Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:



	Hotels & Restaurants		Trains & Cruises	Total
Year ended December 31, 2012	$'000		$'000	$'000

Balance as of January 1, 2012	153,605		7,855	161,460
Impairment	(2,055	)	—	(2,055	)
Foreign currency translation adjustment	1,737		136	1,873

Balance as at December 31, 2012	153,287		7,991	161,278



	Hotels & Restaurants		Trains & Cruises		Total
Year ended December 31, 2011	$'000		$'000		$'000

Balance as of January 1, 2011	168,982		7,888		176,870
Impairment	(11,907	)	—		(11,907	)
Foreign currency translation adjustment	(3,470	)	(33	)	(3,503	)

Balance as at December 31, 2011	153,605		7,855		161,460

The gross goodwill amount at January 1, 2012 was $190,545,000 (2011 - $194,048,000) and the accumulated impairment at that date was $29,085,000 (2011 - $17,178,000). All impairments to that date related to hotel and restaurant operations.

The assessment and, if required, the determination of goodwill impairment to be recognized uses a discounted cash flow analysis to compute the fair value of the reporting unit. When determining the fair value of a reporting unit, OEH is required to make significant judgments that OEH believes are reasonable and supportable considering all available internal and external evidence at the time. However, these estimates and assumptions are, by their nature, highly judgmental. Fair value determinations are sensitive to changes in the underlying assumptions and factors including those relating to estimating future operating cash flows to be generated from the reporting unit which are dependent upon internal forecasts and projections developed as part of OEH’s routine, long-term planning process, available industry/market data (to the extent available), OEH’s strategic plans, estimates of long-term growth rates taking into account OEH’s assessment of the current economic environment and the timing and degree of any economic recovery, estimation of the useful life over which the cash flows will occur, and market participant assumptions. The assumptions with the most significant impact to the fair value of the reporting unit are those related to future operating cash flows which are forecast for a five-year period from management’s budget and planning process, the terminal value which is included for the period beyond five years from the balance sheet date based on the estimated cash flow in the fifth year and a terminal growth rate ranging from 2.5% to 5.9% (December 31, 2011 - 2.0% to 10.7%), and pre-tax discount rates which for the year ended December 31, 2012 range from 9.2% to 16.5% (December 31, 2011 - 8.8% to 17.3% ).

Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair values of OEH’s reporting units may include such items as (i) a prolonged weakness in the general economic conditions in which the reporting units operate and therefore negatively impacting occupancy and room rates, (ii) an economic recovery that significantly differs from OEH’s assumptions in timing and/or degree, (iii) volatility in the equity and debt markets which could result in a higher discount rate, (iv) shifts or changes in future travel patterns from the OEH’s significant demographic markets that have not been anticipated, (v) changes in competitive supply, (vi) political and security instability in countries where OEH operates and (vii) deterioration of local economies due to the uncertainty over currencies or currency unions and other factors which could lead to changes in projected cash flows of OEH’s properties as customers reduce their discretionary spending. If the assumptions used in the impairment analysis are not met or materially change, OEH may be required to recognize additional goodwill impairment losses which may be material to the financial statements.

Under the first step of the goodwill impairment testing for the year ended December 31, 2012, the fair value of the Sicilian hotels was approximately $163,795,000 which was 4% in excess of its carrying value of $156,842,000. Factors that could be reasonably expected to impact negatively the fair value of the reporting unit are outlined above and specifically sensitive for the Sicilian reporting unit are the continued improvements in occupancy and ADR growth as it becomes a more established location within OEH’s portfolio.

During the year ended December 31, 2012, OEH identified a non-cash goodwill impairment of $2,055,000 at Reid's Palace. Management’s estimates considered future profitability of the business, future growth rates and the related discount rates. OEH determined this impairment was triggered due to performance that required a reassessment.



Year ended December 31, 2012		$’000

Reid's Palace		2,055

		2,055

During the year ended December 31, 2011, OEH identified non-cash goodwill impairments of $11,907,000 at three hotels. Management’s estimates considered future profitability of the businesses, future growth rates and the related discount rates. OEH determined these impairments were triggered in each case due to performance that required a reassessment. The impairment loss consisted of the following:



Year ended December 31, 2011		$’000

Maroma Resort and Spa		7,904
La Residencia		2,779
Mount Nelson Hotel		1,224

		11,907

During the year ended December 31, 2010, OEH identified non-cash goodwill impairments of $5,895,000 at two hotels. Management’s estimates considered future profitability of the businesses, future growth rates and the related discount rates. OEH determined these impairments were triggered in each case due to performance that required a reassessment. There was no goodwill impairments recorded as part of OEH’s annual impairment analysis. The impairment loss consisted of the following:



Year ended December 31, 2010		$’000

La Samanna		5,401
Napasai		494

		5,895