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v3.19.3.a.u2

Goodwill and other intangible assets | 12 Months Ended
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Dec. 31, 2019
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Goodwill and other intangible assets | 13. Goodwill and other intangible assets
|  | Goodwill $m |  |  | Brands $m |  |  | Software $m |  |  | Management agreements $m |  |  | Other intangibles $m |  |  | Total $m |
Cost |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
At 1 January 2018 |  |  | 377 |  |  |  | 193 |  |  |  | 745 |  |  |  | 71 |  |  |  | 13 |  |  |  | 1,399 |
Acquisition of businesses (note 11) |  |  | 83 |  |  |  | 58 |  |  |  | — |  |  |  | 6 |  |  |  | — |  |  |  | 147 |
Additions |  |  | — |  |  |  | — |  |  |  | 107 |  |  |  | — |  |  |  | 5 |  |  |  | 112 |
Capitalised interest |  |  | — |  |  |  | — |  |  |  | 5 |  |  |  | — |  |  |  | — |  |  |  | 5 |
Disposals |  |  | — |  |  |  | — |  |  |  | (72 | ) |  |  | — |  |  |  | — |  |  |  | (72 | )
Exchange and other adjustments |  |  | (5 | ) |  |  | (1 | ) |  |  | (4 | ) |  |  | — |  |  |  | — |  |  |  | (10 | )
At 31 December 2018 |  |  | 455 |  |  |  | 250 |  |  |  | 781 |  |  |  | 77 |  |  |  | 18 |  |  |  | 1,581 |
Acquisition of businesses (note 11) |  |  | 70 |  |  |  | 189 |  |  |  | — |  |  |  | 45 |  |  |  | — |  |  |  | 304 |
Additions |  |  | 4 |  |  |  | — |  |  |  | 98 |  |  |  | — |  |  |  | 6 |  |  |  | 108 |
Capitalised interest |  |  | — |  |  |  | — |  |  |  | 5 |  |  |  | — |  |  |  | — |  |  |  | 5 |
Disposals |  |  | — |  |  |  | — |  |  |  | (22 | ) |  |  | — |  |  |  | — |  |  |  | (22 | )
Exchange and other adjustments |  |  | — |  |  |  | — |  |  |  | 2 |  |  |  | — |  |  |  | (1 | ) |  |  | 1 |
At 31 December 2019 |  |  | 529 |  |  |  | 439 |  |  |  | 864 |  |  |  | 122 |  |  |  | 23 |  |  |  | 1,977 |
Amortisation and impairment |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
At 1 January 2018 |  |  | (140 | ) |  |  | — |  |  |  | (281 | ) |  |  | (7 | ) |  |  | (4 | ) |  |  | (432 | )
Provided |  |  | — |  |  |  | — |  |  |  | (36 | ) |  |  | (3 | ) |  |  | (1 | ) |  |  | (40 | )
System Fund expense |  |  | — |  |  |  | — |  |  |  | (37 | ) |  |  | — |  |  |  | — |  |  |  | (37 | )
Disposals |  |  | — |  |  |  | — |  |  |  | 67 |  |  |  | — |  |  |  | — |  |  |  | 67 |
Exchange and other adjustments |  |  | (2 | ) |  |  | — |  |  |  | 6 |  |  |  | — |  |  |  | — |  |  |  | 4 |
At 31 December 2018 |  |  | (142 | ) |  |  | — |  |  |  | (281 | ) |  |  | (10 | ) |  |  | (5 | ) |  |  | (438 | )
Provided |  |  | — |  |  |  | — |  |  |  | (35 | ) |  |  | (3 | ) |  |  | (2 | ) |  |  | (40 | )
System Fund expense |  |  | — |  |  |  | — |  |  |  | (46 | ) |  |  | — |  |  |  | (1 | ) |  |  | (47 | )
Impairment charge s |  |  | (49 | ) |  |  | — |  |  |  | — |  |  |  | (50 | ) |  |  | — |  |  |  | (99 | )
Disposals |  |  | — |  |  |  | — |  |  |  | 22 |  |  |  | — |  |  |  | — |  |  |  | 22 |
Exchange and other adjustments |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1 |
At 31 December 2019 |  |  | (190 | ) |  |  | — |  |  |  | (340 | ) |  |  | (63 | ) |  |  | (8 | ) |  |  | (601 | )
Net book value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
At 31 December 2019 |  |  | 339 |  |  |  | 439 |  |  |  | 524 |  |  |  | 59 |  |  |  | 15 |  |  |  | 1,376 |
At 31 December 2018 |  |  | 313 |  |  |  | 250 |  |  |  | 500 |  |  |  | 67 |  |  |  | 13 |  |  |  | 1,143 |
At 1 January 2018 |  |  | 237 |  |  |  | 193 |  |  |  | 464 |  |  |  | 64 |  |  |  | 9 |  |  |  | 967 |
Goodwill and brands Brands Brands relate to the acquisitions of Kimpton ( $193m ) , Regent ( $57m ) and Six Senses ( $189m ) . They are each considered to have an indefinite life given their strong brand awareness and reputation, and management’s commitment to continued investment in their growth. The brands are protected by trademarks and there are not believed to be any legal, regulatory or contractual provisions that limit the useful lives of the brands. In the hotel industry there are a number of brands that have existed for many years and IHG has brands that are over 60 years old. Allocation of goodwill and brands to CGUs The Group’s cash-generating units (CGUs) reflect the Group’s geographical regions, differentiated where material between franchised and managed operations, together with the UK portfolio. The carrying value of goodwill and indefinite life brands were allocated to CGUs for year-end impairment testing purposes as follows:
