Impairment of 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.

For the year ended 31 May 2020, management performed an impairment assessment over the goodwill and investment balances as follows:

  • assessing the recoverable amount as being value-in-use, as entities are held-for-trading and not for sale;
  • calculating the value-in-use for each cash-generating unit using a discounted cash flow model; and
  • performing a sensitivity analysis over the value-in-use calculations, by varying the assumptions used (growth rates, terminal growth rate and weighted average cost of capital, i.e. discount rate) to assess the impact on the valuations.
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 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
%
Blue Label Connect Proprietary Limited 11.5 4.5 21.9 16.2 4.2 22.7
Glocell Distribution Proprietary Limited 8.4 4.5 21.0 3.4 4.2 20.7

The discount rates used are pre-tax and reflect specific risks relating to the relevant associates and 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 companies/cash-generating units operate.

Based on the impairment assessments, as well as management judgement, the following impairments were applied:

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 company's 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 its 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 Distribution's 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 Company's 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 on discontinued operations for details.