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OAO Severstal and subsidiariesOAO Severstal and subsidiariesNotes to the consolidated financial statementsfor the years ended December 31, 2008, 2007 and 2006(Amounts expressed in thousands of US dollars, except as stated otherwise)Notes to the consolidated financial statementsfor the years ended December 31, 2008, 2007 and 2006(Amounts expressed in thousands of US dollars, except as stated otherwise)The following specific assumptions were used in impairment test:• the forecast sales volumes decline by 49% in 2009, increase by 54% in 2010 and further increase on average by5% p.a. in 2011 to 2013; thereafter sales volumes remain constant at the average level of the forecast period;• the forecast steel prices increase by 8% in 2009; decline by 2% in 2010 and remain stable till 2013; thereaftersales prices remain constant at the weighted average level of the forecast period;• operating costs are forecast to decrease by 33% in 2009, increase by 32% in 2010 and then increase on averageby 5% p.a. during the next three years; thereafter operating costs remain constant at the average level of theforecast period;• pre-tax discount rate of 18.9%.Results of Goodwill impairment testingThe goodwill of the following cash generating units had been tested for impairment and no impairment loss wasrecognised as the result of those tests:Mining segmentNerengri-Metallik and Rudnik AprelkovoThe carrying amount of goodwill allocated to the cash generating unit was amounted US$ 54.5 million.The above estimates are particularly sensitive in the following areas:The following assumptions were used in the impairment test:• a 1% increase in discount rate increases an impairment loss by US$ 21.1 million;• a 10% decrease in future planned revenues increases an impairment loss by US$ 113.4 million.Severstal Warren Inc.The recoverable amount was determined as fair market value less costs to sell.An impairment loss was recognised of US$ 382.6 million and was allocated to property, plant and equipment in theamount of US$ 376 million and to goodwill in the amount of US$ 6.6 million.The carrying amount of goodwill allocated to the cash generating unit before impairment loss was US$ 6.6 million.The following assumptions were used for the calculation of fair market value less cost to sell:• the market value of the major production equipment is determined based on the most recent valuationperformed by the independent appraiser when finalising the purchase price allocation (Note 30);• the value of other items of property, plant and equipment is determined on current prices for scrap, adjusted fordecommissioning costs;• the fair value calculation includes site restoration and other related environmental expenditures based onrequirements of applicable regulation.Management believes that any reasonable possible change in any of these key assumptions would not cause thecarrying amount of the cash generating unit to exceed its recoverable amount.Metalware segmentThe impairment loss related to other cash generating units was recognised in the amount of US$ 7.2 million and wasallocated to property, plant and equipment.• the forecast extraction volumes grow on average at 22% p.a. during 2009 to 2012 and remain constantthereafter;• the forecast has the following growth rates for gold prices: decline of 16% in 2009; average growth of 12% p.a.in 2010 to 2013; average decline of 4% p.a. during the remaining contractual term of the respective licenses;• operating costs are forecast to increase on average by 9% p.a. in 2009 to 2013 and to grow on average by 1%p.a. during the remaining contractual term of the respective licenses;• pre-tax discount rate of 21% (in US$ terms).The above estimates are particularly sensitive in the following areas:• a 10% decrease in future planned revenues causes the carrying amount of cash generating unit to exceed itsrecoverable amount by US$ 52.2 million.Celtic Resources Holdings Plc.The carrying amount of goodwill allocated to the cash generating unit was amounted US$ 37.8 million.The following assumptions were used in the impairment test:• the forecast extraction volumes increase on average by 54% p.a. in 2009 to 2010, decline on average by 10% in2011 to 2012 and remain constant thereafter;• the forecast has the following growth rates for gold prices: decline of 17% in 2009; average growth of 12% p.a.in 2010 to 2013; average decline of 5% p.a. during the remaining contractual term of the respective licenses;• operating costs are forecast to increase on average by 39% p.a. in 2009 to 2010, further grow on average by 5%p.a. in 2011 to 2012 and remain constant during the remaining contractual term of the respective licenses;• pre-tax discount rate of 23.6% (in US$ terms).Management believes that any reasonably possible change in any of these key assumptions would not cause thecarrying amount of the cash generating unit to exceed its recoverable amount.132133