National Grid 2016 Annual Report Download - page 122

9. Goodwill
Goodwill represents the excess of what we paid to acquire businesses over the fair value of their net assets at the acquisition date.
Weassess whether goodwill is recoverable each year by performing an impairment review.
Goodwill is recognised as an asset and is not amortised, but is tested for impairment annually or more frequently if events or changes in
circumstances indicate a potential impairment. Any impairment is recognised immediately in the income statement and is not subsequently
reversed.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing exchange rate.
Impairment
Goodwill is allocated to cash-generating units and this allocation is made to those cash-generating units that are expected to benefit from
thebusiness combination in which the goodwill arose.
Impairments of goodwill are calculated as the difference between the carrying value of the goodwill and the estimated recoverable amount
ofthe cash-generating unit to which that goodwill has been allocated. Recoverable amount is defined as the higher of fair value less costs
tosell and estimated value-in-use at the date the impairment review is undertaken.
Value-in-use represents the present value of expected future cash flows, discounted using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Impairments are recognised in the income statement and are disclosed separately.
Total
£m
Net book value at 1 April 2014 4,594
Impairment (12)
Exchange adjustments 563
Net book value at 31 March 2015 5,145
Exchange adjustments 170
Net book value at 31 March 2016 5,315
The cost of goodwill at 31 March 2016 was £5,327m (2015: £5,157m) with an accumulated impairment charge of £12m (2015: £12m).
The amounts disclosed above as at 31 March 2016 include balances relating to the following cash-generating units: New York £3,061m
(2015:£2,964m); Massachusetts £1,145m (2015: £1,108m); Rhode Island £426m (2015: £412m); and Federal £683m (2015: £661m).
Goodwill is reviewed annually for impairment and the recoverability of goodwill has been assessed by comparing the carrying amount of our
operations described above (our cash-generating units) with the expected recoverable amount on a value-in-use basis. In each assessment,
the value-in-use has been calculated based on five year plan projections that incorporate our best estimates of future cash flows, customer
rates, costs (including changes in commodity prices), future prices and growth. Such projections reflect our current regulatory rate plans taking
into account regulatory arrangements toallow for future rate plan filings and recovery of investment. Our plans have proved to be reliable
guides in the past and the Directors believe the estimates are appropriate.
The future economic growth rate used to extrapolate projections beyond five years has been lowered to 2% (2015: 2.25%). The growth rate
hasbeen determined having regard to data on projected growth in US real gross domestic product (GDP). Based on our business’ place in
theunderlying US economy, it is appropriate for the terminal growth rate to be based upon the overall growth in real GDP and, given the nature
of our operations, to extend over a long period of time. Cash flow projections have been discounted to reflect the time value of money, using
apre-tax discount rate of 8% (2015: 9%). The discount rate represents the estimated weighted average cost of capital of these operations.
While it is possible that a key assumption in the calculation could change, the Directors believe that no reasonably foreseeable change would
result in an impairment of goodwill, in view of the long-term nature of the key assumptions and the margin by which the estimated fair value
exceeds the carrying amount.
As part of their review in 2014/15, the Directors specifically reviewed the carrying value of goodwill associated with Clean Line Energy Partners
LLC. This review resulted in a full impairment being recorded of £12m.
Notes to the consolidated financial statements
– analysis of items in the primary statements continued
120 National Grid Annual Report and Accounts 2015/16 Financial Statements