Chapters
Annual Report 2019

13. Goodwill

Accounting Policy
Goodwill arises from the acquisition of subsidiaries, chains and stores and represents the excess of the consideration transferred over the fair value of the Group’s share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary, chain or store at the date of obtaining control. Any negative goodwill resulting from acquisitions is recognized directly in the consolidated Income Statement.

For the purpose of impairment testing, goodwill is allocated to those groups of cash-generating units (CGUs) expected to benefit from the acquisition. Each of those groups of cash-generating units represents the Group’s investment in a country or group of countries, which is the lowest level at which the goodwill is monitored for management purposes.

If a cash-generating unit is divested, the carrying amount of its goodwill is recognized in the consolidated Income Statement. If the divestment concerns part of cash-generating units, the amount of goodwill written off and recognized in the consolidated Income Statement is determined based on the relative value of the part divested compared to the value of the group of cash-generating units. Goodwill directly attributable to the divested unit is written off and recognized in the consolidated Income Statement.

Goodwill is not amortized but is subject to annual impairment testing.

Impairment Test of Non-amortized Assets

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the value-in-use and the fair value less costs of disposal. Value-in-use is calculated using the discounted cash flow method based on the asset’s continuing use and applying a pre-tax discount rate derived from the average cost of capital. If a CGU does not pass the value in use test, the recoverable amount will be calculated with fair value less costs of disposal method. Fair value less costs of disposal model is based on the CGU's highest and best use from a market participant's perspective as far as they can be reasonably ascertained, taking financial plans as approved by management as a base (level 3). These estimates include potential business expansion and reorganizations, if applicable. This model is based on a post-tax calculation, using a post-tax discount rate. Fair value less costs of disposal model can be based on the discounted cash flows method or sales multiple.

Impairments are recognized in the consolidated Income Statement. Impairment recognized in respect of cash-generating units is first allocated to goodwill and then to other assets of the cash-generating unit on a pro-rata basis based on the carrying amount of each asset in the cash-generating unit. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

Significant Accounting Estimates and Judgments

The Group performs its annual goodwill impairment test in the fourth quarter.

For mature markets the Group calculates fair value less costs of disposal using the discounted cash flows method. For emerging markets a sales multiple is used to determine fair value less cost of disposal. The Group applies a multiple to the average sales of the last three years. The sales multiple is based on recent market transactions and peers of the Group, considering risk factors of the CGU, for which the fair value less costs of disposal is calculated. For recently acquired cash-generating units and cash-generating units with large investments in store openings to generate growth, the average sales of the last three years are adjusted to reflect these developments.

The discounted cash flow method requires management to apply judgements around revenue growth, profit assumptions and the discount rate.

The key assumptions applied in the goodwill impairment test during the reporting period are further described below.

Movements in goodwill are as follow:

in thousands of EUR

Notes

2019

2018

At 31 December

1,052,282

1,065,467

Adjustment on initial application of IFRS 16

32,626

-

At 1 January

1,084,908

1,065,467

Acquisitions

4

99,802

4,458

Adjustment to purchase price allocation

-

2,317

Impairment

- 51,138

- 19,331

Reclassification

-

- 243

Exchange differences

12,456

- 386

At 31 December

1,146,028

1,052,282

Costs

1,293,756

1,148,234

Accumulated impairment

- 147,728

- 95,952

Carrying amount

1,146,028

1,052,282

Amount of €32,626 relates to Fonds de Commerce in France, reclassified from the key money, which were a part of Intangible assets until 1 January 2019, when this amount was recognized as part of Goodwill, since it cannot be included to cost of right-of-use assets.

In 2019, increase in Goodwill is mainly related to acquisitions of Charlie Temple, which operates in the G4 segment, Optica 2000 and McOptic, which operate in the Other Europe segment. Refer to note 4 for more details.

In 2019, the impairment charge relates to an impairment of goodwill in the CGU United States, which operates in the Americas & Asia segment. In 2018, the impairment charge relates to an impairment of goodwill in the CGU Italy, which operates in the Other Europe segment.

The table below shows goodwill per segment:

in thousands of EUR

31 December 2019

31 December 2018

G4

496,610

426,672

Other Europe

534,974

463,331

Americas & Asia

114,444

162,279

1,146,028

1,052,282

Goodwill impairment charge

During the reporting period there were triggering events for impairment in the CGU United States, which operates in the Americas & Asia segment, following the delayed profitability of the US business. In June 2019 the Group completed its goodwill impairment test for the CGU United States and as a result the carrying amount of the CGU United States has been reduced to its recoverable amount of €63,157 (USD 70,951) through recognition of an impairment loss against goodwill of €51,138 (USD 57,326). In the second half of 2019 the agreement between the Group and Walgreen was signed, allowing the Group to open stores in the Walgreens pharmacy chain in the United States under the store-in-store concept.

The recoverable amount of the CGU United States is its fair value less costs of disposal, determined using the discounted cash flow method.

The key assumptions applied are described below:

  • The discounted cash flow projections cover a period of eight years in which only in the first 4 years expansion is included. The longer horizon is used for the expected new store openings to become mature. Estimation techniques were based on the CGU United States' highest and best use from a market participant's perspective as far as they could have reasonably been ascertained, taking the five-year financial plan as approved by management as a base (level 3). The growth rate beyond 5-year period is 2% in line with the expected growth in the United States eyewear industry.
  • At the end of the eight-year projected cash flow period, a terminal value was estimated in order to reflect the value of the CGU in the future years. The terminal values were calculated as a perpetuity at the growth rate of 2% based on the long-term inflation expectation in the United States.
  • The discount rate of 8.47% used is a post-tax rate. It excludes cost of leasing and reflects the country-specific risks relating to the optical retail industry.
  • The revenue growth rate is based on historical performance, as well as management assessment of the development of this rate in the upcoming years. Average revenue growth rate is 10.9%.

