C12. Goodwill and other intangible assets

The total carrying value was distributed and changed as follows.

SEK in millions

Dec 31, 2016

Dec 31, 2015

Dec 31, 2016

Dec 31, 2015

Goodwill

Other intangible assets

Accumulated cost

66,974

63,316

39,842

38,750

Accumulated amortization

-25,347

-24,235

Accumulated impairment losses

-9,051

-8,378

-1,471

-1,520

Advances

Carrying value

57,923

54,938

13,024

12,995

of which work in progress

1,296

886

Carrying value, opening balance

54,938

70, 895

12,995

15,266

Investments

2,786

3,106

of which capitalized interest

21

17

Sales and disposals

-552

-21

Operations acquired

34

1,769

8

2,882

Reclassifications

0

121

63

Adjustments related to put options and contingent consideration

-198

Amortization for the year, continuing operations

-2,620

-2,532

Amortization for the year, discontinued operations

-922

Impairment losses for the year, continuing operations

-1,900

-3

-6

Impairment losses for the year, discontinued operations

-1,628

-293

Advances

155

Exchange rate differences

3,527

-6,573

570

-1,308

Reclassification to assets classified as held for sale

-24

-7,427

-15

-3,395

Carrying value, closing balance

57,923

54,938

13,024

12,995

In 2016 and 2015, investments in telecom licenses and frequency permits amounted to SEK 609 million and SEK 307 million, respectively. Operations acquired in 2015 were primarly related to the acqusition of Tele2’s Norweigan mobile operations. In 2015, a goodwill write down of SEK 1,900 million was recognized in the cash-generating unit Denmark, as a result of updated earnings projections following the decision to withdraw from the proposed joint venture with Telenor. For information on discontinued operations, see Note C34.

Apart from goodwill, there are currently no intangible assets with indefinite useful lives. No general changes of useful lives were made in 2016. For amortization rates applied, see section “Useful lives” in Note C2 “Key sources of estimation uncertainty.” In the statement of comprehensive income, amortization and impairment losses are included in all expense line items by function as well as in line item Other operating expenses.

The total carrying value of goodwill was distributed by reportable segments and cash generating units with significant goodwill amounts as follows.

SEK in millions

Dec 31, 2016

Dec 31, 2015

Region Europe

56,871

53,893

of which Finland

30,493

29,082

of which Norway

18,110

16,422

of which Denmark

2,126

2,020

of which Lithuania

2,698

2,574

of which Estonia

2,465

2,351

of which other countries

979

1,445

Region Sweden

950

922

Other operations

102

122

Total goodwill

57,923

54,938

The total carrying value of other intangible assets was distributed by asset type as follows.

SEK in millions

Dec 31, 2016

Dec 31, 2015

Trade names

57

82

Telecom licenses and frequency permits

5,049

5,314

Customer and vendor relationships, interconnect and roaming agreements

3,135

3,142

Capitalized development expenses

2,899

2,562

Patents, etc.

35

2

Leaseholds, etc.

552

1,012

Work in progress, advances

1,297

881

Total other intangible assets

13,024

12,995

Capitalized development expenses mainly refer to IT systems, supporting the selling and marketing, and administrative functions.

Impairment testing, continuing operations

The impairment testing for continuing operations is described below. For information regarding measurement of discontinued operations, see Note C34 “Discontinued operations and assets classified as held for sale.”

Goodwill is, for impairment testing purposes, allocated to cash generating units in accordance with Telia Company’s business organization. In most cases, each country within the respective reportable segment constitutes a cash-generating unit (CGU). Carrying values (for impairment testing purposes defined as segment operating capital and allocated common assets from Global Services and Operations less deferred tax on fair value adjustments and notionally adjusted for non-controlling interests in goodwill) of all cash-generating units are annually tested for impairment. For definition of segment operating capital, see Note C5 “Segment information” and Definitions. The recoverable amounts (that is, the higher of value in use and fair value less cost to sell) are determined on the basis of value in use, applying discounted cash flow calculations. In the recoverable amount calculations, management used assumptions that it believes are reasonable based on the best information available. The key assumptions in the value in use calculations were sales growth, EBITDA margin development, the weighted average cost of capital (WACC), CAPEX-to-sales ratio, and the terminal growth rate of free cash flow. The value in use calculations were based on forecasts approved by management, which management believes reflect past experience, forecasts in industry reports, and other externally available information. For Denmark the sales growth and EBITDA margin development in the forecasts are deviating from historical trends. This is due to that Telia Company for the forecast period has clear and committed plans for sales initiatives, cost reductions and working capital improvements in Denmark. Management believes that value in use based on own business plan better reflects the value for Telia Company and of the long-term valuation, compared to the current equity market values that in some cases can be below the recoverable amount derived from Telia Company’s own long-term business plans.

The forecasted cash flows were discounted at the weighted average cost of capital (WACC) for the relevant cash-generating unit. The WACC is derived from the risk free interest rate in local currency, the country risk premium, the business risk represented by the estimated beta, the local equity market risk premium and an estimated reasonable cost of borrowing above the risk free rate. The pre-tax discount rate typically cannot be directly observed or measured. It is calculated by iteration – by first running DCF calculation using post-tax cash flows and a post-tax discount rate, and then determining what the pre-tax discount rate would need to be to cause value in use determined using pre-tax cash flows to equal the value in use determined by the post-tax DCF calculation.

