10. Goodwill

The following table shows a reconciliation of the carrying amounts of goodwill for the periods presented in the consolidated financial statements as of March 31, 2014:

Impairment tests for cash-generating units containing goodwill

Goodwill is allocated to the following cash-generating units:

With regard to the value in use, goodwill is reviewed for impairment applying the discounted cash flow method. The calculation is performed on the basis of cash flows before tax of a three-year medium-term business plan as of the beginning of March. This medium-term business plan is based on historical data as well as on assumptions regarding the expected future market performance. The Group’s planning assumptions are extended to include sectoral planning assumptions. Intra-group evaluations are complemented by external market studies. The capital costs are calculated as the weighted average cost of equity and the weighted average cost of borrowed capital and using the capital asset pricing model (weighted average costs of capital). Cash flows are discounted using a pre-tax WACC of 7.98% (2012/13: 7.96%). Country risk is taken into account through a cash flow premium/discount specific to the CGU.

Estimates and assumptions used to measure the recoverable amounts of cash generating units with a significant share of the voestalpine Group’s total goodwill include:

External market and economic forecasts for the sale of flat steel products in Europe were used for the three-year medium-term business plan of the CGU Steel Division. Due to positive feedback from individual customer segments, some quality-related adjustments were made. The production plan reflects the sales forecasts. With respect to procurement, the assumptions regarding raw materials according to global market forecasts were taken as a basis for planning. The three-year medium-term business plan was extended by one year to present a sustainable steady-state status for the calculation of the perpetual annuity. The perpetual annuity is based on an expected growth rate of 1%. The country-specific cash flow premium is 3.49%.

The three-year medium-term business plan for the CGU High Performance Metals (HPM) Production was prepared under consideration of both the CGU’s strategic orientation and the regional conditions in the core markets and reflects the general economic environment of the most important industry segments for the companies of this CGU. The internal forecasts and estimates—in particular with regard to the components business that targets sophisticated metallurgical applications in the aerospace, oil and natural gas, energy engineering, and automotive industries—rely on external sources of information and are largely consistent with them. Changes in the cost of input materials due to the price of alloys can mostly be passed on to customers. The last plan year was used to calculate the perpetual annuity based on a growth factor of 1%. The country-specific cash flow discount is 3.23%.

The planning for the CGU Value Added Services was based on both the general economic environment of the relevant industry segments as well as the growth forecasts in the regional sales markets. The optimization of the value creation chain that had already been initiated in the past and the continuation of the oil and natural gas strategy, which is contributing to a significant improvement of the market position, have played a positive role in the planning. Changes in this CGU’s material costs due to alloy prices can also be passed on to the market through so-called “alloy surcharges.” The perpetual annuity begins with the third plan year and is also based on a growth factor of 1%. The country-specific cash flow discount is 6.88%.

The planning process of the CGU Turnout Systems was based on the three-year detailed budgets and market forecasts of the individual companies belonging to the CGU. The planning also reflects their expectations with respect to the development of their respective general market environment and the volume of their customers’ estimated demand. With regard to the most important factor cost developments, general forecasts of the development of personnel expenses and internal assumptions on the development of steel prices were integrated into the budgets. The perpetual annuity begins with the third plan year and is based on a growth factor of 1%. The country-specific cash flow discount is 7.50%.

In addition to the generally applicable forecasts for economic growth in the relevant core markets, in particular the development and potential in the focus industries defined for the segment were taken into account for the three-year medium-term business plan for the CGU Welding Consumables. The discounted cash flow method used in the course of the impairment tests is applied using a perpetual annuity based on the last detailed planning period. A growth factor of 1% was applied for the perpetual annuity. The country-specific cash flow discount is 7.03%.

The cash flow forecasts for the CGU Automotive Body Parts are based on the regional growth forecasts and/or the medium-term production forecasts for the pan-European automobile market, particularly for the European premium brand automakers. External forecasts were adjusted upward based on internal estimates. The last plan year was used to calculate the perpetual annuity based on a growth factor of 1%. The country-specific cash flow premium is 2.34%.

The three-year medium-term business plan for the CGU Precision Strip was prepared under consideration of the general regional conditions in the core markets and reflects the general economic environment of the most important industry segments for the companies of this CGU. The external forecasts were supplemented by internal estimates. For the most part, internal estimates are based on external forecasts and were adjusted downward. The last plan year was used to calculate the perpetual annuity based on a growth factor of 1%. The country-specific cash flow premium is 3.21%.

The value of all goodwill was confirmed by the impairment tests. A sensitivity analysis showed that the carrying amounts of each CGU would still be covered if the interest rate were to rise from 7.98% to 8.98% and there is no need to recognize an impairment loss. Furthermore, the cash flow sensitivity analysis showed that if the cash flows are reduced by 10%, the carrying amounts of each CGU are still covered and there is no need to recognize an impairment loss.

The following cash-generating units and groups of cash-generating units contain intangible assets with indefinite useful lives:

Intangible assets with indefinite useful lives contain solely trademark rights. The period, during which these trademark rights are expected to generate cash flows is not subject to a foreseeable limit. Therefore, trademark rights do not depreciate and are not amortized.