GOODWILL AND IMPAIRMENT EFFECTS ON FINANCIAL

PERFORMANCES
In the statement of financial position, goodwill is recorded as an intangible asset and on a
yearly basis; the management will check for goodwill impairment and record it accordingly.
For instance, in 2012 Thomas Cook valued its intangible assets as 3158.9million. This
amount comprised goodwill worth 2660.2 million; this was marked reduction from the
previous year (2011) of 321.4 million.
However, as at September 2012, goodwill at cost stood at 3255.3 million. After considering
impairment charge, disposals and exchange differences, for the previous two years in
including 2012. The value of goodwill stood at 2660.2. See table F
According to Thomas Cook, in their statement of financial position in 2013, they recorded
intangible assets worth 3154.5 million. Good will was valued at 2690.5 million. In
September of the same year, the cost of goodwill was valued at 3035.3 million before
deducting impairment losses, disposal, and exchange differences. Eventually, the carrying
amount was 2690.9 as reported; an increase of 30.7 million from the previous year.
See table G
This slight increase in the value of goodwill was occasioned by gains in goodwill in all the
four regions that hosts Thomas Cook commercial activities. The table below illustrates it:
2013 2012 Gain in
Goodwill
UK 1,755.8 1,746.0 9.8
Continental Europe 168.8 162.4 6.4
Nortern Europe 745.3 731.8 13.5
!irline" Ger#an$ 21.0 20.0 1
%otal 2,690.9 2,660.2 30.7
In spite of the gain in goodwill, there was no significant improvement in profitability of the
business. In 2012, the company had made a loss of 336.8m compared to 2013 loss of
158.1m.
Goodwill does not in any way change the cash flow of the company, thus Thomas Cook
accounts in 2012 and 2013 and indeed in the all previous years remained unaffected by the
changes in the goodwill.
In the statement of financial position, goodwill maximises shareholders equity since it is an
asset. An increase in goodwill will positively impact on equity while impairment will have
negative impact.
IMPAIRMENT
&n order 'or a""et" to (e "u()e*ted to i#pair#ent, te *o#pan$ en"ure" tat te$ are
identi'ia(le and "epara(le a""et". %e"e a""et" are *on"idered a" *a" +eneratin+ unit" and
te$ are allo*ated to (u"ine"" unit", wi* are +oin+ to (ene'it 'ro# te u"e o' te"e a""et"
,-el.ille, 2011/.
0urter#ore, te *o#pan$ allo*ate" +oodwill to it" (u"ine"" "e+#ent", wi* are #a1in+ u"e
o' a""et" a*2uired. %e *o#pan$ pro.ide" detail" o' "e+#ent" a""et" in te note" to 'inan*ial
"tate#ent" under note 3 3e+#ental &n'or#ation. %i" indi*ate" tat te *o#pan$4" re*ord
+oodwill a" net o' te i#paired a#ount in it" (alan*e "eet. %i" treat#ent i" di''erent 'ro#
oter intan+i(le a""et" re*o+ni5ed and re*orded in te *o#pan$4" (alan*e "eet. 0or te"e
intan+i(le a""et", te *o#pan$ a" e"ti#ated u"e'ul li.e" and te$ are a#orti5ed rater tan
i#paired li1e +oodwill
Impairment is done once a year. This implies that in case of major change in the business
acquired which has a direct effect on its value can be subject to revalue and therefore
impairment early than the completion of one year if the company deems to do so. The
impairment of goodwill is charged to the companys income statement in the year of
recognition.
In 2012, Thomas Cook sold its business to operations in three regions, which was also
involved the reassessment of carrying amounts of goodwill associated with operations
carried out in those regions . The business sold included operation in India, France and
Canada. After classifying the business segment in India on sale, the company determine
impairment the company determined an impairment charge for the same amounting to 96m.
This amount was calculated in line with the guidance provided in the IAS 36. On the other
hand, for Canada and France, the company made use of the present value for those segments
and determined an impairment of 299.6 million as the impairment of goodwill and
amortization of the intangible assets as business combinations
Impairments have an impact in financial performance of a company as it reflects to Net
income. For instance, in 2012, the impairment goodwill and amortisation of business
combination intangibles was 218.6 and 31 in 2013. This difference in impairment was
reflected in statement of income where 2012 recorded a loss of 104.1m and 2013 a net loss of
49.5m all this from continuing operations.
