G4S Annual Report and Accounts 2011

Overview Strategic review Performance
Notes to the consolidated financial statements continued
19 Intangible assets continued
Customer-related intangibles comprise the contractual and other relationships with customers which meet the criteria for identification as intangible assets
in accordance with IFRS. Customer contracts and relationships recognised upon the acquisition of Securicor plc on 19 July 2004 are considered significant to
the group. The carrying amount at 31 December 2011 was £47m (2010: £72m), and the amortisation period remaining in respect of these assets is two and
a half years.
Goodwill acquired in a business combination is allocated to the cash-generating units (CGUs) which are expected to benefit from that business
combination. The majority of goodwill was generated by the merger of the security services businesses of Group 4 Falck and Securicor in 2004 which was
accounted for as an acquisition of Securicor by Group 4 Falck.
The group tests tangible and intangible assets, including goodwill, for impairment on an annual basis or more frequently if there are indications that amounts
may be impaired. The annual impairment test is performed prior to the year end when the budgeting process is finalised and reviewed post year end. The
group’s impairment test compares the carrying value of each CGU to its recoverable amount. CGUs are identified on a country level basis including
significant business units, as per the group’s detailed management accounts. Under IAS 36 Impairment of Assets, an impairment is deemed to have occurred
where the recoverable amount of a CGU is less than its carrying value.
The recoverable amount of a CGU is determined by its value in use which is derived from discounted cash flow calculations. These calculations include
forecast pre-tax cash flows for a period of five years. The five year cash flow forecasts are based on the budget for the following year (year one) and the
business plans for years two and three, the results of which are reviewed by the board, and projections for years four and five, all of which reflect past
experience as well as future expected market trends. Budgeted and forecast cash flows are based on management’s assessment of current contract
portfolio, contract wins, contract retention and price increases. Cash flows beyond the five year forecast period are projected into perpetuity at the lower
of the planned growth rate in year three and the forecast underlying economic growth rate for the economies in which the CGU operates.
Where the planned growth rate in year three exceeds the forecast underlying economic growth rate, the excess is reduced progressively in the projections
for years four and five. Into-perpetuity growth rates across the group’s CGUs range from 0% to 25%, and the rates for the significant CGUs are disclosed in
the table below. Future cash flows are discounted at a pre-tax, weighted average cost of capital which for the group is 6.1% (2010: 6.5%), and the discount
rates for the significant CGUs are disclosed in the table below. Pre-tax cash flows are discounted using pre-tax discount rates derived from calculating the
net present value of the post-tax cash flows discounted at post-tax rates. The group rate is adjusted where appropriate to reflect the different financial risks
in each country in which the CGUs operate. Risk-adjusted discount rates applicable to group entities range from 4.5% in Singapore to 63.6% in Guinea.
In applying the group’s model in 2011, the group has impaired the goodwill relating to its businesses in Greece by £13m. The current challenging economic
circumstances in the country have resulted in a discount rate of 16% being applied to the relevant cash flows. The remaining goodwill relating to Greece is
£14m and given the ongoing economic and political uncertainty in the country there remains a risk of further impairment. Each increase in the discount rate
appropriate to our businesses in Greece of 1% would result in an additional impairment of approximately £1m, all other factors being equal. No impairment
has been identified and recognised in any of the group’s other CGUs for the year ended 31 December 2011 or for the year ended 31 December 2010.
Management believe that there is currently no reasonably possible change in the underlying factors used in the impairment model for its CGUs, apart from
Greece, which would lead to a material impairment of goodwill.
The following CGUs have significant carrying amounts of goodwill:
Discount rate
2011
Discount rate
2010
Growth rate*
2011
Growth rate*
2010
Goodwill
2011
£m
Goodwill
2010
£m
US secure solutions (manned security) 6.0% 6.4% 2.0% 2.5% 375 372
Former GSL business acquired in 2008 6.1% 6.5% 2.5% 2.5% 258 258
UK cash solutions 6.1% 6.5% 2.5% 2.5% 239 239
Netherlands secure solutions 6.0% 6.0% 2.5% 3.3% 118 121
UK secure solutions (manned security) 6.1% 6.5% 2.5% 2.5% 117 117
UK secure solutions (justice services) 6.1% 6.5% 2.5% 2.5% 95 95
Estonia secure solutions and cash solutions 7.4% 7.0% 5.0% 4.0% 63 65
Other (all allocated) 931 892
Total goodwill 2,196 2,159
*Growth rate is the long term into-perpetuity growth rate.
The key assumptions used in the discounted cash flow calculations relate to the discount rates and underlying economic growth rates for each CGU. With
all other variables being equal, a 1% increase in the group discount rate from 6.5% to 7.5% with equivalent increases to the discount rates in all countries
would result in a goodwill impairment to the group of £3m. A significant increase of 3% in the group discount rate from 6.5% to 9.5%, and an equivalent
increase in all countries, would result in a group impairment of £26m.
A decrease in the underlying growth rate in all countries of 1% would result in a group impairment of £2m. A decrease of 3% in growth rate would result in
a group impairment of £11m. These approximations indicate the sensitivity of the impairment test to changes in the underlying assumptions. However, it is
highly unlikely that any variations in the assumptions would impact on all CGUs at the same time.
98
G4S plc
Annual Report and Accounts 2011