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84 IHG Annual Report and Financial Statements 2009
12 Goodwill continued
Goodwill has been allocated to cash-generating units (CGUs) for impairment testing as follows:
Cost Net book value
2009 2008 2009 2008
$m $m $m $m
Americas managed operations 141 141 –78
Asia Pacific:
Asia Pacific franchised and managed operations n/a 65 n/a 65
Asia Australasia franchised and managed operations 82 n/a 82 n/a
223 206 82 143
All cumulative impairment losses relate to the Americas managed CGU.
The Group tests goodwill for impairment annually, or more frequently if there are any indications that an impairment may have arisen.
The recoverable amounts of the CGUs are determined from value in use calculations. These calculations use pre-tax cash flow forecasts
derived from the most recent financial budgets and strategic plans approved by management covering a five-year period or, in absence of
up-to-date strategic plans, the financial budget for the next year with an extrapolation of the cash flows for the following four years, using
growth rates based on management’s past experience and industry growth forecasts. After the five-year planning period, the terminal
value of future cash flows is calculated based on perpetual growth rates that do not exceed the average long-term growth rates for the
relevant markets. Pre-tax discount rates are used to discount the cash flows based on the Group’s weighted average cost of capital
adjusted to reflect the risks specific to the business model and territory of the CGU being tested.
Americas goodwill
Americas managed operations, which is both the CGU to which the goodwill is allocated and a segment reported by the Group, have
incurred significant operating losses during the year. These have arisen as a result of the global economic downturn and, in particular,
IHG’s funding obligations under certain management contracts with one US hotel owner. As a consequence, goodwill has been tested
on a quarterly basis during the year using updated five-year projections prepared by management, a perpetual growth rate of 2.7% and
a discount rate of 12.5%. Due to the expectation of continuing losses, the recoverable value of the CGU has declined resulting in the
impairment of the remaining goodwill balance. Total impairment charges of $78m have been recognised; $57m at 30 June 2009 and
$21m at 30 September 2009.
The above impairment charges follow a charge of $63m that was recognised at 31 December 2008 as a result of the onset of the global
economic downturn and a revision to expected fee income. The value in use calculations were based on the cash flows included in the
approved budget for 2009 with an extrapolation over the following four years at growth rates increasing from 1% to 4%, a perpetual growth
rate of 2.7% and a discount rate of 12.5%. Actual performance during 2009 was significantly worse than budgeted and future cash flow
expectations continued to deteriorate throughout the course of the year.
The impairment charges for both years are included within impairment on the face of the Group income statement. As the goodwill has
now been impaired in full, there is no sensitivity around any assumptions that could lead to a further impairment charge.
Asia Pacific goodwill
Following an internal reorganisation during the year, the regional managed and franchised operations now comprise two separate CGUs,
Greater China and Asia Australasia. Goodwill, which was previously tested for impairment at the Asia Pacific regional CGU level, is now
allocated to the smaller Asia Australasia CGU.
At 31 December 2009, the recoverable amount of the CGU has been assessed based on the approved budget for 2010 and strategic plans
covering a five-year period, a perpetual growth rate of 3.5% (2008 4.0%) and a discount rate of 14.2% (2008 16.0%).
Impairment was not required at either year end and management believe that the carrying values of the CGUs would only have exceeded
their recoverable amounts in the event of highly unlikely changes in the key assumptions.
Notes to the Group financial statements continued