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 and licences and spectrum fees are as follows:
Cash generating unit |
Reportable segment |
2009 £m |
2008 £m |
2007 £m |
|---|---|---|---|---|
| Spain | Spain | 3,400 | – | – |
| Turkey | Other Africa and Central Europe | 2,250 | – | – |
| Ghana | Other Africa and Central Europe | 250 | – | – |
| Germany | Germany | – | – | 6,700 |
| Italy | Italy | – | – | 4,900 |
| 5,900 | – | 11,600 |
Year ended 31 March 2009
The impairment losses were based on value in use calculations. The pre-tax adjusted discount rate used in the most recent value in use in the year ended 31 March 2009 calculation are as follows:
| Pre-tax adjusted discount rate |
|
|---|---|
| Spain | 10.3% |
| Turkey(1) | 19.5% |
| Ghana | 26.9% |
Note:
- (1)
- The pre-tax adjusted discount rate used in the value in use calculation at 30 September 2008 was 18.6%.
Spain
During the year ended 31 March 2009, the goodwill in relation to the Group’s operations in Spain was impaired by £3,400 million following a fall in long term cash flow forecasts resulting from the economic downturn.
The pre-tax risk adjusted discount rate used in the previous value in use calculation at 31 January 2008 was 10.6%.
Turkey
During the year ended 31 March 2009, the goodwill and other intangible assets in relation to the Group’s operations in Turkey was impaired by £2,250 million. At 30 September 2008, the goodwill was impaired by £1,700 million following adverse movements in the discount rate and adverse performance against previous plans. During the second half of the 2009 financial year, impairment losses of £300 million in relation to goodwill and £250 million in relation to licences and spectrum resulted from adverse changes in both the discount rate and a fall in the long term GDP growth rate. The cash flow projections within the business plans used for impairment testing were substantially unchanged from those used at 30 September 2008.
The pre-tax risk adjusted discount rate used in the previous value in use calculation at 31 January 2008 was 16.2%.
Ghana
During the year ended 31 March 2009, the goodwill in relation to the Group’s operations in Ghana was impaired by £250 million following an increase in the discount rate. The cash flow projections within the business plan used for impairment testing was substantially unchanged from the acquisition business case.
Year ended 31 March 2007
Germany
During the year ended 31 March 2007, the goodwill in relation to the Group’s mobile operation in Germany was impaired by £6,700 million following an increase in long term interest rates and increased price competition in the German market along with continued regulatory pressures.
The impairment loss was based on a value in use calculation using a pre-tax risk adjusted discount rate at 31 March 2007 of 10.6% (31 January 2008: 10.2%; 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 £4,900 million. During the second half of the 2007 financial year, £3,500 million 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 £1,400 million, following an increase in long term interest rates.
The impairment loss was based on a value in use calculation using a pre-tax risk adjusted discount rate at 31 March 2007 of 11.5% (31 January 2008: 11.5%; 31 January 2007: 11.2%; 30 September 2006: 10.9%; 31 January 2006: 10.1%).
Goodwill
The carrying value of goodwill at 31 March was as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Germany | 12,786 | 10,984 |
| Italy | 15,361 | 13,205 |
| Spain | 10,561 | 12,168 |
| 38,708 | 36,357 | |
| Other | 15,250 | 14,979 |
| 53,958 | 51,336 |
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 has been based on past experience adjusted for the following:
|
| Budgeted capital expenditure | The cash flow forecasts for capital expenditure are based on past experience and includes the ongoing capital expenditure required to roll out networks in emerging markets, 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 businesses where five years of management plan data is used for the Group’s value in use calculations, a long term growth rate into perpetuity has been determined as the lower of:
For businesses where the ten years of management plan data is used for the Group’s value in use calculations, a long term growth rate into perpetuity has been determined as the lower of:
|
| 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, where possible 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. |
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 2009
The estimated recoverable amount of the Group’s operations in Spain, Turkey and Ghana equalled their respective carrying value and, consequently, any adverse change in key assumption would, in isolation, cause a further impairment loss to be recognised. The estimated recoverable amount of the Group’s operations in the UK, Ireland, Romania, Germany and Italy exceeded their carrying value by approximately £900 million, £60 million, £300 million, £9,250 million and £2,200 million respectively. The tables below show the key assumptions used in the value in use calculation and, for the UK, Ireland, Romania, Germany and Italy, 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 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Spain % |
Turkey(1) % |
Ghana % |
UK % |
Ireland % |
Romania % |
Germany % |
Italy % |
|
| Pre-tax adjusted discount rate | 10.3 | 19.5 | 26.9 | 8.6 | 10.2 | 14.8 | 8.5 | 11.8 |
| Long term growth rate | 1.1 | 7.5 | 7.3 | 1.0 | − | 1.1 | 1.1 | − |
| Budgeted EBITDA(2) | (3.9) | 22.3 | 37.2 | (2.8) | (3.5) | (3.1) | n/a | 2.2 |
| Budgeted capital expenditure(3) | 9.1 to 11.8 | 8.2 to 69.8 | 7.7 to 91.6 | n/a | n/a | n/a | 5.5 to 9.7 | 7.7 to 9.9 |
Notes:
- (1)
- The assumptions listed in the table were used in the value in use calculation at 31 March 2009. The pre-tax adjusted discount rate, long term growth rate, budgeted EBITDA and budgeted capital expenditure assumptions used in the value in use calculation at 30 September 2008 were 18.6%, 10.0%, 13.1% and 8.2% to 54.7%.
