Ayagaull aMLoti! 4 saLID| TELECOM 7d Assets Impairment Review Project Accounting Standards and Common Industry Practices Applicable to Impairment Reviews Saudi Telecom Company May 5, 2006 Draft for Discussion Purposes OnlyDocument Information Abdelkhaleg Ahmad 02/25/2006 Draft version Abdelkhaleg Ahmad 05/02/2006Table of Contents 4. INTRODUCTION 2. APPLICABLE ACCOUNTING STANDARD: 3. CURRENT ASSESSMENT OF APPLICABLE STANDARDS. 4. IAS 36, IMPAIRMENT OF ASSETS... 4.1. SUMMARY OF THE KEY PROVISIONS 4.2 _ INDICATORS OF IMPAIRMENT 4.3 RECOVERABLE AMOUNT.... * 44 BUILDING A CASH-GENERATING UNIT... 4.5 ANNUAL IMPAIRMENT TEST REQUIREMENTS. 4.6 IMPAIRMENT Loss... 7 4.7 REVERSAL OF IMPAIRMENT LOSS... 4.8 DISCLOSURES... 5. SOCPA EXPOSURE DRAFT (IMPAIRMENT OF NON-CURRENT ASSETS) 5.1. SUMMARY OF THE KEY PROVISIONS .. 5.2 _ INDICATORS OF IMPAIRMENT 5.3. RECOVERABLE AMOUNT 5.4 BUILDING A CASH-GENERATING UNIT... 5.5 ANNUAL IMPAIRMENT TEST REQUIREMENTS. 5.6 IMPAIRMENT LOSS... cesses 5.7 DISCLOSURES... 6. APPLYING IMPAIRMENT IN THE TELECOM SECTOR... 6.1. PARTICIPATING COMPANIES 6.2 _ IMPAIRMENT GUIDELINES... 6.3 IMPAIRMENT TRENDS. 64 _ IMPAIRMENT TESTING - THE CGU viEW ... 6.5 OTHER COMMON PRACTICES (OUTSIDE THE SCOPE OF THE SURVEY) 7 IMPAIRMENT POLICIES FOR SELECTED TELECOM OPERATORS: 7.1 FRANC TELECOM. 7.2 PORTUGAL TELECOM: 7.3. TELENOR 7.4 Swisscom. 7.5 TELIASONERA TB KPN ecsessnsee 7.7 VIVEND| UNIVERSAL. DOWHHDA B® AQHGHHH ® BHHGOID @ GDOBHDHAH HAASE1. Introduction As part of the Asset Impairment Review Project, Emst & Young scope includes documentation of the Accounting Standards and Common Practices Applicable to Impairment Reviews. This document summarizes the applicable accounting standards relevant to impairment reviews considering the local accounting regulations in Saudi Arabia and the intemational practices in this regard. The standards summarized in this document form the basis of the impairment review methodology. The impairment review methodology will basically be the response or actions to be taken by STC with regard to impairment testing in order to satisfy the requirements documented below. 2. Applicable Accounting Standards Saudi Telecom prepares its financial statements in accordance with the accounting principles generally accepted in the Kingdom of Saudi Arabia issued by Saudi Organization for Certified Public Accountants (SOCPA). Itis the common practice in Saudi Arabia, as directed by SOCPA, that in case accounting treatment method of an economic event is not covered by the standards issued by SOCPA, then the International Financial Reporting Standards (IFRS) applies. In this regard, the first step is assessing which set of standards applies to Saudi Telecom in conducting the impairment testing is to first search for an applicable standard issued by SOCPA. If such standard is not available then IFRS should apply.Kyopauall S9LA0% F ; : saupi TeLEcom 4 Impairment Review 3. Current Assessment of Applicable Standards Based on the selection criteria setout in the above section, we searched the set of standards issued by SOCPA in order to identify if an impairment of fixed assets standard has been issued and authorized. Our search shows that currently and as of the date of this document, there is no comprehensive standard has been issued by SOCPA on impairment of fixed assets. However, an exposure draft was issued by SOCPA dealing with the principles of impairment testing of assets called “Impairment of Non-Current Assets” which determines the requirements for measurement, presentation and disclosure of impairment of non-current assets in the financial statements of profit-making entities, irrespective to their size and legal form. SOCPA standard stil not released as final standard but once authorized and issued will be the standard that Saudi Telecom should apply. Meanwhile, IFRS includes a standard “IAS 36” which has been issued by the International Accounting Standards Board and deals in a comprehensive manner with impairment of assets. Based on the above and given the special situation of Saudi Telecom, mainly with regard to dealing the two sets of standards SOCPA and IFRS, we view that Saudi Telecom needs to apply IAS 36 till such time when SOCPA standard applicable to impairment reviews is issued. Our review of the exposure draft issued by SOCPA shows that there is no material differences between IAS 36 and SOCPA exposure draft. Therefore, we view that impairment methodology to be developed for Saudi Telecom in the next phase of the Impairment Project will satisfy the requirements of both |AS 36 and SOCPA exposure draft in case no material changes took place on SOCPA exposure draft by the time it is finalized and authorized for issuance. 4. IAS 36, Impairment of Assets This section summarizes the main requirements of IAS 36. This standard requires entities to review all assets within its scope for potential impairment at least annually. The recoverability of goodwill and intangibles with indefinite useful lives is required to be measured annually irrespective of whether there is an indicator of impairment. 4.1 Summary of the Key Provisions The key provisions of IAS 36 are: Page 5 0f 37 51 ERNST& YOUNGKpagesll S8LA0 7 | : SAUDI TELECOM 4 Impairment Review + The entity assesses whether there is any indication that an asset may be impaired * If there is an indication that an asset may be impaired, the recoverable amount of the asset (or if appropriate, the CGU) is determined * The recoverable amounts of © Intangible assets with an indefinite useful life, ; © intangible assets that are not available for use on t he reporting date and © goodwill is required to be measured on an annual basis, itrespective of whether any impairment indicators exist. * An asset is impaired if its carrying amount exceeds its recoverable amount. Recoverable amount is defined as the higher of the ‘fair value less costs to sell’ and the ‘value in use.” * Any impairment loss is recognized in profit or loss for assets carried at cost. For assets carried at a revalued amount, as permitted by IAS 16 Property, Plant and Equipment, any impairment loss is recorded against a previously recognized revaluation gain in equity. 4.2. Indicators of Impairment The Standard requires an entity to assess, at each reporting date, whether there are any indicators that assets may be impaired. Those indicators include both external sources (such as market interest rates, significant adverse changes in technological, market, economic or legal environment in which the entity operates) and internal sources (such as internal restructurings, evidence of obsolescence or physical damage of an asset). Notwithstanding whether indicators exist, recoverability of goodwill and intangibles with indefinite useful lives are required to be measured annually. 