Notes to the financial statements | Note 5.3

Summary of significant accounting policies

Measurement

Goodwill is measured at cost less accumulated impairment losses and is not amortised. Goodwill is tested for impairment annually or when an indication of impairment exists.

Goodwill impairment assessment

Goodwill arising in a business combination is recognised as an intangible asset at the date of acquisition.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net fair value of the acquiree's identifiable net assets.

If the Group's interest in the fair value of the acquiree's identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of profit or loss on disposal.

Impairment considerations

The Group tests impairment at a cash-generating unit (CGU) level. As a right-of-use (ROU) asset does not generate cash inflows largely independent from other assets, the ROU asset is tested for impairment together with the CGU to which such an asset belongs. From an IFRS 16 perspective, the assumptions assume the reinvestment of the ROU asset, i.e. cash flows to replace the ROU asset have been included in the model. Management adjusted the value in use model by excluding the cash outflows in respect of the lease payments as it relates to financing and including the cash outflows to replace the ROU asset.

In prior years, the Group's CGUs consisted of Telkom, BCX, Yellow Pages and Gyro. In the current year, the operations of Yellow Pages have been integrated into Telkom, effective 1 July 2022. This resulted in the Yellow Pages assets no longer generating independent cash flows from those of Telkom Consumer. Yellow Pages is now part of Telkom Consumer CGU. The Openserve Telkom division was carved out of the Company through legal separation. The process and contracts that were then put in place resulted in these assets generating independent cash flows. Effectively, these restructuring transactions changed the former way of the Group asset aggregation, resulting in the Group CGUs being Telkom Consumer, Openserve, BCX and Gyro.

BCX and Telkom Consumer are the only CGUs that have goodwill. In line with IAS 36 (Impairment of Assets), management has performed an annual impairment assessment of the Telkom Consumer and BCX CGUs to cover the impairment of the goodwill balances as of 31 March 2023.

Management has identified impairment indicators on Telkom Consumer and Openserve CGUs, and further details are noted below.

The Group utilised the value in use, using the discounted cash flow method, as the valuation basis for all CGUs. Based on this, the income approach was used. A five-year period is used for the discounted cash flows, approved by senior management and/or the Board of the Group.

BCX CGU

Value in use, using the discounted cash flow method, was adopted as the valuation basis. Based on this, the income approach was used. A five-year period is used for the discounted cash flows, approved by senior management and/or the Board of the Group.

The BCX CGU was then valued using a sum-of-the-parts approach. The valuation was performed on an enterprise value basis.

The value in use calculation took into consideration the following key assumptions:

EBITDA margin

The budgeted EBITDA margin was used based on past experience and management's future expectations of business performance.

Growth rates

The growth rates were consistent with publicly available information relating to long-term average growth rates for the market in which the CGU operated. The compound annual growth rate used for revenue is 8.4% and EBITDA ranges between 12.6% and 15.5%.

Terminal growth rates

Terminal growth rates ranging between 4% and 5% were applied. The terminal value was determined at the end of year five of the cash flow forecasts. The growth rate considered steady state of growth rates to extrapolate revenue beyond the forecast period cash flows.

Discount rate

The discount rate used reflects both time value of money and other specific risks relating to the entity. The discount rate was calculated based on comparable companies in the industry. An equity market risk premium was applied to account for the additional risk associated with equity investments, in excess of the risk-free rate.

The pre-tax discount rate for the BCX CGU ranges from 21.3% to 22.5%. An in-perpetuity calculation was also included after five years as per the terminal growth rate disclosure.

Based on the value in use calculation, the estimated value in use of BCX significantly exceeds the carrying amount of the BCX CGU. As such, there is no impairment loss to be recognised.

Sensitivity to changes in assumptions

Given the significant headroom computed, no further sensitivity analysis has been performed.

Telkom Consumer CGU

Telkom Consumer operates in South Africa. The economic climate of South Africa is under strain due to numerous factors. Telkom Consumer's business is dependent on technology, and for some of its operations the old technology (legacy assets) was still being utilised. The COVID-19 period highlighted the need for efficient virtual ways of working, resulting in highly innovative technology being introduced to the market. The technological evolvement and the economic climate have negatively affected the Telkom Consumer business, evidenced by no growth in operating profits and declining operating cash flows. The incorporation of these factors into the five-year budgets indicated the economic performance of the CGU had declined. Effectively, the five-year budgets have been adjusted to incorporate this outlook, resulting in the recoverable amount of the CGU being lower than its carrying value.

The value in use calculation took into consideration the following key assumptions:

EBITDA margin

The budgeted EBITDA margin is based on experience and management's future expectations of business performance.

Growth rates

The growth rates were consistent with publicly available information relating to long-term average growth rates for the market in which the CGU operated. The compound annual growth rate used for revenue is 2.6% and EBITDA is 14%.

Terminal growth rates

A terminal growth rate of 3% was applied. The terminal value was determined at the end of year five of the cash flow forecasts. The growth rate considered steady state of growth rates to extrapolate revenue beyond the forecast period cash flows.

Discount rate

An equity market risk premium was applied to account for the additional risk associated with equity investments, in excess of the risk-free rate. The pre-tax discount rate for the Telkom CGU ranges from 15% to 16.4%. An in-perpetuity calculation was also included after five years as per the terminal rate disclosure.

Based on the value in use calculation, the recoverable amount of the Telkom CGU is lower than the carrying value as at 31 March 2023, indicating an impairment loss will be recognised.

Openserve CGU

Openserve (Pty) Ltd operates in South Africa. The economic climate of South Africa is under strain due to numerous factors. This has negatively impacted the Openserve operational and economic outlooks, resulting in a deterioration in business sales and growth. The five-year budgets indicated the economic performance of the CGU had declined. Effectively, the five-year budgets have been adjusted to incorporate this outlook, resulting in the recoverable amount of the CGU being lower than its carrying value.

The value in use calculation took into consideration the following key assumptions:

EBITDA margin

The budgeted EBITDA margin is based on experience and management's future expectations of business performance.

Growth rates

The growth rates were consistent with publicly available information relating to long-term average growth rates for the market in which the CGU operated. The compound annual growth rate used for revenue is 3.1% and EBITDA is 3.6%.

Terminal growth rates

A terminal growth rate of 5% was applied. The terminal value was determined at the end of year five of the cash flow forecasts. The growth rate considered steady state of growth rates to extrapolate revenue beyond the forecast period cash flows.

Discount rate

An equity market risk premium was applied to account for the additional risk associated with equity investments, in excess of the risk-free rate. The pre-tax discount rate for the Openserve CGU ranges from 14.7% to 16.1%. An in-perpetuity calculation was also included after five years as per the terminal rate disclosure.

Based on the value in use calculation, the recoverable amount of the Openserve CGU is lower than the carrying value as at 31 March 2023, indicating an impairment loss will be recognised.