Note 4 – Significant estimates and judgments for accounting purposes
Estimates and judgments are evaluated regularly based on historical experience and other factors, including expectations of future events which may be deemed reasonable under prevailing circumstances.
4.1 Significant estimates and judgments for accounting purposes
The Group makes estimates and judgments regarding the future. By definition, the estimates for accounting purposes which follow therefrom rarely correspond to the actual outcome. The estimates and judgments which entail a significant risk of material adjustments in the carrying amounts of assets and liabilities during the following financial year are outlined below.
4.1.1 Useful life, intangible and tangible fixed assets
Group Management determines the estimated useful life and thereby the amortization and deprecation on the Group’s intangible and tangible fixed assets. These estimates are based on historical knowledge of the useful life of equivalent assets. Useful lives and estimated residual values are reviewed on each balance sheet date and adjusted as required.
Regarding the carrying amounts on each balance sheet date for intangible and tangible fixed assets, see Notes 21–25.
4.1.2 Impairment testing for goodwill
Each year, the Group assesses whether there is any impairment of goodwill, in accordance with the accounting principle described in Note 2 under section 2.9. “Impairment of non-financial assets”. The recoverable amount of cash-generating units has been determined by calculating the value in use. Certain estimates must be made for these calculations; see Note 21.
The carrying amounts of goodwill at the balance sheet date are allocated per cash-generating unit; see Note 21.
Even if the estimated rate of growth which is applied to discounted cash flows after the forecast five-year period had been 0% instead of the management’s judgment of 1%, there would be no impairment of goodwill.
The estimated discount rate before tax which Duni applies is shown in the table below:
|Discount rate before tax||2017||2016|
Even if the estimated discount rate before tax which is applied to discounted cash flows had been 1% higher than the management’s judgment, there would be no impairment of goodwill.
Expenses and the value of pension obligations with respect to defined benefit plans are based on actuarial calculations based on assumptions regarding the discount rate, future salary increases, inflation and demographic conditions. Assumptions regarding the discount rate are based on high-quality investments at fixed interest with a term to maturity corresponding to the Group’s existing pension obligations. Other demographic conditions are based on established industry practice.
The largest pension plan (approximately one half of pension obligations) is in Sweden, where there is no sufficiently liquid market for corporate bonds. Accordingly, the discount rate for the Swedish pension liability is based on mortgage bonds with a term to maturity corresponding to the pension plan. Duni believes that it is possible to equate Swedish mortgage bonds with investment-grade corporate bonds since the market for such bonds has a high turnover and is considered to be liquid and deep; furthermore, these bonds often have a triple A rating and thus are extremely creditworthy.
The carrying amounts of pension liabilities for each balance sheet date are set forth in Note 33, “Pension obligations”.
4.2 Significant judgments in applying the Company’s accounting principles
4.2.1 Allocation of fixed assets by operating segment and goodwill to cash-generating units
The operating segments utilize common fixed assets. When recognizing the common fixed assets by operating segment, they have been allocated based on the business volume of each operating segment; this is deemed to constitute a reasonable basis for allocation since the utilization of the asset by each operating segment is proven. Corresponding allocations have also been made when allocating common Group expenses. Acquisition goodwill has been allocated to the cash-generating units and operating segments based on a judgment of which units will benefit from the synergies, etc. created by the business acquisition. In making the allocation, management has considered the estimated business volumes of the units and made a judgment of market growth for each unit.