4.3 Recoverable Amount The recoverable amount of an asset is defined as the greater of its ‘fair value less costs to sell’ and the ‘value in use, To measure impairment, an asset's carrying amount is compared with its recoverable amount The recoverable amount is determined for individual assets. However, if an asset does not generate cash inflows that are largely independent of those from other assets, the recoverable amount is determined for the CGU to which the asset belongs. A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Page 6 of 37 EY ERNST& YOUNGBysgmuall Les SAUDI TELECOM G Impairment Review 4.3.1 Fair Value Less Costs to Sell ‘Fair value less costs to sell’ is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. Although the previous version of IAS 36 used the term ‘net selling price,’ it was changed to be consistent with IFRS 5 Non- current Assets Held for Sale and Discontinued Operations. However, the substance of the measurement remains the same. Paragraphs 25-27 of the Standard apply a hierarchy for determining an asset's fair value less costs to sell, as follows: + The best evidence of an asset's fair value less costs to sell is a price in a binding sale agreement in an arm's length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset * If there is no binding sale agreement but an asset is traded in an active market, fair value less costs to sell is the asset's market price less the costs of disposal. * If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available to reflect the amount that entity could obtain, at the balance sheet date, from the disposal of the asset in an arm's length transaction between knowledgeable, willing parties, after deducting the costs of disposal In assessing fair values, valuation professionals apply various principles, including: The calculation of fair value less costs to sell should reflect all future events that would affect the cash flows arising for a typical market participant that holds the asset. + Fair value should reflect information that is available without undue cost or effort about the market's assessment of the future cash flows. * If there is contrary data indicating that market participants would not use the same assumptions as the entity, the entity should adjust its assumptions to incorporate market information. * Market-based assumptions should be based on current market data, unless reliable evidence indicates current experience will not continue. * Fair value also includes the undiscounted amount of transaction costs that would be incurred at the reporting date in disposing of an asset. Page 7 of 37 8) ERNST& YOUNGAyegeuall HLA FF SAUDI TELECOM G, Impairment Review 4.3.2 Value in Use Value in use is the present value of the future cash flows expected to be derived from an asset or CGU. A value in use calculation includes: + an estimate of the future cash flows the entity expects to derive from the asset * expectations about possible variations in the amount or timing of those future cash flows « the time value of money—that is a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset for which the future cash flow estimates have not been adjusted * the price for bearing the uncertainty inherent in the asset which can be reflected in either the cash flow estimate or the discount rate + other factors that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. The revisions to IAS 36 provide for more rigorous testing of value in use calculations, by requiring that entities compare their previous estimates of cash flows to actuals as part of the assessment of the reasonableness of current assumptions. IAS 36 requires that value in use should reflect the expected present value of the future cash flows, that is, the weighted average of all possible outcomes. In practice, present values are computed either by a ‘traditional’ or ‘expected’ cash flow approach. Under a traditional approach, a single set of estimated cash flows and a single discount rate, often described as ‘the rate commensurate with the risk,” are used. The expected cash flow approach applies different probabilities to expected cash flows rather than using a single most likely cash flow. When comparable assets can be observed in the marketplace, a traditional approach is relatively easy to apply. However, as indicated in the Standard, the expected cash flow approach jis, in some situations, a more effective measurement tool than the traditional approach. Regardless of which approach is selected, cash flows and the discount rate should both be expressed consistently in either real terms, which take inflation into account or nominal terms. IAS 36 requires that pre-tax cash flows and pre-tax discount rates be used in impairment testing. However, in practice primarily because of the widespread use of the Capital Asset Pricing Model post-tax costs of equity are generally determined and used in an entity's computations of the discount rate as the starting point. Discounting post-tax cash flows at a post-tax discount rate and discounting pre-tax cash flows at a pre-tax discount rate, in theory, should give the same result. The same result will be achieved if the pre-tax discount Page 8 of 37 BY ERNST& YOUNGAasgaull Lest 7 SAUDI TELECOM 4 Impairment Review fate is equal to the post-tax discount rate, adjusted to reflect the specific amount and timing of the future tax cash flows. However, a post-tax discount rate, grossed-up by a standard rate of tax, is not always an appropriate pre- tax discount rate to be applied because the tax rate may not be equal to the difference between the pre-tax and post-tax discount rates Determining an appropriate discount rate that reflects current market assessments and risk (if cash flows do not already reflect that risk) often will be difficult and will require consideration and input by financial management, line management and perhaps, also by valuation consultants. Such input will also be required to formulate assumptions regarding growth rates used to project cash flows until the end of an asset's useful life which are also very difficult to formulate 4.3.3 Risk and Uncertainty Both ‘fair value less costs to sell’ and ‘value in use’ should reflect risk and uncertainty to the extent that these would be reflected in the price of an arm's length transaction between knowledgeable, willing parties. Risk may be reflected by adjusting either the cash flows or the discount rate. However, the risk reflected in the measurements should only be undiversifiable risk that is, risk which is common to an entire class of assets. Diversifiable risk that is, asset-specific risk is only reflected in the measurements if there is persuasive empirical evidence that market prices also would reflect that risk. 4.4 Building a Cash-Generating Unit If it is not possible to estimate the recoverable amount of the individual asset, an entity should determine the recoverable amount of the CGU to which the asset belongs. It is not possible to estimate the recoverable amount of the individual asset if: + the asset's value in use cannot be estimated to be close to its fair value less costs to sell and * the asset does not generate cash inflows that are largely independent of those from other assets. ‘The identification of a CGU continues to provide much room for debate. The carrying amount of a CGU as described in Paragraph 76 of the Standard: «includes the carrying amount of assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the CGU excludes the carrying amount of any recognized liability, unless the recoverable amount of the CGU cannot be determined without consideration of this liability. The Standard acknowledges that the identification of CGUs involves judgment. Page 90f 37 5 ERNST& YOUNGA pogaul! OLAS4t SAUDI TELECOM 4 Impairment Review Guidance provided in paragraph 69 of the Standard states that CGU selection will be influenced by ‘how management monitors the entity's operations (such as by product lines, businesses, individual locations, districts or regional areas) or how management makes decisions about continuing or disposing of an entity’s assets or operations.” For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the acquirer's CGUs, or groups of CGUs, that are expected to benefit from the synergies of the combination. This allocation is done irrespective of whether other assets or liabilities of the acquiree are assigned to those CGUs or groups