2019Statements

8 Intangible assets

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 impairments of €31 million mainly relate to several development projects. See also Note 2 'Alternative performance measures'.

The breakdown of the carrying amount of goodwill at year-end 2019 is as follows:

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 (provisional) goodwill are allocated.

The cash flow projections are derived from DSM's business plan (Corporate Strategy Dialogue) as adopted by the Managing Board and updated on a yearly basis. Mature businesses come to a terminal value after five years. The terminal value growth rate is determined with the assumption of limited inflationary growth. For emerging businesses, an explicit forecast period of ten 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), 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.

The market capitalization of DSM at 31 December 2019 amounted to €21,063 million (31 December 2018: €12,961 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 2019 included €125 million (2018: €224 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).

Other intangible assets include drawing rights contracts with Fibrant. Fibrant 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 2019, it had a carrying amount of €167 million (2018: €184 million), a remaining useful life of 11 years, and an amount of €44 million was still payable to Fibrant for the acquisition of the drawing rights (2018: €57 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 2019 of €88 million (2018: €94 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. There are no intangible assets with an indefinite useful life (same as in 2018).