Group notes

Goodwill
Goodwill is recognized at its acquisition cost, as determined on the date of acquiring a business, reduced by any accumulated impairment losses. Goodwill is allocated to the cash-generating units (CGUs) expected to benefit from the synergies resulting from the business combination. The divisions represent the operating segments and Epiroc has identified the operating segments as CGUs. Impairment testing is performed at least annually or whenever the need is indicated. Goodwill is reported as an intangible asset with an indefinite useful life.

Technology-based intangible assets
Expenditures related to research activities are expensed as they are incurred. Research projects acquired as part of business combinations are initially recognized at their fair value as of the acquisition date. After initial recognition, these research projects are carried at cost, less any amortization and impairment losses. Expenditures associated with development activities are also expensed as incurred unless they meet specific criteria for capitalization:

• the product or process under development is estimated to be technically and commercially feasible with the potential to generate probable future benefits.
• the Group has the intent and capability to complete, sell, or utilize the product or process. 
• the Group can reliably measure the expenditures directly attributable to the development of the intangible asset.

Capitalized expenditure includes the cost of materials, direct labor, and other costs directly attributable to the project. Capitalized development expenditure is recorded at cost, reduced by accumulated amortization and impairment losses.

Other intangible assets
Other intangible assets include trademarks, marketing and customer related intangible assets and contract-based rights, such as licenses or franchise agreements. Other intangible assets acquired in relation to contract-based rights, including licenses or franchise agreements, are initially capitalized at their fair value upon acquisition and subsequently reported at cost, reduced by accumulated amortization and impairment losses. Expenditure on internally generated goodwill, trademarks and similar items is expensed as incurred.

The estimated useful lives are as follows:

• Technology-based intangible assets (Product development and Other technology
  and contract based)                                                                                                                 3–15 years
• Trademarks                                                                                                                                4–10 years
• Marketing and customer related intangible assets                                                            4–10 years

Straight-line basis amortization is utilized as the method for allocating the cost of an asset over its useful life and residual values. The useful life and residual values are reassessed annually or more frequently if there are indications of impairment.

Climate risks create uncertainties in the assessment of useful life of intangible assets. Climate-related regulations may also lead to changes in useful life and impairment assessments. Legal or regulatory limitations related to emissions or sustainability practices could also impact the recoverable value of intangible assets.

Research and development related to climate-change mitigation might provide opportunities for Epiroc and could create new intangible assets while failure to invest in climate-related research and development may lead to missed opportunities, increased impairments or negative impact on the recoverable value of existing intangible assets.

Considerations related to climate risks have not had any significant impact on the financial reporting including any changes of useful economic lives of intangible assets.

Impairment
Goodwill is allocated and tested at the level of cash-generating units, which are identified as Epiroc’s operating segments. The Group conducts a periodic assessment of the carrying values of its non-financial assets, which takes place annually or whenever there are indications of impairment. When such indications are identified, the Group proceeds to estimate the recoverable amount of the asset. The recoverable amount for each cash-generating unit has been determined based on the value in Epiroc’s valuation model. Epiroc’s valuation model is based on discounted future cash flows, with a forecast period of either five years or ten years, depending on applicability. The forecast is based on the business plan of each operating segment, considering the characteristics and development of its specific end markets. This assessment is based on both internal and external sources and reflects management’s best estimate of the trajectory of its business operations. The parameters used to calculate future cash flows are assumptions on revenue growth, gross margin development, functional cost efficiency, as well as capital efficiency. This includes planned capital expenditures and target levels of working capital. Epiroc’s weighted average cost of capital (WACC) is calculated at 8% (8) after tax. Since the operating segments are all relatively diversified but with similar geographic coverage and share similar organizational structures and customer bases, the same discount rate is applied to all segments. The perpetual growth beyond the forecast period is assumed as 2% (2).

An impairment loss is acknowledged when the carrying value of an asset or its cash-generating unit (CGU) surpasses its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. When determining value in use, the estimated future cash flows are discounted to their present value, employing a discount rate that reflects the current market’s assessment of the time value of money and the specific risks associated with the asset or CGU. Impairment loss related to goodwill is not subject to reversal in contrast to other assets where impairment losses incurred in previous periods are subject to periodic review with possibility of impairment reversal.

Impairment of goodwill
Key sources of estimation uncertainty
Asset impairment requires management’s judgment, particularly in assessing:

• whether an event has occurred that may affect asset values, 
• whether the carrying value of an asset can be supported by the net present value of future cash flows, which are estimated based upon the continued use of the asset in the business, 
• the appropriate assumptions to be applied in preparing cash flow projections, and 
• the discounting of these cash flows. 

Changing the assumptions selected by management to determine the level of impairment, if any, could affect the financial position and results of operation.