12 Goodwill and intangible assets continued Pre-tax discount rates
Discount rates can change relatively quickly for reasons both inside and outside of management’s control. Those outside management’s direct control or influence include changes in the Group’s Beta, changes in risk free rates of return and changes in Equity Risk Premia. The discount rates are determined using a capital asset pricing model and reflect current market interest rates, relevant equity and size risk premiums and the risks specific to the CGU concerned. On this basis, specific discount rates are used for each CGU in the VIU calculation and the rates reflect management’s assessment on the level of relative risk in each respective CGU. The table below summarises the pre-tax discount rates used for each CGU: Pre-tax discount rate (%) 2021 Pre-tax discount rate (%) 2020 UK Software Resilience 12.9 15.4 North America Software Resilience 15.3 13.5 Europe Software Resilience 13.6 13.6 UK and APAC Assurance 13.0 11.6 North America Assurance 14.2 13.5 Europe Assurance 13.7 12.7 Sensitivity analysis Sensitivity analysis has been performed in respect of certain scenarios where management considers a reasonably possible change in key assumptions could occur. The following key assumptions are considered to carry the greatest level of sensitivity to forecasts: • Revenue is the primary cash flow driver (since due to the Group’s operating leverage, revenue is the key driver of Adjusted EBITDA ¹, considered as a proxy for operating cash flow before changes in working capital and capital expenditure), and a key contributor to VIU • The discount rate for each CGU: both factors inside and outside of management’s control impact the discount rate and can have a significant impact on the VIU calculation With the exception of the Europe Assurance CGU, the outcome of applying sensitivity analysis in respect of the above inputs indicated that there is no reasonably possible scenario in which the carrying value of goodwill would be considered impaired. With respect to the Europe Assurance CGU, management has considered the impact of Covid-19 on the challenging growth targets for this CGU and believes a reasonably possible change in the key assumptions of a 1.7% pts reduction in the revenue CAGR or a 1% pts increase in the discount rate would significantly reduce the headroom or give rise to an impairment. The impact of these changes in assumptions is illustrated in the table below, together with the change in each assumption that would result in the VIU falling below the carrying amount. It is noted that, whilst a 1.7% pts reduction in the revenue CAGR would give rise to a potential impairment of goodwill, it is expected that any such deterioration in expected growth rates would also lead to a reduction in expected future costs. This expected future cost reduction has not been factored into the calculations illustrated below.
Europe Assurance
31 May 2021
Sensitivity analysis £m
31 May 2020
76.9 95.1 18.2
Carrying value of assets (goodwill, development and software costs, right-of-use assets)
72.9 92.3 19.4
Total VIU
Surplus over carrying value of assets Assumptions used in VIU calculation: Five year CAGR
11.7%
13.1%
(43.4) 0.7%
Impact of reduction of 1.7% pts to five year revenue CAGR on VIU
N/A 0.7%
Change required in five year revenue CAGR % for VIU to fall below carrying value
13.7%
Pre-tax discount rate
12.7%
(7.9)
Impact of 1% pts increase in pre-tax discount rate on VIU
(8.1)
2.6% (47.6)
Change required in pre-tax discount rate for VIU to fall below carrying value
2.5% N/A
Impact of both 1.7% pts reduction to revenue CAGR and 1% pts increase in pre-tax discount rate on VIU
NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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