Strategic Report
Corporate Governance
Financial Statements Notes to the Consolidated Financial Statements/Continued
Finsbury Food Group Annual Report and Accounts 2020
81 10. Intangibles/Continued
The table below shows the carrying values of goodwill allocated to cash generating units or groups of cash generating units. When calculating the discount rate that would need to be applied for there to be zero headroom, the discounted cashflows were compared against the carrying amount of goodwill, plant property and equipment and the first-time recognition under IFRS 16 of right of use assets for leases which were previously treated as operating leases under IAS 17. The discount rates are shown in the table below:
Carrying value of goodwill
2020 £000
Lightbody of Hamilton Fletchers Bakery Ultrapharm*
Nicholas & Harris Johnstone’s Food Service * 9.5% with £7.5 million impairment taken.
Impairment An impairment charge has been booked against the Ultrapharm cash generating units. The business has proven more immature than expected and additional resource has been invested into both the UK and Polish businesses. We face commercial issues (in part relating to a small warranty claim) now exacerbated by Covid-19 which have adversely affected cashflows and hence valuation. We believe that the Gluten Free sector remains attractive and that performance will meet our expectations over time. The conclusion is that, based on current performance, the business is overvalued. The strategic forecast revenues and profits have been sensitised and a downside forecast has been considered giving reduced cashflow assumptions, which, when compared to the carrying value of assets, has indicated an impairment is necessary. A non-cash impairment of £7.5 million has been recognised in the current year’s financial results. The downside forecast has been used as a basis for calculating the impairment charge. Revenue in this forecast is expected to grow over the next three years at an annual growth rate of 10%. Each 1% reduction in the annual growth rate over the three year period, compared to forecast, would have an impact of £260,000 on the impairment charge.
The discount rate at which the headroom is nil for Fletchers Bakery is 12.4%. There are key strategies in place in order to improve the performance of Fletchers. New opportunities are in the later stages of customer negotiations for new products into existing customers. An uplift is expected at Easter which was severely disrupted in 2020 by the pandemic. There are also further opportunities in the new product development pipeline that are expected to be realised in the short term. Sensitivities have been carried out to exclude any growth, which, after returning to pre- Covid-19 level of sales, demonstrates that headroom still exists. It has been concluded that no impairment was necessary on the carrying value of goodwill relating to the Fletchers Bakery at 27 June 2020.
Sensitivity analyses have been carried out by the Directors on the carrying value of all remaining goodwill using pre-tax discount rates up to 12.5% which would not result in an impairment of any cash generating units.
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 1.0% was replaced with zero growth rate; • If future growth rate assumption of 1.0% was replaced with a decline of 1.0%.
There are many uncertainties surrounding the recovery, consumer response, retailer dynamics and inflationary impact. Immediate response has been a series of cost-saving initiatives and the acceleration of operational improvement plans, the strategic responses have been around restructuring capacity, development of supply chain systems to accelerate leveraging group scale and driving growth agenda with customers. Where we have identified market and product challenges that will lead to unacceptable recovery timescales, we have taken the decision to recognise a non-cash impairment.
In addition to the Covid-19 priorities, 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 programme. We believe we have strategies that would minimise the impact and the directors are satisfied with the carrying value of the remaining cash generating units.
45,698 20,118 4,046 2,980 372
73,214
2019 £000
45,698 20,118 11,546 2,980 372
80,714 Discount rate at which headroom is nil
2020 %
20.8 12.4 *9.5 51.3 92.3
2019 %
18.8 15.0 -
45.9 83.5
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