12. Intangible assets

Carrying amounts

As at 31 December 2014, the carrying amount of the trademarks recognised on acquisition of Grupa Azoty POLICE amounted to PLN 55 688 thousand (31 December 2013: PLN 55 688 thousand). As at 31 December 2014, the carrying amount of the trademarks recognised on acquisition of Grupa Azoty PUŁAWY amounted to PLN 33 100 thousand (31 December 2013: PLN 33 100 thousand). Trademarks are not amortised. The Group assumed the indefinite useful life of trademarks due to their long-term existence on the market and lack of plans of their modification or replacement in the future.

As at 31 December 2014, the carrying amount of the brand name “POLICE” was PLN 25 545 thousand (31 December 2013: PLN 25 545 thousand), and of the brand name “PUŁAWY” was PLN 105 000 thousand (31 December 2013: PLN 105 000 thousand). Brand names, similarly as trademarks, are not amortised.

Information on impairment tests performed for intangible assets with indefinite useful lives was presented in Note 12.1.

As at the 31 December 2014, the value of customers portfolio mainly results from customers of Fertilizers-Agro segment. Customers portfolios were recognised on acquisition of Grupa Azoty POLICE and Grupa Azoty PUŁAWY. As at 31 December 2014, the carrying amount of the customers portfolio recognised on acquisition of Grupa Azoty PUŁAWY amounted to PLN 103 371 thousand (31 December 2013: PLN 147 869 thousand), which are going to be amortised over 6 years. The remaining part of customers portfolio was recognised on acquisition of Grupa Azoty POLICE and amounts to PLN 1 649 thousand (31 December 2013: PLN 2 198 thousand) 

As at 31 December 2014, the most significant licenses comprised: licence for OXO alcohols production of PLN 26 755 thousand (31 December 2013: PLN 28 539 thousand), licence for production of nitrous acid of PLN 9 777 thousand (31 December 2013: PLN 11 067 thousand) and SAP licence of PLN 28 230 thousand (31 December 2013: PLN 25 450 thousand). 

There are no intangible assets for which legal title is restricted or which are used as collateral.

The amortisation of intangible assets is generally allocated to the administrative expenses.

Carrying amounts of intangible assets

Gross carrying amounts of intangible assets

Impairment losses

Significant expenditures on intangible assets under construction 

Significant expenditures on intangible assets under constructions include among others: development of Azoty Navigator software (PLN 1 979 thousand), implementation of e-commerce system (PLN 1 225 thousand), implementation of internal logistics system Janus (PLN 1 222 thousand), implementation of CMMS software (PLN 1 042 thousand), license for Installation of Mechanical Granulation II (PLN 1 000 thousand). 

Note 12.1 Goodwill

Recoverable amount of CGU including goodwill and intangible assets with indefinite useful lives 

Grupa Azoty POLICE

For the purpose of impairment testing, goodwill and intangible assets with indefinite useful lives are allocated to the group of CGUs including CGU Fertilizers and CGU Pigments in Grupa Azoty POLICE. The corporate assets in the Supporting Departments and Administration were allocated to the segments on an indirect basis. The most reasonable way of allocating corporate assets for the Supporting Departments was the cost basis whereas for Administration was the revenue basis.

The total carrying amount of intangible assets with indefinite useful lives and goodwill allocated to the group of CGUs in Grupa Azoty POLICE on 31 December 2014 was PLN 90 357 thousand (31 December 2013: 90 357 thousand).

The recoverable amount was based on value in use, determined at the group of CGUs level, i.e. Fertilizers and Pigments. Value in use in 2014 was determined in a similar manner as in 2013.

The estimated future cash flows were prepared using the detailed financial forecasts for years 2015-2019. The forecast was limited to the estimate of the results on sales, excluding other income and expenses, finance income and costs and income tax. The forecast was prepared in real terms, i.e. excluding the impact of inflation. The currency exchange rates as of the reporting date were used in the forecast, i.e. for 3.5072 USD and for 4.2623 EUR (2013: for 3.0120 USD and 4.1472 for EUR).

Residual value was determined by extrapolating the free cash flows forecast beyond the 5 year detailed forecast and assuming an adequate growth rate.

The discount rate used was a nominal, pre-tax measure reflecting the weighted average cost of capital (WACC) amounting to 7.72% (2013: 9.34%) 

The value in use of the CGUs as at the test date, i.e. 31 December 2014 amounted to:

• CGU Fertilizers PLN 699 575 thousand (31 December 2013: PLN 622 798 thousand),
• CGU Pigments  PLN 210 145 thousand (31 December 2013: PLN 192 948 thousand)
• Total  PLN 909 720 thousand (31 December 2013: PLN 815 746 thousand). 

The estimated recoverable amount exceeds the assets carrying amount.

Grupa Azoty PUŁAWY

The intangible assets with indefinite useful lives were allocated to the CGU Fertilizers-Agro in Grupa Azoty PUŁAWY for the purpose of impairment testing. The total carrying amount of intangible assets with indefinite useful lives as at 31 December 2014 amounted to PLN 138 100 thousand (31 December 2013: 138 100 thousand). The recoverable amount was based on value in use. 

The forecast of the future cash flows were prepared based on the 2015 budget of Grupa Azoty PUŁAWY and the financial forecast for years 2016-2024. 10-year period was used in the forecast as it is expected that the synergies from operating in Grupa Azoty will be realised in that period. The stabilisation in cash flows is expected afterwards.

The following significant assumptions were made:

• the business will continue for an indefinite period in the future,
• EBITDA margin will increase from 13% in 2015 to 18% in 2020 and will remain stable in the following periods (in 2013: 11-17%). The increase in the expected margin results from the revised estimate of natural gas purchase prices, prepared based on the entity’s own analyses and based on the prices of natural gas derivatives on financial markets,
• the total volume of sales of fertilizers will be comparable to the volume realised in the past,
• the increase in sales prices will follow the expected inflation,
• the corporate assets of Grupa Azoty PUŁAWY were allocated to the CGUs on an indirect basis. The cost ratios were determined to by the most rational allocation ratios for corporate assets,
• the growth rate in terminal period will amount to 2.5% (in 2013: 2%). 

The discount rate used was a nominal, post-tax measure reflecting the weighted average cost of capital (WACC) amounting to 8.09% (2013: 10.25%)

The value in use of the CGU Fertilizers-Agro as at 31 December 2014 and 31 December 2013 exceeded significantly the carrying amount of the tested assets.