Intangible assets

 
Goodwill
Licenses
and patents
Under
construction
Development
projects
Other
Total
       
Balance at 1 January 2015
      
Cost
1,788
204
102
75
1,525
3,694
Amortization and impairment losses
-
93
-
21
713
827
       
Carrying amount
1,788
111
102
54
812
2,867
       
Changes in carrying amount:
      
- Capital expenditure
-
-
31
47
7
85
- Put into operation
-
7
(35)
-
28
-
- Acquisitions
29
4
-
-
12
45
- Disposals
-
(2)
(2)
-
(11)
(15)
- Deconsolidation
-
-
-
-
334
334
- Amortization
-
(11)
-
(3)
(140)
(154)
- Impairment losses
(18)
(2)
-
(13)
(23)
(56)
- Exchange differences
67
1
4
1
44
117
- Other reclassifications
-
-
4
-
1
5
       
 
78
(3)
2
32
252
361
Balance at 31 December 2015
      
Cost
1,883
199
104
122
1,880
4,188
Amortization and impairment losses
17
91
-
36
816
960
       
Carrying amount
1,866
108
104
86
1,064
3,228
       
Changes in carrying amount:
      
- Capital expenditure
-
1
60
1
1
63
- Put into operation
-
9
(58)
27
22
-
- Acquisitions
7
5
-
-
9
21
- Amortization
-
(14)
-
(5)
(124)
(143)
- Decreased drawing rights obligation
-
-
-
-
(88)
(88)
- Impairment losses
-
(9)
-
(6)
(1)
(16)
- Exchange differences
85
3
1
-
30
119
- Other reclassifications
-
1
(2)
(3)
8
4
       
 
92
(4)
1
14
(143)
(40)
Balance at 31 December 2016
      
Cost
1,977
215
105
133
1,748
4,178
Amortization and impairment losses
19
111
-
33
827
990
       
Carrying amount
1,958
104
105
100
921
3,188

Other intangible assets include drawing rights contracts with the partnership ChemicaInvest (included under deconsolidation of €334 million in 2015). ChemicaInvest will continue to supply at least 80% of DSM Engineering Plastics' caprolactam needs in Europe and North America for 15 years (2015-2030) via a drawing rights contract, effectively maintaining DSM Engineering Plastics' backward integration. Initially the fair value of this contract has been recognized as an intangible asset by DSM Engineering Plastics; for subsequent measurement, the initial fair value is the deemed cost of the asset, which is subject to straight-line amortization.
At the end of 2016, it had a carrying amount of €220 million (2015: €325 million), and an amount of €74 million was still payable to ChemicaInvest for the acquisition of the drawing rights (2015: €160 million). The decrease in the carrying amount is mainly caused by the lower obligation of €88 million due to the renewed contract in the US and the revised investment obligation in Europe. The non-current liability for drawing rights was similarly updated. Furthermore, acquisition-related intangibles are included that have been included in the annual goodwill impairment test discussed later in this section. These assets are amortized on a straight-line basis, except for the intangible assets with an indefinite useful life, which amount to €52 million (2015: €50 million).

In 2016, an impairment on Intangible assets of €16 million was recognized. This mainly related to an impairment of €10 million at DSM Bio-based Products & Services in Brazil (see Note 2 'Alternative performance measures').

In 2015, an impairment on Intangible assets of €56 million was recognized. This mainly related to an impairment of €16 million at DSM Resins & Functional Materials against goodwill relating to DSM-AGI (see Note 2 'Alternative performance measures'). Furthermore, an impairment of development costs in DSM Nutritional Products of €13 million had been included as certain new production techniques that had been developed were not taken into operation. Also an impairment of €14 million was included relating to software, as a consequence of outsourcing the related activity.

Over the past few years, DSM has acquired several entities in business combinations that have been accounted for by the acquisition method, resulting in recognition of goodwill and other intangible assets. The amounts assigned to the acquired assets and liabilities are based on assumptions and estimates about their fair values. In making these estimates, management consults independent, qualified appraisers if appropriate. A change in assumptions and estimates could change the values allocated to certain assets and their estimated useful lives, which could affect the amount or timing of charges to the income statement, such as amortization of intangible assets.

