AMORTIZATION RATES

 

Description	%
Capitalized development costs	20-33%
Industrial patents and intellectual property rights	4-20%
Concessions, licenses, trademarks and similar rights	16-30%
Other intangible assets	16-30%

 

 

GOODWILL, TRADEMARKS AND OTHER ASSETS WITH AN INDEFINITE USEFUL LIFE

 

A more detailed analysis of the main items making up intangible assets with an indefinite useful life is given in the following charts.

 

Titles and trademarks:

(in thousands of euro)	31.12.2010	31.12.2009
la Repubblica	229,952	229,952
Il Piccolo / Messaggero Veneto	104,527	104,527
Local newspapers	61,222	61,222
Other titles and trademarks	4,544	4,544
Total	400,245	400,245

 

Frequencies:

(in thousands of euro)	31.12.2010	31.12.2009
Radio frequencies	80,618	80,618
Television frequencies	138,283	138,283
Total	218,901	218,901

 

Goodwill:

(in thousands of euro)	31.12.2010	31.12.2009
Utilities sector (Sorgenia group)	267,262	261,990
Media sector ( Editoriale L’Espresso group)	140,038	140,038
Healthcare sector (Kos group)	164,239	121,607
Automotive sector (Sogefi group)	96,077	96,077
Total	667,616	619,712

 

In detail, goodwill was allocated to the cash-generating units (“CGUs”) identified according to the operating sectors of the Group. The chart above shows the allocation of goodwill by operating sector of the Group.

For the purposes of testing for impairment goodwill and other intangible assets with an indefinite useful life, the estimated recoverable value of each cash generating unit, defined in accordance with the terms of IAS 36, was based on value in use, i.e. fair value less costs to sell.

 

Value in use was calculated by discounting to present value future cash flows generated by the unit in the production phase and at the time of its decommissioning at an appropriate discount rate (discounted cash flow method). More specifically, in accordance with what is required by international accounting standards, for checking the value cash flows were considered without taking into account the inflows and outflows generated by financial management or any cash flows relating to tax management. The cash flows to be discounted are, therefore, operating cash flows, which are unlevered and differential (because they refer to the individual units).

The cash flows of the single operating units were extrapolated from the budgets and forecasts made by management. These plans were then processed on the basis of economic trends recorded in previous years and using the forecasts made by leading analysts on the outlook for the respective markets and more in general on the evolution of each business sector.

To give a correct estimate of the value in use of a Cash Generating Unit, it was necessary to value the amount of expected future cash flows of the unit, expectations of any changes in the amount and timing of the flows, the discount rate to be used and any other risk factors affecting the specific unit.

 

In order to determine the discount rate to use, an estimate was made of the weighted average cost of capital invested (WACC)  at sector level, independently of the financial structure of the individual company/subgroup. More specifically, the discount rate used for the media sector was determined gross of tax (WACC pre-tax) while for the other sectors WACC after-tax was used, thus expressing the future cash flows consistently in these cases.

 

The fair value less costs to sell of an asset or a group of assets (e.g. a Cash Generating Unit) is best expressed in the price “made” in a binding sale agreement between independent parties, net of any direct disposal costs. If this information was not available, the fair value net of costs to sell was determined in relation to the following trading prices, in order of importance:

·        the current price traded in an active market; prices for similar transactions effected previously;

·        the estimated price based on information obtained by the company.

 

For estimating the recoverable value of each asset the higher of fair value less costs to sell and value in use was used.

 

The impairment tests carried out on goodwill and other tangible assets with an indefinite useful life using the cash flow method and other valuation methods ascertained that there were no losses in value.

However considering that recoverable value is determined on the basis of estimates, the Group cannot guarantee that goodwill will not be impaired in future periods. Given the current context of market crisis, the various factors used to make the estimates could be revised if conditions prove not to be in line with those on which the forecasts were based. 

 

Below is a description of the tests carried out.

