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 2020

Industry: support services

9 GOODWILL (extract)

1. Goodwill relating to the Group’s geographical segments of Europe and Rest of World has been reclassified to reflect a change in the way those segments are managed by the chief operating decision maker: Turkey is now part of the Europe segment. Goodwill of £47 million has been reclassified from Rest of World to Europe for the year ended 30 September 2019.

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amount of a cash-generating unit (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 five year period. 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 five year period 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. Growth and discount rates relating to the Group’s geographical segments of Europe and Rest of World has been reclassified to reflect a change in the way those segments are managed by the chief operating decision maker: Turkey is now part of the Europe segment. Residual growth rates in Europe range from 0.7% to 3.8%, with the exception to Turkey which has a 10.6% growth rate.

Although the impact of COVID-19 is not expected to significantly impact the long term prospects of the different CGUs within the business, the size of the short term shock of the pandemic combined with higher discount rates and lower long term growth rates due to continued global economic uncertainty have reduced the level of headroom in certain CGUs in comparison to 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. Sensitivity analysis for the year ended 30 September 2020 has identified the UK CGU as being sensitive to reasonably possible changes in key assumptions. The Group has also considered the instability caused by the UK’s decision to exit the European Union (Brexit) when assessing the future performance of the UK business. The UK goodwill principally relates to the Granada transaction in 2001. The estimated recoverable amount of the Group’s operations in the UK exceed its carrying value by £285 million.

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 discount rate would have to be increased by 0.6% or operating cash flow decreased by 11% or the long term growth rate decreased to 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.