(18) Goodwill
Accounting and measurement policies
Goodwill
In the course of business combinations, goodwill is recognized on the acquisition date. The option to measure non-controlling interests at fair value on the date of their acquisition (full goodwill me thod) is not utilized.
Method for impairment testing
Impairment testing for goodwill takes place at the level of the Healthcare, Life Science and Performance Materials business sectors. These groups of cash-generating units (CGUs) are the lowest level at which goodwill at the Group is monitored for internal management purposes.
Impairment testing is performed annually and on an ad hoc basis where there are indications of impairment. The existence of indications of impairment may be analyzed using various factors, particularly changes in short-term and medium-term planning, sector studies, analyst forecasts, validation multiples based on peer group information, the Group’s average market capitalization compared with its balance sheet equity, and the development of its order books.
In the second quarter of 2020, an analysis was conducted to determine the extent of which the impact of the Covid-19 pandemic could indicate potential impairment losses affecting non-financial assets. This analysis found that individual indicators of impairment within the meaning of IAS 36 were considered to have been fulfilled in the Performance Materials CGU (primarily due to negative impacts in the Display Solutions and Surface Solutions business units) and the Healthcare CGU (primarily due to negative impacts in the Fertility and Neurology franchises). This assessment was based in particular on reductions in short-term and medium-term internal earnings and cash flow forecasts as well as published analyst forecasts. The significant assumptions for determining value underlying the impairment tests and the results of the sensitivity analyses are presented below.
For both value in use and fair value, the recoverable amount is calculated less costs of disposal in accordance with the discounted cash flow method (Level 3 in the IFRS 13 fair value hierarchy). The determination of the recoverable amount for the Life Science CGU and Healthcare CGU was based on the value in use in fiscal 2020 and in the previous year. The impairment test of Performance Materials CGU was based on the fair value less costs of disposal in fiscal 2020 and in previous year. The last medium-term plan approved by the Executive Board, with a detailed planning period of four years, served as the basis for planning. The value of the net cash flows was determined on the basis of the following principles:
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Value in use |
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Fair value less costs of disposal |
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Sales growth in the detailed planning period |
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Based on plans approved by the Executive Board, taking into account internal past experience and largely non-observable input factors in the market, for example regarding future market shares, selling prices and volumes, and excluding new products from the development pipeline and other expansion investments |
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Based on plans approved by the Executive Board, taking into account internal past experience and largely non-observable input factors in the market, for example regarding future market shares, selling prices and volumes, and including new products from the development pipeline and other expansion investments |
Profit margins in the detailed planning period |
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Based on past experiences, adjusted for expected profitability developments |
The discount factor after taxes is derived on the basis of the following input parameters:
Risk-free interest rate |
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Derived from the returns of Long-Term government bonds |
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Beta factor |
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Derived from the respective peer group |
Market risk premium |
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Based on a combination of different estimating methods; e.g. historical and implied stock yields |
Cost of debt and capital structure |
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Derived from the market data of the respective peer group companies |
The long-term growth rate after the detailed planning period is determined taking into account expected long-term growth and long-term inflation expectations.
Significant measurement assumptions
Due to the planning uncertainty concerning the further progress of the Covid-19 pandemic, the planning used in impairment testing in fiscal 2020 is based on two scenarios condensed to form a probability-weighted expected value. In the base scenario (“V” scenario), it is assumed that the sharp downturn in global economic growth in 2020 will be followed by a recovery at a similar speed, with growth rates subsequently returning to the levels recorded prior to the outbreak of the pandemic. In addition to the base scenario, a negative scenario (extended “U” scenario) was included with a probability of occurrence of just under 20%. This scenario assumes a slower recovery from the impact of the Covid-19 pandemic and a prolonged reduction in average global GDP growth across the entire detailed planning period. The planning applied in the previous year was based solely on a base scenario.
As in the previous year, the calculation of the fair value less costs of disposal of the Performance Materials CGU in the base scenario included expected average sales growth in the detailed planning period amounting to a mid single-digit percentage rate. Taking into account Group costs allocated on a pro rata basis, the EBITDA pre margin applied in the detailed planning period in fiscal 2020 was unchanged as against the previous year at around 30%.
In the base scenario, the expected average sales growth used to determine the value in use in the Life Science CGU in the detailed planning period amounted to a high single-digit percentage rate (2019: middle single-digit percentage rate). The EBITDA pre margin in the detailed planning period, taking into account Group costs allocated on a pro rata basis, was around 30% in both fiscal 2020 and the previous year.
In the base scenario, the expected average sales growth in the Healthcare CGU in the detailed planning period amounted to a low single-digit percentage rate as in the previous year. In line with the value-in-use concept, this did not include net sales from the launch of new products.
Compared with the base scenario, the negative scenario for the Performance Materials CGU assumed a reduction in annual net sales of 6 – 7% (Life Science CGU: 2 – 3%; Healthcare CGU: 1 – 7%) and a reduction in annual EBITDA pre of 10 – 13% (Life Science CGU: 2 – 3%; Healthcare CGU: 1 – 10%).
