Note 11. Amortization of intangible assets, depreciation of property, plant and equipment and right-of-use assets

Amortization of intangible assets and depreciation of property, plant and equipment, right-of-use assets and depletion of biological assets include the following:

Impairment tests of intangible assets, property, plant and equipment, right-of-use assets and cash-generating units (CGUs)

If there is an indication of impairment in accordance with IAS 36, intangible assets, property, plant and equipment and right-of-use assets as well as cash-generating units (CGUs) are tested for impairment. A qualitative analysis is performed at the reporting dates for all consolidated financial statements and interim consolidated financial statements to determine whether there are any indications of impairment or any material year-on-year changes in impaired CGUs. This analysis is based on criteria defined by the management of Lenzing AG. Intangible assets, property, plant and equipment and right-of-use assets allocated to a CGU that includes goodwill are also tested during the annual impairment testing of goodwill. The CGUs in the Lenzing Group represent, above all, the individual production sites.

The Lenzing Group initially determines the recoverable amount based on the applicable fair value less costs of disposal. The budget and the medium-term plans for the next five years are approved by the Management Board and acknowledged by the Supervisory Board.. These plans are the starting point for the cash flow projections on a post-tax basis to determine the fair value less costs of disposal. As a matter of principle, the management prepares planning accounts over a detailed planning period of five years. If the steady state is not already achieved at the end of the five-year detailed planning period, this period will be extended until a steady state of cash flows can be assumed. Subsequently, a perpetuity growth rate reflecting a sustainable long-term growth rate is applied after the detailed planning period. The estimate for the sustainable long-term growth rate generally equals half of the inflation rate expected in the relevant country during the next few years, as projected by an international economic research agency. This value usually tends to offset general inflation. A growth-related retention of financial surpluses in the perpetual annuity is taken into consideration in the planning calculations. The planned/projected cash flows are discounted to their present value with a discounted cash flow method. Fair value measurement is classified in full as level 3 of the fair value hierarchy because key input factors (in particular, cash flows) cannot be observed on the market. The applied discount rate is calculated on an individual basis using the capital asset pricing model (CAPM) and represents a composite figure (weighted average cost of capital – WACC) that combines the average interest rate for debt and the anticipated return on equity employed. After-tax WACCs ranging from 7.6 percent to 9.4 percent were used in 2022 (2021 6.0 percent to 7.1 percent).

The WACCs were, for the most part, determined on the basis of externally available capital market data for comparable companies (in particular, to determine the risk premium). The planning and forecasts of free cash flows are based, above all, on internal and external assumptions for the expected development of selling prices and volumes (especially for fibers and cellulose) and the related costs (in particular, raw materials like cellulose, wood and energy plus labor and taxes), including the expected market environment and market positioning. Other input factors include anticipated investments and the changes in working capital. These internal assumptions are based on past experience, current operating results and the assessment of future developments. They are supplemented by external market assumptions such as sector-specific market studies and economic outlooks.

No impairments of CGUs in accordance with IAS 36 were recognized in the 2022 and 2021 financial years.

Due to capital markets trends, the fair value of the equity reduced to below its carrying amount in the fourth quarter of 2022, triggering an indication of impairment for all cash-generating units. The current uncertainties (such as the Covid-19 crisis, the Ukraine war, distortions in energy markets, demand trend for fibers) particularly affect the cash-generating units CGU Fiber Site China, CGU Fiber Site Indonesia and CGU Fiber Site Heiligenkreuz. All assumptions material to the impairment tests were reviewed and the expected effects were reflected in the budgets required for the cash flow forecasts and the medium-term planning. WACCs (weighted average costs of capital) reflected the more exacerbated situation on the capital markets.

Impairment test of the CGU Fiber Site China

The carrying amounts of the intangible assets, property, plant and equipment and right-of-use assets of the CGU Fiber Site China impaired in previous years totaled EUR 59,159 thousand at December 31, 2022 (December 31, 2021: EUR 57,081). This amount includes accumulated impairment losses of EUR 9,386 thousand (December 31, 2021: EUR 13,586 thousand) from the previous impairment tests.

