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7. Intangible assets

 GoodwillDevelopment costsNon-recurring costsConcessions, licences and trademarksAcquired through business combinationsOther intangible assetsTotal
1 January 2015       
Cost---14-1024
Amortisation, depreciation and impairment losses---(13)-(6)(19)
Carrying amount---1-45
        
Investments---2-13
Sales---(1)--(1)
Depreciation---(1)-(2)(3)
31 December 2015---1-34
Broken down as follows:       
Cost---15-1126
Amortisation, depreciation and impairment losses---(14)-(8)(22)
Carrying amount---1-34
        
Effect from Mergers/Demergers7074381,33588611262,755
Investments-231434-15185
Depreciation-(50)(111)(26)(4)(29)(220)
Impairment losses-(3)(13)---(16)
Other changes--1426-(17)23
31 December 20167074081,3689357982,731
Broken down as follows:       
Cost8751,0931,958361964524,835
Amortisation, depreciation and impairment losses(168)(685)(590)(268)(39)(354)(2,104)
Carrying amount7074081,3689357982,731
        
31 December 2016       
Gross value  4,631    
Grants  3,263    

Goodwill

Goodwill is allocated to the Cash Generating Units (CGUs) or groups of CGUs concerned, which are determined with reference to the Group’s organisational, management and control structure at the reporting date coinciding, as is known, with the Group’s four business segments. At the recognition of the mergers and demergers described above, goodwill was allocated, in accordance with the principle of “continuity of values”, on the merged assets solely to the extent of the goodwill recognised in the consolidated financial statements, while that related to foreign equity investments was included in the value of the same equity investments.

The breakdown of goodwill recognised by segment at 31 December 2016 is as follows:

 31 December 201631 December 2015
Helicopters459-
Electronics, Defence & Security Systems188-
Aeronautics60-
 707-

At 31 December 2015 there was no value related to goodwill. There are no changes as regards the data comprising the branches included in the 3 sectors abovementioned.

The CGUs of the separate financial statements are the same as those identified in the consolidated financial statements, to which reference is made. Goodwill is tested for impairment in order to determine any possible loss in value, making reference to the CGU as a whole, including, in accordance with the organisational and operational model, the foreign equity investments falling within the scope of consolidation, which are then included and tested in the same year as the impairment. Therefore, only the equity investments that are not tested together with goodwill are subject to an impairment test separately, if required. For the sake of representation only, the financial assumptions and ratios detailed below are also provided for the equity investments subject to separate tests (the most significant of which is Meccanica Holdings USA Inc., a company that holds, among other things, the investment in DRS Technologies Inc.)

The test is done by individual CGU by comparing the carrying amount with the greater of the value in use of the CGU and amount recoverable by sale. In practice, the Group has established an operational hierarchy between calculating the fair value net transaction costs and value in use, where the value in use is estimated first, and then only after, if it is lower than the carrying value, is the fair value net of transaction costs determined. In particular, the value in use is measured by the unlevered discounting of the cash flows resulting from the Group’s five-year business plans prepared by the management of the CGU and incorporated into the plan approved by Leonardo’s Board of Directors, projected beyond the explicit time horizon covered by the plan according to the perpetuity growth method (terminal value), using growth rates (“g-rate”) no greater than those forecast for the markets in which the given CGU operates. The cash flows used were those provided for in the plans adjusted to exclude the effects of future business restructurings, not yet approved, or future investments for improving future performance. Specifically, these cash flows are those generated before financial expense and taxes, and include investments in capital assets and monetary changes in working capital, while excluding cash flows from financial management, extraordinary events or the payment of dividends. The related underlying macro-economic assumptions were made on the basis of external information sources, where available, while the profitability and growth estimates used in the plans were calculated by management based on past experience and expected developments in the Leonardo’s markets.

These cash flows are discounted on a weighted-average cost of capital (WACC) basis calculated using the Capital Asset Pricing Model method. The following factors were taken into account in calculating WACCs:

  • as risk-free rate, the 10- and 20-year gross yield of government bonds of the geographic market of the CGU was used. The drop in these rates justifies the overall decrease of WACCs compared with 2015. In order to evaluate the potential impacts deriving from the partial compensation for the effects of the ECB monetary policy on the Euro area rates, the following sensitivity analysis was developed;
  • the market premium was equal to 5.7%;
  • the sector beta, determined using data pertaining to our major competitors in each sector;
  • the cost of debt applicable to the Group, net of taxes;
  • the debt/equity ratio, determined using data pertaining to our major competitors in each sector.

