NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 8

8. INTANGIBLE ASSETS
 
   Note  Goodwill 
R’000 		 Intellec- 
tual 
property 
R’000 		 Computer 
software 
R’000 		 Internally 
devel- 
oped 
computer 
software 
R’000 		 Custo- 
mer 
relation- 
ships 
R’000 		 Brands 
R’000 		 Total 
R’000 		   
Opening carrying amount at                            
1 July 2016     872 077  10 462  185 202  215 021  100 859  5 194  1 388 815    
Additions     –  –  49 630  128 418  –  –  178 048    
Disposals     –  –  (27) –  –  –  (27)   
Amortisation charge for the year     –  (841) (39 597) (33 996) (10 114) (1 902) (86 450)   
Impairment**     (16 640) –  –  –  –  –  (16 640)   
Carrying value at 30 June 2017     855 437  9 621  195 208  309 443  90 745  3 292  1 463 746    
At 30 June 2017                            
Cost     898 849  24 935  313 964  416 248  241 378  22 938  1 918 312    
Accumulated amortisation, impairment and adjustments     (43 412) (15 314) (118 756) (106 805) (150 633) (19 646) (454 566)   
Closing carrying amount     855 437  9 621  195 208  309 443  90 745  3 292  1 463 746    
                   
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    
At 30 June 2016                            
Cost     898 849  24 935  264 361  287 830  241 378  22 938  1 740 291    
Accumulated amortisation, impairment and adjustments     (26 772) (14 473) (79 159) (72 809) (140 519) (17 744) (351 476)   
Closing carrying amount     872 077  10 462  185 202  215 021  100 859  5 194  1 388 815    
* The recognition of goodwill (R474 million), customer relationships (R89 million) and take on balances is as a result of the WAD acquisition that was effective 1 August 2015.
** The impairment to goodwill relates to IE Business Strategic Consulting Proprietary Limited which has stopped trading.

  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Goodwill 855 437   872 077   –   –  
Computer software 107 895   96 581   –   –  
FICO (computer software) 87 313   88 620   –   –  
Nexus (internally developed computer software) 161 950   118 297   –   –  
Gexus (internally developed computer software) 48 469   41 313   –   –  
Development costs (internally developed                
computer software) 99 024   55 412   –   –  
Intellectual Property 9 621   10 462   –   –  
Customer relationships 90 745   100 859   –   –  
Brand 3 292   5 194   –   –  
  1 463 746   1 388 815   –   –  

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

  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Healthcare Administration SA CGU                
Medscheme – healthcare administration 248 622   265 262   –   –  
Medscheme – health risk management 89 298   89 298   –   –  
Aid for Aids Management (Pty) Ltd –                
healthcare administration 23 490   23 490   –   –  
Allegra (Pty) Ltd – 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   473 954   –   –  
  855 437   872 077   –   –  

Management determines the recoverable amount of cash generating units as being the higher of fair value less costs to sell or value in use. In the absence of an active market, value in use is used to determine the recoverable amount. As there is no active market, value in use is used. 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 as well as business-specific expectations.

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

  • The rate on government bonds (risk-free rate) 7.72% as at 30 June 2017
  • 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.

  Recover-
able
amount
R’000		 Risk
adjustment
factor		 WACC¹ Forecast
period²		 Average
growth
rate³		  
Medscheme – healthcare administration and health risk management 4 723 853 1.0 13.39 4 years 6.00%  
Aid for Aids Management (Pty) Ltd – healthcare administration 122 491 1.0 13.39 4 years 6.00%  
Allegra (Pty) Ltd – healthcare IT support 121 743 1.15 15.40 4 years 6.00%  
AfroCentric Distribution Services (Pty) Ltd 160 754 1.15 14.73 4 years 6.00%  
Klinikka (Pty) Ltd – medical equipment supplier 32 856 1.20 13.39 4 years 6.00%  
Medscheme Mauritius Limited – local and international administration 74 987 1.15 15.40 4 years 6.00%  
Pharmacy Direct, Curasana and Glen Eden 936 010 1.0 13.39 4 years 6.00%  
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.
2 Based on the average long tenure of current contracts with our clients. A forecast period of four years is considered reasonable.
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.

The sensitivity analysis below indicates a 1% variation on the above input variables on the recoverable amount:

   WACC  Average Growth Rate    
   +1% 
R’000 		 -1% 
R’000 		 +1% 
R’000 		 -1% 
R’000 		   
Medscheme – healthcare administration and health risk management  (563 034) 739 257  790 796  (602 287)   
Aid for Aids Management (Pty) Ltd – healthcare administration  (2 872) 2 982  3 163  (3 097)   
Allegra (Pty) Ltd – healthcare IT support  (11 724) 14 472  15 781  (12 746)   
AfroCentric Distribution Services (Pty) Ltd  (16 326) 20 497  20 912  (16 731)   
Klinikka (Pty) Ltd – medical equipment supplier  (3 871) 5 080  4 799  (3 668)   
Medscheme Mauritius Limited – local and international administration  (7 221) 8 914  9 705  (7 860)   
Pharmacy Direct, Curasana and Glen Eden  (110 277) 144 716  146 819  (112 329)   

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

   Opening 
R’000 		 Addition 
R’000 		 Disposal 
R’000 		 Impairment 
R’000 		 Closing 
R’000 		   
2017                   
Medscheme – healthcare administration  265 262  –  –  (16 640) 248 622    
Medscheme – health risk management  89 298  –  –  –  89 298    
Aid for Aids Management (Pty) Ltd – 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) Ltd – healthcare IT support  1 268  –  –  –  1 268    
AfroCentric Distribution Services (Pty) Ltd  835  –  –  –  835    
Pharmacy Direct, Curasana and Glen Eden  473 954  –  –  –  473 954    
Klinikka (Pty) Ltd – medical equipment supplier  2 435  –  –  –  2 435    
   872 077  –  –  (16 640) 855 437    
             
2016                   
Medscheme – healthcare administration  265 262  –  –  –  265 262    
Medscheme – health risk management  89 298  –  –  –  89 298    
Aid for Aids Management (Pty) Ltd – 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) Ltd – healthcare IT support  1 268  –  –  –  1 268    
AfroCentric Distribution Services (Pty) Ltd  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    

NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 8