 

Media sector

The impairment test on the media sector, which coincides with the Espresso Group consolidation area, was applied to intangible assets with an indefinite useful life, i.e. the titles and trademarks, the balance sheet value of which is approximately € 400.2 million, the radio and television frequencies, recognized in the balance sheet at approximately € 218.9 million, and the goodwill allocated to the sector for a total of approximately € 140.0 million. This goodwill represents the higher value of acquisition costs compared to the Group’s share of  the relative assets and liabilities, measured at fair value.

 

Below is the main information used to prepare the impairment test for each cash generating unit or group of such units which have a significant value:

·         For the national (La Repubblica) and local newspapers (Il Piccolo/Messagero Veneto and the other local dailies) the criterion of value in use was used;

·         For radio frequencies and the Deejay brand value in use was used;

·         For frequencies and goodwill relating to the television sector the criterion of fair value was used.

 

More specifically, to determine the value in use of the CGUs, the procedure involved application of:

-          the Discounted Cash Flow model, discounting the breakdown of the expected cash flows over the time frame of the business plans (2011-2015) and determining terminal value.

-          The discount rate used was the average cost of invested capital (WACC pre-tax) of the Espresso Group which was 10% (9.1% in 2009).

 

-          fair value less costs to sell, determined using a different methodological approach for the various publishing businesses, for which, because there is no active trading market,  reference was made to direct multipliers for estimating value (Enterprise value/Sales, Enterprise value/EBITDA, Enterprise value/EBIT), and for the radio-television businesses for which a price/users multiple was used (Enterprise value/population reachable by the signal), observing the prices used in the transfer of similar frequencies in terms of the population potentially reachable by the signal.

In order to determine the possible “price” of the publishing Cash Generating Unit, entity side multipliers were used, either in the trailing version (historical/precise multipliers) or in the leading version (expected/average multipliers).

The estimate of fair value less costs to sell of the radio and television operating units was made starting from an observation of the prices for the transfer of frequencies similar to those being tested in relation to the population potentially reachable by the signal. The use of this valuation approach makes it possible to estimate the fair value of radio and television frequencies, correlating the price that the market is prepared to pay for the acquisition of the frequency with the number of inhabitants reachable by the signal.

 

To determine economic results and operating cash flows of the individual CGUs of the Group, reference was made to the business plans for the period 2011-2015 prepared by management on the basis of reasonable hypotheses in line with past evidence. These plans represent the best estimate of the economic conditions likely to exist in the period under consideration. The first year of the plans corresponds to the latest budget prepared for 2011, approved by the Board of Directors on January 19 2011.

Moreover, the current situation of uncertainty in the short and medium term scenario led management to reconsider carefully the expected growth rate of revenues and margins. 

Regarding advertising revenues in particular, overall stability was assumed for 2011 in the amount of advertising in a market for which the main operators in the sector are still forecasting a slight decline. This is because of the improvement of commercial efficiency. As for radio and the internet, growth was assumed of 3% and of 15% respectively, in line with the expected evolution of the sector.

As for circulation revenues, the business plan 2011-2015 assumes a trend for sales of the various titles in line with the trend seen over the last two years, bearing in mind the specific market conditions in which each newspaper operates, especially at local level.

It should also be noted that to determine terminal value a growth rate of zero was used prudentially.

For those cash generating units which show a value of the titles and/or frequencies and/or goodwill that is significant for the purposes of the consolidated financial statements of the Group and for which the results of the impairment test indicate a positive difference between fair value less costs to sell and/or value in use compared to carrying value that is below 50%, a sensitivity analysis was also carried out on the results with changes in the basic assumptions, showing which combination of variables would make the recoverable value of the CGUs equal to their carrying amount.

 

For the publishing CGUs this analysis for the  “Messaggero Veneto” and “Il Piccolo” CGUs gave the following results:

·         For the “Messaggero Veneto” CGU, value in use would appear to be equal to the carrying amount assuming a decline in advertising of 4% and a decline of 6% in the number of copies sold. Alternatively, assuming that the projected circulation and advertising revenues contained in the plan 2011-2015 are correct, value in use would be equal to the carrying amount if the discount rate (WACC pre-tax) were 14.2% instead of the 10% currently used;

·         For the “Il Piccolo” CGU, value in use would be equal to the carrying amount assuming a decline of 1% in the amount of advertising collected and a fall of 4.5% in the number of copies sold. Alternatively, assuming that the assumptions about the trend of circulation and advertising revenues contained in the plan for 2011-2015 are valid, value in use would be equal to the carrying amount if we assume a discount rate for the expected cash flows (WACC pre-tax) of 12.5% instead of the 10% currently used.

