Goodwill

The changes in 2013 and 2014 were as follows:

Philips Group
Goodwill in millions of EUR
2013 - 2014
 
2013
2014
Balance as of January 1:
 
 
Cost
9,119
8,596
Amortization and impairments
(2,171)
(2,092)
Book value
6,948
6,504
Changes in book value:
 
 
Acquisitions
4
68
Purchase price allocation adjustment
(4)
8
Impairments
(26)
Divestments and transfers to assets classified as held for sale
(55)
(160)
Translation differences
(363)
738
Balance as of December 31:
 
 
Cost
8,596
9,151
Amortization and impairments
(2,092)
(1,993)
Book value
6,504
7,158

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Acquisitions in 2014 which included goodwill mainly related to the acquisition of General Lighting Company (GLC) for EUR 58 million. In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year. Divestments and transfer to assets classified as held for sale in 2014 relate to the sectors Healthcare and Lighting. In 2014 the movement of EUR 738 million in translation differences is mainly explained by the increase of the USD/EUR rate which impacted the goodwill nominated in USD.

In 2013 the movement of EUR 55 million in divestments and transfers to assets classified as held for sale mainly relate to divestments in the Healthcare sector.

For impairment testing, goodwill is allocated to (groups of) cash-generating units (typically one level below operating sector level), which represent the lowest level at which the goodwill is monitored internally for management purposes.

In 2014, a cash-generating unit Healthcare Informatics Services & Solutions was created in the Healthcare sector. As a result of the change, a portion of the goodwill associated with the unit Patient Care & Clinical Informatics and the unit Home Monitoring was allocated to Healthcare Informatics Services & Solutions. The name of the cash-generating unit Patient Care & Clinical Informatics was changed in 2014 to Patient Care & Monitoring Solutions.

Goodwill allocated to the cash-generating units Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Monitoring Solutions and Professional Lighting Solutions is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, 2014. The amounts associated as of December 31, 2014, are presented below:

Philips Group
Goodwill allocated to the cash-generating units in millions of EUR
2013 - 2014
 
2013
2014
Respiratory Care & Sleep Management
1,544
1,704
Imaging Systems
1,414
1,592
Patient Care & Monitoring Solutions
1,0631)
1,317
Professional Lighting Solutions
1,266
1,470
Other (units carrying a non-significant goodwill balance)
1,217
1,075
Book value
6,504
7,158
1)
Revised to reflect the new organizational structure of the Healthcare sector
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The basis of the recoverable amount used in the impairment tests for the units disclosed in this note is the value in use. In the 2014 annual impairment test, performed in the second quarter, and in the tests performed in the second half of 2014, the estimated recoverable amounts of the cash-generating units tested approximated or exceeded the carrying value of the units, therefore no impairment loss was recognized.

Key assumptions used in the impairment tests for the units were sales growth rates, income from operations and the rates used for discounting the projected cash flows. These cash flow projections were determined using management’s internal forecasts that cover an initial period from 2014 to 2018 that matches the period used for our strategic process. Projections were extrapolated with stable or declining growth rates for a period of 5 years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long-term average growth rate.

The sales growth rates and margins used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages.

Income from operations in all units is expected to increase over the projection period as a result of volume growth and cost efficiencies.

Cash flow projections of Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Monitoring Solutions and Professional Lighting Solutions for 2014 were based on the key assumptions included in the table below. These assumptions are based on the annual impairment test performed in the second quarter except for the unit Professional Lighting Solutions which performed an updated test in Q4 2014 given the acquisition of GLC in the second half of the year.

Philips Group
Key assumptions in %
2014
 
compound sales growth rate1)
 
 
initial forecast period
extra­polation period2)
used to calculate terminal value
pre-tax discount rates
Respiratory Care & Sleep Management
4.2
3.6
2.7
11.4
Imaging Systems
3.3
3.1
2.7
12.8
Patient Care & Monitoring Solutions
4.9
3.8
2.7
12.8
Professional Lighting Solutions
10.1
6.5
2.7
13.8
1)
Compound sales growth rate is the annualized steady growth rate over the forecast period
2)
Also referred to later in the text as compound long-term sales growth rate
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The assumptions used for the 2013 cash flow projections were as follows:

Philips Group
Key assumptions in %
2013
 
compound sales growth rate1)
 
 
initial forecast period
extra­polation period2)
used to calculate terminal value
pre-tax discount rates
Respiratory Care & Sleep Management
4.9
3.7
2.7
11.3
Imaging Systems
3.9
3.4
2.7
12.4
Patient Care & Clinical Informatics
4.1
3.5
2.7
13.2
Professional Lighting Solutions
7.4
5.4
2.7
12.8
1)
Compound sales growth rate is the annualized steady growth rate over the forecast period
2)
Also referred to later in the text as compound long-term sales growth rate
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Among the mentioned units, Respiratory Care & Sleep Management and Professional Lighting Solutions have the highest amount of goodwill and the lowest excess of the recoverable amount over the carrying amount. Based on the annual impairment test performed in the second quarter, the headroom of Respiratory Care & Sleep Management was estimated at EUR 820 million. Based on the updated test performed in Q4, the headroom of Professional Lighting Solutions was estimated at EUR 1,000 million. The following changes could, individually, cause the value in use to fall to the level of the carrying value:

Philips Group
Sensitivity analysis
 
increase in pre-tax discount rate, basis points
decrease in compound long-term sales growth rate, basis points
decrease in terminal value amount, %
Respiratory Care & Sleep Management
380
680
49
Professional Lighting Solutions
400
1,030
47

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The results of the annual impairment test of Imaging Systems and Patient Care & Monitoring Solutions have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.

Impairment charge 2013

In the fourth quarter of 2013, the updated impairment test for Consumer Luminaires resulted in EUR 26 million impairment. This was mainly a consequence of reduced growth rate due to slower anticipated recovery of certain markets and introduction delays of new product ranges. The pre-tax discount rate applied in the mentioned Q4 2013 test was 13.5%. The pre-tax discount rate applied in the 2013 annual impairment test was 13.4%. Compared to the previous impairment test there has been no change in the organization structure which impacts how goodwill is allocated to this cash-generating unit.

Additional information 2014

In addition to the units with significant goodwill, other cash-generating units are sensitive to fluctuations in the assumptions as set out above.

Based on the most recent impairment test, it was noted that the headroom for the cash-generating unit Home Monitoring was EUR 30 million. An increase of 150 points in the pre-tax discount rate, a 310 basis points decline in the compound long-term sales growth rate or a 21% decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Home Monitoring at December 31, 2014 amounts to EUR 34 million.

Based on the most recent impairment test, it was noted that with regard to the headroom for the cash-generating unit Consumer Luminaires the estimated recoverable amount approximates the carrying value of this cash-generating unit. Consequently, any adverse change in key assumptions would, individually, cause an impairment loss to be recognized. The goodwill allocated to Consumer Luminaires at December 31, 2014 amounts to EUR 112 million.

Please refer to note (2) Information by sector and main country for a specification of goodwill by sector.

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