NOTE F27 Impairment of property, plant and equipment, intangible assets, right-of-use assets, and equity method investees

Accounting policy

General

At the end of each reporting period, the Group reviews whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.

The recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate. Future cash flows are adjusted for risks not incorporated into the discount rate.

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

When an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset (or CGU) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

Assets other than non-current assets held for sale

In accordance with IAS 36 Impairment of Assets, the recoverable amount of property, plant and equipment, intangible assets, right-of-use assets, CGUs or groups of CGUs, including goodwill, and equity method investees corresponds to the higher of their fair value less costs of disposal, and their value in use. The latter equals the present value of the future cash flows expected to be derived from each asset, CGU or group of CGUs, and equity method investees and is determined using the following inputs:

business plan approved by management based on growth and profitability assumptions, taking into account past performances, forecast changes in the economic environment and expected market developments, including opportunity and risks resulting from climate change and environmental regulations such as products phasing out. For further details, refer to the Risk Management Section. Such business plan generally covers five years, unless management is confident that projections over a longer period are reliable;
consideration of a terminal value determined based on the cash flows obtained by extrapolating the cash flows of the last years of the business plan referred to above, affected by a long-term growth rate deemed appropriate for the activity and the location of the assets;
discounting of expected cash flows at a rate determined using the weighted average cost of capital formula.

Discount rate

The discount rate is estimated based on an extensive benchmarking with peers, so as to reflect the return investors would require if they were to choose an investment in the underlying assets. The weighted average cost of capital used to discount future cash flows was set at 6.7% in 2019 (6.2% in 2018). The discount rate increase in 2019 results from the increase of the country risk premium in some countries (Italy, Belgium, Brazil, Russia, India, France) and to the increase of the adjusted levered beta.

Long-term growth rates

In 2019 a comprehensive review of the entire business portfolio was performed resulting in the definition of the G.R.O.W Strategy and each CGU was assigned to one of three agile business segments that become effective as from 2020: Materials, Chemicals and Solutions, with different growth opportunities, consistent with the long term growth rates of the market they serve and the Group competitive position in those markets. The long-term growth rate was set at 2% for the CGUs in the Segment Materials, 0% in the Segment Chemicals, except for Soda Ash and Peroxides, for which a 1% rate was set, and 1% in the Segment Solutions (excluding Oil & Gas).

In 2018 the long-term growth rate was set at 2%, except for Aroma Performance, for which a 1% rate was set.

Other key assumptions are specific to each CGU (utility price, volumes, margin, etc.).

Impairment tests 2019

Impact of IFRS 16 Leases adoption

The adoption of IFRS 16 Leases had a limited impact on the assets to which IAS 36 Impairment of Assets applies. As of January 1, 2019, those assets increased from € 15.2 billion to € 15.6 billion or by 3% adding the right-of-use assets. In light of the limited impacts of the adoption of IFRS 16, its consequences for the impairment testing were insignificant.

Novecare Oil & Gas business

Most of Novecare Oil & Gas business is linked to the unconventional oil & gas in North America, and in particular the “fracking” stage of the process. Novecare serves other oil & gas applications and other process stages, such as cementing and production, but they represent only a small portion of the total sales.

In the context of difficult and uncertain global oil & gas markets, the fracking chemicals business has proved to be highly volatile and over the last two years the value pool for fracking chemicals has significantly decreased and both volumes and prices have come under pressure, as changes in the competitive environment are commoditizing the market. Solvay’s oil & gas position, which comprise the Chemlogics and the Rhodia Oil & Gas businesses, have also been impacted by two further developments that have accelerated and became particularly impactful in 2019:

The first is a marked decline in more sustainable and efficient, but also more expensive, natural guar-based formulations as customers have continued to opt for lower cost friction reducers rather than Solvay’s solutions, and recent innovations have thus far failed to reverse that trend.
The second is increased pricing pressure and loss of market share as competitors entered the important “last-mile” delivery and service space, which was previously a source of differentiation, as well as the more general pressure on the whole value chain caused by lower oil and natural gas prices.

As a result of these developments, in 2019 the profitability of the Oil & Gas business has deteriorated significantly. Action has been taken in terms of changing management, adapting cost structures as well as developing plans that are expected to help recover to a level of profitability that better reflects the competitive landscape.

Further, the strategic review that was undertaken also evidenced that the former Chemlogics business has been relatively more resilient than the former Rhodia guar based business.

As a result the synergies between the Oil & Gas business and the rest of Novecare are now too small and future growth opportunities too modest to support the Oil & Gas business being considered as part of Novecare, which was previously the position. This conclusion required, in compliance with IAS 36 Impairment of assets, for the Oil & Gas activities to be isolated in a separate CGU and the impairment test to be conducted at an Oil & Gas business level rather than at Novecare level.

