For the year ended 31 December 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
30 Business combinations continued Significant judgements, assumptions and estimates in the acquisition accounting for Fokker continued Valuation of intangible assets — methodology continued
The proprietary technology and know-how has been valued using a relief from royalty methodology. The cash flow forecasts supporting this valuation reflect the future sales to be generated in conjunction with the technology. The fair value attributed to proprietary technology represents the theoretical costs avoided by Fokker from not having to pay a licence fee for the technology. The royalty rates used in the valuation were 2% to 4%, based on a review of licence agreements for comparable technologies in a similar segment. An after tax discount rate of 11% was applied to the forecast cash flows, a rate that reflects the inherent risk within cash flows and is comparable with the weighted average cost of capital for the acquisition. The valuation of all intangible assets reflects the tax benefit of amortisation, which has meant a benefit assessed primarily with reference to the Netherland tax laws. In order to attribute value to pre-existing development costs a review of capitalised costs as compared with Group policy and an impairment exercise under IAS 36 was performed based on acquisition date information. The value recognised for ‘operating intangible assets’ together with the value recognised for customer related ‘intangible assets arising on business combinations’ is supported by underlying contract valuations prepared under IFRS 3.
Valuation of other assets and liabilities — methodology
Adjustments were made to property, plant and equipment and investment balances to reflect fair values following external third party appraisal. Inventories acquired were assessed for scrap and obsolete items before being fair valued. Inventories acquired have been valued at current replacement cost for raw materials and selling price, adjusted for costs of completion and disposal and associated margin, for finished goods and work-in-progress. The fair value of the inventory uplift was £12 million. Provisions and liabilities include an amount in respect of a legal matter with the Department of Justice and other US regulators (see note 21), government refundable advances and other contractual obligations. A liability of £38 million is included in the acquisition balance sheet for a contractual requirement to repay refundable advances provided by the Netherlands Government under a risk sharing arrangement. The liability has been valued based on forecast cash flows and effective interest rates. In addition a deferred tax asset of £92 million has been recognised in respect of previous taxable losses. This has been valued by reference to the expected future profitability of entities, together with an assessment of timing compared to restrictions under relevant jurisdictions.
On 8 June 2015 the Group acquired 100% of the equity share capital of Sheets Manufacturing Inc (SMI). SMI specialises in metallic spin forming and is a technology leader in the manufacture of aircraft engine inlet lip skins. The fair value of consideration was £9 million and comprises an initial cash payment of £6 million plus contingent consideration estimated at £3 million. The range of the contingent consideration, based on achievement of specific technology milestones is between nil and £3 million. The fair value of net assets acquired of £9 million comprises; property, plant and equipment of £1 million, receivables of £2 million, payables of £2 million, a technology based non-operating intangible asset of £6 million, a deferred tax liability of £1 million and goodwill of £3 million. A further £2 million was paid for acquisition of outstanding share capital in a previously equity accounted investment.
GKN plc Annual Report and Accounts 2015