of CGUs. 4.5 Annual Impairment Test Requirements Goodwill and intangible assets with indefinite useful lives need to be tested for impairment annually by comparing the carrying amounts of these assets with their recoverable amounts, irrespective of whether there is any indication that these may be impaired. These assets are required to be tested for impairment even more frequently if events or changes in circumstances suggest that the asset might be impaired However, the Standard provides a concession for intangible assets with indefinite useful lives and for goodwill that forms part of a CGU. In these cases, previous impairment calculations may be re-used when all of the following criteria are met: * The assets and liabilities comprising the CGU have not changed significantly since the most recent calculation of recoverable amount + The previously calculated recoverable amount exceeded the carrying amount by a substantial margin * The likelihood that an updated calculation of the recoverable amount would be less than the asset's carrying amount is remote. The Standard allows impairment tests for CGUs to which goodwill has been allocated and other intangibles with indefinite useful lives to be performed at any time during an annual period, provided the tests are performed at the same time every year. Different CGUs may be tested for impairment at different times. Entities should determine the optimal time for assessing individual CGUs based on the availability of data considering for example, the availability of forecast or budget figures, the potential seasonality in a business or the year end close timetable and use that date in future years. 4.6 Impairment Loss Page 100137 #1] ERnsT& YOUNGSagal Le ; SAUDI TELECOM “4 Impairment Review An impairment loss is recognized to the extent the carrying amount of an asset exceeds its recoverable amount. For assets carried at historical cost, impairment losses are recognized immediately in profit or loss. If the impaired asset is a revalued asset under IAS 16, the impairment loss is recorded directly against the revaluation gain in equity, to the extent of any existing gain in respect of that asset. Any additional loss is recognized immediately in profit or loss. CGUs to which goodwill is allocated are tested for impairment, and any loss is. allocated first to reduce the carrying amount of goodwill. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual CGUs and can be related only to a group of CGUs. CGUs to which goodwill is not allocated but relates to such CGU are tested for impairment without including goodwill, and any impairment loss is allocated first to reduce the carrying amount of the goodwill relating to such CGU Although IFRS requires certain costs to be capitalized into the carrying amount of an asset, the recoverable amount of that asset may not increase commensurate with the amount of capitalized costs. In this regard, though IFRS may require or permit costs to be capitalized, impairment may nonetheless result. 4.7 Reversal of Impairment Loss If the estimates used to determine an asset's recoverable amount have improved since the last impairment loss was recognized, an impairment loss that was previously recognized for the asset other than goodwill is reversed However, in this circumstance, the increased carrying amount of the asset may not exceed the carrying amount of the asset that would have been determined had no impairment loss been previously recognized. The Standard also prohibits reversals of impairment losses for goodwill. 4.8 Disclosures Revised IAS 36 requires disclosures of the amount of impairment losses recognized, CGUs and the allocation of goodwill to CGUs. For each CGU that includes within its carrying amount a significant amount of goodwill or intangible assets with indefinite useful lives, a range of information is required to be disclosed. These disclosures primarily address the key assumptions used to measure the recoverable amounts of CGUs. Page 11 of 37 Y/ ERNST& YOUNGSapaual thas 179 SAUDI TELECOM Impairment Review 5. SOCPA Exposure Draft (Impairment of Non-Current Assets) 5.1 Summary of the Key Provisions The objective of this standard is to determine the requirements for the measurement, recognition, presentation and disclosure of impairment of non- current assets in the financial statements of profit-making entities for them to present fairly the financial position and results of there operations. According to this Exposure Draft, an asset is impaired when its carrying value exceed its recoverable amount. Recoverable amount is determined on the higher of all present value of cash flows expected from the asset or net selling price. If the carrying value of an asset exceeds its recoverable amount, the difference will be recognized as an impairment in asset value. 5.2 Indicators of Impairment As per SOCPA Exposure Draft an enterprise should consider, internal and extemal factors or sources of information to assess whether there are indication for impairment External sources of information include significant decline in an asset's market, significant adverse change in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated, increase in market interest rates, other market rates or return on investments Internal sources of information include evidence of obsolescence or physical damage of an asset; or significant changes with an adverse effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used including plans to discontinue, use of an asset or restructure the operation to which an asset belongs, dispose of an asset before the previously expected date; and evidence that the economic performance of an asset is, or will be, worse than expected. 5.3. Recoverable Amount The recoverable amount of non-current asset is measured by using the higher of net selling price or the present value of the expected cash flows. f the net selling price or the present value of expected cash flows exceeds the carrying value of the assets, the asset is not impaired and it is not necessary to estimate the other amount. Page 12 0f 97 EY ErNsT& YOUNGSeon itll (77 SAUDI TELECOM 24 Impairment Review 5.3.1 The net selling price of the non-current asset (Fair Value Less Costs to Sell) As per paragraph 114 of the Exposure Draft, the net selling price of the non- current asset is determined by adopting one of the following methods * A price in a binding sale agreement is an arm's length transaction, adjusted for incremental costs that would be directly attributable to disposal of the asset. * The market price of the asset in an active market less disposal costs. * The price of the recent transaction for similar assets, provided that there has not been a significant change in economic circumstances between the transaction date and the date as at which the estimate is made * The best information available to the entity to reflect the net selling price of the asset. 