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INTANGIBLE ASSETS AND GOODWILL | 12 Months Ended
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Dec. 31, 2018
INTANGIBLE ASSETS AND GOODWILL |
INTANGIBLE ASSETS AND GOODWILL | NOTE 14 – INTANGIBLE ASSETS AND GOODWILL 14.1 Intangible assets other than goodwill Intangible assets other than goodwill as of the end of each reporting period are detailed as follows:
|  | 12-31-2018 |  | 12-31-2017
|  | Gross |  | Cumulative |  | Net |  | Gross |  | Cumulative |  | Net
Detail |  | Amount |  | Amortization |  | Amount |  | Amount |  | Amortization |  | Amount
|  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$
Distribution rights (1) |  | 661,285,834 |  | (259,434) |  | 661,026,400 |  | 656,411,004 |  | (116,387) |  | 656,294,617
Software |  | 31,526,159 |  | (24,160,202) |  | 7,365,957 |  | 27,595,084 |  | (21,087,741) |  | 6,507,343
Others |  | 728,198 |  | (298,002) |  | 430,196 |  | 511,470 |  | (40,552) |  | 470,918
Total |  | 693,540,191 |  | (24,717,638) |  | 668,822,553 |  | 684,517,558 |  | (21,244,680) |  | 663,272,878
| (1) |  | Correspond to the contractual rights to produce and distribute Coca-Cola products in certain parts of Argentina, Brazil, Chile and Paraguay. Distribution rights result from the valuation process at fair value of the assets and liabilities of the companies acquired in business combinations. Production and distribution contracts are renewable for periods of 5 years with Coca-Cola. The nature of the business and renewals that Coca-Cola has permanently done on these rights, allow qualifying them as indefinite contracts. These production and distribution rights, and in conjunction with the assets that are part of the cash-generating units, are annually subjected to the impairment test. Such distribution rights are composed in the following manner and are not subject to amortization: except for the Monster rights that are amortized in the term of the agreement which is 4 years.
|  | 12.31.2018 |  | 12.31.2017
Distribution rights |  | ThCh$ |  | ThCh$
Chile (excluding Metropolitan Region, Rancagua and San Antonio) |  | 304,888,183 |  | 304,969,889
Brazil (Rio de Janeiro, Espirito Santo, Ribeirão Preto and the investments in Sorocaba and Leão Alimentos e Bebidas Ltda.) |  | 181,583,404 |  | 187,695,738
Paraguay |  | 172,594,328 |  | 162,825,074
Argentina (North and South) |  | 1,960,485 |  | 803,916
Total |  | 661,026,400 |  | 656,294,617
The movement and balances of identifiable intangible assets are detailed as follows:
|  | 01-01-2018 to 12-31-2018 |  | 01-01-2017 to 12-31-2017
|  | Distribution |  |  |  |  |  |  |  | Distribution |  |  |  |  |  |
Details |  | Rights |  | Rights |  | Software |  | Total |  | Rights |  | Rights |  | Software |  | Total
|  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$ |  | ThCh$
Opening balance |  | 656,294,617 |  | 470,918 |  | 6,507,343 |  | 663,272,878 |  | 674,920,063 |  | 470,918 |  | 5,605,081 |  | 680,996,062
Additions |  | — |  | — |  | 3,718,038 |  | 3,718,038 |  | 11,923,449 | (1) | — |  | 2,907,715 |  | 14,831,164
Amortization |  | (112,601) |  | (40,722) |  | (1,971,417) |  | (2,124,740) |  | (116,387) |  | — |  | (1,842,933) |  | (1,959,320)
Other increases (decreases) (2) |  | 4,844,384 |  |  |  | (888,007) |  | 3,956,377 |  | (30,432,508) |  | — |  | (162,520) |  | (30,595,028)
Total |  | 661,026,400 |  | 430,196 |  | 7,365,957 |  | 668,822,553 |  | 656,294,617 |  | 470,918 |  | 6,507,343 |  | 663,272,878
| (1) |  | Corresponds to distribution rights paid in Argentina, Paraguay and Chile resulting from the transaction in which The Coca-Cola Company acquired the “AdeS” business described in previous notes.
| (2) |  | Mainly corresponds to the foreign currency effect of converting foreign subsidiaries’ distribution rights into the presentation currency.
