Impairment test 2009.doc

EMIRATES TELECOMMUNICATIONS CORPORATIONIMPAIRMENT TESTFOR THE YEAR ENDING 31 DECEMBER 2009

Basic principles of impairment

An asset may not be carried in the balance sheet at more than its recoverable amount. IAS 36 states that "If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss". [IAS 36 para 59]. An asset's carrying amount is the amount at which the asset is recognised after deducting any accumulated depreciation or amortisation and accumulated impairment losses thereon. [IAS 36 para 6].

An asset's recoverable amount represents its greatest value to the business in terms of the cash flows that it can generate. That is the higher of: fair value less costs to sell (the amount for which the asset could be sold in an arm's length

transaction between knowledgeable and willing parties, net of estimated costs of disposal); and

value in use (the present value of the future cash flows that are expected to be derived from the asset. The expected future cash flows include those from the asset’s continued use in the business and those from its ultimate disposal. Value in use is explicitly based on present value calculations). [IAS 36 paras 6, 31].

An impairment review involves estimating an asset's recoverable amount and comparing it with its carrying value. If the recoverable amount is lower than the carrying value, the asset is impaired and must be written down to the recoverable amount. Impairment cannot be avoided by arguing that the diminution in value is not permanent.

Impairment indicators (IAS 36) Decline in the investments market value Significantly adverse changes that have taken place or are expected in the near future in the

technological, market, economic or legal environment in which the entity operates or in its markets

Increase in interest rates or markets rate of return that may materially effect the discount rate used in calculating the investment’s recoverable amount

Carrying amount of the investee’s net assets exceeds the investee’s market capitalization Management’s own forecast of future net cash inflows pr operating profits may show a

significant decline from previous budgets and forecasts Actual net cash outflows or operating profit or loss may be significantly worse than budgeted Operating losses or net cash outflows, when current period figures are aggregated with

budgeted figures for the future Cash flow for maintaining or operating it are significantly higher than those budgeted

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The principles of impairment testing and accounting for impairment losses

RegulationsCalculation of impairment

Fair value less costs to sellEstablishing fair value less costs to sell (IAS 36.25-29)

Value in useEstablishing fair value in use (IAS36.30-32)Detail on estimating cash flows (IAS 36.33-54) Detail on appropriate discount rate (IAS 36.55-57)

Notional goodwill is required to be included where there is a minority interest in a CGU (IAS 36.91.92)

IAS 36 provides a list of assets outside the scope of the standard (IAS 36.2)

A CGU (cash generating unit) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (IAS36.6)

Asset or CGU impaired where:

Carrying amount Recoverable amount

Including notional goodwillWhere relevant for a CGU

Higher of:

Fair value less costs to sellBased on: Binding sale agreement Prices in an active market Best information at reporting date

Value in useFuture estimated cash flowsdiscounted to present value

exceeds

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The principles of impairment testing and accounting for impairment losses (continued)

Allocation of the impairment loss

Recognition of loss in profit or loss/ other comprehensive income (IAS 36.58.64)

Allocation of loss to CGU including

Maximum write downs(IAS 36.104-108)

Impairment loss reduces carrying amount to recoverable amount

Allocate loss to assets of CGU

Recognise loss

Directly against any revaluation surplus related to

the asset, then2. In profit or loss

Against goodwill, thenAgainst other assets pro rata

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ISA requirements

In the absence of a specific ISA for impairment, we had regard regard ISA 545 – Auditing Fair Value Measurements and Disclosures. The basis for use of ISA 545 is that under IAS 36 impairment is to be tested based on recoverable amount. Recoverable amount under IAS 36 is higher of its fair value less costs to sell and its value in use. Value in use is the present value of future cash flows expected to be derived from an asset or a CGU. Etisalat has determined the value in use as the basis to determine impairment. Given the similarities in methodology to determine fair value and value in use the audit procedures prescribed in ISA 545 have been applied to Etisalat value in use calculation of its CGU’s as of 31 December 2008.

