67 Finsbury Food Group Annual Report & Accounts 2019


Notes to the Consolidated Financial Statements


11. Intangibles (continued)


The Group tests goodwill for impairment on an annual basis, or more frequently if there are indications that the goodwill may be impaired. The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions for the value in use calculations are the discount and growth rates used for future cash flows and the anticipated future changes in revenue, direct costs and indirect costs. The assumptions used reflect the past experience of management and future expectations.


The Group prepares cash flow forecasts covering a three-year period based on the detailed financial forecasts approved by management for the next three years. The cash flows beyond this forecast are extrapolated to perpetuity using a 0.5% (2018: nil) growth rate on a prudent, when compared to long term UK GDP, basis, to reflect the uncertainties of forecasting further than three years. Changes in revenue and direct costs in the detailed three year plan are based on past experience and expectations of future changes in the market.


The revenue growth rate combines volume, mix and price of products. An inflation factor has been applied to costs of sales, variable costs and indirect costs and takes into consideration the general rate of inflation, movements in commodities, improvement in efficiencies from capital investment and operations and purchasing initiatives.


A pre-tax discount rate of 11% (2018: 10%) has been used in these calculations. The Group has considered the economic environment and higher level of return expected by equity holders due to the perceived risk in equity markets when selecting the discount rate. The discount rate used for each cash generating unit has been kept constant as the market risk is deemed not to be materially different between the different segments of the bakery sector, nor over time.


The carrying amount of goodwill has been allocated to cash generating units or groups of cash generating units as follows:


2019 £000


Lightbody of Hamilton Fletchers Bakery Ultrapharm


Nicholas & Harris Johnstone’s Food Service


45,698 20,118 11,546 2,980 372


80,714


2018 £000


45,698 20,118 -


2,980 372


69,168


Sensitivity analyses have been carried out by the Directors on the carrying value of all remaining goodwill using pre-tax discount rates ranging between 8.0% and 12.5% which would not result in an impairment of any cash generating units. The table below illustrates the discount rate that would need to be applied for there to be zero headroom when comparing discounted cash flows against carrying amount of goodwill.


Discount rate


Lightbody of Hamilton Fletchers Bakery Nicholas & Harris


Johnstone’s Food Service Further sensitivity analysis has been carried out using a range of factors such as growth rate and cost increases. These include:


• If future growth rate assumption of 0.5% was replaced with zero growth rate • If future growth rate assumption of 0.5% was replaced with a decline of 2%


In addition, the Group has a cross-functional team which has prepared a number of strategies to minimise the impact of Brexit. We buy some commodities from Europe. Any tariffs on trade will therefore have a bearing on the Group. We have contingency planning in place, looking at alternative UK sources of products. Higher logistics and administration costs may result from border delays and could necessitate higher stock levels. We are developing labour strategies to retain and develop existing workers, attract and hire new workers and reduce labour, while boosting productivity with our capital investment program. We believe we have strategies that would minimise the impact and the Directors are satisfied with the carrying value of the cash generating units.


During the year the Group acquired a specialist Free From bakery, Ultrapharm. As part of the due diligence process a comprehensive multi-function assessment was completed, utilising expert resource from across the Group as well as the existing management team against Finsbury Group standards and best practice before creating a prioritised integration action plan. Additional expert resources from across the Group have complemented management to implement the year one plan which is largely complete. Ultrapharm has been tested for impairment during the reporting period and the Directors are satisfied with the carrying value of the cash generating units.


18.8% 15.0% 45.9% 83.5%


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