18 Impairment of goodwill
Prior to the disposal of the regional business of BA Connect, goodwill acquired through business combinations was allocated for the purposes of impairment reviews to two cash-generating units with separately identifiable cash inflows and which were reportable business segments. The two segments were the airline cash-generating unit and the regional airline cash-generating unit.
In the quarter ending September 30, 2006, an impairment review was performed on the assets, including goodwill of the regional airline business in accordance with IAS 36, using value in use. This was prompted by the ongoing deterioration in trading performance against plan. This resulted in a goodwill impairment charge of £32 million. This impairment charge was reflected in discontinued operations.
The carrying amount of goodwill is now wholly reflected in the airline cash-generating unit.
| Group | ||
|---|---|---|
| £ million | 2008 | 2007 |
| Carrying amount of goodwill | 40 | 40 |
The recoverable amount of the airline unit has been measured on the basis of its value in use, by applying cash flow projections based on the financial budgets approved by the Board covering a two-year period. Cash flows beyond the two-year period are projected to increase by the long-term growth rate of 2.5 per cent. The pre-tax discount rate applied to the cash flow projections is 8.9 per cent (2007: 8.9 per cent). This discount rate is derived from the Group’s post-tax weighted average cost of capital, adjusted for the risks specific to the market.
The calculation of value in use for the airline unit is most sensitive to the following assumptions:
- Operating margin;
- Discount rates; and
- Long-term growth rate.
Operating margins are based on the estimated effects of planned business efficiency and business change programmes, approved and enacted at the balance sheet date. These are adjusted for the volatile trading conditions that have impacted the airline unit over the past three years. The trading environment is subject to both regulatory and competitive pressures that can have a material effect on the operating performance of the business. Foreseeable events are unlikely to result in a change in the projections of a significant nature so as to result in the unit’s carrying amount exceeding its recoverable amount.
The discount rate reflects management’s estimate of the long-run return on capital employed for the airline unit. Changes in the cash-generating unit’s sources of funding or the cost of that funding (referring to long-term market rates) could result in changes to the discount rates used. An increase in discount rates by 1.5 points (2007: 4.1 points) would result in the airline unit’s carrying amount being equal to its recoverable amount. A sensitivity analysis was performed by reducing the risk-adjusted cash flow projections (decrease in margins and increase in capital expenditures) by 10 per cent, which did not lead to an impairment of goodwill.