FGV Annual Report 2013

Felda Global Ventures Holdings Berhad 240 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2013 21 INTANGIBLE ASSETS (Cont’d.) (a) Impairment test for goodwill (Cont’d.) (i) Sugar business operations in Seberang Prai, Malaysia (Cont’d.) The key assumptions used for the CGU’s fair value less cost to sell calculation are: 2013 2012 Gross margin 18%-19% 20%-22% Terminal value growth rate 1% 2% Discount rate 10% 9% (i) Gross margin The basis used to determine the value assigned to the budgeted gross margin is the average gross margin achieved in the year immediately before the budgeted year, adjusted for market and economic conditions, which includes expectations of raw sugar pricing under long-term contracts, subsidies receivable from the Government of Malaysia in certain locations and expected efficiency improvements. (ii) Terminal value growth rate The terminal growth rate used is based on long-term growth rates in the sugar industry in Malaysia. (iii) Discount rate Discount rate used, which is pre-tax, reflects specific industry risks relating to the sugar business. Management believes that there is no reasonably possible change in any of the above key assumptions which would cause the carrying amount of the CGU to exceed the recoverable amount. (ii) Plantation estates in Lahad Datu, Sabah Goodwill arising from the business combination with Pontian United Plantations Berhad (“PUP”) represents economic benefits from synergies between PUP’s estates and Group’s mills and refinery in Lahad Datu, Sabah. Both parties will benefit in terms of increased utilisation of mills and refinery, cost savings in transportation and workforce and managerial exchange for both parties. Therefore, the goodwill has been allocated to the Malaysian plantation CGU and tested as one cash generating unit. The recoverable amount of the CGU is determined using a discounted cash flow calculation using cash flow projections based on financial budgets approved by the Directors. The key assumptions are as follows: (i) CPO price RM2,450/MT to RM2,600/MT (ii) FFB price RM488/MT to RM524/MT (iii) Estate replanting fixed cost Matured – RM3,270 per hectare based on a 25 year cycle for oil palm Immature – RM9,414 per hectare based on a 25 year cycle for oil palm (iv) Terminal value growth rate The terminal growth rate used is 2.4% based on long-term growth rates in the oil palm industry in Malaysia. (v) Discount rate Discount rate used is 9.47% reflects specific industry risks relating to the oil palm business, on a pre-tax basis. Management believes that there is no reasonably possible change in any of the above key assumptions which would cause the carrying amount of the CGU to exceed the recoverable amount.