IAS 36 para 134 (f) sensitivity analysis, reasonably possible change in assumption would result in impairment

Swisscom Ltd – Annual report – 31 December 2017

Industry: telecoms

3.3 Goodwill

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Swisscom amended its organisational structure and dissolved the Small and Medium-Sized Enterprises Swisscom Switzerland segment and merged the Health division into the segment Enterprise Customers Swisscom Switzerland (see Note 1.1). The segment Small and Medium-Sized Enterprises Swisscom Switzerland consisted of the cash-generating units Telecommunications Business with small and medium-sized enterprises in Switzerland (SME telecommunications business) and Swisscom Directories. The SME telecommunications business was fully merged into the organisation and business processes of the Residential Customers Swisscom Switzerland unit. Accordingly, the previous goodwill amounting to CHF 656 million was transferred to the cash-generating unit Residential Clients Swisscom Switzerland. The goodwill of Swisscom Directories continues to be classified in the consolidated financial statements under other cash-generating units. In connection with the merger of Health division, goodwill amounting to CHF 25 million was transferred to the cash-generating unit Enterprise Customers Swisscom Switzerland.

Impairment testing

In the fourth quarter of 2017 and after completion of business planning, individual goodwill amounts were subjected to an impairment test. The recoverable amount of a cash-generating unit is determined based on its value in use, using the discounted cash flow (DCF) method. The projected free cash flows are estimated on the basis of the business plans approved by management. In general, the business plans cover a three-year period. A planning horizon of five years is used for the impairment test of Fastweb. For the free cash flows extending beyond the detailed planning period, a terminal value was computed by capitalising the normalised cash flows using an assumed long-term constant growth rate. The growth rates applied are those customarily assumed for the country or market. The discount rate is derived from the Capital Asset Pricing Model (CAPM). This latter comprises the weighted cost of own equity and external borrowing costs. For the risk-free interest rate underlying the discount rate, the yield from government bonds (abroad – Germany) with a duration of 10 years and a zero-interest rate is used, subject to a minimum interest rate of 1.5% (Switzerland) and 2.0% (abroad). In the prior year, a minimum interest rate of 2.5% (Switzerland) and 3.0% (abroad) was used. For cash-generating units abroad, a risk premium for the country risk is then added.

Discount rates and long-term growth rates

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The discount rates used take into consideration the specific risks relating to the cash-generating unit being considered. The projected cash flows and management assumptions are corroborated by external sources of information.

Results and sensitivity of impairment tests

Residential Customers and Enterprise Customers Swisscom Switzerland

As of the measurement date, the recoverable amount at all cash-generating units, based on their value in use, was higher than the carrying amount relevant for the impairment test. Swisscom believes none of the anticipated changes in key assumptions which can rationally be expected would cause the carrying amount of the cash-generating units to exceed the recoverable amount.

Fastweb

As of the date of the impairment test, no impairment of goodwill resulted. The recoverable amount exceeded the net carrying amount by EUR 332 million (CHF 386 million). In the prior year, the difference amounted to EUR 710 million (CHF 768 million). The following changes in material assumptions lead to a situation where the value in use equates to the net carrying amount:

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