Note 11: 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 2020 and 2019, there were no material 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) annually 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 2020, 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 for annual impairment testing are:

• Revenue growth per year: based on actual experience, analysis of markets and GDP growth and the expected market share developments
• Adjusted EBITDA-margin development per year: based on actual experience and management’s long-term projections
• Weighted average cost of capital per year: the pre-tax discount rate determined per business unit, reflecting current market assessments of the time value of money and the risks specifically associated with the business units

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 8.9% to 14.5% (2019: 8.8% to 12.7%), with a weighted average of 9.6% (2019: 9.4%).

Sensitivity tests were performed for growth assumptions, adjusted EBITDA margin development assumptions and for the weighted average cost of capital. These sensitivity tests show that reasonably possible changes in these key assumptions would not cause carrying amounts to exceed recoverable amounts for any of the business units.

In 2020 and 2019, no impairment charges were recognized in relation to the annual impairment test.

Impact COVID-19 on annual impairment testing process

The situation around COVID-19 is being closely monitored to ensure that the impact on estimated future cash flows is reflected in the models which are used to assess the valuation of the carrying value of AkzoNobel’s asset base. In addition to the beforementioned annual impairment testing process, AkzoNobel has made a detailed assessment in the second quarter, specifically focussing on the potential impact of the pandemic. The outcome of both assessments showed sufficient headroom in all business units.

Specific asset impairments

In 2020, no impairment charges were recorded in relation to specific assets. In 2019, impairment charges 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.