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3.4 Intangible assets
Accounting policies
Goodwill and trademarks
Goodwill is not amortised but is instead tested for impairment annually and whenever there is an indication of impairment. For testing purposes, goodwill is allocated to the cash generating units. Goodwill is measured at initial cost and that acquired prior to 1 January 2004, at deemed cost net of impairment. Any negative goodwill is immediately recognised as income. For goodwill, a recognised impairment loss is not reversed.
Intangible assets with indefinite useful lives are not amortised. They are tested for impairment annually and whenever there is an indication of impairment. These intangible assets include trademarks capitalised upon acquisition, recorded at their fair values at the acquisition date.
Other intangible assets
The cost of intangible assets with definite useful lives are recorded in the balance sheet and recognised as expenses during their useful lives. Such intangible assets include software licences, customer relationships and licences measured at the fair value at the date of acquisition, and leasehold interests that are amortised during their probable lease terms.
The estimated useful lives are:
Software and licences 3−5 years
Customer and supplier relationships 10 years
Licences 20 years
Research and development expenses
The costs of research and development activities have been expensed as incurred, because the Group does not have development costs eligible for capitalisation. Development costs previously recognised as an expense are not recognised as an asset in subsequent periods.
Software
Costs directly attributable to the development of new software are capitalised as part of the software cost. On the balance sheet, software is included in intangible assets and its cost is amortised over the useful life of the software. Costs associated with maintaining the software are recognised as an expense as incurred.
Impairment of non-financial assets
At each balance sheet date, the Group assesses whether there is any indication that an asset may be impaired. If any such indication exists, the recoverable amount of the asset is estimated. The recoverable amount of goodwill and intangible assets with indefinite useful lives is assessed every year whether or not there is an indication of impairment. In addition, an impairment test is performed whenever there is an indication of impairment.
The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. Often, it is not possible to estimate the recoverable amount for an individual asset. Then, as in the case of goodwill, the recoverable amount is determined for the cash generating unit to which the goodwill or asset belongs.
An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount. The impairment loss is recognised in the income statement. An impairment loss recognised for an asset in prior years is reversed, if the revaluation shows an increase in the recoverable amount. However, the reversal of an impairment loss of an asset should not exceed the carrying amount of the asset without impairment loss recognition. For goodwill, a recognised impairment loss is not reversed under any circumstances.
2017
€ million
Goodwill Trademarks Other
intangible
assets
Prepayments Total
2017
Cost
Cost as at 1 January 249.6 131.0 284.0 18.3 682.9
Exchange differences -0.2 -2.6 -4.0 0.0 -6.9
Additions 1.0 17.7 14.2 32.9
Acquisitions 0.0 0.0
Disposals -12.9 -39.1 -12.4 -0.0 -64.3
Deductions -80.6 -0.5 -81.1
Transfers between items 18.0 -14.9 3.0
Cost as at 31 December 237.5 89.3 222.6 17.0 566.5
Accumulated amortisation and impairment charges
Accumulated amortisation and impairment charges as at 1 January -59.7 -7.8 -184.9 0.0 -252.3
Exchange differences 0.2 0.6 2.9 3.7
Accumulated amortisation and impairment charges on disposals 8.8 12.0 20.8
Accumulated amortisation on deductions and transfers 80.6 80.6
Amortisation and impairment charges for the year -14.5 -28.5 -43.0
Accumulated amortisation and impairment charges as at 31 December -65.2 -7.2 -117.8 0.0 -190.2
Carrying amount as at 1 January 189.9 123.3 99.1 18.3 430.5
Carrying amount as at 31 December 172.3 82.2 104.7 17.0 376.2
2016
€ million
Goodwill Trademarks Other
intangible
assets
Prepayments Total
2016
Cost
Cost as at 1 January 101.6 70.9 229.5 8.4 410.3
Exchange differences -0.0 1.8 2.3 4.1
Additions 152.2 25.1 14.6 191.8
Acquisitions 58.3 39.6 6.2 104.0
Disposals -0.1 -9.8 -9.9
Deductions -10.5 -0.2 -10.7
Transfers between items -4.0 8.0 -10.7 -6.7
Cost as at 31 December 249.6 131.0 284.0 18.3 682.9
Accumulated amortisation and impairment charges
Accumulated amortisation and impairment charges as at 1 January -60.6 -7.4 -174.0 0.0 -241.8
Exchange differences 0.1 -0.4 -1.8 -2.1
Accumulated amortisation and impairment charges on disposals 0.1 3.8 3.9
Accumulated amortisation on deductions and transfers 0.6 10.5 11.1
Amortisation and impairment charges for the year -23.4 -23.4
Accumulated amortisation and impairment charges as at 31 December -59.7 -7.8 -184.9 0.0 -252.3
Carrying amount as at 1 January 41.0 63.5 55.5 8.4 168.4
Carrying amount as at 31 December 189.9 123.3 99.1 18.3 430.5
Other intangible assets include other non-current expenditure, of which €62.5 million (€55.4 million) are software and licence costs.
