Note 12. Intangible Assets


	Rights to Produce and Distribute Coca-Cola Trademark Products		Goodwill			Trademark Rights		Other Indefinite Lived Intangible Assets			Total Unamortized Intangible Assets		Technology Costs and Management Systems			Systems in Development			Alcohol Licenses		Other			Total Amortized Intangible Assets			Total Intangible Assets
Cost as of January 1, 2016	Ps.	66,392	Ps.	33,850		Ps.	1,481	Ps.	1,246		Ps.	102,969	Ps.	4,890		Ps.	683		Ps.	1,225	Ps.	860		Ps.	7,658		Ps.	110,627
Additions		—		—			3		—			3		345			609			191		146			1,291			1,294
Acquisitions from business combinations (see Note 4)		9,602		12,276			239		1,067			23,184		318			3			—		174			495			23,679
Changes in fair value of past acquisitions		—		(2,385	)		4,315		(554	)		1,376		—			—			—		1,078			1,078			2,454
Transfer of completed development systems		—		—			—		—			—		304			(304	)		—		—			—			—
Disposals		—		—			—		—			—		(336	)		—			—		(24	)		(360	)		(360	)
Effect of movements in exchange rates		8,124		8,116			187		392			16,819		451			(193	)		—		104			362			17,181
Changes in value on the recognition of inflation effects		1,220		—			—		—			1,220		141			—			—		—			141			1,361
Capitalization of borrowing costs		—		—			—		—			—		11			—			—		—			11			11

Cost as of December 31, 2016	Ps.	85,338	Ps.	51,857		Ps.	6,225	Ps.	2,151		Ps.	145,571	Ps.	6,124		Ps.	798		Ps.	1,416	Ps.	2,338		Ps.	10,676		Ps.	156,247


	Rights to Produce and Distribute Coca-Cola Trademark Products			Goodwill			Trademark Rights			Other Indefinite Lived Intangible Assets			Total Unamortized Intangible Assets			Technology Costs and Management Systems			Systems in Development			Alcohol Licenses		Other			Total Amortized Intangible Assets			Total Intangible Assets
Cost as of January 1, 2017	Ps.	85,338		Ps.	51,857		Ps.	6,225		Ps.	2,151		Ps.	145,571		Ps.	6,124		Ps.	798		Ps.	1,416	Ps.	2,338		Ps.	10,676		Ps.	156,247
Additions		1,288			—			—			6			1,294			464			920			221		445			2,050			3,344
Acquisitions from business combinations (see Note 4)		4,144			140			5			—			4,289			6			—			—		80			86			4,375
Changes in fair value of past acquisitions		5,167			(7,022	)		836			9			(1,010	)		(188	)		—			—		892			704			(306	)
Transfer of completed development systems		—			—			—			—			—			412			(412	)		—		—			—			—
Disposals		—			—			—			—			—			110			—			—		—			110			110
Effect of movements in exchange rates		(2,563	)		(1,526	)		119			91			(3,879	)		175			(15	)		—		52			212			(3,667	)
Changes in value on the recognition of inflation effects		(727	)		—			—			—			(727	)		—			—			—		175			175			(552	)
Venezuela deconsolidation effect		(745	)		—			—			—			(745	)		—			—			—		(139	)		(139	)		(884	)

Cost as of December 31, 2017	Ps.	91,902		Ps.	43,449		Ps.	7,185		Ps.	2,257		Ps.	144,793		Ps.	7,103		Ps.	1,291		Ps.	1,637	Ps.	3,843		Ps.	13,874		Ps.	158,667


