Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
10. Goodwill and intangible assets
A. Reconciliation of carrying amount
At December 31, 2015 Goodwill Contracts Intellectual
Patents Total Cost Beginning of year $102,526 $101,549 $118,819 $10,141 $333,035 Effect of movements in exchange rates 19,788 19,599 — 1,957 41,344 End of year 122,314 121,148 118,819 12,098 374,379 Accumulated amortization Beginning of year — 88,978 40,992 1,963 131,933 Amortization charge — 2,458 4,438 609 7,505 Effect of movements in exchange rates — 17,373 — 438 17,811 End of year — 108,809 45,430 3,010 157,249 Net book value at December 31, 2015 $122,314 $12,339 $73,389 $9,088 $217,130 At December 31, 2014 Goodwill Contracts Intellectual
Patents Total Cost Beginning of year $93,998 $93,102 $118,819 $9,298 $315,217 Effect of movements in exchange rates 8,528 8,447 — 843 17,818 End of year 102,526 101,549 118,819 10,141 333,035 Accumulated amortization Beginning of year — 82,960 36,940 1,286 121,186 Amortization charge — (1,438) 4,052 531 3,145 Effect of movements in exchange rates — 7,456 — 146 7,602 End of year — 88,978 40,992 1,963 131,933 Net book value at December 31, 2014 $102,526 $12,571 $77,827 $8,178 $201,102
The intangible asset values relate to intellectual property acquired with Cameco Fuel Manufacturing Inc. (CFM), patents acquired with UFP Investments LLC (UFP) and purchase and sales 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 sales 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 products and services sold as inventory is sold. Sales contracts are amortized to revenue. Approximately $3,517,000 of pre-tax earnings (in USD) relating to the amortization of the fair value allocated to the NUKEM contracts will be amortized in 2016 with the remaining balance being recognized fairly evenly each year through 2022.
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 $55,524,000 (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:
2015 Discount rate (pre-tax) 11.8% 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 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 variables 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 $37,222 Terminal value growth rate 1% decrease 30,805 Uranium prices $1/lb decrease 6,001 Perpetual annual cash flow $1 million (US) decrease 11,131
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.