9.	Goodwill

Goodwill results from the Company’s acquisitions of Bols, Polmos Bialystok, Parliament, Russian Alcohol, Whitehall and Bols Hungary.


	2012			2011
Goodwill as at January 1, gross	$	1,600,421		$	1 452 986
Acquisitions during the period		0			270,631
Foreign exchange impact		97,139			(123,196	)

Goodwill as at December 31, gross	$	1,697,560		$	1,600,421

Accumulated impairment losses as at January 1		(930,127	)		0
Foreign exchange impact		(51,201	)		0
Impairment charges recognized during the period		(327,847	)		(930,127	)

Accumulated impairment losses as at December 31		(1,309,175	)		(930 127	)

Goodwill as at January 1, net	$	670,294		$	1,452,986

Goodwill as at December 31, net	$	388,385		$	670,294

The impairment charge for the years ended December 31, 2012 and December 31, 2011 amounts to $327.8 million and $930.1 million, respectively. Impairment Charges for the year ended December 31, 2012 in this Annual Report are lower than those previously provided by the Company as preliminary unaudited estimates.

Accumulated impairment related to goodwill as of December 31, 2012 and December 31, 2011 amounts to $1,257.9 million excluding revaluation and $930.1 million respectively.

Impairment test on goodwill performed as of December 31, 2012

At December 31, 2012, the Company performed its annual impairment test of goodwill. The Company tested fair value of the following reporting units: Poland Core Business Unit, Russia Core Business Unit, Poland Fine Wines Unit, Russia Import Unit and Hungary Unit. In order to support its value, the Company calculated the fair value of the reporting units using a discounted cash flow approach based on the following assumptions:

•

Risk free rates for Poland, Russia and Hungary used for calculation of discount rate were based on the yield of long term bonds denominated in U.S. dollars issued by Polish, Russian and Hungarian governments as of December 31, 2012. When estimating discount rates to be used for the calculation we have taken into account current market conditions in Poland, Russia and Hungary separately. As a result of our assumptions and calculations, discount rates of 9.32%, 9.86% and 11.41% for Poland, Russia and Hungary, respectively have been determined. These inputs were determined utilizing primarily Level 1 inputs.

•

The Company estimated the growth rates in projecting cash flows for each of reporting group separately, based on a detailed five year plan related to each reporting unit. These inputs were determined utilizing primarily Level 2 inputs.

•

The Company estimated the terminal value growth rates of 2.5% for Polish reporting units, 3.0% for Russian reporting units and 2.7% for its Hungarian unit. These inputs were determined utilizing primarily Level 2 inputs.

Based on goodwill impairment test as of December 31, 2012, it was determined that the carrying value of our Core Business unit in Poland and Russia Import Unit exceeded their fair value. The primary reasons for this was the continuous decline in spirits market, changes in consumer behavior, loss of suppliers and increasing discount pressures from customers both in Russia and in Poland. As a result, the Company completed step two of the impairment test, and compared the implied fair value of the reporting unit’s goodwill to the carrying amount of the reporting unit’s goodwill. As the carrying amount of the reporting unit’s goodwill for both Core Business unit in Poland and Russia Import Unit was greater than the implied fair value of the underlying reporting units’ goodwill values, an impairment loss was recognized for the excess amounting to $64.0 million and $263.8 million for Core Business unit in Poland and Russia Import Unit, respectively.

As a result of tests performed during 2012 described above total impairment charge recognized for the year ended December 31, 2012 amounts to $327.8 million (the charge recognized for the year ended December 31, 2011 amounted to $930.1 million).

The impairment was accumulated assuming 100% realization of budgeted operating income in the period of prognosis. Based on sensitivity analysis of Russia Core Business unit the increase of WACC by 1 p.p. would result in no impairment charge. If the operating profit was lower by 10 p.p. the reporting unit’s fair value would still exceed its book value. Based on our sensitivity analysis the operating income would have to be lower than budgeted by more than 16 p.p. to result in goodwill impairment charge.

Based on sensitivity analysis of Poland Core Business unit the increase of WACC by 1 p.p. would result in impairment charge higher by $49.9m while decrease of WACC by 1 p.p. would result in no impairment charge. Reduction of the operating profit by 10 p.p. would result in higher impairment charge by $19.1 m, while increase by 10 p.p. would result in lower impairment charge by $19.1 m.