Vodafone 2006 Annual Report Download - page 94

92 Vodafone Group Plc Annual Report 2006
Notes to the Consolidated Financial Statements
continued
10. Impairment continued
The key assumptions used in determining the value in use are:
Assumption How determined
Budgeted EBITDA Budgeted EBITDA, calculated as adjusted operating profit before depreciation and amortisation, has been based on past experience adjusted for
the following:
•voice and messaging revenue is expected to benefit from increased usage from new customers, the introduction of new services and traffic
moving from fixed networks to mobile networks, though these factors will be partially offset by increased competitor activity, which may
result in price declines, and the trend of falling termination rates;
•non-messaging data revenue is expected to continue to grow strongly as the penetration of 3G enabled devices rises and new products and
services are introduced; and
•margins are expected to be impacted by negative factors such as an increase in the cost of acquiring and retaining customers in increasingly
competitive markets and the expectation of further termination rates cuts by regulators; and by positive factors such as the efficiencies
expected from the implementation of One Vodafone initiatives.
Budgeted capital expenditure The cash flow forecasts for capital expenditure is based on past experience and includes the ongoing capital expenditure required to provide
enhanced voice and data products and services and to meet the population coverage requirements of certain of the Group’s licences. Capital
expenditure includes cash outflows for the purchase of property, plant and equipment and computer software.
Long term growth rate For mobile businesses, a long term growth rate into perpetuity has been determined as the lower of:
•the nominal GDP rates for the country of operation; and
•the long term compound annual growth rate in EBITDA implied by the business plan.
For non-mobile businesses, no growth is expected beyond management’s plans for the initial five year period.
Pre-tax risk adjusted discount rate The discount rate applied to the cash flows of each the Group’s operations is based on the risk free rate for ten year bonds issued by the
government in the respective market, adjusted for a risk premium to reflect both the increased risk of investing in equities and the systematic
risk of the specific Group operating company. In making this adjustment, inputs required are the equity market risk premium (that is the required
increased return required over and above a risk free rate by an investor who is investing in the market as a whole) and the risk adjustment
(“beta”) applied to reflect the risk of the specific Group operating company relative to the market as a whole.
In determining the risk adjusted discount rate, management have applied an adjustment for the systematic risk to each of the Group’s
operations determined using an average of the beta’s of comparable listed mobile telecommunications companies and, where available and
appropriate, across a specific territory. Management have used a forward looking equity market risk premium that takes into consideration both
studies by independent economists, the average equity market risk premium over the past ten years and the market risk premiums typically
used by investment banks in evaluating acquisition proposals.
The following assumptions have been applied in the value in use calculations as follows:
Pre-tax risk adjusted discount rate Long term growth rate
2006 2005 2006 2005
%%%%
Germany 10.1 9.6 1.1 2.7
Italy 10.1 9.2 1.5 4.1
Spain 9.0 9.3 3.3 3.4
Impact of a reasonbly possible change in a key assumption
For those cash generating units, or the aggregate of cash generating units which are not individually significant, where a reasonably possible change in a key assumption would lead
to an impairment loss, the following provides additional information on the sensitivity of such a change on the recoverable amount.
Germany Italy
£m £m
Amount by which recoverable amount exceeded the carrying value at 31 January 2006 – –
%%
Key assumptions:
Budgeted EBITDA(1) 0.3 (1.8)
Budgeted capital expenditure(2) 9.3 to 9.0 13.4 to 8.5
Notes:
(1) Compound annual growth rates in the initial five years of the Group’s approved financial plans.
(2) Range of capital expenditure as a percentage of revenue in the initial five years of the Group’s approved plans.
As noted above, there has been an impairment loss recognised in the year ended 31 March 2006 in respect of Germany and Italy, whose carrying values, therefore, equalled their
respective recoverable amounts at 31 January 2006, the date of the Group’s annual impairment test. As a result, any adverse change in key assumption would cause a further
impairment loss to be recognised.