11. Goodwill
2017 2016
Opening balance 77.0 78.2
Translation differences -0.9 -1.2
Depreciation and impairment -3.6 -
Closing balance 72.4 77.0
Allocation of goodwill
All acquisitions resulting in the Group recognising goodwill have concerned the acquisition of net assets or business by an individual CGU and goodwill has been allocated to said CGU separately in respect of each acquisition. Goodwill has been allocated to a total of four CGUs.
Specification of goodwill 2017 2016
Finland 19.8 19.8
Sweden 30.4 31.4
Denmark - 3.6
Baltics 22.2 22.2
Total 72.4 77.0
Allocation and recognition of impairment loss
An impairment loss amounting to EUR 6.7 million has been recorded in the Danish segment based on impairment testing. The impairment loss was allocated to goodwill at EUR 3.6 million, intangible assets EUR 1.7 million and machinery and equipment EUR 1.4 million. The impairment loss is included in row depreciation and amortization in the income statement. The impairment had no cash flow impact. After the impairment loss, the Danish segment does not have any remaining goodwill value. The impairment loss has been recorded because the segment has not reached the planned profitability.
Impairment testing
The company tests for impairment each year. The key assumptions in testing are the growth prospects of the business, cost trends, and the discount rate employed.
Management reviews the business performance based on business segments and it has identified Finland, Sweden, Denmark and the Baltics as the main segments. Goodwill is monitored by the Management at the business segment level.
In impairment testing all the segment’s assets are tested against the recoverable amounts in the future. The recoverable amounts of the cash generating units are based on value-in-use calculations. The cash flow estimates employed are based on financial plans adopted by Management and the Board of Directors and spanning three years. The plans are based on moderate and cautious net sales growth under the assumption that Group EBIT percent will improve in the forecast period. The cash flow after the forecast period is extrapolated using a cautious growth factor (1.0 per cent). The growth factors of the CGUs for the period following the forecast period do not exceed the long-term historical growth of the CGUs.
The interest rate has been defined as the weighted average cost of capital (WACC). Calculation of the interest rate is based on market information on companies operating in the same field (control group). In addition, the risks in each market area have been taken into account in the calculation. The interest rates used are 4.7 (4.7) per cent in Sweden, 4.4 (4.7) per cent in Finland, 4.3 (4.7) per cent in Denmark and 4.7 (4.8) per cent in the Baltic countries.
The sensitivity of each CGU to impairment is tested by varying the discount rate, future cash flow before debt service, and the growth factor reflecting profitability development. Based on the sensitivity analyses conducted, a reasonable change in variables would not result in impairment in Sweden, Finland or the Baltics. Following discount rate increases in percentage points would not cause any impairment, provided that other factors remained unchanged: Sweden 7.3, Finland 7.3, the Baltics 4.8.
The following table presents terminal cash flow before debt service that would result in asset values to equal recoverable amounts of the CGUs all other variables unchanged.
2016
CFBDS
2017
CFBDS
breakeven
terminal
CFBDS
Sweden 8.2 18.1 6.7
Finland 25.9 -56.0 11.6
Baltics 6.7 4.4 4.8
Due to impairment loss, Denmark’s recoverable amount corresponds to the book value. As a result, any adverse change in the assumptions would generate more impairment loss. If the cash flow in testing would be 10 % smaller, additional impairment loss amounting to EUR 5 million would have to be booked. If the discount rate in testing would be 1 percentage point higher, additional impairment loss amounting to EUR 12 million would have to be booked.
As far as Management is aware, reasonable changes in assumptions used in respect of other factors do not necessitate impairment for the goodwill of Sweden, Finland or the Baltics. Sudden, and other than reasonably possible changes in the business environment of cash generating units, may result in an increase in capital costs or in a situation where a cash generating unit is forced to assess clearly lower cash flows. Recognition of an impairment loss is likely in such situations.
The annual impairment testing performed in 2017 resulted in recognition of impairment loss. The annual impairment testing performed in 2016 did not result in recognition of impairment loss.