- (2)
- Budgeted EBITDA is expressed as the compound annual growth rates in the initial ten years for Turkey and Ghana and the initial five years for all other cash generating units of the plans used for impairment testing.
- (3)
- Budgeted capital expenditure is expressed as the range of capital expenditure as a percentage of revenue in the initial ten years for Turkey and Ghana and the initial five years for all other cash generating units of the plans used for impairment testing.
| Change required for carrying value to equal the recoverable amount |
|||||
|---|---|---|---|---|---|
| UK pps |
Ireland pps |
Romania pps |
Germany pps |
Italy pps |
|
| Pre-tax adjusted discount rate | 0.9 | 0.2 | 2.2 | 3.3 | 1.4 |
| Long term growth rate | (1.1) | (0.3) | (3.4) | (3.9) | (1.5) |
| Budgeted EBITDA(1) | (6.9) | (1.6) | (9.0) | n/a | (9.1) |
| Budgeted capital expenditure(2) | n/a | n/a | n/a | 23.8 | 8.5 |
Notes:
- (1)
- Budgeted EBITDA is expressed as the compound annual growth rates in the initial five years of the plans used for impairment testing.
- (2)
- Budgeted capital expenditure is expressed as the range of capital expenditure as a percentage of revenue in the initial five years of the plans used for impairment testing.
The changes in the following table to assumptions used in the impairment review would, in isolation, lead to an (increase)/decrease to the aggregate impairment loss recognised in the year ended 31 March 2009:
| Spain | Turkey | Ghana | All other | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase by 2% £bn |
Decrease by 2% £bn |
Increase by 2% £bn |
Decrease by 2% £bn |
Increase by 2% £bn |
Decrease by 2% £bn |
Increase by 2% £bn |
Decrease by 2% £bn |
||||
| Pre-tax adjusted discount rate | (2.1) | 3.3 | (0.4) | 0.6 | (0.04) | 0.05 | (2.1) | – | |||
| Long term growth rate | 3.4 | (1.9) | 0.3 | (0.2) | 0.01 | (0.01) | – | (1.5) | |||
| Budgeted EBITDA(1) | 0.4 | (0.3) | 0.1 | (0.1) | 0.02 | (0.01) | – | – | |||
| Budgeted capital expenditure(2) | (0.4) | 0.4 | (0.1) | 0.1 | (0.02) | 0.02 | – | – | |||
Notes:
- (1)
- Represents the compound annual growth rate for the initial ten years for Turkey and Ghana and the initial five years for all other cash generating units of the plans used for impairment testing.
- (2)
- Represents capital expenditure as a percentage of revenue in the initial ten years for Turkey and Ghana and the initial five years for all other cash generating units of the plans used for impairment testing.
31 March 2008
The estimated recoverable amount of the Group’s operations in Germany and Italy exceeded their carrying value by approximately £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 pps |
Italy pps |
||
| 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 plans used for impairment testing.
- (2)
- Budgeted capital expenditure is expressed as the range of capital expenditure as a percentage of revenue in the initial five years of the plans used for impairment testing.