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Impairment testing of non-financial assets

14 IMPAIRMENT TESTING OF NON-FINANCIAL ASSETS
 

If there is an indication of impairment, or at least annually, all indefinite life intangible assets and goodwill are assessed for impairment unless stated otherwise. Goodwill acquired through business combinations, trademarks, licence agreements and customer lists have been allocated to cash-generating units to facilitate this assessment.

The key assumptions disclosed below are based on management’s past experience and expectations. Based on this experience and the well-established brands the group owns, management considers forecast cash flow periods of five years to be appropriate.
14.1

Methods and assumptions

The group applies a discounted cash flow methodology (value in use) to assess goodwill and certain indefinite life intangible assets for impairment. Where this results in a value lower than the carrying amount, the higher of this value or the fair value less costs of disposal is used. For the current year, all recoverable amounts were based on the value in use, being the higher value. This methodology entails a calculation of the present value of future cash flows generated by applicable cash-generating units over a period of five years and incorporates a terminal growth rate.

These cash flows have been based on the approved budget for the 2022 financial year which include assumptions on profit before interest and tax, depreciation, working capital movements, capital maintenance expenditure, an appropriate discount rate and a terminal growth rate. The terminal growth rate used is 5,5% (2020: 5,5%), however, it is dependent on the industry and maturity of the cash-generating unit.
14.2

Discount rates

The group has calculated a weighted average cost of capital (WACC) which is utilised as a basis for performing the value-in-use calculation. In cases where the cash-generating unit is deemed to be of greater risk than the group as a whole, a risk premium has been included within the discount rate applied. The discount rate utilised for the purposes of the impairment testing was between 12,2% for South African entities and 17,0% for the international component of Davita (2020: 12,7% and 17,4%). A pre-tax discount rate for purpose of the impairment testing would be between 16,9% and 24,8% (2020: 17,6% and 25,5%).
14.3

Growth rates

In determining the growth rate, consideration is given to the growth potential of the respective cash-generating unit. As part of this assessment, a prudent outlook is adopted that mirrors an inflationary increase in line with the consumer price index and real growth expected within the specific market. Based on these factors, the nominal price growth rates applied for the purposes of the impairment testing ranges between 5% and 8%. Volume growth assumptions are based on management's best estimates of known strategies and future plans to grow the business.
14.4

Specific impairments in the current year

The table below reflects the detail of the respective impairments for the year, with the comparatives noted.

  GROUP
(R'million) 2021 2020
International and Exports – Goodwill1 – (250,0)
International and Exports – Property, plant and equipment2 (139,1) (199,2)
Consumer Brands – Goodwill3 – (36,0)
Consumer Brands Food – Property, plant and equipment4 (15,1) (83,2)
Other – Investment in associated company5 – (117,7)
Total (154,2) (686,1)
  COMPANY
(R'million) 2021 2020
Other – Investment in associated company5 – (74,7)
Other – Interest in subsidiary – (140,0)
Total – (214,7)
1 Davita is included in the Exports and International cash-generating unit. The impairment arose during the previous reporting period as a result of the consistent risks associated with key export markets, as well as lower sales forecast for the powdered seasoning brand, Benny. During the six-month period ended 31 March 2020, a five-year discounted cash flow model was used with the post-tax discount rate utilised for the purposes of impairment testing of 18,4%. The impact of Covid-19-led economic challenges as far as could be estimated at the time, were factored into the cash flow forecasts. During the period under review, Davita was evaluated for impairment testing. No further impairment was required in 2021 as there was sufficient headroom on the remaining carrying value of the goodwill.
2 Property, plant and equipment in the Deciduous Fruit business (LAF) was fully impaired by R139,1 million (2020: R196,5 million), down to its recoverable amount. The downturn in LAF, which is predominantly an export sales business, continued from the previous reporting period which resulted in an impairment down to zero.
3 Goodwill relating to the Personal Care category within the HPC business was impaired in the prior financial year.
4 During the current year R15,1 million relating to property, plant and equipment in the Groceries business and the IT function was impaired. Subsequent to the reclassification to held for sale in terms of IFRS 5 in the prior financial year, Value Added Meat Products' (VAMP) property, plant and equipment was remeasured to fair value less costs of disposal per IFRS 5.
5 In the prior year, as part of the annual impairment assessment performed for all investments, using the methods and assumptions as noted in note 14.1, R117,7 million (R74,7 million in company) was impaired in relation to the UAC Foods (UAC) investment in associate. Refer note 15.3 for further details.
 

The impairments recognised in the current year are as a result of the annual impairment assessment performed on property, plant and equipment, goodwill and indefinite useful life intangible assets.
14.5

Changes in key assumptions

The determined value in use of each cash-generating unit is sensitive to the discount rate. No reasonably probable change in any of the above key valuation assumptions would cause the carrying amount of cash-generating units to materially exceed their recoverable amounts.