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Goodwill and Other Intangible Assets

Movement in intangible assets for the year ended December 31, 2014 was as follows:

Patents and trademarks Goodwill Software Customer relationships Proprietary technology Other TOTAL

COST
Balance at January 1, 2014 211 881 601 341 21 858 472 300 14 100 8 599 1 330 079
Additions 528 – 19 – – 1 748 2 295
Disposals (51) – (22) – – (829) (902)
Currency translation adjustments (767) (36 548) (9 022) – – (3 855) (50 192)
BALANCE AT DECEMBER 31, 2014 211 591 564 793 12 833 472 300 14 100 5 663 1 281 280

ACCUMULATED AMORTISATION AND IMPAIRMENT
Balance at January 1, 2014 (456) (16 437) (20 773) (382 718) (9 786) (3 577) (433 747)
Amortisation charge (149) – (450) (33 399) (1 762) (1 321) (37 081)
Impairment – (151 369) – – – – (151 369)
Disposals 44 – 22 – – 402 468
Currency translation adjustments 193 6 874 8 724 – – 1 761 17 552
BALANCE AT DECEMBER 31, 2014 (368) (160 932) (12 477) (416 117) (11 548) (2 735) (604 177)
NET BOOK VALUE AT DECEMBER 31, 2014 211 223 403 861 356 56 183 2 552 2 928 677 103
NET BOOK VALUE AT JANUARY 1, 2014 211 425 584 904 1 085 89 582 4 314 5 022 896 332

Movement in intangible assets for the year ended December 31, 2013 was as follows:

Patents and trademarks Goodwill Software Customer relationships Proprietary technology Other TOTAL

COST
Balance at January 1, 2013 209 746 607 742 23 420 472 300 14 104 7 380 1 334 692
Additions 606 – 88 – – 2 690 3 384
Disposals (1) – – – – (905) (906)
Increase due to acquisition of subsidiaries (Note 10) 1 606 – – – – – 1 606
Currency translation adjustments (76) (6 401) (1 650) – (4) (566) (8 697)
BALANCE AT DECEMBER 31, 2013 211 881 601 341 21 858 472 300 14 100 8 599 1 330 079

ACCUMULATED AMORTISATION AND IMPAIRMENT
Balance at January 1, 2013 (370) (16 548) (18 025) (341 374) (8 024) (2 555) (386 896)
Amortisation charge (111) – (4 128) (41 344) (1 762) (1 757) (49 102)
Impairment – (1 080) – – – – (1 080)
Disposals 1 – – – – 525 526
Currency translation adjustments 24 1 191 1 380 – – 210 2 805
BALANCE AT DECEMBER 31, 2013 (456) (16 437) (20 773) (382 718) (9 786) (3 577) (433 747)
NET BOOK VALUE AT DECEMBER 31, 2013 211 425 584 904 1 085 89 582 4 314 5 022 896 332
NET BOOK VALUE AT JANUARY 1, 2013 209 376 591 194 5 395 130 926 6 080 4 825 947 796

Customer relationships represent non-contracted interactions with clients. Remaining amortisation period for customer relationships is 2-4 years. Customer relationships are amortised using the diminishing balance method which reflects the pattern of consumption of the economic benefits that customer relationships provide.

Goodwill relates to the assembled workforce and synergy from integration of the acquired subsidiaries into the Group.

Patents and trademarks include intangible assets with indefinite useful lives with the carrying value of 210,306 (December 31, 2013: 208,700).

The carrying amount of goodwill and intangible assets with indefinite useful lives were allocated among cash-generating units as follows as at December 31:

2014 г. 2013 г.
Goodwill Intangible assets with indefinite useful lives Goodwill Intangible assets with indefinite useful lives
American division 322 572 208 700 472 968 208 700
Middle East division 36 241 – 36 241 –
Oilfield division 17 143 – 29 468 –
European division 5 805 – 6 566 –
Other cash-generating units 22 100 1 606 39 661 –
403 861 210 306 584 904 208 700

The Group determines whether goodwill and intangible assets with indefinite useful lives are impaired on an annual basis and when circumstances indicate the carrying value may be impaired.

Goodwill and intangible assets with indefinite useful lives were tested for impairment as at December 31, 2014. For the purpose of impairment testing of goodwill the Group determines value in use of each of its cash-generating units. The value in use was calculated using cash flow projections based on operating plans approved by management covering a period of five years with the adjustments to reflect the expected market conditions. Cash flows beyond five-year period were extrapolated using zero growth rate. The projected cash flows of American division for 2015-2017 were updated to reflect the current analysts’ expectations about the decrease of demand for oil pipes in the US market.

The discount rates used in the calculations are presented in the table below:

Cash-generating units Pre-tax discount rate, %
American division 10,83%
Middle East division 10,88%
Oilfield division 15,75%
European division 12,49%
Other cash-generating units 11,89%-15,21%

As at December 31, 2014, the Group determined that the recoverable amount of American division was 1,054,894 (December 31, 2013: 1,270,592 using the pre-tax discount rate of 11.38%). The Group recognised the impairment loss of 150,396 in respect of American division goodwill in the year ended December 31, 2014.

The impairment of American division goodwill was primarily driven by expected decline in consumption of OCTG products in the US market due to the drop of oil prices in the past few months.

Based on external sources of information and management judgment the Group made the following assumption to calculate value in use of American division:

The reasonably possible deviations of assumptions from the underlying operating plans could affect the recoverable amount of American division. American division recoverable amount was the most sensitive to the growth of discount rate, changes in sales volumes, prices and costs. A 10% increase in the discount rate would result in an additional decrease of the recoverable amount by 123,563; a 5% rise in costs would result in an additional decrease of the recoverable amount by 801,007; a decrease in sales prices by 5% would result in an additional decrease of the recoverable amount by 990,120; a decrease in sales volume by 5% would result in an additional decrease of the recoverable amount by 197,585.