Annual and transition report of foreign private issuers pursuant to Section 13 or 15(d)

Intangible Assets

v3.19.2
Intangible Assets
12 Months Ended
Jan. 31, 2019
Disclosure of detailed information about intangible assets [abstract]  
Intangible Assets

15 Intangible Assets

 

   

31 January 2019

NZ$000’s

    31 January 2018
NZ$000’s
    31 January 2017
NZ$000’s
 
Goodwill                  
Cost     5,607       -       -  
Accumulated impairment     (3,287 )     -       -  
      2,320       -       -  
Patents and licences                        
Cost     25,993       919       1,169  
Accumulated amortisation and impairment     (918 )     (718 )     (573 )
      25,075       201       596  
Brands                        
Cost     14,769       12,463       12,036  
Accumulated amortisation and impairment     (4,563 )     -       -  
      10,205       12,463       12,036  
Software                        
Cost     15,718       15,788       17,308  
Accumulated amortisation and impairment     (15,455 )     (15,440 )     (15,260 )
      263       348       2,048  
Total Intangible assets     37,864       13,012       14,680  

 

  (a) Software impairment

 

For the year ended 31 January 2018, management decided to fully impair the costs on the ERP upgrade and are currently reviewing alternatives.

 

  (b) Movements in carrying amounts of intangible assets

 

    Software
NZ$000’s
    Patents and licences
NZ$000’s
    Brands
NZ$000’s
    Goodwill
NZ$000’s
    Total
NZ$000’s
 
Year ended 31 January 2019                              
Balance at the beginning of the year     348       201       12,463       -       13,012  
Additions     33       25,076       2,726       5,798       33,633  
Amortisation     (29 )     (202 )     -       -       (231 )
Impairment     (83 )     -       (4,563 )     (3,287 )     (7,933 )
Foreign exchange movements     (6 )     -       (420 )     (192 )     (618 )
Closing value at 31 January 2019     263       25,075       10,205       2,320       38,864  

 

    Software
NZ$000’s
    Patents and licences
NZ$000’s
    Brands  
NZ$000’s
    Goodwill
NZ$000’s
    Total
NZ$000’s
 
Year ended 31 January 2018                              
Balance at the beginning of the year     2,048       596       12,036       -       14,680  
Additions     106       12       -       -       118  
Amortisation     (163 )     (143 )     -       -       (306 )
Impairment     (1,650 )     (264 )     -       -       (1,914 )
Foreign exchange movements     7       -       427       -       434  
Closing value at 31 January 2018     348       201       12,463       -       13,012  

  

    Software
NZ 000’s
$
    Patents and licences
NZ 000’s
$
    Brands
NZ 000’s
$
    Goodwill
NZ 000’s
$
    Total
NZ 000’s
$
 
7 months ended 31 January 2017                              
Balance at the beginning of the year     2,196       274       12,105       -       14,575  
Additions     -       351       -       -       351  
Amortisation     (148 )     (30 )     -       -       (178 )
Foreign exchange movements     -       1       (69 )     -       (68 )
Closing value at 31 January 2017     2,048       596       12,036       -       14,680  

 

  (c) Impairment testing for goodwill

 

 

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

Description of the cash-generating unit (CGU)  

For the Year Ended 31

January 2019
NZ $000’s

   

For the Year

Ended 31

January 2018
NZ $000’s

   

For the 7

Months Ended

31 January 2017
NZ $000’s

 
United States     2,320       -       -  
      2,320       -       -  

 

Impairment assumptions

 

Goodwill relates to the acquisition of Naked Inc, a business operating in the United States and was allocated to the Group’s operation in United States which is the cash generating unit (CGU) for the purpose of impairment testing. The recoverable amount of the CGU was determined based on value-in-use calculations which require the use of assumptions. The 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 stated 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 exceeded the fair value less costs to sell by an amount of $3.2m. As such, the goodwill has been partially impaired for the year ended 31 January 2019.

 

Significant assumptions used for the purposes of the value-in-use calculation include:

 

United States

Post-tax discount rate - 10.50%

EBITDA growth rate - 10%

Terminal growth - 2%

 

 

Impact of possible changes in key assumptions

 

The directors have made judgements and estimates to assess goodwill 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 3.25% increase in the post-tax discount rate

(b) EBITDA growth rate reduced to 5%

 

The carrying amount of the goodwill is sensitive to assumptions used in the impairment test calculations including the post-tax discount rate and sales growth rate. A 3.25% increase in the post-tax discount rate would result in an additional impairment of $2,320 thousand against the carrying amount of the goodwill. A reduction of the EBITDA growth rate to 5% would not result in a further impairment as goodwill would be fully impaired from the increase of the post-tax discount rate.

 

  (d) Impairment testing for indefinite-lived brand intangibles

 

Brand intangible assets represent brands owned by the Group, that arose on historical acquisitions including Pleasure State, Davenport and Lovable. The intangible assets increased in the current period as result of the business combinations with Naked Brand Group Inc. See note 8 for further information.

 

The brand intangible assets of $10,205,000 (2018: $12,463,000, 2017: $12,036,000) are tested for impairment annually.

 

Impairment assumptions

 

Management has determined the recoverable amount of the indefinite-lived 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 has exceeded the fair value less costs to sell by $3.9m. As such, the indefinite-lived brand assets has been partially impaired for the year ended 31 January 2019.

 

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

Sales growth: 2.5% (31 January 2018: 5%)

Royalty rate: 5.0% (31 January 2018: 6.6%)

Cash flow - revenue forecast period: 5 years (31 January 2018: 5 years)

Post-tax discount rate (%) for US brands: 10.5% (31 January 2018: 0%)

Post-tax discount rate (%) for NZ brands: 11.75% (31 January 2018: 11.4%)

Long term sales growth rate (%): 2% (31 January 2018: 2%)

 

Impact of possible changes in key assumptions

 

The directors have made judgements and estimates to assess indefinite-lived 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 additional impairment of $951 thousand (31 January 2018: an increase of 1.5% would result an impairment of $929 thousand) against the carrying amount of the indefinite-lived brand intangibles. A reduction of the sales growth rate to 0% would result in an additional impairment of $1,554 thousand (31 January 2018: a reduction to 2% would result an impairment of $611 thousand) against the carrying amount of the indefinite-lived brand intangible assets.

 

In order to mitigate exchange rate movements and to manage the inventory costing process, the Group has entered into forward currency contracts to purchase US dollars.