Carphone Warehouse 2016 Annual Report Download - page 119

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9 Goodwill continued
b) Goodwill impairment testing
As required by IAS 36, goodwill is subject to annual impairment reviews. These reviews are carried out using the
following criteria:
• business acquisitions generate an attributed amount of goodwill;
• the manner in which these businesses are run and managed is used to determine the CGU grouping as defined in IAS 36
‘Impairment of Assets’;
• the recoverable amount of each CGU group is determined based on calculating its value in use (VIU);
• the VIU is calculated by applying discounted cash flow modelling to management’s own projections covering a five-year
period;
• cash flows beyond the five-year period are extrapolated using a long-term growth rate equivalent to long-term forecasts
of Gross Domestic Product (GDP) growth rates for the relevant market; and
• the VIU is then compared to the carrying amount in order to determine whether impairment has occurred.
The key assumptions used in calculating value in use are:
• management’s projections;
• the growth rate beyond five years; and
• the pre-tax discount rate.
The long term projections, which have been approved by management, have been prepared using three-year strategic plans as
a base extrapolated to five years and which have regard to the relative performance of competitors and knowledge of the current
market together with management’s views on the future achievable growth in market share and impact of the committed
initiatives. The cash flows which derive from these five-year projections include ongoing capital expenditure required to develop
and upgrade the store network in order to maintain and operate the businesses and to compete in their markets. In forming the
five-year projections, management draws on past experience as a measure to forecast future performance.
Key assumptions used in determining the five year projections comprise the growth in sales and costs over this period. The
compound annual growth rate in sales and costs can rise as well as fall year-on-year depending not only on the year five targets,
but also on the current financial year base. These targets, when combined, accordingly drive the resulting profit margins and the
profit in year five of the projections which is in turn used to calculate the terminal value in the VIU calculation. Historical amounts
for the businesses under impairment review as well as from other parts of the Group are used to generate the values attributed
to these assumptions.
The value attributed to these assumptions for the most significant components of goodwill are as follows:
30 April 2016 2 May 2015
Compound
annual
growth
in sales
Compound
annual
growth
in costs
Growth rate
beyond
five years
Pre-tax
discount
rate
Compound
annual
growth
in sales
Compound
annual
growth
in costs
Growth rate
beyond
five years
Pre-tax
discount rate
UK – Carphone Warehouse 2.8% 2.6% 2.1% 8.8% 3.2% 2.5% 2.9% 9.5%
UK & Ireland – Dixons 2.3% 2.1% 2.1% 8.8% 2.3% 2.0% 2.9% 9.5%
Nordics 4.4% 4.3% 2.0% 8.1% 4.9% 4.8% 2.2% 8.5%
Growth rates used were determined based on third party long-term growth rate forecasts and are based on the GDP growth rate
for the territories in which the businesses operate. The pre-tax discount rates applied to the forecast cash flows reflect current
market assessments of the time value of money and the risks specific to the CGUs.
c) Goodwill impairment sensitivity analysis
A sensitivity analysis has been performed on each of the base case assumptions used for assessing the goodwill with other
variables held constant. Consideration of sensitivities to key assumptions can evolve from one financial year to the next.
The directors have concluded that there are no reasonably possible changes in key assumptions which would cause the carrying
amount of goodwill to exceed its value in use.
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