13. Goodwill impairment testing

Allocation of goodwill

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. The carrying value of goodwill is allocated as follows:

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

Goodwill 31 Dec 2016
4,635 17,612
Goodwill 31 Dec 2015
4,612 17,525

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

2016 2016 2015 2015

Discount rate (WACC), post-tax 11.8% 12.4% 11.8% 12.5%
Discount rate (WACC), pre-tax 14.8% 15.4% 14.7% 15.0%
Adjusted operating result in relation to revenue for the forecast period 2017 - 2021 (2016 - 2020), per cent 5,2 % - 11,5 % 10,5 % - 12,7 % 10.0 % - 25.0 % 7.0 % - 14.4 %
Adjusted operating result for the foercast period 2017 - 2021 (2016 - 2020), EUR million 2,2 - 4,4 2,4 - 2,7 4.6 - 9.5 2.2 - 2.8
Residual value growth rate factor 2.5% 2.3% 2.5% 2.5%

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 2017 (2015: on the budget for 2016) and forecasts for the years 2018 - 2021 (2015: for the years 2017 - 2020) 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 7.1 - 10.5 per cent being EUR 5.2 - 6.9 million (2015: a level of 9.4 - 13.8 per cent being EUR 7.9 - 10.7 million) and a typical level for the industrial sector.

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.

Sensitivity analysis of the impairment tests

In the goodwill impairment test, the sensitivity of the outcome is estimated through changes in key variables. The segment wise sensitivity analysis is presented in the table below. In the analyses, it is presented how many percentage points the used post-tax discounting rate, the terminal period adjusted operating result and the residual value growth rate factor should change, other variables remaining constant, that the estimated cash flow would match with the carrying amount of the tested assets on 31 December 2016.

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

2016 2016 2015 2015

The change of discount rate (WACC), in percentage points 1.0% 3.7% 8.0% 6.6%
Change in adjusted operating result for terminal period, in percentage -17% -45% -73% -61%
Change in residual value growth rate factor, in percentage points -1.9% -7.9% -25.7% -22.3%
Amount by which the recoverable amount exceeds the carrying value, EUR 1,000 1,786 4,376 16,377 8,640