Tesco 2015 Annual Report Download - page 109

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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.
In February 2015 and 2014 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.
Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs of disposal. Value in use is calculated from
cash flow projections for generally 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 estimates
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.
The pre-tax discount rates used to calculate value in use range from 9% to 12% (2014: 7% to 11%). On a post-tax basis, the discount rates range from 7% to
10% (2014: 6% to 8%). 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 cash-generating unit.
The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of 2% to 3% (2014: 2% to 3%).
The challenging economic climate and significant shifts in the retail industry structure has resulted in revised forecast cash flows and updated discount rates.
A resulting impairment charge has been recognised of £116m (2014: £nil) related to Dobbies (£83m) and other UK businesses (£33m). Dobbies and the other
UK businesses are within the UK segment. This charge has been recognised in the cost of sales line in the Group Income Statement.
A final regulation has been published by the European Commission, imposing a cap on interchange fees on credit and debit cards. This change to existing
interchange fees, which is expected to come into force during the first half of 2015, along with the forecast impact of mitigating management actions, has
been considered as part of goodwill impairment testing for the Tesco Bank cash-generating unit. No reduction in the asset recognised has been required
following completion of this review.
The components of goodwill are as follows:
2015
£m
2014
£m
Malaysia 74 74
South Korea 502 475
Tesco Bank 802 802
Thailand 159 145
UK 722 761
Other 29 29
2,288 2,286
107Tesco PLC Annual Report and Financial Statements 2015
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