m) Impairment in the value of long-lived assets
The Company assesses the existence of indicators of impairment in the carrying value of long-lived assets, investments in associates, goodwill and intangible assets according to IAS 36 “Impairment of assets”. When there are such indicators, or in the case of assets whose nature requires an annual impairment analysis (goodwill and intangible assets with indefinite useful lives), the Company estimates the recoverable amount of the asset, which is the higher of its fair value, less disposal costs, and its value in use. Value in use is determined by discounting estimated future cash flows, applying a pre-tax discount rate that reflects the time value of money and taking into consideration the specific risks associated with the asset. When the recoverable amount of an asset is below its carrying value, impairment is considered to exist. In this case, the carrying value of the asset is reduced to the asset’s recoverable amount, recognizing the loss in results of operations for the respective period. Depreciation and/or amortization expense of future periods is adjusted based on the new carrying value determined for the asset over the asset’s remaining useful life. Impairment is computed individually for each asset. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets.
In the estimation of impairments, the Company uses the strategic plans established for the separate cash-generating units to which the assets are assigned. Such strategic plans generally cover a period from 3 to 5 years. For longer periods, beginning in the fifth year, projections are based on such strategic plans while applying a constant or declining expected growth rate.
Key assumptions used in value in use calculations
The forecasts are made in real terms (net of inflation) and in the functional currency of the subsidiary as of December 31, 2017.
Financial forecasts, premises and assumptions are similar to what any other market participant in similar conditions would consider.
Local synergies, that any other market participant would not have taken into consideration to prepare similar forecasted financial information, have not been included.
The assumptions used to develop the financial forecasts were validated for each of the cash generating units (“CGUs”), typically identified by country and by service (in the case of Mexico) taking into consideration the following:
| • | Current subscribers and expected growth. |
| • | Type of subscribers (prepaid, postpaid, fixed line, multiple services) |
| • | Market environment and penetration expectations |
| • | New products and services |
| • | Economic environment of each country |
| • | Expenses for maintaining the current assets |
| • | Investments in technology for expanding the current assets |
| • | Market consolidation and synergies |
The foregoing forecasts could differ from the results obtained through time; however, América Móvil prepares its estimates based on the current situation of each of the CGUs.
The recoverable amounts are based on value in use. The value in use is determined based on the method of discounted cash flows. The key assumptions used in projecting cash flows are:
| • | Margin on EBITDA is determined by dividing EBITDA (operating income plus depreciation and amortization) by total revenues. |
| • | Margin on CAPEX is determined by dividing capital expenditures (“CAPEX”) by total revenues. |
| • | Pre-tax weighted average cost of capital (“WACC”) used to discount the projected cash flows. |
As discount rate, the Company uses the WACC which was determined for each of the cash generating units and is described in the following paragraphs.
The estimated discount rates to perform the IAS 36 “Impairment of assets”, impairment test for each CGU consider market participants assumptions. Market participants were selected taking into consideration size, operations and characteristics of the business that were similar to those of América Móvil.
The discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Company and its operating segments. The WACC takes into account both debt and equity costs. The cost of equity is derived from the expected return on investment by América Móvil’s investors. The cost of debt is based on the interest bearing borrowings América Móvil is obliged to service. Segment-specific risk is incorporated by applying individual beta factors.
The beta factors are evaluated annually based on publicly available market data.
Market participant assumptions are important because, not only do they include industry data for growth rates, but also management assesses how the CGU’s position, relative to its competitors, might change over the forecasted period.
The most significant forward looking estimates used for the 2016 and 2017 impairment evaluations are shown below:
| Average margin on EBIDTA |
Average margin on CAPEX |
Average pre-tax discount rate (WACC) |
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|
2016: |
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|
Europe (7 countries) |
23.61% - 51.58% | 8.29% - 20.72% | 8.74% - 20.07% | |||
|
Brazil (fixed line, wireless and TV) |
31.65% | 18.21% | 9.70% | |||
|
Puerto Rico |
28.91% | 9.08% | 11.29% | |||
|
Dominican Republic |
45.83% | 10.55% | 19.70% | |||
|
Mexico (fixed line and wireless) |
33.38% | 10.75% | 14.34% | |||
|
Ecuador |
35.80% | 7.92% | 22.84% | |||
|
Peru |
28.92% | 14.18% | 14.20% | |||
|
El Salvador |
39.43% | 23.69% | 21.95% | |||
|
Chile |
25.92% | 8.61% | 7.87% | |||
|
Colombia |
38.34% | 14.40% | 13.93% | |||
|
Other countries |
10.1% - 48.92% | 0.5% - 21.39% | 7.39% - 23.79% |
| Average margin on EBITDA |
Average margin on CAPEX |
Average pre-tax discount rate (WACC) |
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|
2017: |
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|
Europe (7 countries) |
25.59% - 52.46% | 7.34% - 14.97% | 9.06% - 19.04% | |||||||||
|
Brazil (fixed line, wireless and TV) |
35.28% | 22.13% | 11.71% | |||||||||
|
Puerto Rico |
23.31% | 8.31% | 4.42% | |||||||||
|
Dominican Republic |
45.79% | 15.55% | 19.23% | |||||||||
|
Mexico (fixed line and wireless) |
35.48% | 8.72% | 16.13% | |||||||||
|
Ecuador |
37.83% | 10.07% | 23.57% | |||||||||
|
Peru |
29.64% | 16.75% | 13.61% | |||||||||
|
El Salvador |
40.36% | 17.99% | 25.14% | |||||||||
|
Chile |
22.04% | 12.45% | 6.15% | |||||||||
|
Colombia |
41.93% | 19.88% | 19.06% | |||||||||
|
Other countries |
9.16% - 48.18% | 0.43% - 23.43% | 7.89% - 24.28% | |||||||||
Sensitivity to changes in assumptions:
The implications of the key assumptions for the recoverable amount are discussed below:
Margin on CAPEX- The Company performed a sensitivity analysis by increasing its CAPEX by 5% and maintaining all other assumptions the same. The sensitivity analysis would require the Company to adjust the amount of its long-lived assets in its CGUs with potential impairment of approximately Ps. 2,386,782.
WACC- Additionally, should the Company increase by 50 base points in WACC per CGU and maintain all other assumptions the same, the carrying amount of the long-lived assets in its CGUs with potential impairment, would be impaired by approximately Ps. 3,517,584.