Annual Report 2006 ISS Global A/S

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 January – 31 December. Amounts in DKK millions 15. Impairment tests ISS Global performs impairment tests on intangibles 1) annually and whenever there is an indication that intangibles may be impaired. As described in note 9, Goodwill impairment and write-down, no impairment losses have been recognised in 2006. ISS Global's intangibles relate to several hundred acquisitions carried out under varying circumstances and at different stages of macro-economic cycles. The intangibles are distributed between most of the countries in which ISS Global operates. The acquired companies, to which the intangibles relate, comprise a diverse portfolio of service types, customer segments, geographical regions, contract sizes and management skills. Impairment tests are carried out per country as this represents the lowest level of cash-generating units (CGU) to which the carrying amount of intangibles can be allocated and monitored with any reasonable certainty. This level of allocation and monitoring of intangibles is in accordance with the monitoring for internal management purposes and should be seen in the light of ISS Global's strategy to integrate acquired companies as quickly as possible in order to benefit from synergies. Acquired companies are typically organisationally integrated and merged with (or activities transferred to) existing ISS Global companies shortly after the completion of the acquisition. Furthermore, synergies and other effects resulting from cooperation with existing ISS Global companies in their geographical or business area normally influence the financial performance of an acquired company. Consequently, after a short period of time, it is generally not possible to track and measure the value of intangibles of the individual acquired companies (or activities) with any reasonable certainty. As a company based in Europe, ISS Global assumes the long-term market equity risk premium to be 3.5%. When performing impairment test for individual CGU's, the risk premium applied may be higher than ISS Global's. When doing acquisitions ISS Global typically applies a hurdle rate, which is significantly higher than the calculated cost of capital. The carrying amount of intangibles and the key assumptions 2) used in the impairment testing for each CGU representing more than 5% of the carrying amount of intangibles are presented below. Goodwill Brands 2006 France 4,415 1 Finland 4) 1,859 - Netherlands 5) 1,852 - United Kingdom 1,609 - Australia 6) 1,400 - Sweden 1,045 - Spain 913 - Germany 7) 990 7 Other 5,982 - Total carrying amount at 31 December 2006 20,065 Carrying amount 8 Customer contracts 3) Total intangibles 1) 253 219 92 248 288 155 277 163 1,011 2,706 4,669 2,078 1,944 1,857 1,688 1,200 1,190 1,160 6,993 22,779 Applied expected long-term rate Growth Margin Applied rate Discount rate, net of tax 3.0% 6.7% 8.2% 3.0% 8.5% 9.1% 3.0% 6.5% 8.4% 3.0% 6.5% 8.4% 3.0% 7.0% 10.5% 3.0% 6.2% 9.0% 3.0% 6.2% 8.2% 3.0% 5.8% 8.5% 1) In this context intangibles cover the value of goodwill, brands and customer contracts portfolios and related customer relationships resulting from the acquisition of companies. 2) The key assumptions applied in the impairment tests are used for accounting purposes and should not be considered a forward-looking statement within the meaning of the US Private Securities Litigation Act of 1995 and similar laws in other countries regarding expectations to the future development. 3) Includes customer contract portfolios and related customer relationships. 4) The growth in Finland is expected to be 3.3% on average over the next nine years while the margin is expected to be 7.6% on average over the next seven years. 5) The growth in the Netherlands is expected to be 3.2% on average over the next seven years. 6) The margin in Australia is expected to increase from 6% in 2007 to 7% in 2009 while the growth is expected to be 4.9% on average over the next eight years. 