5.3.2 Value in Use The Exposure Draft states that the value in use calculation includes: + an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows + the time value of money that is a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset for which the future cash flow estimates have not been adjusted * the price for bearing the uncertainty inherent in the asset which can be reflected in either the cash flow estimate or the discount rate + other factors that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. In measuring the present value of expected cash flows, an entity shall base cash flow projections on reasonable and supportable assumptions and that cash flow projections should be based on the most recent financial budgets/forecasts approved by management. As it is the case with IAS 36, the entity shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset's performance. Page 13 0f37 EY ERNST& YOUNGByogeuall SILAS 7 SAUDI TELECOM 4 Impairment Review The Exposure draft requires that for impairment testing a pretax (pre-zakat) cash flow and a pretax (pre-Zakat) discount rate are used in estimating the assets value in use. 5.4 Building a Cash-Generating Unit As required by the Exposure Draft, if it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount for the cash generating unit to which the asset belongs (the asset's cash-generating unit) Cash generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified Each unit or group of units to which the goodwill is so allocated shall represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and not be larger than a segment on either the entity's primary. It is important to note that under SOCPA Exposure Draft, requires that in testing a cash generating unit for impairment, an entity shall identify all the corporate assets that relate to the cash generating unit under review. If a portion of the carrying amount of a corporate asset * can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the carrying amount of the unit, including the portion of the carrying amount of the corporate asset allocated to the unit, with its recoverable amount. * cannot be allocated on a reasonable and consistent basis to that unit, the entity shall © compare the carrying amount of the unit, excluding the corporate asset, with its recoverable amount. o Identify the smallest group of cash generating units that includes the cash generating unit under review and to which a portion of the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis; and Compare the carrying amount of that group of cash generating units, including the portion of the carrying amount of the corporate asset allocated to that group of units, with the recoverable amount of the group of units The above treatment is identical to treatment of IAS 36. Page 14 of 37 2 ERNsT& YOUNGAyegauall SILAS saul TELECOM 4 Impairment Review 5.5 Annual Impairment Test Requirements According to SOCPA Exposure Draft on Impairment of non-current assets, an enterprise should assess, at each of the financial reporting date, whether there is an indication than an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset Irrespective to whether indications on impairment are existed or not, an enterprise shall annually verify to ensure whether impairment existed in the value of: + intangible assets with indefinite useful life by comparing its carrying value with its recoverable amount; * goodwill arising from merger The annual impairment test for a cash generating unit to which goodwill has been allocated may be performed at any time during financial period, provided the test is performed at the same time every year. Different cash generating units may be tested for impairment at different times. However, if some or all of the goodwill allocated to a cash generating unit was acquired in a business combination during the current financial period, that unit shall be tested for impairment before the end of the current financial period. Page 15 0f 37 EW ERnsT& YOUNGKesgaaall SYLAS4! SAUDI TELECOM 4 Impairment Review 5.6 Impairment Loss As per the Exposure Draft If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. The reduction is an impairment loss and shall be recognized in the income for the period. When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognize a liability if, and only if, that is required by another standard established by SOCPA ‘An impairment loss shall be recognized for a cash-generating unit, if, and only if, the recoverable amount is less than the carrying amount. The impairment loss shall be allocated first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit, if any and then to the other assets of the unit on pro rate on the basis of the carrying amount of each asset in the unit. The depreciation or amortization shall be charged on the basis of the assets’ revised carrying amount. 5.7 Disclosures The Exposure draft requires that impairment loss is disclosed as a separate component in the statement of income before “extra-ordinary items". An entity shall also disclose the accounting policies and assumptions used in measuring the recoverable amount of the non-current assets or cash generating unit. The Exposure Draft requires that the financial statements shall disclose the main classes of assets affected by impairment losses, the events and circumstances that led to the recognition of the impairment loss; Page 16 of 37 BI ERNST & YOUNGHagan GLa SAUDI TELECOM 4 Impairment Review 6. Applying Impairment in the Telecom Sector IAS 36 is fairly comprehensive and covers in sufficient details the steps of the impairment testing. However there are certain areas that are controversial when applied for certain industries like telecom industries. These mainly relates to determining CGUs, treatment of capital expenditure and forecast horizon. The purpose of this section is to highlight how telcos deal with these issues. Impairment testing in its comprehensive view is relatively new in the business environment. Under the recent developments in the telecoms industry, operators are required to review a variety of impairment indicators. IAS 36 brings with it many changes in practice and in the way entities will need to deal with impairment of assets. Both entities who already report under IFRS as well as those who are adopting IFRS for the first time should carefully assess the impact of IAS 36 to avoid any unpleasant surprises when adoption is required. The rigours and extent of impairment testing may well result in the need for additional independent expertise to assist with the required valuations. Ernst and Young carried out a study in 2005 to bring into focus impairment aspects in more detail, and their importance to the business as a whole. The study mainly focused on how operators evaluate their network assets for impairment testing purposes? And how easily can the network be defined and tracked as cash-generating units? Overall, there are clear question marks over the long-term sustainability of adopting an overly-simplistic view towards impairment testing. In order to get in shape for the race to survive and succeed in the IP-based world, telcos need to categorize and manage their asset groups at a more detailed level Aside from its alignment with IFRS, this approach will give them transparency and superior management information to manage their business better and establish the agility and competitive edge they need in the marketplace. Page 17 of 37 EW ErnsT& YOUNGRepel Les 977 SAUDI TELECOM “4 Impairment Review 6.1 Participating Companies Eighteen leading telecom operators have participated in the Ernst & Young benchmarking survey. The participants covered in this survey operate in the following countries: Australia Belgium Germany Indonesia Japan New Zealand South Africa South Korea Spain United Kingdom United States eee ere erence To further illustrate on the profile of the participating companies, we present below revenues and fixed assets values for the participating companies in pie chart format. On fixed assets, it is important to note that on average fixed assets represent 54% of total assets of the participants. Participants profile - revenues £20 billion + (23%) Upto £1 billion (8%) £10-20 billion (7%) £1-5 billion (31%) £5-10 billion (31%) Participants profile — total assets (net) £20 billion + (23%) Upto £1 billion (7%) £1-5 billion (31%) £10-20 billion (34%) £5-10 billion (8%) Page 18 of 37 3] ERNST& YOUNGRyegeull CLAD F SAUDI TELECOM 4 Impairment Review 6.2 Impairment guidelines Globally, impairment practices are driven mainly by two sets of accounting standards, IFRS and the United States (US) GAAP. As indicated earlier in section 4 of this document, under IFRS impairment exists when CGUs carrying amount is greater than its recoverable amount which is the higher of net selling price and the value in use. For telecom operators it is difficult to estimate fair value based on net selling price for telecom assets. Therefore, telecom operators rely on the value in use to estimate the recoverable amount of CGUs. Under US GAAP (SFAS 144, SFAS 121) impairment exists when carrying amount for an asset is greater than its fair value. Impairment is recorded only if carrying amount is not recoverable on an undiscounted basis. Under SFAS, goodwill is included in an asset group to be tested for impairment only if the asset group is or includes a reporting unit. Under SFAS reversals of impairment are prohibited. 