	Rights to Produce and Distribute Coca-Cola Trademark Products			Goodwill			Trademark Rights			Other Indefinite Lived Intangible Assets			Total Unamortized Intangible Assets			Technology Costs and Management Systems			Systems in Development			Alcohol Licenses		Other			Total Amortized Intangible Assets			Total Intangible Assets
Cost as of January 1, 2018	Ps.	91,902		Ps.	43,449		Ps.	7,185		Ps.	2,257		Ps.	144,793		Ps.	7,103		Ps.	1,291		Ps.	1,637	Ps.	3,843		Ps.	13,874		Ps.	158,667
Additions		—			75			—			71			146			1,051			371			131		94			1,647			1,793
Acquisitions from business combinations (see Note 4)		4,602			842			170			—			5,614			35			57			—		291			383			5,997
Changes in fair value of past acquisitions		—			272			—			—			272			—			—			—		—			—			272
Internal development		—			—			—			—			—			—			—			—		41			41			41
Transfer of completed development systems		—			—			—			—			—			904			(904	)		—		—			—			—
Disposals		—			—			—			(2	)		(2	)		(43	)		—			—		(146	)		(189	)		(191	)
Philippines Disposal		(3,882	)		—			—			—			(3,882	)		—			—			—		(596	)		(596	)		(4,478	)
Effect of movements in exchange rates		(5,005	)		(4,108	)		(656	)		(349	)		(10,118	)		(343	)		(38	)		—		(311	)		(692	)		(10,810	)
Changes in value on the recognition of inflation effects		—			—			—			—			—			—			—			—		57			57			57

Cost as of December 31, 2018	Ps.	87,617		Ps.	40,530		Ps.	6,699		Ps.	1,977		Ps.	136,823		Ps.	8,707		Ps.	777		Ps.	1,768	Ps.	3,273		Ps.	14,525		Ps.	151,348


Amortization and Impairment Losses	Rights to Produce and Distribute Coca-Cola Trademark Products		Goodwill		Trademark Rights		Other Indefinite Lived Intangible Assets		Total Unamortized Intangible Assets		Technology Costs and Management Systems			Systems in Development		Alcohol Licenses			Other			Total Amortized Intangible Assets			Total Intangible Assets
Amortization as of January 1, 2016	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	(1,619	)	Ps.	—	Ps.	(302	)	Ps.	(365	)	Ps.	(2,286	)	Ps.	(2,286	)
Amortization expense		—		—		—		—		—		(630	)		—		(74	)		(302	)		(1,006	)		(1,006	)
Impairment losses		—		—		—		—		—		—			—		—			—			—			—
Disposals		—		—		—		—		—		313			—		—			36			349			349
Effect of movements in exchange rates		—		—		—		—		—		(1	)		—		—			(35	)		(36	)		(36	)

Amortization as of December 31, 2016	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	(1,937	)	Ps.	—	Ps.	(376	)	Ps.	(666	)	Ps.	(2,979	)	Ps.	(2,979	)

Amortization as of January 1, 2017	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	(1,937	)	Ps.	—	Ps.	(376	)	Ps.	(666	)	Ps.	(2,979	)	Ps.	(2,979	)
Amortization expense		—		—		—		—		—		(961	)		—		(81	)		(217	)		(1,259	)		(1,259	)
Impairment losses		—		—		—		—		—		(110	)		—		—			—			(110	)		(110	)
Disposals		—		—		—		—		—		—			—		—			—			—			—
Venezuela deconsolidation effect		—		—		—		—		—		—			—		—			(120	)		(120	)		(120	)
Venezuela impairment		—		—		—		—		—		—			—		—			—			—			—
Effect of movements in exchange rates		—		—		—		—		—		(254	)		—		—			148			(106	)		(106	)

Amortization as of December 31, 2017	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	(3,262	)	Ps.	—	Ps.	(457	)	Ps.	(855	)	Ps.	(4,574	)	Ps.	(4,574	)

Amortization as of January 1, 2018	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	(3,262	)	Ps.	—	Ps.	(457	)	Ps.	(855	)	Ps.	(4,574	)	Ps.	(4,574	)
Amortization expense		—		—		—		—		—		(1,453	)		—		(87	)		(373	)		(1,913	)		(1,913	)
Disposals		—		—		—		—		—		93			—		—			98			191			191
Philippines Disposal		—		—		—		—		—		—			—		—			375			375			375
Effect of movements in exchange rates		—		—		—		—		—		236			—		—			(1	)		235			235
Changes in value on the recognition of inflation effects		—		—		—		—		—		(51	)		—		—			(1	)		(52	)		(52	)
Amortization as of December 31, 2018	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	—	Ps.	(4,437	)	Ps.	—	Ps.	(544	)	Ps.	(757	)	Ps.	(5,738	)	Ps.	(5,738	)

Carrying Amount

Rights to
Produce
and
Distribute
Coca-Cola
Trademark
Products

Goodwill

Trademark
Rights

Other
Indefinite
Lived
Intangible
Assets

Total
Unamortized
Intangible
Assets

Technology
Costs and
Management
Systems

Systems in
Development

Alcohol
Licenses

Other

Total
Amortized
Intangible
Assets

Total
Intangible
Assets

As of December 31, 2016

Ps.