 

Furthermore, for the radio and television cash generating units it should be noted that in the determination of  fair value less costs to sell for the radio frequencies the price range used was between 1.5 and 3 times the number of inhabitants reachable by the FM signals of the Radio Deejay, Radio Capital and m2o CGUs, while for the television frequencies a price range of between 3.4 and 3.8 times was used. In the latter case, the fair value of the “Rete A-All Music” CGU would be equal to its carrying amount with an average price multiplier 2.11 times the number of inhabitants reachable by the signal. Given the scarcity of recent transactions in Italy involving television frequencies, the value in use of the television frequencies was also calculated and this confirmed the recoverability of the values recognized in the balance sheet. To do this a rise in revenues was assumed from the rent of bandwidth relating to the changeover from analogue to digital terrestrial technology in line with the national switch-over plan.

 

The impairment test carried out at the close of 2010 on the titles, radio and television frequencies, trademarks and goodwill, which are all considered as assets with an indefinite useful life, showed that there were no impairment losses needing recognition in the financial statements. 

 

A comparison between the values determined from the procedures described and the carrying value in the accounts at December 31 2010 showed that there had been no loss in value.

 

To complete the tests described above, which confirmed that there were no impairment losses at December 31 2010 needing recognition in the accounts, the fair value – expressed in the stock prices of Gruppo Editoriale L’Espresso at December 31 2010 – was compared with the carrying value of the assets held by the Group in the media sector. This comparison further validated the carrying value in the accounts of such assets.

 

 

 

Automotive sector

Goodwill allocated to the automotive sector, which coincides with the consolidation of the Sogefi Group, is equal to approximately € 96.1 million.

For the purposes of the impairment test the group identified four CGUs to which the goodwill from acquisitions was allocated:

-          filters

-          car suspension components

-          industrial vehicle suspension components

-          precision springs.

 

In particular, the goodwill of the Filter Division totals approximately € 77 million, while that of the Car Suspension Components Division is approximately € 17 million.

A test was carried out to check for any impairment of goodwill by comparing the carrying value of the individual CGUs with their respective value in use.

The Unlevered Discounted Cash Flow method was used, based on projections made in the budgets/multiyear business plans for the period 2011-2014, approved by management and on a discount rate of 8.3% (8% in 2009) based on the weighted average cost of capital after tax.

Lastly, terminal value was calculated using the perpetuity formula, assuming a growth rate of 2% and an operating cash flow based on the last year of the multiyear business plan (2014), adjusted to project a stable situation into perpetuity, using the following main assumptions:

-       an overall balance between investments and amortization (considering a level of investment necessary to “maintain” the business);

-       a zero change in working capital (assuming the improvements obtainable from the program of reducing working capital in which the group is engaged as substantially finished in the medium term).

 

The average cost of capital is the result of the weighted cost of debt (calculated as the benchmark rate plus a spread) and of the cost of the company’s own capital, calculated on the basis of parameters for a group of companies operating in the European automotive components sector considered to be the peers of Sogefi by the main financial analysts who follow this business sector. The values used in the calculation of the average cost of capital (extrapolated from the main financial sources) are the following:

-       Financial structure of the sector: 27.7%

-       Unlevered beta of the sector: 1.07

-       Risk free interest rate: 2.9%

-       Risk premium: 5%

-       Spread: 1%

 

Sensitivity analyses were then carried out on two of the above variables assuming a zero growth rate and rise of two percentage points in the calculation of the average cost of capital. In none of the projected scenarios did the need for any write-down emerge.

The test carried out on the present value of projected cash flows would justify a higher level of goodwill than that recorded in this balance sheet and therefore no write-down was contemplated.

