Current report of foreign issuer pursuant to Rules 13a-16 and 15d-16 Amendments

Intangible Assets

v3.19.3.a.u2
Intangible Assets
6 Months Ended
Jul. 31, 2019
Disclosure of detailed information about intangible assets [abstract]  
Intangible Assets

9 Intangible assets

 

   

31 July 2019

NZ $000’s

    31 January 2019
NZ $000’s
 
Goodwill              
Cost     5,993       5,607  
Accumulated impairment     (5,993 )     (3,287 )
      -       2,320  
Patents and licences                  
Cost     27,157       25,993  
Accumulated amortisation and impairment     (2,955 )     (918 )
      24,202       25,075  
Brands                  
Cost     14,901       14,769  
Accumulated amortisation and impairment     (6,672 )     (4,563 )
      8,229       10,205  
Software                  
Cost     15,716       15,718  
Accumulated amortisation and impairment     (15,716 )     (15,455 )
      -       263  
                 
Total intangible assets     32,431       37,864  

 

  (a) Movements in carrying amounts of intangible assets

 

    Goodwill NZ $000’s    

Patents and licences

NZ $000’s

   

Brands

NZ $000’s

    Software NZ $000’s    

Total

NZ $000’s

 
For the 6 months ended 31 July 2019                                        
Balance at the beginning of the period     2,320       25,075       10,205       263       37,864  
Additions     -       -       -       -       -  
Disposals     -       -       -       -       -  
Amortisation expense     -       -       -       (9 )     (9 )
Impairment     (2,480 )     (2,037 )     (2,130 )     (202 )     (6,849 )
Reclassification to tangible fixed assets     -       -       -       (51 )     (51 )
Foreign exchange movements     160       1,164       154       (1 )     1,477  
Closing value at 31 July 2019     -       24,202       8,229       -       32,431  

 

    Goodwill NZ $000’s    

Patents and licences

NZ $000’s

   

Brands

NZ $000’s

    Software NZ $000’s    

Total

NZ $000’s

 
For the 6 months ended 31 January 2019                                        
Balance at the beginning of the period     2,399       217       14,395       276       17,287  
Additions     -       24,957       -       -       24,957  
Disposals     -       -       -       -       -  
Amortisation expense     -       (99 )     -       (12 )     (111 )
Impairment     -       -       (3,867 )     -       (3,867 )
Foreign exchange movements     (79 )     -       (323 )     (1 )     (403 )
Closing value at 31 January 2019     2,320       25,075       10,205       263       37,864  

 

  (b) Impairment of goodwill

 

For the purpose of impairment testing, goodwill is allocated to cash-generating units as below:

 

Description of cash-generating unit (CGU)

 

   

6 months to

31 July 2019

NZ $000’s

   

6 months to

31 July 2018

NZ $000’s

 
             
United States     2,480       3,399  
Impairment of goodwill     2,480       3,399  

 

Impairment assumption

 

Goodwill on the merger of Naked Inc. was allocated to the Group’s operation in United States which is the cash generating unit (CGU) for the purpose of impairment testing. On the 30th September 2019 the Group resolved to close its Wholesale operations in the United States. As at the date of signing the interim financial statements, the restructure is still in progress.

 

The result of the impairment assessment is that the carrying value of goodwill amount of $2,480 thousand is impaired. As such, the goodwill has been fully impaired during the half year ended 31 July 2019.

 

  (c) Impairment of patents & licences

 

Impairment charge relating to patents & licences is a result of the impairment of the Fredericks of Hollywood (FOH) licence which was acquired on 15 November 2018 as part of the Stock Purchase Agreement with the shareholders of FOH Online Corp Inc. The Group also fully impaired the carrying value of patents and licence acquired as part of the Naked merger.

