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 amounted to CHF 34 million (previous year: CHF 29 million).
Land use rights increased to CHF 13 million (previous year: CHF 10 million). The main reason was the increase in land use rights for the new plant in Changzhou at GF Machining Solutions. Software also amounted to CHF 13 million (previous year: CHF 10 million). The main reason for this increase was the industrial software and SAP implementation in various companies by GF Piping Systems and GF Machining Solutions.
Royalties, patents, others in the amount of CHF 8 million (previous year: CHF 9 million), remained almost unchanged compared to the previous year.
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 –4 million (previous year: CHF –1 million) is due to the adjustments of the conditional purchase price of GF Casting Solutions SRL, Pitesti of CHF –3.3 million and of Microlution Inc of CHF –0.2 million. The adjustments will be amortized together with the goodwill over the remaining period of amortization.
At the balance sheet date no indications of impairment were found except for the goodwill of Symmedia GmbH and Microlution Inc. These goodwill items were tested for impairment. Both impairment tests revealed that the resulting recoverable amounts based on value in use calculations, exceeded the carrying amounts.
By applying the capital asset pricing model, individual costs of capital were calculated for Symmedia GmbH and Microlution Inc. The calculation required an assessment of the relative market risk of different peer groups as well as the determination of specific risk-free interest rates, an equity market risk premium, the borrowing costs and relevant tax rates.
Since the cash flow projections were based on cash flows after tax, the discount rate has also been determined after tax. The discount rate for Symmedia GmbH was calculated at 7.0% and for Microlution Inc at 9.5%.
It was confirmed that the theoretical goodwill of both companies retained its carrying amount.
Accounting principles: intangible assets
Acquired licenses, patents, and similar rights are capitalized and, with the exception of land use rights, 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 acquisition price plus transaction costs incurred in connection with the business combination less the value of the acquired and re-valued net assets 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 GF Corporate 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 carrying amount of non-current assets (especially property, plant, and equipment, intangible assets, financial asssets 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 cumulatively:
- –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