 

The results obtained from the analyses carried out through the determination of value in use were amply confirmed by the fair value – expressed in Sogefi’s stock prices at December 31 2010 – of the assets held by the Group in the automotive sector. These values are in fact much higher than the carrying amounts in the financial statements.

Utilities sector

The goodwill allocated to the utilities sector amounts to approximately € 267.3 million, of which € 175.5 million refers to the “Renewables” CGU while approximately € 90 million refers to the Thermal CGU. This goodwill represents the higher value of acquisition costs compared to the Group’s share of the assets and liabilities acquired, measured at fair value.

 

The measurement of the goodwill allocated on the acquisitions made by the Sorgenia Group, for the purposes of the impairment test, is based on the cash flows of the cash generating units. These flows were discounted to present value using the current weighted average cost of capital after tax (WACC after-tax) as the discount rate and analysing in detail existing plants and projecting a time horizon for building new plants based on the state of advancement of the works on projects in progress and, more in general, on the time needed to complete the authorization processes.

The main assumptions used to calculate value in use are the discount rate, the expected useful life of the plants, expectations regarding the performance of investments, revenues and operating costs during the period taken for the calculation and the terminal value of the plants after their initial useful life.

Projected operating cash flows were taken from the Business Plan of the group. More specifically, the operating cash flows were calculated for the whole of the remaining useful life of the wind farms, which is estimated at 25 years.

The parameters used to carry out the impairment test are different in the various business sectors considered and in the different geographical areas of operation. The WACC applied, net of tax, took into account the specific nature of the various initiatives included in the CGUs identified. Specifically for the “Renewables” CGU the WACC varies from a minimum of 4.9% for the Solar businesses, to 8.9% for the Wind Romania initiatives, while for the Thermal CGU the WACC applied, net of tax, varies from 5.79% to 6.1%.

 

Investments for the construction of new wind parks were considered in line with those of the Business Plan. The trend of revenues and direct costs was based on specific assumptions regarding the amount of electricity produceable by existing plants and plants to be built as per the same Plan and were based on reasonable assumptions about electricity prices in line with the regulatory environment and the energy scenario of the Sorgenia Group.

The comparison between value in use calculated as described above and the carrying amount in the balance sheet at December 31 2010 did not reveal any loss of value.

Sensitivity analyses were carried out on the results obtained, assuming a change of +/-0.5% in the calculation of the average cost of capital.

The check carried out on the present value of expected cash flows justified a considerably higher level of goodwill than that recorded in the accounts and thus did not reveal any problematic situations but confirmed the results of the impairment test.

 

Healthcare sector

The goodwill allocated to the healthcare sector, which corresponds to the consolidation area of the KOS Group, amounts to approximately € 164.2 million. The Group allocated all of the goodwill to a single CGU “Healthcare” and then, from the analyses carried out for the purpose of the impairment test, identified specific CGUs according to the management logic adopted by the KOS sub-holding. In order to check for any impairment of the value of goodwill and other fixed assets recorded in the balance sheet, the value in use was calculated of the cash generating units to which the goodwill was allocated at KOS sub-holding level.

As required by accounting principle IAS 36, the KOS group tested the recoverability of the remaining value of the tangible and intangible assets recorded in the consolidated financial statements of the group at December 31 2010.

 

In application of the methodology set out in IAS 36, the KOS group identified its CGUs which are the smallest identifiable group of assets able to generate broadly independent cash flows in the consolidated financial statements. To identify the CGUs the following factors were taken into account: the organizational structure, the type of business and the way in which control is exercised over the operations of the same CGUs.  

