Note 10: Intangible assets

Brands with indefinite useful lives are almost fully related to Dulux, which is the major brand, due to its global presence, high recognition and strategic nature. Other intangibles include licenses, know-how, intellectual property rights, software and development cost. Both at year-end 2019 and 2018, there were no purchase commitments for individual intangible assets. No intangible assets were registered as security for bank loans.

Annual impairment testing

Goodwill and other intangibles with indefinite useful lives are tested for impairment per business unit (one level below segment level) in the fourth quarter or whenever an impairment trigger exists, applying the value-in-use method. The impairment test is in principle based on cash flow projections of the five-year plan. Elements considered to determine if a different approach would be more appropriate are, among others, high growth/emerging economies, geo expansion opportunities, introduction of new product ranges and opportunities from market consolidation. In 2019, the above exception was applied for Decorative Paints Asia and Decorative Paints South America, for which the revenue growth and adjusted EBITDA-margin development projections were extrapolated beyond the five-year explicit forecast period for another five years, applying reduced average growth rates.

The key assumptions used in the projections are:

• Revenue growth: based on actual experience, analysis of market growth and the expected market share development
• Adjusted EBITDA-margin development: based on actual experience and management’s long-term projections

For all business units, a terminal value was calculated based on the long-term inflation expectations of 1.0%. The estimated pre-tax cash flows are discounted to their present value using a pre-tax weighted average cost of capital. The discount rates are determined for each business unit and range from 8.8% to 12.7% (2018: 8.6% to 12.0%), with a weighted average of 9.4% (2018: 9.3%).

Sensitivity tests were performed for growth assumptions (a 50% reduction of the revenue growth rate), adjusted EBITDA margin development assumptions (a one percentage point decrease) and for the weighted average cost of capital (a one percentage point increase). All sensitivity tests confirm sufficient headroom in all businesses.

Both in 2018 and 2019, no impairment charges were recognized in relation to the annual impairment test.

Specific asset impairments

In 2019, impairments were recorded for Performance Coatings, following the implementation of our strategic portfolio review, which was determined to be a triggering event.

As this portfolio review also included certain recently acquired and not yet integrated businesses to be divested, the goodwill related to these businesses was also included in the impairment review and subsequently impaired.