|Balance at 1 April 2015||38,678||10,148||48,826|
|Effect of movements in foreign exchange||1,597||1,214||2,811|
|Balance at 31 March 2016||41,462||14,294||55,756|
|Balance at 1 April 2016||41,462||14,294||55,756|
|Effect of movements in foreign exchange||2,298||945||3,243|
|Balance at 31 March 2017||43,760||15,284||59,044|
|Amortisation and impairment|
|Balance at 1 April 2015||13,835||2,829||16,664|
|Amortisation for the year||—||974||974|
|Effect of movements in foreign exchange||190||411||601|
|Balance at 31 March 2016||14,025||3,472||17,497|
|Balance at 1 April 2016||14,025||3,472||17,497|
|Amortisation for the year||—||1,302||1,302|
|Effect of movements in foreign exchange||414||149||563|
|Balance at 31 March 2017||14,439||4,923||19,362|
|Net book value|
|At 1 April 2015||24,843||7,319||32,162|
|At 31 March 2016||27,437||10,822||38,259|
|At 31 March 2017||29,321||10,361||39,682|
The amortisation charge is recognised in administrative expenses in the income statement. Of the £1.30m charge in the year, £1.27m relates to amortisation on acquired intangibles.
Other intangible assets are made up of:
- Customer relationships acquired as part of the acquisition of PSEP. The remaining amortisation period left on these assets is 6.75 years
- Customer relationships, technology know-how and technology patents acquired as part of the acquisition of VIC. The average remaining amortisation period on these assets is 10.72 years (maximum 12.17 years).
- Customer relationships and order backlog acquired as part of the acquisition of Kuhlmann. The average remaining amortisation period on these assets is 8.50 years.
There were £nil impairments made during 2017 (2016: £nil).
The following cash generating units have carrying amounts of goodwill:
|Special Fasteners Engineering Co. Ltd (Taiwan)||10,834||9,780|
|TR Fastenings AB (Sweden)||1,063||1,063|
|Lancaster Fastener Company Ltd (UK)||1,245||1,245|
|Serco Ryan Ltd (within TR Fastenings Ltd) (UK)||4,083||4,083|
|Power Steel and Electro-Plating Works SDN Bhd (PSEP) (Malaysia)||763||753|
|Viterie Italia Centrale (VIC) (Italy)||9,731||9,020|
|TR Kuhlmann GmbH (Germany)||1,498||1,389|
The £1.05m, £0.71m, £0.11m and £0.01m increases in the goodwill of SFE, VIC, Kuhlmann and PSEP respectively refer to foreign exchange gains as these investments are held in Singapore Dollars, Euros and Malaysian Ringits.
The Group tests goodwill annually for impairment. The recoverable amount of cash generating units is determined from value in use calculations.
Value in use was determined by discounting the future cash flows generated from the continuing use of the unit. In this method, the free cash flows after funding internal needs of the subject company are forecast for a finite period of four years based on actual operating results, budgets and economic market research. Beyond the finite period, a terminal (residual) value is estimated using an assumed stable cash flow figure.
The values assigned to the key assumptions represent management's assessment of future trends in the fastenings market and are based on both external and internal sources of historical data. Further information on sources of data used can be found in each description of the key assumptions below.
The recoverable amount of Special Fasteners Engineering Co. Ltd (Taiwan), Viterie Italia Centrale (Italy) and Serco Ryan Ltd (within TR Fastenings Ltd) (UK) have been calculated with reference to the key assumptions shown below:
|Long term revenue growth rate||2.0%||2.0%||2.0%||2.0%||2.0%||2.0%|
|Discount rate — post-tax||8.2%||8.8%||8.9%||9.6%||6.8%||8.2%|
|Discount rate — pre-tax||9.9%||10.6%||12.4%||13.9%||8.5%||10.2%|
|Terminal EBIT margin||16.0%||16.0%||17.4%||20.0%||11.0%||9.0%|
The downward movement in the terminal EBIT margin for VIC has resulted largely from a revised assumption in the long term €:$ rate. This reflects more recent trends continuing for the longer term.
