Notes to the consolidated financial statements – analysis of items in the primary statements
11. Goodwill
| £m | |
|---|---|
| Cost at 1 April 2006 | 2,156 |
| Exchange adjustments | (192) |
| Acquisition of subsidiary undertakings | 157 |
| Reclassification to assets of businesses held for sale | (641) |
| Cost at 31 March 2007 | 1,480 |
| Exchange adjustments | 23 |
| Acquisition of subsidiary undertakings (note 28) | 2,335 |
| Cost at 31 March 2008 | 3,838 |
| Accumulated impairment losses at 1 April 2006 | 14 |
| Exchange adjustments | (1) |
| Impairment charge | 55 |
| Reclassification to assets of businesses held for sale | (68) |
| Accumulated impairment losses at 31 March 2007 and 31 March 2008 | – |
| Net book value at 31 March 2008 | 3,838 |
| Net book value at 31 March 2007 | 1,480 |
The amounts disclosed above as at 31 March 2008 include balances relating to our operations in New England of £909m (2007: £915m; 2006: £882m), New York of £560m (2007: £565m; 2006: £639m) and our acquired KeySpan businesses of £2,369m.
Goodwill is reviewed annually for impairment.
Within our New England and upstate New York operations, goodwill is allocated to the individual subsidiary companies. These are defined as cash-generating units for impairment testing purposes. The recoverability of the goodwill as at 31 March 2008 that relates to our New England and upstate New York operations has been assessed by comparing the carrying value of these operations with the recoverable amount on a value-in-use basis. Value-in-use has been calculated based on projections that incorporate our best estimates of future cash flows, customer rates, costs, future prices and growth and has been prepared from internal forecasts for the next five years extrapolated into the future by using a 2% growth rate. Cash flow projections have been discounted to reflect the time value of money, using a discount rate of 5.5% (2007: 6%). The discount rate is the post-tax weighted average cost of capital. On a pre-tax basis it is estimated that the discount rate would be approximately 9% (2007: 10%).
Within KeySpan, provisional goodwill (see note 28) is allocated based on the fair value of each cash-generating unit following a business enterprise valuation using both income and market-based approaches. For the income approach, a discounted cash flow analysis was prepared. This is an analysis of prospective cash flows discounted to present value at a discount rate, which reflects the risk of the entity being valued. The market-based approach indicates the fair value of a business based on a comparison of the company to comparable publicly traded companies and transactions in its industry, as well as prior company transactions. Once the fair value of the cash- generating unit and any identified intangible assets were estimated, the goodwill was implied as the residual value.
The main companies in the KeySpan group of companies are each defined as cash-generating units. The recoverability of the goodwill as at 31 March 2008 has been assessed by comparing the carrying value of these companies with the recoverable amount on a value-in-use basis. This has been based on projections prepared from internal forecasts extrapolated into the future by using a 2% growth rate. Cash flow projections have been discounted to reflect the time value of money, using discount rates of between 6.5% and 13.5% depending on the cash-generating unit. The discount rates are the post-tax weighted average cost of capital. On a pre-tax basis it is estimated that the discount rates would have been between 8.5% and 14.5%.