Goodwill

The changes in 2008 and 2009 were as follows:

Acquisitions in 2009 include goodwill related to the acquisition of Saeco for EUR 80 million and several other companies. Acquisitions in 2008 include goodwill related to the acquisitions of Respironics for EUR 2,162 million, Genlyte for EUR 1,024 million, VISICU for EUR 175 million, and several smaller acquisitions.
In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year.

For Impairment testing, goodwill is allocated to (groups of) cash-generating units (typically one level below sector level), which represent the lowest level at which the goodwill is monitored for internal management purposes. A significant part of goodwill is allocated to the following businesses:

Key assumptions used in the annual (performed in the second quarter) and trigger-based impairment tests of both 2008 and 2009, for the businesses in the table above, were sales growth rates and the rates used for discounting the projected cash flows. These cash flow projections, reflecting value in use, were determined using management’s internal forecasts that cover an initial period of no more than five years and were extrapolated with stable or declining growth rates for a period of no more than 10 years, after which a terminal value was calculated, for which growth rates were capped at a historical long-term average growth rate.

The projected cash flows rely on the experience of the management teams of the cash-generating units and are based on external market growth assumptions and industry long-term growth averages. Cash flow projections of Respiratory Care and Sleep Management, Professional Luminaires, and Imaging Systems for 2009 were based on the following key assumptions: 1) during the initial forecast period a compound sales growth was used of 9.4%, 8.0% and 3.8%, respectively; 2) during the period beyond the initial forecast period, a stable and declining growth was considered with compound rates of 4.2%, 4.9% and 3.0%, respectively; and 3) a terminal value for all three units was based on a growth rate of 2.7%. Adjusted income from operations in all three units is expected to increase over the projection period as a result of volume growth and cost efficiencies. The respective pre-tax discount rates applied to the most recent cash flow projections were 10.4%, 14.0%, and 10.0%, respectively (2008: 12.1%, 14.0%, and 10.5%, respectively). Based on this analysis, management did not identify impairment for these (groups of) cash-generating units.

The value in use of Respiratory Care and Sleep Management per the test in the fourth quarter was approximately EUR 450 million above its carrying value. An increase of 100 basis points in the pre-tax discount rate, a 150 basis points decrease in the compound long-term sales growth rate, or a 21% decrease in terminal value would cause its value in use to fall to the level of its carrying value.

The value in use of Professional Luminaires per the annual test in the second quarter was approximately EUR 350 million above its carrying value. An increase of 120 basis points in the pre-tax discount rate, a 190 basis points decrease in the compound long-term sales growth rate, or a 26% decrease in terminal value would cause its value in use to fall to the level of its carrying value.

The results of the annual impairment test of Imaging Systems have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.

In 2008, the trigger-based tests resulted in goodwill impairment charges of EUR 301 million, mainly related to Lumileds as a consequence of weaker demand for LED solutions in the automotive, display and cell phone markets. As a result of the recovery in the LED market, the recoverable amount of Lumileds increased in 2009 and no further impairment charges were required.

Please refer to Information by sector and main country for a specification of goodwill by sector.