REG - ITV PLC - Annual Report and Accounts 2014 <Origin Href="QuoteRef">ITV.L</Origin> - Part 9

ITVAnnouncement

26/03/2015 10:31

- Part 9: For the preceding part double click  ID:nRSZ5364Ih 

years the Group expects to use
the asset, the useful economic life, via an annual amortisation charge to the income statement. Where there has been a
technological change or decline in business performance the Directors review the value of assets, including goodwill, to
ensure they have not fallen below their amortised value. Should an asset's value fall below its amortised value an
additional one-off impairment charge is made against profit. 
 
This section explains the accounting policies applied and the specific judgements and estimates made by the Directors in
arriving at the net book value of these assets. 
 
Accounting policies 
 
Goodwill 
 
Goodwill represents the future economic benefits that arise from assets that are not capable of being individually
identified and separately recognised. The goodwill recognised by the Group has all arisen as a result of business
combinations. Goodwill is stated at its recoverable amount being cost less any accumulated impairment losses and is
allocated to the business to which it relates. 
 
Due to changes in accounting standards goodwill has been calculated using three different methods depending on the date the
relevant business was purchased. 
 
Method 1:All business combinations that have occurred since 1 January 2009 were accounted for using the acquisition method.
Under this method, goodwill is measured as the fair value of the consideration transferred (including the recognition of
any part of the business not yet owned (non-controlling interests)), less the fair value of the identifiable assets
acquired and liabilities assumed, all measured at the acquisition date. Any contingent consideration expected to be
transferred in the future will be recognised at fair value at the acquisition date and recognised within Other payables.
Contingent consideration classified as an asset or liability that is a financial instrument is measured at fair value with
changes in fair value recognised in the income statement. The determination of fair value is based on discounted cash
flows. The key assumptions take into consideration the probability of meeting each performance target and the discount
rate. 
 
Where less than 100% of a subsidiary is acquired, and call and put options are granted over the remaining interest, a
non-controlling interest is initially recognised in equity at fair value, which is established based on the value of the
put option. A call option is recognised as a derivative financial instrument, carried at fair value. The put option is
recognised as a liability within Other payables, carried at the present value of the put option exercise price, and a
corresponding charge is included in Merger and Other Reserves. Any subsequent remeasurement of the call option and the put
option liability is recognised within finance income or cost. 
 
Subsequent adjustments to the fair value of net assets acquired can only be made within 12 months of the acquisition date,
and only if fair values were determined provisionally at an earlier reporting date. These adjustments are accounted for
from the date of acquisition. 
 
Acquisitions of non-controlling interests are accounted for as transactions with owners and therefore no goodwill is
recognised as a result of such transactions. Transaction costs incurred in connection with those business combinations,
such as legal fees, due diligence fees and other professional fees, are expensed as incurred. 
 
Method 2:All business combinations that occurred between 1 January 2004 and 31 December 2008 were accounted for using the
purchase method in accordance with IFRS 3 'Business Combinations (2004)'. Goodwill on those combinations represents the
difference between the cost of the acquisition and the fair value of the identifiable net assets acquired and did not
include the value of the non-controlling interest. Transaction costs incurred in connection with those business
combinations, such as legal fees, due diligence fees and other professional fees, were included in the cost of
acquisition. 
 
Method 3:For business combinations prior to 1 January 2004, goodwill is included at its deemed cost, which represents the
amount recorded under UK GAAP at that time less accumulated amortisation up to 31 December 2003. The classification and
accounting treatment of business combinations occurring prior to 1 January 2004, the date of transition to IFRS, has not
been reconsidered as permitted under IFRS 1. 
 
Other intangible assets 
 
Intangible assets other than goodwill are those which are identifiable and can be sold separately or which arise from legal
rights. 
 
Within ITV there are two types of intangible assets: those acquired and those that have been internally generated (such as
software licences and development). 
 
Intangible assets acquired directly by the Group are stated at cost less accumulated amortisation. Those separately
identified intangible assets acquired as part of a business combination are shown at fair value at the date of acquisition
less accumulated amortisation. 
 
