Notes to the Consolidated Financial Statements

12. Intangible assets
           
Impairment testing of goodwill
Goodwill from acquisitions is allocated to the Group's cash-generating units (CGUs). CGUs are the lowest level of assets for which there are separately identifiable cash flows. Currently Wärtsilä identifies two (2) separate independent cash inflow CGUs to which goodwill can directly be linked as per the below table. In addition, the goodwill allocated for companies acquired during the current period has been subject to impairment testing. These companies have been integrated into the Power Business operations.
           
Cash-Generating Units
        Goodwill
MEUR       2011 2010
Ship design       114 116
Cedervall       40  
Power Business, other       462 459
Total       616 574
           
The recoverable amounts from the CGUs are determined based on value-in-use calculations. The calculations are on an orderbook and a discounted cash flow method basis, derived from 5-year cash flow projections from management approved strategic plans. The current market situation has been taken into account as decreased sales expectations as well as capacity adaptations. The estimated performances of the CGUs are based on utilisation of the existing property, plant and equipment in their current condition with normal maintenance capital expenditure, excluding any potential future acquisitions. Cash flows beyond the five-year period are calculated using the terminal value method. The terminal growth rate used in projections is based on management's assessment on conservative long term growth. The terminal growth rate used is 2%.
           
The key driver for the valuation is the growth in the global economy and in particular the development of the global power market, the global shipbuilding industry and the demand for related services. The projected development of total costs in the market affects the profitability, whereas no single cost item is considered to have a material impact. The valuation driver for the new equipment sales is the growth in the global economy, whereas for after sales the drivers are also the demand for related services and the projected development in labour cost.
           
The applied discount rate is the weighted average pre-tax cost of capital (WACC) as defined by Wärtsilä. The components of the WACC are risk-free rate, market risk premium, industry specific beta, cost of debt and debt equity ratio. When defining the WACC for 2011, it has been considered that the general interest rate is currently on a lower level. Wärtsilä has used a WACC of 9.1% (9.3) in the calculations.
           
As a result of the impairment test, no impairment loss for any of the CGUs was recognized for the period ended December 31, 2011 and 2010 respectively. The recoverable amounts from all CGUs exceeded their carrying values by more than 200%.
           
Sensitivity analysis
Sensitivity analyses have been carried out for the valuation of each cash-generating unit by making downside scenarios. The change in the enterprise value was evaluated through these downside scenarios by changing the underlying assumptions in the valuations. The changes in the assumptions and their effects are:
- sales growth and EBIT profitability lowered based on scenario analysis in each business, effect 24% (28)
- terminal growth rate lowered by 50%, effect 15% (12)
- WACC increased by 2%, effect 29% (28).
           
According to the performed sensitivity analyses, none of the downside scenarios would change the long term key assumptions on which Wärtsilä's recoverable amounts are based and none would cause their respective values to fall short of their carrying amounts. As a result of performed impairment tests, there is no need for write-downs of the goodwill in a particular cash generating unit.
           
In management's opinion, the changes in the basic assumptions provided in these theoretical downside scenarios shall not be seen as an indication that these factors are likely to materialise. The sensitivity analyses are hypothetical and should therefore be treated with caution.
           
2011          
MEUR Intangible rights Construction in progress and advances paid Other intangible assets Goodwill Total
Acquisition cost at 1 January 2011 81 18 414 579 1 091
Changes in exchange rates     2 4 6
Acquisitions     23 40 64
Additions   12 9   21
Disposals and reclassifications -1 -5 4 -2 -4
Acquisition cost at 31 December 2011 80 25 452 621 1 177
           
Accumulated amortisation and impairment at 1 January 2011 -46   -261 -4 -311
Changes in exchange rates         -1
Accumulated amortisation on disposals 1   2   3
Amortisation during the financial year -5   -38   -44
Accumulated amortisation and impairment at 31 December 2011 -51   -298 -4 -352
           
Carrying amount at 31 December 2011 28 25 156 616 826
           
Developing costs for internally produced assets amounting to EUR 14 million (6) were capitalised during the financial period, and the asset value was EUR 47 million (38).
           
2010          
MEUR Intangible rights Construction in progress and advances paid Other intangible assets Goodwill Total
Acquisition cost at 1 January 2010 74 27 395 562 1 058
Changes in exchange rates     3 17 21
Additions 2 8 7   17
Disposals and reclassifications 5 -17 8   -4
Acquisition cost at 31 December 2010 81 18 414 579 1 091
           
Accumulated amortisation and impairment at 1 January 2010 -43   -231 -4 -279
Changes in exchange rates     -2   -2
Accumulated amortisation on disposals 2   9   11
Amortisation during the financial year -5   -37   -42
Accumulated amortisation and impairment at 31 December 2010 -46   -261 -4 -311
           
Carrying amount at 31 December 2010 35 18 153 574 780
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