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Notes to the financial statements
continued
for the year ended 30 September 2015
146
Tiger Brands Limited integrated annual report
2015
13
Impairment testing of non-financial assets
Annually, or if there is an indication of impairment, all indefinite life intangible assets and goodwill are assessed for
impairment. Goodwill acquired through business combinations, trademarks, licence agreements, supplier relationships,
customer lists and restraint of trade agreements have been allocated to cash-generating units to facilitate this assessment.
The key assumptions disclosed below are based on management’s experience and expectations. Based on this
experience and the well-established brands the group owns, management considers forecast cash flow periods in
excess of five years to be appropriate.
13.1 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. This methodology entails a calculation of the present value of future cash flows
generated by applicable cash-generating units over a period of five to 10 years and incorporates a terminal
growth rate.
These cash flows have been based on the approved budget for the 2016 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 1% (2014: 1%); however, it is
dependent on the industry and maturity of the cash-generating unit.
Trademarks
The group applies the “relief from royalty” valuation methodology to value trademark assets. This methodology entails
quantifying royalty payments, which would be required if the trademark were owned by a third party and licensed to
the company.
Main inputs used are forecast future sales, a notional royalty rate payable in an arm’s length transaction and an
appropriate discount rate.
Customer lists
The group applies the “multi-period excess earnings” valuation methodology to value customer lists. The method is
based on apportioning the returns earned by a business across its tangible and intangible assets.
Main inputs used are forecast sales to which the customer relationships contribute and estimated cash flows earned from
these sales, a tax rate of 28% (2014: 28%) and a required rate of return.
13.2 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 CGU 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 11,5% and 19,7% (2014: 11,0% and 15,5%).
13.3 Growth rates
In determining the growth rate, consideration is given to the growth potential of the respective CGU. 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 1% and 6%. Volume growth assumptions are based on
management’s best estimates of known strategies and future plans to grow the business. The terminal growth rates
applied were between 1% and 8%.