85,338

Ps.

51,857

Ps.

6,225

Ps.

2,151

Ps.

145,571

Ps.

4,187

Ps.

798

Ps.

1,040

Ps.

1,672

Ps.

7,697

Ps.

153,268

As of December 31, 2017

Ps.

91,902

Ps.

43,449

Ps.

7,185

Ps.

2,257

Ps.

144,793

Ps.

3,841

Ps.

1,291

Ps.

1,180

Ps.

2,988

Ps.

9,300

Ps.

154,093

As of December 31, 2018

Ps.

87,617

Ps.

40,530

Ps.

6,699

Ps.

1,977

Ps.

136,823

Ps.

4,270

Ps.

777

Ps.

1,224

Ps.

2,516

Ps.

8,787

Ps.

145,610

During the year ended December 31, 2016 the Company capitalized Ps. 8 of borrowing costs in relation to Ps. 28 in qualifying assets. The effective interest rate used to determine the amount of borrowing costs eligible for capitalization was 4.1%. For the years ended December 31, 2018 and 2017, the Company did not recognize any capitalization of borrowing costs.

On March 28, 2017 Coca-Cola FEMSA acquired distribution rights and other intangibles of AdeS soy-based beverages in its territories in Mexico and Colombia for an aggregate amount of Ps. 1,287. This acquisition was made to reinforce Coca-Cola FEMSA leadership position. For the years ended 2018, 2017 and 2016, allocation for amortization expense is as follows:


	2018		2017		2016
Cost of goods sold	Ps.	399	Ps.	132	Ps.	82
Administrative expenses		858		627		727
Selling expenses		656		500		207

	Ps.	1,913	Ps.	1,259	Ps.	1,016

The average remaining period for the Company’s intangible assets that are subject to amortization is as follows:


		Years
Technology Costs and Management Systems		3 - 10
Alcohol Licenses		12 - 15

Coca-Cola FEMSA Impairment Tests for Cash-Generating Units Containing Goodwill and Distribution Rights

For the purpose of impairment testing, goodwill and distribution rights are allocated and monitored on an individual country basis, which is considered to be a CGU.

The aggregate carrying amounts of goodwill and distribution rights allocated to each CGU are as follows:


	December 31, 2018		December 31, 2017
Mexico	Ps.	56,352	Ps.	56,352
Guatemala		1,853		488
Nicaragua		460		484
Costa Rica		1,417		1,520
Panama		1,182		1,185
Colombia		4,600		5,824
Brazil		42,153		48,345
Argentina		327		50
Uruguay		3,003		—
Philippines		—		3,882

Total	Ps.	111,347	Ps.	118,130

Goodwill and distribution rights are tested for impairments annually.

The recoverable amounts are based on value in use. The value in use of a CGU is determined based on the discounted cash flows method. The key assumptions used in projecting cash flows are: volume, expected annual long-term inflation, and the weighted average cost of capital (WACC) used to discount the projected cash flows. The cash flow forecasts could differ from the results obtained over time; however, Coca-Cola FEMSA prepares its estimates based on the current situation of each of the CGUs.

To determine the discount rate, Coca-Cola FEMSA uses the WACC as determined for each of the cash generating units in real terms and as described in following paragraphs.

The estimated discount rates to perform impairment test for each CGU consider market participants’ assumptions. Market participants were selected taking into consideration the size, operations and characteristics of the businesses that are similar to those of Coca-Cola FEMSA.

The discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the opportunity cost to a market participant, considering the specific circumstances of Coca-Cola FEMSA and its operating segments and is derived from its WACC. The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by Company’s investors. The cost of debt is estimated based on the interest-bearing borrowings Coca-Cola FEMSA is obliged to service, which is equivalent to the cost of debt based on the conditions that a creditor in the market. Segment-specific risk is incorporated by applying beta factors which are evaluated annually based on publicly available market data.