The deterioration of the market environment has led to substantial losses for the Fiber Site China CGU. As the Lenzing Group is currently investing in China to convert existing capacities for conventional viscose into capacities for environmentally responsible specialty fibers (conversion of one line to the production of modal fibers), the site is expected to perform well in the future. In addition, the China site was converted to green power as part of these investments. The recoverable amount showed sufficient coverage of the carrying amounts. The carrying amounts would increase/decrease in particular if planned EBITDA or the weighted average cost of capital (WACC) decreases (increases). In the event of an increase (decrease) in planned EBITDA by 1 percent, the recoverable amount determined would increase (decrease) by EUR 3,431 thousand. If the weighted average cost of capital (WACC) decreases (increases) by 0.25 percentage points, the recoverable amount will increase by EUR 5,779 thousand or decrease by EUR 5,459 thousand.

Impairment test of the CGU Fiber Site Indonesia

The CGU Fiber Site Indonesia, as the previous viscose site, was significantly affected by the negative trend in the market environment and also reported substantial losses. As the Lenzing Group is currently investing in Indonesia in order to convert existing capacity for conventional viscose into capacity for environmentally responsible specialty fibers, the site is expected to perform well in the future. In Purwakarta, Lenzing is creating additional capacity for LENZING™ ECOVERO™ brand fibers. The Indonesian site will thereby become a pure specialty viscose supplier in 2023. In addition, the Indonesia site was converted to green power as part of these investments. The recoverable amount showed sufficient coverage of the carrying amounts. The carrying amounts would increase/decrease in particular if planned EBITDA or the weighted average cost of capital (WACC) decreases (increases). In the event of an increase (decrease) in planned EBITDA by 1 percent, the recoverable amount determined would increase (decrease) by EUR 6,154 thousand. If the weighted average cost of capital (WACC) decreases (increases) by 0.25 percentage points, the recoverable amount will increase by EUR 11,166 thousand or decrease by EUR 10,625 thousand.

Impairment test of the CGU Fiber Site Heiligenkreuz

The CGU Fiber Site Heiligenkreuz is significantly affected by the distortions in energy markets in Europe and consequently reports significant losses in the 2022 financial year. In response to these distortions, work is currently underway on a sustainable energy concept, which has been taken into consideration in the planning. The recoverable amount showed sufficient coverage of the carrying amounts. The carrying amounts would increase/decrease in particular if planned EBITDA or the weighted average cost of capital (WACC) decreases (increases). In the event of an increase (decrease) in planned EBITDA by 1 percent, the recoverable amount determined would increase (decrease) by EUR 5,310 thousand. If the weighted average cost of capital (WACC) decreases (increases) by 0.25 percentage points, the recoverable amount will increase by EUR 12,273 thousand or decrease by EUR 11,540 thousand.

Impairment test of CGUs to which goodwill is allocated

Goodwill was allocated to the following segments/cash-generating units (CGUs) as at the reporting date:

The recoverable amount of the largest CGU with goodwill in 2022 – the CGU Pulp Site Czech Republic – was determined on the basis of fair value less costs of disposal. The measurement of fair value is classified in full under level 3 of the fair value hierarchy. The following individual assumptions from the most recent impairment tests were used for annual testing:

The average revenue growth of the Pulp Site Czech Republic during the detailed planning period equals 2.2 percent per year (2021: 1.4 percent per year).

The estimated fair value less costs of disposal of the CGU Pulp Site Czech Republic exceeds the carrying amount by EUR 33,504 thousand (2021: EUR 78,558 thousand). This estimate is considered appropriate, but corrections may be required if there are changes in the underlying assumptions or circumstances. The following table shows a sensitivity analysis with hypothetical scenarios for the key assumptions as well as the possible changes in value as at the reporting date which, if they occurred, would result in the recoverable amount equaling the carrying amount of the CGU plus goodwill.

A long-term growth rate of 1.2 percent to 1.8 percent (2021: 1.1 percent to 1.3 percent) was taken into account as perpetual yield for the other CGUs with goodwill.