4.1 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 acquisition 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 assumptiom
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.

   2020
R'000
  2019
R'000
 
Year ended 31 May        
Opening carrying amount  1 234 995    1 036 243   
Acquisition of subsidiary  643    313 664   
Disposal of subsidiaries  (295 225)   —   
Impairment of goodwill  (259 170)   (124 400)  
Foreign Currency Translation Reserve on goodwill  —    9 488   
Closing carrying amount  681 243    1 234 995   
At 31 May 
Cost  1 076 941    1 371 523   
Accumulated impairments  (395 698)   (136 528)  
Carrying amount  681 243    1 234 995   

The carrying amount of goodwill and intangible assets was reduced to their recoverable amounts through recognition of an impairment loss of R259.2 million (2019: R124.4 million). 

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

2020
R’000
  2019
R’000
 
3G Mobile Proprietary Limited   47 212  
Airvantage Proprietary Limited   52 707  
AV Technology Limited   55 053  
Blue Label Connect Proprietary Limited   156 501  
Blue Label Distribution Proprietary Limited 36 364   36 364  
CEC Proprietary Limited 335 468   335 468  
Cellfind Proprietary Limited   21 406  
Datacel Group 79 854   79 854  
Glocell Distribution Proprietary Limited 161 697   218 779  
Panacea Mobile Proprietary Limited   6 883  
The Prepaid Company Proprietary Limited 62 113   62 113  
TicketPros Proprietary Limited 5 104   5 104  
Viamedia Proprietary Limited   111 964  
Visual Revenue Management Proprietary Limited 643    
WiConnect Proprietary Limited   45 587  
681 243   1 234 995  

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:

2020   2019
Average 
EBITDA 
margin 
Terminal 
growth 
rate 
Pre-tax 
discount 
rate 
  Average 
EBITDA 
margin 
Terminal 
growth 
rate 
Pre-tax discount  rate 
3G Mobile Proprietary Limited  —   —  —     4.1  5.5  19.5 
Airvantage Proprietary Limited  —   —   —     68.5  4.0  35.9 
AV Technology Limited  —   —   —     77.0  2.5  17.9 
Blue Label Connect Proprietary Limited  11.5  4.5  21.9    16.2  4.2  22.7 
Blue Label Distribution Proprietary Limited  2.8  4.5  19.9    3.4  4.2  19.7 
CEC Proprietary Limited  14.21 28.4    2.5  5.5  21.8 
Cellfind Proprietary Limited  —   —   —     34.3  4.2  23.3 
Datacel Group  13.8  4.5  21.5    19.9  2.5  27.2 
Glocell Distribution Proprietary Limited  8.4  4.5  21.0    3.4  4.2  20.7 
Panacea Mobile Proprietary Limited  —   —   —     23.9  4.2  22.9 
The Prepaid Company Proprietary Limited  3.6  4.5  16.3    2.4  4.2  15.8 
TicketPros Proprietary Limited  24.5  4.5  25.0    19.4  4.2  19.8 
Viamedia Proprietary Limited  —   —   —     28.5  4.2  29.0 
WiConnect Proprietary Limited  —   —   —     11.0  4.2  33.4 
1 The 11.7% increase in average EBITDA margin is directly aligned to the 9 year contract entered into by CEC in the current financial year.
* The value-in-use calculation performed on CEC covers a fixed term of 9 years based on the time frame of the underlying contract, hence no terminal growth rate is applied.

The discount rates used are pre-tax and reflect specific risks relating to the relevant associates and subsidiaries. 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 companies/cash-generating units operate. The Groupís target debt to equity ratio is applied in the calculation of the weighted average cost of capital. 

For all goodwill balances, except the goodwill tested for sensitivity 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 following inputs applied when calculating the value-in-use calculation would need to be increased/decreased by the following amounts before any impairments would be required: 

Increase in  
discount rate 
Reduced 
monthly 
increase in 
subscription 
base 
Units 
Excess over 
carrying value 
R’000 
CEC Proprietary Limited 1.0  (1 477) 92 396 

The following goodwill impairments would be required should these assumptions be adjusted in the value-in-use calculation of Glocell Distribution:

1% increase in 
discount rate 
R’000 
2% decrease 
in terminal 
growth rate 
R’000 
5% decrease 
in annual 
EBITDA 
R’000 
Glocell Distribution Proprietary Limited (14 577) (17 992) (9 371)

Goodwill impairments recognised in the 2020 financial year are as follows: 

Blue Label Connect Proprietary Limited

Blue Label Connect is engaged in the supply of post-paid mobile communications products, with focused marketing to end consumers. The companyís performance has been negatively impacted as a result of challenging economic conditions due in part to COVID-19. Furthermore, margin compression resulting from reduced incentives from the networks as well as an increase in product costs, has resulted in the decision to impair their goodwill of R156.5 million in full (2019: R49.2 million). The recoverable amount of Blue Label Connect is calculated to be R291 million. 

Glocell Distribution Proprietary Limited

GloCell Distributionís core strategy is the distribution of starter packs for the various mobile network operators through its established channels. In the current year, the company experienced unfavourable trading conditions, with specific reference to starter packs, exacerbated by the impact of COVID-19, which resulted in a goodwill impairment of R57 million. The recoverable amount of Glocell Distribution attributable to The Prepaid Companyís 48% shareholding is calculated to be R152 million. 

WiConnect Proprietary Limited

WiConnect provided customers with the full suite of cellular and Blu Approved products through its retail stores. Despite the implementation of a turnaround strategy, the severe impact of COVID-19 on WiConnect’s performance resulted in the decision to cease operations in their entirety. As such, the recoverable amount of WiConnect equates to its net asset value of Rnil and the goodwill of R45.6 million attributable to the entity was impaired in full. Refer to note 11.