10. Goodwill and intangible assets
A. Reconciliation of carrying amount
Goodwill Contracts Intellectual property Patents Total Cost Beginning of year $ – $ – $118,819 $8,697 $127,516 Additions [note 6] 87,460 86,627 – – 174,087 Effect of movements in exchange rates 6,538 6,475 – 601 13,614 End of year 93,998 93,102 118,819 9,298 315,217 Accumulated amortization Beginning of year – – 33,694 721 34,415 Amortization charge – 79,609 3,246 494 83,349 Effect of movements in exchange rates – 3,351 – 71 3,422 End of year – 82,960 36,940 1,286 121,186 Net book value at December 31, 2013 $93,998 $10,142 $81,879 $8,012 $194,031 Intellectual property Patents Total Cost Beginning of year $118,819 $8,890 $127,709 Effect of movements in exchange rates – (193) (193) End of year 118,819 8,697 127,516 Accumulated amortization Beginning of year 29,735 246 29,981 Amortization charge 3,959 484 4,443 Effect of movements in exchange rates – (9) (9) End of year 33,694 721 34,415 Net book value at December 31, 2012 $85,125 $7,976 $93,101
The intangible asset values relate to intellectual property acquired with Cameco Fuel Manufacturing (CFM), patents acquired with UFP Investments LLC (UFP) and purchase and sale contracts acquired with NUKEM. The CFM intellectual property is being amortized on a unit-of-production basis over its remaining life. Amortization is allocated to the cost of inventory and is recognized in cost of products and services sold as inventory is sold. The patents acquired with UFP are being amortized to cost of products and services sold on a straight-line basis over their remaining life which expires in July 2029. The NUKEM purchase and sale contracts will be amortized to earnings over the remaining terms of the underlying contracts, which extend to 2022. Amortization of the purchase contracts is allocated to the cost of inventory and is included in cost of sales as inventory is sold. Sale contracts are amortized to revenue. The approximate amount of pre-tax earnings (in USD) relating to the amortization of the fair value allocated to the NUKEM contracts is as follows:
2014 2015 2016 2017 2018 2019 2020 2021 2022 Total $(694) 1,933 2,897 994 1,091 975 871 777 692 $9,536
C. Impairment test
For the purpose of impairment testing, goodwill is attributable to NUKEM, which is considered a CGU.
The recoverable amount of NUKEM was estimated based on a value in use calculation, which involved discounting the future cash flows expected to be generated from the continuing use of the CGU. The estimated recoverable amount of NUKEM exceeded its carrying amount by approximately $70,500,000 (US) and therefore no impairment loss was recognized.
Five years of cash flows were included in the discounted cash flow model. Any cash flows expected to be generated beyond the initial five-year period were extrapolated using a terminal value growth rate. The projected cash flows included in the calculation were based upon NUKEM’s approved financial forecasts and strategic plan, which incorporate NUKEM’s current contract portfolio as well as management’s expectations regarding future business activity. The key assumptions used in the estimation of the value in use were as follows:
2013 Discount rate (pre-tax) 11.6% Discount rate (post-tax) 8.8% Terminal value growth rate 2.5%
The discount rate was determined based on NUKEM’s internal weighted average cost of capital, adjusted for the marginal return a market participant would expect to earn on an investment in the entity. It represents a nominal, post-tax figure. The terminal value growth rate was determined based on management’s expected average annual long-term growth in the uranium industry. The rate represents a nominal figure, and it is consistent with forecast economic growth rates observed in the market.
Other key assumptions include uranium price forecasts and perpetual cash flows. Uranium prices applied in the calculation were based on approved internal price forecasts, which reflect management’s experience and industry expertise. These prices are consistent with expected long-term prices observed in the market. Perpetual cash flows have been determined based on management’s expectation of future business activity.
Cameco has validated the results of the value in use calculation by performing sensitivity tests on its key assumptions. Holding all other variable constant, the decreases in recoverable amount created by marginal changes in each of the key assumptions are as follows:
Change in assumption Amount of decrease Discount rate 1% increase $19,344 Terminal value growth rate 1% decrease 12,847 Uranium prices $1/lb decrease 4,220 Perpetual annual cash flow $1 Million (US) decrease 11,331
As a result of these tests, the Company believes that any reasonably possible changes in the key assumptions would not result in NUKEM’s carrying amount exceeding its recoverable amount.