Cost of Capital Study 2011-2012-KPMG

Corporate Finance
Cost of Capital Study

2011/2012
Developments in Volatile Markets
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International
or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks of KPMG International.
2 | Section or Brochure name
Cost of Capital Study 2011/2012 | 3
Table of Contents
Foreword
Summary of Findings
Introduction
1.1 Foundations and Objectives

of the Study
1.2 Data Collection
Organization and Execution of the
Impairment Test
2.1 Timing, Frequency, Triggering Events

and Reversals
2.2 Number of Cash Generating Units

and Changes to their Structure
2.3 Determination of Recoverable Amount
2.4 Composition of the Carrying Amount
2.5 Use of Impairment Test for
Other Purposes
Measurement of Cash Flows
3.1 Preparation of Budget Calculations

and Determination of Sustainable Year
3.2 Growth Expectations in Budget

Calculations
3.3 Plausibility Check of Budget

Calculations Used
3.4 Foreign Currency Translation
3.5 Tax Rate
Cost of Capital Parameters

4.1 Risk-free Base Rate
4.2 Market Risk Premium
4.3 Beta Factor
4.4 Other Risk Premiums
4.5 Cost of Equity
4.6 Cost of Debt
4.7 Capital Structure
4.8 Weighted Cost of Capital
4.9 Growth Rate
30
31
34
35
37
38
39
40
41
42
Outlook Overall Economic Development

5.1 Expected Economic

Development 2012
5.2 Development of Interest Rate

Level 2012
44
44
Your Industry Specialists
48
8
8
10
10
14
15
19
6
19
20
20
24
25
26
28
47
4 | C ost of Capital Study 2011/2012
List of Abbreviations
CAPM
Capital Asset Pricing Model
CGU
Cash Generating Unit
DAX
Main German Stock Index
DCF
Discounted Cash Flow
EBIT Earnings Before Interest and Taxes

EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization
EBT Earnings Before Taxes
ECB European Central Bank
FREP
German Financial Reporting Enforcement Panel
HFA
IDW Expert Committee
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IDW
Institute of Public Auditors in Germany, Incorporated Association
IFRS
International Financial Reporting Standards
SMI
Swiss Market Index
WACC
Weighted Average Cost of Capital
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm
has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and
cutting through complexity are registered trademarks of KPMG International.
Foreword
The sovereign debt crisis rising worldwide and particularly
in Europe since mid-2010 has called into question the initial signs of an economic recovery. The economic growth
observed around the globe did not indicate any clear tendencies during 2010 and 2011. The increasingly volatile
economy and capital markets as well as the continuously
decreasing interest rate level reflect the uncertainty remaining in the short and medium term outlook for companies.
An adequate incorporation of the current risks and uncertainties in budget figures, not only for impairment tests, but
also for planning and company controlling purposes, is a significant challenge to the corporate decision-makers.
The current economic developments are relevant, especially when calculating the cost of capital as a central
parameter for any value-related corporate decision. Average
capital costs after corporate taxes of 7.9 percent were taken
as the basis in the fiscal year 2010/2011. Compared to historical figures and in the context of the current market situation, this further decrease raises the question of whether
and how accurately the current low level of capital cost is
realistically reflected in the budget figures of the companies. Particular attention must be paid to the equivalence
between the growth margin and return expectations underlying the budget figures and the declined capital costs.
This years Cost of Capital Study offers the opportunity to
understand the real effects of the continuing difficult market environment on the accounting and valuation practice of
companies, in particular with respect to the cost of capital.
Furthermore, it provides insights into the practical handling
of forecasts in a volatile market environment.
Following our studies in the years 2006 to 2010, we are
delighted to present to you our sixth edition of the Cost of
Capital Study.
As in the previous edition, this year we also included the

assessment of particularities specific to certain industries,
as well as an outlook on the future economic development.
The history of meanwhile five studies enables us to present
increasingly conclusive trend analyses of the development
of different parameters and other organizational aspects
observed over time. Should you be interested in more
detailed industry-specific assessments, we will be happy
to provide these to you.
Our analysis can be divided into following four main areas:
Organization and execution of impairment tests
Measurement of cash flows
Cost of capital parameters
Overall economic outlook
As in previous years, in addition to the current analyses and
our comments, we provide brief supplementary summaries
of the essential rules of IAS 36 regarding impairment tests.
We conducted our survey between June and September2011. Consequently, in our analysis we included financial statements from September 2010 to August 2011.
This study is an empirical analysis aiming to provide an
insight into currently applied corporate practices. Information and remarks in this study will not deliver a complete
picture of the proper handling or interpretation of the regulations for impairment tests.
We would like to thank all participating companies and particularly the staff in charge. Thanks to you, we were once
again able to increase our response rate among all participants and therefore improve the results of this study.
Prof. Dr. Vera-Carina Elter

Partner, Corporate Finance
KPMG AG Wirtschaftsprfungsgesellschaft
Dr. Marc Castedello

KPMG AG Wirtschaftsprfungsgesellschaft
Summary of Findings
Collected data
A total of 493 companies in Europe
were contacted; 137 companies
participated (total response rate of
27.8percent).
Participation rate: 70 percent
DAX-3 0, 45 percent MDAX and
40percent SMI.
Highest response rate in the sectors
industrial products (35 responses)
and consumer products & services
(21 responses).
Significance of the impairment test
Regarding their financial statements
for the period 30 September 2010
to 31 August 2011, 23 percent of
the surveyed companies stated that
they recognized a goodwill impairment (previous year: 26 percent).
On average, these companies
wrote-off 16.5 percent of the goodwill on their balance sheet.
51 percent of the companies recognized goodwill impairment, asset
impairment, or both (decrease compared to previous year: 4 percent).
The percentage of companies that
performed an impairment test based
on a triggering event decreased significantly to 37 percent compared to
the previous year (53 percent). The
main reason stated was deteriorating long-term prospects.
Organization and execution of the

impairment test
Approximately 29 percent made
adjustments to their CGU structure
compared to the previous year
(complete restructuring of CGUs:
14percent).
73 percent created a maximum of
ten CGUs for the goodwill impairment test. For the asset impairment test, 31 percent of the surveyed companies created more than
20CGUs.
69 percent of the companies calculated solely the value in use and only
18 percent calculated solely the fair
value less costs to sell; 13 percent
calculated both. Of these companies 68 percent stated that the value
in use was higher than the fair value
less costs to sell.
More than half of listed companies
compared total recoverable amounts
across all CGUs with market capitalization.
Measurement of cash flows

Almost 90 percent of the surveyed
companies prepared their group
budget maximum three months in
advance of the impairment test.
45 percent of the participants prepared an integrated budget. Only
19 percent prepared a statement of
anticipated income without forecasting any balance sheet figures. More
than 80 percent projected their budget figures for a period of three
years.
In most cases the definition of the
sustainable year was based on
the last budget year with top-down
adjustments in some cases.
51 percent of the surveyed companies did not perform plausibility
checks of their planning based on
a market and competitive environment comparison.
22 percent of the companies also

used the results of the impairment
test for value-driven company controlling or product and segment
controlling.
Only 11 percent of the companies

recognized an appreciation in the
value of individual assets.
Cost of capital parameters

62 percent of the surveyed companies derived the risk-free rate based
on the yield of national government
bonds with an average maturity
period of 15 years. 38 percent used
the yield curve to determine the
base rate. The average base rate
applied was 3.3 percent which is a
decline compared to the previous
years base rate.
The average market risk premium
applied is 5.1 percent.
The majority of the surveyed companies derive their beta from a peer
group, based on an average historical observation period of 3.7 years.
For the determination of the capital costs, 66 percent of companies
applied a country risk premium predominantly between 1 and 5percent.
Depending on the industry, the average cost of equity applied by the
surveyed companies for the fiscal
year 2010/2011 ranged between
7.5 percent and 11.1 percent, and
amounts to 9.1 percent on average,
which is significantly lower than in
the previous year (9.8 percent).
The average cost of debt is 5.2 percent and varies by industry between
4.5 and 5.8 percent.
To determine the debt-equity ratio
applied for the derivation of the
value in use, 32 percent of the surveyed companies used peer group
data (fair value less costs to sell:
54percent). The average debtequity ratio applied amounts to
48percent.
The WACC average amounts to
approximately 7.9 percent (previous
year: 8.2 percent). Depending on the
industry, it ranges between 6.4 percent and 8.4 percent.
Outlook overall economic

development
57 percent of the companies expect
a positive development of the overall economic situation in 2012.
The same tendency applies to the
assessment of the individual economic situation of the surveyed
companies.
69 percent of all surveyed companies expect an increased interest
rate level in 2012 compared to the
previous year.
In the fiscal year 2010/2011, the

majority of surveyed companies
applied a growth rate between 0 and
2 percent 1.5 percent on average
applying the value in use approach
and 1.2 percent applying the fair
value less costs to sell approach.
1 Introduction
1.1 Foundations and Objectives

of the Study
The cost of capital is required for all
value-related corporate decisions. In
addition, there are a number of occasions on which legal requirements
apply to the use of capital costs such
as the IAS Impairment Test. Despite
the detailed guidance provided in the
standard, the IAS Impairment Test
according to IAS 36 remains a highly
complex process. Therefore, the central issue guiding all analyses of our
investigation is how the often ambiguous wording and interpretation of
details required are implemented in
practice. Particularly in the context of
the ongoing debt crisis, the underlying
capital costs and budget figures used
for impairment tests are considerably
affected by the current fluctuations
on the financial markets. This study
reflects the different approaches typically resulting from the interpretation
room provided by IAS 36. Additionally,
we present the growth expectations
underlying the budget calculations in
the context of the current market volatility as well as with regard to the anticipated future economic development
across the individual industries.
We have summarized our analysis in

distinct sections addressing each of
the following issues:
Organization and execution of
impairment tests,
Derivation of cash flows,
Cost of capital parameters,
Outlook overall economic
development.
The purpose of each question is
described briefly at the beginning of
the section. To make the study more
comprehensive, we have outlined the
essence of some of the applicable
IFRS rules where necessary.
To the extent permitted by the data,
we also assessed the cost of capital
by country, industry and stock market
segment. Additionally, we compared
this years findings to the results of
previous years studies (trend analysis).
1.2 Data Collection

This year we contacted a total of
493companies in Europe (previous year 740), 137 of which (previous
year 152) participated in the survey.
The response rate of 27.8 percent is
higher than that of the previous year
(20.5percent).
27.8%
of the companies contacted
participated in this years survey.
The response rate in Germany was

31.6 percent (previous year: 32.8 percent). Above-average participation
was achieved again in DAX-30 and
MDAX. 70 percent of the DAX-30 and
44.9 percent of the MDAX companies
participated in this years study.
70.0%
of DAX-30 companies again
participated in this years survey.
Industry analysis: Separate statistical

assessments were made for industries
with a minimum response rate of five
responses. We would like to point out
that some companies did not answer
all the questions. The highest response
rate was achieved in the sectors indus-
The companies were surveyed

between June and September 2011.
The fiscal year 2010/2011 shown
below includes group balance sheet
dates between 30 September 2010
and 31 August 2011.
Country
Numbers of
companies
contacted
Numbers of
response
Response rate
Germany
275
87
31.6%
74
10.8%
108
38
35.2%
36
11.1%
493
137
27.8%
Austria
Switzerland
Others*
Total
trial products (35 companies) and consumer products & services (21 companies). The industrial products sector
includes companies operating in different manufacturing sectors as well as
companies mainly producing industrial
intermediate products.
Figure 1
Breakdown of participants by country
* All EuroStoxx-50 companies are contacted.
Source: KPMG
Figure 2
Composition of sample by industry
35
35
Source: KPMG
30
1 Automotive
2 Building & Construction
25
3 Chemicals
4 Computer & Semiconductors
20
5 Consumer Products & Services
21
15
6 Energy & Power Generation

