23. Goodwill and intangible assets

Million CHF

Goodwill

Intangible assets

1

Restated due to changes in accounting policies, see note 2.

2015

 

 

At cost of acquisition

7,377

1,597

Accumulated amortization/impairment

(247)

(996)

Net book value as at January 1

7,130

601

Merger with Lafarge (see note 4)

11,611

1,030

Other change in structure

(834)

(61)

Reclassification

0

(30)

Additions

0

88

Disposals

0

(19)

Amortization

0

(132)

Impairment loss (charged to statement of income)

(962)

(40)

Currency translation effects

(456)

(20)

Net book value as at December 31

16,490

1,416

 

 

 

At cost of acquisition

17,698

2,584

Accumulated amortization/impairment

(1,209)

(1,168)

Net book value as at December 31

16,490

1,416

 

 

 

20141

 

 

At cost of acquisition

7,082

1,532

Accumulated amortization/impairment

(246)

(929)

Net book value as at January 1

6,836

603

Change in structure

(2)

0

Reclassification from assets classified as held for sale

20

13

Additions

0

32

Disposals

0

0

Amortization

0

(66)

Impairment loss (charged to statement of income)

(1)

0

Currency translation effects

277

20

Net book value as at December 31

7,130

601

 

 

 

At cost of acquisition

7,377

1,597

Accumulated amortization/impairment

(247)

(996)

Net book value as at December 31

7,130

601

Intangible assets have finite useful lives, over which the assets are amortized. The corresponding amortization expense is recognized mainly in administration expenses.

Intangible assets mainly consist of mining rights, trademarks and brands.

During the fourth quarter 2015, the Group carried out an extensive portfolio review and identified a number of brands being in local decline therefore resulting in an aggregate impairment charge of CHF 40 million. No asset impairment was deemed to be individually material.

Impairment tests for goodwill

For the purpose of impairment testing, goodwill is allocated to a cash-generating unit or to a group of cash-generating units that are expected to benefit, among others, from the synergies of the business combination. The Group’s cash-generating units are defined on the basis of the geographical market, normally country- or region-related. The carrying amount of goodwill allocated to the countries or regions stated below is significant in comparison with the total carrying amount of goodwill, while the carrying amount of goodwill allocated to the other cash-generating units is individually not significant.

For the impairment test, the recoverable amount of a cash-generating unit, which has been determined based on value in use, is compared to its carrying amount. An impairment loss is only recognized if the carrying amount of the cash-generating unit exceeds its recoverable amount. Future cash flows are discounted using the weighted average cost of capital (WACC).

The cash flow projections are based on a three-year financial planning period using business plans approved by management. Cash flows beyond the three-year budget period are extrapolated based on increasing sustainable cash flows. In any event, the growth rate used to extrapolate cash flow projections beyond the three-year budget period does not exceed the long-term average growth rate for the relevant market in which the cash-generating unit operates.

In respect of the goodwill allocated to “Others”, the same impairment model and parameters are used, as is the case with individually significant goodwill positions, except that different key assumptions are used depending on the risks associated with the respective cash-generating units.

Key assumptions used for value-in-use calculations in respect of goodwill 2015

Cash-generating unit (Million CHF)

Carrying amount of goodwill

Currency

Pre-tax discount rate

Long-term growth rate

1

Individually not significant.

North America

4,495

USD/CAD

7.6%

2.1%

Algeria

1,709

DZD

9.3%

4.0%

India

1,669

INR

10.4%

4.0%

France

1,215

EUR

8.0%

1.9%

United Kingdom

1,058

GBP

7.0%

1.9%

Nigeria

998

NGN

12.8%

7.0%

Central Europe West

624

CHF/EUR

6.5%

1.3%

Philippines

475

PHP

10.0%

4.0%

Poland

456

PLN

8.1%

3.0%

Mexico

450

MXN

8.8%

4.0%

Others1

3,341

Various

6.4%–12.8%

1.2%–7.5%

Total

16,490

 

 

 

Key assumptions used for value-in-use calculations in respect of goodwill 20141

Cash-generating unit (Million CHF)

Carrying amount of goodwill

Currency

Pre-tax discount rate

Long-term GDP growth rate

1

Restated due to changes in accounting policies, see note 2.

