NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 11

11. INTANGIBLE ASSETS
    Goodwill
R'000		 Trademarks 
and market-related 
intangibles 
R'000 		 Customerrelated 
intangibles 
and licence 
agreements 
R'000 		 Manu- 
facturing- 
related- 
intangibles 
R'000 		 Total 
R'000 		  
  2016            
  Carrying value at beginning of year            
  Cost 12 580  756 652  263 572  1 605  1 034 409    
   Accumulated amortisation  –  (145 553) (144 095) (1 605) (291 253)   
   Net balance at beginning of year  12 580  611 099  119 477  –  743 156    
   Current year movements – cost                   
   Reclassification to assets held-for-sale (note 2.2) –  (596 734) (158 414) (1 605) (756 753)   
   Disposals  –  (2 018) –  –  (2 018)   
   Exchange rate adjustments  –  77 071  4 746  –  81 817    
   Cost movement for the year  –  (521 681) (153 668) (1 605) (676 954)   
   Current year movements – accumulated amortisation                   
   *Charge for the year  –  (9 167) 6  –  (9 161)   
   Reclassification to assets held-for-sale (note 2.2) –  231 561  142 478  1 605  375 644    
   Disposals  –  330  –  –  330    
   Impairment of asset transferred to held-for-sale (1)  –  (135 180) –  –  (135 180)   
   Impairment (1)  –  (3 149) –  –  (3 149)   
   Exchange rate adjustments  –  (12 320) (6 296) –  (18 616)   
   Accumulated amortisation movement for the year  –  72 075  136 188  1 605  209 868    
   Carrying value at end of year                   
   Cost  12 580  234 971  109 904  –  357 455    
   Accumulated amortisation  –  (73 478) (7 907) –  (81 385)   
   Net balance at end of year  12 580  161 493  101 997  –  276 070    
   (1) Refer to Annexure G on impairments.                   
   *Amortisation split as follows:  –  9 167  (6) –  9 161    
     Continuing operations  –  9 050  –  –  9 050    
     Discontinued operations  –  117  (6) –  111    
   2015                   
   Carrying value at beginning of year                   
   Cost  12 580  712 861  254 754  1 605  981 800    
   Accumulated amortisation  –  (93 792) (50 225) (1 605) (145 622)   
   Net balance at beginning of year  12 580  619 069  204 529  –  836 178    
   Current year movements – cost                   
   Disposal of business (note 1.1) –  –  (226) –  (226)   
   Exchange rate adjustments  –  43 791  9 044  –  52 835    
   Cost movement for the year  –  43 791  8 818  –  52 609    
   Current year movements – accumulated amortisation                   
   *Charge for the year  –  (43 654) (16 718)    (60 372)   
   Impairment (1)  –  –  (74 432) –  (74 432)   
   Exchange rate adjustments  –  (8 107) (2 720) –  (10 827)   
   Accumulated amortisation movement for the year  –  (51 761) (93 870) –  (145 631)   
   Carrying value at end of year                   
   Cost  12 580  756 652  263 572  1 605  1 034 409    
   Accumulated amortisation  –  (145 553) (144 095) (1 605) (291 253)   
   Net balance at end of year  12 580  611 099  119 477  –  743 156    
   (1) Intangible assets have been impaired where the Group does not expect these assets to generate any future economic benefit. Refer to Annexure G.                   
   *Amortisation split as follows:  –  43 654  16 718  –  60 372    
     Continuing operations  –  9 811  –  –  9 811    
     Discontinued operations  –  33 843  16 718  –  50 561    
   Amortisation is included in fixed and administrative expenses and impairments in non-trading expenses in the statement of comprehensive income.           
  Goodwill acquired through business combinations and other intangible assets have been allocated to the following individual reportable segments for impairment testing. These segments represent the lowest level within the entity at which intangible assets are monitored for internal management purposes.

    OTC
R’000		 Consumer
R’000		 Prescription
R’000		 Hospital
R’000		 Southern
Africa
R’000		 India and
Rest of Africa
R’000		 Total
R’000		  
  2016                
  Carrying amount of goodwill       12 580 12 580   12 580  
  Carrying amount of other Intangibles 85 289 85 262 90 592 – 261 143 2 347 263 490  
  Indefinite useful lives 78 807   90 592   169 399 2 347 171 746  
  Finite useful lives 6 482 85 262     91 744   91 744  
  Total 85 289 85 262 90 592 12 580 273 723 2 347 276 070  
  2015                
  Carrying amount of goodwill       12 580 12 580   12 580  
  Carrying amount of other intangibles 85 917 93 684 93 741   273 342 457 234 730 576  
  Indefinite useful lives 78 807   93 741   172 548 2 347 174 895  
  Finite useful lives 7 110 93 684     100 794 454 887 555 681  
  Total 85 917 93 684 93 741 12 580 285 922 457 234 743 156  
 

IMPAIRMENT TESTING OF OTHER INTANGIBLE ASSETS
The average remaining useful life for intangible assets with finite useful lives is ten years.

The recoverable amount of the indefinite life intangible assets has been determined based on a value-in-use calculation using cash flow projections from financial budgets approved by senior management covering a 10-year period when management believes that products have a value-in-use of 10 years or more and that these projections, based on past experience, are reliable.

The pre-tax discount rate applied to cash flow projections, before adjusting for risk, is 22.6% (2015: 19.2%) for the intangible assets in the continuing operations. The cash flows beyond the 10-year period are discounted using a 0.5% long-term growth rate (2015: 0.5%).

Key assumptions used in value-in-use calculations:

The calculation of value-in-use for all segments is sensitive to the following assumptions:
– gross margin;
– discount rates;
– raw materials price inflation;
– market share during the budget period; and
– growth rate used to extrapolate cash flows beyond the budget period.

Gross margin
Gross margins are based on average values of between 27% and 50% in the three years preceding the start of the budget period. These are changed over the budget period for anticipated efficiency improvements, estimated changes to cost of production and raw materials, and selling prices.

Discount rates
Discount rates reflect management’s estimate of the risks. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. In determining appropriate discount rates, regard has been given to the yield on a 10-year government bond at the beginning of the budgeted period.

Raw materials price inflation
Estimates are obtained from published indices for the countries from which materials are sourced, as well as data relating to specific commodities. Forecast figures are used if data is publicly available, otherwise past actual raw materials price movements of 5% has been used as an indicator of the future price movements.

Market share assumptions
These assumptions are important because, as well as using industry data for growth rates, management assesses how the Group’s position, relative to its competitors, might change over the budget period. Market share is considered separately for each asset to determine the impact on the future cash flows.

Growth rate estimates
The growth rate used beyond the next 10-year period is management’s best estimate taking market conditions into account.

Sensitivity to change in assumptions
The implications of the key assumptions for the recoverable amount are discussed below:

Gross margin
A decreased demand and cost input inflation in excess of selling price increases can lead to a decline in the gross margin which could result in a further impairment of intangibles.

Discount rates
A material increase in excess of 4% in the pre-tax discount rate would result in impairment.

Raw materials price inflation
Management has considered the possibility of greater than forecast increases in raw material price inflation. If prices of raw materials increase greater than the forecast price inflation and the Group is unable to pass on, or absorb these increases through efficiency improvements, then the Group will have a further impairment.

Market share assumptions
Although management expects the Group’s market share to be stable over the forecast period, a material decline in the market share would result in a further impairment.

Growth rate estimates
Management acknowledges that new entrants into the market could have a significant impact on growth rate assumptions. This is not expected to have a material adverse impact on forecasts, but could yield a reasonably possible alternative to the estimated long-term growth rate which could result in impairment.

NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 11