ISA 545 - Auditing fair value measurements and disclosures requirements:

Paragraph Description Covered by10. As part of the understanding of the entity and its environment,

including its internal control, the auditor should obtain an understanding of the entity's process for determining fair value measurements and disclosures and of the relevant control activities sufficient to identify and assess the risks of material misstatement at the assertion level and to design and perform further audit procedures

Audit/Valuation team

14. After obtaining an understanding of the entity's process for determining fair value measurements and disclosures, the auditor should identify and assess the risks of material misstatement at the assertion level related to the fair value measurements and disclosures in the financial statements to determine the nature, timing and extent of the further audit procedures

Audit/ Valuation team

17. The auditor should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with the entity's applicable financial reporting framework

Audit team

22. The auditor should obtain audit evidence about management's intent to carry out specific courses of action, and consider its ability to do so, where relevant to the fair value measurements and disclosures under the entity's applicable financial reporting framework

Audit team

24. Where alternative methods for measuring fair value are available under the entity's applicable financial reporting framework, or where the method of measurement is not prescribed, the auditor should evaluate whether the method of measurement is appropriate in the circumstances under the entity's applicable financial reporting framework

Valuation team

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ISA Requirements (continued)

ISA 545 - Auditing fair value measurements and disclosures requirements: (continued)

27. The auditor should evaluate whether the entity's method for its fair value measurements is applied consistently

Valuation team

29. The auditor should determine the need to use the work of an expert

Audit team

33. The auditor should design and perform further audit procedures in response to assessed risks of material misstatement of assertions relating to the entity's fair value measurements and disclosures

Audit team

39. Where the auditor determines there is a significant risk related to fair values, or where otherwise applicable, the auditor should evaluate whether the significant assumptions used by management in measuring fair values, taken individually and as a whole, provide a reasonable basis for the fair value measurements and disclosures in the entity's financial statements

Valuation team

50. The auditor should perform audit procedures on the data used to develop the fair value measurements and disclosures and evaluate whether the fair value measurements have been properly determined from such data and management's assumptions ( see pages 7 to 9)

Valuation team

53. The auditor should consider the effect of subsequent events on the fair value measurements and disclosures in the financial statements

Audit team

56. The auditor should evaluate whether the disclosures about fair values made by the entity are in accordance with its financial reporting framework

Audit team

61. In making a final assessment of whether the fair value measurements and disclosures in the financial statements are in accordance with the entity's applicable financial reporting framework, the auditor should evaluate the sufficiency and appropriateness of the audit evidence obtained as well as the consistency of that evidence with other audit evidence obtained and evaluated during the audit

Audit team

63. The auditor should obtain written representations from management regarding the reasonableness of significant assumptions, including whether they appropriately reflect management's intent and ability to carry out specific courses of action on behalf of the entity where relevant to the fair value measurements or disclosures

Audit team

In addition the auditor may make an independent estimate of fair value under ISA 545.52

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Risk of material misstatement

Cash flows used may not be those in business plans approved by management (IAS 36.33 (b)) Discount rate used may not be pre tax. (IAS 36.55) Deferred tax adjustments may be included in cash flows. Goodwill not grossed up in carrying value for mismatch in minority interest in goodwill. Cash flow estimates may be over optimistic. (IAS 36.38) Restructuring plans that the CGU is not committed to/improvement or enhancing the asset’s

performance may have been considered in cash flows (IAS 36.44) Foreign currency cash flows may not be used (IAS 36.50) Modelling risk mainly due to extensive use of spreadsheets Carrying value may not be correctly computed (IAS 36.75)

Measuring recoverable amount

Recoverable amount is defined as the higher of an asset's fair value less costs to sell and its value in use. [IAS 36 para 6]. This reflects the greatest value of an asset in terms of the cash flows that can be derived from it, either by selling it or by continuing to use it in the business.

It is not always necessary to calculate both measures when performing an impairment review. If an asset’s fair value less costs to sell or its value in use exceeds the asset’s carrying amount the asset is not impaired and there is no need to estimate the other amount. [IAS 36 para 19].

The starting point for determining the recoverable amount in impairment testing is at the level of individual assets, unless the asset does not generate cash inflows that are largely independent of other assets or groups of assets. Where it does not generate such independent cash flows recoverable amount is determined for the cash generating unit (CGU) to which the asset belongs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets [IAS 36 para 6]. A CGU can be a single asset.

