8. Goodwill and other intangible assets

The net book value of goodwill and other intangible assets as at 31 December 2013, 2012 and 2011 was as follows:


  Goodwill Number capacity Trade–marks Computer software Customer list Licences Other Total
Cost                
                 
At 1 January 2011 18,834 1,000 762 38,526 3,454 11,402 1,608 75,586
Additions 7 26 4,969 16 225 579 5,822
Acquisition through business combination 18,236 310 263 124 13,157 217 4,046 36,353
Disposals (84) (20) (24) (4,007) (4) (373) (229) (4,741)
Reclassification 49 (114) 381 105 (83) (362) (24)
At 31 December 2011 37,035 1,297 913 39,993 16,728 11,388 5,642 112,996
                 
At 1 January 2012 37,035 1,297 913 39,993 16,728 11,388 5,642 112,996
Additions 4,955 216 1,523 6,694
Additions from internal development 921 921
Acquisition through business combination 1,305 2 1 64 9 1,381
Disposals (1) (2) (3) (5,146) (197) (89) (5,438)
Reclassification (80) 11 (160) 229
Foreign exchange (65) (3) (68)
At 31 December 2012 38,274 1,295 832 40,735 16,789 11,247 7,314 116,486
                 
At 1 January 2013 38,274 1,295 832 40,735 16,789 11,247 7,314 116,486
Additions 8,610 421 67 9,098
Disposals (2) (6,532) (237) (518) (7,289)
Disposals through business combination (44) (2) (46)
Reclassification to assets held for sale of mobile business (12,940) (208) (59) (3,018) (1,741) (11,594) (1,004) (30,564)
Reclassification (133) 833 (700)
Foreign exchange 34 4 2 1 11 52
At 31 December 2013 25,368 1,085 773 39,622 15,050 671 5,168 87,737
                 
Accumulated amortization and impairment losses
                 
At 1 January 2011 (1,577) (463) (255) (18,634) (499) (1,095) (586) (23,109)
Amortization expense (63) (153) (4,796) (1,150) (1,158) (772) (8,092)
Disposals 84 16 2 3,634 209 223 4,168
Impairment losses (197) (11) (5) (213)
Reversal of impairment losses 3,566 3,566
Reclassification 1 (8) (59) 31 64 (5) 24
At 31 December 2011 (1,690) (509) (414) (16,300) (1,618) (1,980) (1,145) (23,656)
                 
At 1 January 2012 (1,690) (509) (414) (16,300) (1,618) (1,980) (1,145) (23,656)
Amortization expense (31) (145) (4,587) (1,260) (1,129) (1,318) (8,470)
Disposals 3 3,987 176 22 4,188
Impairment losses (274) (5) (279)
Reversal of impairment losses 60 60
Foreign exchange 34 (15) 4 (107) 84
At 31 December 2012 (1,690) (537) (525) (17,129) (2,874) (3,040) (2,362) (28,157)
At 1 January 2013 (1,690) (537) (525) (17,129) (2,874) (3,040) (2,362) (28,157)
Amortization expense (24) (140) (5,212) (1,249) (1,468) (1,187) (9,280)
Disposals 2 6,325 211 414 6,952
Disposals through business combination 44 2 46
Impairment losses (359) (273) (1) (633)
Reversal of impairment losses 338 338
Reclassification to assets held for sale of mobile business 135 183 59 2,142 641 3,970 216 7,346
Reclassification (10) (83) 93
Foreign exchange (1) (1) (1) (3)
At 31 December 2013 (1,914) (376) (606) (13,776) (3,483) (410) (2,826) (23,391)
                 
Net book value                
At 31 December 2011 35,345 788 499 23,693 15,110 9,408 4,497 89,340
At 31 December 2012 36,584 758 307 23,606 13,915 8,207 4,952 88,329
At 31 December 2013 23,454 709 167 25,846 11,567 261 2,342 64,346

Interest amounting to 105, 130 and 172 was capitalized in intangible assets for the years ended 31 December 2013, 2012 and 2011 respectively.

Intangible assets with indefinite useful lives and Goodwill

The owned number capacity with a carrying amount of 706 (2012: 727, 2011: 730) is intangible assets with indefinite useful lives and is not amortized. These assets have no legal restrictions on the term of their use and the Group can derive economic benefits from their use indefinitely. These assets are tested for impairment annually or more frequently if there is an indication that the intangible assets may be impaired.

