| 2013
£m | 2012
£m |
|---|
| Cost | | |
| At 1 January | 202.9 | 175.5 |
| Exchange differences | (2.3) | (2.1) |
| Recognised on acquisition of businesses | 4.5 | 29.5 |
| At 31 December | 205.1 | 202.9 |
| Accumulated impairment | | |
| At 1 January | 71.1 | 72.9 |
| Exchange differences | (1.7) | (1.8) |
| At 31 December | 69.4 | 71.1 |
| Carrying amount | 135.7 | 131.8 |
The Group recorded a £4.5m adjustment to goodwill which relates to the confirmation of various preliminary estimates for acquisitions made in 2012. The adjustments can be summarised as deferred tax adjustments as detailed in note 19, purchase price variances arising from the settlement of working capital balances against target working capital amounts and amendments to fixed asset values following receipt of detailed third party valuations as detailed in note 12. The adjustments were made during the 12 month retrospective measurement period, as permitted by IFRS 3 'Business Combinations'. These adjustments are not considered significant in relation to the financial statements.
Goodwill acquired in a business combination is allocated, at acquisition, to the business units that are expected to benefit from that business combination. After recognition of impairment losses, the carrying amount of goodwill has been allocated to the Group's operating segments as follows:
| 2013
£m | 2012
£m |
|---|
| ADE: | | |
| Western Europe | 26.7 | 26.7 |
| North America | 44.7 | 44.9 |
| AGI: | | |
| Western Europe | 17.6 | 17.4 |
| North America | 40.5 | 36.6 |
| Emerging markets | 6.2 | 6.2 |
| 135.7 | 131.8 |
The Group tests goodwill at least annually for impairment, or more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions for those calculations are the discount rates, growth rates and expected changes to selling prices and direct costs in respect of future cash flows. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating units. This rate is risk adjusted, for specific countries, where the Group perceives a risk premium is appropriate. The rates used to discount the forecast cash flows for cash generating units are between 12.3% (2012: 11.3%) and 14.3% (2012: 13.3%). The recoverable amount is the sum of the discounted cash flows as forecasted for the coming five years, together with a further estimate of cashflows in perpetuity.
The forecasted sales reflect management's expectation of how sales will develop at this point in the economic cycle. The expected profit margin reflects management's experience of each cash generating unit's profitability at the forecast level of sales. As outlined in the Business review, these forecasts take into account the current and expected economic environment both in respect of geography and market sectors. Cash flows after five years are based on an estimated growth rate of 3.1% (2012: 3.2%), being the historical weighted average growth in GDP in the markets that the Group operates in. Growth rates by cash generating unit range from 2.75% to 6%. This rate does not exceed the average long-term growth rate for the relevant markets.
If the goodwill allocated to a cash generating unit represents more than 15% of the Group's total goodwill carrying value then the cash generating unit is considered to be individually significant. The Group considers the North America ADE Heat Treatment and North America AGI Heat Treatment cash generating units to be significant cash generating units. The long term growth rates applied to cash flows after five years and the rates used to discount the forecast cash flows for these significant cash generating units are shown below:
| Cash generating unit | Goodwill
carrying
value
£m | Long term growth rate
% | Discount
rate
% |
|---|
| North America ADE Heat Treatment | 42.1 | 3.2 | 12.3 |
| North America AGI Heat Treatment | 40.5 | 3.2 | 12.3 |
The Group has conducted sensitivity analyses on the key assumptions applied to the value in use calculations for each cash generating unit. A decline in sales of 10.9% per annum in perpetuity would result in the recoverable amount of goodwill for the Group being reduced to its carrying value. The directors do not believe such a decline to be likely.
Declines in sales of 36.1% and 6.5% per annum in perpetuity for North America ADE Heat Treatment and North America AGI Heat Treatment cash generating units, respectively, would result in the recoverable amount of goodwill for these cash generating units being reduced to their carrying values. The directors do not believe such declines to be likely.
The Board has concluded that no impairment charge is required in 2013.