2006 20-F - Sappi

SAPPI
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)
for the year ended September 2006
2. ACCOUNTING POLICIES (Continued)
(iv) Goodwill
All business combinations are accounted for by applying the purchase method of accounting. At
acquisition date the group recognises the acquiree’s identifiable assets, liabilities and contingent liabilities
that satisfy the recognition criteria at their respective fair values. The cost of a business combination is the
fair value of the purchase consideration due at date of acquisition plus any directly attributable transaction
costs. Any contingent purchase consideration is recognised to the extent that it is probable and can be
measured reliably. Any excess between the cost of the business combination and the group’s interest in the
net fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognised as
goodwill in the balance sheet. Goodwill is adjusted for any subsequent remeasurement of contingent
purchase consideration.
Goodwill is subsequently held at cost less any accumulated impairment losses. Goodwill is not
amortised but tested for impairment annually or more frequently where there is an indication of
impairment.
Goodwill is tested for impairment based on an allocation to one or more cash-generating units
(CGUs), being the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or group of assets. Goodwill is allocated to the CGUs in
which the synergies from the business combinations are expected. Each CGU containing goodwill is tested
annually for impairment. An impairment loss is recognised whenever the carrying amount of an asset or its
CGU exceeds its recoverable amount.
Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of
any goodwill allocated to a CGU and then to reduce the carrying amount of the other assets in the CGU
on a pro rata basis.
The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value-in-use.
The fair value less cost to sell is determined by ascertaining the current market value of an asset and
deducting any costs related to the realisation of the asset.
In assessing value-in-use, the expected future cash flows from the CGU are discounted to their
present value using a pre-taxation discount rate that reflects current market assessment of the time value
of money and the risks specific to the CGU.
Impairment losses relating to goodwill are not reversed.
On the disposal of a subsidiary, the attributable amount of goodwill is included in the determination
of profit or loss on disposal.
2.2.3 Cash and cash equivalents
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash and that are subject to an insignificant
risk of changes in value, with maturities of less than three months. Similar investments with maturities
beyond three months are considered short-term marketable securities.
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