Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that are the basis for our consolidated financial statements. Our critical accounting policies, the judgments we make in the creation and application of these policies, and the sensitivities of reported results to changes in accounting policies, assumptions and estimates are factors to be considered along with our consolidated financial statements. For additional information, see the notes to our consolidated financial statements for the fiscal years ended December 31, 2010 and December 31, 2009, included in this prospectus beginning on page F-7 and F-59, respectively.
Recoverability of Goodwill and Other Intangible Assets
Intangible assets, including goodwill and trade names, represent a significant part of the total assets of our Group. At December 31, 2010, 2009 and 2008, the carrying amount of goodwill and non-regularly amortizable intangible assets with indefinite useful lives wasA301,019 thousand, A254,208 thousand and A262,217 thousand, respectively. This represented 52.0%, 54.1% and 52.5%, respectively, of our total assets.
Assets that have an indefinite useful life, which are not subject to scheduled amortization, are tested for impairment at least annually. Impairment exists when the carrying amount of an asset exceeds the recoverable amount. The recoverable amount is the higher of fair value less costs to sell and the value in use. The fair value less costs to sell is the best-possible estimate of the amount for which the asset would be acquired by a third-party in an arm’s length transaction less the estimated costs of disposal. The value in use is calculated by discounting estimated future cash flows expected to be derived from an asset with a risk-adjusted discount rate (weighted average cost of capital, “WACC”). The WACC is the average cost of debt and equity funding weighted by the proportion of the capital structure that the fair values of those two components constitute. If the carrying amount of an asset is higher than its recoverable amount, the asset is immediately written down to this amount.
If the recoverable amount of an individual asset cannot be reliably established, the recoverable amount of the CGU, identified according to geographical areas (EMEA, Americas or Asia Pacific), to which the asset belongs is established and compared with the carrying amount of the CGU. Goodwill is tested for impairment regularly, at least annually, after completion of the annual budget process by comparing the carrying amount of the relevant group of CGUs with their recoverable amount. In addition, goodwill is tested for impairment at Group level as certain assets and cash flows can only be attributed to the Group as a whole. For the goodwill impairment test, the operating segments of the segment reporting were identified as the relevant groups of CGUs.
The fair value less costs to sell is taken as the recoverable amount. This amount is determined on the basis of a recognized company valuation model. Our company valuation model is based on cash flow plans which are in turn based on a five-year plan approved by the management and applicable at the date of the performance of the impairment test. The planned cash flows are based on the management’s past experience and expectations about the future market developments. Cash flows beyond the five-year period are extrapolated using estimated perpetual growth rates which are set out in our financial statements. If the carrying amount of a segment exceeds the recoverable amount, an impairment loss is recognized for the difference. In this case, the goodwill of the relevant segment is first written down. Any remaining impairment is allocated to the assets of the segment in proportion to the net carrying amounts of the assets on the balance-sheet date. The carrying amount of an individual asset must not be less than the highest of fair value less costs to sell, value in use (both in as far as they can be established) and nil.
Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred Income Tax Assets
Deferred income tax assets are recognized for (i) all deductible temporary differences to the extent that future taxable income will be available against which such assets may be relieved, or (ii) for tax losses carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable.
We did not recognize deferred income tax assets in respect of deductible temporary differences as of December 31, 2010 (December 31, 2009:A1,040 thousand). However, we did not recognize deferred income tax assets in respect of losses amounting toA2,914 thousand at December 31, 2010 (December 31, 2009: A4,366 thousand) that can be carried forward against future taxable income because these amounts did not meet the management’s expectation.
Taxable temporary differences amounting toA13,663 thousand as of December 31, 2010 (December 31, 2009:
A2,292 thousand) associated with investments in subsidiaries were not recognized as deferred tax liabilities because the respective parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Consolidation
The companies we acquire are fully consolidated from the date on which we have the right to control their financial and operating policies, which is generally the case when we own shares of more than 50% of the voting rights. To account for the companies we acquired, we use the purchase method of accounting. Thus, the costs of any acquisition are measured as the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the costs of any acquisition exceeding the fair value of our share of the identifiable net assets acquired is recorded as goodwill. If the cost of an acquisition is less or more than the fair value of the net assets of the company or business acquired, the difference is recognized directly in profit or loss.
INFORMATION FROM THEUNCONSOLIDATEDFINANCIALSTATEMENTS INACCORDANCE WITHHGBFOR THEFISCAL YEARENDEDDECEMBER31, 2010
Some information from the audited unconsolidated financial statements of the Company prepared in accor-dance with the HGB as of and for the fiscal year ended December 31, 2010 is presented below. The HGB financial statements are included on pages F-129 et seq. in the financial section.
As of December 31, 2010, the total assets of the Company amounted toA98,084 thousand, as determined on an unconsolidated basis in accordance with the HGB, compared toA83,801 thousand as of December 31, 2009. The Company generated a net loss for the 2010 fiscal year in the amount ofA151 thousand, compared to a net loss of A42 thousand for the 2009 fiscal year.
INDUSTRY