2

Individually not significant.

North America

1,788

USD/CAD

7.1%

2.4%

India

1,257

INR

9.9%

6.6%

United Kingdom

843

GBP

6.8%

2.8%

Central Europe

510

CHF/EUR

6.1%

1.3%

Philippines

393

PHP

9.5%

5.0%

Mexico

374

MXN

8.3%

4.0%

France Benelux

288

EUR

7.1%

1.6%

Australia

233

AUD

7.5%

2.9%

Eastern Europe

274

Various

8.0%

3.6%

Others2

1,170

Various

6.7%–28.5%

1.3%–8.4%

Total

7,130

 

 

 

The merger between Holcim and Lafarge resulted in recognizing a provisional goodwill of CHF 11,611 million (see note 4), which is subject to change upon finalization of the accounting of the business combination.

IAS 36 Impairment of assets requires goodwill to be tested for impairment whenever there are indications that goodwill may be impaired. Due to the weaker than anticipated outlook for the macro-economic environment, especially in terms of expected growth rates and cement demand for countries such as China and Brazil, as well as the development of the LafargeHolcim share price, management performed an impairment test on the provisional goodwill during the fourth quarter 2015 and hence provisionally allocated this goodwill to the Group’s cash-generating units.

Subsequent to the completion of the impairment test performed on the provisional goodwill, management recognized a goodwill impairment charge of CHF 962 million relating to certain cash-generating units (country- or region-related).

The cash-generating units included in “Others” comprise the following impairment charges:

  • a goodwill impairment charge relating to Brazil of CHF 421 million and since insufficient goodwill was available to absorb this amount, an additional impairment charge of CHF 358 million was recognized for property, plant and equipment. A pre-tax discount rate of 7.7 percent was used to calculate the recoverable amount, which was measured based on value in use. The reportable segment for Brazil is Latin America;
  • a goodwill impairment charge relating to Iraq of CHF 228 million. A pre-tax discount rate of 11.6 percent was used to calculate the recoverable amount, which was measured based on value in use. The reportable segment for Iraq is Middle East Africa;
  • a goodwill impairment charge relating to Russia of CHF 185 million and since insufficient goodwill was available to absorb this amount, an additional impairment charge of CHF 106 million was recognized for property, plant and equipment. A pre-tax discount rate of 9.0 percent was used to calculate the recoverable amount, which was measured based on value in use. The reportable segment for Russia is Europe; and
  • a goodwill impairment charge relating to Spain of CHF 112 million. A pre-tax discount rate of 6.4 percent was used to calculate the recoverable amount, which was measured based on value in use. The reportable segment for Spain is Europe.

The total recoverable amount of countries that were impaired for goodwill amounted to CHF 2.5 billion.

In accordance with IFRS 3 Business Combinations, the provisional purchase accounting is subject to change up to 12 months after the acquisition date. Any change made to the provisional fair values of the identifiable assets acquired and liabilities assumed would impact goodwill which may result in a retrospective adjustment to the provisional goodwill impairment charge of CHF 962 million.

Sensitivity to changes in assumptions

With regard to the assessment of value in use of a cash-generating unit or a group of cash-generating units, management believes that except for the countries listed below, a reasonably possible change in the pre-tax discount rate of 0.5 percentage point, and a 0.25 percentage point change in long-term growth rate, would not cause the carrying amount of a cash-generating unit or a group of cash-generating units to materially exceed its recoverable amount. With the used pre-tax discount rate of 6.4 percent and 11.6 percent, the impairment tests for Spain and Iraq resulted in recoverable amounts equal to their carrying amounts. For the countries listed below, a change in the pre-tax discount rate and long-term growth rate would have the following impacts:

Sensitivity to changes in assumptions

Cash-generating unit

Used pre-tax discount rate

Used long-term growth rate

Excess of recoverable amount over carrying amount (Million CHF)

Break-even pre-tax discount rate using the used long-term growth rate

Break-even long-term growth rate using the used pre-tax discount rate

Belgium

7.5%

1.8%

7

7.7%

1.6%

Australia/New Zealand

7.9%

2.6%

73

8.2%

1.9%

India

10.4%

4.0%

114

10.6%

3.6%

Argentina

11.2%

6.0%

1

11.2%

6.0%