|  | 2019 |  |  | 2018 |
|  | Goodwill $m |  |  | Brands $m |  |  | Goodwill $m |  |  | Brands $m |
CGU |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas Managed |  |  | 95 |  |  |  | 289 |  |  |  | 69 |  |  |  | 203 |
Americas Franchised |  |  | 37 |  |  |  | — |  |  |  | 37 |  |  |  | — |
EMEAA – Europe Managed |  |  | 48 |  |  |  | 46 |  |  |  | 29 |  |  |  | 13 |
EMEAA – Europe Franchised |  |  | 10 |  |  |  | — |  |  |  | 10 |  |  |  | — |
EMEAA – rest of region |  |  | 140 |  |  |  | 88 |  |  |  | 113 |  |  |  | 23 |
Greater China |  |  | 9 |  |  |  | 16 |  |  |  | 7 |  |  |  | 11 |
UK portfolio |  |  | 49 |  |  |  | — |  |  |  | — |  |  |  | — |
Allocated to CGUs |  |  | 388 |  |  |  | 439 |  |  |  | 265 |  |  |  | 250 |
Unallocated a |  |  | — |  |  |  | — |  |  |  | 48 |  |  |  | — |
|  |  | 388 |  |  |  | 439 |  |  |  | 313 |  |  |  | 250 |
Less: UK portfolio impairment |  |  | (49 | ) |  |  | — |  |  |  | — |  |  |  | — |
Net book value at 31 December |  |  | 339 |  |  |  | 439 |  |  |  | 313 |  |  |  | 250 |
a | The UK portfolio goodwill remained unallocated at 31 December 2018 pending completion of the portfolio acquisition in early 2019.
Impairment testing other than the UK portfolio The recoverable amounts of the CGUs have been determined from value in use calculations. These calculations include a three-year period using pre-tax cash flow forecasts derived from the most recent financial budgets approved by management, incorporating growth rates based on management’s past experience and industry growth forecasts. The key assumptions that underpin the financial budgets are RevPAR growth and net System size growth. RevPAR is based on market forecasts provided by Oxford Economics adjusted for historical experience of how the Group has performed compared to these expectations. Cash flows beyond the three-year period are extrapolated using terminal growth rates that do not exceed the average long-term growth rates for the relevant markets. A 10% contingency factor is applied to reduce all cash flow projections before being discounted using pre-tax rates that are based on the Group’s weighted average cost of capital adjusted to reflect the risks specific to the business model and territory of the CGU being tested. The terminal growth rates and discount rates used, which are considered to be key assumptions, are as follows:
|  | 2019 |  |  | 2018 |
|  | Terminal growth rate % |  |  | Pre-tax discount rate % |  |  | Terminal growth rate % |  |  | Pre-tax discount rate % |
Americas Managed |  |  | 1.9 |  |  |  | 9.6 |  |  |  | 2.0 |  |  |  | 10.5 |
Americas Franchised |  |  | 1.9 |  |  |  | 8.6 |  |  |  | 2.0 |  |  |  | 9.6 |
EMEAA – Europe Managed |  |  | 1.5 |  |  |  | 8.9 |  |  |  | 2.0 |  |  |  | 11.4 |
EMEAA – Europe Franchised |  |  | 1.5 |  |  |  | 7.9 |  |  |  | 2.0 |  |  |  | 10.5 |
EMEAA – rest of region |  |  | 3.3 |  |  |  | 11.6 |  |  |  | 3.5 |  |  |  | 13.4 |
Greater China |  |  | 2.5 |  |  |  | 10.8 |  |  |  | 2.5 |  |  |  | 12.3 |
Impairment was not required at either 31 December 2019 or 31 December 2018. Given the contingency factor applied to the cash flow projections and the significant amounts by which the recoverable amounts of the CGUs exceed their carrying amounts, management have determined that impairment charges would not arise from reasonably possible changes in the key assumptions. UK portfolio For impairment testing of the UK portfolio, which is reported within the EMEAA reportable segment, each hotel is deemed to be a CGU. The 12 individual hotels are treated as a group for impairment testing of goodwill and the IFRS 16 right-of-use asset, as neither of these assets can be allocated to individual hotels other than on an arbitrary basis. The right-of-use asset cannot be allocated as there is one framework lease which covers all of the hotels, and the ‘in-substance fixed’ payments recognised as a lease liability arise from the rent guarantee which relates to the whole portfolio. The UK