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88 FINANCIAL STATEMENTS
Tesco PLC Annual Report and Financial Statements 2009
Note 10 Goodwill and other intangible assets continued
Impairment of goodwill
Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis or more frequently if there are indications
that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at
which management monitor that goodwill.
Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs to sell. In 2008/9, recoverable amounts
are based on value in use. Value in use is calculated from cash flow projections for five years using data from the Group’s latest internal forecasts, the
results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and
expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value
of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations
of future changes in the market. Given the current economic climate, a sensitivity analysis has been performed in assessing the recoverable amounts
of goodwill. In the case of Japan, it is reasonably possible that a change in key assumptions would cause the goodwill to exceed its value in use. At
28 February 2009, there was headroom of £8m, incorporating a long-term growth rate of 1.5% and a pre-tax discount rate of 7.3% as key assumptions.
A 0.2% reduction in the long-term growth rate or a 0.2% increase in the discount rate would cause goodwill to exceed its value in use. EBITDA margin
is also assumed to increase in 2009/10 from 2008/9, where a 2.9% decrease in the forecast margin for 2009/10 would also cause goodwill to exceed its
value in use. For Poland, with headroom of £84m and assuming an 11.3% pre-tax discount rate, a 0.4% increase in the discount rate would cause
goodwill to exceed its value in use.
The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of generally 2%-10% (2008: 3%-4%).
The pre-tax discount rates used to calculate value in use range from 7%-24% (2008: 8%-24%). On a post-tax basis, the discount rates ranged from
5%-19% (2008: 5%-20%). These discount rates are derived from the Group’s post-tax weighted average cost of capital as adjusted for the specific
risks relating to each geographical region.
In February 2009 and 2008 impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the
cash-generating units to which goodwill has been allocated. Management determined that there has been no impairment.
The components of goodwill are as follows:
2009 2008
£m £m
UK 616 571
Tesco Personal Finance Group Limited 767 –
Thailand 153 124
South Korea 378 48
Japan 196 129
China 540 376
Malaysia 76 65
Poland 354 394
Czech Republic 47 44
Turkey 53 54
Other 5 24
3,185 1,829
Notes to the Group financial statements continued