14. Intangible assets
The largest portion of the Group’s intangible assets is goodwill. Around half of the goodwill arose as a result of the acquisition of the SIG Group by Onex in 2015. The remaining half of the goodwill mainly arose as a result of the acquisitions of Scholle IPN and Evergreen Asia in 2022 and the remaining shares of the joint ventures in the Middle East in 2021. The other intangible assets mainly consist of trademarks, customer relationships and technology-related assets. The SIG trademarks have indefinite useful lives.
Composition of intangible assets
(In € million) |
|
Goodwill |
|
Trademarks |
|
Customer relationships |
|
Technology and other assets |
|
Total |
|---|---|---|---|---|---|---|---|---|---|---|
Cost |
|
2,128.1 |
|
325.3 |
|
774.1 |
|
389.7 |
|
3,617.2 |
Accumulated amortisation and impairment losses |
|
– |
|
– |
|
(433.1) |
|
(263.6) |
|
(696.7) |
Carrying amount as of 31 December 2021 |
|
2,128.1 |
|
325.3 |
|
341.0 |
|
126.1 |
|
2,920.5 |
Cost |
|
3,186.2 |
|
357.7 |
|
1,035.4 |
|
517.3 |
|
5,096.6 |
Accumulated amortisation and impairment losses |
|
– |
|
(1.4) |
|
(526.5) |
|
(322.5) |
|
(850.4) |
Carrying amount as of 31 December 2022 |
|
3,186.2 |
|
356.3 |
|
508.9 |
|
194.8 |
|
4,246.2 |
Carrying amount as of 1 January 2021 |
|
1,566.7 |
|
311.1 |
|
262.9 |
|
152.1 |
|
2,292.8 |
Additions |
|
– |
|
– |
|
– |
|
2.8 |
|
2.8 |
Additions through business combination |
|
518.4 |
|
– |
|
146.1 |
|
3.1 |
|
667.6 |
Amortisation |
|
– |
|
– |
|
(74.0) |
|
(37.8) |
|
(111.8) |
Effect of movements in exchange rates |
|
43.0 |
|
14.2 |
|
6.0 |
|
5.9 |
|
69.1 |
Carrying amount as of 31 December 2021 |
|
2,128.1 |
|
325.3 |
|
341.0 |
|
126.1 |
|
2,920.5 |
Carrying amount as of 1 January 2022 |
|
2,128.1 |
|
325.3 |
|
341.0 |
|
126.1 |
|
2,920.5 |
Additions |
|
– |
|
– |
|
– |
|
19.2 |
|
19.2 |
Additions through business combinations |
|
1,060.8 |
|
16.3 |
|
260.9 |
|
91.2 |
|
1,429.2 |
Disposals |
|
– |
|
– |
|
(1.5) |
|
– |
|
(1.5) |
Amortisation |
|
– |
|
(1.4) |
|
(89.9) |
|
(46.5) |
|
(137.8) |
Effect of movements in exchange rates |
|
(2.7) |
|
16.1 |
|
(1.6) |
|
4.8 |
|
16.6 |
Carrying amount as of 31 December 2022 |
|
3,186.2 |
|
356.3 |
|
508.9 |
|
194.8 |
|
4,246.2 |
The increase in intangible assets since 31 December 2021 is primarily due to the acquisitions of Scholle IPN and Evergreen Asia in 2022 (see note 27). In the year ended 31 December 2021, the Group acquired the remaining shares of the joint ventures in the Middle East, which resulted in an increase in intangible assets (see note 27).
Research and development
Research and development costs (excluding depreciation and amortisation expense) recognised as a component of general and administrative expenses amount to €45.0 million for the year ended 31 December 2022 (€56.3 million for the year ended 31 December 2021). In the year ended 31 December 2022, the Group has capitalised development costs of €15.3 million, mainly relating to the ongoing development of the next-generation SIG NEO VITA aseptic carton filling machine (included in “Technology and other assets” in the table above).
Amortisation of intangible assets
Amortisation of intangible assets is recognised in the following components in the statement of profit or loss and other comprehensive income.
(In € million) |
|
Year ended |
|
Year ended |
|---|---|---|---|---|
Cost of sales |
|
92.0 |
|
75.1 |
Selling, marketing and distribution expenses |
|
1.7 |
|
0.2 |
General and administrative expenses |
|
44.1 |
|
36.5 |
Total amortisation |
|
137.8 |
|
111.8 |
Annual impairment tests of goodwill and trademarks with indefinite useful lives
Goodwill with a carrying amount of €3,186.2 million as of 31 December 2022 (€2,128.1 million as of 31 December 2021) and the SIG trademarks with indefinite useful lives with a carrying amount of €341.3 million as of 31 December 2022 (€325.3 million as of 31 December 2021) are not subject to amortisation but are tested for impairment on an annual basis and whenever there is an impairment indicator. The annual impairment tests are performed in the fourth quarter each year.
The Group does not monitor goodwill at a lower level than Group level for internal management purposes but, for impairment testing purposes, goodwill must be allocated to a CGU, or group of CGUs, that is not larger than an operating segment before aggregation. The Group has allocated the goodwill for impairment testing purposes to its four operating segments (Europe, MEA, APAC and Americas).
Goodwill
For the impairment test of goodwill, the recoverable amount has been estimated with reference to value in use. In assessing the value in use, the estimated future cash flows (in Euros) have been discounted to their present values using a pre-tax discount rate that reflects current market assessments of the time value of money as well as the risks specific to each segment. The weighted average cost of capital (“WACC”) is used to determine the discount rate. Cash flows for the first five years are based on financial plans approved by management. Cash flows after the five-year internal planning period are extrapolated using terminal growth rates that are aligned with the estimated long-term inflation. The terminal growth rates used by the Group for impairment testing purposes do not exceed the estimated long-term growth rates in the packaging industry.
