Notes to Income Statement (Note 4 - 10)
Note 4: Acquisitions and Disposals
Total acquisition spending in 2009 was €54 million (2008: €667 million), including payments for acquisitions made in previous years. This includes an amount of €4 million (2008: €12 million) relating to costs that are directly attributable to acquisitions, such as legal fees, broker's costs, and audit fees.
Since the acquisition date, the 2009 acquisitions for a consideration of €26 million have contributed €8 million to revenues, €0 million to ordinary EBITA, and €(1) million to profit for the year. If these acquisitions had been executed on January 1, 2009, full-year 2009 revenues for the Group would have been €3,451 million, ordinary EBITA €684 million, and profit for the year €111 million.
The fair value of the acquirees' identifiable assets and liabilities of some acquisitions could only be determined provisionally and will be subject to change based on the outcome of the purchase price allocation in 2010, which will be completed within 12 months from the acquisition date.
In 2009 and 2008, there were a number of small disposals across the divisions to optimize the portfolio.
Note 5: Personnel Expenses
Note 6: Amortization, Impairments, and Depreciation
(See note 3
for details by segment.)
Note 7: Financing Results
Net foreign exchange gains/(losses) include foreign exchange results on certain intercompany balances.
Note 8: Income Tax Expense
The normative income tax expense has been computed as the weighted average rates of the jurisdictions where the Group operates. The impairment of goodwill and publishing rights of €203 million are included in the computation and resulted in a relatively low normative tax rate of 5%.
The impairments relate mainly to the non-tax deductible goodwill and therefore the normative tax must be reversed for an amount of €70 million when calculating the effective tax rate.
In 2009, the Group implemented a new intragroup finance structure optimizing the tax effect of international intragroup financing activities. The 2009 tax benefits of €36 million are slightly higher than for 2008 (€35 million).
In 2009, the Company applied for a substitute tax in Italy following amendments in Italian tax law. Portions of previously non-tax deductible publishing rights have now become tax deductible. As a result of the additional tax amortization, the Company will realize additional cash benefits of €66 million in total in the period 2009-2017. The agreement required an upfront payment of €34 million to the Italian tax authorities in 2009 and resulted in a one-time tax benefit of €32 million in the 2009 income statement.
Due to the release of a provision for potential tax claims related to divestments in the past, the Non-deductible costs and other items have been positively affected by an amount of €13 million.
Note 9: Non-Controlling Interests
The Group's shares in the most material consolidated subsidiaries that were not fully owned at December 31 were:
Non-controlling interests of consolidated participations in the profit for the year of the Group in 2009 were €(8) million (2008: €2 million). Non-controlling interests in the equity of consolidated participations, totaling €21 million (2008: €33 million), are based on third-party shareholding in the underlying shareholders' equity of the subsidiary.
The Group has an agreement to acquire the remaining 25.1% shares of AnNoText in January 2010.
Note 10: Intangible Assets
Reclassifications include the deferred tax liability that relates to the final outcome of the purchase price allocation of 2008 acquisitions.
In 2009, the Group recognized €15 million (2008: €20 million) in its income statement for expenditures that are not components of the costs of internally generated intangible assets.
Impairment testing cash-generating units
The Group reviews at each reporting date whether there is an indication that any of the cash-generating units (CGUs) that contain goodwill and publishing rights may be impaired. Furthermore, the Group carries out an annual impairment test by comparing the carrying amount of the CGUs to which the goodwill and publishing rights belong, net of related deferred taxes, to the recoverable amount of the CGUs. The recoverable amount is determined based on a calculation of the value in use and compared to multiples of recent transactions to estimate the net selling price. These calculations use cash flow projections based on actual operating results and Business Development Plans, as approved by the Executive Board and Supervisory Board. The period over which the Group estimates its cash flow projections has been extended in 2009 from three to five years. After five years cash flow projections are extrapolated using an appropriate perpetual growth rate that is consistent with the long-term average market growth rate and that does not exceed 3% (2008: 4.5%).
The estimated pre-tax cash flows are discounted to their present value using a pre-tax weighted average cost of capital (WACC) between 9.0% and 11.2%.
The key assumptions used in the projections are:
- Revenue growth: based on actual experience, an analysis of market growth, and the expected development of market share; and
- Margin development: based on actual experience and management's long-term projections.
The impairment test carried out in 2009 showed that the carrying amount for certain (CGUs) exceeded the recoverable amount. For these (CGUs) an impairment loss has been recorded of €197 million. The recoverable amount has been estimated based on value in use using a pre-tax WACC of 10.4%.
The majority of the impairment loss (€135 million) recognized relates to the Health & Pharma Solutions division and is mainly a consequence of market conditions resulting in lower expected long-term growth rates, particularly within the pharmaceutical promotion markets. The remaining smaller impairment losses relate to the Legal, Tax & Regulatory Europe division and are mainly a consequence of market conditions resulting in lower expected long-term growth rates, particularly within the advertising and training markets and impairment losses on assets held for sale throughout the Group.
The impairment loss relates to goodwill (€192 million) and publishing rights (€5 million).
The impairment test also included an assessment, if a reasonably possible change in a key assumption would cause the carrying amount to exceed the recoverable amount and none were noted, other than the above mentioned impairments. If the pre-tax discount rate would increase by 0.5% none of the other non-impaired CGUs would need to recognize additional impairment. Further, if the perpetual growth rate would decline by 0.5% to 2.5% on average, none of the other CGUs would be impaired either.