The breakdown of the carrying amount of goodwill at year-end 2016 is as follows:

Goodwill

Acquisition
2016
2015
 
Cash generating unit
Functional Currency
Year of acquisition
       
Martek
444
425
 
DSM Nutritional Products
USD
2011
NeoResins
358
358
 
DSM Resins & Functional Materials
EUR
2005
Fortitech
333
318
 
DSM Nutritional Products
USD
2012
Ocean Nutrition Canada
210
196
 
DSM Nutritional Products
CAD
2012
Kensey Nash
155
148
 
DSM Biomedical
USD
2012
Tortuga
118
94
 
DSM Nutritional Products
BRL
2013
The Polymer Technology Group
84
80
 
DSM Biomedical
USD
2008
Pentapharm
36
36
 
DSM Nutritional Products
CHF
2007
Cargill Cultures and enzymes business
30
30
 
DSM Food Specialties
EUR/USD
2012
Shandong ICD
26
27
 
DSM Dyneema
CNY
2011
Unitech
18
17
 
DSM Nutritional Products
NZD
2013
Aland
14
14
 
DSM Nutritional Products
CNY
2015
Novamid
14
9
 
DSM Engineering Plastics
JPY
2010
Syntech Far East
13
12
 
DSM Resins & Functional Materials
HKD
2005
Cubic Tech
12
15
 
DSM Dyneema
USD
2015
Zhejiang Zhongken Biotechnology
11
11
 
DSM Food Specialties
CNY
2010
Verenium
11
10
 
DSM Food Specialties
USD
2012
Japan Fine Coatings
10
-
 
DSM Resins & Functional Materials
JPY
2016
C5 Yeast Company
9
9
 
DSM Bio-based Products & Services
EUR
2011
Crina
9
9
 
DSM Nutritional Products
CHF
2006
DSM Japan Engineering Plastics
6
6
 
DSM Engineering Plastics
EUR
2003
DSM Valley Research
6
6
 
DSM Food Specialties
USD
2008
Other acquisitions
31
36
    
Total
1,958
1,866
    

Goodwill per Cash generating unit

Cash generating unit
2016
2015
   
DSM Nutritional Products
1,198
1,125
DSM Resins & Functional Materials
386
375
DSM Biomedical
238
228
DSM Food Specialties
64
63
DSM Dyneema
44
47
DSM Engineering Plastics
16
16
DSM Bio-based Products & Services
9
9
DSM Advanced Solar
3
3
   
Total
1,958
1,866

The annual impairment tests of goodwill are performed in the fourth quarter. The recoverable amount of the cash generating units (CGUs) concerned is based on a value-in-use calculation. DSM Nutritional Products, DSM Resins & Functional Materials and DSM Biomedical are the three CGUs to which significant amounts of goodwill is allocated.

The cash flow projections for the first 5 years are derived from DSM’s business plan (Corporate Strategy Dialogue) as adopted by the Managing Board. For the subsequent 5 years a gradual declining growth is applied for mature businesses to come to a terminal value after 10 years. The terminal value growth rate is determined with the assumption of limited inflationary growth of 1% (2015: 1%). For emerging businesses an explicit forecast period of 10 years is used with the same assumption for growth in the terminal value. The key assumptions in the cash flow projections relate to the market growth for the CGUs and the related revenue projections, EBITDA developments, and the rates used for discounting cash flows.

For DSM Nutritional Products the growth assumptions are based on the growth of the global food and feed markets, for DSM Resins & Functional Materials on the demand for advanced coating resins (influenced by growth in building and construction markets) and for DSM Biomedical on the growth of the market for medical devices. For both DSM Nutrional Products (2016 pre-tax discount rate 8.6%, 2015: 7.8%) and DSM Resins & Functional Materials (2016 pre-tax discount rate 11.2%, 2015: 11.1%) the organic sales growth for the first 5 years is expected to be between 3-5%. For the subsequent 5 year period, a declining growth rate of 2.4% for DSM Nutritional Products and 1.2% for DSM Resins & Functional Materials was applied. A sensitivity test was performed on the impairment tests of the CGUs and showed that the conclusions of these tests would not have been different if reasonable possible adverse change in key parameters had been assumed, with the exception of DSM Biomedical.

The goodwill allocated to DSM Biomedical (2016 pre-tax discount rate 10.5%, 2015 10.5%) amounted to €238 million and, similar to last year, the headroom is limited. The key assumptions determining the value in use are a compounded annual sales growth rate of 7.7% (2015: >10%) for the 10-year forecast period, an expected average EBITDA margin of 25% (2015: 18%) for the first 5 years and 34% (2015: 25%) for the remainder of the forecast period (due to better coverage of R&D spend). The terminal value growth rate was set at 1% (2015: 1%). A sensitivity test shows that an increase in the pre-tax weighted average cost of capital of 152.5 basis points in combination with the same decrease in the EBITDA margin over the full forecast period would result in no headroom.

The market capitalization of DSM at 31 December 2016 amounted to €10,334 million (31 December 2015: €8,396 million) and was clearly above the carrying amount of net assets, providing an additional indication that goodwill was not impaired.

Other intangible assets

    
2016
2015
 
Cost
Amortization
Carrying
amount
Of which
acquisition-
related
Of which
acquisition-
related
      
Application software
170
(113)
57
11
12
Marketing-related
69
(15)
54
54
60
Customer-related
522
(185)
337
275
296
Technology-based
680
(457)
223
188
184
Drawing rights
245
(25)
220
-
-
Other
62
(32)
30
12
15
      
Total
1,748
(827)
921
540
567
      
Total 2015
1,880
(816)
1,064
567