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100 <strong>Kesko's</strong> <strong>year</strong> <strong>2007</strong><br />
Goodwill and intangible assets by segment<br />
Intangible<br />
assets * Goodwill<br />
The useful lives of trademarks (brands) included in intangible assets<br />
have been classified as indefinite because it has been estimated that they<br />
will affect the generation of cash flows over an indefinite period. This is<br />
because no foreseeable limit to the period over which they are expected<br />
to generate net cash inflows for the Group can be seen. Trademarks are<br />
part of assets purchased in connection with acquisitions.<br />
Intangible assets with indefinite lives are tested annually for possible<br />
impairment and whenever there is an indication of impairment.<br />
Impairment test for goodwill and intangible assets<br />
The recoverable amount of a cash-generating unit is determined based<br />
on value-in-use calculations. These calculations use cash flow projections<br />
based on financial plans approved by the management covering a<br />
period of 3–5 <strong>year</strong>s. The key assumptions used for the plans are total market<br />
development and profitability, changes in store network, product and<br />
service selection and pricing. Cash flows beyond the period are extrapolated<br />
using mainly 1–2% growth rates. The discount rate used is the<br />
WACC, specifed for each division and country after tax, which is adjusted<br />
by tax effects in connection with the test. The WACC formula inputs are<br />
risk-free rate of return, market risk premium, industry-specific beta factor,<br />
target capital structure, borrowing cost and country risks.<br />
Impairment losses<br />
During the <strong>2007</strong> accounting period, impairment was not allocated to<br />
goodwill and trademarks with indefinite useful lives.<br />
For the 2006 accounting period, an impairment charge of €30.3 million<br />
was made against intangible assets relating to Indoor Group operations<br />
(Finland). Of this amount €21.3 million was allocated to trademarks<br />
and €9.0 million to goodwill, with both amounts reported as non-recur-<br />
Discount rate<br />
(WACC) **<br />
Intangible<br />
assets * Goodwill<br />
Discount rate<br />
(WACC) **<br />
€ million <strong>2007</strong> <strong>2007</strong> <strong>2007</strong> 2006 2006 2006<br />
Rautakesko<br />
Other Nordic countries 39.2 48.9 7.5% 37.9 46.8 7.0%<br />
Baltic countries 18.3 9.0–11.0% 18.3 9.0%<br />
Others 14.0 12.0% 13.9 12.0%<br />
Anttila<br />
Finland 23.4 7.0% 17.8 23.4 6.5%<br />
Other operating activities<br />
Finland 17.8 29.8 7.0–7.5% 28.4 6.5–7.0%<br />
Other countries 1.5<br />
Total 57.0 134.3 55.7 130.8<br />
* intangible assets with indefinite useful lives ** after tax<br />
Cash-generating units have mainly been identified at a level lower than business segments. The units have been identified by chain/country, which<br />
substantially corresponds to the legal structure.<br />
ring items. The impairment loss was due to weaker-than-expected profitability<br />
and a tightened competitive situation especially in the Greater<br />
Helsinki area. In addition, retail sales failed to meet expectations despite<br />
the expanded retail network. Consequently, revenue expectations concerning<br />
Indoor Group were estimated to have declined. Indoor Group's<br />
operations and its existing retail chains will be developed by investing<br />
heavily in its competitiveness any by increasing the stores' selling areas.<br />
Investments will be made in the trademarks in order to improve their<br />
appeal. Indoor Group is a separate cash generating unit and belongs to<br />
the Other operating activities segment.<br />
Additionally, an impairment charge of €0.6 million relating to the<br />
Intersport operations was made for the period, due to the business being<br />
transferred outside the Group without compensation.<br />
Sensitivity analysis<br />
The key variables used in the impairment test are EBITDA percentage<br />
and discount rate.<br />
When cash generating units are estimated according to the management's<br />
assumptions, a foreseeable possible change in any key variable<br />
would not create a situation in which the recoverable amounts of cash<br />
generating units would be less than their carrying amounts. The intangible<br />
assets related to Indoor Group's and Bryggmakker's operating activities<br />
are the most sensitive to changes in assumptions. A change of 1 percentage<br />
point in their discount rates would not cause impairment. A 0.5<br />
percentage point change in future <strong>year</strong>s' operating margins would not<br />
result in impairment either.
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