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24 Goodwill and other intangible assets


In CHF million
 

Goodwill
  Internally
generated
software
 
Purchased
software
 
Customer
relationships
 

Brands
  Other
intangible
assets
 

Total
                             
Acquisition costs
Balance at 31 December 2014   6,540   1,307   1,980   1,133   272   986   12,218
Additions     176   166       205   547
Disposals     (75)   (53)       (35)   (163)
Reclassifications     95   21       (76)   40
Additions from business combinations   255     32   50   4   16   357
Disposals from sales of subsidiaries   (13)   (18)   (2)   (1)     (15)   (49)
Foreign currency translation adjustments   (217)   (14)   (109)   (100)   (26)   (15)   (481)
Balance at 31 December 2015   6,565   1,471   2,035   1,082   250   1,066   12,469
Additions     138   187       247   572
Disposals     (202)   (75)   (12)     (54)   (343)
Reclassifications     71   31       (93)   9
Additions from business combinations         22       22
Foreign currency translation adjustments   (18)   (1)   (12)   (8)   (2)   (1)   (42)
Balance at 31 December 2016   6,547   1,477   2,166   1,084   248   1,165   12,687
                             
Accumulated amortisation and impairment losses
Balance at 31 December 2014   1,557   838   1,499   905   203   312   5,314
Amortisation     217   228   93   25   111   674
Impairment losses     2         1   3
Disposals     (75)   (47)       (34)   (156)
Disposals from sales of subsidiaries     (18)   (2)   (1)     (14)   (35)
Reclassifications     16   (9)         7
Foreign currency translation adjustments   (153)   (10)   (83)   (85)   (20)   (9)   (360)
Balance at 31 December 2015   1,404   970   1,586   912   208   367   5,447
Amortisation     246   234   69   25   115   689
Impairment losses       2       6   8
Disposals     (200)   (75)   (12)     (48)   (335)
Reclassifications     (2)   1       3   2
Foreign currency translation adjustments   (13)   (1)   (10)   (8)   (2)   (2)   (36)
Balance at 31 December 2016   1,391   1,013   1,738   961   231   441   5,775
                             
Net carrying amount
Net carrying amount at 31 December 2016   5,156   464   428   123   17   724   6,912
Net carrying amount at 31 December 2015   5,161   501   449   170   42   699   7,022
Net carrying amount at 31 December 2014   4,983   469   481   228   69   674   6,904

As of 31 December 2016, other intangible assets included advance payments made and uncompleted development projects of CHF 215 million (prior year: CHF 154 million). Apart from goodwill, there are no intangible assets with indefinite useful lives. As of 31 December 2016, accumulated impairment losses on goodwill of CHF 1,391 million were recognised. Goodwill arising from investments in associates is included as part of the investments in associates.

Goodwill impairment testing

Goodwill is allocated to the cash-generating units of Swisscom according to their business activities. Goodwill acquired in a business combination is allocated to each cash-generating unit expected to benefit from the synergies of the business combination. The allocation of the goodwill to the cash-generating units is as follows:

In CHF million   31.12.2016   31.12.2015
Residential Customers Swisscom Switzerland   2,620   2,620
Small and Medium-Sized Enterprises Swisscom Switzerland   662   662
Enterprise Customers Swisscom Switzerland   907   907
Fastweb   529   533
Other cash-generating units   438   439
Total goodwill   5,156   5,161

Goodwill was tested for impairment in the fourth quarter of 2016 after the business planning had been completed. The recoverable amount of a cash-generating unit is determined based on its value in use, using the discounted cash flow (DCF) method. The projected free cash flows are estimated on the basis of the business plans approved by management in general covering a three-year period. A planning horizon of five years is used for the impairment test of Fastweb. For the free cash flows extending beyond the detailed planning period, a terminal value was computed by capitalising the normalised cash flows using an assumed long-term constant growth rate. The growth rates applied are those customarily assumed for the country or market. The key assumptions underlying the calculations are as follows:

