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Note 10 Goodwill and other intangible assets continued
Impairment of goodwill
Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis, or more frequently if there are indications
that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at which
management monitor that goodwill.
Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs of disposal. Value in use is calculated from
cash flow projections for generally five years using data from the Group’s latest internal forecasts, the results of which are reviewed by the Board. The key
assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimates
discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units.
Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market. Giventhe current economic climate,
a sensitivity analysis has been performed in assessing the recoverable amounts of goodwill.
The pre-tax discount rates used to calculate value in use range from 7% to 11% (2013: 7% to 12%). On a post-tax basis, the discount rates range from 6% to
8% (2013: 5% to 10%). These discount rates are derived from the Group’s post-tax weighted average cost of capital, as adjusted for the specific risks relating
to each cash-generating unit.
The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of 2% to 3% (2013: 1% to 5%).
In February 2014 and 2013 impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the
cash-generating units to which goodwill has been allocated.
In July 2013, the European Commission announced proposed changes in regulation which would cap interchange fees on consumer debit and credit cards.
The regulation remains draft and it is unclear at this stage how and when the proposals will be finally implemented. Transaction fees on credit cards represent
a significant part of the Tesco Bank business so any limitation on interchange fees may have an impact of the carrying value of goodwill for that business.
Given the uncertainty surrounding the outcome of the proposed changes, no change to existing interchange fees has been considered as part of goodwill
impairment testing for Tesco Bank at this time.
The components of goodwill are as follows: 2014
£m
2013
£m
China –649
Malaysia 74 86
South Korea 475 514
Tesco Bank 802 802
Thailand 145 173
UK 761 701
Other 29 29
2,286 2,954
Goodwill related to China was reclassified to discontinued operations in the year.
An impairment charge of £495m was made in the previous year and arose from Poland (£373m), Czech Republic (£69m) and Turkey (£53m) CGUs
(all included in the European operating segment). This loss was recognised in the cost of sales line in the Group Income Statement.
90 Tesco PLC Annual Report and Financial Statements 2014
Notes to the Group financial statements continued