Goodwill is not amortised. It is tested for impairment at least once a year during the fourth quarter or whenever an adverse event occurs. Adverse events may result among other things from an increase in market interest rates or from a decrease in actual net sales or operational profit compared to forecasts.
Impairment tests consist of comparing the carrying amount of assets including goodwill and brands with there coverable amount of each Cash Generating Unit. A Cash Generating Unit corresponds to one or more worldwide brands. A Cash Generating Unit can contain several brands in case of similar marketing position or depending on organisational criteria and particularly when distribution circuits and commercial/management structures are pooled. Recoverable values are determined on the basis of discounted operating cash flow forecasts covering a period of 10 years (the period considered necessary for the strategic positioning of an acquisition) and a terminal value.
The cash flows are determined in the currencies of the countries in question and are translated, in the same way as the net carrying amounts to which they are compared, at the estimated exchange rate for the following year. The discount rate used for these calculations is based on the weighted average cost of capital (WACC), which amounted to 8.8% in 2022, to 7.8% in 2021 and 7.3% in 2020 for amounts in euro, adjusted where appropriate by a country risk premium according to the geographic zones concerned. The discount rates are post-tax rates applied to post-tax cash flows, and result in recoverable amounts identical to those obtained by applying pre-tax rates to pre-tax cash flows. The assumptions adopted in terms of sales growth and terminal values are reasonable and consistent with the available market data (generally 2.5% for Europe and 3% for the rest of the world for terminal values except in specific cases).
The use of discounted cash flow forecasts is preferred in order to determine recoverable amounts, unless details of similar recent transactions are readily available.
Impairment tests of Cash Generating Units for which the carrying amount of goodwill and intangible assets with indefinite useful lives is significant, are carried out based on the following data and assumptions:
| € millions | 2022 | 2021 | 2020 |
|---|---|---|---|
| Net carrying amount of goodwill and brands with an indefinite useful life | |||
| Perfumes | 1,842.2 | 1,812.9 | 1,827.7 |
| L'Oréal Paris | 1,235.7 | 1,215.6 | 1,174.8 |
| Maquillage Mass Market | 1,109.5 | 1,067.5 | 1,017.5 |
| SkinCeuticals/Skinbetter Science | 938.2 | 234.7 | 228.3 |
| Lancôme | 850.8 | 852.7 | 842.5 |
| CeraVe | 839.0 | 812.5 | 779.8 |
| Redken/PureOlogy | 802.4 | 767.2 | 722.1 |
| IT Cosmetics | 757.4 | 726.9 | 934.1 |
| Matrix | 755.4 | 720.8 | 675.6 |
| Skincare Luxe | 640.4 | 630.7 | 142.8 |
| YSL Beauté | 536.4 | 536.0 | 535.5 |
| Stylenanda | 493.8 | 494.6 | 498.2 |
| NYX Professional Makeup | 446.4 | 424.6 | 397.6 |
| Garnier | 436.6 | 493.8 | 471.3 |
| L'Oréal Professionnel/Kérastase | 429.5 | 417.9 | 403.7 |
| Vichy/Dermablend | 327.3 | 336.2 | 327.9 |
| Urban Decay | 244.1 | 232.4 | 217.8 |
| Shu Uemura | 228.3 | 242.9 | 246.2 |
The discount rate used at 31 December 2022 for this test were between 6.2% and 15.9% including 8.6% for the USA and 8.8% for international. This rate is the result of specific rates for each market or geographic zone based on the risks they represent.
At 31 December 2022, a 1% increase in the discount rate on all the Group’s Cash Generating Units would lead to an impairment loss risk of around €168.9 million.
A 1% decrease in the terminal growth rate on all the Group’s Cash Generating Units would lead to an impairment loss risk of around €94.4 million.
The terminal growth rate is consistent with market data, i.e. 2.5% for Europe and 3.0% for the rest of the world.
A 1-point decrease in the margin rate over the business plan period on all the Group’s Cash Generating Units would lead to an impairment loss risk of around €64.5 million.
