Cemex 2012 Annual Report Download - page 49

Notes to the
consolidated
financial
statements
49
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Goodwill and intangible assets of indefinite life
Goodwill and other intangible assets of indefinite life 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 group of cash-
generating units (“CGUs”)to which goodwill balances have been allocated, which consists of the higher of such group of CGUs fair
value, less cost to sell and its value in use, represented by the discounted amount of estimated future cash flows to be generated
by such CGUs to which goodwill has been allocated. Other intangible assets of indefinite life may be tested at the CGU or group
of CGUs level, depending on their allocation. CEMEX determines discounted cash flows generally over periods of 5 years. In
specific circumstances, when, according to CEMEX’s experience, actual results for a given cash-generating unit do not fairly
reflect historical performance and most external economic variables provide the Company with confidence that a reasonably
determinable improvement in the mid-term is expected in their operating results, management uses cash flow projections over
a period of up to 10 years, to the extent CEMEX has detailed, explicit and reliable financial forecasts and is confident and can
demonstrate its ability, based on past experience, to forecast cash flows accurately over that longer period. The number of
additional periods above the standard period of 5 years of cash flow projections up to 10 years is determined by the extent to
which future expected average performance resembles the historical average performance. If the value in use of a group of CGUs
to which goodwill has been allocated is lower than its corresponding carrying amount, CEMEX determines the fair value of such
group of CGUs 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 group of CGUs to which goodwill has been
allocated. Impairment charges recognized on goodwill are not reversed in subsequent periods.
The geographic operating segments reported by CEMEX (note 4), represent CEMEX’s groups of CGUs to which goodwill has
been allocated for purposes of testing goodwill for impairment. In arriving at this conclusion, CEMEX considered: a) that after
the acquisition, goodwill was allocated at the level of the geographic operating segment; b) that the operating components that
comprise the reported segment have similar economic characteristics; c) that the reported segments are used by CEMEX to
organize and evaluate its activities in its internal information system; d) the homogeneous nature of the items produced and
traded in each operative component, which are all used by the construction industry; e) the vertical integration in the value
chain of the products comprising each component; f) the type of clients, which are substantially similar in all components; g) the
operative integration among components; and h) that the compensation system of a specific country is based on the consolidated
results of the geographic segment and not on the particular results of the components. In addition, the country level represents
the lowest level within CEMEX at which goodwill is monitored for internal management purposes.
Impairment tests are significantly sensitive to, among other factors, 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. For purposes of
estimating future prices, CEMEX uses, to the extent available, historical data plus the expected increase or decrease according
to information issued by trusted external sources, such as national construction or cement producer chambers and/or in
governmental economic expectations. Operating expenses are normally measured as a constant proportion of revenues, following
past experience. However, such operating expenses are also reviewed considering external information sources in respect to inputs
that behave according to international prices, such as gas and oil. CEMEX uses specific pre-tax discount rates for each group of
CGUs to which goodwill is allocated, which are 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 of undiscounted future cash flows by group of CGUs obtained. Conversely, the
higher the discount rate applied, the lower the amount of discounted estimated future cash flows by group of CGUs obtained.
2L) Financial liabilities, derivative financial instruments and fair value measurements (note 16)
Debt
Bank loans and notes payable are recognized at their amortized cost. Interest accrued on financial instruments is recognized in the
balance sheet within “Other accounts payable and accrued expenses” against financial expense. During 2012 and 2011, CEMEX
did not have financial liabilities voluntarily recognized 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.