7 Entertainment & Media
17
8 Financial Services
10
5
9 Industrial Products
12
8
7
2
11
0
1
10 Internet & E-Commerce
10
11 Life Science & Healthcare

12 Software
13 Telecommunications
14 Transport & Logistics
11
12
13
14
2 Organization and
Execution of
the Impairment Test
In general, IAS 36 provides companies with sufficient room for interpretation concerning the recognition of
the individual operational reality. This
allows companies to take into account
individual company-specific assumptions and premises. IAS 36 does not,
for instance, set a specific date for the
execution of an impairment test. The
test does not necessarily have to take
place at the end of the fiscal period;
however, once the initial choice of date
is made, the test has to be consistently
executed at the same time in the consecutive periods (consistency principle
as per IAS 36.10). In exceptional cases
the reference date may be changed.
Furthermore, within the given framework CGUs may be tailor-made to the
planning and steering structures of
the respective companies. Despite
the well-defined requirements of the
standard, there are two subjects aside
from the definition of CGUs that are
frequently discussed in the context of
the practical organization and execution of impairment tests: the consistent determination of the recoverable
and the carrying amount that is in line
with the requirements of the standard.
In order to analyze the prevalent practice more closely, we investigated the

following questions:
When is the annual impairment test
executed? How often are impairments made and of what amount?
How are triggering events determined? Were any reversals recognized in the past fiscal year?
(Section 2.1)
How many different CGUs are the
calculations based upon? Is there
an alteration in the CGU structure
compared to previous years?
(Section 2.2)
How is the recoverable amount
determined and which valuation
method is used? (Section 2.3)
Which balance sheet items does the
carrying amount comprise?
(Section 2.4)
For what other purposes are the
results of the impairment test being
used? (Section 2.5)
2.1 Timing, Frequency, Triggering

Events and Reversals
The selection of a reference date is
an essential aspect of the impairment testing process for several reasons. First of all, the companys staff
has a lower workload if the valuation
date and the consolidated balance
sheet date do not coincide. The test
can, therefore, be executed independently of the preparation of the financial statements. Furthermore, if the
impairment test is based on a DCF
approach, the latest budget figures
for CGUs adopted by the companys
bodies should be included in the calculations. For these reasons, the end
of the planning process would be the
most suitable time for the execution of
an impairment test.
For 61 percent of the companies, the
reference date for the execution of the
impairment test lies before the groups
balance sheet date.
Industry analysis: The analysis of
the various industries yields different
results. In the energy & power generation industry (71 percent) and the
financial services industry (67 percent), the majority of impairment tests
are performed as of the groups balance sheet date. In the life science&
healthcare industry this is true for
100percent of the companies.
Figure 3
Timing of impairment test execution
Total (in percent)
61
Before financial statement date

Date of financial statement
39
0
10
20
30
40
Source: KPMG
50
60
70
As a result of the financial and economic crisis, since fiscal year2008/2009,

the impairment test has been in the
public focus as well as on the list of
focal points of the Financial Reporting Enforcement Panel (FREP) review.
During the crisis, numerous companies had to adjust their short and
medium-term planning. Some of the
parameters influencing the result of
the impairment test, such as cost of
capital, or multiples, are also affected
by the consequences of the volatile
markets in light of the current sovereign debt crisis. The effects of the
financial and economic crisis are still
visible in the fiscal year 2010/2011.
At 51 percent, the ratio of companies

recognizing an impairment is almost
as high as in the fiscal year 2009/2010
(55percent) and thus, still considerably higher than before the crisis in
2007/2008 (40 percent). For non-listed
companies, this figure, at 81percent,
is even higher compared to 79percent
in the previous year. For non-listed
companies it must be noted that the
percentage of companies performing
goodwill impairment has risen considerably (44percent, previous year
33percent). As was the case in previous years, the largest proportion of
impairments continues to be attributable to assets.
Background IFRS
When must an impairment test
be performed?
The impairment test according to

IFRS performed at regular intervals
is intended to ensure that the assets
are not valued higher than their
recoverable amount. To the extent of
which the carrying amount exceeds
the recoverable amount, it is necessary to recognize an impairment
loss. As of each balance sheet date
all assets are to be tested in order to
determine whether there are indications that the value of these assets
has declined.
Goodwill and intangible assets with

an indefinite useful life are not a subject of scheduled amortization. They
are amortized only in the event of
impairment (so-called impairment
only approach). The aforementioned
assets as well as intangible assets
not yet available for use are to be
subjected to an annual impairment
test. In case there are grounds suggesting impairment (so-called triggering events), an impairment test
might have to be carried out in addition to the regular annual test.
Trend analysis
The rate of companies that performed
a value adjustment amounts to 51percent and is lower than in the previous years (2009/2010: 55 percent,
2008/2009: 60percent), but remains
significantly higher than in the year
prior to the crisis, 2007/2008 (40 percent).
IAS 36.12-14 provides a long list of

indicators that may require the performance of an impairment test.
Generally, the standard differentiates between internal indicators (the
origin of which lies in the CGU and/
or the company itself) and external
indicators (for example, a slump in
orders or cancellations of orders,
drop in price, sustained under-utilization of capacity). Ultimately, a company ought to identify the respective
relevant indicators and test these at
regular intervals.
Figure 4
Execution of an impairment
Total (in percent)
Figure 5
Not listed companies (in percent)
Source: KPMG
Source: KPMG
11
19
28
49
37
33
15
Industry analysis: Findings vary substantially across the individual industries. It stands out that with 59 percent
(previous year 66 percent) significantly more companies of the chemicals industry wrote-down individual
assets as compared to the total group
of surveyed companies. Far fewer
companies of the entertainment &
media industry recognized an impairment loss compared to previous year
(43percent as opposed to 77 percent).
55 percent of the life science& healthcare companies recorded an asset
impairment in 2010/2011.
Goodwill Impairment
Asset Impairment
Both
No Impairment
For companies recording goodwill

impairment, goodwill was writtendown in the fiscal year 2010/2011 by
an average of 16.5 percent (previous
year 13.5 percent).
16.5%
is the amount by which goodwill was
written-down on average in the fiscal
year 2010/2011.
The impairment of assets is of

particular relevance for pharmaceutical companies as there
are higher market risks associated
The fairly stable positive price trend
with the investment in R&D. To
of media stocks and the favorable
account for the market uncertainties, development of the advertising
companies usually build expectancy
market certainly contributed to
values weighting the future cash
the fact that significantly fewer
flows with the probability of their
impairments were recorded at
occurance.
media companies in 2010/2011.
Christian Klingbeil

Figure 6
Chemicals (in percent)
Figure 7
Entertainment & Media (in percent)
Source: KPMG
Source: KPMG
15
35
14
57
53
14
6
Goodwill Impairment
Asset Impairment
Both
No Impairment
Considering the volatility of the markets mainly attributable to the current

financial and sovereign debt crisis, it
is of particular interest to explore the
extent to which companies performed
impairment tests based on triggering
events. This was the case for 37 percent of companies participating in the
survey, which represents a decline
of 16 percent as opposed to previous
year. The impairment of assets makes
up the greatest portion of impairment
tests triggered by a specific event
(27percent).
As major reasons for the performance

of impairment tests based on triggering events, companies stated the
deteriorated long-term outlook, price
declines and a sales slump. In the previous year, 25 percent of the participating companies stated a slump in sales
to be the primary reason. This percentage declined to 12 percent in the fiscal year 2010/2011. In addition to the
deteriorated long-term outlook, the
energy& power generation industry
states price drops in particular as a reason for triggered impairment tests.
Industry analysis: The energy&

power generation industry is an exception to the overall trend described.
Here, an above-average 92percent of
the companies performed an impairment test based on triggering events,
which can be attributed to the changes
in the energy and climate policies.
However, this observation does not
reflect the impact of the earthquake
and the tsunami in Japan, and the
resulting nuclear disaster in Fukushima
in March2011, because the statements made by participating energy
companies are as of balance sheet
date for the fiscal year 2010, which
was within the calendar year 2010 for
all companies.
It is, however, surprising that the surveyed companies in the consumer

products & services industry did not
state price decreases as a triggering
event in the last fiscal year. Compared
to the total of surveyed companies,
64percent of the surveyed retail companies noted the deteriorated longterm outlook as triggering event, as
opposed to 50 percent in the previous
year.
With the exception of goodwill, IAS3 6

allows the recognition of reversals
for individual assets if an unscheduled impairment has previously been
recorded. In the context of first signs
of economic recovery and considering
the impairments for individual assets
recorded in the previous years, it may
be assumed that some companies recognized reversals for the respective
assets. However, the sample shows
that only 11 percent of the participating companies recognized reverse
amounts for individual assets. Nonlisted surveyed companies, on the
other hand, recognized value appreciation of individual assets considerably
more often in the fiscal year 2010/2011
(30 percent).
Figure 8
Specification of triggering event
Total (in percent)
Source: KPMG
Fewer companies than the overall

average performed an impairment
test based on a triggering event in the
financial services and industrial products sectors with 23 and 20 percent,
respectively.
12
28
10
45
Drop in orders
Price decline
Worsening long-run expectations
Cost of capital
Others
2.2 Number of Cash Generating

Units and Changes to their

Structure
In order to determine the relevant
CGU structure, the companies need
not only to apply the requirements of
IAS3 6 and IFRS 8, but should also
take other factors into account such as
the amount of work resulting for the
company from the determination of
the CGU organization. The determination of CGU levels is oriented towards
the respective internal management
control level. A larger number of CGUs
in a company suggests a higher level
of workload when performing the
impairment test. The lower the number of CGUs is, the larger the size of
each respective CGU. The larger the
size of a CGU resulting from a combination of several units, the higher the
possibility for a company to compensate a negative earnings outlook in one
area through a positive earnings outlook in another one.
With regard to the number of CGUs
selected for goodwill impairment
tests, about 73 percent (previous year
75 percent) of the participating companies stated that they define a maximum of 10 CGUs for their goodwill
impairment test. The majority (53percent) determined a maximum of five
CGUs. No significant changes were
observable compared to previous
years.
With regard to asset impairment tests,
65 percent of the companies determined less than ten CGUs (2007/2008:
44percent; 2008/2009: 60 percent;
2009/2011: 67 percent). The data
shows a clear tendency towards limiting the number of CGUs applied in the
asset impairment test.
Figure 9
Number of CGUs
Total (Numbers of answers)
Source: KPMG
80
70
68
60
50
40
43
30
26
20
10
18
14
14
4
0
0 to5
6 to10
11 to20
21 to 30
31 to 40
41 to 50
3
more than 50
Goodwill Impairment Test

Asset Impairment Test
Industry analysis: The vast majority of the companies participated in

the survey (71 percent) kept the CGU
structure unchanged compared to
the previous year. Approximately half
of the companies that changed their
structure in the last year modified their
CGUs as well, which is mainly attributable to changes in the reporting structure. These general tendencies also
apply to the individual industries. However, in the energy & power generation industry none of the companies
changed their CGU structure and in the
financial services industry only one of
the participating companies did. With
34percent, it was predominantly companies of the industrial products industry that most often changed their CGU
structure.
Figure 10
Change in the CGU structure
Total (in percent)
Figure 11
Reason for the modification in the CGU structure
Total (in percent)
Source: KPMG
Source: KPMG
26
41
Trend analysis
A reduction in the number of CGUs
can be observed with regard to the
asset impairment test. In the fiscal
year 2010/2011, only 35 percent of
the companies defined more than ten
CGUs. In 2007/2008, this number
amounted to 56 percent.
71
29
14
7
33
Modified structure compared to the last year
Modified reporting structure
Consolidation of CGUs
Acquisition/divesture of company divisions
Realignment of CGUs
Others
Others
Same structure as last year
2.3 Determination of Recoverable

