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95
Tesco PLC Annual Report and Financial Statements 2013
OVERVIEW BUSINESS REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS
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 to sell. 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 12% (2012: 6% to 17%). On a post-tax basis, the discount rates range
from 5% to 10% (2012: 5% to 13%). 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 geographical region.
The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of 1% to 5% (2012: 1% to 5%).
In February 2013 and 2012 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.
The components of goodwill are as follows:
2013
£m
2012
£m
China 649 622
Czech Republic – 73
Malaysia 86 86
Poland – 388
South Korea 514 479
Tesco Bank 802 802
Thailand 173 165
Turkey – 46
UK 701 681
US – 102
Other 29 5
2,954 3,449
An impairment charge of £495m (2012: £nil) arose in the year in Poland (£373m), Czech Republic (£69m) and Turkey (£53m) CGUs (all included in
the European operating segment) following a period of difficult economic and trading conditions. This loss has been recognised in the cost of sales
line in the Group Income Statement. The pre-tax discount rates used to calculate the value in use for Poland, Czech Republic and Turkey CGUs were
9% (2012: 11%), 7% (2012: 9%) and 12% (2012: 16%) respectively.