Where an entity has an asset that is included in a CGU because it does not generate cash flows independently, its recoverable amount would generally be determined at the CGU level to which the asset belongs. However, this does not apply where the asset's fair value less costs to sell is higher than its carrying amount or where the asset's value in use can be estimated as being close to its fair value less costs to sell and the fair value less costs to sell can be determined. [IAS 36 para 22].

Where an asset’s recoverable amount has been separately considered from the CGU to which it belongs, if the CGU is tested for impairment then no part of any impairment loss relating to the CGU is allocated to the asset if it would reduce the carrying amount of the asset below its fair value less costs to sell. [IAS 36 para 105]. Furthermore, the carrying amount of each asset within the CGU is reduced to the higher of its fair value less costs to sell and value in use. Any unallocated impairment is reallocated to the CGU’s non-monetary assets, subject to the same limits. This could result in an iterative process, continuing until the impairment charge is fully

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EMIRATES TELECOMMUNICATIONS CORPORATIONIMPAIRMENT TESTFOR THE YEAR ENDING 31 DECEMBER 2009Measuring recoverable amount (continued)

allocated or until each of the CGU’s non-monetary assets have been reduced to the higher of each asset’s fair value less costs to sell, value in use and zero. The recognition of an impairment does not, however, result in the recognition of a liability, unless it meets the definition of a liability under another IFRS standard. It is, therefore, possible that some of the impairment loss will not be recognised.

Measuring value in use

The Standard clarifies that the following elements should be reflected in the calculation of an asset’s value in use: an estimate of the future cash flows the entity expects to derive from the asset; expectations about possible variations in the amount or timing of those future cash flows; the time value of money, represented by the current market risk-free rate of interest; the price for bearing the uncertainty inherent in the asset; and other factors, such as illiquidity, that market participants would reflect in pricing the future

cash flows the entity expects to derive from the asset. The Standard also clarifies that the second, fourth and fifth of these elements can be reflected

either as adjustments to the future cash flows or adjustments to the discount rate.

Value in use cash flows should strictly exclude working capital cash flows, where as they will be included in fair value less cost to sell cash flows. For practical reasons, even when value in use is being estimated, working capital is sometimes included. When this is done the carrying amount of the CGU should be also adjusted for these items (IFRS Manual of Accounting, 18.225.7)

The Standard clarifies the cash flows to be used by management in measuring value in use: Should assess the reasonableness of the assumptions on which its current cash flows

projections are based on examining the causes of differences between past cash flow projections and actual cash flows.

Should ensure that the assumptions on which its current cash flows are based are consistent with past actual outcomes, provided the effects of subsequent events or circumstances that did not exist when those actual cash flows were generated make this appropriate.

Compare like with like:It is important, when entities are preparing their value in use calculations, that they ensure that the cash flows are prepared on a basis that is consistent with the calculation of the CGU’s carrying amount. The cash outflows associated with financing the CGU’s operations (including interest-bearing debt, dividends and interest payable) are excluded from the value in use calculations. Therefore, the carrying amount of a CGU should exclude liabilities that relate to financing the CGU's operations. As the cash flows in a value in use calculation are prepared on a pre-tax basis the cash flows associated with tax should not be included in the value in use calculation. Tax liabilities are not included as part of the carrying value in a CGU.

Management may use hedging instruments, such as swaps and collars, to hedge cash flows. The cash flows prepared for the value in use calculation should reflect management’s best estimate of the future cash flows expected to be generated from the assets in the CGU. Management should use the contracted price for the relevant cash flows in its VIU calculation, unless the contract is already on the balance sheet at fair value.

Measuring value in use (continued)

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Corporate overheads and day-to-day servicing:IAS 36, states that "Projections of cash outflows include those for the day-to-day servicing of the asset as well as future overheads that can be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset". [IAS 36 para 41]. It is reasonable to assume that the cash outflows attributable to a CGU should include sensible allocations of corporate overheads, in the same way that the carrying values of CGUs should, where practicable, include apportionments of corporate assets. The assets of a CGU could be considered to be impaired if, for example, its own cash flows did not make a contribution to corporate overheads that are incurred to support its activities.