The forecast periods, WACC rates and the terminal growth rates of free cash flow used to extrapolate cash flows beyond the forecast period varied by cash generating unit as presented below. In all cases management believes the terminal growth rates do not exceed the average growth rates for markets in which Telia Company operates.

Years/Percent

2016

Sweden

Finland

Norway

Denmark

Lithuania

Latvia

Estonia

Spain

Telia Carrier

Forecast period, years

5

5

5

5

5

5

5

5

Post-tax WACC rate, %

4.6

4.5

5.5

4.4

5.1

4.9

5.0

5.0

Pre-tax WACC rate, %

5.4

5.4

7.1

5.5

5.7

5.7

6.1

5.9

Terminal growth rate of free cash flow, %

2.1

2.0

2.5

2.0

2.2

2.0

2.2

2.1

Years/Percent

2015

 

Sweden

Finland

Norway

Denmark

Lithuania

Latvia

Estonia

Spain

Telia Carrier

Forecast period, years

5

5

5

5

5

5

5

5

5

Post-tax WACC rate, %

4.2

4.3

4.9

4.3

4.9

4.9

5.7

5.0

4.5

Pre-tax WACC rate, %1

4.9

5.3

6.4

5.4

5.6

5.7

7.1

6.4

5.9

Terminal growth rate of free cash flow, %

2.0

1.8

1.9

2.0

2.1

2.0

2.7

1.9

2.0

1) Disclosures of pre-tax WACC rate 2015 have been restated, but with no effect on the 2015 impairment test.

Sensitivity analysis

The estimated recoverable amounts for Finland, Norway and Denmark were in proximity of the carrying values as of December 31, 2016. As of December 31, 2015, the estimated recoverable amounts for Finland and Estonia were in proximity of the carrying values and for Denmark the recoverable amount equaled the carrying value.

The impairment tests assumed, in addition to the post-tax WACC rates and the terminal growth rates stated above, the following sales growth, EBITDA margin and CAPEX-to-sales ranges during the next 5 years for the cash generating units (CGUs) that are sensitive to reasonable changes in assumptions.

5-year period/Percent

2016

Finland

Norway

Denmark

Sales growth, lowest in period (%)

0.6

0.2

1.1

Sales growth, highest in period (%)

1.9

1.6

2.3

EBITDA margin, lowest in period (%)

31.4

34.1

11.5

EBITDA margin, highest in period (%)

33.8

36.2

14.4

CAPEX-to-sales, lowest in period (%)

13.3

12.2

7.2

CAPEX-to-sales, highest in period (%)

22.5

23.7

17.7

5-year period/Percent

2015

Finland

Norway

Denmark

Sales growth, lowest in period (%)

-2.7

2.3

-0.9

Sales growth, highest in period (%)

1.9

4.5

1.5

EBITDA margin, lowest in period (%)

31.3

32.1

11.7

EBITDA margin, highest in period (%)

33.8

35.0

14.3

CAPEX-to-sales, lowest in period (%)

12.2

8.7

7.1

CAPEX-to-sales, highest in period (%)

16.2

16.1

17.0

The upper part of the following table sets out how many percentage points each key assumption approximately must change, all else being equal, in order for the recoverable value to equal carrying value for the respective cash generating unit.

The lower part of the table first shows the SEK billion effect on the recoverable values of the cash generating units, should there be a one percentage-point upward shift in WACC. Finally, it sets out the absolute SEK billion change of the recoverable value that would equal carring value for the respective cash generating unit. The decrease in headroom between the recoverable amount and the carrying value for Norway to SEK 6.0 billion (15.8) is primarily due to higher WACC and more conservative assumptions regarding CAPEX.

Percentage points, SEK in billions

2016

Finland

Norway

Denmark

Sales growth each year in the 5-year period (%)

-2.1

-2.0

0.0

EBITDA margin each year in the 5-year period and beyond (%)

-2.5

-2.6

0.0

CAPEX-to-sales ratio each year in the 5-year period and beyond (%)

2.9

2.5

0.1

Terminal growth rate (%)

-0.8

-0.9

0.0

Post-tax WACC rate (%)

0.7

0.8

0.0

       

Effect of a one percentage-point upward shift in WACC (SEK in billions)

-13.5

-7.4

-1.3

Change in the recoverable value to equal the carrying value (SEK in billions)

-10.6

-6.0

0,0

Percentage points, SEK in billions

2015

Finland

Norway

Denmark

Sales growth each year in the 5-year period (%)

-2.1

-5.5

0.0

EBITDA margin each year in the 5-year period and beyond (%)

-2.7

-6.6

0.0

CAPEX-to-sales ratio each year in the 5-year period and beyond (%)

2.6

6.3

0.0

Terminal growth rate (%)

-0.8

-2.8

0.0

Post-tax WACC rate (%)

0.7

2.3

0.0

       

Effect of a one percentage-point upward shift in WACC (SEK in billions)

-13.9

-9.2

-1.9

Change in the recoverable value to equal the carrying value (SEK in billions)

-10.6

-15.8

0.0