Goodwill is allocated to the Group’s four operating (and reportable) segments as per the following table. The goodwill that arose upon the acquisition of Scholle IPN on 1 June 2022 has been allocated to all four segments, while the goodwill that arose upon the acquisition of Evergreen Asia on 2 August 2022 has been fully allocated to APAC. The goodwill that arose upon the acquisition of the remaining shares of the joint ventures in the Middle East on 25 February 2021 has been allocated to MEA (see also note 7). At the same time, the goodwill that had been allocated to the former segment EMEA was fully reallocated to Europe. The table also includes information about the key assumptions used in the impairment test.
|
|
Year ended 31 December 2022 |
|
Year ended 31 December 2021 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In € million or %) |
|
Carrying |
|
Growth rate |
|
Pre-tax |
|
Carrying |
|
Growth rate |
|
Pre-tax |
Europe |
|
1,000.7 |
|
2.5% |
|
8.1% |
|
757.2 |
|
2.0% |
|
6.6% |
MEA |
|
533.4 |
|
2.5% |
|
11.0% |
|
526.4 |
|
2.0% |
|
8.0% |
APAC |
|
949.2 |
|
2.5% |
|
8.6% |
|
656.3 |
|
2.0% |
|
5.6% |
Americas |
|
702.9 |
|
2.5% |
|
10.1% |
|
188.2 |
|
2.0% |
|
8.9% |
Total goodwill |
|
3,186.2 |
|
|
|
|
|
2,128.1 |
|
|
|
|
No impairment of goodwill was identified in either of the periods. Management considers it unlikely that any realistic change in the assumptions used, including changes in the assessed future cash flows, would result in an impairment loss. The estimated recoverable amounts of the goodwill allocated to the segments significantly exceed the respective carrying amounts in both periods. The Group overall has not been, and is currently not, significantly impacted by the COVID-19 pandemic and the effects of the war in Ukraine. Management does not believe that these events and the current global economic uncertainty in general will have any significant long-term negative impacts on the Group’s estimated future cash flows (see note 5.4). However, there is no assurance that the Group’s experience to date, which has been reflected in the assessment of future cash flows, will be representative of future periods.
Trademarks with indefinite useful lives
The value of the SIG trademarks with indefinite useful lives is associated with the Group as a whole. Trademarks are tested for impairment at Group level as all SIG entities benefit from the trademarks. The entities are charged a royalty fee for the use of the SIG trademarks. For the impairment test, the recoverable amount has been estimated with reference to value in use. The assessed royalty fees have been discounted to their present value using a pre-tax discount rate at Group level of 9.2% (6.6% in the 2021 annual impairment test) and a terminal growth rate at Group level of 2.5% (2.0% in the 2021 annual impairment test). The WACC is used to determine the discount rate. The royalty fees for the first five years are based on financial plans approved by management. Cash flows after the five-year internal planning period are extrapolated using a terminal growth rate that is aligned with the estimated long-term inflation. The terminal growth rate used by the Group for impairment testing purposes does not exceed the estimated long-term growth rates in the packaging industry.
No impairment of the SIG trademarks with indefinite useful lives was identified in any of the periods. Management considers it unlikely that any realistic change in the assumptions used would result in an impairment loss.
Accounting policy
Goodwill arising upon business combinations is measured at cost less accumulated impairment losses. With respect to investments in joint ventures accounted for using the equity method, the carrying amount of goodwill is included in the carrying amount of the investment.
The SIG trademarks are assessed to have indefinite useful lives considering the long history of the SIG brand and its expected future continuous use. They are measured at cost less accumulated impairment losses. Other intangible assets, including customer relationships, Scholle trademarks and technology assets, have finite useful lives and are measured at cost less accumulated amortisation and accumulated impairment losses. Gains and losses on disposals of intangible assets are recognised in profit or loss as part of other income or expenses.
Development expenditure is capitalised only if the expenditure can be measured reliably, the product or process is technologically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete the development and to use or sell the asset. If the capitalisation criteria are not met, development expenditure is recognised in profit or loss as incurred. Expenditure on research activities is recognised in profit or loss as incurred.
Intangible assets with finite useful lives are amortised on a straight-line basis over their estimated useful lives, with amortisation generally recognised in profit or loss. The estimated useful lives of amortisable intangible assets for the current and comparative periods, considering also the acquisitions of Scholle IPN and Evergreen Asia in 2022, are as follows:
- Customer relationships 10 to 15 years
- Scholle trademarks 7 years
- Technology assets (including patented and non-patented technology and know-how) 6 to 10 years
- Other intangible assets (including software) 3 to 6 years
Capitalised development costs are amortised over the period that is assessed to reflect the expected useful life of the particular innovation.
Impairment of goodwill and other intangible assets
Intangible assets with finite useful lives are reviewed regularly and at least annually to identify whether there is an indication of impairment. If an impairment indicator exists, the asset’s recoverable amount is estimated. Goodwill and intangible assets with indefinite useful lives are tested for impairment on an annual basis and whenever there is an indication that they may be impaired. See note 5.5.3 for details about impairment testing of non-financial assets.
Significant judgements and estimates
Significant judgement is involved in the annual impairment testing of goodwill and trademarks with indefinite useful lives. The judgements and assumptions used in estimating the recoverable amount are included above under “Annual impairment tests of goodwill and trademarks with indefinite useful lives”, where the outcome of the annual impairment tests is also described.