Inflation:Assumptions about inflation can be dealt with in one of two ways. One method is to forecast cash flows in current prices — that is, not to forecast future inflation. The cash flows are then discounted at a real discount rate (that is, a rate of return that excludes inflation). The second method is to forecast cash flows to include estimates of inflation in revenues and costs. The cash flows are then discounted at a nominal discount rate (that is, a rate of return that includes inflation). It is important that inflation is treated consistently in the cash flow projections and the choice of discount rate.

Foreign currency cash flows:Where future cash flows are expected to be denominated in a foreign currency, they should be estimated in that currency and then discounted at a rate appropriate for that currency. The entity then translates the present value (expressed in the foreign currency) at the spot rate of exchange at the date of the value in use calculation. [IAS 36 para 54]. IAS 36 specifically prohibits use of the forward rate existing at the date of the impairment review.

Future restructuring and expenditure to improve or enhance an asset’s performance:A key constraint concerning the assumptions in the cash flow forecasts relates to future restructuring or reorganisation and capital investment. In calculating value in use, future cash flows should be estimated for assets and goodwill in their current condition. The future costs and benefits of a future restructuring should not be recognised in the cash flow forecasts; unless the entity is committed to the restructuring and related provisions have been made.

Assets under construction:Assets under construction also need to be considered when looking at the cash flows to include in a value in use calculation.

Discount rate:Investment decisions take account of the time value of money and the risks associated with expected future cash flows. These are also reflected in the measurement of an asset's value in use. Projected future cash flows are discounted at a pre-tax rate that reflects both current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted. [IAS 36 para 55]. This means that (unless fair value less costs to sell is higher) an asset is regarded as impaired if it is not expected to earn a current market-related rate of return on its carrying value. The rate of return expected by the market is the return

Measuring value in use (continued)

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EMIRATES TELECOMMUNICATIONS CORPORATIONIMPAIRMENT TESTFOR THE YEAR ENDING 31 DECEMBER 2009Discount Rate (continued)that investors would require if they chose an investment that would generate cash flows of the same amounts, timing and risk profile as those that the entity expects from the asset or CGU under review. The rate is independent of the way the asset is financed. It is estimated from current market transactions for similar assets or from the 'weighted average cost of capital' (WACC) of a listed entity that has a single asset or portfolio of assets that are similar in terms of service potential and risks to the asset under review. [IAS 36 para 56].

If an asset specific rate is not available directly from the market an entity should estimate an appropriate discount rate that reflects as far as possible a market assessment of: The time value of money to the end of the asset's useful life The risks that the future cash flows will differ in amount or timing from estimates The price for bearing the risk inherent in the asset Other factors that market participants would reflect in the rate such as illiquidity

The entity may take into account the following factors in determining this rate: The WACC for the entity (adjusted as explained in the next paragraph), determined using

techniques such as the capital asset pricing model The entity's incremental borrowing rate Other market borrowing rates

The rates are adjusted to take account of the way in which the market would assess the specific risks associated with the estimated cash flows and to exclude risks that are not relevant to the estimated cash flows or for which the estimated cash flows have been adjusted. Factors to consider might include: Country risk, for example the risk of political unrest Currency risk, for example the risk of devaluation The nature of the asset being tested; intangible assets are higher risk Whether the cash flows are optimistic or stretch targets Price risk, for example the risk that prices may be forced down by competitive pressures

IAS 36 requires the discount rate for value in use calculations to be calculated on a pre-tax basis. [IAS 36 para 55]. Thus a CGU's pre-tax cash flows should be discounted at the pre-tax discount rate.

Fair value less costs to sell

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EMIRATES TELECOMMUNICATIONS CORPORATIONIMPAIRMENT TESTFOR THE YEAR ENDING 31 DECEMBER 2009The definition of fair value less costs to sell is "…the amount obtainable from the sale of an asset or cash generating unit in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal". [IAS 36 para 6]. IAS 36 provides a hierarchy of sources for fair value less costs to sell.

The best indicator of fair value less costs to sell is the price in a binding arm’s length sale agreement adjusted for the costs of disposal. [IAS 36 para 25]. If there is no binding sale agreement but the asset is traded in an active market, the current market price or the latest transaction price, less costs to sell, should be used. [IAS 36 para 26].

An active market is defined in the standard as a market where the following conditions exist: The items traded on the market are homogeneous Willing buyers and sellers can normally be found at any time Prices are available to the public

Annual impairment review of goodwill and certain intangibles

Goodwill and intangible assets that are deemed to have an indefinite useful life are tested annually for impairment (irrespective of indicators). [IAS 36 para 10].

