Brexit risks, car manufacturer, potential impairment trigger though none yet identified

Jaguar Land Rover Automotive plc – Annual report – 31 March 2018

Industry: automotive

CHIEF EXECUTIVE OFFICER’S STATEMENT (extract)

Our external environment (extract)

As a company operating in multiple territories, with major import–export movements, heavy regulatory obligations and the need for specialised skills, we favour a policy and trading environment that protects tariff-free, fair and frictionless trade and regulatory harmonisation. Continuing EU recognition of vehicle homologation approvals issued by the UK is a pre-requisite.

While we respect the democratic decision of the UK people, Jaguar Land Rover is seeking clarification and certainty on the terms of Britain’s withdrawal from the European Union. It is of paramount importance that the UK Government preserves as many benefits of the Single Market and Customs Union as possible, for our workforce, wider business and the complete automotive supply chain ecosystem.

OUR PRINCIPAL RISKS (extract)

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18 INTANGIBLE ASSETS (extract)

IMPAIRMENT TESTING

The directors are of the view that the operations of the Group represent a single cash-generating unit. The intellectual property rights are considered to have an indefinite useful life on the basis of the expected longevity of the brand names.

For the periods presented, the recoverable amount of the cash-generating unit has been calculated with reference to its value in use. The key assumptions of this calculation are shown below:

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The growth rates used in the value in use calculation reflect those inherent within the Group’s business plan as approved by the JLR plc Board, which is primarily a function of the Group’s cycle plan assumptions, past performance and management’s expectation of future market developments through to 2022/23. The business plan also considers other key assumptions, such as volume forecasts, exchange rates, commodity prices, production capacity and costs, fixed costs and tax rates. The cash flows are then extrapolated into perpetuity assuming a growth rate as stated above and is set with reference to projected GDP growth of the countries in which the Group operates.

SENSITIVITY TO KEY AND OTHER ASSUMPTIONS

The sensitivity analysis below has been presented in the interests of transparency only. It is not believed that any reasonably possible movement in key and other assumptions will lead to an impairment.

Sensitivity analysis has been completed on each key assumption in isolation. This indicates that the value in use calculation will be equal to its carrying value with an increase in the pre-tax discount rate of 4.0 per cent (2017: 4.5 per cent, 2016: 4.1 per cent) or a reduction in the growth rates used to extrapolate cash flows beyond the five-year period of the Group’s business plan of 5.3 per cent (2017: 4.0 per cent, 2016: 3.2 per cent). In addition, a reduction in EBIT margin of 3.5 per cent in the terminal year (2017: 3.2 per cent, 2016: 2.3 per cent) will result in the value in use calculation being equal to its carrying amount.

As disclosed on page 82–83, the Group considers the key assumptions in the cash flow forecasts to be sales volumes, exchange rates, commodity rates, production capacity and costs and capital expenditure. It continues to monitor on a periodic basis the impact of certain future strategic (implications of Brexit, increasing tariffs), operational (diesel uncertainty), legal and compliance (environmental regulations and compliance) and financial risks (competitive business efficiency, exchange rate fluctuations) in order to assess whether an impairment trigger has occurred. In particular, certain Brexit scenarios and tariff scenarios could lead to an impairment trigger, although none has been identified as at 31 March 2018.

The Group continues to assess the potential impacts of Brexit. Until the Brexit negotiations are sufficiently concluded, it is not possible to determine with certainty the full financial impact to the Group and impact on the value in use calculation, if any.

 

 

 

 

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