80
Finsbury Food Group Annual Report and Accounts 2020
Notes to the Consolidated Financial Statements/Continued
10. Intangibles/Continued
Goodwill has arisen on acquisitions and reflects the future economic benefits arising from assets that are not capable of being identified individually and recognised as separate assets. The goodwill reflects the anticipated profitability and synergistic benefits arising from the enlarged Group structure. The goodwill is the balance of the total consideration less fair value of assets acquired and identified. The carrying value of the goodwill is reviewed annually for impairment. The carrying value of all goodwill has been assessed during the year.
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.
There have been major disruptions to markets since March 2020 as a result of the impact of the Covid-19 pandemic. Post Covid-19 consumer spending behaviour and lifestyle choices are an unknown. With knowledge and experience since lockdown a bottom-up full-year 2021 budget and strategic forecast to June 2023 has been compiled.
The forecasts have taken in consideration the following key factors:
1. Covid-19 has had an impact on markets, focus is on a rebuild of the business to a ‘new normal’ with difficulty in predicting timescale for recovery and the impact of recessionary pressures;
2. Latest market forecast and market research data has been considered when making commercial judgements; 3. Detailed SWOT analysis of all businesses with strategic plan to respond to challenges; 4. Plans to combat inflationary pressures particularly labour costs in UK and Europe; 5. There are ingredient challenges during the lockdown environment, these have been factored into the forecasts; 6. Operating Brilliance Programme will support improved efficiencies and help drive recipe value engineering, plausible improvements have been built in; and
7. Leadership teams strengthened to help realise a step change in growth particularly in the Free From area.
The forecasts covering a three-year period are based on the detailed financial forecasts challenged and approved by management for the next three years. The cashflows beyond this forecast are extrapolated to perpetuity using a 1.1% (2019: 0.5%) growth rate for all of the CGUs. The starting position has been impacted by Covid-19 and growth we believe is relatively 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 to the extent that can be anticipated.
The strategic forecast process commenced in November 2019 to review consumer and competitor insight to prepare the foundations for the financial forecasts; this groundwork was completely overtaken by events surrounding the worldwide pandemic. The recent strategic forecasts were prepared as late as possible in the financial year to allow further insights into the post lockdown environment and the journey to recovery. We have been encouraged by the recovery in the final quarter of the year to 27 June 2020 with revenue trends improving, with April 24% down year on year, May, 19% down and June 14% down.
The revenue growth rate in the strategic forecast 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. External market data and trends are considered when predicting growth rates. Compound annual growth rates for revenues for the three-year forecast period range from 3.7% to 14.0%, reflecting the recovery from the lower base year and budget year that have been impacted by the Covid-19 pandemic.
A pre-tax discount rate of 9% (2019: 11%) has been used in these calculations. The discount rate uses weighted average cost of capital which reflects the returns on government bonds and an equity risk premium adjusted specifically for Finsbury plus further risk premiums that consider cash generating unit risk. 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 has decreased by 2% to take account of the removal of a small company risk premium that had been included in the prior year; the spread of investors and liquidity supports the exclusion of this risk premium. 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. When considering the Ultrapharm discount rate a further 0.5% has been added for the overseas risk element.
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