IAS 36 para 134(e), goodwill impairment review, fvlcd, assumptions including margins

TUI AG – Annual report – 30 September 2017

Industry: leisure

Principles and methods underlying the Consolidated Financial Statements (extract)

Key estimates and judgements (extract)

Goodwill

The goodwill reported as at 30 September 2017 has a carrying amount of EUR 2,889.5 m (previous year EUR 2,853.5 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.

(13) Goodwill

Goodwill
EUR million

2017

2016

Historical cost
Balance as at 1 Oct

3,286.7

3,678.8

Exchange differences

– 42.5

– 234.3

Additions

74.9

9.2

Reclassification as assets held for sale

– 167.0

Balance as at 30 Sep

3,319.1

3,286.7

Impairment
Balance as at 1 Oct

– 433.2

– 458.4

Exchange differences

3.6

25.0

Reclassification as assets held for sale

0.2

Balance as at 30 Sep

– 429.6

– 433.2

Carrying amounts as at 30 Sep

2,889.5

2,853.5

The increase in the carrying amount is mainly attributable to the acquisition of Transat France S.A. Detailed information on the acquisitions is presented in the section on Consolidation principles and methods. A reduction was caused by the translation of goodwill not carried in TUIGroup’s reporting currency into euros.

In accordance with 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. As with 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 and disclosed as a separate item. In financial year 2017, a decrease in the carrying amount of goodwill of EUR 38.9 m (previous year decrease of EUR 209.3 m) resulted from foreign exchange differences.

The following table presents a breakdown of goodwill by cash generating unit (CGU) at carrying amounts:

Goodwill per cash generating unit
EUR million

30 Sep 2017

30 Sep 2016

Northern Region

1,217.0

1,545.1

Central Region

510.2

507.7

Western Region

411.2

338.8

Destination Services

86.0

94.3

Riu

351.7

351.7

Marella Cruises

289.2

Other

24.2

15.9

Total

2,889.5

2,853.5

The hotel company Blue Diamond Hotels & Resorts Inc., St Michael, Barbados, which was carried in the Northern Region segment in the prior year, was integrated into and is now carried in the Hotels & Resorts segment in the completed financial year. Moreover, the British cruise business Marella Cruises was reclassified from the Northern Region segment to the Cruises segment in financial year 2017. Accordingly, the prorated goodwill was transferred to these businesses from Northern Region.

In the financial year, goodwill was tested for impairment at the level of CGUs as at 30 June 2017.

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 2017, 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. The prior year’s negative EBITA p.a. margin related to a new business segment being established.

Assumptions for calculation of fair value in financial year 2017

Planning ­period in years

Growth rate revenues in % p. a. EBITA-­Margin  in % p. a. Growth rate after planning period in % WACC in %

Level

Northern Region

3.25

5.6 3.9 1.0 5.25

3

Central Region

3.25

4.5 1.1 1.0 5.25

3

Western Region

3.25

6.4 3.0 1.0 5.25

3

Destination Services

3.25

5.5 8.8 1.0 5.25

3

RIU

3.25

4.9 33.1 1.0 6.25

3

Marella Cruises

3.25

11.7 17.5 1.0 5.25

3

Other

3.25

17.3 to 79.1 3.7 to 19.7 1.0 6.25 to 7.00

3

 

Assumptions for calculation of fair value in financial year 2016

Planning ­period in years

Growth rate revenues in % p. a. (restated) EBITA-­Margin  in % p. a. (restated) Growth rate after planning period in % WACC in %

Level

Northern Region

3.25

10.7 6.1 0.5 6.75

3

Central Region

3.25

7.9 1.1 0.5 6.75

3

Western Region

3.25

7.8 2.8 0.5 6.75

3

Destination Services

3.25

5.0 6.1 0.5 6.75

3

RIU

3.25

3.7 26.3 0.5 5.75

3

Other

3.25

24.4 to 93.1 – 4.7 to + 15.7 0.5 5.75

3

Goodwill was tested for impairment as at 30 June 2017. 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 the growth rate of perpetuity of 10 %.

 

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