Goodwill and indefinite life assets are tested for impairment annually, or more frequently if there are indications that amounts might be impaired. The impairment tests involve determining the recoverable amount of the relevant asset or cash generating unit, which corresponds to the higher of the fair value less costs to sell or its value in use. In the Group's case, the recoverable amount is based on the value in use calculations.

Acquired intangible assets that are being amortised are reviewed for indicators of impairment annually, and in the event that impairment indicators exist, a full value in use calculation is performed. Despite the current year sales growth, given the previous sales decline of our FAP products, the impairment indicator assessment for FAP assets was given particular attention. A review was performed to ensure that the individual products capitalised are reflective of the sales growth in the period and that no impairment indicators exist. No impairment was recognised on these assets.

Value in use calculations are performed by forecasting the future cash flows attributable to the asset being tested (or the relevant cash generating unit in respect of goodwill). The forecast cash flows are discounted at an appropriate rate as described below.

The cash flow forecasts are derived as follows:

  • The latest available Board-approved business plan for the first two years;
  • The business plan is extrapolated by applying a growth rate of between 0% and 3% (2016: 3%) per annum in years three and four; and
  • Thereafter, a terminal value is calculated based on year four cash flows, and assuming a long term growth rate of 0% (2016: 0%).

The projections covered a period of four years as we believe this to be the most appropriate timescale over which to review and consider annual performances before applying a fixed terminal value.

Value in use calculations were performed at 30 June 2017 for the following assets:

Cash generating unit2017
Goodwill
carrying
value
£000
Indefinite
life assets carrying value
£000
Total
value
£000
Pre-tax
discount
rate
%
Dechra Veterinary Products EU72,30795773,26411.7
Dechra Veterinary Products NA53,59653,59614.5
Dechra Pharmaceuticals Manufacturing — Skipton2,2312,23113.2
128,134957129,091
Cash generating unit2016
Goodwill
carrying
value
(restated)
£000
Indefinite
life assets carrying value
£000
Total
value
£000
Pre-tax
discount
rate
%
Dechra Veterinary Products EU54,51085355,36312.3
Dechra Veterinary Products NA56,43856,43813.5
Dechra Pharmaceuticals Manufacturing — Skipton2,2312,23111.1
113,179853114,032

Key Assumptions

The key assumptions implicit in the impairment review are those regarding the Board-approved business plan, medium and long term growth rates and the discount rate.

The Board-approved business plan incorporates a number of key input assumptions, most notably regarding market growth expectations, the competitive and legislative environments, lifecycle management, selling prices, product margins and direct costs. The assumptions applied in the business plan are based on past experience and the Group's expectation of future market changes and, where applicable, are consistent with external sources of information.

The medium and long term growth rates of 2-3% and 0% respectively reflect a cautious estimate of expected future growth in the Group's markets, are no higher than those implicit in the Group's strategic planning process, and do not exceed the long term growth rates in the countries in which each CGU operates.

The pre-tax discount rates have been estimated using a market participant rate, which is adjusted after consideration of market information, and risk adjusted dependent upon the specific circumstances of each asset or cash generating unit.

Sensitivity Analysis

We have performed sensitivity analyses around the key assumptions and have concluded that no reasonable changes in key assumptions would cause the recoverable amount to be less than the carrying value. An increase in the pre-tax discount rate of 10% and a reduction in the growth rate to nil would still not result in the requirement for an impairment provision.