The main intangible assets the Group has valued are brands, licences, contractual arrangements, customer contracts and
relationships and libraries. 
 
Each class of intangible asset's valuation method on initial recognition, amortisation method and estimated useful life is
set out in the table below: 
 
 Class of intangible asset             Valuation method                                                                                                                                                                                                                                                                                Amortisation method                              Estimated useful life                                                           
 Brands                                Applying a royalty rate to the expected future revenue over the life of the brand.                                                                                                                                                                                                              Straight-line                                    up to 14 years                                                                  
 Customer contracts and relationships  Expected future cash flows from those contracts and relationships existing at the date of acquisition are estimated. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.  Straight-lineor reducing balance as appropriate  up to 6 years for customer contracts  5 to 10 years for customer relationships  
 Contractual arrangements              Expected future cash flows from those contracts existing at the date of acquisition are estimated. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.                    Straight-line                                    up to 10 years depending on the contract terms                                  
 Licences                              Start-up basis of expected future cash flows existing at the date of acquisition. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.                                     Straight-line                                    11 to 17 years depending on term of licence                                     
 Libraries and other                   Initially at cost and subsequently at cost less accumulated amortisation.                                                                                                                                                                                                                       Sum of digits or straight line as appropriate    up to 20 years                                                                  
 Software licences and development     Initially at cost and subsequently at cost less accumulated amortisation.                                                                                                                                                                                                                       Straight-line                                    1 to 5 years                                                                    
 
 
Determining the fair value of intangible assets arising on acquisition requires judgement. The Directors make estimates
regarding the timing and amount of future cash flows derived from exploiting the assets being acquired. The Directors then
estimate an appropriate discount rate to apply to the forecast cash flows. Such estimates are based on current budgets and
forecasts, extrapolated for an appropriate period taking into account growth rates, operating costs and the expected useful
lives of assets. Judgements are also made regarding whether, and for how long, licences will be renewed; this drives our
amortisation policy for those assets. 
 
The Directors estimate the appropriate discount rate using pre-tax rates that reflect current market assessments of the
time value of money and the risks specific to the assets or businesses being acquired. 
 
Amortisation 
 
Amortisation is charged to the income statement over the estimated useful lives of intangible assets unless such lives are
judged to be indefinite. Indefinite life assets, such as goodwill, are not amortised but are tested for impairment at each
year end. 
 
Impairment 
 
Goodwill is not subject to amortisation and is tested annually for impairment and when circumstances indicate that the
carrying value may be impaired. 
 
Other intangible assets are subject to amortisation and are reviewed for impairment whenever events or changes in
circumstances indicate that the amount carried in the statement of financial position is less than its recoverable amount. 
 
Determining whether the carrying amount of intangible assets has any indication of impairment requires judgement. Any
impairment is recognised in the income statement. 
 
An impairment test is performed by assessing the recoverable amount of each asset, or for goodwill, the cash-generating
unit (or group of cash-generating units) related to the goodwill. Total assets (which includes goodwill) are grouped at the
lowest levels for which there are separately identifiable cash flows ('cash-generating unit' or 'CGU'). 
 
The recoverable amount is the higher of an asset's fair value less costs to sell and 'value in use'. The value in use is
based on the present value of the future cash flows expected to arise from the asset. 
 
The Group applies cautious assumptions for impairment testing. Estimates are used in deriving these cash flows and the
discount rate. Such estimates reflect current market assessments of the risks specific to the asset and the time value of
money. The estimation process is complex due to the inherent risks and uncertainties. If different estimates of the
projected future cash flows or a different selection of an appropriate discount rate or long-term growth rate were made,
these changes could materially alter the projected value of the cash flows of the asset, and as a consequence materially
different amounts would be reported in the financial statements. 
 
Impairment losses in respect of goodwill are not reversed. In respect of assets other than goodwill, an impairment loss is
reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is
reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortisation, if no impairment loss had been recognised. 
 
