CITY PHARMACY LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2017
14. Goodwill Net Carrying Value 31 December 2016 Impairment expense Net Carrying value 31 December 2017
CONSOLIDATED
PARENT COMPANY
K’000
K’000 20,522
3,431
(15,582)
–
4,940
3,431
Significant Accounting Policies Goodwill represents the excess of the cost of an acquisition over the fair value of the share of the net identifiable assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Impairment of non-financial assets: The carrying amounts of the Group’s goodwill is reviewed for impairment at least annually and when there is an indication that the asset may be impaired Calculation of recoverable amount The recoverable amount of an asset is the greater of its value in use (“VIU”) and its fair value less costs to dispose (“FVLCTD”). An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Statement of Profit or Loss and Other Comprehensive Income. Impairment losses recognised in respect of the CGU will be allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU on a pro-rata basis to their carrying amounts.
Key assumptions Key assumptions used in determining the recoverable amount of assets include expected future cash flows, long-term growth rates (terminal value assumptions) and discount rates. In assessing VIU, estimated future cash flows are based on the Group’s latest internal forecasts reviewed by the Board covering a period not exceeding five years. Cash flows beyond the forecast period are extrapolated using estimated long-term growth rates. In assessing FVLCTD, estimated future cash flows are based on the Group’s latest Board approved strategic plan. Cash flow forecasts beyond the period covered by the strategic plan are based on estimated long-term growth rates. Goodwill has been allocated for impairment testing purposes to the following cash-generating units. • City Pharmacy Limited • Hardware Haus Limited • Pharmacy Wholesalers Limited
City Pharmacy Limited The recoverable amount of this cash generating unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by the Directors covering a five-year period, and a discount rate of 15% per annum (2016: 18 to 24%). Cash flow projections during the budget period are based on the same expected gross margin and inventories price inflation throughout the budget period. The cash flow beyond that five year period have been extrapolated using a steady 5% (2016: 6%) per annum growth rate which is the projected long-term average growth rate. The Directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash generating unit.
Hardware Haus Limited The recoverable amount of this cash generating unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by the Directors covering a five-year period, and a discount rate of 15% per annum (2016: 15%). Cash flow projections during the budget period are based on the same expected gross margin and inventories price inflation throughout the budget period. The cash flow beyond that five year period have been extrapolated using a growth rate of 0% in 2019 and a steady 4% for the four years after that (2016: 6%) which is the projected long-term average growth rate. The Directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash generating unit. For both VIU and FVLCTD models, long-term growth rates are based on past experience, expectations of external market operating conditions, and other assumptions which take account of the specific features of each business unit. Terminal value growth is based on an estimated long-term growth rate of generally 4%, and does not exceed industry growth rates for the business in which the CGU operates. In this regard, the cash flow projections are based on assumptions that would be 56
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