Tesco plc Annual Report and Financial Statements 2008

Notes to the Group financial statements continued
Note 10 Goodwill and other intangible assets continued
Impairment of goodwill
Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis or more frequently if there are indications
that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at
which management monitor that goodwill.
Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs to sell. Value in use is calculated from cash
flow projections for five years using data from the Group’s latest internal forecasts, the results of which are reviewed by the Board. The key assumptions
for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates
using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in
selling prices and direct costs are based on past experience and expectations of future changes in the market.
The recoverable amounts of China, Japan and Turkey were based on fair value less costs to sell. Fair value less costs to sell is the amount for which the
cash-generating unit could be exchanged between knowledgeable, willing parties in an arm’s length transaction less costs to sell. Management undertakes
an assessment of relevant market data including, where available, recent market transactions for similar assets in the retail industry. Fair value is also
calculated from cash flow projections for five years using data from the Group’s latest internal forecasts, including future capital expenditure, the results
of which are reviewed by the Board. The key assumptions for the fair value calculations are those regarding discount rates, growth rates, expected changes
in margins and capital expenditure. Management estimate discount rates using post-tax rates that reflect the current market assessment of the time value
of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of
future changes in the market.
The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of generally 3%-4% (2007: 3%-4%).
The pre-tax discount rates used to calculate value in use range from 8%-24% (2007: 10%-17%). The post-tax discount rates used to calculate fair value
less costs to sell range from 5%-20%. These discount rates are derived from the Group’s post-tax weighted average cost of capital as adjusted for the
specific risks relating to each geographical region.
In February 2008 and 2007 impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the
cash-generating units to which goodwill has been allocated. Management determined that there has been no impairment.
The components of goodwill are as follows:
64
Tesco PLC Annual Report and
Financial Statements 2008
2008 2007
£m £m
UK 571 501
Thailand 124 113
South Korea 48 29
Japan 129 115
China 376 346
Malaysia 65 64
Poland 394 322
Czech Republic 44 34
Turkey 54 47
Other 24 15
1,829 1,586
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