6.3 Impairment Trends This question intends to explore the effect of applying IFRS within participants and their future expectations. Our survey shows that 2 participants (11%) have recorded impairment charges on their network assets in the last 12 months, Meanwhile, three participants believe that new technology will lead to impairment of existing network infrastructure. This is mainly because: Q Soft switches replacing traditional switch infrastructure Q GSM base stations categorised and aged Q Traditional voice network has been end dated UMTS assets have not been impaired so far, whereas some operators have impaired the licence itself. 6.4 Impairment Testing - The CGU view The stated approaches to network impairment testing are shown in below. Most participants treat the network assets as one unit for the purpose of Page 19 of 37 1] ErnsT& YOUNGSpogauall CLES 7 SAUDI TELECOM 74 Impairment Review defining CGUs. A significant minority subdivides them into separate CGUs, whilst two participants evaluate the assets by product or service type. These findings are significant, and underline some of the complexities presented by a combination of a competitive marketplace, and challenges presented by the regulatory environment. Viewing of the network assets as a single, undifferentiated unit also seems to be influenced by an embedded lack of visibility of the various network subgroups. Network evaluation Number of operators (Ubiquitous (one aggregate) network 8 Product/service mix (data, voice etc) 2 [Separate network CGUs (Le. fixed, mobile) 5 Source: Emst & Young Fixed Assets Survey, June 2005 Under IFRS it is possible to argue that the 2G and 3G can form one CGU. Operators can reverse impairment loss under IFRS (exceptions exist) — This has significant implications for the 3G business In addition to the complexities involved in defining and identifying CGUs, telcos are required to analyze fair value elements of fixed assets. In the telecoms world, it is extremely difficult to be able to identify fair values based on market-selling prices. Therefore companies are forced to constantly evaluate value-in-use estimates for key assets under different CGUs and asset groups. 6.5 Other Common Practices (outside the scope of the survey) 6.5.1 Incumbents with multiple CGUs We provide below an example of how incumbent operators carries impairment test where multiple CGUs exist within their scope of operations. Operators, especially incumbents, usually have a fixed-line and mobile business. Certain assets are clearly identifiable as mobile assets, including the base stations and mobile switching centre while certain other assets are also clearly identifiable as fixed-line assets The fixed-line network usually includes a national backbone that carries their mobile traffic on its fixed-line network. As required by most regulations the mobile is charged on a commercial rate for mobile traffic that it carries on the Page 20 of 37 &Y Ernst & YOUNGRpagauall Lad 97 SAUDI TELECOM 4 Impairment Review backbone against termination and conveyance charges as it would levy on a third-party mobile operator Operators in this case identify separately those revenue streams that are generated from its mobile and fixed customers. Operators also classify the mobile and fixed-line businesses as separate CGUs for impairment purposes. The mobile assets are included in the net assets of the mobile CGU, and the distinct fixed-line assets should be included in the net assets of the fixed-line CGU. The shared backbone should be included in the net assets of the fixed-line CGU. Since mobile unit is levied a commercial arms-length charge for usage, the revenues are included in the fixed-line CGU's cash inflows and the costs are included in the mobile CGU’s cash flows. 6.5.2 Forecast Horizon and Terminal Value The forecast horizon allowed under IAS 36 is limited to a maximum period of 5 years based on management budgets. Estimates of cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified. In addition IAS 36 requires entities to include net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life. ‘As most operators test impairment at the CGU level, estimating net cash flows to be received at the end of the useful live and estimating cash flows beyond the forecast period of 5 years prepared by management is a complex exercise, operators uses a terminal value for years beyond the forecast period using discounted cash flows valuation techniques. 6.5.3 Capital Expenditure Telecom industry is a capital intensive one and capital expenditure presents major future cash outflows for telecom operators. Under IAS 36, only capital expenditure necessary to bring an asset into use are included in the calculation of value in use. Capital expenditure that would improve or enhance the asset in excess of its originally assessed standard of performance should not be included in the calculation of the value in use. Page 21 of 37 3Y ERNST& YOUNGSyageuall La Fy SAUDI TELECOM 4 Impairment Review Most operators have significant capital expenditure programs in place. Determining whether items of capital expenditure complete, maintain or enhance the network asset is often complex. Estimates of future cash flows include future cash outflows necessary to maintain the level of economic benefits expected to arise from the asset in its current condition. When a cash-generating unit consists of assets with different estimated useful lives, all of which are essential to the ongoing operation of the unit, the replacement of assets with shorter lives is considered to be part of the day-to-day servicing of the unit when estimating the future cash flows associated with the unit. Page 22 of 37 I ERNST& YOUNGSuepaul LAS 779 SAUDI TELECOM 4 Impairment Review 7 Impairment Policies for Selected Telecom Operators ‘Cash Generating Unit is defined as the smallest identifiable group of assets that generates cash inflows which are largely independent in light of cash inflows from other assets or groups of assets, ‘A group of CGUs within a business or geographical segment; represents the lowest level at which management monitors return on investment of these acquisitions. To determine whether each group of assets (Cash Generating Unit) has been impaired; the carrying value of the assets and liabilities of the CGU (or group of CGUs) is compared to its recoverable amount. The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use. 1) Fair value less costs to sell