Goodwill and goodwill impairment testing

General Principles

The goodwill is allocated to cash-generating units (CGUs) being the lowest level of assets for which there are separately identifiable cash flows. These CGUs are then aggregated to the Business Unit (BU) level which is the lowest operative management reporting level at which goodwill is monitored and for which the impairment testing is primarily done.

The recoverable amounts of the BUs and CGU are determined based on value in use - calculations (discounted cash flow method). In those cases where a CGU forms a stand alone business where synergies with the rest of the respective BU activities are difficult to assess, the goodwill is tested on the CGU level. The forecasting period of cash flows is five years and it is based on financial forecasts of each BU’s management, adjusted by Group management if needed. The forecasts have been made based on BU specific historical data, order book, the current market situation and industry specific information of the future growth possibilities. The calculated cash flows after the five-year forecasting period are based on a zero percent growth estimate on sales and operating margin. Calculations are prepared during the fourth quarter of the year.

The discount rate applied to cash flow projections is the weighted average (pre-tax) cost of capital and is based on risk free long term government bond rates and market and industry specific risk premiums. These risk premiums are derived based on the business portfolio of companies which operate in a similar industry as the BUs. The average discount rate used in 2012 is 11.7 percent (a weighted average of a range from 9 to 19 percent). In 2011, the average pre-tax discount rate used was 11.2 percent (a weighted average of a range from 9 to 30 percent). The business risk distribution of the tested BUs were considered when determining the discount rates in use and the discount rates account for the average cost of capital for all BUs.

Goodwill allocation to main cash-generating Units (CGUs), Business Units (BU) and business segments

The Group’s total goodwill is allocated to the Business Units (BU) as indicated in the table below. The table also shows separately the goodwill of those individual CGUs that represent stand alone businesses and thus are extracted from BU-level for goodwill impairment testing purposes (tested separately).

In Group’s assets, there is also included EUR 10.4 million intangible assets with indefinite useful life arising from the acquisition of R. Stahl AG’s material handling division, which consists of the trademark of the brand name ‘Stahl’. The carrying amount of this asset is tested on a yearly basis by using a similar kind of impairment testing method as the goodwill.

Sensitivity analyses

In addition to impairment testing using the base case assumptions, three different sensitivity analyses were performed:

• A discount rate analyses where the discount rate was increased by 5 percentage points.

• A Group management adjustment to the future profitability. Each BU and stand alone CGU cash flow was analyzed separately by the Group management. Based on the BU specific historical data and future growth prospects the cash flows were decreased by -10%.

• A higher discount rate (+5%) analyses combined with lower (-10%) cash flows as mentioned above.

Goodwill testing results

As a result of the impairment test in 2012 an EUR 2.9 million impairment need was identified for Konecranes Lifting Systems as the future discounted cash flows did not support the asset value tested due to the low volumes in tailor-made manipulator business.