27th Feb 2006 07:01
Vodafone Group Plc27 February 2006 27 February 2006 IMPAIRMENT REVIEW AND UPDATE TO OUTLOOK Against a backdrop of intensifying competition and pricing pressures in severalof its key markets, Vodafone Group Plc ("Vodafone") is currently completing itsdetailed budget for the year ending 31 March 2007 and its annual long termplanning process. This incorporates an annual review of the carrying value ofits assets in accordance with International Financial Reporting Standards("IFRS"). Under IFRS, which was first adopted with effect from 1 April 2004,goodwill is no longer subject to annual amortisation. Previously, under UK GAAP,goodwill was amortised with a charge to the income statement of approximately£13 billion per annum. Vodafone now expects the outcome of this review of the carrying value of itsassets ("impairment review") will be a material impairment in the carrying valueof goodwill in the range of £23 billion to £28 billion, reflecting a lower viewof growth prospects, particularly in the medium to long term, than those it hadused previously. Final details of the review of carrying values will beannounced upon completion of the process. Vodafone is also providing an update to its revenue and EBITDA marginexpectations for the year ending 31 March 2007. Vodafone's expectations foradjusted earnings per share for the year ending 31 March 2007 are in line withcurrent market expectations. Vodafone's outlook for the current financial year remains unchanged. Impairment review Under IFRS, goodwill and indefinite lived intangible assets in respect ofsubsidiary undertakings and joint ventures are not subject to amortisation butare tested at least annually for impairment or when indicators are identifiedthat an asset may be impaired. Investments in associated undertakings are alsotested for impairment. Finite lived assets, such as 3G licences, are carried athistoric cost and subject to annual depreciation or amortisation and arereviewed for indicators of impairment. As detailed below, Vodafone carries a significant amount of goodwill on itsbalance sheet, principally resulting from the Mannesmann acquisition in 2000,which occurred at a time when share prices in the telecommunications sector weresignificantly higher than today. The Group prepares ten year plans for its businesses annually, which it alsouses for the purposes of conducting the carrying value review. Reflecting theincreasingly competitive environment in the industry, Vodafone has incorporatedinto its latest ten year plan a lower view of growth prospects for a number ofkey operating companies, particularly in the medium to long term, than those ithas used previously. The result of these factors is that Vodafone expects to report: * An impairment of the Group's goodwill in the range of £23 billion to £28 billion in respect of reductions in the aggregate goodwill for Vodafone Germany, Vodafone Italy and, potentially, Vodafone Japan. It is expected that most of the total will be attributable to Vodafone Germany. * No impairment for any other subsidiary, joint venture or investment in associated undertakings * No impairment in respect of finite lived assets A summary of the Group's goodwill in respect of subsidiary undertakings andjoint ventures as at 30 September 2005 is set out below. £ billion ---------Germany 35.5Italy 19.7Japan 9.0Spain 10.3UK 0.7Other subsidiaries and joint ventures 6.3 --------- 81.5 --------- The carrying value of investments in associated undertakings as at 30 September2005 was £22.1 billion. No impairment is expected to be recorded under US GAAP due to a differentmethodology under US GAAP when compared to IFRS. This expected reduction in carrying value of goodwill will not impact thisyear's reported cash flows or distributable reserves. This expected impairmentto goodwill will be reported within operating profit in Vodafone's IncomeStatement for the year ending 31 March 2006, but will be classified as an itemnot reflecting underlying business performance and therefore will not impactadjusted performance reporting measures. Outlook for the year ending 31 March 2007 Vodafone will provide a full outlook statement for the year ending 31 March 2007with its 2006 preliminary results announcement on 30 May 2006. It is now expected that the overall proportionate mobile revenue growth, on anorganic basis, will be in the range of 5% to 6.5%. This lower growth ratecompared to the year ending 31 March 2006 reflects the increasingly intensecompetitive environment, continuing regulatory reductions in termination ratesand the one-off beneficial impact in the year ending 31 March 2006 of theintroduction of mobile to mobile termination rates in France. The Group envisages a year on year decline in proportionate mobile EBITDAmargins, excluding Japan, of around 1% on an organic basis, as initiatives todrive further cost efficiencies are offset by pricing pressures, additionalinvestments in customers and changes in termination rates. The Group continues to expect EBITDA margins for Japan to be in the high teensfor the year. Vodafone is reiterating other expectations for the year ending 31 March 2007contained within the outlook statement provided on 15 November 2005, as updatedon 24 January 2006. The statements were provided on the basis that the impact ofthe transactions in Sweden, India, South Africa and Turkey were not included.Vodafone will update these expectations for the impact from these transactionson 30 May 2006. Vodafone's expectations for adjusted earnings per share for the year ending 31March 2007 are in line with current market expectations. For further information: Vodafone Group Investor Relations Media RelationsTelephone: +44 (0) 1635 664447 Telephone: +44 (0) 1635 664444 Notes to Editors: IFRS requirements Under IFRS, Vodafone tests fixed assets, including goodwill, for impairment bycomparing the carrying value for each operating company to its respectiverecoverable amount. The recoverable amount is defined as the higher of fairvalue less costs to sell, and value in use. Value in use is estimated based ondiscounted cash flows. Key assumptions used in value in use calculations The Group prepares ten year plans for its businesses annually and historicallyhas used these ten year plans for its value in use calculations. Reflecting the increasingly competitive environment in the industry, Vodafonehas incorporated into its latest ten year plan a lower view of growth prospectsfor a number of key operating companies, particularly in the medium to longterm, than those it has used previously. As a result of these lower growth prospects, Vodafone has now also determinedthat it is appropriate to use projections of five years instead of ten years forits value in use calculations, except in operations it is forecasting to growahead of the long term growth rate for the relevant market for a period of morethan five years. The perpetuity growth rate used in the Group's value in use calculations formobile businesses is generally determined as the lower of the nominal GDP ratefor the country of operation and the long term compound annual growth rate inEBITDA implied by the business plan. The lower view of longer term prospects hasresulted in a reduction in the perpetuity growth rate in certain markets. US GAAP requirements Under US GAAP, Vodafone tests finite lived fixed assets for impairment using atwo step process. The carrying value of each operating company is first comparedto its respective recoverable amount. The recoverable amount is determined basedon undiscounted cash flows. Secondly, if the carrying value exceeds therecoverable amount, then the carrying value is reduced to its fair value, whichis generally determined using discounted cash flows. Forward-looking statement This Press release contains forward-looking statements, in particular inrelation to the Group's outlook for the financial years ending on 31 March 2006and 31 March 2007, which are subject to risks and uncertainties because theyrelate to future events. Some of the factors which may cause actual results todiffer from these forward looking statements can be found by referring to theinformation contained under the heading "Forward Looking Statements" in ourinterim results announcement for the six months to 30 September 2005 and underthe heading "Risk Factors" in our Annual Report for the year ended 31 March2005. The interim results announcement and our Annual Report can be found on ourwebsite (www.vodafone.com). 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