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Notes to the Financial Statements 2018
21. Goodwill Goodwill arises when the Group acquires another business and reflects the excess of the cost of the acquisition over the fair value of the assets and liabilities of the acquired business. Fair values are assigned to the identifiable assets and liabilities of subsidiaries and associates of the Group at the date they are acquired. Goodwill is stated at cost, less any impairment losses. Goodwill is allocated to cash-generating units (CGUs) and is not amortised but is tested annually for impairment, and when an indication of impairment exists. Goodwill in respect of associates is included in the carrying amount of associates. Any discount on acquisition is recognised directly in earnings. Impairment is deemed to occur when the recoverable amount of an asset falls below its carrying value. The recoverable amount is determined to be the greater of the fair value, less disposal costs or the sum of expected future discounted net cash flows arising from the ownership of the asset. Future net cash flows take into account the remaining useful life and the expected period of continued ownership, including any intended disposals, and any costs or proceeds expected to eventuate at the end of the remaining useful life or the end of the expected period of continued ownership. For the purposes of considering whether there has been an impairment, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. When the book value of a group of assets exceeds the recoverable amount, an impairment loss arises and is recognised in earnings immediately. Assessing the carrying value of goodwill requires management to estimate future cash flows to be generated by the related cash-generating unit. The key assumptions used in the value in use models include the expected rate of growth of revenues and earnings, the terminal growth rate and the appropriate discount rate to apply. Goodwill was tested for impairment in June 2018. Each CGU that carries goodwill is valued on a value-in-use or fair value less costs of disposal basis using a discounted cash flow model. Management has used its past experience of sales growth, operating costs and margin, and external sources of information where appropriate, to determine their expectations for the future. These cash flow projections are principally based on the Group's five year strategic plan approved by the directors. Cash flows beyond five years have been extrapolated using estimated terminal growth rates, which do not exceed the long-term average growth rate for the industries and countries in which the business units operate. The terminal growth rates used range from 2.5%-3% (2017: 2.5%-3%), with the majority of the business units using 2.5% (2017: 2.5%). The cash flows are discounted using a nominal rate after tax of 9.0% (2017: 9.5%) for New Zealand, 8.5% (2017: 8.5%) for Australia, 7.0% (2017: 7.0%) for Europe, 8.0% (2017: 8.0%) for North America and 9.0% (2017: 9.0%) for Asia, reflecting the risk profile of each business and for the regions in which the CGUs operate. The valuation models used are most sensitive to changes in the terminal year earnings and cash flows. Impairment charge recognised Rocla Products The Rocla Products business unit has underperformed during the year. The business faces an uncertain outlook in terms of returning to targeted levels of profitability. Management's previous expectations of improvement in earnings justified the prior carrying values. Management has revised its expectations as to the business unit’s sustainable mid-cycle earnings as well as the time now expected to attain the required improvement in earnings. This has led to a reduction of the value-in-use of the business unit, based on a 8.5% nominal, after tax discount rate. An impairment of assets of $40 million has been recorded, including $11 million of goodwill, resulting in no goodwill or brands balances remaining. Management has identified a number of strategies and initiatives to achieve an appropriate improvement in EBIT. If this improvement does not eventuate, there may be a need for further impairment. Roof Tile Group The Group announced during the year that a divestment process was underway for the Roof Tile Group. The Group considers it appropriate to record a $15 million impairment of goodwill, a $4 million impairment of brands, and a $33 million impairment of other specific asset balances to bring the carrying values of the regional businesses of the Roof Tile Group in line with expected divestment values.
88 Fletcher Building Limited Annual Report 2018
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