Intangible assets

The movements during the prior year and current year in respect of intangible assets, which comprise computer software, licences and brands (all acquired), were as follows:

Computer software

€’000 Licences

€’000 Brands

€’000 Total

€’000

Cost

Balance at 1 January 2012 41,780 26,795 18,549 87,124

Additions 20,224 287 - 20,511

Disposals (505) - - (505)

Transfers (Note 12) 92 - - 92

Foreign currency translation adjustment (84) 551 16 483

Balance at 31 December 2012 61,507 27,633 18,565 107,705

Additions 23,402 442 - 23,844

Disposals (627) - - (627)

Transfers (Note 12) 840 - - 840

Foreign currency translation adjustment (2,834) (513) (3,263) (6,610)

Balance at 31 December 2013 82,288 27,562 15,302 125,152

Amortisation and impairment

Balance at 1 January 2012 27,275 3,426 5,423 36,124

Amortisation charges 9,192 370 - 9,562

Disposals (377) - - (377)

Foreign currency translation adjustment (85) (6) 5 (86)

Balance at 31 December 2012 36,005 3,790 5,428 45,223

Amortisation charges 13,778 395 - 14,173

Disposals (627) - - (627)

Foreign currency translation adjustment (1,834) (14) (954) (2,802)

Balance at 31 December 2013 47,322 4,171 4,474 55,967

Net book value

At 31 December 2013 34,966 23,391 10,828 69,185

At 31 December 2012 25,502 23,843 13,137 62,482

The value of betting shop licences of €21,716,000 (2012: €22,184,000) acquired as a result of the purchase of D McGranaghan Limited in 2008 and an additional betting shop in Northern Ireland in 2011 are not being amortised as the directors consider these licences to have an indefinite life because:

• existing law in Northern Ireland restricts entry of new competitors;

• there exists a proven and future expected demand for bookmaking services and products; and • Paddy Power has a track record of renewing its betting permits and licences at minimal cost.

The value of brand intangible assets recognised on application of fair value accounting to the purchase of Sportsbet and IAS in 2009 (amounting to €15,302,000 at 31 December 2013 (2012:

€18,565,000)) are not being amortised as the directors consider that the relevant brands have indefinite lives because:

• the directors intend to utilise the brands in the businesses for the foreseeable future (with the exception of the IAS brand – see below); and

• substantial sums are invested annually in the form of marketing expenditure expensed through profit or loss to maintain and to enhance the value of these brands.

The Group reviews the carrying value of licences and brands for impairment annually (or more frequently if there are indications that the value of the licences and brands may be impaired) by comparing the carrying values of these assets with their recoverable amounts (being the higher of value in use and fair value less costs to sell).

In 2011, the directors reviewed the carrying value of the IAS brand of AUD6,900,000 and determined, on the basis of future plans, that an impairment provision was required against the value of that brand at 31 December 2011. A similar review was performed at 31 December 2012 and at 31 December 2013 (when the euro equivalent value of the brand was €5,428,000 and €4,474,000, respectively) which indicated that there had been no changes in the circumstances that gave rise to the impairment provision and that continued provision was appropriate.

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14. Goodwill

The following cash generating units, being the lowest level of asset for which there are separately identifiable cash flows, have the following carrying amounts of goodwill:

Online (ex Australia)

€’000

Online Australia

€’000

UK Retail

€’000

Irish Retail

€’000 Total

€’000

Balance at 1 January 2012 13,303 60,671 11,426 8,207 93,607

Arising on acquisitions during the year (Note 16) - - 2,604 125 2,729

Foreign currency translation adjustment - 52 194 - 246

Balance at 31 December 2012 13,303 60,723 14,224 8,332 96,582

Arising on acquisitions during the year (Note 16) - - 4,270 2,554 6,824

Foreign currency translation adjustment - (10,674) (178) - (10,852)

Balance at 31 December 2013 13,303 50,049 18,316 10,886 92,554

The Online (ex Australia) segment goodwill amount arose from the acquisition by the Group in November 2011 of CT Networks Limited (‘Cayetano’), a games developer based in the Isle of Man and Bulgaria. Cayetano develops games for the online and mobile gaming markets.

The Online Australia segment goodwill amount arose from the acquisition by the Group of an initial 51% interest in Sportsbet Pty Limited (‘Sportsbet’) and the subsequent acquisition of International All Sports Limited (‘IAS’) by Sportsbet, both in 2009.

Goodwill on UK Retail arose from the acquisition of two London bookmaking businesses in 2004, the acquisition of a retail bookmaking company in Northern Ireland in 2008 and the acquisition of a number of retail bookmaking shop properties since 2010 (see Note 16).

Goodwill on Irish Retail arose from the amalgamation of three bookmaking businesses to form Paddy Power plc in 1988, the acquisition of three retail bookmaking businesses in 2007 and the acquisition of a number of retail bookmaking shop properties since 2009 (see Note 16).

Impairment tests for cash generating units containing goodwill and indefinite life intangible assets

In accordance with accounting requirements, the Group performs an annual test for impairment of its cash generating units. The most recent test was performed at 31 December 2013.

For the purpose of impairment testing, the Group’s operating segments include amounts in respect of goodwill and indefinite life intangible assets (comprising licences acquired as part of the purchase of the D McGranaghan Limited business in 2008 and a shop acquisition in 2011, and brands acquired as part of the purchase of Sportsbet and IAS in 2009 – see Note 13).

