(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:

The discount factor after taxes is derived on the basis of the following input parameters:

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.

Net cash flows were discounted using cost of capital after tax. The aforementioned cost of capital before tax was subsequently derived iteratively.