On the contrary, the growth rates used to project the CGU’s cash flows beyond the explicit term of the plan were estimated by making reference to the growth assumptions of the individual sectors in which said CGUs operate. These assumptions are based on the internal processing of external sources, making reference to a period of time that is usually ten years. The g-rates used for the purposes of the impairment test were equal to 2%, consistently with the actions taken in previous financial years, even in the presence of higher expected growth rates in some sectors.

The mostly important assumptions for the purposes of estimating the cash flows used in determining the value in use are summarised below:

 HelicoptersElectronicsAeronautics
WACCXXX
g-rateXXX
ROS as per the planXXX
Flat trend in real terms of the Defence budget in domestic marketsXXX
Growth in production rates of mass production of particular importanceX X

In estimating these basic assumptions, the management made reference, in the case of external variables, to internal information processed on the basis of external surveys, as well as on its knowledge of the markets and of the specific contractual situations.

The following WACCs (after taxes) and (nominal) growth rates were used at 31 December 2016 and 2015:

 31 December 201631 December 2015 (*)
 Waccg-rateWaccg-rate
Helicopters7.6%2%8.7%2%
Electronics, Defence & Security Systems5.5%2%7.8%2%
Aeronautics5.9%2%7.2%2%

(*) Data referred to impairment tests performed in 2015 solely on the value of the equity investments

Testing revealed no signs of impairment. We note that the performance of the Electronics, Defence and Security Systems sector was subject to impairment test in the 2011 and 2012 consolidated financial statements, with particular reference to DRS through the equity investments in Meccanica Holdings USA. Sensitivity analysis was conducted on these results, making reference to the assumptions for which it is reasonably possible that a change in the same may significantly modify the results of the test. The wide positive margins recorded are such that they may not be significantly modified by any changes in the assumptions described above. For information purposes, below are reported the results. The table below highlights the headroom in the base scenario, with reference to the goodwill value, compared with the following sensitivity analyses: (i) increase by 50 basis points in the interest rate used to discount cash flows across all the CGUs, other conditions being equal; (ii) reduction by 50 basis points in the growth rate used in calculating the terminal value, other conditions being equal; (iii) reduction by half point in the operating profitability applied to the terminal value, other conditions being equal.

 Margin (base case)Margin post sensitivity
  Waccg-rateROS TV
Helicopters3,8723,3463,4373,856
Elettronics, Defence & Security Systems6,9265,7365,8845,759
Aeronautics12,40111,11611,27010,824

In order to evaluate the possible effects of an increase in the risk-free rates of the Euro area, a sensitivity analysis was developed, as previously said, considering an increase in rates equal to 100 basis points using the following WACCs: Helicopters 8.6%, Electronics, Defence and Security Systems 6.5% and Aeronautics 6.9%. Within this scenario, the margins of the 3 CGUs decreased by about 15% although remaining significantly positive (in detail: Helicopters €mil. 2,902, Electronics, Defence and Security Systems €mil. 4,810 and Aeronautics €mil. 10,097).

Other intangible assets

In addition to the net effect of investments, “development costs” rose due also as a result of the concentration process, especially in the Helicopters (€mil. 6) and Electronics, Defence and Security Systems (€mil. 17) sectors, and of the amortisation for the year. Investments attributable to “non-recurring costs” related to the Helicopters (€mil. 74) sector, to programmes concerning aircraft (€mil. 42) and to programmes of the Electronics, Defence and Security Systems sector (€mil. 27). As regards programmes that benefit from the provisions of Law 808/85 and that are classified as functional to national security, the portion of capitalised non-recurring costs, pending the fulfilment of the legal requirements for the classification under receivables, is separately disclosed under other non-current assets (Note 10). Receivables for grants assessed by the grantor in relation to capitalised costs (shown here net of the related grants) are illustrated in Note 26.

Total research and development costs, including also “development” and “non-recurring costs” just mentioned, amount to €mil. 982, of which €mil. 123 expensed.

“Other” mainly includes software, which is amortised over a 3 to 5 year period, and intangible assets in progress and advances.

Commitments are in place for the purchase of intangible assets for €mil. 5 (€mil. 0 at 31 December 2015).