Amount
Background IFRS
recoverable amount
According to IAS 36.18, the recoverable amount is determined as
the higher of fair value less costs to
sell and value in use. The standard
does not require necessarily calculating both value in use and fair
value less costs to sell if one of them
already exceeds the carrying amount
(IAS3 6.19). This gives companies
the freedom to choose the valuation
concept they wish to use in the first
step.
The two valuation concepts are
based on different valuation perspectives which must be taken into
consideration for the actual application and which entail corresponding advantages and disadvantages
regarding their feasibility and amount
of work required.
How is the value in use determined?
The value in use equals the cash
value resulting from the estimated
expected future cash flows from the
continuous use of an asset, a CGU
or a group of CGUs and the cash
outflow at the end of the useful life
(IAS3 6.31). The cash flows applied
in the value in use calculation reflect
the available information concerning current and future business prospects, as well as company-specific
factors, which possibly are solely
applicable to the individual company
and are generally not transferable to
other companies.
The value in use reflects the internal

perspective of the company/CGU
exploiting the asset. The capital
value-oriented valuation method is
to be applied. Adopting this valuation
perspective means that the company
needs to consider real synergy
effects between CGUs and assets in
the derivation of its cash flows. On
the contrary, cash flows from future
restructuring activities for which no
specific planning exists at the time,
as well as cash flows from expansion
investments of the CGU or the asset,
respectively, must be eliminated.
Cash flows from financing and taxes
should not be taken into account
either.
How is the fair value less costs to
sell determined?
The fair value less costs to sell is
the amount that could be generated for an asset or a CGU between
knowledgeable, willing and mutually independent business partners
after deducting the cost of sales
(IAS3 6.6; IDW RS HFA 16 margin # 8). In this case, the perspective of a typified market participant
is assumed. Costs to be deducted
are costs for legal services or similar transaction costs, transport costs
as well as costs to bring an asset
or a CGU into condition for sale
(IAS3 6.28). In practice, costs to sell
are often determined at one to two
percent of the fair value for purposes
of simplification.
The fair value less costs to sell must

primarily be determined based on
market-price oriented methods
according to IAS 36.25 f. Accordingly, the asset and/or CGU or at
least comparable assets and/or
CGUs, would have to be traded in
the active market and their market
prices would need to be transferable to the asset or the CGU, respectively. The income approach is to be
used only if such market prices do
not exist.
Even though the internal management planning usually serves as
basis for the determination of the
fair value less costs to sell, when
applying the income approach, it
must be ensured that none of the
relevant planning parameters (such
as price and volume development,
profit margin development, etc.) are
determined according to the internal management perspective, but
are rather supported by observable
market data (for example industry
reports, analysis reports, peer group
analyses). As opposed to the derivation of cash flows for the value in
use, real synergy effects must be
eliminated from the planning figures
when deriving cash flows for the calculation of the fair value less costs
to sell.
With regard to the determination of
the fair value less costs, regulations
set forth in IFRS 13: fair value measurement must be considered in the
future containing detailed regulations on the determination of the fair
value.
Our study shows that the vast majority of surveyed companies (82 percent;
previous year: 86 percent) determined
the value in use, while 31 percent of
the companies (previous year 29 percent) determined the fair value less
costs to sell. By contrast, 86 percent
of Swiss companies determined only
the value in use.
82%
of the surveyed companies determined
the value in use to measure the
recoverable amount.
Figure 12
Applied measure of value
Total (in percent)
13
18
69
Fair Value less costs to sell

Both
Due to the current sovereign debt crisis the factors crucial to the determination of the fair value less costs to
sell such as market prices obtained
from the stock market or from comparable transactions are still quite volatile. The observable price fluctuations
are therefore a possible explanation
for the increased proportion of companies exclusively calculating the value in
use. Due to these market fluctuations,
in the selection of a valuation concept
the companies took into consideration that a valuation based on transaction prices at lower values will lead to
lower values than a valuation based on
the own use of a CGU and/or asset.
As was the case in previous years,
68 percent of companies that determined both value in use and fair value
less costs to sell stated that the value
in use is the higher of the two values.
However, there is a decreasing trend
for this figure observable over time
(2008/2009: 79 percent, 2009/2010:
71 percent).
Source: KPMG
Value in Use
Industry analysis: The high percentage of companies adopting a value

in use calculation is also reflected in
the different industries except for the
energy& power generation industry,
where 37 percent of the companies
determine the fair value less costs
to sell.
Due to the lack of comparable market

data for the respective CGU, the fair
value less costs to sell is usually determined based on the income approach.
In order to compare the performed
valuation with the estimation of a market participant, the sum of the recoverable amounts of all CGUs can also be
validated against the market capitalization of the listed entity. Hence, the fair
value less costs to sell per CGU, or the
respective underlying planning, may
need to be adjusted accordingly so as
to ensure that they truly reflect current
market assessments.
Of listed companies that determined
the value in use 64 percent used this
plausibility check, while only 53 percent of the listed companies that
determined the fair value less costs
to sell compared the calculated value
to the market capitalization. DAX-30
companies, on the other hand, stated
significantly more often that they perform a comparison between market
capitalization and totals of value in
use and/or fair value less costs to sell
(value in use 73percent, fair value less
costs to sell 78percent).
To verify the determined recoverable

amount,
70%
of surveyed DAX-30 companies
compared total recoverable amounts
across all CGUs with the market
capitalization of the company.
Figure 13
Comparison with market capitalization
Value in Use
Listed companies (in percent)
Figure 14
Comparison with market capitalization
Source: KPMG
Source: KPMG
13
21
36
11
47
20
19
Lower or equal
Slightly higher
Considerably higher
More than twice as high
Significantly higher
Was not considered
Background IFRS 13
fair value measurement
Beside the harmonization of IFRS
and US GAAP, the standard also
aims to provide a consistent definition of fair value, create a framework
for the determination of the fair value
and define the central information to
be provided in the notes.
The definition of fair value according
to IFRS 13 is the price that would
be received for selling an asset or
paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
In contrast to the previous regulations for the determination of the fair
value the following aspects are specified, in particular:
IFRS 13 defines a three-level input

parameter hierarchy for the fair
value determination, whereas
directly observable, unmodified
market prices represent the first
level, while parameters that cannot be observed in the market,
but must be analyzed for commercial viability, represent the third
level. Parameters of the second
level include direct and indirect
(derived) market parameters that
are subject to certain limitations.
A special rule applies for the valuation of non-financial assets.

According to the standard, the
highest and best use of the asset
is relevant for the valuation, which
could also mean a use other than
the current one, as far as it is physically possible, legally permissible
and financially reasonable. Furthermore, the highest and best use
may also be realized in combination with other assets and debt,
which results in a joint evaluation.
If a determination of the fair value

can be made based on market
transactions, parameters of the
principal market should be used.
This is the market with the highest level of activity/volume. If the
principal market cannot be determined, the most favorable market
should be used, for example the
one maximizing the proceeds from
the asset sale or minimizing the
debt level.
Background IFRS
what does the carrying amount
comprise?
According to the so-called equivalency principle (see also IAS 36.75
and 79), all assets and non-interest
bearing liabilities considered to be
a source of the cash flows recognized in the recoverable amount
should be taken into account.
IAS 36.50 restricts the recognition
of assets and liabilities related to
income taxes, such as deferred tax
assets and liabilities, tax refund
claims as well as tax liabilities and
provisions in the carrying amount
of a CGU and in the cash flows of
the recoverable amount. Balancing
CGU losses through a carry-forward is permissible only within the
planning period of the company
and is not a subject to IAS 12.
For consistency reasons deferred
tax liabilities determined in the
context of a purchase price allocation may be included in the carrying amount. Furthermore, it is
necessary to plan the corresponding reversal of deferred taxes, as
the expected actual tax payments
according to tax regulations have
to be taken into account when
determining the cash flows.
Deferred tax liabilities arise for

assets, previously not recognized
or recognized at a lower value in
the balance sheet of a company. In
the context of purchase price allocations such assets are accounted
for at their fair value and from that
moment on depreciated in regular
intervals according to IFRS. This
results in temporary differences
between the tax result (mostly
unaffected) and the result according to IFRS (which will be lower in
the future). In this case, the company recognizes deferred tax liabilities.
Financial liabilities are not to
be allocated to a CGU as per
IAS3 6.76 (b). Therefore, pension provisions do not have to be
included in the carrying amount of
the CGU as the amount of pension
provisions already carried as liabilities represents means of external
financing. Should, however, pension provisions be included when
measuring the carrying amount, all
pension payments (including interest) must be deducted from the
cash flow for the calculation of the
recoverable amount, as per the
equivalence principle.
Corporate assets such as administrative buildings or research and

development centers must be
included in the identified CGU
based on reasonable allocation
keys. If this is not possible, the
smallest group of CGUs, which
includes the identified CGU and
for which such an allocation can be
made, must be determined (see
also IAS 36.102).
When determining the companys
liquidity, in general only liquidity
material to the operations should
be used. So-called surplus liquidity
should not be included. If the WACC
approach is applied as part of the
income approach, the WACC or the
relevant capital structure should be
determined considering gross liabilities. If the WACC and the capital structure are determined based
on net liabilities (interest-bearing
debt capital less liquidity), the liquid
assets should not be included in the
carrying amount.
According to IAS 36.79, trade

receivables and trade payables,
for example, as well as other obligations (working capital) may be
included in the carrying amount of
a CGU.
2.4 Composition of the

Carrying Amount
The calculated recoverable amount is
then compared to the carrying amount
to determine whether an extraordinary impairment loss needs to be recognized at the CGU level. According to
the equivalence principle, it must be
ensured that the assets and possible
debt obligations grouped in a CGU are
related to the cash flows defining the
basis for the calculation of the recoverable amount.
Of all surveyed companies 40 percent

(previous year 45 percent) included
liquidity in the carrying amount. A total
of 27 percent (previous year 36percent) included corporate assets in the
carrying amount. As in previous years,
the majority of the surveyed companies (80 percent) did not include losses
carried-forward from taxes in the carrying amount. Pension provisions,
however, were included by 33percent of the companies (previous year
53percent). Two-thirds of the surveyed companies thus classified pension provisions as financial liabilities.
Deferred tax liabilities from purchase
price allocations were included in the
carrying amount by 31 percent (previous year 45 percent) of the companies.
Figure 15
Carrying amount
Total (in percent)
Source: KPMG
60
Liquidity
73
Jointly used assets
80
Tax losses carry
31
69
Deferred taxes
33
67
Pension provisions
40
27
20
20
40
60
80
Considered in the carrying amount

Not considered in the carrying amount
100
2.5 Use of Impairment Test for

Other Purposes
In principle, it is necessary to carry
out the impairment test according to
IAS3 6 in preparation for the annual
financial statements. The CGU valuation results based on a DCF calculation prepared for impairment test purposes, as well as the related analyses,
calculation of budget figures and capital cost can also be used for other purposes within the company.
A total of 22 percent of the surveyed
companies used the results of the
impairment test for additional purposes. A total of 9 percent of the companies used the results for valuedriven controlling and 13 percent for
product and segment controlling. The
data shows that the results and analyses from the impairment test are only
seldom used for purposes of the internal corporate accounting.
The impairment test according to
IAS3 6 must be distinguished from
the impairment test for investments
in individual company financial statements according to IDW RS HFA 10,
application of principles of IDW S 1
for the evaluation of investments and
other company interests for the purposes of financial statements based
on commercial law. This is also true
for cases in which the CGU is equal to
the legal entity relevant for the valuation of the investment. One of the reasons is that tax losses carried forward,
for example, cannot be considered for
the evaluation as per IAS 36 (see also
Section 3.5). Generally, company-specific tax payments must be used as a
basis for valuations for the purposes
of IDW RS HFA 10, while for the purpose of IAS 36 valuations typified tax
payments are assumed. Furthermore,
the valuation of investments is usually based on company-specific capital costs, while for purposes of IAS 36,
assumptions by typified market participants are used (see Section 4).
3 Measurement of
Cash Flows
If the recoverable amount is calculated based on a DCF method, then it

should correspond to the present value
of the future cash flows expected from
the examined CGU. The cash flows
are usually derived from the company
budget prepared on a company/group
level. This basis may possibly be modified depending on the valuation concept selected. The equivalence principle is also crucial to determining the
cash flows. Therefore, consistency in
the determination of cash flows and
the cost of capital as well as in the calculation of the recoverable amount and
carrying amount needs to be ensured.
Consequently, the following questions
arise:
When was the group budget prepared? What level of detail and planning horizon are used for the budget
calculation? How is the sustainable budget year derived?
(Section 3.1)
What future growth expectations
are reflected in the budget?
(Section 3.2)
What plausibility checks were
applied to the budgeted figures?
What are the effects of the financial
and economic crisis on the budget
used as basis? (Section 3.3)
3.1 Preparation of Budget

