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12. Intangible assets
           
Impairment testing of goodwill
Goodwill from acquisitions is allocated to the Group’s cash-generating units (CGUs) being the lowest level of assets for which there are separately identifiable cash flows. Currently Wärtsilä identifies two (2009: 3) separate independent cash inflow CGUs to which goodwill can directly be linked as per the below table. In addition, the goodwill allocated for companies acquired during the current period has been subject for impairment testing separately. These companies as well as CGU Automation have been integrated into the Power Business operations in 2010 and no longer constitute a separately identifiable CGU.
           
Cash-Generating Units (CGU)
        Goodwill
MEUR       2010 2009
Automation         36
Ship design       116 110
Other acquired companies, non-integrated         7
Power Businesses, other       459 405
Total       574 558
           
The recoverable amounts from the CGUs are determined based on value-in-use calculations. The calculations are on an orderbook and a discounted cash flow method basis, derived from 5-year cash flow projections from management approved strategic plans. The current market situation has been taken into account as decreased sales expectations as well as adapting capacity. The estimated performances of the CGUs are based on utilisation of the existing property, plant and equipment in their current condition with normal maintenance capital expenditure, excluding any potential future acquisitions. Cash flows beyond the five-year period are calculated using the terminal value method. The terminal growth rate used in projections is based on management’s assessment on conservative long term growth. The terminal growth rate used is 2%.
           
The key driver for the valuation is the growth in the global economy and in particular the development of the global power market, the global shipbuilding industry and demand for related services. The projected development of total costs in the market affects the profitability, whereas any single cost item has not been seen as having material impact. The valuation drivers for the new equipment sales are the growth in the global economy whereas for after sales the drivers are also the demand for related services and projected development in labour cost.
           
The applied discount rate is the weighted average pre-tax cost of capital (WACC) as defined by Wärtsilä. The components of the WACC are risk-free rate, market risk premium, industry specific beta, cost of debt and debt equity ratio. When defining the WACC for 2010 it has been considered that the general interest rate is currently on a lower level. Wärtsilä has used a WACC of 9,3% (2009: 10.0%) in the calculations.
           
As a result of the impairment test no impairment loss for non of the CGUs was recognized for the period ended December 31, 2010 and 2009 respectively. The recoverable amounts from all CGUs exceeded their carrying values by more than 200%.
           
Sensitivity analysis
Sensitivity analyses have been carried out for the valuation of each Cash Generating Unit by making downside scenarios. The change in the enterprise value was evaluated through these downside scenarios by changing the underlying assumptions in the valuations. The changes in the assumptions and their effects are:
- sales growth and EBIT profitability lowered based on scenario analysis in each business, effect 28% (13%)
- terminal growth rate lowered by 50%, effect 12% (10)
- WACC increased by 2%, effect 28% (20).
           
According to the performed sensitivity analyses, none of the downside scenarios would change the long term key assumptions for which Wärtsilä’s recoverable amounts are based, and would also not cause their respective values to fall short of their carrying amounts. As a result of performed impairment tests, there is no need for write-downs of the goodwill in a particular cash generating unit.
           
In management’s opinion, changes in the basic assumptions provided in these theoretical downside scenarios shall not be seen as an indication that these factors are likely to materialise. The sensitivity analyses are hypothetical and should therefore be treated with caution.
           
           
2010          
MEUR Intangible rights Construction in
progress and
advances paid
Other intangible assets Goodwill Total
Acquisition cost at 1 January 2010 74 27 395 562 1 058
Changes in exchange rates     3 17 21
Additions 2 8 7   17
Disposals and reclassifications 5 -17 8   -4
Acquisition cost at 31 December 2010 81 18 414 579 1 091
           
Accumulated amortisation and impairments 1 January 2010 -43   -231 -4 -279
Changes in exchange rates     -2   -2
Accumulated amortisation on disposals 2   9   11
Amortisation during the financial year -5   -37   -42
Accumulated amortisation and impairments 31 December 2010 -46   -261 -4 -311
           
Book value at 31 December 2010 35 18 153 574 780
           
Developing costs for internally produced assets amounting to EUR 6 million (7) were activated during the financial period and the asset value was EUR 38 million (36).
           
2009          
MEUR Intangible rights Construction in
progress and
advances paid
Other intangible assets Goodwill Total
Acquisition cost at 1 January 2009 73 19 368 549 1 009
Changes in exchange rates 1   8 18 27
Acquisitions     4 8 12
Additions   17 7   24
Disposals and reclassifications   -8 8 -14 -14
Acquisition cost at 31 December 2009 74 27 395 562 1 058
           
Accumulated amortisation at 1 January 2009 -37   -179   -216
Changes in exchange rates     -1   -1
Amortisation during the financial year -6   -52   -58
Impairments       -4 -4
Accumulated amortisation and impairments at 31 December 2009 -43   -231 -4 -279
           
Book value at 31 December 2009 31 27 164 558 779