Management's discussion analysis
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Background
Impairment of non-current assets
IFRS 1
The preparation of our consolidated financial statements
requires management to make a number of estimates and
assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities, of revenues and
expenses and the disclosure of contingent assets and
liabilities. Estimates and assumptions may differ from future
actual results. The following are our significant critical
accounting policies, estimates and judgments:
Impairment of non-current assets
Pensions and other post-retirement benefit plans
Claims and provisions
Vendor allowances
Income taxes
Leases and sale and lease back transactions
Equity method accounting of ICA
The estimates and assumptions used in each of our
significant critical accounting policies are discussed in
further detail below. For additional information on these
and other accounting policies, see Notes 3 and 37 to our
consolidated financial statements included in this annual
report. Management, along with our independent auditor,
has discussed the critical accounting policies with the Audit
Committee.
We evaluate our non-current assets for impairment whenever
events or changes in circumstances indicate that their
carrying value may not be recoverable. Regardless of the
existence of impairment indicators, non-current assets with
indefinite lives (goodwill and brand names) are tested for
impairment at least annually.
In evaluating our non-current assets with finite lives under
IFRS, we compare the carrying amount of an asset (or the
cash generating unit to which the asset belongs) to the
recoverable amount defined as the higher of the fair value
less cost to sell and the value in use. Under US GAAP, we
measure asset recoverability by comparing the carrying
amount of an asset to the sum of the undiscounted cash
flows we expect to result from the use of the asset plus the
proceeds from its eventual disposal. If the carrying value is
higher than the undiscounted cash flows, the impairment
loss is calculated based on discounted cash flows. We group
non-current assets at the lowest level of identifiable cash
flows for this analysis. If we consider the assets impaired,
the impairment loss is measured under both IFRS and US
GAAP as being the amount by which the carrying amount of
the assets exceeds the recoverable amount of the assets. We
recognize this as a charge to operating income. Determining
whether non-current assets are impaired requires an
estimation of the recoverable amount of the asset, which
includes estimating expected future cash flows and deciding
the appropriate discount rates of future cash flows.
For the purpose of impairment testing, we allocate goodwill
to cash generating units ("CGUs") which are expected to
benefit from a business combination. Impairment testing
for these CGUs is similar to the testing process described
above. For US GAAP we assess goodwill impairment using
a two-step process. The initial step we use to identify
potential goodwill impairment is to compare an estimate of
the fair value of our reporting units to their carrying value,
including goodwill. We use discounted expected future cash
flows to determine the fair value of our reporting units. We
recognize an impairment loss if the estimated fair value is
less than the carrying amount. If such carrying amount
exceeds fair value, US GAAP requires a second step of
comparing the implied fair value of the applicable reporting
unit's goodwill with the carrying amount of that goodwill to
measure the amount of the goodwill impairment loss. We
determine the implied fair value of goodwill by allocating
the fair value of the reporting unit to all of the assets and
liabilities of the reporting unit in a manner similar to the
way we allocate purchase price to a newly acquired reporting
unit. The residual fair value after this allocation is the
implied fair value of the reporting unit's goodwill.
In estimating the discounted future net cash flows,
management makes significant assumptions. These include
determining the appropriate discount rate, projected sales
growth, operating income as a percentage of sales, projected
amount for capital expenditures and divestments and, where
the second step of the goodwill impairment test for intangible
assets applies under US GAAP, valuing our recognized and
unrecognized assets for reporting units. In making these
assumptions, we consider historical results, adjusted to
reflect current and anticipated operating conditions.
The following table shows the amount of impairment loss we
would recognize for goodwill if we increased or decreased
our discounted future net cash flows by 10%:
Euros in millions
US GAAP
Actual goodwill impairment losses
19
3
Goodwill impairment losses if
discounted future net cash flows
increased by 10.0%
19
3
Goodwill impairment losses if
discounted future net cash flows
decreased by 10.0%
19
14
80
