12. Intangible assets continued 12.1 Goodwill Risk of impairment of assets
Gas Transition Plan In May 2022, the New Zealand Government (the Government) released its Emissions Reduction Plan (ERP) detailing the policies the Government will use to achieve the emissions budgets to meet New Zealand’s agreed decarbonisation targets. In releasing the ERP, the Government also announced that it was working with the gas industry to develop a gas transition plan by the end of 2023 to reduce the industry’s emissions. There were no specific policy decisions that could be interpreted as impacting adversely on the future value of the gas distribution business. Initial development of the gas transition plan, including targeted engagement has been in progress since the announcement of the ERP. Public consultation on the gas transition issues has recently commenced and submissions are due on 2 November. Publication of the gas transition plan is likely to be delayed into 2024. Regulatory Environment On 14 June 2023, the Commerce Commission (the Commission) released its draft report on its review of Input Methodologies. Their report proposed a reduction in the weighted average cost of capital (WACC) percentile for gas distribution businesses from 67% to 50% which would result in a decrease in future revenues for Vector’s gas distribution business. Vector has lodged submissions to the Commission that support the maintenance of the current WACC percentile. The Commission will consider these and other submissions and publish its final decision on Input Methodologies in December 2023. Impact on Impairment Testing The impact of ERP policy and the gas transition plan on the Commission’s regulatory model for the gas distribution network will be fundamental to any revision in assumptions for the valuation of the gas distribution CGU. The timing or extent of this is not yet known. The regulatory model determines the cash flows we can earn from the gas distribution business and hence its value. We will be monitoring any policy developments closely. Similarly, any ERP policy changes could impact valuation assumptions for the natural gas, LPG and Liquigas CGUs. Vector currently has $220.0m of goodwill allocated to its gas businesses as summarised in Note 12.1. While at 30 June 2023, the Board and management have concluded that there is no impairment recognised, we acknowledge that the gas transition plan and the Commerce Commission’s final decision on Input Methodologies could change the outlook for these businesses and will present significant risk to the future cashflows and expected lives of the group’s gas assets. As the ERP policies are formalised and the Commission considers the impact on the regulatory model for gas networks, their impact on the assumptions used in impairment valuation models will need to be carefully assessed. We will be carrying out the annual impairment test at 31 December 2023 for all CGUs with allocated goodwill and will report the results of that test in our group interim financial statements for the six months ended 31 December 2023. Other intangible assets are initially measured at cost, and subsequently stated at cost less any accumulated amortisation and impairment losses. Software intangibles have been assessed as having a finite life greater than 12 months and are amortised from the date the asset is ready for use on a straight-line basis over its estimated useful life. The estimated useful lives (years) are as follows: Software 3 - 10 Easements are not amortised but are tested for impairment at least annually as part of the assessment of the carrying values of assets against the recoverable amounts of the CGUs to which they have been allocated.
12.2 Other intangible assets Policies
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Vector Annual Report 2023
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