SOMFY_ANNUAL_FINANCIAL_REPORT_2017

07 CONSOLIDATED FINANCIAL STATEMENTS

Impairment tests Note 5.1.2

At 31 December 2017, as at every year-end or every time that indications of impairment exist, the Group re-examined the value of goodwill associated with Cash Generating Units. For the purpose of impairment tests, goodwill generated on the acquisition of Dooya has been allocated to each Cash Generating Unit and group of Cash Generating Units liable to derive economic benefits from this business combination. The goodwill thus generated on assuming control over this company was allocated as follows: to the Dooya CGU, for the portion of economic benefits that is – directly attributable to it. This goodwill is monitored in the local currency; to a combination of CGUs belonging to the Somfy division, for – the portion of economic benefits that will flow to this CGU. This goodwill is monitored in Euros. Cash flows are evaluated based on budgets and three-year forecasts for companies which operate in a market they know and understand well. Generally, these are companies whose strategies are not expected to change greatly. On the other hand, the period is extended to five years for companies in emerging markets, for which the growth potential and maturity are further away. These cash flows have been projected over several years using specific growth rates which are consistent with the Group’s historical growth rates. The growth rate used to project cash flows to infinity is consistent with the long-term inflation rate relevant to the countries concerned. The discount rate used corresponds to the weighted average cost of capital and reflects the expected return on invested capital (equity and liabilities necessary to finance operations). It is calculated based on the financial data extracted from a sample of comparable companies, comprising listed companies operating in the same business segment as the companies to be valued. Risk is mainly taken into account at a cash flow level. In 2017, cash flow discount rates, determined from market data, were 10% and 14% for the European CGUs, 12.5% for the Chinese CGUs and 15% for other Asian CGUs. In 2016, cash flow discount rates, determined from market data, were 10% for the European CGUs, 12.5% for the Chinese CGUs and 15% for other Asian CGUs.

IAS 36 defines the procedures to be applied by a company to ensure that the net book value of its assets does not exceed their recoverable amount, that is the amount to be recovered from the use or the disposal of the assets. Except for goodwill and intangible assets with an indefinite life, which require systematic annual impairment tests at year-end, the recoverable amount of an asset is estimated every time there is an indication that the asset may be impaired. A recoverable amount is estimated for each individual asset. If it is not possible to do so, assets are brought together in Cash Generating Units (CGUs), whose recoverable amount is subsequently measured. A Cash Generating Unit is the smallest group of assets to which the asset belongs, which generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. CGUs have been identified within the Group. They primarily comprise the Group’s legal entities that have been acquired through merger and acquisition transactions. An impairment test involves comparing the recoverable amount of the CGU with its book value. The recoverable amount of an asset is measured at the higher of its fair value, after deduction of disposal costs, and its value in use. If the recoverable amount exceeds the net book value of the CGU at period end, no impairment is recognised. However, if this amount is lower than the net book value, an impairment loss equal to the difference is recognised in priority against the acquisition goodwill. This impairment loss may not be reversed. Fair value after deduction of disposal costs is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, after deducting disposal costs. The value in use is determined on the basis of cash flows estimated by plans and budgets for a maximum of five years. Cash flows beyond five years are extrapolated through the application of a constant or decreasing rate and discounted using long-term market rates after tax, which reflect market estimates of the time value of money and specific risks pertaining to these assets. In certain cases, cash flows can be estimated over longer periods, to be justified CGU by CGU.

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SOMFY – ANNUAL FINANCIAL REPORT 2017