Intangibles that are not yet ready for use must also be tested annually because they are not being amortised. The ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually more uncertain before it is brought into use. [IAS 36 para 11].

The impairment tests on goodwill and intangibles may be performed at any time in the financial year, provided that the tests are performed at the same time each year. An entity can choose to perform their impairment test at less busy times of the year. Different intangibles and, for goodwill tests, different CGUs may be tested at different times. However, where an intangible or goodwill was recognised during the current financial period it must be tested for impairment before the end of the current period. [IAS 36 paras 10(a), 96].

The standard states that it is acceptable to perform impairment tests at any time in the financial year, provided they are prepared at the same time each year. Entity A could perform an impairment review using 30 September balances, which would be the same time as it completes its budgeting process for the subsequent year.

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Annual impairment review of goodwill and certain intangibles (continued)

Impairment testing for goodwill ( IAS 36) IAS 36.80 requires goodwill to be allocated to each of the acquirer’s CGU or group of

CGU’s that is expected to benefit from the synergies of the combination.

The carrying amount of goodwill (all relating to operations within the Group’s International reportable segment) is allocated as follows:

Sept 2009 AED’000

Atlantique Telecom, S.A. (West Africa) 1,270,280Etisalat DB Telecom Private Limited (India) 1,186,208Zanzibar Telecom Limited (Tanzania) 44,896Canar Telecommunications Co Limited (Sudan) 337,130Etisalat Misr ( Etisalat) S.A.E (Egypt) 149,265

2,987,779

Goodwill should be grossed up in carrying value. The excess of the sum of the net assets and allocated goodwill over the Value in use is the impairment loss.

Goodwill should be grossed up in carrying value for mismatch in minority interest in goodwill:- The carrying amount of the CGU should be notionally adjusted to include goodwill

attributable to the minority.- The notional carrying amount of the CGU is to be compared with the recoverable

amount of the CGU.- The excess of the notional carrying amount over the recoverable amount is the

impairment loss.- This loss attributable to the minority’s notional share in goodwill included in the

impairment loss needs to be identified and excluded from the amount of the loss that is recognized in proportion to the amount of the loss that is attributable to the notional goodwill as a whole.

- The impairment loss (as adjusted for the minority share) is first applied to write down the goodwill that has been reported. This is the goodwill attributable to the parent’s interest that is actually recognized in the financial statements. Any excess of impairment losses over the carrying amount of goodwill is then applied pro rata against the remaining non-monetary assets on the basis of their carrying amounts.

The recoverable amount of an intangible asset with an indefinite useful life to be measured annually irrespective of whether there is any indication that it may be impaired. (IAS 36.10 (a) and 36.89 and BC 120 to 126). The most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test provided specified criteria are met. (IAS 36.24 and BC 127 and 128. (The annual impairment testing of CGU’s which includes in its carrying amount an intangible asset with an indefinite useful life – IAS 36.89 but only if that intangible asset can be tested for impairment as part of that CGU)

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Annual impairment review of goodwill and certain intangibles (continued)

Impairment testing for goodwill ( IAS 36) (continued)

The recoverable amount of an intangible asset not yet available for use to be measured annually, irrespective of whether there is any indication that it may be impaired. (IAS 36. 10a and 11)

Goodwill acquired in a business combination to be tested for impairment annually (IAS 36.10b and 90) Annual testing is required for all CGU’s to which goodwill has been allocated. (IAS 36.90)

Deferred tax assets and liabilities if any of a CGU should be appropriately adjusted Under IAS 36.97 if assets constituting the CGU are tested for impairment as the same time as

the CGU containing the goodwill those assets shall be tested for impairment before the CGU. Any impairment loss of the asset must first be recognized before testing the CGU for impairment.

Corporate assets should be identified and the appropriate proportion allocated to individual CGUs or groups of CGUs that are reviewed for impairment ( IAS 36.102)

IAS 36.54 requires FC cash flows to be estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for the currency. The present value is translated using the spot exchange rate at the date of the value in use calculation.

IAS 36.55 requires use of a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset for which future cash flows have not be adjusted.

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