NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 8

8. INTANGIBLE ASSETS

  Note   Goodwill 
R'000 		 Intellectual
property
R'000 		 Computer
software
R'000 		 Internally
developed
computer
software
R'000 		 Customer
relationships
R'000 		 Brands 
R'000 		 Total 
R'000 		  
Opening carrying amount at 1 July 2015      398 123  11 303  151 359  145 961  30 645  7 096  744 487    
Take on balance      –  –  607  –  –  –  607    
Purchase Price Allocation  4   473 954  –  –  –  89 485  –  563 439*   
Additions      –  –  66 823  98 039  –  –  164 862    
Disposals      –  –  (390) –  –  –  (390)   
Amortisation charge for the year      –  (841) (28 339) (28 979) (19 271) (1 902) (79 332)   
Impairment      –  –  (4 858) –  –  –  (4 858)   
Carrying value at 30 June 2016      872 077  10 462  185 202  215 021  100 859  5 194  1 388 815    
Opening carrying amount at 1 July 2014      398 123  12 144  38 513  101 704  43 670  8 998  603 152    
Additions      –  –  130 993  59 081  –  –  190 074    
Amortisation charge for the year      –  (841) (18 142) (14 824) (13 025) (1 902) (48 734)   
Reclassification      –  –  (5) –  –  –  (5)   
Carrying value at 30 June 2015      398 123  11 303  151 359  145 961  30 645  7 096  744 487    
Carrying value at 30 June 2016 comprises:                             
Cost      898 849  24 935  264 361  287 830  241 378  22 938  1 740 291    
Accumulated impairment      (23 100) (14 473) (4 858) –  (23 980) (3 200) (69 611)   
Accumulated amortisation      –  –  (74 301) (72 809) (116 539) (14 544) (278 193)   
Adjustment to goodwill**      (3 672) –  –  –  –  –  (3 672)   
Carrying value at 30 June 2016      872 077  10 462  185 202  215 021  100 859  5 194  1 388 815   
* The recognition of goodwill (R474 million) and customer relationships (R89 million) is as a result of the WAD acquisition that was effective 1 August 2015.
** The adjustment to goodwill relates the change in estimates on the initial purchase acquisition of Sapling Trade and Invest (Pty) Ltd.

  Group   Company  
  June
2016
R'000		   June
2015
R'000		   June
2016
R'000		   June
2015
R'000		  
Goodwill 872 077   398 123   –   –  
Computer software 96 581   59 610   –   –  
FICO (computer software) 88 620   91 749   –   –  
Nexus (internally developed computer software) 118 297   83 816   –   –  
Gexus (internally developed computer software) 41 313   34 545   –   –  
Development costs (internally developed computer software) 55 412   27 600   –   –  
Intellectual Property 10 462   11 303   –   –  
Customer relationships 100 859   30 645   –   –  
Brand 5 194   7 096   –   –  
  1 388 815   744 487   –   –  

A summary per cash generating unit (CGU) of the goodwill allocation is presented below:

  Group   Company  
  June
2016
R'000		   June
2015
R'000		   June
2016
R'000		   June
2015
R'000		  
Healthcare Administration SA CGU                
Medscheme – healthcare administration 265 262   265 262   –   –  
Medscheme – health risk management 89 298   89 298   –   –  
Aid for Aids Management (Pty) Limited – healthcare administration 23 490   23 490   –   –  
Allegra (Pty) Limited – healthcare IT support 1 268   1 268   –   –  
Bonitas Marketing – healthcare marketing support 835   835   –   –  
Klinikka (Pty) Ltd – medical equipment supplier 2 435   2 435   –   –  
Healthcare Africa CGU                
Medscheme Mauritius Limited – local administration 4 969   4 969   –   –  
Medscheme Mauritius Limited – International administration 10 566   10 566   –   –  
Healthcare Retail SA CGU                
Pharmacy Direct, Curasana and Glen Eden 473 954   –   –   –  
  872 077   398 123   –   –  

Management determines the recoverable amount of cash generating units as being the higher of net selling price or value in use. In the absence of an active market, value in use is used to determine the recoverable amount. A traditional method of discounting management’s best estimate of future cash flows attributable to the cash generating unit has been applied to determine the value in use. A growth rate has been applied to cash flow streams to take into account the effect of inflation.

Assumptions used in the determination of the discount rate are as follows:

• Prime rate (risk free rate) 10.5% as at 30 June 2016.
• A market risk premium of 5.8% is justified as the overall risk is to the downside.

(Please note that the inputs above were adjusted for geographical and entity specific risk).

The table below indicates the variables used in the determination of the discounted cash flows for the separate business units.

  Risk
adjustment
factor		 WACC1 Forecast  
Period2		 Average
Growth
Rate		  
Medscheme – healthcare administration 1.0 13.2   10 years   6.00%  
Medscheme – health risk management 1.0 13.2   10 years   6.00%  
Aid for Aids Management (Pty) Limited – healthcare administration 1.1 14.52   10 years   7.00%  
Allegra (Pty) Limited – healthcare IT support 1.2 15.84   10 years   6.00%  
Bonitas Marketing – healthcare marketing support 1.1 14.52   10 years   6.00%  
Klinikka (Pty) Ltd – medical equipment supplier 0.6 14.38   10 years   6.00%  
Medscheme Mauritius Limited – local administration 1.11 15.18   10 years   7.00%  
Medscheme Mauritius Limited – International administration 1.11 15.18   10 years   7.00%  
Pharmacy Direct, Curasana and Glen Eden 0.6 14.38   10 years   5.00%  

Note 1: All companies within the Group approximate the Group’s WACC. As the Group is debt free, the WACC will approximate the return on equity.
Note 2: Based on the long tenure of current contracts with our clients which span more than 20 years with the Group. A forecast period of 10 years is considered reasonable.
Note 3: Growth rates are based on current consumer price indicators and membership growth.

The net present value of forecasts support the carrying value of the goodwill indicated above.

Below is the movement of goodwill for each cash generating unit:

2016 Opening Addition Disposal Impairment Closing  
Medscheme – healthcare administration 265 262 – – – 265 262  
Medscheme – health risk management 89 298 – – – 89 298  
Aid for Aids Management (Pty) Limited – healthcare administration 23 490 – – – 23 490  
Medscheme Mauritius Limited – local administration 4 969 – – – 4 969  
Medscheme Mauritius Limited – International administration 10 566 – – – 10 566  
Allegra (Pty) Limited – healthcare IT support 1 268 – – – 1 268  
Bonitas Marketing – healthcare marketing support 835 – – – 835  
Pharmacy Direct, Curasana and Glen Eden – 473 954 – – 473 954  
Klinikka (Pty) Ltd – medical equipment supplier 2 435 – – – 2 435  
  398 123 473 954 – – 872 077  
2015            
Medscheme – healthcare administration 265 262 – – – 265 262  
Medscheme – health risk management 89 298 – – – 89 298  
Aid for Aids Management (Pty) Limited – healthcare administration 23 490 – – – 23 490  
Medscheme Mauritius Limited – local administration 4 969 – – – 4 969  
Medscheme Mauritius Limited – International administration 10 566 – – – 10 566  
Allegra (Pty) Limited – healthcare IT support 1 268 – – – 1 268  
Bonitas Marketing – healthcare marketing support 835 – – – 835  
Klinikka (Pty) Ltd – medical equipment supplier 2 435 – – – 2 435  
  398 123 – – – 398 123  

NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 8