Goodwill

The changes in 2012 and 2013 were as follows:

 
 
2012
2013
 
 
 
Balance as of January 1:
 
 
Cost
9,224
9,119
Amortization and impairments
(2,208)
(2,171)
Book value
7,016
6,948
 
 
 
Changes in book value:
 
 
Acquisitions
100
4
Purchase price allocation adjustment
(2)
(4)
Impairments
(26)
Divestments and transfers to assets classified as held for sale
(6)
(55)
Translation differences
(160)
(363)
 
 
 
Balance as of December 31:
 
 
Cost
9,119
8,596
Amortization and impairments
(2,171)
(2,092)
Book value
6,948
6,504

The movement of EUR 55 million in Divestments and transfers to assets classified as held for sale mainly relate to divestments in the Healthcare sector.

Acquisitions in 2012 include goodwill related to the acquisition of Indal for EUR 100 million. In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year.

For impairment testing, goodwill is allocated to (groups of) cash-generating units (typically one level below operating sector level), which represents the lowest level at which the goodwill is monitored internally for management purposes.

Goodwill allocated to the cash-generating units Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional Lighting Solutions is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, 2013. The amounts allocated are presented below:

 
 
2012
2013
 
 
 
Respiratory Care & Sleep Management
1,706
1,544
Imaging Systems
1,482
1,414
Patient Care & Clinical Informatics
1,331
1,271
Professional Lighting Solutions
1,337
1,266

The basis of the recoverable amount used in the annual (performed in the second quarter) and trigger-based impairment tests for the units disclosed in this note is the value in use. Key assumptions used in the impairment tests for the units were sales growth rates, income from operations and the rates used for discounting the projected cash flows. These cash flow projections were determined using management’s internal forecasts that cover an initial period from 2013 to 2017 that matches the period used for our strategic process. Projections were extrapolated with stable or declining growth rates for a period of 5 years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long-term average growth rate.

The sales growth rates and margins used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages.

Income from operations in all units is expected to increase over the projection period as a result of volume growth and cost efficiencies.

Cash flow projections of Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional Lighting Solutions for 2013 were based on the following key assumptions (based on the annual impairment test performed in the second quarter):

in %
 
compound sales growth rate1)
 
 
initial forecast period
extra-polation period2)
used to calculate terminal value
pre-tax discount rates
 
 
 
 
 
Respiratory Care & Sleep Management
4.9
3.7
2.7
11.3
Imaging Systems
3.9
3.4
2.7
12.4
Patient Care & Clinical Informatics
4.1
3.5
2.7
13.2
Professional Lighting Solutions
7.4
5.4
2.7
12.8
1)
Compound sales growth rate is the annualized steady growth rate over the forecast period
2)
Also referred to later in the text as compound long-term sales growth rate

The assumptions used for the 2012 cash flow projections were as follows:

in %
 
compound sales growth rate1)
 
 
initial forecast period
extra-polation period2)
used to calculate terminal value
pre-tax discount rates
 
 
 
 
 
Respiratory Care & Sleep Management
8.0
5.8
2.7
11.2
Imaging Systems
3.4
2.9
2.7
12.8
Patient Care & Clinical Informatics
6.5
4.1
2.7
13.2
Professional Lighting Solutions
6.6
5.3
2.7
13.0
1)
Compound sales growth rate is the annualized steady growth rate over the forecast period
2)
Also referred to later in the text as compound long-term sales growth rate

Among the mentioned units, Respiratory Care & Sleep Management and Professional Lighting Solutions have the highest amount of goodwill and the lowest excess of the recoverable amount over the carrying amount. The headroom of Respiratory Care & Sleep Management was estimated at EUR 660 million, the headroom of Professional Lighting Solutions at EUR 670 million. The increase in the headroom of Professional Lighting Solutions compared to the annual impairment test 2012, in which the headroom approximated the carrying value, is mainly explained by increased forecasted profitability assumptions driven by gross margin improvements. The following changes could, individually, cause the value in use to fall to the level of the carrying value:

 
 
increase in pre-tax discount rate, basis points
decrease in long-term growth rate, basis points
decrease in terminal value amount, %
 
 
 
 
Respiratory Care & Sleep Management
290
550
39
Professional Lighting Solutions
290
520
39

The results of the annual impairment test of Imaging Systems and Patient Care & Clinical Informatics have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.

Impairment charge 2013

In the fourth quarter, the updated impairment test for Consumer Luminaires resulted in EUR 26 million impairment. This was mainly a consequence of reduced growth rate due to slower anticipated recovery of certain markets and introduction delays of new product ranges. The pre-tax discount rate applied to the most recent cash flow projection is 13.5%. The pre-tax discount rate applied in the previous projection was 13.4%. Compared to the previous impairment test there has been no change in the organization structure which impacts how goodwill is allocated to this cash-generating unit.

After the impairment charge mentioned above the estimated recoverable amount for this cash-generating unit approximates the carrying value. Consequently, any adverse change in key assumptions would, individually, cause a further impairment to be recognized. Remaining goodwill allocated to Consumer Luminaires at December 31, 2013 amounts to EUR 106 million.

Additional information 2013

In addition, other units, are sensitive to fluctuations in the assumptions as set out above.

Based on the annual impairment test, it was noted that the headroom for the cash-generating unit Home Monitoring was EUR 76 million. An increase of 280 points in the pre-tax discounting rate, a 560 basis points decline in the compound long-term sales growth rate or a 38% decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Home Monitoring at December 31, 2013 amounts to EUR 35 million.

Based on the annual impairment test, it was noted that with regard to the headroom for the cash-generating unit Lumileds, the estimated recoverable amount approximates the carrying value of the cash-generating unit. Consequently, any adverse change in key assumptions would, individually, cause an impairment to be recognized. The goodwill allocated to Lumileds at December 31, 2013 amounts to EUR 127 million .

Please refer to note (2) Information by sector and main country for a specification of goodwill by sector.

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This is an interactive electronic version of the Philips Annual Report 2013 and also contains certain information in summarized form. The contents of this version are qualified in their entirety by reference to the printed version of the full Philips Annual Report 2013. This printed version is available as a PDF file on this website. Information about: forward-looking statements, third-party market share data, fair value information, IFRS basis of presentation, use of non-GAAP information, statutory financial statements and management report, reclassifications and analysis of 2013 compared to 2012.