Overall, from both the continuing and discontinued operations, 2013 recorded a less severe
net loss of 207.3 as compared 2012 which recorded a massive loss of V590..1m attributed to
a huge goodwill impairment loss. (Thomas Cook, 2013 annual report)
PERFORMANCES
REVENUE: i" an e""ential #ea"ure 'i+ure" in anal$"in+ te 'inan*ial per'or#an*e a" it a"
"i+ni'i*ant in te in*o#e "tate#ent. %o#a" Coo1 67C ,2013/ re.enue" were 89,315#
indi*ate" a "i+ni'i*ant +rowt o' 8120 # *o#pared to 2012.%i" "ow" an in*rea"e wi*
wa" +enerated 'ro# te e''e*ti.ene"" o' #ana+e#ent and it" "1ill dili+en*e alon+"ide wit
"trai+t'orward pro'it a++re+ated (rand" ele#ent", "u* a" in*rea"e o' online (oo1in+" wi*
wa" *au"ed ($ a new "$"te# to rea* te need o' *u"to#er". 9n te oter and te de*rea"ed
o' re.enue in 2012 o' 840# wa" due to te politi*al i""ue" in E+$pt. ,3ee note 3/
%u", te exceptional items +enerated ($ %o#a" Coo1 "ow" a +ain o'' 8 15# (etween
te"e two $ear". %i" ad po"iti.e i#pa*t "tren+ten on 'inan*ial "tate#ent" wi* deri.ed
'ro# (etter ne+otiation" witin tradin+ and enan*ed wor1in+ *apital #ana+e#ent
!" a *on"e2uen*e o' e''e*ti.e (u"ine"" "trate+ie" introdu*ed ($ :arriet Green te new Cie'
E;e*uti.e. %o#a" Coo1 67C wa" a(le to attain a total operatin+ #ar+in o' 19.5< a 2<
in*rea"e a" *o#pared to 2012. %i" #ean" tat 'or e.er$ 81 o' "ale" #ade it +enerate" 19.5p
o' pro'it. 7oo1in+ at te "e+#ental pro'it" and re.enue" a" noted in annual report o' 2013
"e*tion 3 "ow" ===.and == wa" #a)or *ontri(ution to ti" "u**e""'ul per'or#an*e. &n
*on*lu"ion, %e >alan*e "eet and in*o#e "tate#ent" a.e "u**e""'ull$ +oin+ trou+ a
#a)or tran"'or#ation trou+ new (u"ine"" "$"te# in all it" a"pe*t" and tere'ore it #ean"
#ore *ontrol o.er teir per'or#an*e".
CASH FLOW
! %o#a" Coo1 6l*. *a" 'low per'or#an*e "ow" ow #u* te *o#pan$ a.e (een a(le
to pa$ o'' it" de(t". %i" *o#pare" te *a" re"our*e" and *a" *o##it#ent" tat te$ ad to
pa$. U"in+ re'eren*e" 'ro# annual report ,2013/ te net *a" 'low enri*ed wit elp o'
e2uit$ .>etween 2012 and 2013 tere wa" "i+ni'i*ant i#pro.e#ent" (e*au"e o' te
re*apitali"ation o' net *a" 'low o'8 81.6 ( and *a" 'low enan*e#ent 'ro# G>6156 #illion
to a po"iti.e G>653 #illion, an inten"e turnaround 'ro# te ne+ati.e G>6103 #illion o' la"t
$ear 'ro# ti" re"ulted a po"iti.e i#pa*t in te *o#pan$4" 'inan*ial "tate#ent", a" it "ow"
ow te *o#pan$ i" *o#petent to 'a*e it" 'inan*ial *o##it#ent" in ter#" o' i#pro.in+ it"
Group *redit ratin+ o.er te #ediu# "i5e ter# a" te$ 'all. !ltou+ te *a" intere"t were
"li+tl$ i+er in 2013 tan in 2012 due to te 'a*t o' "ale" and lea"e o' !ir*ra't in 2012,
tere wa" a *on"idera(le de*rea"e de(t" lia(ilitie" wi* lea.e" %o#a" Coo1 6l*. in at ea"e
"ituation to *ater 'or it" de(t". Net de(t a" pra*ti*all$ al.ed, a drop o' G>6367 #illion,
"upported ($ i#pro.in+ operational *a" 'low.