14.2 Goodwill Goodwill is considered as the excess acquisition cost over fair value of the group´s ownership interest in identifiable net assets of the acquired subsidiary at the acquisition date. 14.2.1 Measurement of recoverable goodwill value Goodwill is annually reviewed but its recoverable value is checked during anticipated periods, if there are facts indicating a possible impairment. These signs may include new legal dispositions, changes in the economic environment affecting business operating performance indicators, movements in the competition, or the sale of a significant part of the cash-generating unit (CGU). Management reviews business performance based on geographic segments. Goodwill is monitored by operating segment that includes different cash generating units of the operations in Chile, Brazil, Argentina and Paraguay. Impairment of distribution rights is geographically monitored at the CGU or group of cash generating units that correspond to specific territories for which Coca-Cola distribution rights have been acquired. These cash generating units or groups of cash generating units are composed by:
| · |  | Regions in Chile (excluding Metropolitan Region, province of Rancagua and province of San Antonio)
| · |  | Argentina North
| · |  | Argentina South
| · |  | Brazil (state of Rio de Janeiro and Espirito Santo)
| · |  | Brazil (Ipiranga territories)
| · |  | Brazil: (investment in the associate Sorocaba)
| · |  | Brazil: (investment in the associate Leão Alimentos S.A.)
| · |  | Paraguay
In order to check if goodwill has suffered an impairment loss, the company compares its book value with its recoverable value, and an impairment loss is recognized for the excess of the book value amount of the asset over its recoverable amount. To determine the recoverable values of the CGU, management considers the discounted cash flow method as the most appropriate method. 14.2.2 Main assumptions used in the annual test: a. Discount rate: The real discount rate applied in the annual test carried out in December 2018 was estimated with the Capital Asset Pricing Model, which allows estimating a discount rate according to the risk level of the CGU in the country where it operates. A nominal discount rate before taxes is used according to the following table:
|  | Discount Rate |  | Discount Rate |
|  | 2017 |  | 2017 |
Argentina |  | 21.2 | % | 17.1 | %
Chile |  | 8.1 | % | 7.2 | %
Brazil |  | 10.9 | % | 9.6 | %
Paraguay |  | 10.1 | % | 9.1 | %
Management carries out the annual goodwill impairment test as of December 31 of each year for each CGU. b. Other assumptions Financial projections to determine the present net value of future cash flows of the CGU are modelled based on the main historical variables , and the respective budgets approved by the CGU. In this sense, a conservative growth rate is used, which reach 3% for the soft drinks category and up to 7% for the less developed categories such as juices and water. Perpetuity growth rates between 1% and 2.5% are established by operation depending on the level of consumption maturity of the products at each operation are set beyond the fifth year of projection. In this sense, the variables of greater sensitivity in these projections correspond to discount rates applied in order to determine the net present value of projected flows, perpetuity growths and EBITDA margin considered in each CGU. For purposes of sensitizing the impairment test, variations were made to the main variables used in the model. Following we present the ranges used for each of the modified variables:
| - |  | Discount rate: Increase/decrease of up to 100bps as value in the rate with which the future flows are discounted to bring them to present value
| - |  | Perpetuity: Increase/decrease of up to 75bps in the rate to calculate the perpetual growth of future flows
| - |  | EBITDA margin: Increase/decrease of 100bps in the EBITDA margin of operations, which is applied per year for the projected periods, i.e. for the years 2019-2023
14.2.3 Conclusions As a result of the annual test for 2018, no impairments have been identified in any of the CGUs assuming conservative EBITDA margin projections and in line with the markets’ history. As of December 31, 2018, there have been no signs of impairment. Despite the deterioration of the macroeconomic conditions experienced by the economies of the countries where the cash generating units develop their operations, recovery values from the impairment test were higher than the book values of assets. 14.2.4 Goodwill by business segment and country Movement in Goodwill as of December 31, 2018 and December 31, 2017 is detailed as follows:
|  |  |  | Foreign currency translation differences |  |
|  |  |  | where functional currency is different from |  |
Operating segment |  | 01.01.2018 |  | presentation currency |  | 12.31.2018
|  | ThCh$ |  | ThCh$ |  | ThCh$
Chilean operation |  | 8,503,023 |  | — |  | 8,503,023
Brazilian operation |  | 73,509,080 |  | (428,980) |  | 73,080,100
Argentine operation |  | 4,672,971 |  | 23,645,158 |  | 28,318,129
Paraguayan operation |  | 6,913,143 |  | 414,778 |  | 7,327,921
Total |  | 93,598,217 |  | 23,630,956 |  | 117,229,173
|  |  |  | Foreign currency translation differences |  |
|  |  |  | where functional currency is different from |  |
Operating segment |  | 01.01.2017 |  | presentation currency |  | 12.31.2017
|  | ThCh$ |  | ThCh$ |  | ThCh$
Chilean operation |  | 8,503,023 |  | — |  | 8,503,023
Brazilian operation |  | 81,145,834 |  | (7,636,754) |  | 73,509,080
Argentine operation |  | 5,972,515 |  | (1,299,544) |  | 4,672,971
Paraguayan operation |  | 7,298,133 |  | (384,990) |  | 6,913,143
Total |  | 102,919,505 |  | (9,321,288) |  | 93,598,217

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