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 the 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 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.

2023 
R'000 
2022 
R'000 
Year ended 31 May 
Opening carrying amount  681 754  681 754 
Acquisition of subsidiaries  35 721  — 
Closing carrying amount  717 475  681 754 
At 31 May 
Cost  1 113 173  1 077 452 
Accumulated impairments  (395 698) (395 698)
Carrying amount  717 475  681 754 

The carrying amount of goodwill and intangible assets is reduced to their recoverable amounts through recognition of an impairment loss when required.

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

2023 
R'000
 
2022 
R'000 
Aligned Partnered Solutions Proprietary Limited* 4 091
Blue Label Distribution Proprietary Limited 36 364 36 364
CEC Proprietary Limited 335 468 335 468
Datacel Group 79 854 79 854
Glocell Distribution Proprietary Limited 161 697 161 697
Heroticket Proprietary Limited 511 511
Lipa Payments Proprietary Limited* 31 630
The Prepaid Company Proprietary Limited 62 113 62 113
TicketPros Proprietary Limited 5 104 5 104
Visual Revenue Management Proprietary Limited 643 643
717 475 681 754
* The Group acquired 50% of Aligned Partnered Solutions Proprietary Limited's share capital on 31 March 2023. The Group further acquired 60% of Lipa Payments Proprietary Limited's share capital on 24 April 2023.

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:

  2023      2022   
Average 
EBITDA 
margin 
%
 
Terminal 
growth 
rate 
%
 
Pre-tax  
discount  
rate  
%
  
Average 
EBITDA 
margin 
Terminal 
growth 
rate 
Pre-tax 
discount 
rate 
Blue Label Distribution Proprietary Limited   4.3  4.5  22.1   4.9  4.5  20.3 
CEC Proprietary Limited   22.5  19.61  25.4  26.9 
Datacel Group   16.7  4.5  26.3   10.7  4.5  22.9 
Glocell Distribution Proprietary Limited   40.5  4.5  20.6   36.1  4.5  21.8 
The Prepaid Company Proprietary Limited   2.1  4.5  22.12  3.7  4.5  15.9 
* The value-in-use calculation performed on CEC covers a fixed term of nine years based on the time frame of the underlying contract, hence no terminal growth rate is applied.
1 The decrease in the pre-tax discount rate of 7.3% was attributable to a change in valuation methodology from free cash flow to equity, to free cash flow to firm which aligns to the business model of CEC.
2 The increase in the pre-tax discount rate of 6.2% was attributable to a higher specific risk being applied to take into account the risk associated with Cell C cash flows.

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 Group's 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
annual
increase in
subscription
base
Units
Decrease
in
annual
EBITDA
%
Decrease
in
terminal
growth
rate
R'000
Excess
over
carrying
value
R'000
CEC Proprietary Limited 3.7 37 020 11.7 n/a 467 228 441
Glocell Distribution Proprietary Limited 3.1 n/a 18.5 4.5 37 977 571

The goodwill balances did not result in impairment charges for the year when compared to recoverable amounts (2022: Rnil).