Annual report and accounts 2012

(Impairment)/reversal of impairment of non-current assets

OAO Severstal and Subsidiaries
Notes to the Consolidated Financial Statements
7. (Impairment)/reversal of impairment of non-current assets

for the years ended December 31, 2012, 2011 and 2010
(Amounts expressed in thousands of US dollars, except as otherwise stated)

 Year ended December 31,

 

2012

2011

2010

Impairment of goodwill

(48,655)

-

-

(Impairment)/reversal of impairment
of property, plant and equipment

(5,462)

438

(54,077)

Impairment of intangible assets

-

-

(26,053)

 

(54,117)

438

(80,130)

For the purpose of impairment testing, the recoverable amount of each cash-generating unit has been determined based on value in use calculations. The value in use calculation uses cash flow projections based on actual operating results and the business plan approved by management and a corresponding discount rate which reflects the time value of money and risks associated with each individual cash-generating unit. Key assumptions management used in their value in use calculations are as follows:

  • For all cash-generating units, apart from the Severstal Resources segment, cash flow projections cover a period of five years. Cash flows beyond the five-year period have been extrapolated taking into account business cycles. Cash flow projections for cash-generating units of the Severstal Resources segment cover a period which corresponds to the contractual time of the respective mining licenses.
  • Cash flow projections were prepared in nominal terms.
  • Cash flow projections during the forecast period are based on long-term price trends for both sales prices and material costs specific for each segment and geographic region and operating cost inflation in line with consumer price inflation for each country. Consumer price inflation expectations (in local currency) during the forecast period are as follows in percentage terms:
 Year ended December 31,

 

2012

2011

2010

Russia

n/a

n/a

5.4 - 7.0

USA

0.3 - 3.0

2.1 - 2.3

1.3 - 2.8

Italy

n/a

1.9 - 2.5

1.5 - 2.0

  • Discount rates for each cash-generating unit were estimated in nominal terms based on the weighted average cost of capital. These rates, presented by segment, are as follows in percentage terms:
 Year ended December 31,

 

2012

2011

2010

Severstal Resources:

 

 

 

USA

14.7

17.0

18.0

Severstal Russian Steel:

 

 

 

Russia*

n/a

  n/a

13.3

Italy*

n/a

17.3

16.9

Severstal International

n/a

n/a

16.5 - 19.6

*US$ rate

Values assigned to key assumptions and estimates used to measure the unit’s recoverable amount are consistent with external sources of information and historic data for each cash-generating unit. Management believes that the values assigned to the key assumptions and estimates represent the most realistic assessment of future trends.

Severstal Resources segment

PBS Coals Limited

2010

As a result of value in use calculation no impairment loss was recognized in 2010.

The carrying amount of goodwill allocated to the cash-generating unit was US$ 111.7 million as of December 31, 2010.

The following assumptions were used in the impairment test:

  • the forecast extraction volumes increase by 5% in 2011 and remain constant at the 2011 level thereafter;
  • the coking coal concentrate prices are forecast to remain generally constant;
  • the forecast steam coal prices increase on average by 4% p.a. during the five-year forecast period, increase by 2% in 2016 and remain constant at the 2016 level thereafter;
  • operating costs are forecast to decrease by 3% in 2011 and remain constant at the 2011 level thereafter;
  • pre-tax discount rate of 18.0% (in US$ terms).

The above estimates are particularly sensitive in the following areas:

  • a 1% increase in discount rate causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 18.5 million;
  • a 10% decrease in future planned revenues causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 210.1 million.

Specific impairment loss in the amount of US$ 5.7 million was recognized in 2010 and was allocated to intangible assets.

2011

As a result of value in use calculation no impairment loss was recognized in 2011.

The carrying amount of goodwill allocated to the cash-generating unit was US$ 111.7 million as of December 31, 2011.

The following assumptions were used in the impairment test:

  • the forecast extraction volumes increase by 17% in 2012 and remain constant at the 2012 level thereafter;
  • the forecast coking coal concentrate prices decrease by 22% in 2012, increase on average by 4% p.a. in 2013 to 2015, increase by 2% in 2016, increase by 3% in 2017 and remain constant at the 2017 level thereafter;
  • the forecast steam coal prices decrease by 7% in 2012, increase on average by 4% p.a. in 2013 to 2015, increase by 2% in 2016, increase by 3% in 2017 and remain constant at the 2017 level thereafter;
  • operating costs are forecast to increase by 8% in 2012, further grow on average by 2% p.a. in 2013 to 2016, decrease by 2% in 2017 and remain constant at the 2017 level thereafter;
  • pre-tax discount rate of 17.0% (in US$ terms).

The above estimates are particularly sensitive in the following areas:

  • a 10% decrease in future planned revenues causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 31.7 million.

2012

The impairment loss was recognized in 2012 in the amount of US$ 48.7 million and was allocated fully to goodwill.

The carrying amount of goodwill allocated to the cash-generating unit before the impairment loss was US$ 111.7 million as of December 31, 2012.

