Marks and Spencer 2016 Annual Report Download - page 111

Download and view the complete annual report

Please find page 111 of the 2016 Marks and Spencer annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 132

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

109
ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
OUR BUSINESSOUR PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
14 INTANGIBLE ASSETS CONTINUED
Impairment testing
Goodwill is not amortised, but tested annually for impairment with the recoverable amount being determined from value in use
calculations. Goodwill has been allocated for impairment testing purposes to groups of CGUs which include the combined retail and
wholesale businesses for each location.
Brands include the per una brand cost of £80.0m (net book value £18.7m). The per una brand is a defi nite life intangible asset amortised on
a straight line basis over a period of 15 years and is only assessed for impairment where such indicators exist. At the beginning of the year,
the Group also held the M&S Mode brand at a cost of £32.4m. The M&S Mode brand was attributed an indefi nite life as it gave the Group the
future right to use the ‘M&S’ brand in certain countries across Europe. Similar to goodwill, the M&S Mode brand is assessed for impairment
annually based on its value in use. The M&S Mode brand has been assessed for impairment across those European businesses.
The value in use calculations use cash fl ows based on budgets prepared by management covering a three-year period. These budgets
have regard to historic performance and knowledge of the current market, together with management’s views on the future achievable
growth and the impact of committed initiatives. The cash fl ows which derive from the budgets include ongoing capital expenditure
required to maintain the store network. Cash fl ows beyond this three-year period are extrapolated using a long-term growth rate to
10 years or perpetuity.
Other than the detailed budgets, the key assumptions in the value in use calculations are the long-term growth rate and the risk
adjusted pre-tax discount rate. The long-term growth rate has been determined with reference to forecast GDP growth for the territories
in which these businesses operate. Management believe this is the most appropriate indicator of long-term growth rates that is available.
The long-term growth rate used is purely for the impairment testing of goodwill and brands under IAS 36 ‘Impairment of Assets’ and does
not refl ect long-term planning assumptions used by the Group for investment proposals or for any other assessments. These growth rates
do not exceed the long-term average growth rate for the Group's retail businesses. The pre-tax discount rate is based on the Group’s
weighted average cost of capital, taking into account the cost of capital and borrowings, to which specifi c market-related premium
adjustments are made.
In the period the following impairment charges have been recognised (within non-underlying items) by the Group.
> The performance of the Czech Group during the year has been heavily impacted by challenging trading conditions and weakening
currencies. These have impacted the business's ability to improve profi tability year-on-year. As a result, the future cash fl ows of the
business are no longer considered able to support the carrying value of the goodwill resulting in a full impairment of the goodwill
balance of £15.8m. This asset was reported within the International segment.
> The Hungarian retail market has been impacted by challenging trading conditions resulting in a decrease in gross profi t and reduced
expectations of future growth. As a result, the future cash fl ows of the business no longer support the carrying value of the goodwill
resulting in a full impairment of the goodwill balance of £3.3m being recognised in the International segment.
> The M&S Mode brand was acquired in 2011 giving the Group the right to use the M&S brand in European markets. The valuation of this asset
is supported by the cash fl ows of both owned and franchised European businesses. The deterioration in the current year trading
performance across several of these markets (most notably Greece, France, the Czech Group and Hungary) and the consequential
impact on expected future year cash fl ows have resulted in the carrying value of the brand no longer being supportable. As a result
a full impairment of £32.4m has been recognised in the year, also within the International segment.
> E-SAP is an enterprise management system used solely by the owned businesses in G reece, the Czech Republic and Hungar y.
As highlighted above, the expected future cash fl ows of these countries have been impacted by challenging trading conditions and
weakening currencies. As a result, the cash fl ows can no longer support the carrying value of the E-SAP system and an impairment
charge of £18.7m has been recognised in the year in intangibles (with an additional £0.6m in fi xtures, fi ttings and equipment).
> As part of the ongoing review of the Clothing & Home business, signifi cant changes in both the trading strategy and the store ranging
strategy were made. As a result of these changes, two modules within the new supply chain management system will no longer be used
and as a result investment in those modules has been written o , resulting in a one-o charge of £23.7m.
The values attributed to the key assumptions are as follows:
Long-term growth rate Pre-tax discount rate
2016
%
2015
%2016
%
2015
%
per una 2.0 2.0 8.3 8.6
Czech Group 3.9 1.9 10.5 10.1
India 7.3 6.8 17.2 15.4
UK 1.9 –10.5 –
Hungary 3.2 1.4 16.1 11. 0
The M&S Mode brand is tested based on the regions operating in the European business which are covered under the brand rights acquired.
The discount rates used to calculate value in use range from 12.9% to 30.2% (last year 9.3% to 27.9%). Cash fl ows beyond the three-year period
have been extrapolated at long-term growth rates ranging from 0.0% to 3.5% (last year 1.0% to 4.0%).
Sensitivity analysis
Whilst management believe the assumptions are realistic it is possible that a further impairment would be identifi ed for per una, UK or India
if any of the above key assumptions were changed signifi cantly. A sensitivity analysis has been performed on each of these key assumptions
with other variables held constant. Management have concluded that there are no reasonably possible changes in any key assumptions that
would cause the carrying amount of goodwill or brands to exceed the value in use.