Market participant assumptions are important because, not only do they include industry data for growth rates, management also assesses how the CGU’s position, relative to its competitors, might change over the forecasted period.

The key assumptions used for the value-in-use calculations are as follows:

•

Cash flows were projected based on actual operating results and the five-year business plan. Cash flows for a further five-year were forecasted maintaining the same stable growth and margins per country of the last year base. Coca-Cola FEMSA believes that this forecasted period is justified due to the non-current nature of the business and past experiences.

•

Cash flows after the first ten-year period were extrapolated using a perpetual growth rate equal to the expected annual population growth, in order to calculate the terminal recoverable amount.

•

A per CGU-specific WACC was applied as a hurdle rate to discount cash flows to get the recoverable amount of the units; the calculation assumes, size premium adjustments.

The key assumptions by CGU for impairment test as of December 31, 2018 were as follows:

CGU

Pre-tax
WACC

Post-tax
WACC

Expected Annual
Long-Term Inflation
2019-2028

Expected Volume
Growth Rates
2019-2028

Mexico

7.4

5.3

4.0

1.4

Colombia

7.8

5.2

3.1

4.0

Costa Rica

13.9

9.2

4.0

1.6

Guatemala

9.4

7.5

3.2

7.3

Nicaragua

21.2

11.0

6.2

3.8

Panama

9.2

7.0

2.4

3.0

Argentina

19.6

11.3

21.9

2.7

Brazil

10.7

6.6

3.8

1.7

The key assumptions by CGU for impairment test as of December 31, 2017 were as follows:


CGU	Pre-tax WACC			Post-tax WACC			Expected Annual Long-Term Inflation 2018-2027			Expected Volume Growth Rates 2018-2027
Mexico		7.3	%		5.3	%		3.7	%		2.2	%
Colombia		9.1	%		6.6	%		3.1	%		3.2	%
Costa Rica		11.5	%		7.8	%		3.3	%		2.7	%
Guatemala		13.9	%		10.7	%		4.7	%		7.1	%
Nicaragua		16.6	%		10.6	%		5.0	%		4.9	%
Panama		8.3	%		6.5	%		2.3	%		3.4	%
Argentina		11.0	%		7.3	%		10.7	%		3.1	%
Brazil		9.7	%		6.2	%		4.1	%		1.3	%

The values assigned to the key assumptions represent management’s assessment of future trends in the industry and are based on both external sources and internal sources (historical data). Coca-Cola FEMSA consistently applied its methodology to determine CGU specific WACC’s to perform its annual impairment testing.

During the year ended December 31, 2017 and due to the worsened economic and operational conditions in Venezuela,Coca-Cola FEMSA has recognized an impairment for distribution rights in such country for an amount of Ps. 745, such effect has been recorded in other expenses in the consolidated financial statements.

Sensitivity to Changes in Assumptions

At December 31, 2018, Coca-Cola FEMSA performed an additional impairment sensitivity calculation, taking into account an adverse change in post-tax WACC, according to the country risk premium, using for each country the relative standard deviation between equity and sovereign bonds and an additional sensitivity to the volume of 100 basis points and concluded that no impairment would be recorded.


				Change in Volume
CGU	Change in WACC			Growth CAGR⁽¹⁾			Effect on Valuation
Mexico		+0.3	%		-1.0	%		Passes by 5.0x
Colombia		+0.6	%		-1.0	%		Passes by 3.9x
Costa Rica		+1.7	%		-1.0	%		Passes by 1.9x
Guatemala		+0.7	%		-1.0	%		Passes by 18.4x
Nicaragua		+0.3	%		-0.3	%		Passes by 1.0x
Panama		+0.3	%		-1.0	%		Passes by 6.9x
Argentina		+6.1	%		-1.0	%		Passes by 8.9x
Brazil		+1.1	%		-1.0	%		Passes by 1.3x

(1)	Compound Annual Growth Rate (“CAGR”).

