Annual Report and Accounts 2008
14 Intangible assets
| Customer contracts £m |
Rail franchise £m |
Software £m |
Finite life assets £m |
Contractual relationships £m |
Goodwill £m |
Indefinite life assets £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|
| Cost: | ||||||||
| At 1 January 2008 | 356.5 | 9.9 | – | 366.4 | 42.0 | 952.6 | 994.6 | 1,361.0 |
| Additions through business combinations | 7.9 | – | – | 7.9 | 4.8 | 8.7 | 13.5 | 21.4 |
| Additions internally generated | – | – | 8.2 | 8.2 | – | – | – | 8.2 |
| Reclassification from tangible fixed assets | – | – | 2.3 | 2.3 | – | – | – | 2.3 |
| Impairment | – | – | – | – | – | (0.7) | (0.7) | (0.7) |
| Foreign exchange | 107.2 | – | 2.6 | 109.8 | 10.8 | 245.2 | 256.0 | 365.8 |
| At 31 December 2008 | 471.6 | 9.9 | 13.1 | 494.6 | 57.6 | 1,205.8 | 1,263.4 | 1,758.0 |
| Amortisation and impairment: | ||||||||
| At 1 January 2008 | 63.7 | 3.6 | – | 67.3 | – | 86.8 | 86.8 | 154.1 |
| Charge for year | 54.1 | 1.1 | – | 55.2 | – | – | – | 55.2 |
| Foreign exchange | 29.1 | – | – | 29.1 | – | – | – | 29.1 |
| At 31 December 2008 | 146.9 | 4.7 | – | 151.6 | – | 86.8 | 86.8 | 238.4 |
| Net book value: | ||||||||
| At 31 December 2008 | 324.7 | 5.2 | 13.1 | 343.0 | 57.6 | 1,119.0 | 1,176.6 | 1,519.6 |
| At 1 January 2008 | 292.8 | 6.3 | – | 299.1 | 42.0 | 865.8 | 907.8 | 1,206.9 |
The software intangible assets are expected to become operational in 2009 and have not been amortised during the year.
The annual impairment charge in 2008 of £0.7 million related to the goodwill arising on the acquisition of Dot2Dot. The net book value of this goodwill is £nil (note 11).
| Customer contracts £m |
Rail franchise £m |
Finite life assets £m |
Contractual relationships £m |
Goodwill £m |
Indefinite life assets £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Cost: | |||||||
| At 1 January 2007 | 190.8 | 11.7 | 202.5 | 18.0 | 596.7 | 614.7 | 817.2 |
| Additions through business combinations | 142.7 | – | 142.7 | 20.8 | 302.2 | 323.0 | 465.7 |
| Disposals | (0.6) | (1.8) | (2.4) | – | – | – | (2.4) |
| Foreign exchange | 23.6 | – | 23.6 | 3.2 | 53.7 | 56.9 | 80.5 |
| At 31 December 2007 | 356.5 | 9.9 | 366.4 | 42.0 | 952.6 | 994.6 | 1,361.0 |
| Amortisation and impairment: | |||||||
| At 1 January 2007 | 28.5 | 4.3 | 32.8 | – | 86.8 | 86.8 | 119.6 |
| Charge for year | 31.8 | 1.1 | 32.9 | – | – | – | 32.9 |
| Disposals | (0.6) | (1.8) | (2.4) | – | – | – | (2.4) |
| Foreign exchange | 4.0 | – | 4.0 | – | – | – | 4.0 |
| At 31 December 2007 | 63.7 | 3.6 | 67.3 | – | 86.8 | 86.8 | 154.1 |
| Net book value: | |||||||
| At 31 December 2007 | 292.8 | 6.3 | 299.1 | 42.0 | 865.8 | 907.8 | 1,206.9 |
| At 1 January 2007 | 162.3 | 7.4 | 169.7 | 18.0 | 509.9 | 527.9 | 697.6 |
The allocation of the consideration paid to acquire Continental Auto and The Kings Ferry Limited to the fair value of the net assets acquired was completed during the year (see note 19). The 2007 amortisation charge on the Kings Ferry intangible assets acquired was immaterial.
Indefinite life intangible assets and goodwill have been allocated to individual cash-generating units for annual impairment testing on the basis of the Group’s business operations. The carrying value of indefinite life intangible assets by cash-generating unit is as follows:
| 2008 Contractual relationships £m |
2008 Goodwill £m |
Total £m |
2007 Contractual relationships £m |
2007 Goodwill £m |
Total £m |
|
|---|---|---|---|---|---|---|
| UK Bus | – | 13.2 | 13.2 | – | 13.2 | 13.2 |
| UK Coach | – | 13.2 | 13.2 | – | 13.9 | 13.9 |
| North American Bus | 37.8 | 279.3 | 317.1 | 26.6 | 211.9 | 238.5 |
| European Coach & Bus | 19.8 | 813.3 | 833.1 | 15.4 | 626.8 | 642.2 |
| 57.6 | 1,119.0 | 1,176.6 | 42.0 | 865.8 | 907.8 |
The useful economic lives of contractual relationships in North America and Spain are deemed to be indefinite where historical experience has shown that these contracts are consistently renewed. The customer contract and rail franchise intangible assets are amortised over the finite duration of the contract or franchise as appropriate. All amortisation charges in the year have been charged to operating costs.
The recoverable amount of indefinite life intangible assets has been determined based on a value in use calculation using cash flow projections based on financial budgets and forecasts approved by senior management covering a three year period. Growth has then been extrapolated forward from the end of the forecasts.
The assumptions used for the cash-generating units, are as follows:
| Discount rate applied to cash flow projections |
Growth rate used to extrapolate cash flows beyond three year period of management plan |
|||||
|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||
| UK Bus | 12.5% | 10.4% | 2.0% | 2.0% | ||
| UK Coach | 12.5% | 10.4% | 2.0% | 2.0% | ||
| North American Bus | 12.5% | 11.2–12.3% | 2.0% | 2.0% | ||
| European Coach & Bus | 10.5% | 11.3% | 2.0% | 2.0% | ||
The discount rates represent the pre-tax risk adjusted weighted average cost of capital appropriate for the cash flow generated.
The calculation of value in use for each cash-generating unit is most sensitive to the assumptions over operating profit margin, discount rates and revenue growth rates.
The value in use of the North American division exceeds its carrying amount by £34m. Sensitivity analysis has been completed on each key assumption in isolation, and this indicates that the value in use of the division will be equal to its carrying amount following a reduction in operating profit margin of 75 basis points, an increase in the discount rate of 50 basis points and a reduction in revenue growth rates of 100 basis points.
The value in use of the Spain division exceeds its carrying amount by £233m. Sensitivity analysis has been completed on each key assumption in isolation, and this indicates that the value in use of the division will be equal to its carrying amount following a reduction in operating profit margin of 230 basis points, an increase in the discount rate of 145 basis points and a reduction in revenue growth rates of 260 basis points.
It is believed that any reasonably possible movement on assumptions will not lead to an impairment in the indefinite life intangible assets allocated to UK Bus and UK Coach.
The Directors consider the assumptions used to be consistent with the historical performance of each unit and to be realistically achievable in light of economic and industry measures and forecasts.