Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is attributable to synergies that the Group expects to derive from the transaction. If the cost of acquisition is less than the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Goodwill on the acquisition of subsidiaries is included in “Goodwill” in the statement of financial position. Goodwill on acquisitions of associates and joint ventures is included in “Investments in and loans to associates and joint ventures”.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment is recognised.

Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Critical accounting estimates and assumptions

Assessment of goodwill for impairment

The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates.

The carrying amount of goodwill and intangible assets was reduced to their recoverable amounts through recognition of an impairment loss of R124.4 million (2018: nil).

The cash-generating units to which goodwill is allocated are presented below:

Goodwill is allocated to cash-generating units for the purpose of impairment testing.

The recoverable amount has been determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by the Board of Directors for the forthcoming year and forecasts for up to five years which are based on assumptions of the business, industry and economic growth. Cash flows beyond this period are extrapolated using terminal growth rates, which do not exceed the expected long-term economic growth rate.

The key assumptions used for the value-in-use calculations are as follows:

The discount rates used are pre-tax and reflect specific risks relating to the relevant companies. The growth rate is used to extrapolate cash flows beyond the budget period. The growth rates were consistent with publicly available information relating to long-term average growth rates for each of the markets in which the cash-generating units operate. The discount rates used for the prior year were adjusted to reflect the Group’s target debt to equity ratio. This did not give rise to any impairments in the prior period.

For all goodwill balances, except the goodwill balances mentioned below, if one or more of the inputs were changed to a reasonable possible alternative assumption, there would be no impairments that would have to be recognised.

The discount rate used when calculating the value-in-use calculations would need to be increased by the following amounts before any impairments would need to be recognised:

In the event of Cell C being liquidated, the goodwill allocated to the Airvantage cash-generating unit, would be at risk of impairment.

In addition to the value-in-use calculations referred to above, the Group applied an alternative method using the fair value less cost to sell approach in determining the recoverable amount of CEC Proprietary Limited. Based on this method the recoverable amount is sufficient to support the carrying value of the investment as at 31 May 2019.

The goodwill in Reware Proprietary Limited of R1.1 million was fully impaired, and the goodwill in Viamedia Proprietary Limited and Blue Label Connect Proprietary Limited were partially impaired by R74 million and R49.2 million respectively in the current financial year. There were no goodwill impairments in the prior year.

Viamedia impairment

Viamedia’s performance has been negatively impacted as a result of a sector-wide decline in the B2C (direct to consumer) WASP industry. Previously this was significantly offset by growth in its Enterprise division. However, over the past six months, the latter division has flat-lined, which together with the continued decline in the B2C channel, has caused a negative impact on operating profits with marginal growth expectations going forward.

Consequently, the decline in the value-in-use of the company has resulted in an impairment to goodwill of R74 million.

Blue Label Connect

Blue Label Connect’s performance has been negatively impacted as a result of challenging economic conditions that have affected one of its major clients. Furthermore, margin compression resulting from reduced incentives from the networks as well as an increase in product costs, has resulted in an impairment of R49.2 million to goodwill.