FEMSA Comercio – Proximity Division, FEMSA Comercio – Health Division and FEMSA Comercio – Fuel Division Impairment Test for Cash-Generating Units Containing Goodwill

For the purpose of impairment testing, goodwill is allocated and monitored on an individual country basis by operating segment. The Company has integrated its cash generating units as follow: (i) FEMSA Comercio – Proximity Division and (ii) FEMSA Comercio – Health Division are integrated as Mexico, for each of them and (iii) FEMSA Comercio – Fuel Division includes only Mexico.

As of December 31, 2018 in FEMSA Comercio – Health Division there is a significant carrying amount of goodwill allocated in Chile and Colombia as a group of cash generating (South America) with a total carrying amount of Ps. 6,048.

The recoverable amounts are based on value in use. The value in use of CGUs is determined based on the method of discounted cash flows. The key assumptions used in projecting cash flows are: sales, expected annual long-term inflation, and the weighted average cost of capital (“WACC”) used to discount the projected cash flows. The cash flow forecasts could differ from the results obtained over time; however, the Company prepares its estimates based on the current situation of each of the CGUs or group of CGUs.

To determine the discount rate, the Company uses the WACC as determined for each of the cash generating units or group of the cash generating units in real terms and as described in following paragraphs.

The estimated discount rates to perform the IAS 36 “Impairment of assets”, impairment test for each CGU or group of CGUs consider market participants’ assumptions. Market participants were selected taking into consideration the size, operations and characteristics of the businesses that are similar to those of FEMSA Comercio – Proximity, Health and Fuel Divisions.

The discount rates represent the current market assessment of the risks specific to each CGU or group of CGUs, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the opportunity cost to a market participant, considering the specific circumstances of the Company and its operating segments and is derived from its WACC. The WACC takes into account both debt and cost of equity. The cost of equity is derived from the expected return on investment by Company’s investors. The cost of debt is based on the interest-bearing borrowings the Company is obliged to service, which is equivalent to the cost of debt based on the conditions that a creditor would asses in the market. Segment-specific risk is incorporated by applying beta factors which are evaluated annually based on publicly available market data.

The key assumptions used for the value-in-use calculations are as follows:

•

Cash flows were projected based on actual operating results and the five-year business plan. The Company believes that this forecasted period is justified due to the non-current nature of the business and past experiences.

•

Cash flows projected based on actual operating results and five-year business plan were calculated using a perpetual growth rate equal to the expected annual population growth, in order to calculate the terminal recoverable amount.

•

A per CGU-specific Weighted Average Cost of Capital (“WACC”) was applied by FEMSA Comercio – Health Division as a hurdle rate to discount cash flows to get the recoverable amount of the units; the calculation assumes size premium adjustments.

The key assumptions by CGU for impairment test as of December 31, 2018 were as follows:

CGU

Pre-tax
WACC

Post-tax
WACC

Expected Annual
Long-Term Inflation
2019-2028

Expected Volume
Growth Rates
2019-2028

South America (FEMSA Comercio – Health Division)

9.0

6.3

3.0

0.4

The key assumptions by CGU for impairment test as of December 31, 2017 were as follows:


CGU	Pre-tax WACC			Post-tax WACC			Expected Annual Long-Term Inflation 2018-2027			Expected Volume Growth Rates 2018-2027
South America (FEMSA Comercio – Health Division)		6.9	%		6.2	%		3.0	%		2.0	%

The values assigned to the key assumptions represent management’s assessment of future trends in the industry and are based on both external sources and internal sources (historical data). The Company consistently applied its methodology to determine CGU specific WACC’s to perform its annual impairment testing.

Sensitivity to Changes in Assumptions

At December 31, 2018, the Company performed an additional impairment sensitivity calculation, taking into account an adverse change in post-tax WACC, according to the country risk premium, using for each country the relative standard deviation between equity and sovereign bonds and a sensitivity analysis of sales that would be affected considering a contraction in economic conditions as a result of lower purchasing power of customers, which based on management estimation considered to be reasonably possible an effect of 100 basis points in the sale’s compound annual growth rate (“CAGR”), concluding that no impairment would be recognized.

CGU

Change in
WACC

Change in Sales
Growth CAGR⁽¹⁾

Effect on
Valuation

FEMSA Comercio – Health Division (South America)

+0.3

-0.5

Passes by 1.15x

(1)	Compound Annual Growth Rate.