Axactor Annual Report 2016

Note 14 Impairment testing of intangible assets with an in-definite life time Goodwill and intangible assets stated in the consolidated financial position was derived from the acquisition of ALD Abogados in 2015. Followed by new acquisitions in 2016 of IKAS Group in Norway, CS Union in Italy and the Altor Group in Germany. Recognised goodwill amounts to SEK 511,7 million as of 31 December 2016, and intangible assets related to customer relations amounts to SEK 145,7 million, databases amount to SEK 53,3 million and Software and other intangibles amounts to SEK 34,3 million. Only goodwill has an un-definite life time, as all other intangible assets are amortized, ref Note 13. Goodwill and intangible assets with an indefinite life are tested for impairment for each cash generating unit (CGU). The group only have two CGU – Portfolio management and third party collection. Goodwill and intangible assets with an indefinite life are tested for impairment annually, and when there are indications of impairment. The recoverable amount for the CGU has been determined estimating their Value in Use (VIU), and comparing that against the carrying amount of the CGU. The calculation of VIU has been based on management's best estimate, reflect- ing the Group's financial planning process. The discount rates are derived as the weighted average cost of capital (WACC) for a similar business in the same business environment. Cash flow projections and assumptions A five-year forecast of discounted cash flows plus a terminal value (Gordon's growth model) was used to determine net present value of the CGU. Discounted cash flows were calculated after tax and applying a WACC after tax. Estimated cash flow covering the period 2017-2021 consist of approved budgets for 2016 and estimates for 2017 and 2020. The cash flow projections have been extrapolated based on an expected growth rate of 2% and the same for the operating margins. According to management these are reasonable assumptions based on the development of the business and the strategic plan. Terminal value is based on 2021. Key assumptions for the value in use calculations The calculation of VIU for the CGU is most of all sensitive when it comes to the following assumptions: Discount rate: The input data for the WACC is gathered from representative sources, peer groups etc., and this is used to determine best estimate. The WACC was calculated after tax. All parameters were set to reflect the long-term period of the assets and time horizon of the forecast period of the cash flows. Key inputs for the WACC for the CGU: ·· Risk free rate: 10-year Spanish governmental bond ·· Beta (equity): Assuming no external debt in the company – therefore unlevered beta from peer group used. ·· Market risk premium: The market risk premium is based on empirical data for risk premium (Domodran). ·· Company specific premium: The company specific premium is based in the size of the CGU and according to Ibbotson analysis. ·· Capital structure: Equity ratio of 100%. Growth rate The growth rate in the forecast period is based on manage- ment's expectation to the development in the market, and management's strategic plan. The terminal growth rate is based on long term inflation targets in the markets where the CGU operates. Cash Flow The calculation includes cash flows for five years, in addition to terminal. Cash Flow estimates are based on the budget plan approved by the Board of Directors. The cash flow shows expectation of gross profit improvement and revenue growth handled by the existing organization. Sensitivity analysis for key assumptions Impairment testing showed that headroom for the CGU is >60%. An additional sensitivity analysis was performed. The sensitivity analysis showed that with a terminal growth rate of 0% or an increase in the WACC of 1% the VIU was still above the carrying amount for the CGU. Impairment - test results and conclusion The VIU exceeds carrying amount for the CGU. The impair- ment test did not indicate a requirement for write-down. Axactor AB | Annual report 2016 48