Annual Report 2017

16. Impairment Tests for Goodwill

Goodwill is allocated to the Company’s group of cash-generating units (CGUs) according to the country of presence. The Group performs its annual goodwill impairment test in the fourth quarter, in which it uses the budget and other assumptions, as described below.

The recoverable amount is determined by the value in use, calculated using the discounted cash flow method based on the CGU’s continuing use and applying a discount factor derived from the average cost of capital relevant for the CGUs. If the value in use is lower than the carrying value, then the fair value less costs of disposal is also considered, which is determined by a multiple on the average sales of the last three years, or discounted cash flow method based on the CGU’s highest and best use, as appropriate. By applying a multiple on the average sales of the last three years the Group uses a well-balanced approach for both mature and emerging markets. For mature markets it eliminates the impact of incidentals that could have occurred in one of the years. For emerging markets a one-year sales figure would be too volatile as it would not reflect the real growth. The sales multiple is based on recent market transactions and peers of GrandVision, taking into account risk factors of the CGU for which the fair value less costs of disposal is calculated. For recently acquired cash-generating units and cash-generating units with large investments in store openings to generate growth, the average sales of the last three years is adjusted to reflect these developments. The recoverable amount is the higher of the value in use and the fair value less costs of disposal.

Key assumptions used to determine the recoverable amount in 2017:

Revenue growth rate (average)

EBITA percentage (average)

Discount rate
(pre tax)

Sales multiple
(when used)

G4

3.4% - 8.7%

9.1% - 21.5%

9.58%-11.47%

-

Other Europe

2.2% - 10.0%

3.9% - 21.1%

8.90% - 18.58%

-

Americas & Asia

6.2% - 15.3%

3.5% - 14.9%

13.24% - 19.48%

0.6 – 1.2

Key assumptions used to determine the recoverable amount in 2016:

Revenue growth rate (average)

EBITA percentage (average)

Discount rate
(pre tax)

Sales multiple
(when used)

G4

3.3% - 3.8%

11.5% - 22.2%

11.57%-13.27%

-

Other Europe

2.1% - 8.0%

2.9% - 19.7%

10.09% - 18.33%

1

Americas & Asia

0.7% - 20.8%

2.1% - 14.8%

16.21%-22.05%

0.6 – 1.5

The assumptions reflect the averages of each group of the CGUs in the segments for the five-year period. Cash flows beyond this five-year period were extrapolated using an estimated growth rate of nil. The growth rate for the 1st, 2nd and 3rd year is based on the budget for these years. The growth rate for the 4th and 5th year is in line with the third year and zero percent for the subsequent years. The EBITA rate is assumed to remain at a constant level after the three-year period. The EBITA and growth rates are based on historical performance as well as our assessment of the development of these rates in the upcoming years. The discount rates used are pre-tax and reflect the country-specific risks relating to our industry.

For details on sensitivity analysis for the key assumptions refer to note 4.1. For recognized impairment losses during the periods please refer to note 14.

The Group considered and incorporated the impact on the assumptions used in its goodwill impairment tests also in 2017 resulting from the outcome of the UK referendum in 2016 on European Union membership.

G4 segment

In the G4 in 2017 the majority of the CGUs - Germany & Austria, France and the Netherlands & Belgium - are at the lower end of the average revenue growth rate range. The higher end of this range relates solely to the CGU of United Kingdom & Ireland, resulting from the acquisition of Tesco Opticians. The CGUs of Germany & Austria and France are at the middle of the range of the average EBITA percentage, with the Netherlands & Belgium at the higher end of this range, as a result of the relatively high franchise share. The lower end of the range relates to the CGU in United Kingdom & Ireland, again as a result of the Tesco Opticians acquisition. The higher end of the pre-tax discount rate range relates to the CGU of France while the lower end relates to the CGU of United Kingdom & Ireland. The CGUs of Germany & Austria and Netherlands & Belgium are at the midpoint of the pre-tax discount rate range.

The carrying value of goodwill allocated to the CGU of France of €180,873 (2016: €178,694) is considered significant in relation to the Group's total carrying value of goodwill. The recoverable amount of CGU France is determined by value-in-use method. The key assumptions include an average revenue growth rate in line with the lower end of the average revenue growth rate ranges of the G4 segment, an average EBITA percentage in the midst of the range of the G4 segment and a pre-tax discount rate of 11.47% (2016: 13.27%). A reasonably possible change to key assumptions used in the value-in-use would not result in a material impairment of goodwill for CGU of France, as this method indicated sufficient headroom. The approach for determining key assumptions for CGU France is consistent with the Group's approach described above.

Other Europe segment

In 2017, the higher end of the average revenue growth rate range mainly relates to the CGU of Italy and the lower end to the CGU of Finland & Estonia. The higher end of the EBITA percentage range relates to the CGU of Hungary, Czech Republic & Slovakia and the lower end to the CGUs of Spain and Bulgaria. The higher end of the pre-tax discount rate range relates to the CGU of Bulgaria while the lower end relates to the CGUs of Denmark and Finland & Estonia. The remaining CGUs within the Other Europe segment have average revenue growth rates, EBITA percentages and pre-tax discount rates around the midpoint of the respective ranges.

Americas & Asia segment

In 2017, the higher end of the average revenue growth rate range mainly relates to the CGUs of the United States, Turkey and Mexico, and the lower end relates to the CGUs of Brazil and Chile & Uruguay. In 2017, the higher end of the average EBITA percentage range relates to the CGUs of Mexico and Chile & Uruguay, and the lower end to the CGU of the United States. In 2017, the higher end of the pre-tax discount rate range relates to the CGU of Turkey while the lower end relates to the CGU of Chile & Uruguay. The remaining CGUs within the Americas & Asia segment have average revenue growth rates, EBITA percentages and pre-tax discount rates around the midpoint of the respective ranges. Refer to note 14 for more details on the discount rate used for the CGU of United States.