Calculations and Determination

of Sustainable Year
IAS 36 requires up-to-date measurement parameters both to determine
the value in use and the fair value
less costs to sell. Thus, according to
IAS3 6.33 current budgets or management planning must be used to determine the cash flows for the calculation
of the value in use. If budget figures
serve as basis for the impairment test,
it is of crucial importance how up-todate the company/group budgets are.
What principles are applied for the

currency conversion?
(Section 3.4)
What is the basis for computing the
tax expense for measuring the cash
flows? (Section 3.5)
Figure 16
Time of preparation of group budget
Total (in percent)
Source: KPMG
80
60
40
20
54
35
7
Up to one month 2 to 3 months

4 to 6 months
6m onths and
before the
before the
before the
longer before the
impairment test impairment test impairment test impairment test
Figure 17
Level of detail of the budget figures
Total (in percent)
Almost
90%
of the companies based the
impairment test on a budget no older
than three months.
Source: KPMG
60
40
45
20
Industry analysis: By contrast, surveyed companies from the energy&

power generation and automotive
industries tend to prepare their budgets earlier, in some cases more than
6 months prior to the execution of
the impairment test (13 percent and
14percent, respectively). A similar
trend was observed last year.
Other important aspects for the preparation of the budget are its level of
detail and the length of the planning
horizon. Due to current market volatility it is often useful to perform a twostep extrapolation of the cash flow
predictions beyond the time period
covered by the detailed budget (horizon for detailed budget according to
IAS 36 is generally five years). Ultimately, the standard two-phase model
consisting of a detailed planning phase
and a terminal value year is transformed into a three-phase model,
allowing companies to adjust their
budget during the second planning
phase in order to converge to a sustainable budget level as basis for the
calculation of the terminal value.
22
Planning of
P&L items/
no planning
of BS items
14
10
Planning of
the whole
P&L/no
planning
of BS items
About half the participating companies (45 percent) prepared a so-called

integrated budget with cash flows
derived from the planning figures of
the income statement, balance sheet
and cash flow statement. Some of the
other companies prepared detailed
forecasting for the income statement;
others only prepared budgets for
selected items on the income statement. In the cases when a balance
sheet forecast was prepared, it was
in part done as a detailed budget and
in part only for selected items. Only
19percent of the surveyed companies
prepared a statement of anticipated
income without forecasting any balance sheet figures.
Planning of
the P&L and
special of
BS items
Planning of
the P&L and
all BS items
Integrated
planning
(P&L, BS and
cash flow)
45%
of the surveyed companies prepared
an integrated budget.
Industry analysis: A substantial number of the companies from the financial services industry prepared a
detailed budget for the income statement, but forecasted only selected
figures from the balance sheet. Companies in the automotive industry, on
the other hand, prepared complete
budgets including a balance sheet and
an income statement (29percent) or
complete integrated budgets (about
71percent).
Budgets of financial service

providers are characterized by the
profitability of portfolio business
and new business as well as
the required equity; off-balance
sheet items, such as assets under
management, also play a significant
role. For banks, insurance
companies and asset managers the
value-driven planning of income
statement, risk assets, equity and
liquidity is thus given priority.
Gernot Zeidler
Figure 18
Level of detail of the budget
Financial Services (in percent)
Source: KPMG
80
60
55
40
20
18
9
Planning of
P&L items/
no planning
of BS items
9
Planning of
the whole
P&L/no
planning
of BS items
9
Planning of
the P&L and
special of
BS items
Planning of
the P&L and
all BS items
Integrated
planning
(P&L, BS and
cash flow)
Figure 19
Level of detail of the budget
Automotive (in percent)
Source: KPMG
80
71
60
40
29
20
0
Planning of
P&L items/
no planning
of BS items
0
Planning of
the whole
P&L/no
planning
of BS items
0
Planning of
the P&L and
special of
BS items
Planning of
the P&L and
all BS items
The determination of the planning

period length is tied to a number of
issues. While a longer forecast period
may lead to rather inaccurate forecasts, a too short time horizon may
lead to the reflection of short-term
effects in the companys cash flows
resulting in a distortion of the company value or goodwill. Hence, the perpetual annuity needs to be adjusted to
reflect such effects.
Integrated
planning
(P&L, BS and
cash flow)
For the majority of the participating

companies (43 percent) the length of
the planning period was five years.
Another 35 percent of survey participants applied a budget period of three
years. Of the 16 percent of companies
using a different time horizon, 60percent used 4 years, while all others
applied a significantly longer horizon.
Across the different industries the
majority of companies also used budget terms of at least three years.
More than
80%
of the participants projected their
budget figures for at least three years.
The calculation of perpetual annuity is

a central element in the determination
of the present value of cash flows. As
a general rule, the calculation of perpetual annuity should be applied based
on what is called a steady state.
Depending on the development of
cash flows during the detailed planning
period different assumptions can be
made. For example, if the companys
cash flows are assumed to grow substantially during the detailed planning
stage and this development cannot be
expected to continue in perpetuity, a
(generally flat) discount can be made,
or a representative average of the budget years can be used.
Ninety percent of the companies used
the last year of the detailed budget as
a basis for the calculation of the perpetual annuity. About half of these
companies performed top-down
adjustments for the last year of the
detailed planning period (43 percent).
Figure 20
Budget horizon
Total (in percent)
Source: KPMG
Industry analysis: A similar distribution is evident across the different

industries. It should be pointed out
that about 87 percent of the companies in the energy & power generation
industry performed top-down adjustments on the last year of the detailed
budget. As in the previous year, a significant number of companies in the
automotive industry (17percent),
used an average of the budget years
to determine the perpetual annuity,
which is a rather conservative
approach.
Figure 21
Determination of the sustainable planning
period
Total (in percent)
Source: KPMG
1
16
35
47
43
43
One budget year without simplified

rolling forward
One budget year with simplified

rolling forward
Three planning years
Five planning years
Last projected year

Last projected year and

top-down adjustment
Average of projected years
Others
Other number of planning years
3.2 Growth Expectations in

Budget Calculations
Some of the most critical factors for
the preparation of budgets are the
anticipated sales growth and planned
EBIT/ EBITDA margins.
Depending on the industry, the anticipated annual sales growth rate for
the participating companies ranged
between 2.5 percent and 10.2 percent.
The corresponding annual growth
rates for EBITDA and EBIT were on
average at 10.1 percent and 13.4 percent, respectively. The highest growth
rates are expected in the Industrial
Products sector.
Industry analysis: The majority of the

surveyed companies (83 percent) did
The capital intensity of the
not plan adjusted EBIT/EBITDA marTransport & Logistics industry
gins. On the contrary, DAX-30 comdepends mainly on the penetration
panies (32 percent) and survey parof the value chain as well as on
ticipants from the chemicals and
whether rolling assets are leased
transport & logistics industries (31per- or purchased. In this sector there
cent and 33 percent) applied adjusted
are not many representative listed
EBIT/EBITDA margins to their plancompanies for comparisons. To
ning figures. Operating results were
ensure comparability, adjustments
adjusted for one-time effects, which
must be made to the evaluations;
for most companies were mainly
the evaluation of one-third of the
related to expenses for restructuring or surveyed companies is based on
expansion investments. Such adjustadjusted income figures.
ments are common practice in listed
Michael Salcher
companies since analysts usually perPartner, Corporate Finance
form their industry analyses based on
adjusted figures.
Across the total sample adjusted

EBITDA and EBIT margins are slightly
higher than the respective nonadjusted margins. Seventy-eight percent of the adjusted EBITDA margins
and 53 percent of the adjusted EBIT
margins of all surveyed companies
are above 10 percent. Before adjustments these amount to 64 percent and
37percent, respectively.
32%
of DAX-30 companies budget based
on adjusted EBIT/EBITDA margins.
Figure 22
Range EBITDA margins
Total (in percent)
Source: KPMG
EBITDA adjusted
50
40
43
30
20
10
0
14
Source: KPMG
EBIT adjusted
21
14
14
12
0
below 5%
Figure 23
Range EBIT margins
Total (in percent)
28
24
22
EBITDA unadjusted
5 to 10%
10 to 15%
15 to 25%
more
than 25%
50
47
40
30
35
35
20
EBIT unadjusted
18
18
10
12
12
6
below 5%
6
5 to 10%
10 to 15%
15 to 25%
more
than 25%
3.3 Plausibility Check of Budget

Calculations Used
A comparison of the central planning
parameters and the expectations of
market participants is of particular
importance for determining the fair
value less costs to sell. However, a
comparison is also recommended
for the calculation of the value in use,
given the regulatory requirements. The
comparison may be based on industry
or analyst reports, as well as multiples.
With regard to plausibility checks of
budget figures, the data shows that
about half of the participating companies (51 percent) did not perform any
plausibility checks based on comparison of margins with competitors, the
use of multiples, or the analyses of
analyst reports. The majority of companies that performed market comparisons based their plausibility checks
on multiples (17 percent) and analyst
reports (18 percent).
Industry analysis: These general tendencies also apply to the individual
industries. With regard to the financial
services and life science & healthcare
industries, it is remarkable that 78percent and 91 percent of the surveyed
companies respectively, did not perform plausibility checks of their budgets based on market comparisons.
This share is substantially higher than
in other industries. On the other hand,
83 percent of the participants from the
entertainment & media industry based
the plausibility checks of their budget
calculation on market comparisons.
Background IFRS
Which adjustments are to be
made to the budget for value in
use and fair value less costs to
sell?
The value in use determines the
value of the specific asset/CGU
assuming a continuous use by the
company. However, this perspective includes only the earnings
potential of the asset/specific
CGU without further modification
at the time the impairment test is
performed. For the determination
of the value in use it must therefore be ensured that the cash
flows do not include any effects
from future restructuring efforts,
which the company did not yet
commit to, or any future capital
expenditures for business expansions, which would increase the
earning power of the asset/CGU
(IAS 36.33 (b), IAS 36.44 ff.).
The planning premises underlying the measurement of fair

value less costs to sell, on the
other hand, have to be evaluated in terms of their conformity
with the overall market expectations. Therefore, management
budgets should not be adopted
for calculation purposes without
further examinations. The central planning parameters, such as
sales growth, profit margin development and long-term growth,
should thus be derived based on
market expectations (for example industry or analyst reports).
Genuine synergy effects that are
enterprise-specific and would not
apply to potential buyers or would
not apply in the same amount
should be disregarded as well.
Existing commitments to capital expenditures for upcoming

expansions as at valuation date
must, however, be reflected in
the cash flows and thus taken
into account for the determination
of the value in use (IAS 36.48).
With only 34 percent, the number of

surveyed Swiss companies performing market comparisons of their budget calculations is considerably lower
than the percentage of the total surveyed companies performing such
comparisons.
Figure 24
Plausibility check of the budget
Total (in percent)
Figure 25
Parameters for scenario analysis
Source: KPMG
Source: KPMG
14
3.4 Foreign Currency Translation
33
17
51
23
12
18
18
Yes, comparing margin of

competitor
Cost of capital
Yes, multiple
EBIT/EBITDA margin
Yes, analyst report

No
Revenues
Growth rate
Lump-sum discounts in the budget
Others
One possibility for assessing risks in

