Arla Foods Consolidated Annual Report 2021
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Arla Foods Consolidated Annual Report 2021 / Consolidated Financial Statements / Notes
Capital employed
3.1 INTANGIBLE ASSETS
Contents
Accounting policies
Impairment occurs when the carrying amount of an
asset is greater than its recoverable amount through
either use or sale. For impairment testing, assets are
grouped together into the smallest group of assets that
generates cash inflows from continuing use (a cash-
generating unit) that are largely independent of the
cash inflows of other assets or cash-generating units.
For goodwill which does not generate largely
independent cash inflows, impairment tests are
prepared at the level where cash flows are considered
to be generated largely independently.
The group of cash-generating units is determined
based on the management structure and internal
financial reporting. The structure of cash-generating
units is revised yearly. The carrying amount of goodwill
is tested for impairment together with other non-current
assets in the cash-generating unit to which the goodwill
is allocated. The recoverable amount of goodwill is
recognised as the present value of the expected future
net cash flows from the group of cash-generating units
to which the goodwill is allocated, discounted using a
pre-tax discount rate that reflects the current market
assessment of the time value of money and risks
specific to the asset or cash-generating unit.
The carrying amount of other non-current assets is
assessed annually against its recoverable amount to
determine whether there is any indication of impairment.
Any impairment of goodwill is recognised as a separate
item in the income statement and cannot be reversed.
The recoverable amount of other non-current assets
is the higher value of the asset's value in use and its
market value, i.e. fair value, less expected disposal costs.
The value in use is calculated as the present value of
the estimated future net cash flows from the use of the
asset or the group of cash-generating units to which
the asset belongs.
An impairment loss on other non-current assets is
recognised in the income statement under production
costs, selling and distribution costs or administration
costs, respectively. Impairment recognised can only
be reversed to the extent that the assumptions and
estimates that led to the impairment have changed. An
impairment loss is reversed only to the extent that the
asset's carrying amount does not exceed the carrying
amount that would have been determined, net of
depreciation or amortisation, if no impairment loss had
been recognised.
Uncertainties and estimates
Goodwill impairment tests are performed for the group
of cash-generating units to which goodwill is allocated.
The group of cash-generating units is defined based on
the management structure for commercial segments
and is linked to individual markets. The structure and
groups of cash-generating units are assessed on an
annual basis.
The impairment test of goodwill is performed at least
annually for each group of cash-generating units to
which goodwill is allocated.
To determine the value in use, the expected cash flow
approach is applied. The most important parameters in
the impairment test include anticipations of future free
cash flows and assumptions on discount rates.
Anticipated future free cash flows
The anticipated future free cash flows are based on
current forecasts and long-term 2026 targets derived
from the Future26 process. These are determined at
cash-generating unit level in the forecast and target
planning process, and are based on external sources of
information and industry-relevant observations such as
macroeconomic and market conditions. All applied
assumptions are challenged through the forecast and
target planning process based on management's best
estimates and expectations, which are subject to
judgement by nature. They include expectations
regarding revenue growth, EBIT margins and capital
expenditure. The assumptions include moving milk
intake into value-add products and more profitable
markets and operational efficiency initiatives. The
growth rate beyond the strategy period has been set to
the expected inflation rate in the terminal period and
assumes no nominal growth.
Discount rates
A discount rate, namely weighted average cost of
capital (WACC), is applied for specific cash-generating
units based on assumptions regarding interest rates and
risk premiums. The WACC is recalculated to a before-tax
rate. Changes in the future cash flow or discount rate
estimates used may result in materially different values.
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