During 2013 the Group concluded contracts under the investment programme subject of which was research and development. Main area of research and development are software, hardware, clouds models, which may be used as a standard solution on promotion of the services provided by the Group to government and private customers.

The aggregate amount of research and development expenditure recognized as an expense is 0 (2012:0; 2011: 71).

The Group, on an annual basis, performs testing for impairment of goodwill and intangible assets with indefinite lives.

At each reporting date the Group performs impairment testing of goodwill allocated to CGUs that were acquired upon business combinations. Principal approaches which were used to determine value in use of cash–generating units, to which goodwill has been allocated, are disclosed in Note 6.

Carrying amount of goodwill and intangible assets with indefinite useful lives are represented in the table below:


31 December 2013 31 December 201231 December 2011
CGU Goodwill before impairment loss Intangible assets with indefinite useful lives before impairment loss Goodwill before impairment loss Intangible assets with indefinite useful lives before impairment loss Goodwill before impairment loss Intangible assets with indefinite useful lives before impairment loss
Natsionalnye telecommunikatsii 16,955 290 16,955 290
Skylink 10,653 10,653
Volgograd GSM 1,280 20 1,280 20
Nizchegorodskaya sotovaya sviaz 1,076 1,076
MRF Moskva* 11,513 228        
Rostelecom International (former Teleset Networks Public Company Limited)  934 1,680
MRF Severo–Zapad* 4,198 12 911   911  
MRF Volga 1,971 811 210
Macomnet 1,210 50        
MRF Dalniy Vostok 1,068 1,068 973
MRF Ural 660        
Globus Telecom 636 359 636 359 636 359
GNC Alfa 625 589
RTComm.RU 596 596 596
Severen telecom 432 432 432
MRF Sibir 271   183
Other 633 28 460 28 140 28
Total 23,813 677 36,584 697 35,542 697

Key assumptions used by management in impairment testing are as follows (disclosed only for material CGUs*):

  • Discount rates are estimated in nominal terms as the weighted average cost of capital on pre tax basis and is 12,18%;
  • OIBDA margin are based on historical actual results and are 30,4% for MRF Moskva and 40,2% for MRF Severo–Zapad;
  • Cash flow projections cover the period of five years, cash flows beyond five–year period are extrapolated using growth rate of 2%;

Discount rate and operating income before amortization and depreciation (OIBDA) margin are the key assumptions to which calculations of value in use of CGUs with goodwill and indefinite useful life intangible assets allocated to are the most sensitive. Management approach to gross margin projection is based on historical actual results and growth rate forecasts which correlates to industry growth rate.

The table below demonstrates the sensitivity analysis of impairment, the effect of a reasonably possible change in key assumptions on which determination of CGU recoverable amount is based in case such change resulted in impairment loss as at 31 December 2013:


CGU Increase in discount rate Impairment loss Increase in discount rate which resulted in equality of recoverable and carrying amount Decrease of OIBDA margin Impairment loss Decrease in  OIBDA margin which resulted of recoverable amount is equal to carrying amount
GNC Alfa 0.50% (37) 0.40% 3% (104) 0.40%
RTComm.RU n/a n/a n/a 3% (148) 2.47%
Other 0.50%–1.50% (40) 0.5% 3% (169) 0.90%

Impairment Testing of Other Intangible Assets

At each reporting date the Group performs impairment testing of intangible assets not yet available for use and intangible assets with indefinite useful lives. Principal approaches and assumptions which were used to determine value in use of cash–generating units, to which these intangible assets belong, are disclosed in Note 6.

2013 impairment testing

As at 31 December 2013 no impairment loss in respect of other intangible assets were recognised.

2012 impairment testing

As at 31 December 2012 no impairment loss in respect of other intangible assets were recognised.

2011 impairment testing

As at 31 December 2010 impairment loss on billing system Amdocs was recognized due to the absence of intentions to implement and use it. However, in 2011 management approved the decision to implement customer relations management system (further – CRM) on Amdocs platform. According to the agreement with vendor of software billing system licenses were converted into CRM licenses. As a result, previously recognized loss in respect of licenses amounting to 3,419 was reversed in the statement of comprehensive income for 2011 and recognised in the line Depreciation, amortisation and impairment losses.