13. Goodwill impairment testing

Allocation of goodwill

As a result of the goodwill impairment testing made in connection with the preparation of financial statement Tecnotree made a write-down to goodwill of approximately EUR 16.7 million in its consolidated balance sheet. In the profit and loss statement the impact is shown in line depreciations, amortizations and impairment losses. The write-down was done to Middle East, Africa and Americas cash genereating units. The write-down was made now, because the business development in Middle-East and Africa and Americas regions has not met with expectations. The delay of financial arrangements has also contributed to hindering the growth of business volumes.

The major part of the goodwill arose on the acquisition of the Lifetree company in 2009. For the purpose of impairment testing, goodwill has been allocated to the operating segments Europe, Middle-East and Africa, Asia and Pasific and Americas, which constitute cash generating units. After recognition of goodwill impairment losses in 2012, no goodwill is allocated to Europe and APAC regions. After the year 2017 write-down there is no goodwill value left anymore.

EUR 1,000 Europe Middle-East and Africa Asia and Pasific Americas Total

Goodwill 31 Dec 2017
0 0
Goodwill 31 Dec 2016
4,635 17,612

Impairment testing

Goodwill impairment is tested at least at each balance sheet date and at any occurence of an indication that the goodwill or another asset may be impaired. The recoverable amounts of goodwill are determined based on value in use calculations. The cash flow forecasts rely on forecasts of revenue and cost development approved by the management. The forecasts cover a five-year period. The key variables in defining cash flows are the following:

Middle-East and Africa Americas Middle-East and Africa Americas

2017 2017 2016 2016

Discount rate (WACC), post-tax 11.0% 10.5% 11.8% 12.4%
Discount rate (WACC), pre-tax 14.2% 13.6% 14.8% 15.4%
Adjusted operating result in relation to revenue for the forecast period 2018 - 2022 (2017 - 2021), per cent 4,7 % - 9,6 % 4,3 % - 5,8 % 5,2 % - 11,5 % 10,5 % - 12,7 %
Adjusted operating result for the foercast period 2018 - 2021 (2017 - 2021), EUR million 1,4 - 2,8 0,8 - 1,1 2,2 - 4,4 2,4 - 2,7
Residual value growth rate factor 2,0 %- 2,5 % 1,0 % - 2,5 % 2.5% 2.3%

Discount rate: The discount rate applied in the calculations is determined by using the weighted average cost of capital (WACC). The increase in the discount rate compared to the previous year is mainly due to the change in the market risk premiums.

Adjusted operating result: The adjusted operating result is based on the budget for 2018 (2016: on the budget for 2017) and forecasts for the years 2019 - 2022 (2016: for the years 2018 - 2021) approved by the Board of Directors. The adjusted operating result in relation to revenues during the forecast period is estimated to improve to a level of 3.0 - 6.5 per cent being EUR 1.6 - 3.4 million (2016: a level of 7.1 - 10.5 per cent being EUR 5.2 - 6.9 million).

Residual value growth rate factor: The management estimates the development of these factors based on internal and external views of the history and future of the industrial sector.