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Notes to the Consolidated Financial Statements

Notes 6-10

10. Impairment

Impairment losses

The impairment losses recognised in the Consolidated Income Statement, as a separate line item within operating profit, in respect of goodwill are as follows:

  Reportable segment 2008
£m		 2007
£m		 2006
£m
Germany Germany – 6,700 19,400
Italy Italy – 4,900 3,600
Sweden Other Europe – – 515
    – 11,600 23,515

Germany

During the year ended 31 March 2007, the goodwill in relation to the Group’s mobile operation in Germany was impaired by £6.7 billion following a test for impairment triggered by an increase in long term interest rates and increased price competition in the German market along with continued regulatory pressures.

The impairment loss for the year ended 31 March 2006 of £19.4 billion was determined as part of the annual test for impairment and was as a result of the intensification in price competition, principally from new market entrants, together with high levels of penetration and continued regulated reductions in incoming call rates.

The pre-tax risk adjusted discount rate used in the testing at 31 March 2007 was 10.6% (31 January 2007: 10.5%, 30 September 2006: 10.4%, 31 January 2006: 10.1%).

Italy

During the year ended 31 March 2007, the goodwill in relation to the Group’s mobile joint venture in Italy was impaired by £4.9 billion. During the second half of the 2007 financial year, £3.5 billion of the impairment loss resulted from the estimated impact of legislation cancelling the fixed fees for the top up of prepaid cards and the related competitive response in the Italian market. At 30 September 2006, the goodwill was impaired by £1.4 billion, following a test for impairment triggered by an increase in long term interest rates.

The impairment loss for the year ended 31 March 2006 of £3.6 billion was due to competitive pressures increasing with the mobile network operators competing aggressively on subsidies and, increasingly, on price.

The pre-tax risk adjusted discount rate used in the testing at 31 March 2007 was 11.5% (31 January 2007: 11.2%, 30 September 2006: 10.9%, 31 January 2006: 10.1%).

Sweden

The impairment of the carrying value of goodwill of the Group’s mobile operation in Sweden in the year ended 31 March 2006 resulted from fierce competition in the Swedish market combined with onerous 3G licence obligations.

Prior to its disposal in the year ended 31 March 2006, the carrying value of goodwill was tested for impairment as increased competition provided an indicator that the goodwill may have been further impaired. The recoverable amount of the goodwill was determined as the fair value less costs to sell, reflecting the announcement on 31 October 2005 that the Group’s 100% interest in Vodafone Sweden was to be sold for €953 million (£653 million). The sale completed on 5 January 2006.

Goodwill

The carrying value of goodwill at 31 March was as follows:

  2008
£m		 2007
£m
Germany 10,984 9,355
Italy 13,205 11,125
Spain 12,168 10,285
  36,357 30,765
Other 14,979 9,802
  51,336 40,567

Key assumptions used in the value in use calculations

The key assumptions used in determining the value in use are:

Assumption How determined
Budgeted EBITDA Budgeted EBITDA, calculated as adjusted operating profit before depreciation and amortisation, has been based on past experience adjusted for the following:

  • voice and messaging revenue is expected to benefit from increased usage from new customers, the introduction of new services and traffic moving from fixed networks to mobile networks, though these factors will be partially offset by increased competitor activity, which may result in price declines, and the trend of falling termination rates;
  • non-messaging data revenue is expected to continue to grow strongly as the penetration of 3G enabled devices rises and new products and services are introduced; and
  • margins are expected to be impacted by negative factors such as an increase in the cost of acquiring and retaining customers in increasingly competitive markets and the expectation of further termination rate cuts by regulators and by positive factors such as the efficiencies expected from the implementation of Group initiatives.
Budgeted capital expenditure The cash flow forecasts for capital expenditure are based on past experience and includes the ongoing capital expenditure required to provide enhanced voice and data products and services and to meet the population coverage requirements of certain of the Group’s licences. Capital expenditure includes cash outflows for the purchase of property, plant and equipment and computer software.
Long term growth rate For mobile businesses where the first five years of the ten year management plan are used for the Group’s value in use calculations, a long term growth rate into perpetuity has been determined as the lower of:

