Notes to the Financial Statements continued for the year ended 31 May 2022
12 Goodwill and intangible assets continued Impairment review
Goodwill is tested for impairment annually at the level of the CGU to which it is allocated. For the year ended 31 May 2021, the recoverable amount of all CGUs concerned was measured on a value in use basis (VIU). For the year ended 31 May 2022, the recoverable amount of all CGUs concerned was measured on a value in use basis (VIU), with the exception of the Europe Assurance CGU and the IPM Software Resilience CGU, which was measured on a fair value less costs to sell basis. The Directors have considered the impact of climate change on this review, with no material impact identified. Fair value less costs to sell For the year ended 31 May 2022, the recoverable amount of the Europe Assurance CGU and the IPM Software Resilience CGU has been determined on a fair value less costs to sell basis for the purposes of the impairment review. The Directors assessed the recoverable amount of these CGUs on a VIU basis, as in the prior period for Europe Assurance. The VIU calculations prepared for both CGUs are highly sensitive to changes in inputs, which could suggest that they were less than the carrying value of assets. This is because the forecast growth rates applied beyond a period of five years are expected to be higher than the terminal growth rate that would be applied. Therefore, the Directors considered that the fair value less costs to sell exceeded the value in use. The Europe Assurance CGU and IPM Software Resilience CGU valuation has been calculated by assessing the value of the standalone Europe Assurance and IPM Software Resilience business calculated using an EBITDA 1 multiple based on sustainable earnings for the year ended 31 May 2022 adjusted for specific items where relevant. For the IPM Software Resilience business, integration costs associated with combining the business into the wider Group have been added back to sustainable earnings used in the calculation. For the Europe Assurance CGU no material adjustments have been made to the sustainable earnings used in the calculation. The sustainable earnings input is a level 3 measurement; level 3 measurements are inputs which are normally unobservable to market participants. The EBITDA 1 multiple used in the calculations is based on independent third party assessments of the implied enterprise value of the business based on a population of comparable companies and precedent transactions. The estimated cost of disposal was based on other recent transactions that the Group has undertaken. Sensitivity analysis The key assumptions used in the fair value less costs to sell calculation are the EBITDA 1 used and the multiple applied to that sustainable earnings. For the Europe Assurance CGU and the IPM Software Resilience CGU there is no reasonably possible change in those inputs that could give rise to an impairment. Value in use VIU represents the present value of the future cash flows that are expected to be generated by the CGU to which the goodwill is allocated. Capitalised development and software costs are included in the CGU asset bases when performing the impairment review. Capitalised development projects and software intangible assets are also considered, on an asset-by-asset basis, for impairment where there are indicators of impairment. VIU calculations are an area of management estimation. These calculations require the use of estimates (inputs), specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax discount rate. Further detail in relation to these assumptions used in the Group’s goodwill annual impairment review is as follows: Pre-tax cash flow projections Pre-tax cash flow projections are based on the Group’s budget for the forthcoming financial year and longer-term three year strategic plans to 2025. The budget and three year strategic plan are compiled by the business unit management teams using a detailed, bottom-up process with respect to revenue, margin and overheads, taking into account factors specific to that business unit as well as wider economic factors such as industry growth expectations and the impact of Covid-19 or the Ukraine conflict. The Group’s revenue forecasts are developed using the most reliable data available, such as the size of the existing contract base and details of confirmed orders, as well as assumptions over key operational inputs to underpin the forecast for each revenue stream. The combined effect of these individual assumptions on the overall growth rate assumed for each area of the business is then compared to management’s experience of growth and the industry’s expected growth rate.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2022
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