Fair value less costs to sell is the best estimate of the amount obtainable from the sale of a CGU in an arm’s length transaction between knowledgeable, wiling parties, less the costs of disposal. This estimate is determined on the basis of available market information taking into account specific circumstances 2) Value in use \Value in use is the present value of the future cash flows and economic benefits expected to be derived from the CGU or group of CGUs. Cash flow projections are based on economic and regulatory assumptions, license renewal assumptions and other trading conditions drawn up by the respective Telecom company management. When a CGU is found to be impaired, the recognized impairment loss should be equal to the difference between the net book value and recoverable amount of the Cash Generating Unit. The remaining of the document, illustrate the Cash Generating Units and the Impairment methods applied in the following Europe Telecommunication Industries: France Telecom Portugal Telecom Telenor (Norway) ‘Swiscom (Switzerland) TeliaSonera (Sweden) KPN (The Netherlands) Veivendi Universal (France) Page 23 of 37 31 ERNST& YOUNGKysgaul! cauas 777 SAUDI TELECOM 24 Impairment Review The following is a summary of each Europe Telecommunication company's Cash Generating Units, Discount Rates, Growth Rates and the Basis used in estimating the recoverable amount: face ten 21 Peon. | ohne serine [3 veces Jeseon uses Genus ea: 16 Orgs 1 amens +40 forte rt gent + 0G re Home seg wstn Eee ++ Couette wepony bess n Cate ctare +1 CU te ae apony bss intra -2 usr aed eprny and mae operat n Poland |: 2c5us eres weprry ar mide operators n Sere 2 cous teres seprony are mee craton Jaan |-2.05us toes eprny ard noble pera in aia |2.causterna Deere ies Foes, Spa Lue | onnge Farce: 11 5% | oxene uk 108% | veces Fane 125% |Home —Fiene 12% | cowering ne fre Jepeaeslongiem gouhinte [Osorio Cash Fou - ucts ces |- Acie eed tom an oesecet ett bea Teles essen zon sts Sean 4 [aon Pos | Muted unnesss a Poia eaten frst | Pr-Taxooie Rate Nc avai | oscoures Ca Fw | Aart ones tom an spenders ry acu Cash Few [ates on Goma ea Parson, Hany. | sont, Darra | rac Tat 12 | eretnctociant Sweden Opersy, Denar rascal TH oper, Noi £8 Bares Pre, Nene. ee [snr 8% | esanisbiao 8% | cyteriy. 88% | brats TH 8.3% ne abe | oecnrtes Cat Fe |- cues rane pres Page 24 0f 37 I ERNST & YOUNG240 Sz eBeg ONNOAPLSNYT 662 woneyoy o0seR $6601 wena) 20:80 + ee secu} 322 reise pmeeEO:| a tmagven| seven ee | suing} 9at-42 mn | 10-14 som arog | aun eRESASSSea Som RPP see-surg eumngian| 2i-sn suey estan en] esomemn | ist aonsenmaen| ce supose ann pa omare| veo | 2 seve sowrnanisn 34] atime unanvaie a60u mre) Sse 7 SRRTENTION) ed ona e anon hug pe sone] bgt * Nal pacedue> om ayeu pom orn 4 , i wero cn al cows sei] eu nea | ina RAY, Sees “me ney uso neces Bult emvos yous) purwzenvosepi.| © uogein | Tar RRS ‘sco mand ovn stop 2 990 | 05 sons 1) ucxsns | ae ae cov ona 8m, ssi aseens | & Pc ae mo 65 4 eum masensy | $4648 mrad 0M "9 waebiny excuy| © wees) eet aug TG TT ‘malndy juauljeduyy WooaTal Ianvs IRS reseee WwRyapmuall GALATI Fy Impairment Review Project, shiny reiscom 7.1Franc Telecom Introduction The France Telecom Group include the following main subsidiaries: Orange, Amena (the Spanish mobile operator and its subsidiaries acquired in November 2005), TP Group (the Polish telecommunications operator TP SA and its subsidiaries), Equant and PagesJaunes Group, those subsidiaries provide consumers, businesses and other telecommunications operators with a wide range of services including fixed telephony and mobile telecommunications, data transmission, Internet and multimedia, and other value-added services. Financial Statements of France Telecom have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) as adopted for use by the European Union. Cash Generating Units France Telecom has 38 main Cash Generating Units (CGUs). These CGUs break down as follows by primary business segment: 21 Personal. 10 Home. 4 Enterprise 3 Directories To carry out the impairment tests, goodwill which acquired in a business combination is allocated to each CGU (or group of CGUs). Each CGU (or group of CGUs) is. combined within a business or geographic segment, as permitted under IAS 36. Cash Generating Units were identified by France Telecom based on primary business segment and geographical area as the following * 16 Orange CGUs (France, UK, Denmark, Switzerland, Romania, Ivory Coast, Dominican, Cameroon, Senegal, Jordan, Moldova, Mali, Madagascar, Botswana, Mauritius and Slovenes) * 1 Amena (Spain), 4 CGUs for the Enterprise segment, representing business communications services in France. * 4 CGUs for the Home segment in Western Europe (France, UK, Netherlands and Spain). 1 CGU for the fixed telephony business in Cote d'ivoire. 1 CGU for the fixed telephony business in Vietnam. 2. CGUs for fixed telephony and mobile operations in Poland. 2 CGUSs for fixed telephony and mobile operations in Senegal. 2 CGUs for fixed telephony and mobile operations in Jordan 2 CGUs for fixed telephony and mobile operations in Mauritius. 3 CGUs for the Directories business (France, Spain, Luxembourg) Basis of estimating CGUs’ recoverable amount To determine whether each CGU (cr group of CGUs) has been impaired; the carrying value of the CGU (or group of CGUs) is compared to its recoverable amount. E Page 1Seagal! Iles 7 Impairment Review Project SAUDI TELECOM ‘The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use. 1) Fair value less costs to sell Fair values were estimated based on the following: (1) quoted market prices or (2) in the absence of an active market for the CGUs, the best information available to reflect the amount corresponding to the fair value less costs to sell is value that the entity would receive for the CGUs. 2) Value in use Cash flow projections are based on economic and regulatory assumptions, license renewal assumptions and forecast trading conditions drawn up by France Telecom management, as follows * Cash flow projections are based on the five-year business plan; + Cash flow projections beyond the five-year timeframe are extrapolated by applying a declining or flat growth rate over the next two years, followed by a growth rate to perpetuity reflecting the expected long-term growth in the market; «The cash flows obtained are discounted using appropriate rates for the type of business and the countries concerned. Discount Rates The following are the discount rates that applied to France Telecom CGUs in order to calculate the recoverable amount through value in use method: Orange France: 11.5%. Orange UK: 10.6%. Directories France: 12.5% Home ~ France: 12.4%. E Page 2Syepauull ALAS F Impairment Review Project shtorrescom 2A 7.2Portugal Telecom Introduction Portugal Telecom is a limited liability holding company, organized under the laws of the Republic of Portugal. Portugal Telecom's agent for service of process in the United States is CT Corporation System, Portugal Telecom provides telecommunications and multimedia services in Portugal and Brazil. Those services include ‘* Wire line Services, which include fixed line telephone services for retail and wholesale customers. + Leased lines, unbundled local loop access and wholesale line rental, interconnection, Internet access, data and business solutions, portal and e- commerce services. * Mobile telecommunications services, such as voice, data and Internet-related services. * Multimedia services, such as consist of cable and satellite television services, broadband Internet and film distribution and screening, * Provide