  • the nominal GDP rates for the country of operation; and
  • the long term compound annual growth rate in EBITDA in years six to ten of the management plan.
For mobile businesses where the full ten year management plans are used for the Group’s value in use calculations, a long term growth rate into perpetuity has been determined as the lower of:

  • the nominal GDP rates for the country of operation; and
  • the compound annual growth rate in EBITDA in years nine to ten of the management plan.
For non-mobile businesses, no growth is expected beyond management’s plans for the initial five year period.
Pre-tax risk adjusted discount rate The discount rate applied to the cash flows of each of the Group’s operations is based on the risk free rate for ten year bonds issued by the government in the respective market, adjusted for a risk premium to reflect both the increased risk of investing in equities and the systematic risk of the specific Group operating company. In making this adjustment, inputs required are the equity market risk premium (that is the required increased return required over and above a risk free rate by an investor who is investing in the market as a whole) and the risk adjustment (“beta”) applied to reflect the risk of the specific Group operating company relative to the market as a whole.

In determining the risk adjusted discount rate, management has applied an adjustment for the systematic risk to each of the Group’s operations determined using an average of the betas of comparable listed mobile telecommunications companies and, where available and appropriate, across a specific territory. Management has used a forward looking equity market risk premium that takes into consideration both studies by independent economists, the average equity market risk premium over the past ten years and the market risk premiums typically used by investment banks in evaluating acquisition proposals.

Key assumptions for the Group’s operations in Germany and Italy are disclosed below under “Sensitivity to changes in assumptions”. During the year ended 31 March 2008, the most recent value in use calculation for Group’s operations in Spain was based on a pre-tax risk adjusted discount rate of 10.6% (2007: 9.7%) and long term growth rate of 1.4% (2007: 3.2%).

Sensitivity to changes in assumptions

Other than as disclosed below, management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of any cash generating unit to exceed its recoverable amount.

31 March 2008

As of 31 January 2008, the date of the Group’s annual impairment test, the estimated recoverable amount of the Group’s operations in Germany and Italy exceeded their carrying value by £2,700 million and £3,400 million respectively. The table below shows the key assumptions used in the value in use calculation and the amount by which each key assumption must change in isolation in order for the estimated recoverable amount to be equal to its carrying value in both cases.

  Assumptions used in value
in use calculation		   Change required for carrying value
to equal the recoverable amount
  Germany
%		 Italy
%		   Germany
Percentage points		 Italy
Percentage
points
Pre-tax adjusted discount rate 10.2 11.5 1.6 2.7
Long term growth rate 1.2 0.1   (1.7) (3.0)
Budgeted EBITDA(1) (2.2) 1.4   (2.0) (4.2)
Budgeted capital expenditure(2) 7.5 to 8.7 5.8 to 9.5   4.2 6.6
Notes:
(1) Budgeted EBITDA is expressed as the compound annual growth rates in the initial five years of the Group’s approved management plans.
(2) Budgeted capital expenditure is expressed as the range of capital expenditure as a percentage of revenue in the initial five years of the Group’s approved management plans.

31 March 2007

Germany

The estimated recoverable amount of the Group’s operations in Germany equalled its carrying value and, consequently, any adverse change in a key assumption could have caused a further impairment loss to be recognised.

The last value in use calculation during the year ended 31 March 2007 was based on the following assumptions:

  • Pre-tax risk adjusted discount rate of 10.6%;
  • Long term growth rate of 1.2%;
  • Budgeted EBITDA, expressed as the compound annual growth rates in the initial five years of the Group’s approved management plans, of (4.2)%; and
  • Budgeted capital expenditure, expressed as the range of capital expenditure as a percentage of revenue in the initial five years of the Group’s approved management plans, of 7.5-7.0%.
Italy

The estimated recoverable amount of the Group’s operations in Italy equalled its carrying value and, consequently, any adverse change in a key assumption could have caused a further impairment loss to be recognised.

The last value in use calculation during the year ended 31 March 2007 was based on the following assumptions:

  • Pre-tax risk adjusted discount rate of 11.5%;
  • Long term growth rate of 1.0%;
  • Budgeted EBITDA, expressed as the compound annual growth rates in the initial five years of the Group’s approved management plans, of (3.8)%; and
  • Budgeted capital expenditure, expressed as the range of capital expenditure as a percentage of revenue in the initial five years of the Group’s approved management plans, of 11.4-8.7%.
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