SAPPI LIMITED

SAPPI
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)
for the year ended September 2010
2. ACCOUNTING POLICIES (Continued)
The group believes that the following accounting policies are critical due to the degree of
management judgment and estimation required and/or the potential material impact they may have on
the group’s financial position and performance.
2.3.1 Impairment of assets other than goodwill and financial instruments
The group assesses all assets (other than goodwill and intangible assets not yet available for use) at
each balance sheet date for indications of an impairment or the reversal of a previously recognized
impairment.
Intangible assets not yet available for use are tested at least annually for impairment.
In assessing assets for impairment, the group estimates the asset’s useful life, discounted future
cash flows, including appropriate bases for future product pricing in the appropriate markets, raw
material and energy costs, volumes of product sold, the planned use of machinery or equipment or
closing of facilities. The pre-tax discount rate (impairment discount factor) is another sensitive input to
the calculation.
Where an impairment exists, the losses are recognized in profit or loss for the period. For an asset
whose cash flows are largely dependent on those of other assets, the recoverable amount is determined
for the cash-generating unit (CGU) to which the asset belongs.
A previously recognized impairment loss will be reversed through profit or loss if the recoverable
amount increases as a result of a change in the estimates used previously to determine the recoverable
amount, but not to an amount higher than the carrying amount that would have been determined, net of
depreciation or amortization, had no impairment loss been recognized in prior periods.
Refer to note 9 for the assumptions and inputs used in assessing assets for impairment or
impairment reversals.
2.3.2 Goodwill
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the
acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given,
liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the
acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions
for recognition are recognized at their fair value at the acquisition date.
Goodwill arising at acquisition is subsequently held at cost less any accumulated impairment
losses. Goodwill is not amortized but is tested for impairment annually or more frequently where there is
an indication of impairment based on an allocation to one or more cash-generating units (CGUs) in
which the synergies from the business combinations are expected.
Goodwill is tested for impairment using a cash flow valuation model based on an allocation of the
goodwill to one or more cash generating units (CGUs). The group takes into account its ability to
carousel products across different operating units in allocating goodwill to CGUs.
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