Notes to the consolidated financial statements (IFRS)

15. IMPAIRMENT TESTING OF GOODWILL
     
General principles
 
Goodwill acquired in business combinations is allocated to cash-generating units (CGU), which are the reportable service line segments in segment reporting.
 
The recoverable amounts of all CGUs are determined based on value-in-use calculations. The cash flow projections covering the initial three-year period have been based on financial forecasts approved by senior management supported by industry growth forecasts obtained from external sources. The growth rates used to extrapolate the cash flows for the subsequent two-year period vary between 1% and 7%, which reflect the management’s estimate of the industry’s long-term average growth rate. Subsequent to the five-year projection period the growth rate used is 2%, which does not exceed the expectations of growth in real terms.
 
Forecasted profit margins are based on actual performance in prior years adjusted for expected efficiency improvements.
 
The discount rate applied to cash flow projections is the weighted average pre-tax cost of capital. The discount rate is based on the weighted average of 30-year government bond rates in the countries where the CGUs operate. The bond rates are adjusted for the general market risk and the business risk of the CGUs. The pre-tax discount rates for the CGUs vary between 7% and 13% (between 7% and 10%).
 
Carrying amount of goodwill allocated to CGUs and segments
 
The total goodwill at 31 December 2015 was EUR 384.9 million. The increase compared to 31 December 2014 is EUR 61.2 million. Goodwill increased EUR 61.5 milllions due to the acquisitions and EUR 1.6 million due to currency effects. A decrease of goodwill due to a divestment was EUR 1.9 million.
 
All CGUs contain goodwill that may be considered significant in comparison with the Group’s total carrying amount of goodwill. All CGUs are business operations providing services to selected customers in their market segments.
 
In CGU Managed Services the carrying amount of goodwill allocated to the CGU at 31 December 2015 was EUR 64.8 million (EUR 65.5 million in 2014). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between 1% and 3% and EBITDA margin between 19% and 23%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 2%. The discount rate applied to the cash flow projections is 7.4%.
 
In CGU Consulting and System Integration the carrying amount of goodwill allocated to the CGU at 31 December 2015 was EUR 139.8 million (EUR 123.0 million in 2014). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between 5% and 9% and EBITDA margin between 8% and 11%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 6%. The discount rate applied to the cash flow projections is 7.4%.
 
In CGU Industry Products the carrying amount of goodwill allocated to the CGU at 31 December 2015 was EUR 118.2 million (EUR 74.7 million in 2014). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between 7% and 12% and EBITDA margin between 17% and 20%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 7%. The discount rate applied to the cash flow projections is 8.0%.
 
In CGU Product Development Services the carrying amount of goodwill allocated to the CGU at 31 December 2015 was EUR 62.1 million (EUR 60.5 million in 2014). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between -1% and 4% and EBITDA margin between 6% and 7%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 1%. The discount rate applied to the cash flow projections is 12.8%.
 
As a result of the impairment testing no impairment was identified. Value-in-use calculation for each CGU is sensitive to changes in growth assumptions, EBIT margin assumptions and interest rates. The recoverable amount in Product Development Services, EUR 81 million, is EUR 2 million above the carrying amount. The recoverable amount of CGU Product Development Services would equal its carrying amount if the key assumptions were to change as follows:
     
Change in annual growth rate (%-units) -1.0
Change in EBIT margin (%-units) -0.2
Change in interest rates (%-units) +0.3
 
In the other CGUs the surplus between the recoverable amount and the carrying amount is substantial, and any likely change in the three parameters isolated would not result in the recoverable amount being equal to the carrying amount.
 
The carrying amounts of goodwill allocated to the CGUs are disclosed below:
     
Carrying amount of goodwill
     
EUR million 31 Dec 2015 31 Dec 2014
Managed Services 64.8 65.5
Consulting and System Integration 139.8 123.0
Industry Products 118.2 74.7
Product Development Services 62.1 60.5
Total 384.9 323.7