Notes 16-20
16. Debtors
Back to top17. Stocks
The group also has conditional commitments for the purchase of land to be used for residential construction totalling $76 million (June 2008 $136 million). Delivery of this land is expected to take place over the period to 2011.
During the year $47 million of stock was written-down as part of the review of Formica’s manufacturing operations, product profitability and customer cost-to-serve and aligned their stock with the revised product suite and service model. See note 4.
Back to top18. Fixed assets
As at 30 June 2009, fixed assets includes $110 million of assets under construction (June 2008 $157 million).
During the year ended 30 June 2009 the group wrote-off $33 million in Distribution of IT assets, arising from the decision to suspend the implementation of a new retail management information system. Should the project recommence and be successfully implemented the group will assess the value created and may reverse some of the amount written-off. See note 4.
The group has written-off $17 million of fixed assets in regard to the closure of the Laminex particleboard plant at Kumeu and the medium density fibreboard plant at Welshpool during the year.
As part of the project reviewing Formica and Laminex’s manufacturing operations, the group decided during the year ended 30 June 2009 to downsize the operations at Formica’s plant at Bilbao, Spain. Accordingly $24 million has been written-off fixed assets.
During the year ended 30 June 2009 the group decided to write-off $92 million of fixed assets for Formica Europe. This is the result of the annual impairment review undertaken by the group. The review indicated that the value of the assets has been adversely impacted due to the deterioration in current market conditions and a more cautious outlook of the companies sustainable mid-cycle earnings.
Back to top19. Goodwill
Impairment of goodwill
Goodwill has been tested for impairment in June 2009. Each business unit which carries goodwill has prepared a discounted cashflow on a value-in-use basis. They have used their past experience of revenue growth, operating costs and margin, and external sources of information where appropriate, to determine their expectations for the future. These cashflow projections are based on the group’s three-year strategic plan approved by the directors, which has been extended for a further two years. Cashflows beyond the five-year period have been extrapolated using estimated terminal growth rates which do not exceed the long-term average growth rate for the industries in which the business units operate. The growth rates used range from 1.5 percent to 4.0 percent, with the majority of the business units using 2 percent. The cashflows are discounted using a nominal rate of 10 percent after tax, with the exception of Formica which has used 9 percent. This adjustment to the standard rate of 10 percent reflects the risk profile for the countries in which Formica operates.
The group operates in cyclical markets and currently faces deteriorating market conditions that make it difficult to predict future profitability. Residential markets have declined in New Zealand, Australia, the United States, Spain and the United Kingdom, however there are good growth prospects in Asia. There is also divergence in those markets between the prospects for infrastructure and commercial activities. Due to the deterioration in current market conditions and a more cautious outlook of the companies' sustainable mid-cycle earnings, the group wrote-off all the goodwill recognised in Formica Europe of $29 million, Formica North America of $27 million and $5 million of the goodwill recognised on acquisition of The O’Brien Group Limited, as the review indicated that the value of the assets has been adversely impacted.
The forecasts for purposes of valuation are most sensitive to changes in projected operating earnings and cashflows in the terminal year. Based on the sensitivity analysis performed, it is estimated that if there were an adverse change in the terminal year operating earnings of the Formica group by US$1 million (US$0.7 million net of tax), the recoverable value would decline by US$8 million.
The group has identified certain business units which face particular challenges, including the Formica group. The exercise confirmed that there is headroom over the carrying value and based on the analysis performed there are no impairment issues necessitating a further write-down of goodwill. New management have been appointed to achieve an appropriate improvement in their operating earnings. If this improvement does not eventuate there may be a need for a future impairment.
Back to top20. Intangibles
Brands are considered to have an indefinite useful life as there are no factors which indicate that there is a limit on their capacity to generate foreseeable cashflows. Factors considered before arriving at this conclusion are whether the businesses which own the brands are going concerns, whether there is any evidence of obsolescence due to changes in either technology or regulatory conditions, whether the businesses are trading profitably and whether there are any other market-based indications. Brands have been tested for impairment in June 2009 on a value-in-use basis. This exercise confirmed that there are no impairment issues necessitating a write-down.
