Chrysler 2014 Annual Report Download - page 170

168 2014 | ANNUAL REPORT
Consolidated
Financial Statements
Notes to the Consolidated
Financial Statements
Recoverability of non-current assets with definite useful lives
Non-current assets with definite useful lives include property, plant and equipment, intangible assets and assets held
for sale. Intangible assets with definite useful lives mainly consist of capitalized development costs related to the EMEA
and NAFTA segments.
The Group periodically reviews the carrying amount of non-current assets with definite useful lives when events and
circumstances indicate that an asset may be impaired. Impairment tests are performed by comparing the carrying
amount and the recoverable amount of the CGU. The recoverable amount is the higher of the CGU’s fair value less
costs of disposal and its value in use. In assessing the value in use, the pre-tax estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the CGU.
Due to impairment indicators existing in 2014 primarily related to losses incurred in EMEA due to weak demand for
vehicles and strong competition, impairment tests relating to the recoverability of CGUs in EMEA were performed. The
tests compared the carrying amount of the assets allocated to the CGUs (comprising property, plant and equipment
and capitalized development costs) to their value in use using pre-tax estimated future cash flows discounted to their
present value using a pre-tax discount rate. The test confirmed that the value in use of the CGUs in EMEA was greater
than the carrying value at December 31, 2014 and as a result, there was no impairment loss recognized in 2014.
In addition, the recoverable amount of the EMEA segment as a whole was assessed. The value in use of the EMEA
segment was determined using the following assumptions:
the reference scenario was based on the 2014-2018 strategic business plan presented in May 2014 and the
consistent projections for 2019;
the expected future cash flows, represented by the projected EBIT before Result from investments, Gains on the
disposal of investments, Restructuring costs, Other unusual income/(expenses), Depreciation and Amortization
and reduced by expected capital expenditure, include a normalized future result beyond the time period explicitly
considered used to estimate the Terminal Value. This normalized future result was assumed substantially in line with
2017-2019 amounts. The long-term growth rate was set at zero;
the expected future cash flows were discounted using a pre-tax Weighted Average Cost of Capital (“WACC”) of
10.3 percent. This WACC reflects the current market assessment of the time value of money for the period being
considered and the risks specific to the EMEA region. The WACC was calculated by referring to the yield curve of
10-year European government bonds, to FCA’s cost of debt, and other factors.
Furthermore, a sensitivity analysis was performed by simulating two different scenarios:
a) WACC was increased by 1.0 percent for 2018, 2.0 percent for 2019 and 3.0 percent for Terminal Value;
b) Cash-flows were reduced by estimating the impact of a 1.7 percent decrease in the European car market demand for 2015,
a 7.5 percent decrease for 2016 and a 10.0 percent decrease for 2017-2019 as compared to the base assumptions.
In all scenarios the recoverable amount was higher than the carrying amount.
The estimates and assumptions described above reflect the Group’s current available knowledge as to the expected
future development of the businesses and are based on an assessment of the future development of the markets and
the automotive industry, which remain subject to a high degree of uncertainty due to the continuation of the economic
difficulties in most countries of the Eurozone and its effects on the industry. More specifically, considering the
uncertainty, a future worsening in the economic environment in the Eurozone, particularly in Italy, that is not reflected
in these Group assumptions, could result in actual performance that differs from the original estimates, and might
therefore require adjustments to the carrying amounts of certain non-current assets in future periods.
In 2013, as a result of the new product strategy and decline in the demand for vehicles in EMEA, the Group performed
impairment tests related to the recoverability of the CGUs in EMEA and the EMEA segment as a whole using pre-tax
estimated future cash flows discounted to their present value using a pre-tax discount rate of 12.2 percent and the
same methodology for the recoverable amount as described above. For the year ended December 31, 2013, total
impairments of approximately €116 million relating to EMEA were recognized as a result of testing the CGUs in EMEA
(of which €61 million related to development costs and €55 million related to Property, plant and equipment).