26. Goodwill

Impairment test

Impairment test is the comparison of carrying amounts (including goodwill) and recoverable amounts of CGUs. For all the foreign entities and Polish non-insurance entities CGUs are particular companies or their foreign branches which are subject to separate internal monitoring. At the moment of final settlement of the acquisition price, the goodwill resulting from the acquisition of Link4 was fully allocated to the mass-client segment, which – due to the integration of Link4’s business with PZU as part of realization of the two brands strategy assuming synergy resulting from mass-client portfolio management and sale of additional insurance products – is the smallest CGU to which the goodwill can be assigned. Impairment test regarding goodwill was prepared as at 31 December 2015.

For the purposes of the test, the carrying amount of the mass-client insurance segment was determined on the basis of net asset allocation of PZU Group. The assets were allocated in the same proportion as the one between the hypothetical solvency capital requirement, which may be assigned to the mass insurance segment, and total capital solvency requirement.

The recoverable amount of individual CGUs was determined based on value in use, using the discounted cash flow method based on the most up-to-date, approved by PZU Group financial projections not exceeding 5 years, which have been presented in the table below. The discount rates used for the test of insurance companies and Alior Bank were determined based on the level of the cost of equity. In the case of medical companies, the weighted average cost of capital (WACC) was used. The cost of equity was determined according to the CAMP model. In addition, in justified cases, the adjustments regarding size premium were made. Risk-free rates have been determined based on the yield of 10-year government bonds offered by the country where the CGU has it registered seat; the beta ratio has been based on ratios of similar listed entities. Market premiums amounted to 5.5% (in 2014: 5.5–6.0%). In the case of insurance companies and Alior Bank, the projected cash flows include the need to maintain an adequate level of own funds (for branches that do not manage investments, assets under management at the level of the parent company were allocated pro forma). Terminal growth rates were determined taking into consideration long-term development prospects concerning the expected growth of the market in which a given entity operates. In the case of insurance entities operating in the Baltic states, an adjustment regarding the expected growth of insurance penetration rate (share of insurance premiums in GDP) amounting to 0.2–0.3 p.p. was taken into consideration. In the remaining cases, growth indicators do not exceed long-term prospects of GDP development of a given country in nominal terms.

As a result of the test, there was no reason for impairment losses recognition. The table below shows the surplus of the recoverable amounts over the carrying amounts and the maximum discount rates and minimum terminal growth rate, at the level of which the carrying amount of a CGU equals its recoverable amount.