- At a Glance
- Financial Statements
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4. Estimates and Judgments by Management
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the current circumstances.
The Company makes estimations and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.
4.1 Consolidation of the Synoptik Group
The Company’s ownership interest in the Synoptik Group is 63.29% and the agreement is set up so that the partner has both protective and substantive rights. However, considering the substance of the situation we concluded that the partner has not exercised their substantive rights. Consequently the Company has de facto control and the Synoptik Group is consolidated. At each reporting date this assessment will be reconsidered.
4.2 Estimated Impairment of Goodwill
The Group tests annually whether its goodwill is subject to impairment, as described in note 2.14. Goodwill is allocated to the Company’s group of cash-generating units (CGUs) according to the country of presence. The recoverable amount is determined by the value in use, calculated using the discounted cash flow method applying a discount factor derived from the average cost of capital relevant for the CGUs. If the value in use is lower than the carrying value, then the fair value less cost of disposal is also considered, which is determined by a multiple on the average sales of the last three years. The multiple is based on peers of GrandVision and recent market transactions, taking into account risk factors of the CGU for which the fair value less cost to sell is calculated. The recoverable amount is the higher of the value in use and the fair value less costs of disposal.
A 10% reduction of the sales multiple used in the Group impairment test for the most sensitive countries (i.e. those in Latin America) would result in an additional impairment of €11,131 (2013: €13,898).
4.3 Estimated Impairment of Key Money
The Group tests annually whether its non-amortized key money is subject to impairment as described in notes 2.13.2 and 2.14. The recoverable amount is the higher of the fair value less costs of disposal of the key money and the key money’s value in use, which is calculated using the discounted cash flow method applying a discount factor derived from the weighted average cost of capital or the market value of the key money.
A reduction of the expected revenue growth to 0%, all other factors used in calculating the value in use remaining unchanged, would lead to an impairment of €4,128 (2013: €10,101).
4.4 Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the total provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period for which such determination is made. Given a reasonable change in the key assumptions used in determining total deferred tax assets and liabilities, there would be no material impact on the financial statements.
4.5 Post-Employment Benefits
The present value of the defined benefit pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.
The Group determines the appropriate discount rate at year-end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit pension obligations. In determining the appropriate discount rate, the Group considers the interest rates of high-quality corporate bonds with a duration and currency consistent with the term and currency of the related pension obligation.
Other key assumptions for pension obligations are based in part on current market conditions.
4.6 Intangible Assets
When a company is acquired, a value is assigned to intangible assets such as trademarks and the customer database. The determination of the value at the time of acquisition and estimated useful life is subject to uncertainty. One of the calculations used to determine the value is the discounting of expected future results of existing customers at the time of the acquisition. Useful life is estimated using past experience and the useful life period as broadly accepted in the retail sector.
4.7 Provisions and Long-term incentive plan
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The expected expenditures are uncertain future cash flows for which management uses its knowledge, experience and judgment to determine if a corresponding provision should be recognized.
Long-term incentive plans are classified into a real share plan and a phantom plan. The measurement of the expenses relating to the real share plan and phantom plan is subject to the achievement of certain service conditions that can vary between 3-5 years following the date of grant including an estimate for the number of shares expected to be vested. In prior years the Company’s shares were not listed, therefore management estimated the grant date fair value for the measurement of the real shares based on a combination of a market approach and income approach.The measurement of the liability of the phantom plan is during 2014 impacted by the fair value of GrandVision and the probability of a successful listing.