Telecommunication equipments for sale. Portugal Telecom's audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Commission Union Cash Generating Units Portugal Telecom has 4 main Cash Generating Units (CGUs). The main four Cash Generating Units were identified by the Portugal Telecom based on primary business segment as the following: Wire line in Portugal. Mobile in Portugal Multimedia Businesses in Portugal. Mobile in Brazil Basis of estimating CGUs’ Recoverable Amount ‘Where it is not possible to estimate the recoverable amount of an individual asset, the Portugal Telecom estimates the recoverable amount of the Cash Generating Units (CGUs) to which the asset belongs. To determine whether each CGU has been impaired; the recoverable amount of the CGU is compared to its carrying value. The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use. 1) Fair value less costs to sell Fair value less cost to sell were assessed based on the following: (1) amount received from an independent entity, deducted by direct cost related with the sale or (2) measurement of fair value, this measurements based on an evaluation of future discounted cash flows. This evaluation used the best E Page 3Erapmaall oblast 777 Impairment Review Project, SAUDI TELECOM information available to the Company, including reasonable and supportable assumptions and projections. The Company's discounted cash flow evaluation used various discount rates that correspond to the weighted-average of cost of capital in the countries and regions in which the underlying businesses operate. 2) Value in use In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, an impairment loss is recognized immediately in net income, under the caption “Depreciation and Amortization’, and a detail of the impairment loss is provided. E Page 4Byogmull LSI 7 Impairment Review Project SAUDI TELECOM 24 7.3Telenor Introduction Telenor ASA is the leading telecommunication company in Norway, Telenor ASA is a public limited company organized under the laws of Norway. They have substantial international operations, particularly in the area of mobile telephony. Telenor has interest in mobile operation in 11 courtiers, with principle investment in 9 operations, including, but not limited to (Sonofon in Denmark, Vodafone in Sweden, Kyivstar in Ukraine, Pannon GSM in Hungary, DTAC in Thailand, DiGi,Com in Malaysia, Grameen Phone in Bangladesh, Telenor Pakistan in Pakistan and ProMonte GSM in Montenegro). Telenor’s annual audited consolidated financial statements as prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), which differs in certain respect from U.S. GAAP. Cash Generating Units Telenor took into consideration various factors in determining its own Cash Generating Units, including how management monitors the entity's operations such as by product or service lines, businesses and geographical areas. Telenor has identified that a Cash Generating Unit (CGU) often will be the separate networks in the separate geographical areas (countries), distinguishing between different technologies (mobile, fixed and broadcast). Therefore, Telenor identified mobile and fixed operations in different countries as Cash Generating Units (CGUs), in addition to IT operating company, EDB Business Partner and Broadcast DTH operations as well as other units. The Cash Generating Units were identified by the Telenor based on geographical atea as the following Pannon, Hungary Sonofon, Denmark. DTAC, Thailand. Bredbandsbolaget, Sweden Cybercity, Denmark Broadcast, DTH operation, Nordic. EDB Business Partner, Norway. Other. Basis of estimating CGUs’ recoverable amount Where it is not possible to estimate the recoverable amount of an individual asset, the Telenor determines the recoverable amount of the Cash Generating Units (CGUs) to which the asset belongs. To determine whether each CGU has been impaired; the recoverable amount of the CGU is compared to its carrying value E Page 5Ryapauall SILAS 7 Impairment Review Project SAUDI TELECOM 924 The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use. 1) Fair value less costs to sell Fair value less cost to sell has been derived from quoted market prices where available. 2) Value in use Value in use is based on cash flow projections reflecting the financial business plans approved by senior management covering a three-year period. In addition, the calculation includes estimated cash flows for the years 4 to 9 because some of the operations are in a growth phase and will not reach a stable cash flow within three years. If the recoverable amount of an asset is estimated to be less than its carrying amount, an impairment loss is recognized immediately in net income, under the caption “Depreciation and Amortization’, and a detail of the impairment loss is provided. Overall, Telenor has used a combination of value in use and fair value less cost to sell to determine the recoverable amounts of the Cash Generating Units (CGUs). Fair value less cost to sell were used to determine the recoverable amount for DTAC_ which is listed on the Stock Exchange in Singapore, UCOM which owns shares in DTAG, is listed on the Stock Exchange in Thailand and EDB Business Partner on the Oslo Stock Exchange For the other entities, Telenor has used a discounted cash flow analysis basis to determine the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset Discount Rates The following are the pre-tax discount rates that applied to Telenor Cash Generating Units (CGUs) in order to calculate the recoverable amount through value in use method: Pannon; 11.4%. Sonofon 8.1%. Bredbandsbolaget 8.6% Cybercity 8.6%. Broadcast DTH 9.3%. In order for Telenor to extrapolate the cash flows, average growth rates in revenues in the period of 4 to 9 years were used. Those average rates were based on Telenor's expectation to the market development, but are not higher than expected growth in the relevant industries Telenor uses steady growth rates to extrapolate the cash flows beyond nine years. ‘The long-term growth rate beyond nine years is not higher than the expected long term growth in the economy in which the business operates E PagesSporn Stal Impairment Review Project SAUDI TELECOM 7.4Swisscom Introduction Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensive range of products and services to residential and business customers, Swisscom core business is the provision of fixed-line and mobile telephony as well as data services. As a leading provider of fixed line services, Swisscom offers analog and digital access services. In addition, Swisscom offers broadband services over existing subscriber lines using a technology commonly referred to as ADSL. ‘Swisscom’s financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Cash Generating Units In accordance with IAS 36 “Impairment of Assets’, Swisscom recoverability of the carrying amounts of fixed and mobile networks is assessed on the level of Cash Generating Units (CGUs). ‘Swisscom management is of the opinion that fixed and mobile networks should be treated as separate integral units and must therefore be classified as two independent Cash Generating Units (CGUs). ‘Cash Generating Units were identified by the Swisscom based on primary business segment as the following: * Antenna Hungaria. * Swisscom IT Services. * Other cash generating units. Basis of estimating CGUs’ recoverable amount To determine whether each CGU has been impaired; the recoverable amount of the CGU is compared to its carrying value. The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use, Value in Use The recoverable amount of the Cash Generating