11. Goodwill and other intangible assets

Goodwill	2008 £m	Restated 2007 £m
Cost
At 1 January	407	372
Subsidiaries acquired	—	30
Currency variations	142	5
At 31 December	549	407
Accumulated impairment
At 1 January	127	127
Currency variations	55	—
At 31 December	182	127
Net book amount at 31 December	367	280

Comparative information regarding cost and accumulated impairment has been re-presented to reclassify amortisation and impairment charges made under UK GAAP as cost. The net book amount is unchanged.

The carrying value of goodwill at 31 December comprised:

Business segment	Business	Geographical location	2008 £m	2007 £m
Driveline	Driveshafts	Americas	54	44
Powder Metallurgy	Hoeganaes	North America	24	17
OffHighway	Wheels	Italy	23	18
Aerospace	Aerostructures	North America	35	25
	Propulsion Systems	North America	93	67
	Propulsion Systems	North America	42	30
			271	201
Other businesses not individually significant to the carrying value of goodwill			96	79
			367	280

An impairment test is a comparison of the carrying value of the assets of a business or cash generating unit (CGU) to their recoverable amount. Where the recoverable amount is less than the carrying value, an impairment results. During the year, all goodwill was tested for impairment, with no impairment charges resulting.

For the purposes of carrying out impairment tests, the Group’s total goodwill has been allocated to a number of CGUs and each of these CGUs has been separately assessed and tested. The size of a CGU varies but is never larger than a primary or secondary reportable segment. In some cases, the CGU is an individual subsidiary or operation. The allocation of goodwill by business segment is set out in note 2.

All of the recoverable amounts were measured based on value in use. Detailed forecasts for the next five years have been used in the majority of impairment tests except where a longer term more detailed forecast is available and appropriate. These forecasts are based on approved annual budgets and represent a best estimate of future performance.

Key assumptions

In determining the recoverable amount of all CGUs it is necessary to make a series of assumptions to estimate future cash flows. In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external sources of information.

Operating cash flows

The main assumptions within forecast operating cash flow include the achievement of future sales prices and volumes (including reference to specific customer relationships, product lines and the use of industry relevant external forecasts of global vehicle production within Driveline businesses and consideration of specific volumes on certain US military and civil programmes within Aerospace), raw material input costs, the cost structure of each CGU and the ability to realise benefits from annual productivity improvements, the impact of foreign exchange rates upon selling price and cost relationships and the levels of ongoing capital expenditure required to support forecast production.

Pre-tax risk adjusted discount rates

Pre-tax risk adjusted discount rates are derived from risk-free rates based upon long term government bonds in the territory, or territories, within which each CGU operates. A relative risk adjustment (or ‘beta’) has been applied to risk-free rates to reflect the risk inherent in each CGU relative to all other sectors on average, determined using an average of the betas of comparable listed companies. Consideration is also given to both the amount and timing of estimated future tax cash flows.

Except for Driveline’s operations in South America where rates ranging between 18% and 24% have been factored into impairment models, the range of pre-tax risk adjusted discount rates set out below have been used for impairment testing. The range of rates reflects the mix of geographical territories within CGUs within the segments.

Driveline: 10% (North America)–15% (Eastern European and certain Asia Pacific region countries)

Powder Metallurgy: 10%–12% (North America and Europe)

OffHighway: 10%–13% (North America and Europe)

Aerospace: 10%–11% (North America and Europe)

Long term growth rates

To forecast beyond the five years covered by detailed forecasts, a long term average growth rate has been used. In each case, this is not greater than the published Oxford Economic Forecast average growth rate in gross domestic product for the next five year period in the territory or territories where the CGU is primarily based. This results in a range of nominal growth rates from 0.7% to 7.0% with most countries between 2.0% and 4.0% in both years.

Goodwill sensitivity analysis

Sensitivity analysis to likely and potential changes in key assumptions has been reviewed. At 31 December 2008, the date of the Group’s annual impairment test, the estimated recoverable amount of two individual CGUs within the Group’s Aerospace (Propulsion Systems) and Powder Metallurgy (Hoeganaes) businesses exceeded their carrying value by £88 million and £74 million respectively. The table below shows the discount and long term growth rate assumptions used in the calculation of value in use and the amount by which each rate must change in isolation in order for the estimated recoverable amount to equal the carrying value.

	Assumptions used in calculation of value in use		Change required for the carrying value to exceed the recoverable amount
	Aerospace	Powder Metallurgy	Aerospace	Powder Metallurgy
Pre-tax risk adjusted discount rate	10%	10%	3.8% points	3.7% points
Long term growth rate	3.0%	3.0%	5.9% points	5.4% points
Total pre-discounted forecast operating cash flows	£516 million	£423 million	38%	39%

At 31 December 2008, the estimated recoverable amount of the Group’s Driveline Driveshafts operations in the Americas and Asia Pacific regions exceeded their carrying value by £15 million and £43 million respectively. The table below shows the discount and long term growth rate assumptions used in the calculation of value in use and the amount by which each rate must change in isolation in order for the estimated recoverable amount to equal the carrying value.

	Assumptions used in calculation of value in use		Change required for the carrying value to exceed the recoverable amount
	Americas	Asia Pacific	Americas	Asia Pacific
Pre-tax risk adjusted discount rate	10%–24%	10%–15%	0.3% points	2.3% points
Long term growth rate	3.0%–7.0%	0.7%–7.0%	0.5% points	4.2% points
Total pre-discounted forecast operating cash flows	£793 million	£331 million	3%	21%

Other than as disclosed above, it is not considered that a reasonably possible change in any of the key assumptions would generate a different impairment test outcome to the one included in this annual report.

	2008				2007
Intangible assets	Develop- ment costs £m	Computer software £m	Assets arising on business combin- ations £m	Total £m	Develop- ment costs £m	Computer software £m	Assets arising on business combin- ations £m	Total £m
Cost
At 1 January	102	78	68	248	87	75	48	210
Subsidiaries acquired	—	—	—	—	—	—	21	21
Capital expenditure	7	6	—	13	15	5	—	20
Disposals	(2)	—	—	(2)	—	(4)	—	(4)
Currency variations	2	20	29	51	—	2	(1)	1
At 31 December	109	104	97	310	102	78	68	248
Accumulated amortisation
At 1 January	39	61	12	112	36	58	4	98
Charge for the year	4	6	10	20	3	6	8	17
Disposals	—	—	—	—	—	(4)	—	(4)
Currency variations	1	15	9	25	—	1	—	1
At 31 December	44	82	31	157	39	61	12	112
Net book amount at 31 December	65	22	66	153	63	17	56	136

The net book amount of assets arising on business combinations includes marketing related assets of £6 million (2007 – £4 million), customer related assets of £45 million (2007 – £38 million) and technology based assets of £15 million (2007 – £14 million). Computer software under finance leases amounts to £1 million (2007 – £2 million). In January 2009 development costs in an Aerospace subsidiary amounting to £21 million were realised in cash at a value in excess of the 31 December carrying values.

Back to Top