 

Given that the group operates, as already explained, in four different operating sectors (nursing homes for the elderly (RSAs), rehabilitation, acute medicine and hi-tech services), the CGUs and the groups of CGUs identified by management are as follows:

-          In the “RSA” sector CGUs were identified, at a first level, in the individual care-homes, mainly identified by the brand “Anni Azzurri”. They were then grouped together, at a second level, by region. The third level of grouping included the whole operating sector;

-          The “rehabilitation” sector includes two subgroups: Redancia (psychiatric rehabilitation) and IRSS (Functional rehabilitation identified mainly by the brand “S. Stefano Riabilitazione”). The CGUs were identified, at the first level, as the individual facilities (in “IRSS”, one of the CGUs consists of the out-patient centres/day hospitals); subsequently, the individual CGUs are grouped together, at a second level, by region; the third level of grouping includes all the clinics of the same subgroup (Redancia or IRSS). The Sanatrix group, which was recently acquired, constitutes a single first level CGU; although Sanatrix’s business relates to several business sectors (the elderly, rehabilitation and acute), because of the way in which the operation is controlled, it is classified by management as belonging to the “Rehabilitation “ sector and thus follows the second and third level of grouping in the test on “IRSS”;

-          In the “acute medicine” sector, the only CGU identified is the company Ospedale di Suzzara;

-          In the sector “hi-tech services” (brand: Medipass) a first level grouping consists of the individual contracts outstanding (9) and of the Giordani group (also recently acquired) which consists of a single CGU despite being formed of three legal entities; the third level of grouping includes the whole operating sector.

 

The recoverability of the carrying values was tested by comparing the net book value assigned to the CGUs, including the carrying amount of goodwill with the recoverable value (value in use). The value in use is represented by the present value of estimated future cash flows generated by the continuous use of the assets making up the cash generating unit and of the terminal value that can be assigned to the same CGUs.

 

More specifically the chart on the following page shows the values of goodwill allocated to the operating sectors by the management of KOS and any other goodwill allocated to the Healthcare sector which at Group level, as already mentioned, constitutes one single CGU. Although the goodwill was also tested at a lower level, the level that the goodwill of the “Healthcare” CGU was allocated to is considered significant because it confirms the strategic enterprise vision that the Directors of CIR have regarding the specific characteristics of the business sector to which the KOS group belongs.

 

 

 

 

(in thousands of euro)	31.12.2010	%
Goodwill allocated by KOS sub-holding
RSAs	80,566	49
Rehabilitation	69,390	42
Hi-tech services	13,341	8
Acute	--	--
Further goodwill allocated to Healthcare CGU	942	1
Total	164,239	100

 

In developing the impairment test the KOS group used the latest budget forecasts relating to the economic and financial trend forecast for the period 2011-2015 (as described in the paragraph on the use of estimates), assuming that the situations take place and the targets are reached. In calculating the projections, management made various hypotheses based on past experience and expectations regarding the development of the operating sectors in which the group is present.

 

To calculate terminal value a growth rate (g rate) of 1.5% was used (1% in 2009) which is close to the inflation rate even though there are some estimates of a growth rate for the sector that are above inflation.

 

The discount rate used reflects the current market valuations of the cost of money and takes into account the specific risks of the business. This rate, net of taxes (WACC after-tax), was 6.9% (6.8% in 2009).

 

From the test carried out no situations emerged, at the first level tested, of any significant losses in value while at the second level, to which the goodwill was allocated, no losses of value emerged.

 

However, considering that the recoverable value is calculated based on estimates, the group cannot be sure that there will be no impairment losses on goodwill in future periods. Given the continuing critical scenario in the market, the various factors used to make the estimates could be subject to revision.

 

Moreover, in line with the analyses carried out by the KOS sub-holding, the Group also set up sensitivity analyses considering changes in the basic assumptions of the impairment test and particularly in the variables which have most impact on recoverable value (discount rate, growth rate, terminal value).

This analysis, conducted on the test levels shown above (regions and operating sectors and thus at Healthcare CGU level) did not reveal any problematic situations or instances where the carrying value was significantly higher than the recoverable value, even using a growth rate of zero and a considerably higher WACC than the one used in the test.

 

To complete the analyses described above, which confirmed that at December 31 2010 there was no impairment to be recorded in the financial statements, a comparison was made of the fair value of KOS used for the agreements signed during the year with partner AXA, which involved minority interests, with the carrying value in the accounts of the assets held by the Group in the Healthcare sector. This comparison was further confirmation of the carrying values of the assets in the balance sheet.