Vector Annual Report 2019

Vector AR’19 ― notes to the financial statements (continued)

13. Intangible assets CONTINUED 13.1 Goodwill

2019 $M

2018 $M

Goodwill by reportable segment

1,050.2

Regulated Networks

1,050.2

156.8

Gas Trading Technology

156.8

27.3

62.6

Total

1,234.3

1,269.6

Policies

Goodwill represents the excess of the consideration transferred over the fair value of Vector’s share of the net identifiable assets of an acquired subsidiary. Goodwill is carried at cost less accumulated impairment losses. Goodwill is monitored internally at a group level. It is allocated to operating segments, which are also reflective of the group’s cash generating units (“CGUs”), for impairment testing purposes. This is the highest level permissible under NZ IFRS. The CGUs within the group are: electricity, gas distribution, metering, gas trading, communications, E-Co Products and commercial energy solutions. Goodwill is tested at least annually for impairment against the recoverable amount of the CGU to which it has been allocated. To assess impairment, management must estimate the future cash flows of operating segments including the CGUs that make up those segments. This entails making judgements including: —— the expected rate of growth of revenues; —— margins expected to be achieved; —— the level of future maintenance expenditure required to support these outcomes; and —— the appropriate discount rate to apply when discounting future cash flows. As at 30 June 2019, the group has recognised an impairment loss of $46.6 million in respect of goodwill and intangible assets allocated to the E-Co Products (“E-Co”) CGU within the technology segment. The impairment reflects various factors including the post-acquisition performance of E-Co’s heat pumps and filters businesses falling below expectations, the closure of E-Co’s retrofit windows business and the significant investment in establishing the HRV solar business. Following the appointment of newmanagement in September 2018, E-Co has undertaken a detailed review of its operations with a focus on reorganisation and simplification. The business is expected to return to profitability in 2020. The recoverable amount of the E-Co CGU has been determined based on value in use. Post-tax discount rates of between 7.6% and 8.3% (2018: 8.3% and 9.0%) have been applied in determining the recoverable amount for the E-Co CGU. The recoverable amounts attributed to the electricity, gas distribution, metering, gas trading and communications CGUs are calculated on the basis of value-in-use using discounted cash flow models. On the basis that the recoverable amounts of these CGUs to which goodwill is allocated exceeds the net assets plus goodwill allocated, the group has determined that no impairment to goodwill has occurred during the period. Future cash flows are forecast based on actual results and business plans. For the electricity, gas distribution and metering CGUs, a ten-year period has been used due to the long-term nature of the group’s capital investment in these businesses and the predictable nature of their cash flows. A five-year period has been used for the gas trading, E-Co and communications CGUs. Terminal growth rates in a range of 1.0% to 2.0% (2018: 1.0% to 2.0%) and post-tax discount rates between 4.7% to 8.9% (2018: 4.8% and 9.0%) are applied. Rates vary for the specific segment being valued. Projected cash flows for regulated businesses are sensitive to regulatory uncertainty. Estimated future regulated network revenues and the related supportable levels of capital expenditure are based on default price-quality path determinations issued by the Commerce Commission and are in line with estimates published in the asset management plans.

Allocation

Judgements

Impairment

Assumptions

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