7) The growth in Germany is expected to be 2.6% on average over the next four years while the margin is expected to be 4.8% on average over the next seven years. Continues _____________________________________________________________________________________________________________ ANNUAL REPORT 2006 / Consolidated Financial Statements 74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 January – 31 December. Amounts in DKK millions 15. Impairment tests (continued) Estimates used to measure recoverable amount The recoverable amount of each CGU is determined on the basis of its value-in-use. The value-in-use is established using certain key assumptions as described below. The key assumptions are turnover growth, operating margin and discount rates. Value-in-use cash flow projections are based on financial budgets approved by management covering the following financial year. The operating margin is based on past performance and expectations for the future market development. The assumptions applied in the short to medium term are based on management's expectations regarding the development in growth and operating margin. The terminal growth rates do not exceed the expected long-term average growth rate including inflation for the business in which the CGU's operate. Uncertainties reflecting historical performance and possible variations in the amount or timing of the future cash flow is reflected in the discount rate. In determining the country specific discount rates, which are calculated net of tax, a target ratio of 75/25 between the market value of debt and enterprise value is used. A country specific risk premium has been added to the discount rates to reflect the specific risk associated with each CGU. Sensitivity analysis A sensitivity analysis on the key assumptions in the impairment testing is presented below. The allowed change represents the percentage points by which the value assigned to the key assumption can change, all other things being equal, before the unit's recoverable amount equals its carrying amount. Growth Applied expected long-term rate Allowed decrease Applied expected long-term rate Discount rate, net of tax Allowed decrease Applied rate Allowed increase 2006 France 3.0% 2.0% 6.7% 1.8% 8.2% 2.0% Finland 1) 3.0% 2.8% 8.5% 2.7% 9.1% 2.8% Netherlands 2) 3.0% > 3.0% 6.5% 2.6% 8.4% 3.5% United Kingdom 3.0% > 3.0% 6.5% 3.9% 8.4% 8.3% Australia 3) 3.0% 0.9% 7.0% 0.8% 10.5% 0.9% Sweden 3.0% > 3.0% 6.2% 4.1% 9.0% 12.0% Spain 3.0% 2.1% 6.2% 1.8% 8.2% 2.1% Germany 4) 3.0% 0.7% 5.8% 0.6% 8.5% 0.7% Continues _____________________________________________________________________________________________________________ ANNUAL REPORT 2006 / Consolidated Financial Statements 75 Margin 1) The growth in Finland is expected to be 3.3% on average over the next nine years while the margin is expected to be 7.6% on average over the next seven years. 2) The growth in the Netherlands is expected to be 3.2% on average over the next seven years. 3) The margin in Australia is expected to increase from 6% in 2007 to 7% in 2009 while the growth is expected to be 4.9% on average over the next eight years. 4) The growth in Germany is expected to be 2.6% on average over the next four years while the margin is expected to be 4.8% on average over the next seven years.
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ISS Global A/S Bredgade 30 DK - 126
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Key Figures Amounts in DKK millions
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growth. Furthermore, the effect of
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In 2006, ISS Global continued the p
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to costs related to a turnaround pl
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structure, ISS established an Opera
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Strategy ISS Global is a fully owne
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Geography ISS intends to increasing
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Openness and transparency In additi
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tors. The controllers perform follo
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Risk Factors ISS Global is a fully
Page 23 and 24: tual obligations could harm ISS’s
Page 25 and 26: If ISS fails to manage growth and i
Page 27 and 28: ISS may incur substantial liabiliti
Page 29 and 30: thus reduce or prevent dividend pay
Page 31 and 32: Independent Auditor’s Report To t
Page 33 and 34: Organic growth ISS Global uses esti
Page 35 and 36: 2006 primarily related to redundanc
Page 37 and 38: Tempo as well as a number of smalle
Page 39 and 40: including non-interest-bearing debt
Page 41 and 42: CONSOLIDATED CASH FLOW STATEMENT 1
Page 43 and 44: CONSOLIDATED STATEMENT OF TOTAL REC
Page 45 and 46: NOTES TO THE CONSOLIDATED FINANCIAL
Page 73: NOTES TO THE CONSOLIDATED FINANCIAL
Page 103 and 104: CASH FLOW STATEMENT OF THE PARENT C
Page 105 and 106: STATEMENT OF TOTAL RECOGNISED INCOM
Page 107 and 108: NOTES TO THE FINANCIAL STATEMENTS O
Page 123: Definitions EBITDA = Operating prof
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