18. Goodwill

The goodwill amounts to €875 million (30/9/2016: €852 million).

In the METRO Wholesale segment, the acquisition of Pro à Pro resulted in goodwill of €34 million. In addition, the goodwill from previous year’s acquisition of Rungis Express was increased by €8 million due to an adjustment of the purchase price allocation.

At the closing date, the breakdown of goodwill among the major cash-generating units was as shown below:

In accordance with IFRS 3 in conjunction with IAS 36, goodwill is tested for impairment once a year. This is carried out at the level of a group of cash-generating units. In the case of goodwill, this group is the operating segment at METRO Cash & Carry until the demerger and the organisational unit sales line per country at Real. As part of the rollout of the New Operating Model from 1 October 2015, the individual METRO Cash & Carry countries were classified into 3 clusters: HoReCa, Multispecialist and Trader. The HoReCa cluster essentially includes France, Germany, Italy, Japan, Portugal, Spain, Turkey and Classic Fine Foods. Multispecialist includes Austria, Belgium, Bulgaria, China, Croatia, India, Kazakhstan, the Netherlands, Pakistan, Russia, Serbia, Slovakia, the Czech Republic and Hungary. The Trader cluster includes Moldova, Poland, Romania and Ukraine. This has resulted in the monitoring of goodwill at the level of the 3 clusters. As part of the reorganisation of the METRO Wholesale segment resulting from the demerger, the monitoring of goodwill was changed to the sales line per country. The goodwill allocated to the customer group clusters until that point was tested for impairment and subsequently allocated within the METRO Wholesale segment per country according to their relative fair values.

In the impairment test, the cumulative carrying amount of the group of cash-generating units is compared with the recoverable amount. The recoverable amount is defined as the fair value less costs to sell, which is calculated from discounted future cash flows and the level 3 input parameters of the fair value hierarchy.

Expected future cash flows are based on a qualified planning process under consideration of intra-group experience as well as macroeconomic data collected by third-party sources. In principle, the detailed planning period comprises 3 years. In exceptional cases, it may amount to 5 years in the case of longer-term detailed planning. As in the previous year, the growth rates considered at the end of the detailed planning period are generally 1.0%, with the exception of the group of the cash-generating unit Real Germany, for which a growth rate of 0.5% is assumed, as in the previous year. The capitalisation rate as the weighted average cost of capital (WACC) is determined using the capital asset pricing model. In the process, an individual peer group is assumed for all groups of cash-generating units operating in the same business segment. In addition, the capitalisation rates are determined on the basis of an assumed basic interest rate of 1.25% (30/9/2016: 0.9%) and a market risk premium of 6.50% (30/9/2016: 6.75%) in Germany as well as a beta factor of 1.06 (30/9/2016: 1.03). Country-specific risk premiums based on the respective country rating are applied to the equity cost of capital and to the debt cost of capital. The capitalisation rates after taxes determined individually for each group of cash-generating units range from 5.4 to 11.2% (30/9/2016: 5.1 to 9.5%).

The mandatory annual impairment test as of 30 June 2017 of goodwill deemed material resulted in the following assumptions regarding the development of sales, EBIT and the EBIT margin targeted for valuation purposes during the detailed planning period, with the EBIT margin reflecting the ratio of EBIT to net sales.

As of 30 June 2017, the mandatory annual audit confirmed the impairment of all capitalised goodwill, with the exception of goodwill in the amount of €8 million allocated to METRO Cash & Carry Japan after the demerger, as well as €8 million to METRO Cash & Carry Netherlands and €3 million to METRO Cash & Carry Belgium, which were completely depreciated due to the respective business development.

In addition to the impairment test, 3 sensitivity analyses were conducted for each group of cash-generating units. The first sensitivity analysis was based on the assumption of a 1 percentage point lower growth rate. In the second sensitivity analysis, the interest rate for each group of cash-generating units was raised by 10.0%. In the third sensitivity analysis, a lump sum discount of 10.0% was applied to assumed perpetual EBIT. These changes to the underlying assumptions would not result in impairment at any of the groups of cash-generating units.