(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 method) is not utilized.
Method for impairment testing
Impairment testing for goodwill takes place at the level of the Life Science, Healthcare, and Electronics business sectors. These groups of cash-generating units (CGUs) are the lowest level at which goodwill within 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 to its balance sheet equity, and the development of its order books.
For both value in use and fair value less cost of disposal the recoverable amount is calculated 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 2021 as well as in the previous year. In fiscal 2021, the recoverable amount for the impairment test of the Electronics CGU was based on the value in use (2020: fair value less costs of disposal). 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:
|
|
Value in use |
|
Fair value less costs of disposal |
|---|---|---|---|---|
Sales growth in the detailed planning period |
|
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 |
|
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 |
|
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 |
|
Derived from the returns of long-term government bonds |
|---|---|---|
Beta factor |
|
Derived from the respective peer group |
Market risk premium |
|
Based on a combination of different estimating methods; e.g. historical and implied stock yields |
Cost of debt and capital structure |
|
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
The planning used in conjunction with impairment testing in fiscal 2021 was based, in contrast to the previous year, only on one baseline scenario.
The expected average sales growth used to determine the value in use in the Life Science CGU in the detailed planning period was a high single-digit percentage (2020: high single-digit percentage). Taking into account Group costs allocated on a pro rata basis, the EBITDA pre margin applied in the detailed planning period was around 32% in fiscal 2021 (2020: around 30%).
The expected average sales growth in the Healthcare CGU amounted to a low single-digit percentage in the detailed planning period (2020 low single-digit percentage in the baseline scenario). In line with the value-in-use concept, this did not include net sales from the launch of new products.
The calculation of the value in use of the Electronics CGU included expected average sales growth in the detailed planning period at a mid-single-digit percentage rate (2020: mid-single-digit percentage rate in the baseline scenario). Taking into account Group costs allocated on a pro rata basis, the EBITDA pre margin applied in the detailed planning period in fiscal 2021 was unchanged as against the previous year at around 30%.
Owing to the greater planning uncertainty on account of the Covid-19 pandemic, two planning scenarios had been used for impairment testing in the previous year. The baseline scenario (“V” scenario) applied in the previous year assumes that global economic growth will recover at a comparable pace after a sharp slump, and that growth rates will then return to those seen before the outbreak of the pandemic. An additional negative scenario (extended “U” scenario) was included in the previous year with a probability of occurrence of just under 20%. In the previous year, this scenario assumed 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 negative scenario in the previous year assumed a reduction in annual net sales of between 2% and 3% compared with the base scenario for the Life Science CGU (Healthcare CGU: between 1% and 7%; Electronics CGU: between 6% and 7%). With regard to annual EBITDA pre, the negative scenario assumed an annual reduction of between 2% and 3% in the Life Science CGU (Healthcare CGU: between 1% and 10%; Electronics CGU: between 10% and 13%).
The additional significant value-relevant assumptions for underlying the goodwill impairment tests are quantified below.
|
|
Long-term growth rate |
|
Discount factor |
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
Weighted cost of capital after tax |
|
Weighted cost of capital before tax |
||||||||||||||
in % |
|
2021 |
|
Q2/Q3 2020 |
|
2021 |
|
Q2 2020 |
|
Q3 2020 |
|
2021 |
|
Q2 2020 |
|
Q3 2020 |
||||||
Life Science |
|
1.75% |
|
1.75% |
|
5.5% |
|
|
|
6.0% |
|
6.7% |
|
|
|
7.4% |
||||||
Healthcare1 |
|
0.00% |
|
0.00% |
|
5.5% |
|
5.6% |
|
5.5% |
|
7.4% |
|
7.5% |
|
7.5% |
||||||
Electronics1, 2 |
|
1.00% |
|
1.00% |
|
5.4% |
|
5.8% |
|
5.7% |
|
6.7% |
|
7.2% |
|
7.1% |
||||||
|
||||||||||||||||||||||
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.
In all the impairment tests performed, the recoverable amount in both fiscal 2021 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 the sole application of the negative scenario presented above (extended “U” scenario) would not have resulted in the need to recognize impairment losses for any of the CGUs in the previous year. The following table presents the minimum amount by which key assumptions could have changed before the impairment test triggered the recognition of an impairment loss. The figures for fiscal 2020 apply to both the ad hoc and scheduled impairment tests:
|
|
Decrease in net cash flows |
|
Decrease in long-term growth rate |
|
Increase in cost of capital after tax |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
% |
|
percentage points |
|
percentage points |
||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Life Science |
|
>10 |
|
>10 |
|
>2 |
|
>2 |
|
>2 |
|
>2 |
Healthcare |
|
>10 |
|
>10 |
|
>2 |
|
>2 |
|
>2 |
|
>2 |
Electronics |
|
>10 |
|
>10 |
|
>2 |
|
>2 |
|
>2 |
|
>1.5 |
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.
|
|
Goodwill |
||||||
|---|---|---|---|---|---|---|---|---|
€ million |
|
Life Science |
|
Healthcare |
|
Electronics |
|
Total |
Cost as at Jan. 1, 2020 |
|
11,130 |
|
1,534 |
|
4,449 |
|
17,114 |
Other additions |
|
18 |
|
– |
|
– |
|
18 |
Disposals due to divestments/Reclassification to assets held for sale |
|
– |
|
-9 |
|
– |
|
-9 |
Transfers |
|
– |
|
– |
|
– |
|
– |
Impairment losses |
|
– |
|
– |
|
– |
|
– |
Currency translation difference |
|
-862 |
|
– |
|
-303 |
|
-1,165 |
Dec. 31, 2020 |
|
10,287 |
|
1,525 |
|
4,146 |
|
15,959 |
|
|
|
|
|
|
|
|
|
Cost as of Jan. 1, 2021 |
|
10,287 |
|
1,525 |
|
4,146 |
|
15,959 |
Additions |
|
– |
|
– |
|
– |
|
– |
Disposals due to divestments/Reclassification to assets held for sale |
|
– |
|
– |
|
– |
|
– |
Transfers |
|
-4 |
|
– |
|
– |
|
-4 |
Impairment losses |
|
– |
|
– |
|
– |
|
– |
Currency translation difference |
|
776 |
|
– |
|
273 |
|
1,050 |
Dec. 31, 2021 |
|
11,059 |
|
1,525 |
|
4,420 |
|
17,004 |
The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the goodwill from the acquisitions of Versum Materials, Inc., United States, the Sigma-Aldrich Corporation, United States, AZ Electronic Materials S.A., Luxembourg, and the Millipore Corporation, United States, which were mostly denominated in U.S. dollars.
Goodwill impairment testing did not give rise to the need to recognize any impairment losses in either fiscal 2020 or fiscal 2021.