Impairment tests for goodwill were performed as at 31 December 2017 for all the CGUs, to which goodwill was allocated, except for PIM. The test for PIM was not performed because the acquisition transaction took place in December 2017, shortly before the balance sheet date. As a result of the tests, no need has been found to recognize impairment losses.
The goodwill impairment test involves a comparison of carrying amounts (including the allocated goodwill) and recoverable amounts of the CGUs to which goodwill has been allocated. An impairment loss for a CGU should be recognized in the profit and loss account if CGU’s recoverable amount is less than its carrying amount.
Cash-generating units (CGUs)
For foreign companies and Polish non-insurance companies, each entity is considered to be a separate CGU. During the final purchase price allocation, the goodwill arising from the acquisition of Link4 was fully allocated to the mass insurance segment in non-life insurance, which – due to the scale of integration of Link4’s business with PZU under the ‘two brands’ strategy that assumed synergies resulting from the management of the mass client portfolio and sale of additional insurance products – is the smallest CGU to which goodwill can be allocated.
Carrying amount of the mass insurance segment
For the purposes of the test, the net carrying amount of the mass insurance segment was determined on the basis of allocation of the PZU Group’s net assets. The assets were allocated in the proportion corresponding to the ratio of the hypothetical solvency capital requirement, which may be allocated to the mass insurance segment, to the total solvency capital requirement. The Euler method was used to allocate the solvency capital requirement. This method allocates to a segment the risk measures, which are based on Solvency II regulations and take into account diversification effects.
Recoverable amount corresponding to fair value
The recoverable amount is the higher of the fair value less costs of disposal or the value in use.
As at the balance sheet date, the recoverable amount based on fair value less costs of disposal of Pekao and Alior Bank is higher than their carrying amount and therefore the recoverable amount of these entities was not estimated based on the value in use.
Recoverable amount based on value in use
The recoverable amount of individual CGUs was determined based on value in use of the entities, using the discounted cash flow method based on the most current financial projections, for a period not exceeding 5 years, which arepresented in the table below. The discount rates used for testing of the insurance companies were set at the cost of equity level. In the case of medical companies, the weighted average cost of capital (WACC) was used. The cost of equity was set in accordance with the CAPM model. Also, size premiums were applied in justified cases. Risk-free rates were determined based on the average yield of 10-year government bonds offered by the country where the CGU is domiciled and the betas were based on measures of similar listed entities. Market premiums were 5.5% (5.5% in 2016). For regulated entities (banks and insurance companies), the projected cash flows incorporate the requirement to maintain an adequate level of own funds (economic capital). Cash flows of the mass insurance segment were calculated based on the amount of hypothetical dividends that the segment could have paid if it had operated as a separate insurance company. The amount of dividends depends on the projected technical results of that segment, net of income tax and levy on financial institutions and capital surpluses allocated to that segment as at the balance sheet date and in subsequent periods. The growth ratios after the projection period were determined while taking into account the long term growth prospects for the market on which the entity conducts its business. In the case of insurance companies operating in the Baltic states, an adjustment was made for the expected increase in the insurance penetration rate (insurance premiums expressed as % of GDP) at 0.2-0.3 pp. In all the other cases, growth rates do not exceed the long- term GDP growth forecasts of the country in nominal terms.
|Cash generating unit||31 December 2017||31 December 2016|
|Discount rate||Growth rate after the projection period||Timeframe of financial projections||Discount rate||Growth rate after the projection period||Timeframe of financial projections|
|Lietuvos Draudimas AB 1)||5.4%||3.7%||5 years||5.3%||3.7%||5 years|
|AAS Balta||6.2%||3.8%||5 years||5.7%||3.8%||5 years|
|Mass insurance segment 2)||8.2%||2.5%||3 years||7.8%||2.5%||4 years|
|Medical companies||7.1%||2.0-3.0%||3-5 years||6.6%||2.0-3.0%||4 years|
Recoverable amount is based on fair value less costs of disposal
The recoverable amount of Alior Bank and Pekao was calculated based on the fair value less costs of disposal. The fair value was calculated based on the stock price of Alior Bank and Pekao as quoted on the WSE on the balance sheet date plus control premium of, respectively, 10% and 5%. The costs of disposal were considered to be insignificant.
The following table presents the surplus of recoverable amounts over carrying amounts and the maximum discount rates and minimum marginal growth rates after the projection period, at which the carrying amounts and recoverable amounts of the individual CGUs are equal.
|Cash generating unit||31 December 2017||31 December 2016|
|Surplus (PLN million)||Marginal value of the discount rate||Marginal value of the growth rate after the projection period||Surplus (PLN million)||Marginal value of the discount rate||Marginal value of the growth rate after the projection period|
|Lietuvos Draudimas AB||1,283||7.3%||0.9%||2,044||8.6%||(4.0%)|
|Mass insurance segment 1)||8,204||37.5%||n/a 2)||4,197||17.6%||(48.3%)|
1) Surplus of the recoverable amount of the mass insurance segment over its carrying amount, including the Link4 acquisition goodwill allocation allocated to that segment. Starting from 2017, a new model of capital allocation was introduced, which reduced the amount of capital allocated to the mass insurance segment and consequently increased the surplus. Data as at 31 December 2016 have been restated using the new allocation method to ensure comparability. The presented increase in the surplus is a result of the total effect of the assumed higher profitability of the segment and capital allocation.
2) The amount of discounted cash flows in the projection period is higher than the carrying amount attributed to the mass insurance segment and therefore no marginal growth rate was presented after the projection period
The following table shows the surplus of recoverable amounts over carrying amounts and the decreases in fair value that would make the carrying amounts equal to the recoverable amounts of the entities, where the recoverable amounts were determined at fair value less costs to sell.
|Cash generating unit||Surplus1) (PLN million)||Marginal decline in fair value|
1) Surplus of the recoverable amount of the CGU over the carrying amount (100% of the consolidated net assets of Alior Bank with Bank BPH’s Core Business), with goodwill applicable to Alior Bank only allocated to the CGU