budget figures is to perform scenario
The Automotive industry should
calculations. The question here is,
always expect fluctuations on
which parameters will this analysis ulti- the customer side, which is why
mately be based on? Among the commultiple sales scenarios are
panies that performed scenario calcalculated and the sustainable
culations, the capital costs were the
year is used as the average for the
most frequently varying parameter.
budget.
EBIT/EBITDA margins or growth rates
Dr. Marc Castedello
also varied often. Lump-sum discounts
to budget figures and different growth
rates for sales on the contrary, were
used less often. The picture varies
slightly in the different industries. In
the Automotive industry, for example,
the variation of sales figures is applied
rather often (25 percent).
Industry analysis: As in previous

years, the majority of the surveyed
companies converted their cash flows
into the reporting currency first to discount them in a second step. This
applies to 100 percent of the survey
participants from the transport & logistics industry. For companies of the
automotive and energy & power generation industries on the other hand,
the picture is rather mixed. In the automotive industry 43 percent of the surveyed companies as well as 50 percent of participants from the energy&
power generation industry directly discounted their cash flows in the foreign
currency prior to any currency conversion. Surprising is also the fact that the
majority of companies from Switzerland (52percent) tend to discount cash
flows in the foreign currency, subsequently converting the cash value into
the reporting currency.
69%
of the surveyed companies converted
their cash flows into the reporting
currency prior to any discount.
Converting companys cash flows

into the respective reporting currency
raises the question of what conversion
rate should be applied: the spot rate,
forward rates or budget translation
rates defined by the group. Above all,
the choice of the conversion rate needs
to ensure that the inflation expectations are appropriately reflected in the
numerator as well as the denominator
when discounting the future expected
cash flows.
Figure 26
Exchange rates in the case of multiple foreign
currencies
Total (in percent)
Source: KPMG
7
8
31
69
54
Cash flows converted into reporting currency

and discounted
Spot rate
Forward rate for the planning period
Given exchange rate of the group

Cash flows discounted in foreign currency
The majority of companies (78 percent) converting their cash flows from
foreign currency before discounting
them used budget exchange rates
defined by the group (previous year
76 percent). The number of surveyed
companies performing conversions
based on forward rates of the planning
period declined to 12 percent (previous
year 16 percent).
Companies discounting cash flows in
foreign currency prior to conversion
mostly base these on the local capital
costs (45 percent). Another 32 percent
apply capital costs adjusted for inflation delta or country risk premium. Sixteen percent apply unadjusted capital
costs of the reporting currency to the
discount. Of Swiss companies, 89 percent use customary local or adjusted
capital costs for the discount of foreign
currency cash flows.
Background IFRS
What is the rule for handling
currency differences within
a CGU?
If there is a difference between
the reporting currency, for example the currency in which the carrying amount is presented, and
the currency in which the corresponding cash flows occur, then
a currency translation is required
for impairment test purposes.
The common approach here is to
discount the expected cash flows
in the currency of their origin in
the first step (IAS 36.54). Special
attention must be paid to the fact
that individual inflation expectations in the separate currency
regions, as well as other factors,
may lead to different cost of capital. Therefore, discounting the
cash flows in the corresponding
currency region should be based
on reasonable cost of capital. The
resulting recoverable amount is
then converted into the reporting currency at the spot rate on
the day of the impairment test
and compared with the carrying
amount.
If a CGU generates cash flows

in several currencies, it is advisable to first convert the different expected cash flows into the
reporting currency. Forward rates
are recommended, in particular, those for the respective planning year. For example, the cash
flows of the third planning year
should be converted at the corresponding three-year forward
rate. Applying the forward rate
of the reporting currency allows
for capturing the influences previously mentioned in the individual
costs of capital for each currency
region. Finally, the cash flows
expressed in the reporting currency can be discounted with the
cost of capital for the reporting
currency region without further
adjustments. The resulting recoverable amount must then be compared to the carrying amount.
Constant conversion rates for
future foreign currency cash
flows can be applied only in
exceptional cases. Particularly
when deriving the costs of capital, the consistency between
cash flows and the inflation
expectations considered must
be ensured.
Figure 27
Cost of capital for discounting foreign currency
Total versus Switzerland (in percent)
Source: KPMG
Total
Switzerland
80
70
71
60
50
40
45
30
32
20
10
16
18
0
Cost of capital of the
reporting currency

reporting currency
adjusted

foreign currency
Background IFRS
What is important when
determining the corporate tax
rate when computing value in use
and fair value less costs to sell?
If the determination of capital
costs is based on an after-tax
view, tax effects should also be
considered in the cash flows.
According to the standard, the
basis for the impairment test is
a pre-tax calculation. If there are
tax effects resulting from individual company circumstances, for
example from losses carried forward, these should not be considered; this also applies to the
value in use calculation (see also
Section 2.4 for consideration of
deferred tax liabilities from purchase price allocations). However, losses generated during the
detailed budget period should be
accounted for as a loss carried
forward and in later periods set
off against any positive earnings.
A corporate tax rate should be
determined both for the fair value
less costs to sell and for the value
in use. The tax rate should correspond to the tax rate for a typical
enterprise operating in the same
location. Therefore, it might make
sense to define a tax rate for each
CGU.
If foreign sales are generated by

the CGU, then a corresponding
typical tax rate has to be determined for these countries. The
KPMG Tax Rate Survey (KPMGs
Corporate and Indirect Tax Rate
Survey 2011) can serve as a
source of information in this case.
To determine the tax rate that can
be used both for the derivation of
the free cash flows as well as for
the calculation of the cost of capital, the foreign tax rates should
be weighted with the EBT (Earnings before Taxes) or the EBIT
(Earnings before Interest and
Taxes) generated in the respective country.
The question of the applied corporate

tax rate as per CGU is relevant for the
surveyed companies performing an
after-tax calculation to determine the
recoverable amount.
Of the surveyed companies, 41 percent (previous year: 40 percent) use
the group tax rate while 38 percent
apply individual tax rates to the respective CGU. Only 21 percent of companies apply a country-specific marginal
tax rate.
Figure 28
Applied tax rate
Total (in percent)
Source: KPMG
21
41
38
Group tax rate

Individual tax rate of the CGU
Country-specific marginal tax rate
Others
Industry analysis: It is striking that

companies of the entertainment &
media and telecommunications industries applied country-specific marginal
tax rates in 43 percent and 40 percent
of the cases, respectively. In the financial services industry 55 percent of
the participants stated using individual
corporate tax rates for the respective
CGUs.
3.5 Tax rate
4 Cost of
Capital Parameters
In addition to the general methodology applied for the determination of

the cost of capital parameters, we analyzed the overall level of capital cost
currently observable at the surveyed
companies. Accordingly, we first
investigated each parameter and then
the resulting WACC. We examined
in particular, how the approaches to
derive the cost of capital for the measurement of a value in use differ from
those to determine the fair value less
costs to sell.
First, the following questions were
asked:
What values were used for
the base rate (Section 4.1),
the market risk premium
(Section 4.2),
beta factors applied
(Section 4.3),
other risk premiums
(Section 4.4),
applied equity costs (Section 4.5),
applied loan capital costs
(Section 4.6),
by the companies?
What is the capital structure considered in the calculation? (Section 4.7)
How much is the companys
WACC? (Section 4.8)
Was a growth discount used and if
so, of what amount? (Section 4.9)
Background IFRS
How does the determination of
the cost of capital parameters
depend on the choice between
fair value less costs to sell and
value in use?
In contrast to the cash flows to be
discounted, the parameters considered in the WACC do not depend on
the choice between the valuation
concepts value in use and fair value
less costs to sell. Despite the difference in perspectives of the valuation measures, the cost of capital
parameters should reflect a market
estimate, e.g. the view of a potential buyer. In exceptional cases
the determination of the beta factor applied in the calculation of the
value in use can deviate from the
view of a potential purchaser; this is
explained in detail below.
The perspective of an acquirer can
be regularly reproduced by deriving the cost of capital parameters
from a peer group instead of applying certain parameters that are specifically identified for the reporting
entity. This concerns in particular
the capital structure, the cost of
debt as well as the beta factor. This
is based on the assumption that the
market does not evaluate a company in an isolated state, but in the
context of comparable companies.
Should this assumption be incorrect
in a particular case, a justification is
to be provided.
The major difference between the

cost of capital applied in the calculation of the fair value less costs to
sell and the cost of capital applied
in the value in use concept may
result from the general principle of
risk equivalence. Accordingly, the
cost of capital should reflect the risk
level of expected cash flows. For
the calculation of the fair value less
costs to sell, the market expectation alone is relevant for the determination of cash flows, so that the
respective cost of capital derived
from market parameters does not
need to be adjusted. Since management expectations are of particular relevance when deriving
the cash flows for calculating the
value in use, increases or reductions to the underlying cost of capital derived from market parameters
may be required to accommodate
the higher or lower risk of management expectations as compared to
the market expectations.
The appropriate measurement of
the individual parameters can be
seen in the following table.
Measuring cost of capital parameters

Cost of equity
Risk-free rate: bond yield curve/time equivalent
government bonds

Market risk premium before personal taxes

Beta from peer group
Financing costs of potential purchaser, for example
Cost of debt
derived from
ratings of peer group companies
returns from industrial bonds of peer group
companies
coverage ratios of peer group companies
Market-based financing structure of a potential
Debt-equity
ratio purchaser; for example derived from the capital
structure of peer group companies
Marginal tax rate of the respective country
Tax rate
(weighted average if applicable)
4.1 Risk-free Base Rate

The majority of the participating companies (62 percent) relied on the use
of national government bonds to determine the risk-free rate. However, the
number of companies applying this
method has decreased over the past
few years. On the other hand, there
is an increasing trend for companies
using yield curve data to determine the
risk-free rate (38 percent). The use of
yield curve data is in accordance with
the recommendations of the IDW,
which is also confirmed by the high
number of German companies in international comparison, around 52 percent (previous year also 52 percent),
applying this method.
With
52%
the surveyed German companies
tended to use yield curve data for the
determination of the base rate.
Similar to the trend observable for

government bond yields, the average risk-free rate applied by the survey participants declined from 4.3 percent in 2008/2009 to 3.9 percent in
2009/2010 reaching its lowest point at
3.3percent at present.
3.3%
is the risk-free rate used on average by
all surveyed companies.
Companies outside Germany make up

the greatest fraction of surveyed companies applying government bonds
(85percent). The average term of
maturity of underlying government
bonds applied amounts to 15 years.
When assessing the average risk-free

rate applied by all surveyed companies, we would like to point out that
the data stems from different countries, partly different currency areas
and different reporting dates.
Reduced capitalization rates due to

decreased risk-free rates require a
detailed analysis of the yield level in
the budget calculation.
Stefan Schniger
Figure 29
Derivation of the risk-free rate*
(in percent)
62
Source: KPMG
Government bonds
49
Total
85
Germany
38
Remaining countries
Bond yield curve
52
11
10
Others
The European risk-free rate declined

significantly in 2009 mainly due to
the financial and economic crisis.
After a short rise in mid-2009, the
risk-free rate continued to decline
from September 2009, reaching a
low of 3.25percent in the last quarter
of 2010. During the first half of 2011
the rising tendency returned; however, this trend reversed again during
the second half of the year and has
led once more to declining risk-free
rates since then. The development of
Swiss government bonds shows similar fluctuations. Despite the similar
trend, however, the interest rate level
applied in the different currency areas
differed substantially. In the fiscal year
2010/2011, Swiss companies used an
average risk-free rate of 2.7 percent.
Trend analysis
Until the end of 2010 a declining riskfree rate was observable, which only
began to rise again in the beginning
of 2011.
12
7
20
0 10
30
40
50
60
70
80
90 100
* Multiple answers were allowed in response to this question,

making it possible that the total deviates from 100 percent.
Figure 30
Average risk-free rate
Euro area versus Switzerland (in percent)
Source: KPMG
Euro area
Switzerland
4
4,5
4,4
4,0
3,8
4,1
3,5
3,0
2,7
0
Fiscal year
2007/2008
Fiscal year
2008/2009
Fiscal year
2009/2010
Fiscal year
2010/2011
Figure 31
Average risk-free rate
Bond yield curve of ECB and Switzerland
(in percent)
Source: KPMG
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
09.08
01.09
05.09
09.09
01.10
05.10
09.10
01.11
05.11
09.11
ECB bond yield curve

