Note 5 – Intangible Assets and Goodwill Audited

5.1 Cost and Accumulated Amortization and Impairment

Year ended 31 December 2017
million CHF
Goodwill Capsugel trade name / Arch
Chemicals Inc. and Cambrex trademarks
Patents, trademarks, client relationship Computer software Technologies / Development cost Construction in progress Total

Cost

             
At 1 January 1,287 388 733 138 95 1 2,642
Additions 0 0 3 14 6 1 24
Disposals 0 0 (3) (4) 0 0 (7)
Acquisition of subsidiaries 2,496 240 1,265 7 1,216 0 5,224
Currency translation differences 219 3 27 0 71 0 320
At 31 December 4,002 631 2,025 155 1,388 2 8,203
               

Accumulated amortization and impairment

     
At 1 January 0 (1) (235) (109) (42) 0 (387)
Amortization 0 0 (60) (16) (50) 0 (126)
Disposals 0 0 3 4 0 0 7
Currency translation differences 0 0 3 1 2 0 6
At 31 December 0 (1) (289) (120) (90) 0 (500)
Net carrying amount 31 December 4,002 630 1,736 35 1,298 2 7,703

 

Year ended 31 December 2016
million CHF
Goodwill Arch Chemicals
Inc. and Cambrex trademarks
Patents, trademarks, client relationship Computer software Technologies / Development cost Construction in progress Total
               

Cost

             
At 1 January 1,124 384 574 129 93 3 2,307
Additions 0 0 1 10 0 0 11
Disposals 0 0 0 (3) 0 0 (3)
Acquisition of subsidiaries 168 0 176 0 0 0 344
Transfer to assets held for sale (note 4.2) (36) 0 (34) (2) 0 0 (72)
Transfers / reclassification 0 0 0 2 0 (2) 0
Currency translation differences 31 4 16 2 2 0 55
At 31 December 1,287 388 733 138 95 1 2,642
               

Accumulated amortization and impairment

     
At 1 January (6) 0 (217) (99) (34) 0 (356)
Amortization 0 0 (38) (13) (7) 0 (58)
Disposals 0 0 0 2 0 0 2
Imparment losses (31) (1) (2) 0 0 0 (34)
Transfer to assets held for sale (note 4.2) 36 0 24 2 0 0 62
Currency translation differences 1 0 (2) (1) (1) 0 (3)
At 31 December 0 (1) (235) (109) (42) 0 (387)
Net carrying amount 31 December 1,287 387 498 29 53 1 2,255

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.

The Capsugel trade name acquired through the business combination in 2017 as well as the trademarks acquired through the acquistions of Arch Chemicals (2011) and Cambrex (2007) are considered to have indefinite useful lives. As a result, these intangible assets with a carrying amount of CHF 630 million as of 31 December 2017 (2016: CHF 387 million) are not systematically amortized.

Development costs as of 31 December 2017 predominantly include technologies acquired with the acquisitions of Capsugel amounting to CHF 1,243 million and the Arch Chemical acquisition of CHF 42 million (2016: CHF 49 million), as well as with the Micro-Macinazione acquisition of CHF 6 million, the Cambrex aquisition of CHF 2 million (2016: CHF 3 million) and the Diacon acquisition of CHF 1 million (2016: 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 and Composites business unit, with effect from 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.

Capsugel 1


Capsugel's businesses (Consumer Health and Nutrition, Pharma Capsules and Dosage Forms and Delivery Systems) are the cash-generating units used for the impairment testing of goodwill and intangible assets with indefinite useful lives.

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

million CHF 2017 2016 
   
Capsugel (representing a group of cash-generating units) 2,679 0
Specialty Ingredients (representing a group of cash-generating units) 712 743
Bioscience Solutions / Cell Therapy / Viral Therapeutics (representing a group of cash-generating units) 324 1286
Consumer Health 208 1218
Chemical (custom manufacturing and related development services) 238 0
Mammalian (custom manufacturing and related development services) 25 24
Agro Ingredients 12 12
Wood Protection 4 4
Total carrying amounts of goodwill 4,002 1,287


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

million CHF 2017 2016
   
Specialty Ingredients (representing a group of cash-generating units) 348 360
Capsugel (representing a group of cash-generating units) 256 0
Bioscience Solutions / Cell Therapy / Viral Therapeutics (representing a group of cash-generating units) 26 27
Total carrying amounts of intangible assets with indefinite useful life 630 387

 

The recoverable amount of the above cash-generating units is based on the value-in-use calculation. These cash flow projections for 2018 to 2022 are based on the Lonza 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 goodwill arising from the acquisition of Capsugel in July 2017 is allocated to the group of cash-generating units reflecting the acquired businesses, which are Capsugel's Consumer Health and Nutrition business, the Pharma Capsules business and the Dosage Forms and Delivery Systems business. The cash flow projections for 2018–2022 are based on a 6.1% average sales growth with growing EBIT margins. The cash flow projections beyond the five-year period are based on a 2.5% growth rate. A pre-tax discount rate of 8.0% 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 Specialty Ingredients business includes the cash-generating units of Consumer Health, Agro Ingredients, Coatings and Composites (excluding Wood Protection), Wood Protection and Water Care. These cash-generating units are the combination of the activities acquired through the Arch Chemicals acquisition in 2011, the former Life Science Ingredients activities from Lonza and the InterHealth Nutraceuticals acquisition in 2016. The cash flow projections for 2018–2022 are based on a 4.8% (2016: 4.5%) average sales growth. The cash flow projections beyond the five-year period are based on a 1% growth rate (2016: 1%). A pre-tax discount rate of 8.8% (2016: 8.5%) 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 cGMP Solutions, acquired in 2010, Triangle Research Labs, acquired in 2016, as well as PharmaCell, acquired in May 2017. The cash flow projections for 2018–2022 are based on a 14.3% (2016: 9.4%) average sales growth. The cash flow projections beyond the five-year period are extrapolated using a 0.5% (2016: 0.5%) growth rate. A pre-tax discount rate of 8.1% (2016: 7.7%) 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 Health business. The cash flow projections for 2018–2022 are based on a 5.2% (2016: 7.6%) average sales growth with growing EBIT margins. The cash flow projections beyond the five-year period are based on a 1% (2016: 1%) growth rate. A pre-tax discount rate of 7.6% (2016: 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:

in % 2017 2016
     

Mammalian CGU

   
Pre-tax discount rate 7.6 8.0
Average sales growth rate during forecast period 1.4 5.0
Sales growth rate after forecast period 0.0 0.0
     

Chemical CGU

   
Pre-tax discount rate 6.5 n.a.
Average sales growth rate during forecast period 4.1 n.a.
Sales growth rate after forecast period 0.0 n.a.
     

Agro Ingredients CGU

   
Pre-tax discount rate 7.8 7.8
Average sales growth rate during forecast period 2.6 3.9
Sales growth rate after forecast period 1.0 1.0
     

Wood Protection CGU

   
Pre-tax discount rate 10.3 8.3
Average sales growth rate during forecast period 4.9 3.7
Sales growth rate after forecast period 1.0 1.0

 

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.