2.5 Movements in the intangible assets
The major categories of the intangible assets are subdivided into “Land use rights”, “Software”, and “Royalties, patents, others”.
In the period under review, the intangible assets amount to CHF 29 million (previous year: CHF 25 million).
Land use rights, in the amount of CHF 10 million (previous year: CHF 11 million), and Software, in the amount of CHF 10 million (previous year: CHF 12 million), remained almost unchanged compared with the previous year.
Royalties, patents, others increased to CHF 9 million (previous year: CHF 2 million). The main reasons for the increase are the acquired customer relationships in the amount of CHF 4 million and the brand name of CHF 2 million with the acquisition of Urecon Ltd by GF Piping Systems. CHF 2 million relate to an acquired customer list within the GF Piping Systems division and capitalized R&D costs within the GF Automotive division.
The theoretical capitalization of the goodwill would affect the result of the consolidated financial statements as follows:
Theoretical movements in goodwill
Effect on income statement
Effect on balance sheet
Management assumptions and estimates
For goodwill positions, that are listed in the theoretical movements, an impairment test is performed, if there is any indication that these goodwill positions could be affected from such an impairment. If such indications exist, an impairment test is performed for the goodwill positions offset against equity to determine the recoverable amount. As a basis for the calculation, business plans for the next five years are used. Subsequent years are included in the calculation using a perpetual annuity with a growth assumption of zero. The projections are based on knowledge and experience as well as on current judgments made by management as to the probable economic development of the relevant markets. It is assumed that there are no significant planned changes in the organization of any of the divisions, except for the measures already decided and announced.
Goodwill from acquisitions is offset against the Corporation’s equity at the acquisition date. The theoretical amortization is based on the straight-line method over the useful life of five years. The adjustment in the year under review in the amount of CHF –1 million (previous year: CHF –1 million) is due to the reversal of the conditional purchase price of Sterisol from the year 2013 of CHF –1 million, an adjustment of the conditional purchase price of Microlution Inc of CHF –1 million and the reversal of dividend income of Beijing Jingran Lingyun Gas Equipment Co Ltd und Langfang Shuchang Auto Parts Co Ltd that belongs to the period before the acquisition date amounting to CHF 1 million. This adjustment will be amortized together with the goodwill over the remaining period of amortization.
On the basis of the impairment test made on the balance sheet date, no indications of impairment were found, therefore all goodwill positions have retained their recoverable value. The goodwill of Georg Fischer Hakan Plastik AS and Microlution Inc was tested for impairment in addition. The recoverable amount of both companies equals the value in use, which is determined based on future discounted cash flows.
By applying the capital asset pricing model, a specific rate for the cost of capital was calculated for Georg Fischer Hakan Plastik AS and Microlution Inc. The calculation of this discount rate refers to the data of a relevant peer group. Furthermore, specific values for the risk-free interest rate, the market risk premium, the borrowing costs, and the tax rate were applied.
Since the cash flow projections are based on cash flows after tax, the discount rate has also been determined taking tax effects into account. The discount rate for Georg Fischer Hakan Plastik AS was calculated at 16.1% and for Microlution Inc at 8.1%.
It was confirmed that the theoretical goodwill of both companies retained its recoverable value.
Accounting principles: intangible assets and impairment
Acquired licenses, patents, and similar rights are capitalized and, with the exception of land use rights, are amortized on a straight-line basis over their estimated useful lives of 3 to 15 years. Land use rights are amortized over the duration of the usage rights granted. For this item, useful lives can be up to 50 years. Software is amortized on a straight-line basis over the estimated useful lives of 1 to 5 years.
In the event of business combination, goodwill at the date of acquisition is calculated as follows: the fair value of the net assets, plus transaction costs incurred in connection with the business combination, plus the value of the minority interests in the acquired company, less the value of the acquired net assets carried on the balance sheet.
The positive or negative goodwill resulting from acquisitions is offset in equity against retained earnings at the date of acquisition. Upon the disposal of a portion of the company, the goodwill previously offset in equity is transferred to the income statement. If parts of the purchase price are dependent on future results, they are estimated as accurately as possible at the acquisition date and recognized in the balance sheet. In the event of disparities when the definitive purchase price is settled, the goodwill offset in equity is adjusted accordingly.
The recoverable amount of non-current assets (especially property, plant, and equipment, intangible assets, financial assets as well as the goodwill reported in the sample accounting) is reviewed at least once a year. If there is any indication of an impairment, an impairment test is performed immediately. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized in the income statement. As the goodwill is already offset with equity at the date of the acquisition, an impairment of the goodwill does not affect the income statement, but leads to a disclosure in the notes only.
Accounting principles: research and development
All research costs are recognized in the income statement in the period in which they were incurred. Development costs are recognized as an asset only to the extent that the following specific recognition criteria are all met accumulative:
- –costs are clearly defined, clearly attributable to the product or process, and can be separately identified and measured reliably
- –the technical feasibility can be demonstrated
- –the company intends to produce and market the product or to use the process
- –a market exists
- –the required internal resources are available
- –the amount recognized is covered by future cash flows