Long term revenue growth rate
Four year management plans are used for the Group's value in use calculations. Long term growth rates into perpetuity have been determined as the lower of:
- the nominal GDP rates for the country of operation
- the long term compound annual growth rate in EBITDA in years six to ten estimated by management.
Post-tax risk adjusted discount rate
The discount rate applied to the cash flows of each of the Group's operations is based on the Weighted Average Cost of Capital ('WACC') (using post-tax numbers). The cost of equity element uses the risk free rate for ten year bonds issued by the government in the respective market, adjusted for a risk premium to reflect both the increased risk of investing in equities and the systemic risk of the specific Group operating company.
In making this adjustment, inputs required are the equity market risk premium (that is, the increased return required over and above a risk-free rate by an investor who is investing in the market as a whole) and the risk adjustment, beta, applied to reflect the risk of the specific Group operating company relative to the market as a whole.
In determining the risk adjusted discount rate, management has applied an adjustment for the systemic risk to each of the Group's operations determined using an average of the betas of comparable listed fastener distribution and manufacturing companies and, where available and appropriate, across a specific territory. Management has used a forward-looking equity market risk premium that takes into consideration studies by independent economists, the average equity market risk premium over the past ten years and the market risk premiums typically used by investment banks in evaluating acquisition proposals.
To calculate the pre-tax discount rate we have taken the post-tax discount rate and divided this by one minus the applicable tax rate. We consider this an appropriate approximation of the pre-tax rate. The table above discloses the discount rate on a post and pre-tax basis. This takes into account certain components such as the various discount rates reflecting different risk premiums and tax rates in the respective regions. Overall, the Board is confident that the discount rate adequately reflects the circumstances in each location and is in accordance with IAS36.
Terminal EBIT margin
The margins used in the value in use calculations are based on historic performance adjusted for any known or expected changes to occur to existing operations based on management plans. Key adjustments relate to known efficiency gains from increased volumes achieved in the business as well as the transactional foreign exchange impact based on forecast rates.
Sensitivity to changes in assumptions
The impairment test carried out on PSEP assumes a compound annual sales growth rate over the four year period cash flows are projected of 5.2%, reducing to 2.0% for the terminal year. The basis for this sales growth is a combination of new contracts that PSEP has won and additional new business that is expected to follow from fulfilling these initial contracts and further extending relationships with these multinational OEM customers.
Using the assumptions above for sales growth, a terminal EBIT margin of 12.3% and a post-tax discount rate of 10.2% (pre-tax discount rate 13.5%) the recoverable amount of the CGU was estimated to be higher than its carrying amount by £1.0m.
Whilst the year to 31 March 2017 has been very encouraging for PSEP, with sales growth of 6.2%, showing the outlook is improving as a result of the proactive actions the Group are taking, it is possible the estimated start of production dates for the newly awarded sales contracts could be delayed or the new follow on business might come through at lower levels than predicted. If the growth rates were to reduce to 1.5% over the four year period management projects cash flows and also in the terminal year, i.e assuming that growth falls below expected regional GDP forecasts (4.4% per the Economist Intelligence Unit), with terminal EBIT margin and discount rates remaining the same as the above, this would lead to a small impairment of c.£0.3m.
In order for the unit's recoverable amount to equal its carrying amount, in absence of any other changes, the sales growth rate would have to fall to c.2.0%.
The calculation is also sensitive to budgeted EBIT margins with a break even point of c.11.0%, but as an established business with a good track record of consistent margin achievement and strong cost control, despite recent trading level fluctuations, management consider the major sensitivity to be the timing of the revenue growth.
Excluding PSEP, management believe that no reasonably possible change in any of the key assumptions would cause the carrying value of any other cash generating unit to exceed its recoverable amount.