Cemex 2012 Annual Report Download - page 129

Notes to the
financial
statements
129
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2K) Impairment of long lived assets (notes 7 and 8)
Land, buildings and other investments
Land, buildings and investments are tested for impairment upon the occurrence of factors such as the occurrence of a significant
adverse event, changes in the business’s operating environment, changes in projected use or in technology, as well as expectations
of lower operating results, 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 of an asset results from the excess of the asset’s carrying amount over its recoverable amount, corresponding to
the higher of the fair value of the asset, less costs to sell such asset, and the asset’s value in use, the latter represented by the net
present value of estimated cash flows related to the use or disposal of the asset.
Goodwill and investment in subsidiaries and associates
Goodwill and investment in subsidiaries and associates are tested for impairment when required due to significant adverse
changes or at least once a year, during the last quarter of such year, by determining the recoverable amount of the investment
in subsidiaries and associates, which consists of the higher of the investment in subsidiaries and associates’ fair value, less
cost to sell and the investment in subsidiaries and associates’ value in use, represented by the discounted amount of estimated
future cash flows to be generated to which those net assets relate. CEMEX, S.A.B. de C.V. determines initially its discounted cash
flows over periods of 5 to 10 years, depending on the economic cycle. If the value in use of the investment in subsidiaries and
associates is lower than its corresponding carrying amount, CEMEX, S.A.B. de C.V. determines the fair value of its investment
using methodologies generally accepted in the market to determine the value of entities, such as multiples of Operating EBITDA
and by reference to other market transactions, among others. An impairment loss is recognized within other expenses, net, if
the recoverable amount is lower than the net book value of the investment. Impairment charges recognized on goodwill are not
reversed in subsequent periods.
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, S.A.B. de
C.V. uses specific pre-tax discount rates for each group of cash generating units to which goodwill is allocated, which is applied
to discount pre-tax cash flows. The amounts of estimated undiscounted 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.
2L) Financial liabilities, derivative financial instruments and fair value measurements (note 10)
Debt
Bank loans and notes payable are recognized at their amortized cost. Interest accrued on financial liabilities is recognized in the
balance sheet within “Other accounts payable and accrued expenses” against financial expense. During 2012 and 2011, CEMEX
S.A.B. de C.V. did not have financial liabilities recognized voluntarily at fair value or associated to fair value hedge strategies
with derivative financial instruments. Direct costs incurred in debt issuances or borrowings are capitalized and amortized as
interest expense as part of the effective interest rate of each transaction over its maturity. These costs include commissions and
professional fees.
Financial instruments with components of both liability and equity
Based on IAS 32, Financial instruments: presentation (“IAS 32”) and IAS 39, when a financial instrument contains components of
both liability and equity, such as a note that at maturity is convertible into a fixed number of CEMEX, S.A.B. de C.V.’s shares and
the currency in which the instrument is denominated is the same as the functional currency of the issuer, each component is
recognized separately in the balance sheet according to the specific characteristics of each transaction. In the case of instruments
mandatorily convertible into shares of the issuer, 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 instruments that are optionally
convertible into a fixed number of shares, the liability component represents the difference between the principal amount and the
fair value of the conversion option premium, which reflects the equity component (note 2O). When the transaction is denominated
in a currency different than the functional currency of the issuer, the conversion option is accounted for as a derivative financial
instrument at fair value through the statements of operations.