  2016   2015

Cash-generating unit
  WACC
pre-tax
  WACC
post-tax
  Long-term
growth rate
  WACC
pre-tax
  WACC
post-tax
  Long-term
growth rate
Residential Customers Swisscom Switzerland   6.66%   5.25%   0%   6.57%   5.20%   0%
Small and Medium-Sized Enterprises Swisscom Switzerland   6.66%   5.25%   0%   6.61%   5.20%   0%
Enterprise Customers Swisscom Switzerland   6.64%   5.25%   0%   6.61%   5.20%   0%
Fastweb   9.63%   7.38%   1.0%   10.30%   7.50%   1.0%
Other cash-generating units   7.3–12.2%   6.3–9.5%   0–1.0%   7.1–12.1%   6.3–9.5%   0–1.0%

The application of pre- or post-tax discount rates (WACC pre-tax and WACC post-tax) results in the same value in use. The discount rates used take into consideration the specific risks relating to the cash-generating unit being considered. The projected cash flows and management assumptions are corroborated by external sources of information. The approach taken and assumptions made for the impairment tests of Swisscom Switzerland and Fastweb are presented below.

Residential Customers, Small- and Medium-Sized Enterprises and Enterprise Customers – Swisscom Switzerland

The impairment test of goodwill is conducted on these cash-generating units. The recoverable amount was determined based on the value in use using the discounted cash flow (DCF) method. The forecast of future cash flows is based upon the three-year business plan approved by management. For the free cash flows extending beyond the detailed planning period, a long-term growth of zero was assumed, as in the prior year. As of the measurement date, the recoverable amount at all cash-generating units, based on their value in use, was higher than the carrying amount relevant for the impairment test. Swisscom is of the opinion that none of the anticipated changes in key assumptions which can be reasonably expected would cause the carrying amount of the cash­-generating units to exceed the recoverable amount.

Fastweb

The impairment test of Fastweb was undertaken in the fourth quarter of 2016. The recoverable amount was determined on the basis of the value in use using the discounted cash flow method. The basis for projecting future cash flows is the business plan prepared by management for the five years 2017 to 2021. This plan takes into consideration historical empirical values and management’s expectations regarding the future development of the relevant market. The impairment test took into account the following assumptions:

Assumptions   Description
Average annual growth in revenue during the detailed planning period   In the business plan, an average annual growth in revenue of 6.25% is expected for the detailed planning period up to 2021. In the prior year, an average annual growth in revenue of 4.2% had been expected for the detailed planning period 2016–2020.
Projected EBITDA margin (EBITDA as % of net revenue)   Normalised EBITDA margin in the terminal value amounted to 34% (prior year: 40%).
Projected capital expenditure rate (capex as % of net revenue)   Normalised capital expenditure as a percentage of net revenue in the terminal value came to 20% (prior year: 23%).
Post-tax discount rate   The post-tax discount rate is 7.38% (prior year: 7.50%) and the related pre-tax discount rate is 9.63% (prior year: 10.30%). The discount rate is calculated using the Capital Asset Pricing Model (CAPM). This latter comprises the weighted cost of own equity and of external borrowing costs. The risk-free interest rate on which the discount rate is based on, is derived from ten-year bonds issued by the German government with a zero interest rate, however, a floor interest rate of 3% is applied. A premium for the country risk of Italy is then added.
Long-term growth rate   The normalised free cash flows in the terminal value were capitalised with a perpetual growth rate of 1.0% as in the prior year. The growth rate employed corresponds to that customarily used for the country and market based upon experience values as well as future projections and which are corroborated by external information sources. The growth rate employed does not exceed the long-term average growth rate customarily used for the country and market.

As of the date of the impairment test, no impairment of goodwill resulted. The recoverable amount exceeded the net carrying amount by EUR 710 million (CHF 768 million).

The following changes in material assumptions lead to a situation where the value in use equates to the net carrying amount:

    Assumptions   Sensitivity
Average annual growth rate through 2021 with the same EBITDA margin as in the business plan   6.3%   4.3%
Normalised EBITDA margin   34%   31%
Normalised capital expenditure rate   20%   23%
Post-tax discount rate   7.38%   8.84%
Long-term growth rate   1.0%   –0.8%