The details of the impairment reviews in respect of the operating segments above as of 31 December 2013 are presented below:

31 December 2013

€’000 31 December 2012

€’000

Online (ex Australia) – goodwill 13,303 13,303

The recoverable amount of the Online (ex Australia) operating segment underlying cash generating units was estimated based on value in use calculations. These calculations use cash flow projections based on actual operating results and financial budgets and forecasts approved by management covering a three year period. Cash flow growth for the extrapolated period (following the initial three year period) is projected to be approximately 3% (2012: 4%) per annum and is based on a weighted average revenue growth rate of 3% (2012: 4%), which is based on experience and is consistent with management’s expectations for market development and growth in market share where applicable. The growth rate assumption is considered realistic by management in light of the recent performance of the Group and the Group’s targeted performance over the next three years. A pre-tax discount rate of 13% (2012: 13%), which reflects the specific risks and currency of the cash flows relating to the underlying business segments, has been used in discounting the projected cash flows. Management believe that any reasonably possible change in the key assumptions on which the Online (ex Australia) segment goodwill recoverable amount is based would not cause its carrying amount to exceed its recoverable amount.

31 December 2013

€’000 31 December 2012

€’000

Online Australia – goodwill and brands 65,351 79,288

Less: IAS brand impairment provision (4,474) (5,428)

Online Australia – goodwill and brands net of impairment provision 60,877 73,860

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

14. Goodwill (continued)

The recoverable amount of the Online Australia operating segment underlying cash generating units was estimated based on value in use calculations. These calculations use cash flow projections based on actual operating results and financial budgets and forecasts approved by management covering a three year period. Cash flow growth for the extrapolated period (following the initial three year period) is projected to be approximately 3% (2012: 3%) per annum and is based on a weighted average income growth rate of 3% (2012: 3%) and a gross win of 11% (2012: 10%), which are based on experience and are consistent with management’s expectations for market development and growth in market share where applicable. The growth rate assumption is considered realistic by management in light of the recent performance of the Group and the Group’s targeted performance over the next three years. A pre-tax discount rate of 15.5% (2012: 15.5%), which reflects the specific risks and currency of the cash flows relating to the underlying business segments, has been used in discounting the projected cash flows. Management believe that any reasonably possible change in the key assumptions on which the Online Australia operating segment goodwill and brands recoverable amounts are based would not cause their carrying amounts to exceed their recoverable amounts (with the exception of the IAS brand amounting to €4,474,000 at 31 December 2013 (2012: €5,428,000) – see Note 13).

31 December 2013

€’000 31 December 2012

€’000

UK Retail – goodwill and licences 40,032 36,408

The recoverable amount of the UK Retail operating segment underlying cash generating units was estimated based on value in use calculations. These calculations use cash flow projections based on actual operating results and financial budgets and forecasts approved by management covering a three year period. Cash flow growth for the extrapolated period (following the initial three year period) is projected to be approximately 2% (2012: 2%) per annum and is based on weighted average income growth rates of 2% (2012: 2%) and a gross win rate of 12% (2012: 12%), which are based on experience and are consistent with management’s expectations for market development and growth in market share where applicable. The growth rate assumption is considered realistic by management in light of the recent performance of the Group and the Group’s targeted performance over the next three years. It is assumed, and management have no reason to expect otherwise, that the Group will continue to trade in locations currently occupied by the underlying cash generating units for the foreseeable future. A pre-tax discount rate of 10% (2012: 10%), which reflects the specific risks and currency of the cash flows relating to the underlying business segments, has been used in discounting the projected cash flows. Management believe that any reasonably possible change in the key assumptions on which the UK Retail operating segment goodwill and licences recoverable amounts are based would not cause their carrying amounts to exceed their recoverable amounts.

31 December 2013

€’000 31 December 2012

€’000

Irish Retail – goodwill 10,886 8,332

The recoverable amount of the Irish Retail operating segment underlying cash generating units was estimated based on value in use calculations. These calculations use cash flow projections based on actual operating results and financial budgets and forecasts approved by management covering a three year period. Cash flow growth for the extrapolated period (following the initial three year period) is projected to be approximately 2% (2012: 2%) per annum and is based on weighted average income growth rates of 2% (2012: 2%) and a gross win rate of 13% (2012: 13%), which are based on experience and are consistent with management’s expectations for market development and growth in market share where applicable. The growth rate assumption is considered realistic by management in light of the recent performance of the Group and the Group’s targeted performance over the next three years. It is assumed, and management have no reason to expect otherwise, that the Group will continue to trade in locations currently occupied by the underlying cash generating units for the foreseeable future. A pre-tax discount rate of 10% (2012: 10%), which reflects the specific risks and currency of the cash flows relating to the underlying business segments, has been used in discounting the projected cash flows. Management believe that any reasonably possible change in the key assumptions on which the Irish Retail operating segment goodwill recoverable amount is based would not cause its carrying amount to exceed its recoverable amount.

The discount rates applied to each cash generating unit’s cash flows is based on the risk free rate for government bonds with a maturity in excess of ten years, adjusted for a risk premium that reflects both the increased risk of investing in equities and the systemic risk of the cash generating units. The risk premium is calculated using the equity market risk premium (being the increased return required by investors in the equity market as a whole over and above the risk free rate available) and the risk adjustment applied to reflect the risk of the specific cash generating unit relative to the market as a whole. The discount rates reflect the market conditions applicable to the Group and to the particular cash generating units being reviewed.

Based on the reviews as described above, with the exception of the IAS brand impairment of AUD6,900,000 initially provided for in 2011 (see Note 13), no impairment has arisen.

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Paddy Power plc Annual Report 2013