A number of economic and operational events during the year ended 31 July 2020 had a negative impact on EOH's market capitalisation and certain underlying businesses. This has resulted in a material impact on the carrying value of goodwill. The Group's annual review of goodwill highlighted impairments of R413 million (R110 million in the iOCO segment, R243 million in the NEXTEC segment and R60 million in the IP segment).

iOCO

Impairments in iOCO were largely driven by lost or unrenewed contracts, delayed projects with customers as a result of ongoing challenging market conditions, or businesses that have been rendered non-operational during the year.

NEXTEC

The largest contributor to the impairment of goodwill in NEXTEC is the TCD cash generating unit (CGU), which incurred an impairment of R93 million due to the effects of changes in clinical trials legislation which led to a loss of customers and consequent restructuring of the business. The PIA Solar CGU incurred a R49 million impairment to goodwill relating to renewable energy loss-making contracts. The PCI CGU incurred a R39 million impairment, primarily due to continued material delays in the commencement or award of projects in the water sector. Other impairments in the segment related primarily to assets held for sale, the values for which were negatively impacted by challenging market conditions, particularly in the water and rail sector, which impacted infrastructure-focused businesses that have been disposed of or are in the process of being sold.

IP

The impairment of goodwill amounting to R60 million in the IP segment relates to key long-term contract renewal challenges. Some of the CGUs within IP were particularly hard hit by the effects of the COVID-19 lockdown due to their B2B2C business lines.

Prior year impairments

Prior year goodwill impairments amounted to R1 855 million (R613 million in the iOCO segment and R1 242 million in the NEXTEC segment). Goodwill amounting to R565 million across a number of cash-generating units was impaired due to project complexities, supplier issues, slow debtor recoveries, and underperformance to budgets. Impairments of R375 million were driven by lost or delayed contracts and projects due to the reputational damage sustained by EOH in that year. Court rulings and legislation changes issued in the prior year negatively impacted cash-generating units providing employee services and clinical trials, contributing to impairments of R212 million. Cash-generating units in the Middle East and Europe sustained impairments of R114 million owing to weaker cash conversion and project delivery difficulties. Impairments of R122 million relate to non-core CGUs that were held for sale and were written down to fair value less costs of disposal. The balance of impairments sustained in the prior year related mainly to the prevailing challenging market conditions.

Impairment testing

For the purpose of impairment testing, goodwill is allocated to the Group's cash-generating units. The recoverable amount of these cash-generating units was determined based on value-in-use calculations, discounting the future cash flows expected to be generated from the continuing operations of each cash-generating unit. Impairment tests on assets held for sale were based on fair value less costs of disposal.

A pre-tax discount rate was used in discounting the projected cash flows depending on the nature of business and operating markets (including country specific risk factors). These calculations use cash flow projections based on financial budgets and forecasts for three years and in some instances up to five years, as approved by the Board of Directors, which are based on assumptions of the business, industry and economic growth. A perpetuity growth rate is calculated using long term growth rates, this is further applied based on conservative historical market trends and operating markets (including country specific risk factors).

With the Group undergoing significant re-organisation and corporate structure simplification, a number of businesses were integrated during the year, which resulted in movements in goodwill attributed to certain CGU's. The Glacier CGU was combined with the Compute CGU, the Synergy and Softworks CGU's were combined and the XDS, MIE and HTCSA CGUs were integrated to operate as one CGU under the Infosys name. Faculty Training Institute, Proserv, Siyanqoba, and Siyaya were previously recognised as individual CGUs. During the current year these have been merged to form a single unit, Learning and Development. The performance of these assets are now being collectively managed, measured and reported on by a single executive team, sharing the same markets and offering its services collectively to prospective customers.

Impacts of COVID-19 on the goodwill financial impairment testing

In determining the budgets and forecasts, the management team has taken into consideration the impact of COVID-19 on the underlying cash-generating units' performance and adjusted the revenue growth forecasts and adjusted EBITDA margins where applicable.

Key assumptions used in discounted cash flow projection calculations

The values assigned to the key assumptions represent management's assessment of future trends in the industry and are based on past experience and both external and internal data.

Changes in key assumptions, as well as the actual cash flows achieved against forecasts, may result in further impairments to the cash-generating units impaired during the year. The forecast cash flows of these cash-generating units are reliant on a certain level of anticipated improvement within the forecast period.

The assumptions below have been applied to calculate the recoverable amount of cash-generating units based on value-in-use calculations. The discount rates used in the discounted cash flow models are calculated using the principles of the Capital Asset Pricing Model, taking into account current market conditions.

The following key assumptions were used for the value in use calculations:

• Growth rates: the Group used growth rates to extrapolate revenues for the two years beyond the budget period. These growth rates were based on the different industries the cash generating units operate in, as well as management's views on the growth prospects of the businesses. The higher growth rates applied to certain CGU's relate to businesses that had shown growth despite the COVID-19 impacted economic conditions (the Impressions digital signatures business), or CGU's with low budgeted 2021 revenue bases due to the expected negative impacts of COVID-19, which are anticipated to grow over the forecast periods to historically achieved or improved levels (for example the Learning and Development CGU, which is also undergoing an active business optimization process). In the prior year, the higher growth rates were driven by proven historic trends in revenue growth (for example the Allos CGU).
• Discount rates: discount rates used reflect both time value of money and other specific risks relating to the relevant cash generating unit;
• Adjusted EBITDA margins in the following ranges: iOCO (3.4%-45.3%), Nextec (6.4%-19.8%) (prior year: iOCO (1.6%-52.8%), Nextec (5.5%-25.2%), (IP: 3.2%-39.4%)); and
• Perpetuity growth rates: a perpetuity growth rate of 4% (prior year: 3.9%) has been used for the Group.

