Notes to the consolidated financial statements (IFRS)

15. IMPAIRMENT TESTING OF GOODWILL
     
General principles
 
Goodwill acquired in business combinations is allocated to cash-generating units (CGU), which are the reportable service line segments in segment reporting.
 
The recoverable amounts of all CGUs are determined based on value-in-use calculations. The cash flow projections covering the initial three-year period have been based on financial forecasts approved by senior management supported by industry growth forecasts obtained from external sources. The growth rates used to extrapolate the cash flows for the subsequent two-year period vary between 3% and 6%, which reflect the management’s estimate of the industry’s long-term average growth rate. Subsequent to the five-year projection period the growth rate used is 2%, which does not exceed the expectations of growth in real terms.
 
Forecasted profit margins are based on actual performance in prior years adjusted for expected efficiency improvements.
 
The discount rate applied to cash flow projections is the weighted average pre-tax cost of capital. The discount rate is based on the weighted average of 30-year government bond rates in the countries where the CGUs operate. The bond rates are adjusted for the general market risk and the business risk of the CGUs. The pre-tax discount rates for the CGUs vary between 7% and 10% (approximately 9%, based on 10-year government bond rates). The calculated weighted average pre-tax cost of capital for Tieto has decreased with 1%-unit from 2013 due to decreases in the general interest rate level and beta.
 
Carrying amount of goodwill allocated to CGUs and segments
 
The total goodwill at 31 December 2014 was EUR 323.7 million. The decrease compared to 31 December 2013 is EUR 48.6 million. Goodwill decreased EUR 39.6 milllions due to impairment in Product Development Services, EUR 8.7 million due to currency effects and EUR 0.5 millions due to a divestment. Increase of goodwill due to an acquisition was EUR 0.2 million.
 
All CGUs contain goodwill that may be considered significant in comparison with the Group’s total carrying amount of goodwill. All CGUs are business operations providing services to selected customers in their market segments.
 
In CGU Managed Services the carrying amount of goodwill allocated to the CGU at 31 December 2014 was EUR 65.5 million (EUR 67.0 million in 2013). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between 0% and 5% and EBITDA margin between 13% and 19%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 2.8%. The discount rate applied to the cash flow projections is 7.4%.
 
In CGU Consulting and System Integration the carrying amount of goodwill allocated to the CGU at 31 December 2014 was EUR 123.0 million (EUR 124.4 million in 2013). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between 5% and 6% and EBITDA margin between 7% and 12%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 6%. The discount rate applied to the cash flow projections is 7.6%.
 
In CGU Industry Products the carrying amount of goodwill allocated to the CGU at 31 December 2014 was EUR 74.7 million (EUR 77.3 million in 2013). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between 3% and 6% and EBITDA margin between 19% and 22%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 5%. The discount rate applied to the cash flow projections is 8.2%.
 
In CGU Product Development Solutions the carrying amount of goodwill allocated to the CGU at 31 December 2014 was EUR 60.5 million (EUR 103.6 million in 2013). The recoverable amount of the CGU has been calculated in accordance with the general principles described above. The growth rate for the initial three-year period varies between -38% and 3% and EBITDA margin is 4%. The growth rate used to extrapolate the cash flows subsequent to the initial three-year period is 4%. The discount rate applied to the cash flow projections is 9.9%.
 
As a result of the impairment testing no impairment was identified in addition to impairment EUR 39.6 million recognized during Q3 in Product Development Services in consequence of the insourcing decision made by one key customer. Value-in-use calculation for each CGU is sensitive to changes in growth assumptions, EBIT margin assumptions and interest rates. The recoverable amount in Product Development Services, EUR 89 million, is equal to the carrying amount, and any negative change in the three parameters would cause an additional impairment charge. In the other CGUs the surplus between the recoverable amount and the carrying amount is substantial, and any likely change in the three parameters isolated would not result in the recoverable amount being equal to the carrying amount.
 
The carrying amounts of goodwill allocated to the CGUs are disclosed below:
     
Carrying amount of goodwill
     
EUR million 31 Dec 2014 31 Dec 2013
Managed Services 65.5 67.0
Consulting and System Integration 123.0 124.4
Industry Products 74.7 77.3
Product Development Services 60.5 103.6
Total 323.7 372.3