UDG Healthcare plc – Annual report – 30 September 2017
- Goodwill (extract)
Goodwill acquired through business combinations has been allocated to cash generating units (CGUs) for the purpose of impairment testing. The CGUs represent the lowest level within the Group at which associated goodwill is monitored for management purposes and is not bigger than the segments determined in accordance with IFRS 8 Operating Segments. Significant under-performance in any of the Group’s major CGUs may give rise to a material write-down of goodwill which would have a substantial impact on the Group’s income and equity. A total of nine (2016: eight) CGUs have been identified.
The carrying value of goodwill and the number of CGUs are analysed between the operating segments in the Group below.
In accordance with IAS 36 Impairment of Assets, the CGUs to which significant amounts of goodwill (greater than 10% of the total value) have been allocated are as follows:
The value in use and excess of value in use over the carrying amount of the above significant CGUs are as follows:
Impairment Testing of Cash Generating Units (CGUs) Containing Goodwill
The Group tests goodwill for impairment on an annual basis or more frequently if there is an indication that the goodwill may be impaired. This testing involves determining the CGU’s value in use and comparing this to the carrying amount of the CGU. Where the value in use exceeds the carrying value of the CGU, the asset is not impaired, but where the carrying amount exceeds the value in use, an impairment loss is recognised to reduce the carrying amount of the CGU to its value in use. Estimates of value in use are key judgemental estimates in the Financial Statements. A number of key assumptions have been made as a basis for the impairment tests. In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external sources of information.
Value in Use Calculations
Where a value in use approach is used to assess the recoverable amount of the CGU, calculations use pre-tax cash flow projections based on financial budgets and projections covering a five year period. The cash flow forecasts used for the value in use computations exclude incremental profits and other cash flows derived from planned acquisition activities. For individual CGUs, forecasts for up to four years have been approved by senior management. The remaining year’s forecasts have been extrapolated using growth rates of 1% to 10% (2016: 2% to 10%) based on the historical annual growth experience of individual CGUs. For the purposes of calculating terminal values, a terminal growth rate of 2.5% (2016: 2.5%) has been adopted. The value in use of each CGU is calculated using a discount rate representing the Group’s estimated weighted average cost of capital, adjusted to reflect risks associated with each CGU. The pre-tax discount rates range from 8.1% to 12.5% (2016: 8.0% to 13.6%). The pre-tax discount rates used for significant CGUs are detailed in the table below.
The key assumptions used for the value in use computations are that the markets will grow in accordance with publicly available data, the Group will maintain its current market share, gross margins will be maintained at current levels and overheads will increase in line with expected levels of inflation. The cash flow forecasts assume appropriate levels of capital expenditure and investment in working capital to support the growth in individual CGUs.
The Group did not impair goodwill in the current year nor in the prior year.
Additional Sensitivity Analysis
The Group has conducted a sensitivity analysis on each of the CGUs. For the purposes of performing sensitivity analysis, each individual discount rate was increased by 2% and the terminal growth rate was reduced to 2%. Applying these assumptions did not indicate any impairment.