The additional significant assumptions for determining value underlying the goodwill impairment tests are quantified below.
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Long-Term growth rate |
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Discount factor |
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Weighted cost of capital after tax |
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Weighted cost of capital before tax |
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in % |
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Q2/Q3 2020 |
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2019 |
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Q2 2020 |
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Q3 2020 |
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2019 |
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Q2 2020 |
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Q3 2020 |
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2019 |
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Healthcare1 |
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0.0% |
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0.0% |
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5.6% |
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5.5% |
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5.8% |
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7.5% |
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7.5% |
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7.8% |
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Life Science |
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1.8% |
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1.8% |
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6.0% |
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7.1% |
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7.4% |
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8.9% |
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Performance Materials1,2 |
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1.0% |
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1.0% |
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5.8% |
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5.7% |
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6.3% |
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7.2% |
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7.1% |
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8.0% |
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Net cash flows were discounted using cost of capital after tax. The aforementioned cost of capital before tax was subsequently derived iteratively.
Significant discretionary decisions and sources of estimation uncertainty
Goodwill
The determination of the recoverable amount is subject to discretion and significant estimation uncertainty. Assumptions regarding the amount of net cash flows, long-term growth rates, and discount factors are considered a material source of estimation uncertainty due to their inherent uncertainty. This is particularly true in fiscal 2020 due to the uncertainty in connection with the Covid-19 pandemic.
In all the impairment tests performed, the recoverable amount in both 2020 and the previous year was more than 15% higher than the carrying amount of the respective CGU. Regardless of this, the planning data used was checked for plausibility against external analyst assessments and the recoverable amounts determined were validated using validation multiples based on peer group information.
In addition, sensitivity analyses of the key assumptions were performed as part of the impairment tests. As a result, no change of a significant assumption deemed possible by management would have resulted in an impairment. Even an increase in the probability of occurrence of the negative scenario presented above (extended “U” scenario) to 100% would not have resulted in the need to recognize impairment losses for any of the CGUs. The following table presents the minimum amount by which key assumptions would have to change before the impairment test would trigger the recognition of an impairment loss. The figures for fiscal 2020 apply to both the ad hoc and scheduled impairment tests:
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Decrease in net cash flows |
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Decrease in long-term growth rate |
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Increase in cost of capital after tax |
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% |
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percentage points |
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percentage points |
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2020 |
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2019 |
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2020 |
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2019 |
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2020 |
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2019 |
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Healthcare |
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>10 |
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>10 |
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>2 |
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>2 |
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>2 |
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>2 |
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Life Science |
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>10 |
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>10 |
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>2 |
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>1 |
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>2 |
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>1 |
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Performance Materials1 |
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>10 |
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>10 |
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>2 |
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>2 |
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>1.5 |
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>1.5 |
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Goodwill shown below was incurred mainly in the course of the acquisitions of the Versum Materials Inc., United States, the Sigma-Aldrich Corporation, United States, the AZ Electronic Materials S.A., Luxembourg, the Millipore Corporation, United States, and the Serono SA, Switzerland.
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Goodwill |
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€ million |
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Healthcare |
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Life Science1 |
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Performance Materials1 |
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Total1 |
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Cost as at Jan. 1, 2019 |
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1,534 |
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10,896 |
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1,334 |
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13,764 |
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Additions due to Versum Materials, Inc. |
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– |
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– |
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3,121 |
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3,121 |
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Other additions |
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– |
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36 |
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17 |
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53 |
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Disposals due to divestments/ |
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– |
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– |
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– |
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– |
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Transfers |
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– |
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– |
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– |
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– |
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Impairment losses |
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– |
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– |
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– |
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– |
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Currency translation difference |
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– |
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199 |
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-23 |
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175 |
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Dec. 31, 2019 |
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1,534 |
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11,130 |
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4,449 |
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17,114 |
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Cost as of Jan. 1, 2020 |
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1,534 |
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11,130 |
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4,449 |
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17,114 |
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Additions |
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– |
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18 |
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– |
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18 |
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Disposals due to divestments/ |
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-9 |
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– |
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– |
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-9 |
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Transfers |
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– |
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– |
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– |
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– |
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Impairment losses |
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– |
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– |
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– |
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– |
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Currency translation difference |
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– |
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-862 |
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-303 |
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-1,165 |
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Dec. 31, 2020 |
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1,525 |
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10,287 |
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4,146 |
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15,959 |
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The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the goodwill from the acquisitions of the Sigma-Aldrich Corporation, the Versum Materials, Inc., the AZ Electronic Materials S.A., and the Millipore Corporation, which were partially denominated in U.S. dollars, into the reporting currency.
See Note (6) “Acquisitions and divestments” for further information on the additions.
The recoverable amount exceeded the respective carrying amount in all ad hoc impairment tests in the second quarter of 2020 as well as the scheduled impairment tests on October 31, 2019 and August 31, 2020.