Intangible assets

 
Goodwill
Licenses
and patents
Under
construction
Development
projects
Other
Total
       
Balance at 1 January 2016
      
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 obligations
-
-
-
-
(88)
(88)
- Other 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
       
Changes in carrying amount:
      
- Capital expenditure
-
-
26
70
2
98
- Put into operation
-
32
(68)
-
36
-
- Acquisitions
159
21
23
-
15
218
- Amortization
-
(11)
-
(7)
(128)
(146)
- Impairment losses
(3)
(11)
-
(11)
(9)
(34)
- Exchange differences
(181)
(10)
(6)
-
(70)
(267)
- Other reclassifications
-
-
(14)
30
(15)
1
       
 
(25)
21
(39)
82
(169)
(130)
Balance at 31 December 2017
      
Cost
1,950
225
66
215
1,657
4,113
Amortization and impairment losses
17
100
-
33
905
1,055
       
Carrying amount
1,933
125
66
182
752
3,058

The amortization of intangible assets is included in Cost of sales, Marketing and sales, Research and development and General and administrative expenses.

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 impairment losses of €34 million mainly relate to acquisition-related assets and development projects at DSM Innovation Center and DSM Food Specialties. See also Note 2 'Alternative performance measures'.

The breakdown of the carrying amount of goodwill at year-end 2017 is as follows:

Goodwill per acquisition

Acquisition
2017
2016
 
Cash generating unit
Functional Currency
Year of acquisition
       
Martek
387
444
 
DSM Nutritional Products
USD
2011
NeoResins
358
358
 
DSM Resins & Functional Materials
EUR
2005
Fortitech
290
333
 
DSM Nutritional Products
USD
2012
Ocean Nutrition Canada
198
210
 
DSM Nutritional Products
CAD
2012
Kensey Nash
135
155
 
DSM Biomedical
USD
2012
Tortuga
102
118
 
DSM Nutritional Products
BRL
2013
The Polymer Technology Group
73
84
 
DSM Biomedical
USD
2008
Other acquisitions
390
256
    
       
Total
1,933
1,958
    

Goodwill per Cash generating unit

Cash generating unit
2017
2016
   
DSM Nutritional Products
1,189
1,198
DSM Resins & Functional Materials
383
386
DSM Biomedical
208
238
DSM Food Specialties
59
64
DSM Dyneema
40
44
DSM Advanced Solar
16
3
DSM Engineering Plastics
15
16
DSM Hydrocolloids
14
-
DSM Bio-based Products & Services
9
9
   
Total
1,933
1,958

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 are 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, updated on a yearly basis. 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. 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.

Key assumptions goodwill impairment tests

 
2017
2016
   
Explicit forecast
  
- Mature business
5
5
- Emerging business
10
10
   
Terminal value growth
1%
1%
   
Pre-tax discount rate
  
- DSM Nutritional Products
8.4%
8.6%
- DSM Resins & Functional Materials
10.3%
11.2%
- DSM Biomedical
10.6%
10.5%
   
Organic sales growth
  
DSM Nutritional Products
  
- Year 1-5
4-9%
3-5%
- Year 6-10
2.4%
2.4%
DSM Resins & Functional Materials
  
- Year 1-5
2-10%
3-5%
- Year 6-10
1.2%
1.2%
DSM Biomedical
  
- Year 1-10
8.0%
7.7%

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.

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. Where in 2016 headroom for Biomedical was limited and the sensitivity test resulted in a risk of no headroom, for 2017 this is no longer the case.

The market capitalization of DSM at 31 December 2017 amounted to €14,454 million (31 December 2016: €10,334 million) and was clearly above the carrying amount of net assets, thus providing an additional indication that goodwill was not impaired.

Development costs

The carrying amount of development costs at 31 December 2017 included €156 million mainly relating to strategic projects which are not being amortized yet. The recoverable amount of these CGUs was estimated based on the present value of the future cash flows expected to be derived from the CGUs (value-in-use). The recoverable amount of all CGUs was estimated to be higher than its carrying amount and no impairment was required.

Other intangible assets

    
2017
2016
 
Cost
Amortization
Carrying
amount
Of which
acquisition-
related
Of which
acquisition-
related
      
Application software
258
(186)
72
4
11
Marketing-related
93
(26)
67
67
54
Customer-related
537
(242)
295
249
275
Technology-based
460
(376)
84
63
188
Drawing rights
237
(39)
198
-
-
Other
72
(36)
36
13
12
      
Total
1,657
(905)
752
396
540
      
Total 2016
1,748
(827)
921
540
 

Other intangible assets include drawing rights contracts with the partnership ChemicaInvest. 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 2017, it had a carrying amount of €198 million (2016: €220 million) and a remaining useful life of 13 years, and an amount of €72 million was still payable to ChemicaInvest for the acquisition of the drawing rights (2016: €74 million). Other intangible assets also include the customer relationships that were part of the Fortitech acquisition in 2012, with a carrying amount at the end of 2017 of €99 million (2016: €124 million). Furthermore, acquisition-related intangibles are included in the annual goodwill impairment test previously discussed in this section. These intangible assets are amortized on a straight-line basis, except for the intangible assets with an indefinite useful life, which amount to €46 million (2016: €52 million).