REC Silicon Annual Report 2019

50 Notes to the consolidated financial statements, REC Silicon Group REC Silicon Annual Report 2019 IMPAIRMENTS OF CASH-GENERATING UNITS RECSilicon routinelymonitors assets for indications that the carrying values of assets are no longer recoverable. If impairment indicators exist, impairment tests will be carried out to determine whether the carrying value of affected assets can be justified. If estimates conclude that asset values are no longer recoverable, the assets are written down to the recoverable amount which is the greater of fair value less cost to sell and value in use (discounted cash flows). CASH-GENERATING UNITS REC Silicon consisted of two cash generating units at December 31, 2019 and 2018 Management has performed an evaluation of the Company’s operations and determined that the Group consisted of two cash generating units (CGUs) based upon the Company’s operations and management structures. This determination included consideration for segment reporting which includes segments for Solar Materials and Semiconductor Materials which were determined by management to represent the smallest units for which cash flows can be reasonably determined. Net Costs associated with Other have been allocated to the individual CGUs based upon estimated activity, volume, and revenue factors. SUMMARYOF IMPAIRMENTTESTS During 2019, the shutdown of the FBR facility in Moses Lake, decreases in the Company’s market capitalization, recurring net operating losses, and continued uncertain market conditions for solar grade polysilicon were determined to be indicators of impairment for the Solar Materials Segment. Accordingly, impairment testing was performed at June 30, 2019, September 30, 2019, and December 31, 2019 on the Solar Materials CGU. The net carrying value of the Solar Materials CGU exceeded the resulting value in use calculated at June 30, 2019. Therefore, additional impairments of USD 20.0million were made against the property, plant, and equipment of the of the Solar Materials CGU at June 30, 2019. Impairment testing performed at September 30, 2019 and December 31, 2019 on the Solar Materials CGU resulted in estimated values in use that approximated the carrying value of the Solar Materials CGU. Consequently, no additional impairment or reversal of impairment was recognized at September 30, 2019 or December 31, 2019. During 2018, changes in solar grade polysilicon market conditions, production capacity curtailments due to uncertainty caused by trade barriers imposed by China, and carrying values in excess of the value of the Company’s market capitalization were determined to be indicators of impairment for the Solar Materials Segment. Impairment testing was performed at June 30, 2018 on both CGUs and resulted in the recognition of net impairment expense of USD 340.5million. The net carrying value of the Solar Materials CGU exceeded the resulting value in use calculated at June 30, 2018. Therefore, an additional impairment of USD 396.7million was taken against the property, plant and equipment of the Solar Materials CGU at June 30, 2018. Impairment testing was performed on the Semiconductor Materials CGU because of the determination that the Company consisted on two CGUs. The resulting value in use of the Semiconductor Materials CGU exceeded the net carrying value at June 30, 2018. Therefore, net impairments to the Semiconductor Materials CGU recorded during previous periods of USD 56.3million were reversed. Impairment testing was also performed at September 30, 2018 and December 31, 2018 on the Solar Materials CGU only. At these dates, the resulting value in use was estimated to approximate the carrying value of the Solar Materials CGU. Consequently, no additional impairment or reversal of impairment was recognized at December 31, 2018. Impairments charges are included in the line item “impairment” in the statement of income. BASIS FOR THE IMPAIRMENTTESTS Recoverable amounts for each cash-generating unit subject to impairment testing are based on value in use. Value in use has been estimated using discounted cash flows over a 5-year period with the last year used as a basis for estimating terminal value. Future cash flows are estimated on the basis of the budget for the next year and the subsequent four forecast years. A terminal value is calculated from the estimated cash flows generated in the last forecast year. A growth rate of zero has been used during the terminal period for both years presented. EBITDA less capital expenditures and changes in working capital have been used to estimate future cash flows. Future cash flows do not include the effects of improvements or enhancements to asset performance. However, assets under construction for which investment has been committed are included with estimated expenditures to complete and estimated cash flows from their operations. The carrying amounts of cash-generating units include tangible fixed assets, intangible assets, and net working capital only. DISCOUNT RATE The discount rate applied is based on the Company’s cost of capital which has been estimated using the weighted average of the required rates of return for the Company’s equity and debt (WACC). The required rate of return for the Company’s equity is estimated using the capital assets pricing model (CAPM). The required rate of return on debt is estimated on the basis of a risk-free rate of return plus a credit risk premium derived from analysis of the debt costs and loading of public companies similar to REC Silicon. The discount rate is estimated on an after-tax basis and adjusted to estimate the equivalent before tax discount rate using the Company’s estimated before and after-tax cash flows and evaluated for reasonableness. The discount rates used at December 31, 2019 and 2018 are reflected in the table below: 8