Note 5 – Intangible Assets and Goodwill Audited

5.1 Cost and Accumulated Amortization and Impairment

 

Intangible assets include software purchased from third parties, related software implementation costs, as well as patents, trademarks, client relationship acquired and development costs. Their amortization is included in the line item “Administration and general overheads” of the consolidated income statement.

Trademarks acquired through the Arch Chemicals Inc. (2011) and Cambrex (2007) acquisitions are considered to have indefinite useful lives. As a result, these intangible assets with a carrying amount of CHF 387 million as of 31 December 2016 (2015: CHF 384 million) are not systematically amortized.

Development costs as of 31 December 2016 include technology acquired with the Arch Chemical Inc. acquisition of CHF 49 million (2015: CHF 54 million), the Cambrex aquisition of CHF 3 million (2015: CHF 3 million) and the Diacon acquisition of CHF 1 million (2015: CHF 1 million).

5.2 Impairment Tests for Cash-Generating Units Containing Goodwill and Intangible Assets with Indefinite Useful Lives

The Group has identified the following cash-generating units:

Specialty Ingredients

The segment’s business units are the cash-generating units used for the impairment testing of goodwill and intangible assets with indefinite useful lives, with the exception that the Wood Protection business continues to be considered as a separate cash-generating unit due to its independent cash flows, despite the fact that this business was integrated into the Coating & Composites business unit, effective for the 2016 financial year.

Pharma&Biotech

The various technologies (mammalian, chemical, etc.) applied within the segment are the cash-generating units used for the impairment testing of goodwill and intangibles assets with indefinite useful lives.

The following cash-generating units maintain carrying amounts of goodwill as presented below (at year-end exchange rates):

The Chemical cash-generating unit does not maintain goodwill anymore, as a result of the impairment due to the sale of Lonza’s Braine (BE) site (see note 4.3).

The following cash-generating units maintain carrying amounts of intangible assets with indefinite useful lives as presented below (at year-end exchange rates):

 

The recoverable amount of the above cash-generating units is based on the value-in-use calculation. These cash flow projections for 2017 to 2021 are based on the business strategy review and exclude any future cash inflows and outflows expected to arise from growth potential of future capital expenditures.

The cash flow projections beyond the five-year period, as stated in the respective paragraphs of the cash-generating units, are based on the concept of perpetual growth rates, which do not necessarily reflect the Group’s strategic objective targets for the future growth potential of the underlying businesses.

The key assumptions and the approach to determining the recovery value of the significant cash-generating units are based on the following:

The Specialty Ingredients business includes the cash-generating units of Consumer Products Ingredients, Agro Ingredients, Coatings and Composites (excluding Wood Protection), Wood Protection and Water Treatment. These cash-generating units are the combination of the activities acquired through the Arch Chemicals acquisition in 2011, as well as the former Life Science Ingredients activities of Lonza. The cash flow projections for 2017–2021 are based on a 4.5% (2015: 4.2%) average sales growth. The cash flow projections beyond the five-year period are based on a 1% growth rate (2015: 1%). A pre-tax discount rate of 8.5% (2015: 9.4%) has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

The Bioscience Solutions / Cell Therapy / Viral Therapeutics businesses include the Cambrex Corporation, acquired in 2007, the amaxa business, acquired in 2008, MODA Technology Partners and Vivante GMP Solutions, acquired in 2010, as well as Triangle Research Labs, acquired in April 2016, respectively. The cash flow projections for 2017–2021 are based on a 9.4% (2015: 11.2%) average sales growth. The cash flow projections beyond the five-year period are extrapolated using a 0.5% growth rate (2015: 0.5%). A pre-tax discount rate of 7.7% (2015: 8.6%) has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

The goodwill arising from the acquisition of InterHealth Nutraceuticals in September 2016 is allocated to the Consumer Products Ingredients business. The cash flow projections for 2017–2021 are based on a 7.6% average sales growth with growing EBIT margins. The cash flow projections beyond the five-year period are based on a 1% growth rate. A pre-tax discount rate of 8.1% has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

In addition, the following table summarizes the assumptions applied for the other cash-generating units:

 

Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.