Euro area risk-free rate referred to the cost of capital study

Bond yield curve of Switzerland
Swiss risk-free rate referred to the cost of capital study
Figure 32
Development of German risk-free base rate
3-month average, not rounded
(in percent)
Source: KPMG
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
03.02
06.02
09.02
12.02
03.03
06.03
09.03
12.03
03.04
06.04
09.04
12.04
03.05
06.05
09.05
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
06.10
09.10
12.10
03.11
06.11
09.11
2.0
Figure 33
Yield
10-year yield government bond versus inflation rate
(in percent)
Source: KPMG
6.0
5.0
4.0
3.0
2.0
1.0
0
1.0
09.11
01.11
05.11
09.10
01.10
05.10
09.09
01.09
05.09
09.08
05.08
09.07
01.08
01.07
05.07
09.06
01.06
05.06
09.05
01.05
05.05
09.04
01.04
05.04
09.03
01.03
05.03
09.02
2.0
01.02
Therefore, the determination of the

costs of capital must be critically evaluated within the framework of impairment tests and business appraisals
in general. Given the current market
environment, a mere continuation
of the approach applied in the past
would most probably lead to inadequate results. Should the current,
low risk-free rates be directly applied
for impairment test purposes without any adjustments of the remaining
capital cost parameters, the assumptions underlying the companys budget might have to be reassessed to
ensure risk equivalency between cash

flows and capital costs. This is relevant in particular for the determination
of the terminal value as availability of
capital at lower costs in the mid and
long-term could lead to declining company returns as a result of adjustment
mechanisms on the competitive market (for example emergence of new
competitors).
05.02
The derivation of capital costs for

impairment tests and general company
appraisals needs to be exercised with
caution in the context of the unusually
low risk-free rate level during the last
quarter of 2010 and the second half
of 2011. Particularly the yield of German government bonds is strongly
impacted by the current uncertainty
and the volatility of the markets. Investors worldwide are searching for safe
investment opportunities. A large number of market participants view German government bonds as one of the
few remaining safe harbors. This led
to an increased demand for German
government bonds and consequently
declining yields,* with investors willing
to accept close to zero or even negative real interest rates, as current and
expected rates of inflation are higher
than the interest rates for German government bonds. In our opinion, the
acceptance of a negative real interest
rate for German government bonds in
particular, can only be viewed as a
temporary effect. Assuming that the
current interest rate level does not
properly reflect the long-term market
expectations concerning real interest
rates and inflation, a higher market
risk premium can be applied to compensate for these effects. As risk premiums cannot be reliably derived for
shorter historical periods, the development of the German government bond
(real) interest rates can therefore provide valuable indications for the derivation of a premium range to be added to
the long-term risk premium observable
on the market.
Yield of the latest available government bond with a 10-year maturity
Rate of change to previous month in percent

Delta between bond yield and inflation rate
This is also to be considered for the application of yield curve

data from ECB and Swiss National Bank since similar
developments were also observable for countries other than
Germany.
The market risk premium describes

the yield in excess of the risk-free rate
required by an investor for holding the
market portfolio.
The market risk premium is usually
determined retrospectively based on a
comparison between observable longterm stock yields and risk-free bond
yields over a certain historical period.
Despite the recent financial crisis, we
do not expect significant alteration of
the market risk premiums applied by
the surveyed companies, as the empirical measurement of market risk premiums is usually based on longer historical periods smoothening the impact of
temporary market turbulences.
Accordingly, the average market risk
premium used in the 2010/2011 fiscal
year remained constant at the previous
years level of 5.1 percent.
A slight rise in the market risk premium
from 5.4 percent to 5.5 percent could
be observed in Switzerland.
About 84 percent (previous year
80 percent) of all surveyed companies applied a market risk premium
between 4.5 percent and 5.5 percent, mostly 5.0 percent, in fiscal year
2010/2011.
For impairment tests and company
appraisals in the context of the current turbulent financial markets, one
should investigate the cost of capital
in terms of their adequacy as a whole,
rather than the separate parameters,
as these could be impacted by compensatory market effects (for example
a low interest rate level can be set off
by increasing risk premiums refer to
page 33.)
Figure 34
Average market risk premium used
Total (in percent)
5.1
4.7
5.1
5.1
Source: KPMG
2
0
Fiscal year Fiscal year Fiscal year Fiscal year
2007/2008 2008/2009 2009/2010 2010/2011
65%
of all surveyed companies applied a
market risk premium of 5.0 percent in
the fiscal year 2010/2011.
Figure 35
Average market risk premium used range
Total
Source: KPMG
100
90
80
Numbers of Answers
4.2 Market Risk Premium
70
60
50
40
30
20
10
0
2.0
2.5
3.0
Amount of MRP in percent
3.5
4.0
4.5
5.0
5.5
6.0
> 6.0
4.3 Beta Factor

The beta is a crucial input for the
calculation of the cost of equity. It
expresses the systematic risk (market
risk), for example the risk that shareholders cannot eliminate through diversification and that is therefore theoretically compensated by excess returns.
As in the previous years, the vast
majority of participating companies
(95 percent) derived their beta factors
from historic betas, also due to a lack
of convincing forecast models.
Figure 36
Derivation of betas
Total (in percent)
Source: KPMG
25
13
95
57
Historical betas

Current one-year betas
Average of one-year betas
Trend analysis
For the determination of beta factors
57percent of surveyed companies
tend to use the multi-year beta; in
2009/2010 this number was only
48percent and in 2008/2009
44percent.
We would like to point out that all

of the surveyed DAX-30 companies
used historical betas. 72 percent of
these companies applied a multi-year
beta based on a historical period of
3.5years on average. Additionally, all
surveyed companies in the Automotive industry applied historical betas
based on multi-year betas. In these
cases, companies on average used a
data collection period of 4.6 years.
The use of a one-year beta raises
the critical question to what degree
the data of the more recent past is
an adequate estimate of the systematic risk expected in the long-term. A
multi-year average, on the other hand,
allows the analysis and incorporation
of market trends and changes in the
capital structure of the peers based on
the differentiated view for the individual years.
One difficulty in determining the beta

factor results from the fact that most
of the CGUs to be evaluated are not
listed on the stock exchange. As there
are no directly available betas for the
CGUs the question arises, which companies adequately reflect the operating
risk of the respective CGU and should
therefore be included in the peer analysis? Since the answer to this question depends on the valuation concept
selected, we analyzed the responses
in a differentiated manner.
Overall it is advisable to derive the
beta based on a peer group, independently from the valuation concept
applied. The selection of suitable peer
companies allows for explicitly considering the risk profile of the CGU to be
assessed. In addition, building an average minimizes the impact from individual fluctuations of stock yields.
Multiple-year betas
Forecasted betas
With regard to the question concerning the historical period considered for
the determination of the beta, 57percent of the companies responding
used a multi-year beta (previous year:
48 percent). The average historical
data collection period for the derivation of the multi-year beta amounted
to 4years. By contrast, the use of an
average of one-year betas declined
from 27 to 13 percent compared to the
previous year. In these cases the companies used a data collection period of
3.4years on average.
The use of the beta factor of the

reporting group/company is only
appropriate if the operative risk of the
CGU coincides with that of the group
as a whole and the share price is not
subject to any significant fluctuations
that are not connected with the risk
profile of the company.
A total of 64 percent of the participating companies applied a peer-group
beta for the value in use (previous year
55percent). A peer-group beta was
also applied by the majority of the surveyed companies (75 percent) in determining the fair value less costs to sell
(previous year 70 percent). In general,
there is an increase in the number of
companies calculating peer-group
betas.
75%
of the surveyed companies derived
the beta applied in their fair value
calculation based on a peer group.
Beta factors of the reporting company

were mostly used for the determination of the value in use (32 percent).
Only 15 percent of surveyed companies determining the fair value less
costs to sell relied on the beta of the
own reporting company (previous year
17 percent).
The number of companies applying an
industry beta in the calculation of the
cost of capital decreased further in
2010/2011 (5 percent for value in use
and 10 percent for fair value less costs
to sell).
Surveyed companies from Switzerland

applied the beta factor of the reporting
company for the determination of the
value in use (38 percent) significantly
more often than the total number of
companies in the sample. To derive
the fair value less costs to sell, Swiss
companies also often used the industry beta (43 percent). DAX-30 companies used exclusively peer-group betas
for the determination of the fair value
less costs to sell.
The total of participating companies
used an average levered beta of 1.02
for their capital cost determination in
the fiscal year 2010/2011.
Trend analysis
The beta trend is a levered beta for the
overall market.
The average levered beta of 1.02

seems plausible with respect to all surveyed companies. In view of the definition of the beta as a relative measurement of risk, the average of all levered
betas on the market ought to amount
to 1.0. Against this background, the
average applied beta factor appears
to reflect the appropriateness of the
calculations made in the companies.
Based on the survey data, on average
there is no systematic underestimation
of the beta factor and thus of the systematic risk for impairment test purposes.
Figure 37
Average levered beta
Total (absolute)
Source: KPMG
1.2
1.0
0.8
1.04
1.02
1.02
Fiscal year
2008/2009
Fiscal year
2009/2010
Fiscal year
2010/2011
0.6
0.4
0.2
0
The beta is always determined in relation to the overall market. If the beta
rises in one industry or in several companies, for example due to effects
from the financial and economic crisis,
ceteris paribus, this implies a reduction of the beta of the remaining companies on the market. In other words,
a declining beta at first merely implies
that the risk compared to other industries or companies has decreased. This
indicator does not provide direct information on the development of the risk
in absolute terms.
Industry analysis: With average
levered betas between 0.83 and 0.86
life science & healthcare as well as
energy & power generation industries
were significantly below the average
of all industries. This may be due to
the fact that these industries are relatively independent of economic fluctuations (see Section 2.1; information for
energy companies is based on the
fiscal and calendar year 2010 and is
thus not influenced by the effects
of Fukushima). The industrial products sector on the other hand applied
the highest average levered beta
of1.20. The average levered beta of
the consumer products & services
industry declined from 1.04 in fiscal year 2009/2010 to 0.90 in fiscal
year2010/2011. In contrast, the average
levered beta factor of the transport&
logistics industry significantly rose
from 0.85 in fiscal year2009/2010 to
0.99 in fiscal year2010/2011.
Figure 38
Average levered beta by industry
The economic development

of companies of the Logistics
and Transport industry after the
financial and economic crisis has
improved to a degree that was not
to be expected. Companies of this
sector are more often affected by
economic volatility than others. This
leads to an increase in earnings
volatility and is highlighted by
increased beta and total capital
costs.
Source: KPMG
Total
1.02
Automotive
1.15
Building & Construction
n/a
Chemicals
4.2
1.04
Computer & Semiconductors
n/a
Consumer Products & Services
0.90
Energy & Power Generation
0.86
Entertainment & Media
1.01
Financial Services
1.11
Industrial Products
1.20
Internet & E-Commerce
n/a
Life Science & Healthcare
Michael Salcher
0.83
Software
n/a
Telecommunications
n/a
Transport & Logistics
0.99
0
4.4 Other Risk Premiums