Taking into account the carrying amount of the assets related to the Oil & Gas business and the present value of future cash flows based on the recovery plan, an impairment of € 825 million pre-tax and € 658 million post-tax has been recognized. The magnitude of the impairment is exacerbated both by the evolution of foreign currency exchange rates since the acquisition of Chemlogics in 2013, and by an expectation of persistently low oil prices. The latter dampens demand for premium solutions and thereby the recoverable amount of the asset (cash-generating unit), which is its value in use, calculated with a WACC of 6.7%.

The impairment loss of € 825 million has been recognized by class of assets in the Segment Advanced Formulations as follows: € 758 million for goodwill, € 53 million for intangible assets, € 9 million for property, plant and equipment, and € 5 million for inventories.

Sensitivities for Composite Materials

Composite Materials was part of the Cytec acquisition at year-end 2015 (Operating Segment: Advanced Materials). It had a carrying amount of € 3.4 billion, including goodwill of € 1.3 billion (see note F21 Goodwill and business combinations). The headroom for Composite Materials (being the difference between the value in use based on discounted cash flows and the carrying amount) was close to € 0.8 billion, or close to 24% of the carrying amount.

The headroom of Composite Materials is sensitive to change in assumptions related to discount rate and long term growth rate. Under the sensitivities below, this headroom remained positive, although below 10% of the carrying amount if the long term growth rate decreases by 1%.

(XLS:) Download

in € billion	2019		2018
Assumptions: Discount rate = 6.7% Long term growth rate = 2%	Impact on recoverable amount	Revised headroom	Impact on recoverable amount	Revised headroom
Sensitivity to discount rate –0.5%	0.5	1.3	0.6	1.3
Sensitivity to discount rate +0.5%	(0.4)	0.4	(0.4)	0.3

Sensitivity to long term growth rate –1%	(0.7)	0.1	(0.6)	0.1
Sensitivity to long term growth rate +1%	1.0	1.8	1.0	1.8

The table below shows the break-even analysis for the headroom of Composite Materials:

	Discount rate		Long term growth rate
	Base rate	Break-even rate	Base rate	Break-even rate
2019	6.7%	7.8%	2.0%	0.8%
2018	6.2%	7.1%	2.0%	0.8%

Sensitivities for Technology Solutions

Technology Solutions was equally part of the Cytec acquisition at year-end 2015 (Operating Segment: Advanced Formulations). It had a carrying amount of € 2.0 billion, including goodwill of € 1.0 billion (see note F21 Goodwill and business combinations). The headroom for Technology Solutions (being the difference between the value in use based on discounted cash flows and the carrying amount) was close to € 0.4 billion, or close to 20% of the carrying amount.

In light of the strategic review performed in 2019, the long term growth assumption for Technology Solutions has been revised (from 2% in 2018 to 1% in 2019). As this change in assumption has a significant impact on the recoverable amount of Technology Solutions, a sensitivity analysis has been performed.

Under the sensitivities below, this headroom remained positive, although below 10% of the carrying amount if the long term growth rate decreases by 1%.

(XLS:) Download

in € billion	2019
Assumptions: Discount rate = 6.7% Long term growth rate = 1%	Impact on recoverable amount	Revised headroom
Sensitivity to discount rate –0.5%	0.2	0.6
Sensitivity to discount rate +0.5%	(0.2)	0.2

Sensitivity to long term growth rate –1%	(0.3)	0.1
Sensitivity to long term growth rate +1%	0.5	0.8

The table below shows the break-even analysis for the headroom of Technology Solutions:

Discount rate		Long term growth rate
Base rate	Break-even rate	Base rate	Break-even rate
6.7%	7.8%	1.0%	(0.2%)

Impairment tests 2018

No impairment loss for fully consolidated CGUs

The impairment tests performed at CGU level at December 31, 2018 did not lead to any impairment of assets, as the recoverable amounts of the (groups of) CGUs were higher than their carrying amounts. More specifically, the difference between the (groups of) CGUs’ value in use and their carrying amount (headroom) represented in all cases more than 10% of their carrying amount. As such, for those (groups of) CGUs, a reasonable change in a key assumption on which the recoverable amount of the (groups of) CGUs is based, would not result in an impairment loss for the related (groups of) CGUs.

Reversal of impairment for a cogeneration asset in Brazil

In 2018 following improved market conditions, the impairment loss related to the Brazilian electricity cogeneration asset that was recognized in 2016 had been reversed (€ 22 million – Operating Segment: Corporate and Business Services) – also see note F5 Results from portfolio management and reassessments, legacy remediation and major litigations.

Results of impairment tests for CGUs under joint control

RusVinyl is a Russian joint venture in chlorovinyls (Operating Segment: Performance Chemicals) in which Solvay holds a 50% equity interest, together with Sibur who holds the remaining 50% equity interest.

The recoverable amount of the investment has been estimated based on a dividend discount model taking into account the latest business plan. It is highly sensitive to the RUB/€ exchange rate. This rate impacts the carrying amount of the investment, the foreign currency losses on the euro denominated debt, and consequently the distributable earnings potential. The impairment test confirms that the value-in-use (based on dividend discount model) is in line with the carrying amount.