Chapters
Annual Report 2018

12. Goodwill

Accounting Policy
Goodwill arises from the acquisition of subsidiaries, chains and stores and represents the excess of the consideration transferred over the fair value of the Group’s share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary, chain or store at the date of obtaining control. Any negative goodwill resulting from acquisitions is recognized directly in the consolidated Income Statement.

For the purpose of impairment testing, goodwill is allocated to those groups of cash-generating units (CGUs) expected to benefit from the acquisition. Each of those groups of cash-generating units represents the Group’s investment in a country or group of countries, which is the lowest level at which the goodwill is monitored for management purposes.

If a cash-generating unit is divested, the carrying amount of its goodwill is recognized in the consolidated Income Statement. If the divestment concerns part of cash-generating units, the amount of goodwill written off and recognized in the consolidated Income Statement is determined on the basis of the relative value of the part divested compared to the value of the group of cash-generating units. Goodwill directly attributable to the divested unit is written off and recognized in the consolidated Income Statement.

Goodwill is not amortized but is subject to annual impairment testing.

Impairment Test of Non-amortized Assets

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs of disposal. The recoverable amount is determined by the value in use method, calculated using the discounted cash flow method based on the asset’s continuing use and applying a discount factor derived from the average cost of capital. If the value in use method results in a lower value than the carrying value or the economic reality results in more realistic estimates, then the recoverable amount is based on the fair value less costs of disposal method. These fair value calculations qualify as level 3 calculations. See note 3.3 for a description of the different levels of valuation categories.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

Impairments are recognized in the consolidated Income Statement. Impairment recognized in respect of cash-generating units is first allocated to goodwill and then to other assets of the cash-generating unit on a pro-rata basis based on the carrying amount of each asset in the cash-generating unit.

The Group performs its annual goodwill impairment test in the fourth quarter, in which it uses the next year budget and other assumptions, as described below.

Significant Accounting Estimates and Judgments

The Group tests annually whether its goodwill is subject to impairment. The recoverable amounts in impairment testing are determined based on the higher of the value in use of the CGU, calculated using the discounted cash flow method, and fair value less costs of disposal of the CGU. Fair value less cost of disposal is determined by a multiple on the average sales of the last three years, or discounted cash flow method, as appropriate.

When the discounted cash flow method is used to determine the value in use of the CGU, estimation techniques are based on the CGU's continuing use. This discounted cash flow method is based on a pre-tax calculation model, using financial plans as approved by management and a pre-tax discount rate.

When the discounted cash flow method is used to determine the fair value less costs of disposal, estimation techniques are based on the CGU's highest and best use from a market participant's perspective as far as they can reasonably be ascertained, taking financial plans as approved by management as a base (level 3). These estimates include potential business expansion and reorganizations, if applicable. This discounted cash flow method is based on a post-tax calculation model, using a post-tax discount rate, and the deferred tax positions and corresponding tax-related cash flows related to temporary differences are included in the carrying amount and recoverable amount, respectively.

The discounted cash flow method requires management to apply judgements around revenue growth, profit assumptions and the discount rate. The discount factor is derived from the average cost of capital relevant for the CGUs.

Where a sales multiple is used to determine fair value less cost of disposal, 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 key assumptions applied in the annual goodwill impairment test are further described below.

Movements in goodwill are as follow:

in thousands of EUR

Notes

2018

2017

At 1 January

1,065,467

1,012,059

Acquisitions

4

4,458

119,100

Adjustment to purchase price allocation

4

2,317

-

Impairment

- 19,331

- 38,045

Reclassification

- 243

2,179

Exchange differences

- 386

- 29,826

At 31 December

1,052,282

1,065,467

Costs

1,148,234

1,141,205

Accumulated impairment

- 95,952

- 75,738

Carrying amount

1,052,282

1,065,467

The table below shows goodwill per segment:

in thousands of EUR

31 December 2018

31 December 2017

G4

426,672

422,812

Other Europe

463,331

480,583

Americas & Asia

162,279

162,072

1,052,282

1,065,467

Goodwill impairment

In 2018, the carrying amount of the CGU Italy has been reduced to its recoverable amount of €172,061 through recognition of an impairment loss against goodwill of €19,331. This mainly resulted from the lower profitability of the Italian business compared to previous projections as it took longer than expected to benefit from the integration of the merger of the two Italian businesses. The CGU Italy operates in the Other Europe segment.