EARIN:
%o#a" *oo1 pl*. !l"o #ea"ure te +earin+ 'a*tor" "u* a" te *o#parin+ o' di''erent le.el"
o' "areolder e2uit$ to (orrowed 'und" li1e an$ oter li"ted *o#panie". %e +earin+
#ea"ure#ent indi*ate" te *o#pan$ i" re+arded a" lower +eared *o#pan$ in 2013 tan 2012
(e*au"e teir #a+ni'i*ent de(t" pa$ o''. %u", "areolder re2uired #ini#u# return". &t a"
(een a(le to *o.er teir out"tandin+ intere"t pa$#ent wi* a" i#pro.ed li1ened to pre.iou"
$ear. Con"e2uentl$, te *o#pan$ a" a(ilit$ to en*ounter it" o(li+ation" trou+ te +rowt
o' re.enue4" +enerated in ,2013/ o' *o#(ination o' 'i;ed and 'loatin+ *orporate (ond".
INTANI!LE ASSETS OF THOMAS COO" Plc# $%&'()
3in*e te intan+i(le a""et" in*lude o' +oodwill upturned 'ro# te (u"ine"" *o#(ination" and
oter a""et". %o#a" *oo1" 6l*. ,Note 13/. %ere wa" a de*rea"e in te *arr$in+ .alue o'
intan+i(le a""et". :owe.er, te #ana+e#ent .alue" it" (u"ine"" *o#(ination intan+i(le" on
te (a"i" o' 'ore*a"ted *a" 'low" and *e*1ed weter i' te$ are rea"ona(le &n parti*ular,
*isco+nt ,ates# %i" *ould tere'ore a.e i#pli*ation" on te "i5e o' te *o#pan$4" (alan*e
"eet i' an$ #i"ta1e" or error" wron+ )ud+e#ent a.e (een #ade ($ deter#inin+ 'uture *a"
'low" deri.ed on (a"i" o' te *o#panie" ?ei+t !.era+e *o"t o' Capital ,?!CC/ %e
di"*ount rate, wi* i" al"o u"ed 'or di"*ountin+ 'uture *a" 'low" i" deri.ed on te (a"i" o'
te *o#pan$4" ?!CC wi* i" al"o e;pe*ted to .ar$ trou+out te *our"e o' te (u"ine"".
%e *o#pan$ a" di"*lo"ed te di"*ount rate in it" annual report, wi* a" (een u"ed 'or
*al*ulatin+ te pre"ent .alue o' 'uture *a" 'low" 'ro# te a""et" a*2uired. %i" di"*ount rate
i" (etween 13.4< and 14.1<. %i" rate .arie" a**ordin+ to ri"1" a""o*iated wit ea* *a"@
+eneratin+ unit ,CGU/. :owe.er, tere i" no di"*lo"ure in te annual report o' te *o#pan$
related to te a""e""#ent o' ri"1" pertainin+ to ea* (u"ine"" "e+#ent o' te *o#pan$. %e
audit report o' te *o#pan$ doe" #ention tat te (a"i" 'or te *o#pan$4" re*ordin+ o'
+oodwill and "u("e2uent i#pair#ent o' +oodwill a" (een *e*1ed and a""e""ed weter it i"
rea"ona(le.
2013
million
2012
million
Goodwill 2,690.9 2,660.2
Business combination intangible assets 325.9 369.2
Others 137.7 129.5
3,154.5 3,158.9
%e !udit a" appro.ed ($ .eri'$in+ tat te (ot #etod" u"ed o' depre*iation and o'
di"*ount rate" (a"i" u"ed ($ te *o#pan$ 'or deter#inin+ te *arr$in+ .alue o' +oodwill. &t"
e''e*t in 'inan*ial "tate#ent" i" te #ar1et 'air .alue o' te 'ore"eea(le e.ent" wi* reall$
put a *ertain wei+t in. %i" deli.er" #ore tran"paren*$ and relia(ilit$ 'or u"er" o' 'inan*ial
"tate#ent". ,!udit report, p+. 90/