Food Lion 2006 Annual Report Download - page 72

Goodwill is allocated and tested for impairment at the operating entity level,
which is the lowest level at which goodwill is monitored for internal management
purpose. Delhaize Group conducts an annual impairment assessment for goodwill
in the fourth quarter of each year and whenever events or circumstances indicate
that impairment may have occurred. The impairment test of goodwill involves
comparing the recoverable amount of each operating entity with its carrying
value, including goodwill. The recoverable amount of each operating entity is
determined based on the higher of value in use calculations and the fair value
less cost to sell. The value in use calculations use cash flow projections based on
financial plans approved by management covering a five-year period. Cash flows
beyond the five-year period are extrapolated using estimated growth rates. The
growth rate does not exceed the long-term average growth rate for the supermar-
ket retail business. The fair value less cost to sell of each operating company is
based on earnings multiples paid for similar companies in the market and market
capitalization for publicly traded subsidiaries. In 2006, 2005 and 2004, goodwill
was tested for impairment using the discounted cash flows methodology and
comparing to market multiples for reasonableness for the U.S. entities. Goodwill
at the other Group entities was tested for impairment using the market multiple
approach and market capitalization approach and discounted cash flows if the
market approach indicated that there was potential impairment. An impairment
loss is recorded if the carrying value exceeds the recoverable amount.
In 2006, EUR 17.1 million goodwill associated with Delvita was classified as held
for sale and was fully impaired upon writing down the value of Delvita to fair
value less costs to sell (see Note 5). No impairment loss was recorded in 2005
and 2004.
Key assumptions used for value in use calculations in 2006:
Food Lion Hannaford
Growth rate* 2.0% 2.0%
Discount rate** 8.8% 8.8%
* Weighted average growth rate used to extrapolate sales beyond the five-year period.
** After tax discount rate applied to the cash flow projections.
8. Intangible Assets
Intangible assets consist primarily of trade names, purchased and developed
software, favorable lease rights and prescription files and other licenses.
Delhaize Group has determined that its trade names have an indefinite useful
life and are not amortized but tested for impairment in the fourth quarter of every
year and whenever events or circumstances indicate that impairment may have
occurred. Trade names are tested for impairment by comparing their recoverable
value with their carrying amount. The value in use of trade names is estimated
using revenue projections of each operating entity and applying an estimated
royalty rate of 0.45% and 0.70% for Food Lion and Hannaford, respectively. No
impairment loss of trade names was recorded in 2006, 2005 or 2004.
See Note 9 for a discussion of the impairment test for assets with definite lives.
7. Goodwill
(in millions of EUR) 2006 2005 2004
Gross carrying amount at January 1 3,081.1 2,536.2 2,587.7
Accumulated impairment at January 1 (83.7) (73.4) (77.6)
Net carrying amount at January 1 2,997.4 2,462.8 2,510.2
Acquisitions through business combinations and adjustments to initial purchase accounting (0.9) 165.9 137.8
Amount classified as held for sale (17.1) - -
Transfers to/from other accounts 1.1 4.7 (0.2)
Currency translation effect (282.9) 364.0 (185.0)
Gross carrying amount at December 31 2,775.1 3,081.1 2,536.2
Accumulated impairment at December 31 (77.5) (83.7) (73.4)
Net carrying amount at December 31 2,697.6 2,997.4 2,462.8
The allocation of goodwill is as follows:
(in millions of EUR) 2006 2005 2004
Food Lion 1,282.0 1,429.4 1,231.8
Hannaford 1,159.6 1,293.7 1,109.4
United States 2,441.6 2,723.1 2,341.2
Belgium 159.6 162.5 18.3
Greece 94.2 93.5 86.0
Emerging Markets 2.2 18.3 17.3
Total 2,697.6 2,997.4 2,462.8
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