The Group ascertains the possibility of recovering amounts relating to goodwill and trademarks that are recorded in the accounts by carrying out impairment tests annually, or more frequently if there are indications of a loss in value. The recoverability of the amounts relating to goodwill and trademarks is assessed through an estimate of their value in use, which is the present value of future cash flows discounted at a rate that reflects the time value of money and specific risks on the valuation date. In addition, in the absence of multiple-year estimates, the recoverable value of assets may be estimated according to the fair value criterion minus cost of sale, using comparable transaction multiples.
For the purposes of the impairment tests, the amounts for goodwill and trademarks were allocated to the respective units (or groups of units) that generated cash flows (“cash generating units” or CGUs) on the closing date of the accounts. The Group identified the CGUs in the businesses, or groups of businesses acquired by them, that correspond to an individual brand or portfolios of brands, or to entities that produce and/or distribute one or more brands. Estimates of cash flows generated by individual CGUs were used for estimating the recoverable value based on value in use. Forecasts of operating cash flows come from the 2011 budget and the strategic plans prepared by the Group’s subsidiaries in 2010 for the period 2012-2015. In addition, the five-year plan was extrapolated on a ten-year basis, assuming medium- to long-term growth rates no higher than the average long-term growth rate for the market in which the Group operates. The use of a ten-year period was justified in light of the life cycle of the brands in the spirits market, as well as the presence in some CGUs of products that require long periods of ageing.
Estimates of future cash flows were calculated based on prudent criteria in respect of growth rates and sales development. In addition, projections are based on reasonableness and consistency with respect to the allocation of future general expenses, expected trends in capital investment, conditions of financial equilibrium and the main macroeconomic variables. Estimates of future cash flows were determined also by taking into account the Group’s historical averages. Cash flow projections relate to current operating conditions and therefore do not include cash flows connected with any one-off operations.
For the purposes of determining the terminal value, the perpetuity growth method of discounting was used. Specifically, the terminal growth rate was taken to be 1.5%, which does not exceed the sector’s estimated long-term growth rate. Moreover, in view of the large amount of stock on hand required to finance the future development of those CGUs whose main business relates to products with a long ageing period, it was considered appropriate also to use the exit multiple method to determine the terminal value in order to take into account the excess stocks of ageing liquid.
The value in use of the CGUs was calculated by discounting the estimated value of future cash flows, including the terminal value, which it is assumed will derive from the continuing use of the assets, at a discount rate (net of taxes
Weighted Average Cost of Capital (WACC). To determine the discount rate, reference was made to observable market indicators and parameters, the present value of money and specific risks connected with the business being valued. A discount rate of 7.8% was used on the date that the valuation was performed.
To estimate the recoverable value in the absence of a multi-year plan, the fair value criterion less sales costs was used, in conjunction with the comparable transaction multiples method. This methodology applies parameters to the CGU being valued that were deduced from the valuation attributed to a comparable company acquired in an active market. These implicit parameters or multipliers are deduced from the ratio of the price paid to acquire comparable companies to specific economic and financial indicators relating to those companies.
The procedure to identify a relevant sample consists of selecting a number of recent transactions relating to the acquisition of companies with similar characteristics based on operational and financial criteria. For the purposes of determining the fair value of the CGUs, the EV/EBITDA multiple was used. The use of this multiplier is considered particularly effective as it avoids distortions caused by the different tax regulations and financial structures; is less sensitive to distortions caused by variations in extraordinary profit; and facilitates comparison at international level. At 31 December 2010, based on the methodologies and assumptions set out above, the impairment tests revealed that the value of goodwill and trademarks was fully recoverable.
To take into account current market volatility and uncertainty over future economic prospects, sensitivity analyses have been carried out to assess the recoverability of amounts relating to goodwill and trademarks.
In addition, a sensitivity analysis of recoverable values was carried out based on the assumption of a half-point increase in the discount rate and a half-point reduction in the terminal growth rate.
The sensitivity analysis described above confirmed that the values of the goodwill and trademarks of the CGUs are fully recoverable.
The value of goodwill and trademarks allocated to the CGUs at 31 December 2010 and classified by business area according to the CGUs' main activity is shown in the table below.
31 December 2010 31 December 2009
Goodwill Trademarks Goodwill Trademarks € million € million € million € million
Spirits
Ouzo-12 10.0 7.4 10.0 7.4
Brazilian brands 81.6 - 72.0 -
Skyy Spirits 360.2 - 334.1 -
Barbero - Riccadonna - Mondoro 137.9 12.3 137.9 12.3
Barbero 137.9 - 137.9 -
Riccadonna - 11.3 - 11.3
Mondoro - 1.0 - 1.0
GlenGrant, Old Smuggler - 104.3 - 104.3
X-Rated Fusion Liqueur - 38.2 - 35.5
Cabo Wabo 27.0 53.2 25.1 49.3
Destiladora San Nicolas 8.4 7.1 7.3 6.2
Sabia 4.4 0.1 4.2 0.1
Wild Turkey 154.9 136.7 143.7 126.8
C&C brands 25.1 116.6 - -
Campari Benelux (formerly Mcs) 0.3 0.3 -
Other - 1.0 - 1.0
Total 809.8 476.9 734.6 342.9
Wines
Cinzano 51.5 0.8 51.5 0.8
Sella&Mosca - Zedda Piras - Lamargue 55.3 0.0 55.3 0.0
Odessa 8.4 - 7.7 -
Total 115.2 0.8 114.5 0.8
Soft drinks
Former Bols brands 4.6 2.0 4.6 2.0
Total 4.6 2.0 4.6 2.0