Investor Presentaiton
CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ACQUISTIONS AND CAPITAL EXPENDITURE
4.2 GOODWILL
Goodwill allocation
Goodwill is allocated to cash-generating units (CGUS). A cash
generating unit is typically defined as the country unit in which
the acquired business operates in accordance with KONE's
business model and organization structure. As at Dec 31,
2022 the carrying amount of goodwill is allocated to 23
different CGUS. The five largest CGUS carry 75% of the
goodwill. The carrying amount of goodwill is below EUR 10
million for 9 CGUS. The geographical allocation of goodwill
and the weighted average discount rates are presented in the
adjacent table.
Impairment testing
The value-in-use calculations have been prepared utilizing
cash flow projections that are based on CGU specific financial
estimates approved by the Group management. The explicit
forecast period covers the following three years for each
CGU.
The business growth, sales price and cost development
assumptions embedded in the CGU specific cash flow
projections are based on management assessment of the
market demand and environment, which are examined
against external information sources. The productivity and
efficiency assumptions are based on internal targets, which
are evaluated against actual performance. The cash flows for
subsequent terminal year are assumed prudently without
growth, except as stated below.
The discount rates are based on the risk-free interest
rates, risk factors (beta coefficient) and market risk premiums
available on financial markets. The value-in-use calculations
are validated against KONE's market capitalization.
Compared to previous year, the most significant change
affecting the cash flow projections has concerned the
deterioration of new equipment market in China where
goodwill is carried related to KONE's second brand business.
The operating environment having seen big changes,
assumptions specific to this CGU have been revised when
estimating the value in use, including country risk premium
and terminal growth rate that has been increased to better
align with local inflation.
As a result of the annual impairment test, the goodwill for
one CGU in EMEA in the amount of EUR 1.0 million, was fully
impaired. Additionally, EUR 2.8 million of goodwill attached to
Accounting principles
Goodwill
Acquisitions are accounted for using the acquisition method.
Goodwill is calculated as the excess of acquisition cost over
the fair values of identified assets and liabilities acquired.
Goodwill typically represents the value of the acquired
market share, business knowledge and the synergies
obtained in connection with the acquisition. The carrying
amount of goodwill is not amortized, but is tested for
impairment.
Impairment testing
The Group assesses the carrying amount of goodwill
annually or more frequently if any indication of impairment
exists. Goodwill is allocated to the cash generating units
(CGUS) of the Group, which are identified according to the
Goodwill, MEUR
EMEA
Americas
Asia-Pacific
Total
Goodwill reconciliation
Goodwill, MEUR
Opening net book value
Translation differences
Increase
Decrease
Companies acquired (note 4.1)
Closing net book value
country of operation and business area at the level at which
goodwill is monitored for internal management purposes. The
recoverable amount of a CGU is determined by value-in-use
calculations. In assessing the recoverable amount, estimated
future cash flows are discounted to their present value. Cash
flow estimates are based on management's estimates. The
discount rate is the weighted average cost of capital (WACC)
for the main currency area in the location of the CGU (country
or business area), which reflects the market assessment of
the time value of money and the risks specific in KONE's
business.
Any impairment loss of goodwill is recognized immediately
as an expense and is not subsequently reversed.
Dec 31, 2022
%
Discount rates used
(pre-tax), %
809.5
57
8.23
368.1
26
10.05
237.1
17
10.17
1,414.7
Dec 31, 2021 %
814.9 58
349.0 25
241.4 17
1,405.2
Discount rates used
(pre-tax), %
5.52
7.22
8.91
Dec 31, 2022
1,405.2
Dec 31, 2021
1,327.0
58.6
8.2
3.5
-6.1
-0.9
4.0
20.5
1,414.7
1,405.2
68
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