Financial report / Explanations and comments on the Balance Sheet
Impairment analysis for cash generating unit carrying
For the purposes of impairment testing, goodwill is allocated between the assets — the Group subsidiaries that represent the lowest level within the Group at which the goodwill is monitored for internal management purposes and which does not exceed an operating segment of the Group.
The aggregate carrying amount of goodwill, allocated to the Group subsidiaries, and the corresponding values of the recognized impairment losses are presented in the table below:
| Goodwill |
JSC Vladivostok Air
|
OJSC AK Rossiya |
OJSC Orenburgskie avialinii |
OJSC Sahalinskiye aviatrassi |
CJSC Aerofirst
|
Total |
| As at 1 January 2011 |
42.1 |
166.4 |
35.6 |
4.9 |
6.1 |
255.1 |
| Impairment |
(43.6) |
|
29.3 |
— |
— |
(43.6) |
| Foreign currency translation |
1.5 |
10.0 |
2.1 |
0.3 |
0.4 |
14.3 |
| As at 31 December 2012 |
|
176.4 |
37.7 |
5.2 |
6.5 |
225.8 |
The recoverable amount of the impairment was calculated on the basis of value in use. The analysis showed that the carrying amount of “Vladivostok Air” goodwill in the amount of USD 44.7 million exceeds its recoverable amount, therefore, an impairment loss of USD 43.6 million was recognized. This impairment loss was recognized in other expenses.
Value in use was determined by discounting the future cash flows to be derived from continuing use of these assets.
Key assumptions against which the recoverable amount is estimated concerned the discount rate, the terminal growth rate (for the calculation of the terminal value) and cash flow. We used the following assumptions:
JSC “Vladivostok Air”
The discount rate is assumed at 10.2%. This rate is calculated based on the risk-free rate on 10-year U.S. government bonds, adjusted for country risk (for Russia) and currency risk (in rubles), the risk of investing in equities, and the risk associated with small capitalization. The average values D / E and Beta coefficient as of December 31, 2012 were taken into account in the calculation. The cost of debt is calculated based on the share of financial leasing in overall Company’s debt amount, the effective rate on long-term loans in rubles and the effective rate of finance lease, adjusted for currency risk. Pre-tax WACC equals 12.75%.
The growth rate for the terminal value calculation is set at the level of Russia’s GDP long-term growth rate of 4.4%.
As a basis for the cash flow forecast the Company adopted the approved budget for 2013. Cash flows were projected for the upcoming years in accordance with macro-economic assumptions adopted for the three-year plan of Aeroflot Group.
OJSC “Rossiya”
The discount rate is assumed at 9.9%. This rate is calculated based on the risk-free rate on 10-year U.S. government bonds, adjusted for country risk (for Russia) and currency risk (in rubles), the risk of investing in equities, and the risk associated with small capitalization. The average values D / E and Beta coefficient as of December 31, 2012 were taken into account in the calculation. The cost of debt is calculated based on the share of financial leasing in overall Company’s debt amount, the effective rate on long-term loans in rubles and the effective rate of finance lease, adjusted for currency risk. Pre-tax WACC equals 12.38%.
The growth rate for the terminal value calculation is set at the level of Russia’s GDP long-term growth rate of 4.4%.
As a basis for cash flows forecast Company adopted the approved budget for 2013, as well as a three-year plan of the company for years 2013- 2015.
OJSC “Orenburg Airlines”
The discount rate is assumed at 11%. This rate is calculated based on the risk-free rate on 10-year U.S. government bonds, adjusted for country risk (for Russia) and currency risk (in rubles), the risk of investing in equities, and the risk associated with small capitalization. The average values D / E and Beta coefficient as of December 31, 2012 were taken into account in the calculation. The cost of debt is calculated based on the share of financial leasing in overall Company’s debt amount, the effective rate on long-term loans in rubles and the effective rate of finance lease, adjusted for currency risk. Pre-tax WACC equals 13.75%.
The growth rate for the terminal value calculation is set at the level of Russia’s GDP long-term growth rate of 4.4%.
As a basis for cash flows forecast Company adopted the approved budget for 2013, adjusted for the analysis of the actual implementation of the budget for the 3 months of 2013.