portfolio has experienced trading disruption in the year as a result of renovations and re-branding of these hotels and increasingly challenging trading conditions in 2019. Management has reassessed its short and medium-term forecasts which assume that some disruption continues into 2020, and that hotels see progressive trading improvements when the renovation and re - branding projects complete. The recoverable amount of the UK portfolio as at 31 December 2019 has been determined based on a value in use calculation using cash flow projections for a five-year period. These cash flow projections use pre-tax cash flow forecasts derived from the most recent financial budgets approved by management, incorporating growth rates from industry forecasts and management’s expectation of growth in the hotels following completion of the renovation and re-branding projects. Cash flows from 2025 to the end of the lease term are extrapolated using a 1.5% growth rate that is in line with the long-term average growth rate for the UK hotel industry. The pre-tax discount rate applied to the cash flow projections is 9.7%. As a result of this analysis, management has recognised an impairment charge of $81m in the current year; $49m against the carrying value of the goodwill, which is now written down to $nil, and $32m against the right-of-use asset. The impairment charge is recorded as a separate line in the Group income statement. The sensitivity of the value in use calculation to changes in key assumptions is disclosed on page 1 40 . No impairment of the hotels’ property, plant and equipment was required, based on the fair value less costs to sell of these assets. A replacement cost methodology was used to value these assets, which were either initially recognised at fair value on acquisition or acquired during 2019. The same underlying cash flows are used to measure the fair value of the contingent purchase consideration liability, which was reduced by $38m in the year (see note 25) resulting in a corresponding gain in the Group income statement. The net impact before tax therefore resulting from the reassessment of the hotel cash flows was a $43m charge to the Group income statement, being impairment of $81m less the fair value gain of $38m, and an equivalent reduction in net assets. The IFRS 16 lease accounting for the UK portfolio is set out in note 15. Software Software includes $288m relating to the development of the next-generation Guest Reservation System with Amadeus. Of this amount , $135m relating to Phase 2 of the project i s not yet being amortised as Phase 2 has not been completed and rolled out to hotels. P hase 1 is being amortised o ver 10 years , with nine years remaining at 31 December 2019, reflecting the Group’s experience of the long life of guest reservation systems and the initial term over which the Group is party to a technology agreement with Amadeus . Substantially all software additions are internally developed. Management agreements Management agreements relate to contracts recognised at fair value on acquisition. The impairment charge of $50m relates to the Kimpton management contract portfolio acquired in 2015 and results from revised expectations regarding future trading, the rate of hotel exits (‘attrition’) and the cost of retaining hotels in the portfolio. The net book value tested for impairment includes related contract assets. The recoverable amount is based on value in use calculations using management fee projections based on near-term industry projected growth rates for the US upper upscale sector and a long-term stabilised growth rate of 2.0%. The projected income flows have been discounted at a rate of 8.0% (2018: 9.0%). The sensitivity of the value in use calculations to changes in key assumptions is disclosed on page 1 40 . At 31 December 2019, the net book value and remaining amortisation period of the most significant acquired management agreements were:
|  | Net book value $m |  |  | Remaining amortisation period Years |
Kimpton |  |  | 10 |  |  |  | 20 |
Six Senses (note 11) |  |  | 44 |  |  |  | 30 |
The weighted average remaining amortisation period for all management agreements is 26 years (2018: 25 years).

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