  			2020
  Figures in Rand thousand	Goodwill closing balance		Pre-tax discount rates		Growth rates
  iOCO
  Compute	211 899		23.4%		7.8%
  Managed Services	80 793		23.9%		5.8%
  Symplexity	50 123		23.6%		0.8%
  Softworks	39 345		22.1%		7.4%
  Employee Benefits	38 162		23.4%		3.2%
  Microsoft	35 707		22.5%		11.4%
  ESA	31 773		25.6%		(2.3%)
  Network Solutions	31 163		22.1%		4.6%
  Legal Services	29 177		23.5%		2.9%
  Coastal	22 342		22.9%		13.5%
  IOT	14 814		25.6%		6.0%
  Freethinking	14 081		22.5%		14.4%
  XTND	13 333		23.9%		6.9%
  Impressions	12 240		24.6%		37.2%
  Connection 42	12 016		23.7%		9.4%
  Other	55 305		n/a		n/a
  NEXTEC
  Learning and Development	93 488		25.1%		17.7%
  JOAT	59 463		27.3%		10.6%
  SCAN RF	28 155		25.6%		(2.2%)
  Energy Insight	12 261		24.9%		17.6%
  Other	31 103		n/a		n/a

   

  		Restated 2019
  Figures in Rand thousand	Goodwill closing balance	Pre-tax discount rates	Growth rates
  iOCO
  Compute	176 569	20.1%	3.9%
  LSD	103 684	24.1%	2.4%
  Managed Services	80 798	21.6%	3.9%
  Symplexity	60 123	19.0%	8.5%
  Employee Benefits	58 162	19.7%	3.9%
  Microsoft	35 707	21.6%	3.9%
  Glacier	35 330	20.2%	3.9%
  Synergy	33 778	19.6%	5.0%
  Allos	33 604	21.4%	19.7%
  ESA	31 773	21.6%	3.9%
  Network Solutions	31 163	20.0%	6.1%
  Legal Services	29 177	19.9%	3.9%
  Coastal	22 342	20.8%	3.9%
  CA	20 771	19.9%	3.9%
  IOT	14 814	19.9%	3.9%
  Freethinking	14 081	20.0%	4.9%
  XTND	13 333	22.0%	3.9%
  MPC Recruitment	13 126	21.2%	3.9%
  Impressions	12 240	20.3%	3.9%
  Connection 42	12 016	20.2%	3.2%
  Oracle	11 671	20.2%	3.9%
  Other	60 733	n/a	n/a
  NEXTEC
  TCD	92 953	19.6%	3.9%
  JOAT	59 463	23.1%	3.9%
  PIA Solar	48 530	26.4%	3.9%
  PCI Africa	38 699	22.7%	5.0%
  SCAN RF	28 155	21.7%	10.0%
  Change Logic	24 967	20.3%	3.9%
  Impact HR	15 808	20.3%	3.9%
  Gibela	14 124	16.3%	3.9%
  Energy Insight	12 261	21.6%	3.9%
  Other	26 388	n/a	n/a
  IP
  Sybrin	237 467	19.8%	11.2%
  MIE	139 926	20.5%	12.1%
  Syntell	98 601	22.3%	23.0%
  XDS	97 317	20.8%	10.0%
  HTCSA	11 200	20.4%	3.9%

  Sensitivity analysis on value in use

  In performing the impairment test for goodwill, EOH considered the sensitivity of the cash-generating units to changes in assumptions around key value drivers. The key value drivers for the cash-generating units are adjusted EBITDA margins, discount rates and revenue growth assumptions. The cash-generating units not included in the table below have sufficient headroom and are not sensitive to the changes applied to the assumptions. However, a decrease in the adjusted EBITDA margin of 2.5 percentage points (prior year: 1 percentage point) resulted in the following cash-generating units being impaired by the values listed:

  Figures in Rand thousand	2020		Restated 2019
  iOCO
  Impressions	8 405		n/a
  Compute	3 110		n/a
  NEXTEC
  Impact Human Resources	16 258		n/a
  Legal Services	6 412		n/a
  GLS Consulting	3 280		n/a
  Hospitality Professionals SA	n/a		681

  n/a - These cash-generating units have sufficient headroom and were not materially impacted by the sensitivity analysis performed.

  Assets held for sale

  The Group tested its held for sale assets, for impairment in line with IFRS 5. The recoverable amount was determined as the fair value less costs of disposal which was then compared to the carrying value of the CGU (including its allocated goodwill balance). The fair value was determined primarily with reference to advanced offers from potential acquirers less estimated disposal costs. In assessing sensitivity, the advanced offers were adjusted down by 5% and in all cases sufficient headroom remained.

  In 2019, the fair values of the Proserv and Siyaya CGUs were determined using a discounted cashflow approach applying the following pre-tax discount rates and average growth rates respectively: Proserv (21.0% and 3.9%) and Siyaya (20.7% and 3.9%). Sufficient headroom existed after applying the same sensitivities applied to the prior year value-in-use calculations and it was found that these CGUs were not sensitive to changes in key assumptions.

  	2020
  Figures in Rand thousand	Goodwill closing balance
  IP
  Infosys	248 443
  Sybrin	242 630
  Syntell	38 601
  NEXTEC
  DENIS	74 401
  	2019
  Figures in Rand thousand	Goodwill closing balance
  iOCO
  Vilt	59 251
  Dataworld	28 027
  NEXTEC
  DENIS	94 402
  Siyaya	47 377
  Enablemed	23 617
  Proserv	23 138
  MSO	22 871
  Siyanqoba	15 345
  Other	8 204