2014 Annual report

NOTE 13

GOODWILL AND INFORMATION ON BUSINESS COMBINATIONS

Pursuant to IFRS 3 Business combinations, the net assets of acquired companies have been assessed at fair value at the acquisition date. The remaining part of the consideration after allocating the consideration to identifiable assets and liabilities, is recognised as goodwill. The tables below show the values and movements in the the various goodwill items in the Group.

 

NOK 1 000

Interwell

Jacilla

(skisporet.no)

Servi

Norrwin AB (Lundhags)

Alf Valde

Elopak Europa

Seco Invest (TeleComputing)

Total

Cost at 1 January

Additions

Disposals

Exchange differences

Cost at 31 December

Accumulated impairment at 1 January

Additions

Write-downs

Disposals

Exchange differences

Accumulated impairment at 31 December

Carrying amount at 31 December

Changes in 2014:

In 2014, Ferd increase its stake from 34 % to 58 % in Interwell and thereby achieved control over the company. The acquisition was made with accounting effect from 1 January 2014. The purchase has increased Ferd's patents and rights by MNOK 298 (note 7), capitalised development costs by MNOK 36, customer relations by MNOK 250, in addition to a goodwill of appr. MNOK 1212. The goodwill is not deductible for tax purposes. The cost for the shares in Interwell AS constitutes appr. MNOK 895, of which MNOK 496 were paid cash in 2014 and MNOK 399 were the value of the shares before the acquisition. Before the purchase, the shares in Interwell were measured at fair value with value changes over profit and loss. MNOK 601 in non-controlling interest at the acquisition date have been recognised, calculated as their proportionate share of the enterprise's identifiable net assets. Interwell's impact on Ferd's consolidated financial statments amounted to MNOK 856 in operating income and MNOK 315 in EBITDA in 2014.

In 2014, Swix Sport acquired 55% of the shares in Jacilla AS, the operator of the portal ww.skisporet.no. A private share issue took place in October, with the consequence that Swix Sport AS has increased its stake to 61,5%. The acquisition is effective from 1 November 2014 for accounting purposes. As a consequence of the purchase, Swix Sport has increased the goodwill by more than MNOK 4. The goodwill is not deductible for tax purposes. The cost for the shares in Jacilla AS was TNOK 2.775 and was paid cash in 2014. MNOK 2 in non-controlling interests at the acquisition has been recognised, calculated as their proportionate share of the company's identifiable net assets. Jacilla's impact on Ferd's consolidated financial statements amounted to TNOK 722 in operating income and TNOK 44 in EBITDA in 2014.

On 29 August 2014, TeleComputing AS made an agreement on purchasing 100% of the shares in Alcom AS. Alcom is a company located on Bryne in Rogaland concentrating on goods and services related to IT operations and communication solutions. The acquisition has given Ferd increased excess values related to patents amounting to MNOK 4, in addition to increased goodwill of more than MNOK 18. The purchase amount constitutes MNOK 28, and parts of the settlement for the shsares in Alcom was carried out with shares in Seco Invest. Alcom's contribution constituted MNOK 20 in operating income an MNOK 0.5 in EBITDA in the owner period.

NOK 1 000

Servi

Norrwin AB (Lundhags)

Alf Valde

Elopak Europa

Seco Invest (TeleComputing)

Sum

Cost at 1 January

Additions

Disposals

Exchange differences

Cost at 31 December

Accumulated impairment at 1 January

Impairment

Disposals

Exchange differences

Accumulated impairment at 31 December

Carrying amount at 31 December

Changes in 2013:

Effective from 1 August 2013 for accounting purposes, Ferd acquired Servi Group. Through the acquisition, Ferd has increased its customer relations by MNOK 120,7 (note 7), in addition to a goodwill of appr. MNOK 386. The cost of the shares in Servi Group AS constituted appr. MNOK 672, of which MNOK 288 are financed by loans. Servi's contribution to Ferd's consolidated financial statements amounted to MNOK 354 in operating income and MNOK 17 in EBITDA in 2013.

The purchase analysis of Lundhags and Alf Valde (acquired in 2012) was only marginally changed in 2013.

Impairment testing for goodwill:

Goodwill is allocated to the Group's cash generating units, and is tested for impairment annually or more frequently if there are indications of impairment. Testing for impairment implies determining the recoverable amount of the cash generating unit. The recoverable amount is determined by discounting future expected cash flows, based on the cash generating unit's business plans. The discount rate applied to the future cash flows is based on the Group's weighted average cost of capital (WACC), adjusted to the market's appreciation of the risk factors for each cash generating unit. Growth rates are used to project cash flows beyond the periods covered by the business plans.

The goodwill items specified above relate to Ferd Capital's investments in the group companies Elopak, Telecomputing, Interwell, Servi, in addition to some minor goodwill items in the sub-groups Swix and Mestergruppen.