Goodwill and intangible rights by division
€ million Trademarks
2017
Goodwill
2017
Discount
rate
(WACC)
2017
Trademarks
2016
Goodwill
2016
Discount
rate
(WACC)
2016
Grocery trade 76.1 6.0 76.1 6.0
Building and technical trade
Byggmakker, Norway 23.9 7.0 25.9 7.0
Onninen 58.3 55.1 7.2 58.3 55.1 7.1
Kesko Senukai, Baltics 21.1 7.0 20.5 7.0
K-rauta Rus, Russia 14.5 11.0
Indoor, Finland 39.1 4.1 7.0
Car trade 20.0 7.0 19.7 7.0
Total 82.2 172.3 123.3 189.9
Intangible assets with indefinite useful lives are tested annually for possible impairment and whenever there is an indication of impairment.
The useful lives of trademarks (brands) included in intangible assets have been classified as indefinite, because it has been estimated that the period over which they generate cash inflows is indefinite. This is because no foreseeable limit to the period over which they are expected to generate net cash inflows for the Group can be seen. Trademarks are part of assets acquired in connection with acquisitions.
Cash generating units have been identified at maximum at the level of reported divisions.
WACC is determined after tax. The rate is used in impairment testing.
Impairment test for goodwill and intangible assets
In impairment testing, the recoverable amount of a cash-generating unit's business operations is determined based on value-in-use calculations. These calculations use cash flow projections based on financial plans approved by management, covering a period of three years. The key assumptions used for the plans are total market growth and profitability trends, changes in store site network, product and service selection, pricing and movements in operating costs. Cash flows beyond this period have been extrapolated mainly based on 1.5-2.0% (1.0–4.0%) forecast growth rates, allowing for country-specific differences.
The discount rate used is the weighted average cost of capital (WACC) after tax, specified for each division and country and adjusted for tax effect in connection with the test. The WACC formula inputs are risk-free rate of return, market risk premium, industry-specific beta factor, target capital structure, borrowing cost and country risks. Discount rates remained at the level of the previous year.
Impairment losses
During the 2017 financial year, a €14.5 million goodwill impairment was recorded for K-rauta Rus (building and technical trade) due to lower than targeted profit development. The impairment has been presented as an item affecting profitability. There were no impairment charges recognised on goodwill or intangible rights in the financial year 2016.
Sensitivity analysis
The key variables used in impairment testing are the EBITDA margin and the discount rate. The most sensitive to movements in assumptions in the building and technical trade are the brand related to the Byggmakker business: if the residual EBITDA decreased by more than 0.5 percentage points, an impairment would be recognised. Regarding the other cash generating units, according to management’s estimates, a foreseeable change in any key variable would not create a situation in which the unit’s recoverable amount would be lower than its carrying amount.