| 5. | Long-term assets | ||||||||||||||||||||||||
| 5.3 | Impairment of goodwill and cash-generating units | ||||||||||||||||||||||||
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Significant accounting judgements, estimates and assumptions CGU impairment assessment IAS 36 (Impairment of Assets) requires assets to be assessed for impairment when impairment indicators are evident. This standard also requires goodwill to be assessed for impairment on an annual basis. In determining the recoverable amount of the Group's CGUs, the Group considered several sources of estimation uncertainty and makes certain assumptions or judgements about the future. Management uses the cash flow projections per the Boardapproved business plans. These cash flow projections are based on a five-year outlook for the current year-end. Management applied the following key assumptions in the discounted cash flow (DCF) valuation model:
Summary of material accounting policies Measurement Goodwill is measured at cost less accumulated impairment losses and is not amortised. Goodwill is tested for impairment annually or when an indication of impairment exists. Goodwill impairment assessment Goodwill arising in a business combination is recognised as an intangible asset at the date of acquisition. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net fair value of the acquiree's identifiable net assets. If the Group's interest in the fair value of the acquiree's identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of profit or loss on disposal.
Impairment considerations The Group tests impairment at a cash-generating unit (CGU) level. As a right-of-use (ROU) asset does not generate cash inflows largely independent from other assets, the ROU asset is tested for impairment together with the CGU to which such an asset belongs. From an IFRS 16 perspective, the assumptions assume the reinvestment of the ROU asset, i.e. cash flows to replace the ROU asset have been included in the model. Management adjusted the value-in-use model by excluding the cash outflows in respect of the lease payments as it relates to financing and including the cash outflows to replace the ROU asset. The Group's CGUs consist of Telkom Consumer, Openserve, BCX and Gyro. BCX is the only CGU that has goodwill. In line with IAS 36 (Impairment of Assets), management has performed an annual impairment assessment of CGUs as of 31 March 2024. Management has identified impairment indicators on the Telkom Consumer and Openserve CGUs, and further details are noted below. The Group utilised the value in use, using the discounted cash flow method, as the valuation basis for all CGUs. Based on this, the income approach was used. A five-year period is used for the discounted cash flows, approved by senior management and/or the Board of the Group. BCX CGU Value-in-use, using the discounted cash flow method, was adopted as the valuation basis. Based on this, the income approach was used. A five-year period is used for the discounted cash flows, approved by senior management and/or the Board of the Group. The BCX CGU was then valued using a sum-of-the-parts approach. The valuation was performed on an enterprise value basis. The value in use calculation took into consideration the following key assumptions: EBITDA margin The budgeted EBITDA margin was used, based on past experience and management's future expectations of business performance. Growth rates The growth rates were consistent with publicly available information relating to long-term average growth rates for the market in which the CGU operated. The compound annual growth rate used for revenue is 4.9% (31 March 2023: 8.4%) and EBITDA ranges between 11.5% and 16.0% (31 March 2023: 12.6% and 15.5%). Terminal growth rates A terminal growth rate of 5% (31 March 2023: 4% to 5%) was applied. The terminal value was determined at the end of year five of the cash flow forecasts. The growth rate considered steady state of growth rates to extrapolate revenue beyond the forecast period cash flows. Discount rate The discount rate used reflects both time value of money and other specific risks relating to the entity. The discount rate was calculated based on comparable companies in the industry. An equity market risk premium was applied to account for the additional risk associated with equity investments, in excess of the risk-free rate. The pre-tax discount rate for the BCX CGU is 21.6% (31 March 2023: 21.3% to 22.5%). An in-perpetuity calculation was also included after five years as per the terminal growth rate disclosure. Based on the value-in-use calculation, the estimated value in use of BCX significantly exceeds the carrying amount of the BCX CGU. As such, there is no impairment loss to be recognised. Sensitivity to changes in assumptions Given the significant headroom computed, no further sensitivity analysis has been performed. Telkom Consumer CGU Telkom Consumer operates in South Africa. The economic climate of South Africa is under strain due to numerous factors. Telkom Consumer's business is dependent on technology, and for some of its operations the old technology (legacy assets) was still being utilised. The five-year budgets indicated that the economic performance of the CGU had not materially changed from the previous valuation. Even though the discount rates had sightly increased from the previous valuation, this was not material enough to warrant an impairment loss. Effectively, the five-year budgets have been adjusted to incorporate the changes, resulting in the recoverable amount of the CGU being higher than its carrying value. The value-in-use calculation took into consideration the following key assumptions: EBITDA margin The budgeted EBITDA margin is based on experience and management's future expectations of business performance. Growth rates The growth rates were consistent with publicly available information relating to long-term average growth rates for the market in which the CGU operated. The compound annual growth rate used for revenue is 3.9% (31 March 2023: 2.6%) and EBITDA is 10.8% (31 March 2023: 14%). Terminal growth rates A terminal growth rate of 3% (31 March 2023: 3%) was applied. The terminal value was determined at the end of year five of the cash flow forecasts. The growth rate considered steady state of growth rates to extrapolate revenue beyond the forecast period cash flows. Discount rate An equity market risk premium was applied to account for the additional risk associated with equity investments, in excess of the risk-free rate. The pre-tax discount rate for the Telkom CGU is 17.4% (31 March 2023: 15% to 16.4%). An in-perpetuity calculation was also included after five years as per the terminal rate disclosure. Based on the value-in-use calculation, the recoverable amount of the Telkom CGU is higher than the carrying value as at 31 March 2024, indicating no impairment loss. Sensitivity to changes in assumptions The recoverable amount is most sensitive to the discount rate and terminal growth rate:
Openserve CGU Openserve operates in South Africa. The economic climate of South Africa is under strain due to numerous factors. Openserve's business is dependent on technology, and for some of its operations the old technology (legacy assets) was still being utilised. The five-year budgets indicated that the economic performance of the CGU had not materially changed from the previous valuation. Even though the discount rates had sightly increased from the previous valuation, this was not material enough to warrant an impairment loss. Effectively, the five-year budgets have been adjusted to incorporate the changes, resulting in the recoverable amount of the CGU being higher than its carrying value. The value-in-use calculation took into consideration the following key assumptions: EBITDA margin The budgeted EBITDA margin is based on experience and management's future expectations of business performance. Growth rates The growth rates were consistent with publicly available information relating to long-term average growth rates for the market in which the CGU operated. The compound annual growth rate used for revenue is 4.2% (31 March 2023: 3.1%) and EBITDA is 6.2% (31 March 2023: 3.6%). Terminal growth rates A terminal growth rate of 5.0% (31 March 2023: 5%) was applied. The terminal value was determined at the end of year five of the cash flow forecasts. The growth rate considered steady state of growth rates to extrapolate revenue beyond the forecast period cash flows. Discount rate An equity market risk premium was applied to account for the additional risk associated with equity investments, in excess of the risk-free rate. The pre-tax discount rate for the Openserve CGU is 16.7% (31 March 2023: 14.7% to 16.1%). An in-perpetuity calculation was also included after five years as per the terminal rate disclosure. Based on the value-in-use calculation, the recoverable amount of the Openserve CGU is higher than the carrying value as at 31 March 2024, indicating no impairment loss. Sensitivity to changes in assumptions Given the significant headroom computed, no further sensitivity analysis has been performed. |
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