Goodwill concerning Elopak is allocated to the cash generating unit Europa, which consists of Elopak's European markets, including the in-house production and supply organisation. This goodwill has a carrying value of MNOK 485 at 31 December 2014. The rationale for determining Europe as one cash-generating unit is the dynamics of this market. The trend is that customers are merging, and have easy access to the supplies all over Europe. Elopak adapts to its customers by distributing the production of cartons for the various markets according to the optimal production efficiency in Europe. The historical geographical criteria for production and demands from customers are no longer as important. As a consequence of this development, the split of margins along Elopak's value chain will be subject to change from one year to another. Hence, one European business unit will be the best indicator for assessing any impairment of goodwill.

Goodwill related to Telecomputing concerns Telecomputing's operations in Norway and Sweden. The goodwill has a carrying amount of MNOK 613 as at 31 December 2014, following the acquisition of Alcom in 2014 that resulted in an increase of the goodwill of MNOK 19. For impairment purposes, Telecomputing is considered to be one cash generating unit due to similar activities and the synergy effects achieved acrosss the companies under Seco Invest AS.

Goodwill in Mestergruppen relates to the acquisition of Alf Valde AS (Byggeriet Digernes) in 2012. The goodwill amounts to MNOK 15. After the acquisition, Alf Valde has been very well integrated in Mestergruppen's operations, is sharing purchase and salaes conditions for all goods, and Mestergruppen's purchase bonuses are also influenced by the entire group's total purchases. Accordingly, Byggeriet Digernes is part of the entire Mestergruppen's total operations and is considered as one joint cash-generating unit when tested for impairment.

Goodwill in Swix concerns from previous periods the acquisition of Norrwin AB, with the brand Lundhags in Sweden in 2012. The goodwill amounts to appr. one million as at 31 December 2014. In addition to manufacturing and selling Lundhags' products, Norrwin has taken over as Swix' distributor in the Swedish market, and the company is thereby very much integrated in Swix' operations. Accordingly, Norrwin is considered together with the rest of Swix as one joint cash generating unit for impairment purposes.

In 2014, Swix Sport acquired 61,5% of the shares in Jacilla AS. Through the acquisition, Swix Sport has increased the goodwill by more than MNOK 4. The purchase is effective for accounting purposes from November 2014, and no impairment testing has been made of this goodwill this year.

Goodwill identified at the acquisition of Servi, carried out in 2013,with a carryikng amount at 31 December 2014 of MNOK 386, is allocated to Servi in total as the cash generating unit. This is a consequence of Servi's co-ordinated and well integrated activities.

The acquisition of Interwell in 2014 has implied a recognition of goodwill of MNOK 345 for Ferd. This goodwill is allocated to the whole of Interwell as one joint cash-generating unit, which is the level on which Ferd is following up Interwell. In the Interwell group, however, there are an additional MNOK 867 in goodwill from acquisitions carried out by Interwell. This goodwill is allocated to two separate cash-generating units, Interwell Norge and Interwell Technology, as these business areas generate ingoing cash-flows separately.

The recoverable amount for the cash generating unit is calculated on the basis of the present value of expected cash flows. The cash flows are based on assumptions about future sales volumes, selling prices and direct costs. The background for these assumptions is historical experience from the market, adopted budgets and the Group's expectations of market changes. Having carried out impairment testing, the Group does not expect significant changes in current trade. This implies that expected future cash flows mainly are a continuation of observed trends.

Determined cash flows are discounted at a discount interest rate. The rate applied and other assumptions are shown below.

Calculated recoverable amounts in the impairment tests are positive, and based on the tests, the conclusion is that no write-down for impairment is required in 2014. The uncertainty connected with the assumptions on which the impairment testing is based is illustrated by sensitivity analyses. The conclusions are tested for changes in discount and growth rates. The sensitivity analyses indicate that a large gap is required before there can be any question of impairment.

Detailed description of the assumptions applied:

Discount rate after tax

Discount rate before tax

Growth rate 2-5 years

Long-term growth rate

Elopak Europa

Seco Invest

Servi

Alf Valde

Lundhags

Interwell Norge

Interwell Technology

The discount rate reflects the market's assessment of the risk specific to the cash generating unit. The rate is based on the weighted average cost of capital for the industry. This rate has been further adjusted to reflect the specific risk factors related to the cash generating unit, which has not been reflected in the cash flows. 'As Elopak's functional currency is euro, the basis has also been a euro interest significantly lower than NOK interest rates.

The average growth rate in the period 2 to 5 years is based on Ferd's expectations for the development in the market in which the business operates. Ferd uses a stable growth rate to extrapolate the cash flows beyond 5 years.

EBITDA represents operating profit before depreciation and is based on the expected future market development. Committed operating efficiency improvement measures are taken into account. Changes in the outcomes for these initiatives may influence future estimated EBITDA.

Investment costs necessary to meet expected future growth are taken into account. Based on management's assessment, the estimated investment costs do not include investments that improve the current assets' performance. The related cash flows are treated correspondingly.