TUI AG – Annual report – 30 September 2018
Principles and methods underlying the Consolidated Financial Statements (extract)
Key judgements, assumptions and estimates (extract)
ASSUMPTIONS AND ESTIMATES (extract)
The goodwill reported as at 30 September 2018 has a carrying amount of € 2,958.6 m (previous year € 2,889.5 m). The determination of the recoverable amount of a Cash Generating Unit (CGU) for the annual impairment test requires estimates and judgement with regard to the methodology used and the assumptions, which may have a considerable effect on the recoverable amount and the level of a potential impairment. They relate, in particular, to the weighted average cost of capital (WACC) after income taxes, used as the discounting basis, the growth rate in perpetuity and the forecasts for future cash flows including the underlying budget assumptions based on corporate planning. Changes in these assumptions may have a substantial impact on the recoverable amount and the level of a potential impairment.
The increase in the carrying amount is mainly attributable to the acquisition of Destination Management worth € 82.3 m in Q4 2018. Moreover, the carrying amount grew due to the acquisition of stakes in hotel companies (GBH Turizm Ticaret A. S. worth € 9.1 m and Darecko S. A. worth € 6.5 m) and the acquisition of Cruisetour AG and Croisimonde AG worth € 5.6 m. In the prior year, the additions mainly arose from the acquisition of Transat France S. A.
The disposal of € 8.6 m results from the sale of three RIUSA II Group hotel companies. More detailed information on the acquisitions and divestments is presented in the section on Principles and methods of consolidation. A reduction was caused by the translation of goodwill not carried in TUI Group’s reporting currency into euros.
In accordance with the rules of IAS 21, goodwill allocated to the individual segments and sectors was recognised in the functional currency of the subsidiaries and subsequently translated when preparing the consolidated financial statements. Similar to the treatment of other differences from the translation of annual financial statements of foreign subsidiaries, differences due to exchange rate fluctuations between the exchange rate at the date of acquisition of the subsidiary and the exchange rate at the balance sheet date are taken directly to equity outside profit and loss and disclosed as a separate item. In FY 2018, a decrease in the carrying amount of goodwill of € 26.1 m (previous year decrease of € 38.9 m) resulted from foreign exchange differences.
The following table presents a breakdown of goodwill by cash generating unit (CGU) at carrying amounts:
In the completed financial year, goodwill was tested for impairment at the level of CGUs as at 30 June 2018.
For all CGUs, the recoverable amount was determined on the basis of fair value less costs of disposal. The fair value was determined by means of discounting the expected cash inflows. This was based on the Q4 forecast for the financial year and on the medium-term plan for the entity under review, prepared as at 30 September 2018, following deduction of income tax payments. Budgeted turnover and EBITA margins are based on empirical values from prior financial years and expectations with regard to the future development of the market.
The discount rates are calculated as the weighted average cost of capital, taking account of country-specific risks of the CGU and based on external capital market information. The cost of equity included in the determination reflects the return expected by investors. The cost of borrowing is derived from the long-term financing terms of comparable companies in the peer group.
The table below provides an overview of the parameters underlying the determination of the fair values per CGU. It shows the timeframe for the cash flow forecast, the growth rates used to extrapolate the cash flow forecast, the discount rates and the relevant valuation hierarchy according to IFRS 13. The table lists the CGUs to which goodwill has been allocated. The below stated EBITA margin p. a. is adjusted for reasonable discounts for centrally incurred cost.
Goodwill was tested for impairment as at 30 June 2018. The test did not result in a requirement to recognise any further impairment. Neither an increase in WACC by 50 basis points nor a reduction by 50 basis points in the growth rate after the detailed planning period would have led to an impairment of goodwill. The same applies to a reduction of the discounted free cash flow in perpetuity of 10 %.