The following assumptions were used in the impairment test:

  • the forecast extraction volumes decrease by 9% in 2013, decrease by 3% in 2014 and remain at this level in 2015, increase by 24% in 2016 and remain constant at the 2016 level thereafter;
  • the forecast coking coal concentrate prices decrease by 18% in 2013, increase by 13% in 2014, increase on average by 6% p.a. in 2015 to 2022, further grow on average by 2% p.a.;
  • the forecast steam coal prices decrease by 15% in 2013, increase by 13% in 2014, increase on average by 6% p.a. in 2015 to 2022, further grow on average by 2% p.a.;
  • operating costs are forecast to decrease by 14% in 2013, remain constant at the 2013 level in 2014 to 2015, increase by 26% in 2016, further grow on average by 4% p.a.;
  • pre-tax discount rate of 14.7% (in US$ terms).

The above estimates are particularly sensitive in the following areas:

  • a 1% increase in discount rate increases the impairment loss by US$ 31.5 million;
  • a 10% decrease in future planned revenues increases the impairment loss by US$ 267.4 million.

Other units

2010

The impairment loss was recognized in 2010 in the amount of US$ 9.1 million in relation to specific items of property, plant and equipment and intangible assets.

2012

The impairment loss was recognized in 2012 in the amount of US$ 3.0 million in relation to specific items of property, plant and equipment.

Severstal Russian Steel segment

Neva-Metall

2010

As a result of value in use calculation no impairment loss was recognized in 2010.

The carrying amount of goodwill allocated to cash-generating unit was US$ 10.6 million as of December 31, 2010.

The following specific assumptions were used in the impairment test:

  • cash flow projections are based on financial forecasts approved by management covering a five-year period;
  • volumes are assumed to increase on average by 10% p.a. during the forecast period and remain constant at the 2015 level thereafter;
  • the forecast sales prices increase by 8% in 2011, increase on average by 5% p.a. in 2012 to 2015 and increase on average by 1.8% p.a. thereafter;
  • operating costs are forecast to increase by 19% in 2011, increase on average by 5% p.a. in 2012 to 2015 and increase on average by 1.8% p.a. thereafter;
  • pre-tax discount rate of 13.3% (in US$ term).

Redaelli Tecna S.p.A.

2010

As a result of value in use calculation no impairment loss was recognized in 2010.

The carrying amount of goodwill allocated to the cash-generating unit was US$ 31.4 million as of December 31, 2010.

The following assumptions were used in the impairment test:

  • the forecast sales volumes decrease by 7% in 2011, increase on average by 4% p.a. in 2012 to 2015 and remain constant thereafter;
  • forecast sales prices decrease on average by 4% p.a. in 2011 to 2012 and then increase on average by 2% p.a. in 2013 to 2015 and increase on average by 1.8% p.a. thereafter;
  • operating costs are forecast to decrease by 8% in 2011, increase on average by 1% p.a. in 2012 to 2015 and increase on average by 1.8% p.a. thereafter;
  • pre-tax discount rate of 16.9% (in US$ terms).

The above estimates are particularly sensitive in the following areas:

  • a 1% increase in discount rate causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 5.1 million;
  • a 10% decrease in future planned revenues causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 72.1 million.

2011

As a result of value in use calculation no impairment loss was recognized in 2011.

The carrying amount of goodwill allocated to the cash-generating unit was US$ 30.4 million as of December 31, 2011.

The following assumptions were used in the impairment test:

  • the forecast sales volumes decrease by 7% in 2012 and increase on average by 4% p.a. in 2013 to 2016 and remain constant at the 2016 level thereafter;
  • forecast sales prices decrease by 8% in 2012, increase by 12% in 2013, decrease by 6% in 2014, increase on average by 9% p.a. in 2015 to 2016 and remain constant at the 2016 level thereafter;
  • operating costs are forecast to decrease by 14% in 2012, increase on average by 7% p.a. in 2013 to 2016 and remain constant at the 2016 level thereafter;
  • pre-tax discount rate of 17.3% (in US$ terms).

The above estimates are particularly sensitive in the following areas:

  • a 1% increase in discount rate causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 12.8 million;
  • a 10% decrease in future planned revenues causes the carrying amount of the cash-generating unit to exceed its recoverable amount by US$ 64.2 million.

Other units

2010

The impairment loss related to other cash-generating units within the segment was recognized in the amount of US$ 21.1 million in 2010 and was allocated to specific items of property, plant and equipment in the amount of US$ 10.7 million and intangible assets in the amount of US$ 10.4 million.

2011

The reversal of impairment loss related to other cash-generating units within the segment was recognized in the amount of US$ 0.4 million in 2011 and was allocated to specific items of property, plant and equipment.

2012

The impairment loss was recognized in the amount of US$ 2.4 million in 2012 and was allocated to specific items of property, plant and equipment.

Severstal International segment

2010

An impairment loss was recognized in the amount of US$ 44.2 million in 2010 and was allocated to specific items of property, plant and equipment in the amount of US$ 34.1 million and intangible assets in the amount of US$ 10.1 million.