Chapters
Annual Report 2018

13. Other Intangible Assets

Accounting Policy

Other intangible assets contain key money and rights of use, customer databases, trademarks, software and others.

Key money & rights of use

Key money represents expenditure associated with acquiring existing operating lease agreements for company-operated stores in countries where there is an active market for key money (e.g. regularly published transaction prices), also referred to as ‘rights of use’. Key money is not amortized but annually tested for impairment, as described in note 12.

Customer databases

Customer databases are only recognized as an intangible asset if the Group has a practice of establishing relationships with its customers and when the Group is able to sell or transfer the customer database to a third party. The customer databases are initially recognized at fair value using the discounted cash flow method or multi-period excess earnings method for the large acquisitions. The fair value is subsequently regarded as cost. Customer databases have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method over the estimated useful life but no longer than 15 years.

Trademarks

Trademarks acquired in business combinations are initially recognized at fair value using the relief-from- royalty approach. The fair value is subsequently regarded as cost. Trademarks have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method over the estimated useful life but not longer than 15 years (with exceptions of certain older trademarks).

Software

Acquired software is capitalized on the basis of the costs incurred to acquire and to bring to use the specific software. Software is amortized when the product is put in operation and charged to the consolidated Income Statement using the straight-line method, based on an estimated useful life of maximum five years.

Costs incurred on development projects (i.e. internally developed software) are recognized as an intangible asset when the following criteria are met:

  • It is technically feasible to complete the product so that it will be available for use;
  • Management intends to complete the product and use it;
  • The product can be used;
  • It can be demonstrated how the product will generate probable future economic benefits;
  • Adequate technical, financial and other resources to complete development and use the product are available;
  • The expenditure attributable to the software product during its development can be reliably measured.

The expenditure that is capitalized includes purchases and the directly attributable employee costs. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

Other

Other intangible assets are mainly related to reacquired rights, franchise contracts and rights to open new optical stores.

A reacquired right is an identifiable intangible asset that the acquirer recognizes separately from goodwill. As part of a business combination, an acquirer may acquire a right that it had previously granted to the acquiree to use one or more of the acquirer’s recognized or unrecognized assets. An example of such rights include a right to use the acquirer’s trade name under a franchise agreement. Reacquired rights are initially valued at the present value of the expected future cash flows, which is subsequently used as cost and amortized on a straight-line basis over its useful life, being the remaining contractual period without considering contractual extension possibilities, but not exceeding 10 years. 

Franchise contracts acquired in a business combination are initially valued at fair value, being the present value of the estimated future cash flows, which is subsequently used as cost and amortized on a straight line basis over its useful life, being the remaining duration of the franchise contract without considering contractual extension possibilities, but not exceeding 10 years.

Rights to open new optical stores acquired in a business combination is an identifiable intangible asset that the acquirer recognizes separately from goodwill. These rights to open new locations are initially valued at fair value, being the present value of the estimated future cash flows, which is subsequently used as cost and amortized on a straight line basis over its useful life, being the remaining contractual period without considering contractual extension possibilities, but not exceeding 10 years.

Significant Accounting Estimates and Judgments

The recoverable amount is the higher of the fair value less costs of disposal of the key money and the key money’s value in use, which is calculated using the discounted cash flow method applying a discount factor derived from the weighted average cost of capital or the market value of the key money.

Key assumptions applied are the revenue growth rate and the discount rate.

Movements in Other Intangible Assets are as follows:

in thousands of EUR

Notes

Key money

Customer databases

Trademarks

Software

Other

Total

At 1 January 2017

Cost

221,617

55,246

272,571

187,694

44,050

781,178

Accumulated amortization and impairment

- 10,332

- 16,927

- 154,002

- 116,961

- 37,311

- 335,533

Carrying amount

211,285

38,319

118,569

70,733

6,739

445,645

Movements in 2017

Acquisitions

1,667

118,279

27,799

6,057

12,863

166,665

Additions

3,496

706

-

38,053

17

42,272

Disposals

- 605

- 15

- 1

- 110

- 2

- 733

Amortization charge

7

-

- 9,705

- 17,999

- 19,844

- 3,757

- 51,305

Impairment

7

- 1,322

-

-

- 1,934

-

- 3,256

Reclassification

- 2,179

- 30

73

140

- 100

- 2,096

Exchange differences

- 817

- 3,106

- 3,499

- 879

- 20

- 8,321

At 31 December 2017

211,525

144,448

124,942

92,216

15,740

588,871

At 1 January 2018

Cost

220,527

170,251

292,449

230,277

54,523

968,027

Accumulated amortization and impairment

- 9,002

- 25,803

- 167,507

- 138,061

- 38,783

- 379,156

Carrying amount

211,525

144,448

124,942

92,216

15,740

588,871

Movements in 2018

Acquisitions

4

4,024

-

-

2

3,715

7,741

Additions

3,814

658

-

43,737

81

48,290

Disposals

- 1,201

- 3

-

- 252

-

- 1,456

Amortization charge

7

-

- 18,557

- 15,580

- 27,002

- 5,330

- 66,469

Impairment

7

- 4,739

-

- 5,538

- 5,534

-

- 15,811

Reclassification

-

-

- 232

280

195

243

Exchange differences

- 479

2,035

551

- 166

- 83

1,858

At 31 December 2018

212,944

128,581

104,143

103,281

14,318

563,267

Cost

224,770

173,057

291,547

261,011

44,575

994,960

Accumulated amortization and impairment

- 11,826

- 44,476

- 187,404

- 157,730

- 30,257

- 431,693

Carrying amount

212,944

128,581

104,143

103,281

14,318

563,267

Key money

During 2018 the impairment test on key money resulted in an impairment in France and Brazil of €4,739 (2017:€1,322) as a result of a decrease in value in use and external valuations performed for each store individually.

Customer databases and trademarks

In 2018, €5,538 of trademarks was impaired in the Other Europe segment. In 2017, the increase mainly related to the acquisitions of Visilab and Tesco Opticians.

Software

In 2018, the additions mainly related to the ongoing deployment of the global ERP system, the development of omni- channel capabilities and other investments in IT systems.

In 2018, €5,534 of software was impaired in the G4 segment and at corporate level. In 2017, €1,934 of software was impaired in the G4 and Americas & Asia segments.

Other

The other intangible assets mainly comprise the Group's right to open additional optical stores in the Tesco store network of €8,389 (2017: €11,600).

Impairment Test of Key Money

Key money as part of intangible assets has an indefinite useful life, relating to stores in France and Brazil. These assets are not amortized but are subject to an annual impairment test using cash flow projections covering a five-year period and the market value is used based on external valuations. Details as to the cost per square meter and latest key money transactions for the main shopping malls are publicly available.

If the calculated value in use is less than the carrying value of the assets, external valuations are performed to arrive at a fair value less costs of disposal.

The carrying amount of the key money with an indefinite useful life is tested on a store-by-store basis and per country amounts to:

in thousands of EUR

31 December 2018

31 December 2017

France

209,005

206,967

Brazil

3,939

4,558

212,944

211,525

Key assumptions used to determine the recoverable amount:

2018

2017

Revenue growth rate

1.6% - 13.7%

1.5%-13.0%

Discount rate

7.30% - 17.05%

7.84%-15.86%

Sensitivity

The most sensitive key assumption in the impairment test of key money relates to revenue growth. A reduction of the expected revenue growth to 0%, with all other factors used in calculating the value in use remaining unchanged, would lead to an additional impairment of €4,320 (2017: €5,285).