IAS 36 para 134(f), Goodwill impairment review, COVID – 19, reasonably possible changes that would cause carrying amount to equal recoverable amount

Compass Group PLC – Annual report – 30 September 2021

Industry: support services

8 GOODWILL (extract)

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. Consistent with the monitoring and management of the business, the cash-generating units (CGU) relate to the total business for each country in which the Group operates. The recoverable amount of a CGU is determined from value in use calculations. The key assumptions for these calculations are externally derived long term growth rates, pre-tax discount rates and operating cash flow forecasts (revenue and operating margins) derived from the most recent financial budgets and forecasts approved by management covering a period of up to five years. Budgets and forecasts are based on expectations of future outcomes taking into account past experience, adjusted for anticipated revenue growth, from both new business and like for like growth, and taking into consideration external economic factors, including the impact of COVID-19. Cash flows beyond the period covered by the budgets and forecasts are extrapolated using estimated growth rates based on local expected economic conditions and do not exceed the long term average growth rate for that country. The pre-tax discount rates are based on the Group’s weighted average cost of capital adjusted for specific risks relating to the country in which the CGU operates.

1. Rest of Europe includes Turkey which has residual growth rate and pre-tax discount rate assumptions of 9.4% (2020: 10.6%) and 24.1% (2020: 25.8%), respectively. Excluding Turkey, the residual growth rate and pre-tax discount rate assumptions for Rest of Europe range from 0.9% to 4.0% (2020: 0.7% to 3.8%) and 9.3% to 14.0% (2020: 7.5% to 11.8%), respectively.

Although the impact of COVID-19 is not expected to significantly impact the long term prospects of the Group’s CGUs, the size of the short term shock of the pandemic combined with higher discount rates have reduced the level of headroom in certain CGUs in comparison with the prior year. The Group has performed a sensitivity analysis based on changes in key assumptions considered to be reasonably possible by management leaving all other assumptions unchanged. The UK CGU is sensitive to reasonably possible changes in key assumptions. The UK goodwill principally relates to the Granada transaction in 2001. The estimated recoverable amount of the Group’s operations in the UK exceeds its carrying value by £102 million (2020: £285 million). The reduction in headroom on prior year mainly reflects an increase in the pre-tax discount rate and, from 1 April 2023, the increase in the UK tax rate. The associated impact of changes in key assumptions on the impairment assessment is presented in the table below. The sensitivity analysis presented is prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment review.

In order for the recoverable amount to be equal to the carrying value, the pre-tax discount rate would have to be increased by 0.5% (2020: 0.6%), operating profit decreased by 5% (2020: 11%) or the long term growth rate decreased to 1.1% (2020: 1%). The directors consider that changes in key assumptions of this magnitude are reasonably possible in the current environment.

Other than as disclosed above, the directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the net operating assets of the individually significant CGUs disclosed above to fall below their carrying values.