In addition to the market risk premium,
other premiums are used for business
appraisals and the appraisal of individual assets to reflect specific risks, for
instance a country risk in excess of the
market risk of established capital markets or risk premiums reflecting budget uncertainties, insolvency or financing risks. Furthermore, a so-called
small-size company premium is also
assessed reflecting the increased risk
of smaller companies.
Figure 39
Risk premiums
Total* (in percent)
Of the surveyed companies, 66 percent assessed a country risk premium

for the determination of capital costs
within the framework of impairment
tests. The average range of the country risk premiums applied in fiscal
year 2010/2011 for all the participants
ranged between 1 and 5 percent.
Another 20 percent of the surveyed
companies applied a small-size company premium for the capital costs.
A risk premium for uncertain budgets
or particular financing risks was only
assessed in 11 percent of the capital
costs calculations.
0.2
0.4
0.6
0.8
1.0
1.2
absolute
A majority of the Swiss companies

(52percent) assessed a small-size
company premium to derive the cost
of capital.
Especially the developments in the

euro area show how important a
sustainable and comprehensible
country risk model is for the validity
of an impairment test.
Stefan Schniger
100
80
Source: KPMG
60
66
40
20
20
0
Country risk
premium
Small size
company
premium
11
11
Risk premium
for planning
uncertainty
Risk premium
for insolvency
risks
Risk premium
for financing
risks
16
Others

4.5 Cost of Equity

The levered cost of equity according
to the CAPM results from the risk-free
rate, the market risk premium and the
levered beta.
Figure 40
Average cost of equity used
(after corporate taxes)
Total (in percent)
Source: KPMG
10
9.9
9.8
Fiscal year
2008/2009
Fiscal year
2009/2010
rEKn=r*+MRR3b
4
2
0
Calculation of the cost of equity in

accordance with CAPM.
Compared to the previous year, the

average cost of equity of all surveyed
companies in the 2010/2011 fiscal year
declined slightly from 9.8 to 9.1percent, which is below the pre-crisis
2007/2008 level of 9.5 percent.
Assessing the average cost of equity
applied by all surveyed companies
as well as the individual industries, it
needs to be taken into account that
the data stems from different countries and partly from different currency
areas and reporting dates.
Participating companies from Germany applied on average cost of equity
of 9.0 percent (previous year 9.4 percent). Despite the low risk-free rate,
surveyed Swiss companies, on average, used higher costs of equity of
around 9.5 percent (previous year:
10.2 percent).
Industry analysis: The lowest cost of
equity was applied by companies from
the life science & healthcare industry with 7.5 percent. Surveyed companies from the entertainment & media
and industrial products industries on
the other hand used an average cost
of equity of 10.4 and 11.1 percent,
respectively.
9.1
Fiscal year
2010/2011
Figure 41
Average cost of capital used
(after corporate taxes)
Germany versus Switzerland
(in percent)
Source: KPMG
12
10
8
9.4
10.4
9.4
10.2
9.5
9.0
6
4
2
Germany
Switzerland
Fiscal year
2008/2009
Fiscal year
2009/2010
Fiscal year
2010/2011
Figure 42
Average cost of equity (after corporate taxes)
by industry
(in percent)
Source: KPMG
9.1
Total
9.1
Automotive
n/a
Chemicals
9.5
n/a
8.3
8.2

10.4
Financial Services
9.6
11.1
7.5
n/a
Software
Telecommunications
8.3
8.3
0
Industrial Products
n/a

9 10
11 12
4.6 Cost of Debt

The cost of debt is the second determinant required for the derivation of
the weighted average cost of capital
(WACC).
As with the cost of equity, the cost of
debt must be calculated based on the
usual market cost of debt observable
at the reporting date, independent of
the valuation concept and the specific
company refinancing terms and conditions.
As in the previous year, the majority
of participating companies applied
cost of debt derived from capital market data at the respective reporting
date when determining the value in
use (approx. 49 percent) and the fair
value less costs to sell (approx. 64 percent). Furthermore, as in the previous
year, a significantly higher percentage
of the surveyed companies applied the
real cost of debt of the reporting company for the value in use calculation as
compared to the fair value less costs
to sell.
Industry analysis: The majority of
surveyed companies in the entertainment& media industry applied the
real cost of debt of the reporting company for both the value in use and the
fair value less costs to sell. Companies
from the other industries derived their
cost of debt from capital market data
as of reporting date, as did the total
sample of surveyed companies.
Figure 43
Determination of the cost of debt
Total* (in percent)
Source: KPMG
80
70
60
64
50
49
40
30
40
20
21
10
0
Actual cost of
debt of the
company
Derivation from
capital market
data at cut-off
date
13
Derivation from
historical capital
market data
Others
Value in Use

Compared to the previous year, the

average cost of debt in the 2010/2011
fiscal year declined significantly from
6.0 to 5.2 percent. This reflects the
general trend of increasing capital
costs observable since the beginning
of the economic and financial crisis.
Currently, the average cost of debt is
at a level lower than in 2007/2008, the
year before the crisis.
Trend analysis
When assessing the average cost of

debt applied by all surveyed companies as well as the individual industries, it needs to be taken into account
that the data stem from different countries and partly from different currency
areas and dates.
The average cost of debt used in German surveyed companies declined
from 6.1 percent to 5.5 percent; for
Swiss companies the applied cost of
debt declined from 5.6 percent in the
previous year to 4.2 percent at present.
The cost of debt has significantly

declined since 2008/2009 for the
first time reaching 5.2 percent, which
is below the level observable in
2007/2008, the year before the crisis.
Figure 44
Average cost of debt used
(before corporate taxes) by industry
Eurozone versus Switzerland
(in percent)
Source: KPMG
Eurozone
Switzerland
6
4
6.6
5.7
6.0
5.6
5.6
4.2
0
Fiscal year
2008/2009
Fiscal year
2009/2010
Fiscal year
2010/2011
Industry analysis: The automotive,

consumer products & services and
entertainment & media industries all
reported a significant decline in the
average cost of debt used compared
to the previous year with decreases
from 7.3 to 5.5 percent, from 6.4 to
4.8 percent and from 6.2 to 4.7 percent, respectively. The highest cost of
debt of 5.8 percent was applied in the
industrial products sector.
Figure 45
Average cost of debt used
(before corporate taxes) by industry
(in percent)
Source: KPMG
Total
5.2
Automotive
5.5
n/a
Chemicals
5.3
n/a
4.8
5.0
4.7

Financial Services
n/a
Industrial Products
5.8
n/a
4.5
Software
n/a
Telecommunications
n/a
4.9
0
4.7 Capital Structure

The determined capital structure (market value of debt/market value of
equity) provides the basis for weighting the cost of equity and cost of debt
to determine the WACC.
Figure 46
Determination of the capital structure
Total* (in percent)
Source: KPMG
60
50
54
IAS 36 generally requires estimates

of market participants to be used as a
basis for determining the value in use
and deriving the capital structure. The
vast majority of participating companies rely on the current capital structure or target capital structure of the
company/CGU. However, the percentage of companies deriving their
capital structure from the peer group
increased over the past from 20 percent two years ago to 26 percent in
the previous year reaching the current
level of 32 percent.
40
Industry analysis: Companies from

the automotive and energy & power
generation industries require special
attention as they, for the most part,
use their own or a self-defined target
capital structure when determining the
value in use.
As to the question of whether the

applied capital structure (target or cur- The capital structure as an
rent) is determined using market valimportant determinant of the capital
ues or book values, the majority of
costs is of particular relevance for
companies (60 percent) applied market capital intensive companies as
values. However, the percentage of
in the energy and utility industry.
companies using book values for the
However, with the increasing trend
determination of the capital structure
towards less capital-intensive
increased to 40 percent compared to
business models in the industry, we
27 percent in the previous year, which
expect peer-group comparisons and
represents a discontinuation of the
target capital structures to become
trend observable in previous years of
less relevant.
an increased use of market values.
As expected, when determining the

capital structure for the fair value less
costs to sell, the majority of companies used the peer group capital structure (54 percent).
44
38
30
32
30
20
20
10
0
Companys current
capital structure
Companys target
capital structure
Derivation from a
peer group
Value in Use
Michael Salcher
The average leverage applied in the

total sample declined further compared to the previous years. The average leverage adopted by Swiss companies, on the contrary, increased in
the fiscal year 2010/2011 from 48 to
59percent.
Industry analysis: The average leverage per industry was between 35
and 58 percent. Exceptions were the
life science & healthcare as well as
the transport & logistics industries
with average leverage ratios of about
28percent and 75 percent, respectively.
4.8 Weighted Cost of Capital

In the current year, the weighted average cost of capital (WACC) applied
after corporate taxes but before growth
discount is slightly lower than in the
previous year.
Figure 47
Average capital structure
Total (in percent)
Trend analysis
The trend of declining leverage from
previous years continues in fiscal year
2010/2011.
Source: KPMG
100
80
60
67
40
55
48
20
0
Fiscal year
2008/2009
Fiscal year
2010/2011
Fiscal year
2009/2010
Figure 48
Average WACC applied (after corporate taxes)
Germany versus Switzerland (in percent)
Source: KPMG
10
8
8.9
7.9
7.9
7.9
7.9%
Germany
Switzerland
is the average WACC applied by

companies surveyed in the fiscal year
2010/2011 (previous year 8.2percent).
The average WACC applied in Swiss

companies declined significantly
compared to the previous year from
8.9percent to 7.9 percent, which contrasts the increasing trend observable
in the last years.
Fiscal year
2009/2010
Fiscal year
2010/2011
Figure 49
Average WACC applied (after corporate taxes)
by industry
(in percent)
Source: KPMG
Total
7,9
Automotive
7,6
n/a
Industry analysis: The average WACC

per industry lies between 6.4 and
8.4percent.
Chemicals
8,3
n/a
7,8
When assessing the average WACC

applied by all surveyed companies
as well as the individual industries, it
needs to be taken into account that
areas and dates.
6,4
8,4
Financial Services
n/a
Industrial Products
8,4
n/a
7,0
Software
n/a
Telecommunications
n/a
7,0
Travel, Leisure & Tourism
n/a
0
10
4.9 Growth Rate

The application of a sustainable
growth rate comes into consideration
when applying the income approach
under the going concern premise.
Almost all surveyed companies applied
a growth rate for the determination of
both the value in use and the fair value
less costs to sell. Compared to the previous year this percentage increased
significantly.
Figure 50
Use of the growth rate
Total (in percent)
Source: KPMG
100
80
96
92
60
40
20
0
Growth rate
No growth rate
Value in Use
Industry analysis: This trend can be

observed for almost all participating
countries, indexes and industries. The
energy & power generation industry is
the only exception, with 43 percent of
the surveyed companies determining
the value in use without the application of a growth rate.
The growth rate determination can
be based both on internal company or
external market factors. As in the previous year, the vast majority of participating companies based the applied
growth rate on industry and product
sales taking into account the inflation
rate. By contrast, most of the surveyed
Swiss companies (30 percent) determined their growth rate based on the
past growth of earnings.
Industry analysis: In part, different
approaches are adopted in the different industries for growth rate calculation. Surveyed companies of the consumer products & services as well as
life science & healthcare industries
predominantly applied a growth rate
based on industry sales. energy &
power generation, financial services
and entertainment & media on the
other hand used the inflation rate as
a reference.
Figure 51
Determination of the growth rate
Total (in percent)
Figure 52
Determination of the growth rate
Switzerland (in percent)
Source: KPMG
Source: KPMG
As in the previous year, the majority of surveyed companies applied a

growth rate between 0 and 2 percent
for both valuation approaches. Surveyed companies applying the value in
use adopted an average growth rate of
1.5 percent. Companies using the fair
value less costs to sell, on the other
hand, applied a growth rate of 1.2 percent. In the previous year, the average
growth rate in both cases was 1.5 percent. Due to the elimination of expansion investments and restructuring
measures in the budget underlying a
value in use calculation, the application
of a lower growth rate appears reasonable; however, this is not supported by
the data. An explanation for this discrepancy could be the small number
of surveyed companies adopting a fair
value less costs to sell, thus distorting
the overall results with a comparatively
low level of applied growth rates.
1.5%
is the average growth rate used to
determine the value in use; only
1.2percent for the determination of
the fair value less costs to sell.
10
22
25
30
29
24
7
29
19
5
Growth rate of product/product group revenues

