Goodwill is allocated to the appropriate CGUs according to the type of business and where it operates. The CGUs represent the identifiable assets for which an active market exists and which generate independent cash flows for the Group.
External and internal factors surrounding the business operations play a role in determining an indication of impairment. In addition the carrying amount of goodwill is subject to an annual impairment test. Impairment tests are carried out on all goodwill balances within each CGU.
Impairment of goodwill arises when the recoverable amount of the CGU, including goodwill is less than the carrying value. The recoverable amount is determined as the greater of the fair value less costs to sell or the value in use. It is difficult to use the fair value less costs to sell as a reliable estimate is not easily obtainable in determining the recoverable amount. Therefore the value in use method is used to assess the goodwill for impairment.
Key assumptions used in value in use calculations
Cash flow projections
The value in use is calculated using the forecasted cash inflows and outflows which are expected to be derived from continuing use of the CGU and its ultimate disposal. Cash flow projections for financial forecasts are based on expected revenue, operating margins, working capital requirements and capital expenditure, which were approved by senior management.
The expected revenues were based on market share assumptions, volume growth and price increases. No significant change in market share was assumed during the forecasted period and is based on the average market share in the period immediately before the forecast period. Volume growth was based on average growth experienced in recent years. The exchange rates used in the cash flow projections were consistent with external sources of information.
Operating margins reflect past experience but adjusted for any expected changes for the individual CGU’s.
These cash flow projections cover a five-year forecast period, which are then extrapolated into perpetuity using applicable terminal growth rates.
The key assumptions used in arriving at projected cash flows were as follows:
Logistics Africa - Revenue growth and the operating margins.
Logistics International - Market share assumptions and operating margins.
Vehicle import, distribution and dealerships - Volume growth, and exchange rates affecting the purchase price in relation to the vehicle selling price increases.
Vehicle retail, rental and after market parts - Market share assumptions and operating margins.
Growth rates
Growth rates applied during the five year forecasted period were determined based on future trends within the industry, geographic location and past experience within the operating divisions. Growth rates can fluctuate from year to year based on the assumptions used to determine these rates.
The Group used steady growth rates (terminal growth rates) to extrapolate revenues beyond the forecasted period, which were consistent with publicly available information relating to long-term average growth rates for each of the markets in which each of the respective
CGUs operates.
Discount rates applied
The discount rates present the current market assessment of the risks for each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow projections. The discount rate calculations are derived from the CGU’s weighted average cost of capital and takes into account both the cost of debt and the cost of equity.
The cost of equity was arrived at by using the capital asset pricing model (CAPM) which, where necessary, takes into account an equity risk premium and a small stock premium. The CAPM uses market betas of comparable entities in arriving at the cost of equity. The cost of debt is based on the interest-bearing borrowings the CGU is obliged to service.
The debt to equity ratio was determined by applying market value weights based on theoretical target gearing levels, giving consideration to industry averages and using data of comparable entities. |