 5 and 6:
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24: Punch Taverns plc Annual Report and
Page 73: Punch Taverns plc Annual Report and
Page 107 and 108: This report is printed using papers
show all

Punch Taverns plc 2011 Annual Report

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?