Growth rate of revenues realized in the relevant

business line
Growth rate of the gross domestic product
Rate of inflation
Historic growth rate of the company earnings
When assessing the average growth

rate applied by all surveyed companies, it needs to be considered that
areas and different dates.
DAX-30 companies generally applied
higher growth rates, as was the case
in the previous year. The majority of
DAX-30 companies applied a growth
rate between 1 and 2 percent in both
valuation approaches. On average,
DAX-30 companies applied a growth
rate of 1.8 percent for the value in use
and of 1.3 percent for the fair value
less costs to sell.
Figure 53
Growth rates used
Total (in percent)
Source: KPMG
60
58
50
40
40
43
30
25
20
17
10
8
6
4
0
0.0 to 1.0
1.01 to 2.0
2.01 to 3.0
3.01 to 4.0
2
4
more than4.0
Value in Use
The growth rate expected in the

industry clearly reflects the
significant inflation expected
by consumer goods producers
and retailers. Nevertheless, it is
expected that a great portion of the
expected inflation will be passed on
to consumers.
Stephan Fetsch
The reasons for the application of

the highest growth rates by financial
service providers compared to other
industries are found in the business
model and the international
orientation of financial service
companies. Value drivers in banks
and insurances, such as credit and
insurance volume, grow in line
with the inflation and without
any adjustments for the market
share with the overall economic
growth. Additionally, financial
service companies are increasingly
operating in growth regions.
Gernot Zeidler
Industry analysis: For the value in

use the companies of those industries for which an analysis is possible
applied a growth rate between 1.4 and
1.9percent. Companies of the financial services and life science& healthcare industries based their determination of value in use in the fiscal year
2010/2011 on the highest growth rates
between 1.8 and 1.9percent. For the
determination of the fair value less
costs to sell, the highest growth rate
of 1.7 percent was applied by companies of the consumer products & services industry.
5 Outlook
Overall Economic
Development
The assessment of the companys

development in the context of the
overall economic and industry trends is
key to the business planning process,
raising the question whether participating companies have a similar understanding of the relevant trends driving
their particular industry. An additional
aspect of particular importance for the
assessment of the overall economic
outlook is the expected interest rate
level. We asked the following questions regarding the companies assessment of these subjects:
What is your assessment of the
overall economic development and
the developments in your industry
for the year 2012 compared to the
respective prior fiscal year? Which
significant trends lead to these
industry developments?
(Section 5.1)
What is your assessment of the
interest rate level for the year 2012
compared to the prior fiscal year?
(Section 5.2)
5.1 Expected Economic

Development 2012
We would like to point out that the survey results were mainly produced prior
to the end of August 2011. After that,
there was a significant change in the
stock markets worldwide, which
is not reflected in the results of this
survey.
Overall, the majority of the surveyed
companies are optimistic about the
economic development/outlook in
2012. For 2012, 57 percent of the surveyed companies expect a continuing
improvement of economic conditions
compared to the previous year.
The DAX-30 companies view the economic development for 2012 even
more optimistically. 77 percent of the
surveyed DAX-30 companies expect
a slight improvement of overall economic conditions in 2012.
Figure 54
Overall economic development 2012
Total (in percent)
Source: KPMG
12
13
27
45
Significant decline
Slight decline
Unchanged
Slight improvement
Significant improvement
Of the surveyed German companies,

67percent expect an improvement in
2012. Far less optimistic are the surveyed Swiss companies in terms of
the overall economic development.
Only 30 percent expect a positive
development in 2012.
Industry analysis: Similarly pessimistic is the energy & power generation
industry regarding the future economic
development. 43 percent of the surveyed energy companies expect a
slight deterioration of the economy
in 2012.
Figure 55
Germany (in percent)
Figure 56
Source: KPMG
Source: KPMG
1
13
13
9
15
24
19
54
A similar trend as in the overall economic development can be observed

in terms of the economic situation in
the own industry.
46
Significant decline
Slight decline
Unchanged
Slight improvement
Another 54 percent expect a positive

development for their industry in 2012.
The energy sector is seriously
affected by the nuclear disaster
in Japan and the far reaching
consequences of subsequent
measures. The industry is also
more pessimistic in terms of the
overall economic development
than companies of other industries
surveyed. This is true despite the
fact that capital costs of companies
surveyed remained relatively
constant in 2010, even declining
slightly. However, we expect
changing capital structures and an
increase in the cost of debt and
overall capital costs in the near
future.
More than
50%
of the surveyed companies expect
a positive development for both the
own industry as well as the overall
economy for 2012. In the previous
year it was roughly 80 percent of the
participating companies that expected
a positive economic development in
2011.
Michael Salcher
Of the German participating companies, 62 percent expected an improvement of the developments in their
industry for 2012. Similar to their
expectations concerning the overall
economic development, 27 percent of
the Swiss companies participating in
the survey expect a major deterioration of the industry development in the
near future.
Figure 57
Economic development 2012
Energy & Power Generation (in percent)
Figure 58
Economic development 2012
Financial Services (in percent)
Source: KPMG
Source: KPMG
0
14
30
43
Industry analysis: Industrial products

is particularly optimistic for the fiscal
year 2012. A total of 70 percent of the
companies expect a slight to significant improvement of the economic
situation in their industry for fiscal
year 2012. Participants of the automotive industry also expect an economic
improvement of their industry in 2012
(84 percent).
Much more pessimistic are the surveyed financial services companies
for the fiscal year 2012. Of the surveyed companies, 40 percent from
that industry expect a negative industry development.
In contrast to the overall economic
development, 29 percent of the surveyed companies in the entertainment& media industry expect a negative development in 2012.
00
14
40
29
30
Significant decline
Slight decline
Unchanged
Slight improvement
Of particularly high interest are the reasons leading to the expectations of the
industry developments of the respective participants. 45 percent of all surveyed companies tie their expectations about the industry development
to the general economic development,
while 21 percent attribute industry
trends to political and regulatory conditions, 18percent to trends in the society and 12percent to advancements in
research and technology.
The media industry is characterized

by continuously shorter innovation
cycles and technical changes as
well as by the social behavior of
the target media audience and,
therefore, by trends in society.
Industry analysis: Due to the current

events in the energy & power generation industry and the associated
political debates, 42 percent of the
surveyed companies of this industry
stated that their expectations concerning the economic industry outlook is
based on political and regulatory conditions.
The majority of companies in the automotive and entertainment & media
industries stated that the overall economic development is a major factor
for the assessment of the economic
development of their industry. Advancements in research and technology as well as trends in society are
stated more often as the significant
drivers of the economic development in
the automotive and entertainment &
media industries.
90 percent of the surveyed companies
in the financial services industry base
their assessment of the future sector
development on the overall economic
development as well as on political and
regulatory conditions.
5.2 Development of Interest Rate

Level 2012
The future development of the interest rate level has a significant impact
on the overall economic development.
Nevertheless, the development of the
interest rates is often seen as an indicator of the overall economic situation
and, therefore, the economic situation
of all industries.
Figure 59
Development of interest rate level
Germany (in percent)
Figure 60
Development of interest rate level
Source: KPMG
Source: KPMG
0
1
00
3
10
21
45
52
69%
of the surveyed companies expect an
increase of the interest rate level in
2012 compared to the previous year.
68
Significant increase
Slight increase
Stable
Slight decline
Significant decline
The assessment of surveyed companies regarding the overall economic

development and the future interest rate level shows distinct parallels.
69percent of all the surveyed companies expect a slight to significant
increase of interest levels in 2012.
78percent of the surveyed German
companies expect a slight to significant increase of the interest rate level
in 2012 compared to the previous
year. The surveyed Dax-30 companies
expressed similar expectations for
interest rate levels. The majority of the
surveyed Swiss companies expect a
constant interest rate level in 2012.
6 Your Industry Specialists
Automotive
Dr. Marc Castedello
Partner
T +49 89 9282-1145
[email protected]

Chemicals
Christian Klingbeil
Partner
T +49 89 9282-1284
[email protected]
Automotive
Industrial Products

Industrial Products
Gertraud Dirscherl
Partner
T +49 89 9282-1200
[email protected]
Jens Koch
Director
T +49 711 9060-41112
[email protected]

Software
Telecommunications

Partner
T +49 211 475-6069
[email protected]
Hartmut Paulus
Partner
T +49 69 9587-3747
[email protected]

Stephan Fetsch
Partner
T +49 221 2073-5534
[email protected]
Michael Salcher
Partner
T +49 89 9282-1239
[email protected]
Travel, Leisure & Tourism

Stefan Schniger
Partner
T +49 40 32015-5690
[email protected]
Industrial Products
Dr. Jakob Schrder
Partner
T +49 211 475-8200
[email protected]
Automotive
Industrial Products
Ralf Weimer
Director
T +49 89 9282-1150
[email protected]
Financial Services
Gernot Zeidler
Partner
T +49 69 9587-2864
[email protected]
Your contacts
Germany
Overall responsibility
Technical coordination

KPMG AG
Wirtschaftsprfungsgesellschaft
Tersteegenstrasse 1931
40474 Dusseldorf
Dr. Marc Castedello

KPMG AG
Wirtschaftsprfungsgesellschaft
Ganghoferstrasse 29
80339 Munich
T +49 211 475-6069

[email protected]
T +49 89 9282-1145
[email protected]
Austria
Switzerland
Dr. Klaus Mittermair

KPMG Alpen-Treuhand GmbH
Kudlichstrasse 4143
4021 Linz
Johannes Post
KPMG AG
Badenerstrasse 172
8026 Zurich
T +43 732 6938-2151

[email protected]
T +41 44 249-2374
[email protected]
www.kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is
accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent
firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to
obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such
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Corporate Finance

Cost of Capital Study

2 | Section or Brochure name

Cost of Capital Study 2011/2012 | 3

Cost of Capital Parameters

Outlook Overall Economic Development

Your Industry Specialists

4 | C ost of Capital Study 2011/2012

Capital Asset Pricing Model

Cash Generating Unit

Main German Stock Index

Discounted Cash Flow

EBIT Earnings Before Interest and Taxes

German Financial Reporting Enforcement Panel

IDW Expert Committee

International Accounting Standards

International Accounting Standards Board

Institute of Public Auditors in Germany, Incorporated Association

International Financial Reporting Standards

Swiss Market Index

Weighted Average Cost of Capital

Cost of Capital Study 2011/2012 | 5

As in the previous edition, this year we also included the

Prof. Dr. Vera-Carina Elter

Dr. Marc Castedello

6 | C ost of Capital Study 2011/2012

Organization and execution of the

Measurement of cash flows

22 percent of the companies also

Only 11 percent of the companies

Cost of Capital Study 2011/2012 | 7

Cost of capital parameters

Outlook overall economic

In the fiscal year 2010/2011, the

8 | C ost of Capital Study 2011/2012

1.1 Foundations and Objectives

We have summarized our analysis in

1.2 Data Collection

The response rate in Germany was

Cost of Capital Study 2011/2012 | 9

Industry analysis: Separate statistical

The companies were surveyed

5 Consumer Products & Services

6 Energy & Power Generation

10 Internet & E-Commerce

11 Life Science & Healthcare

10 | C ost of Capital Study 2011/2012

In order to analyze the prevalent practice more closely, we investigated the

2.1 Timing, Frequency, Triggering

Cost of Capital Study 2011/2012 | 11

Before financial statement date

As a result of the financial and economic crisis, since fiscal year2008/2009,

At 51 percent, the ratio of companies

The impairment test according to

Goodwill and intangible assets with

IAS 36.12-14 provides a long list of

12 | C ost of Capital Study 2011/2012

For companies recording goodwill

The impairment of assets is of

Prof. Dr. Vera-Carina Elter