Unit (CGU) was calculated on the basis of value in use using the discounted cash flow (DCF) method. Future cash flows were forecasted in line with the five-year business plan for Antenna Hungaria and three-year business plan for Swisscom IT Services approved by the Board of Directors. ‘Swisscom considers the business plan and long term growth rates to be appropriate in view of the launch of terrestrial digital television broadcasting and the current level of inflation in Hungary. The net carrying value of the cash generating unit approximated the vaiue in use. E Page 7Saget! clea 79 Impairment Review Project, SAUDI TELECOM Discount Rates Antenna Hungaria The discount rate on the scheduled weighted average cost of capital after tax is 8.6%. WACC pre-tax was 9.75%. The terminal value was calculated using a long term growth rate of 1.5%. ‘Swisscom IT Services The discount rate on the scheduled weighted average cost of capital after tax is 7.0%. WACC pre-tax was 8.7%. The terminal value was calculated using a long term growth rate of 1.0%. E Page 8Impairment Review Project 7.5 TeliaSonera Introduction TeliaSonera is an international telecommunication company. The merger of Telia and Sonera, first announced on March 26, 2002, was carried out through an exchange offer in which Sonera shareholders received shared in Telia, Upon completion of the ‘exchange offer in December 2002, Telia changed its name to TeliaSonera. TeliaSonera is determined to lead the migration from traditional fixed services to mobile and IP-based services. TeliaSonera's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), Cash Generating Units In accordance with IAS 36 "Impairment of Assets”, TeliaSonera recoverability of the carrying amounts is assessed on the level of Cash Generating Units (CGUs). Cash Generating Units were identified by the TeliaSonera based on the geographical afea as the following: * TeliaSonera Finland (formerly Sonera) * Danish mobile. * NetCom ASA, Basis of estimating CGUs’ recoverable amount Carrying values of all Cash Generating Units (CGUs) have been tested for impairment. The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use Value in Use The recoverable amounts (that is, higher of value in use and fair value less cost to sell) are normally determined on the basis of value in use, applying discounted cash flow calculations. However, certain external events, such as market values for mobile operators falling after the acquisition of NetCom and the strong price pressure on the Finnish telecom market starting in 2004, have made TeliaSonera request independent appraisals of fair values to determine recoverable amounts for NetCom in 2002, International Carrier in 2004 and TeliaSonera Finland in 2005. E Page 9Kesqaall SILAS Impairment Review Project shoorretecom 7.6KPN Introduction KPN and its subsidiaries offer telecommunications services to both consumers and business customers. KPN core activities include telephone, internet and television services through its fixed network in the Netherlands. KPN provides a wide range of services, from voice, internet and data services to fully-managed outsourced ICT solutions, in the Netherlands and internationally In addition, KPN provides mobile telecommunication services in the Netherlands, Germany and Belgium and data services in Western Europe. KPN has adopted International Financial Reporting Standards (IFRS). including International Accounting Standards (IAS) and interpretations issued by the International Accounting Standards Board (IASB) as adopted by the EU. Cash Generating Units Cash Generating Units were identified by the KPN based on the geographical area as the following: E-PLUS (Germany) KPN MOBILE (Netherlands) THE NETHERLANDS BASE (Belgium). OTHER. Basis of estimating CGUs’ recoverable amount To determine whether each CGU has been impaired; the recoverable amount of the CGU is compared to its carrying value. The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use. KPN used to perform the impairment test the second method which is Value in Use. Value in use In assessing the value in use, KPN determined the discount rate based on the time value of money, taking into consideration the accounts of risks for the Cash Generating Unit (CGU) specifically. In determining the discounts rates KPN make use of market data for comparable companies and they involve a third party valuation specialist to support KPN in estimating the discount rate. Finally, if the calculated recoverable amount of the Cash Generating Units (CGUs) is lower than the carrying values of the assets involved, impairment loss should be recognized. E Page 10Ryagauall SYLaS3! 9 Impairment Review Project SAUDI TELECOM “4 7.7 Vivendi Universal Introduction Vivendu Universal is a major player in media and telecommunication industries with activities in music, interactive games, television, cinema, fixed and mobile telecommunications. Vivendi Universal holds a leading position in each of its primary business segment The consolidated Financial Statements of Vivendi Universal have been prepared in accordance with International Financial Reporting Standards (IFRS) decreed by the International Accounting Standards Board (IASB) as adopted by the European Union (EU) Cash Generating Units Vivendi Universal performed an impairment test to determine whether the carrying amount of the Cash Generating Unit (CGU) or a group of Cash Generating Units (CGUs) under consideration exceeds its or their recoverable amount. ‘Cash Generating Units were identified by the Vivendi Universal based on primary business segment as the following Universal Music Group. Vivendi Universal Games. Canal+ Group. SFR. Maroc Telecom. Other such as: UMG & VUG. Basis of estimating CGUs’ recoverable amount To determine whether each CGU has been impaired; the recoverable amount of the CGU is compared to its carrying value. The recoverable amount of a CGU is the higher of its: (1) fair value less costs to sell and, (2) value in use. 1) Fair value less costs to sell Fair value less costs to sell is the amount obtainable from the sale of the asset or group of assets in an arm's length transaction between knowledgeable and willing parties, less costs to sell. These values are determined based on market data (comparison with similar listed companies, value attributed in recent transactions and stock market prices) In the absence of reliable data, recoverable amount of Cash Generating Units (CGUs) will be calculated based on discounted future cash flows. E Page 11Impairment Review Project 2) Value in use Value in use is determined based on cash flow projections consistent with the most recent budget and business plan approved by executive management and presented to the Management Board. The discount rate applied reflects current assessments by the market of the time value of money and the risks specific to the Cash Generating Unit (CGU) or a group of Cash Generating Units (CGUs). If the recoverable amount is less than the carrying amount of a Cash Generating Unit (CGU) or a group of Cash Generating Units (CGUs), an impairment loss is recognized for the difference. In the case of a group of Cash Generating Units (CGUs), this impairment loss is recorded in priority against goodwill Discount Rates The following are discount rates and Growth rates respectively, which applied to Vivendi Universal CGUs in order to calculate the recoverable amount through value in use method: Universal Music Group: 8.25%, 2.5% Vivendi Universal Games: 11.0% - 12.0%, 3.5% StudioCanal: 8.0% - 9.0%, 2.0% - 2.5% SFR: 8.00%, 2.5% Maroc Telecom: 10.50%, 2.5% E Page 12