The recoverable amount of CGU Italy is its fair value less costs of disposal, determined using the discounted cash flow method. Estimation techniques were based on CGU Italy's highest and best use from a market participant's perspective as far as they could have reasonably been ascertained, taking financial plans as approved by management as a base (level 3). These estimates included potential business expansion and reorganizations. This discounted cash flow method was based on a post-tax calculation model, using a post-tax discount rate of 8.89%, and the deferred tax positions and corresponding tax-related cash flows related to temporary differences were included in the carrying amount and recoverable amount, respectively. The key assumptions such as average revenue growth and average EBITA percentage are around midpoint of the ranges of Other Europe segment showed below. The details on sensitivity analysis are further described below.

In 2017, the impairment charge relates to an impairment of goodwill in the CGU United States, which operates in the Americas & Asia segment.

Other movements

In 2018, the adjustment to purchase price allocation relates mainly to Visilab (refer to note 4), which operates in the Other Europe segment.

In 2017, the acquisitions are mainly related to Visilab and Tesco Opticians. The exchange differences in 2017 are mainly related to the weakening of the US Dollar.

Key assumptions applied in annual goodwill impairment test

Key assumptions used to determine the recoverable amount in 2018:

Revenue growth rate (average)

EBITA percentage
(average)

Discount rate
(pre tax)

Sales multiple
(when used)

G4

3.5% - 5.8%

5.8% - 18.5%

9.13% - 11.74%

-

Other Europe

3.3% - 13.5%

3.6% - 21.7%

8.31% - 14.37%

-

Americas & Asia

3.2% - 21.0%

6.1% - 12.3%

11.14% - 25.16%

1 – 1.2

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

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 is based on the budget for these five years. 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 the optical retail industry.

The Group considered and incorporated the impact on the assumptions used in its goodwill impairment tests also in 2018 resulting from the outcome of the UK referendum in 2016 on European Union membership.

G4 segment

In the G4 in 2018 the higher end of the average revenue growth rate range mainly relates to the CGU of United Kingdom & Ireland and the lower end to the CGU of France. The CGU of the Netherlands & Belgium are at the higher end of the average EBITA percentage range with the CGUs of Germany & Austria and France closely following. The lower end of the range relates to the CGU in United Kingdom & Ireland, as a result of the Tesco Opticians acquisition. The higher end of the pre-tax discount rate range relates to the CGU of Netherlands & Belgium while the lower end relates to the CGU of United Kingdom & Ireland. The CGUs of Germany & Austria and France are at the midpoint of the pre-tax discount rate range.

The carrying value of goodwill allocated to the CGU of France of €179,174 (2017: €180,873) 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 towards the higher end of the range of the G4 segment and a pre-tax discount rate of 10.67% (2017: 11.47%). 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 2018, the higher end of the average revenue growth rate range mainly relates to the CGU of Bulgaria and the lower end to the CGU of Finland & Estonia and Portugal. 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, Sweden 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 2018, the higher end of the average revenue growth rate range mainly relates to the CGU of the United States and the lower end relates to the CGU of Brazil. In 2018, the higher end of the average EBITA percentage range relates to the CGUs of Mexico, Chile & Uruguay and Turkey, and the lower end to the CGUs of Peru and the United States. In 2018, 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 the United States. 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.

Sensitivity

For the discounted cash flow method the most sensitive key assumptions relate to revenue growth, profit assumptions and the discount rate. In the fair value less costs of disposal method based on the sales multiple, the sales multiple used is the most sensitive key assumption.

A reasonably possible change to key assumptions would not result in a material impairment of goodwill where the value in use method is used, as this method (where applied) indicated sufficient headroom. A 10% reduction of the sales multiple used in the Group impairment test would result in a limited impairment (2017: €1,169).

For the discounted cash flow method used for the CGU Italy, a 1% decrease in revenue growth in next year and a 1% increase in the discount rate would result in an additional impairment of €24,851 and €18,959 respectively. A 1% terminal value growth rate and 1% decrease in the discount rate would result in a decrease in impairment of €15,979 and €23,882 respectively.