Intangible assets 
 
Intangible assets can be analysed as follows: 
 
                              Goodwill£m  Brands£m  Customer contracts and relationships£m  Contractualarrangements£m  Licences£m  Libraries and other£m  Software licences and development£m  Total£m  
 Cost                                                                                                                                                                                                   
 At 1 January 2013            3,411       175       332                                     10                         121         79                     78                                   4,206    
 Additions                    58          4         20                                      -                          -           2                      -                                    84       
 Foreign exchange             (2)         -         -                                       -                          -           -                      -                                    (2)      
 At 31 December 2013          3,467       179       352                                     10                         121         81                     78                                   4,288    
 Additions                    146         21        30                                      -                          -           16                     11                                   224      
 Foreign exchange             14          1         3                                       -                          -           -                      -                                    18       
 At 31 December 2014          3,627       201       385                                     10                         121         97                     89                                   4,530    
 Amortisation and impairment                                                                                                                                                                            
 At 1 January 2013            2,654       143       306                                     -                          74          43                     48                                   3,268    
 Charge for the year          -           16        20                                      2                          9           7                      12                                   66       
 At 31 December 2013          2,654       159       326                                     2                          83          50                     60                                   3,334    
 Charge for the year          -           18        21                                      3                          7           7                      11                                   67       
 At 31 December 2014          2,654       177       347                                     5                          90          57                     71                                   3,401    
 Net book value                                                                                                                                                                                         
 At 31 December 2014          973         24        38                                      5                          31          40                     18                                   1,129    
 At 31 December 2013          813         20        26                                      8                          38          31                     18                                   954      
 
 
All intangible asset additions in the year, excluding software, are due to the acquisition of three production companies,
as detailed in note 3.4 (2013: four production companies acquired). 
 
Goodwill impairment tests 
 
The following CGUs represent the carrying amounts of goodwill: 
 
                     2014£m  2013£m  
 Broadcast & Online  342     342     
 SDN                 76      76      
 ITV Studios         555     395     
                     973     813     
 
 
There has been no impairment charge for the year (2013: £nil). 
 
When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations
require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market
discount rate. 
 
Cash flow projections are based on the Group's current five year plan. Beyond the five year plan these projections are
extrapolated using an estimated long-term growth rate of 2% (2013: 2%). The growth rate used is consistent with the
long-term average growth rates for both the industry and the country in which they are located and is appropriate because
these are long-term businesses. 
 
The discount rate has been revised for each CGU to reflect the latest market assumptions for the Risk-Free rate, the Equity
Risk Premium and the net cost of debt. There is currently no reasonably possible change in discount rate that would reduce
the headroom in any CGU to zero. 
 
Broadcast & Online 
 
The goodwill in this CGU arose as a result of the acquisition of broadcasting businesses since 1999, the largest of which
was the merger of Carlton and Granada in 2004 to form ITV plc, which was treated as an acquisition of Carlton for
accounting purposes. 
 
No impairment charge arose in the Broadcast & Online CGU during the course of 2014 (2013: £nil). 
 
The main assumptions on which the forecast cash flow projections for this CGU are based include: the share of the
television advertising market; share of commercial impacts; programme and other costs; and the pre-tax market discount
rate. 
 
The key assumption in assessing the recoverable amount of Broadcast & Online goodwill is the size of the television
advertising market. In forming its assumptions about the television advertising market, the Group has used a combination of
long-term trends, industry forecasts and in-house estimates, which place greater emphasis on recent experience. The latest
range of forecasts for the advertising market is 2-5% for 2015. No impairment was identified. Also as part of the review, a
sensitivity of up to -10% was applied to 2015 for the purposes of the impairment test, again with no impairment
identified. 
 
A pre-tax market discount rate of 10.6% (2013: 11.3%) has been used in discounting the projected cash flows. 
 
The Directors believe that currently no reasonably possible change in these assumptions would reduce the headroom in this
CGU to zero. 
 
SDN 
 
Goodwill was recognised when the Group acquired SDN (the licence operator for DTT Mul