 

    6 months to
31 July 2019
NZ $000’s
    6 months to
31 July 2018
NZ $000’s
 
             
FOH licence     1,914       -  
Naked patents & licence     123       -  
Impairment of patents & licences     2,037       -  

 

Impairment assumptions

 

Management has determined the recoverable amount of the FOH licence asset by assessing the fair value less cost of disposal (FVLCOD) of the underlying assets. The relief from royalty method adopted to complete the valuation determines, in lieu of ownership, the cost that would be required to obtain comparable rights to use the asset via a third-party licence arrangement. These calculations use cash flow projections based on financial budgets approved by management covering a five year period. Cash flows beyond the five year period are extrapolated using the estimated growth rates shown below. These growth rates do not exceed the long-term average growth rates for the industry. The result of the impairment assessment is that the carrying value of the FOH licence exceeded the fair value less costs to sell by an amount of $1,914 thousand. As such, the FOH licence asset has been partially impaired during the half year ended 31 July 2019.

 

Management’s approach and the key assumptions used to determine the FVLCOD were as follows: Sales growth: 5.0%

Royalty rate: 5.0%

Cash flow - revenue forecast period: 5 years

Post-tax discount rate (%): 10.5%

Long term sales growth rate (%): 2%

 

  (d) Impairment for indefinite-life brand intangibles

 

Brand intangible assets represent brands historically acquired by the Group and include Pleasure State, Davenport, Lovable and Naked.

 

    6 months to
31 July 2019
NZ $000’s
    6 months to
31 July 2018
NZ $000’s
 
             
Brands - Naked     2,130       696  
Impairment for indefinite-lived brand intangibles     2,130       696  

 

Impairment assumptions

 

Management has determined the recoverable amount of the indefinite-life brand assets by assessing the fair value less cost of disposal (FVLCOD) of the underlying assets. The relief from royalty method adopted to complete the valuation determines, in lieu of ownership, the cost that would be required to obtain comparable rights to use the asset via a third-party licence arrangement. These calculations use cash flow projections based on financial budgets approved by management covering a five year period. Cash flows beyond the five year period are extrapolated using the estimated growth rates shown below. These growth rates do not exceed the long-term average growth rates for the industry. The result of the impairment assessment is that the carrying value of the Naked brand merger exceeded the fair value less costs to sell by an amount of $2,130 thousand. It is also managements intention to close the Company’s wholesale business in the US and phase out trading of the Naked brand resulting in a decision to impair brand and goodwill (note b) in full. There is no further impairment for other brands. As such, the indefinite-life brand assets have been partially impaired during the half year ended 31 July 2019.

 

Management’s approach and the key assumptions used to determine the FVLCOD were as follows: Sales growth: 2.5% (31 January 2019: 2.5%)

Royalty rate: 5.0% (31 January 2019: 5.0%)

Cash flow - revenue forecast period: 5 years (31 January 2019: 5 years)

Post-tax discount rate (%) for US brands: 10.5% (31 January 2019: 10.5%)

Post-tax discount rate (%) for NZ brands: 11.75% (31 January 2019: 11.75%)

Long term sales growth rate (%): 2% (31 January 2019: 2%)

 

Impact of possible changes in key assumptions

 

The directors have made judgements and estimates to assess indefinite-lived brand assets for impairment. Should these judgements and estimates not occur the resulting carrying amount may decrease.

 

The sensitivities that have been separately modelled are as follows:

 

(a) a 2.1% increase in the post-tax discount rate

(b) sales growth rate reduced to 0%

 

The carrying amounts of the indefinite-lived brand intangible assets are sensitive to assumptions used in the impairment test calculations including the post-tax discount rate and sales growth rate. A 2.1% increase in the post-tax discount rate would result in an impairment of $5,604 thousand (31 January 2019: an increase of 2.1% would result an impairment of $951 thousand) against the carrying amount of the indefinite-lived brand intangibles. A reduction of the sales growth rate to 0% would result in an impairment of $6,052 thousand (31 January 2019: a reduction to 0% would result an impairment of $1,554 thousand) against the carrying amount of the indefinite-lived brand intangible assets.

 

  (e) Impairment of software

 

Impairment charge relating to software ($0.2m) is due to management deciding to fully impair the costs on a prior ERP upgrade, as this software will need to be replaced with a more advanced system.

 

    6 months to
31 July 2019
NZ $000’s
    6 months to
31 July 2018
NZ $000’s
 
             
Software     202       64  
Impairment of software     202       64