Sensitivity

For the discounted cash flow method, the most sensitive key assumptions are revenue growth and discount rate.

For the discounted cash flow method used for the CGU United States, a 1 p.p decrease in the revenue growth of existing stores in the next five years and a 1 p.p increase in the discount rate would result in an additional impairment of €27,550 (USD 30,883) and €18,318 (USD 20,535), respectively. A 1 p.p increase in revenue growth of existing stores in next five years and 1p.p decrease in the discount rate would have resulted in a decrease in impairment of €28,522 (USD 31,973) and €25,607 (USD 28,706), respectively.

Annual goodwill impairment test

Key assumptions used to determine the recoverable amount (value-in-use):

2019

Revenue growth rate (average)

EBITA percentage (average)

Discount rate
(pre-tax)

Sales multiple

G4

3.2% - 5.6%

5.9% - 17.5%

6.44% - 7.50%

n.a

Other Europe

1.3% - 6.1%

7.6% - 24.7%

6.12% - 8.92%

n.a

Americas & Asia

4.3% - 13.6%

4.9% - 17.4%

11.79% - 22.31%

1 – 1.2

2018

Revenue growth rate (average)

EBITA percentage (average)

Discount rate
(pre-tax)

Sales multiple

G4

3.5% - 5.8%

5.8% - 18.5%

9.13% - 11.74%

n.a

Other Europe

3.3% - 13.5%

3.6% - 21.7%

8.31% - 14.37%

n.a

Americas & Asia

3.2% - 21.0%

6.1% - 12.3%

11.14% - 25.16%

1 – 1.2

The assumptions above reflect the averages of each group of the CGUs in the segments for the five-year period. Cash flows beyond this five-year period were extrapolated using an estimated growth rate of nil. The growth rate is based on the budget for these five years. The EBITA and growth rates are based on the historical performance as well as management assessment of the development of these rates in the upcoming years. The discount rates used are pre-tax and reflect the country-specific risks relating to the optical retail industry.

Following implementation of IFRS 16 as of 2019, value-in-use test is based on discounted cash flows, which exclude lease payments and lease receipts, as they are treated as cash flows from financial activities. In addition, since the leases are treated as a financing item, the capital cost of lease liabilities is reflected in the discount rate. Right-of-use assets are included in the carrying amount of a relevant CGU.

In 2019, the Group considered and incorporated the impact on the assumptions resulting from Brexit in its goodwill impairment test.

G4 segment

In the G4 in 2019 the higher end of the average revenue growth rate range mainly relates to the CGU of the United Kingdom & Ireland and the lower end to the CGU of France. The CGU of the Netherlands & Belgium are at the higher end of the average EBITA percentage range with the CGUs of Germany & Austria and France closely following. The lower end of the EBITA range relates to the CGU of the United Kingdom & Ireland. The higher end of the pre-tax discount rate range relates to the CGU of France while the lower end relates to the CGU of the Netherlands & Belgium. The CGUs of Germany & Austria and the United Kingdom & Ireland are at the midpoint of the pre-tax discount rate range.

The carrying value of goodwill allocated to the CGU of France of €211,175 (2018: €179,174) is considered significant in relation to the Group's total carrying value of goodwill. The key assumptions for CGU of France include an average revenue growth rate in line with the lower end of the average revenue growth rate ranges of the G4 segment, an average EBITA percentage towards the higher end of the range of the G4 segment and a pre-tax discount rate of 7.50% (2018: 10.67%). A reasonably possible change to key assumptions used in the value-in-use would not result in a material impairment of goodwill for CGU of France, as this method indicated sufficient headroom. The approach for determining key assumptions for CGU France is consistent with the Group's approach described above.

Other Europe segment

In 2019, the higher end of the average revenue growth rate range mainly relates to the CGU of Spain and the lower end to the CGU of Finland & Estonia. The higher end of the EBITA percentage range relates to the CGU of Hungary, Czech Republic & Slovakia and the lower end to the CGUs of Italy and Greece & Cyprus. The higher end of the pre-tax discount rate range relates to the CGU of Italy while the lower end relates to the CGUs of Denmark, Sweden and Finland & Estonia. The remaining CGUs within the Other Europe segment have average revenue growth rates, EBITA percentages and pre-tax discount rates around the midpoint of the respective ranges.

Americas & Asia segment

In 2019, the higher end of the average revenue growth rate range mainly relates to the CGU of Turkey and the lower end relates to the CGU of Argentina. The higher end of the average EBITA percentage range relates to the CGU of the Turkey and Mexico and the lower end relates to the CGU of Colombia. The higher end of the pre-tax discount rate range related to the CGU of Turkey, while the lower end related to the CGU of Chile & Uruguay. The remaining CGUs within the Americas & Asia segment have average revenue growth rates, EBITA percentages and pre-tax discount rates around the midpoint of the respective ranges.

Sensitivity

For the discounted cash flow method, the most sensitive key assumptions relate to revenue growth, profit assumptions and the discount rate. In the fair value less costs of disposal method based on the sales multiple, the sales multiple used is the most sensitive key assumption.

A reasonably possible change to key assumptions would not result in a material impairment of goodwill where the value-in-use method is used, as this method (where applied) indicated sufficient headroom. A 10% reduction of the sales multiple used in the Group impairment test would not result in an impairment (2018: limited impairment).