18.

Impairment of goodwill and other non-current assets

As of December 31, 2018 and 2017, the Group performed an impairment analysis of goodwill and other non-current assets at the level of cash generating units (CGU). The Group considers the relationship between market capitalization and its book value, among other factors, when reviewing for indicators of impairment. Goodwill acquired through business combinations has been allocated to CGUs for impairment testing as follows (before impairment write-downs):


		Goodwill
Cash generating units	Segment	December 31, 2018		December 31, 2017
Yakutugol	Mining		13,399		13,399
Southern Kuzbass Power Plant	Power		2,382		2,382
Kuzbass Power Sales Company	Power		1,026		1,026
Port Posiet	Mining		756		756
Chelyabinsk Metallurgical Plant	Steel		646		556
Southern Kuzbass Coal Company	Mining		143		143
Port Temryuk	Mining		69		69

Total			18,421		18,331

As of December 31, 2018 and 2017, the recoverable amount of CGUs was determined based on value in use. The material assumptions that drive the value in use are represented by projected prices, sales volumes, operating costs, terminal growth rates and discount rates. Some of these assumptions materially deviate from the Group’s historical results primarily due to the market downturns and economic slowdowns in the recent years in Russia. All these material assumptions are based on the Group’s projections and are subject to risk and uncertainty.

The forecasted period for non-mining subsidiaries of the Group was assumed to be five years to reach stabilized cash flows. As of December 31, 2018, the value beyond the forecasted period was based on the terminal growth rates of 2%-4%. For mining subsidiaries of the Group the forecasted period was based on the remaining life of the mines.

Discount rates used in the impairment test for goodwill and non-current assets were estimated in nominal terms on the weighted average cost of capital basis. Inflation and discount rates, range of discount rates, estimated for each year for the forecasted period, were as follows:


	Forecast period, years
For the year ended December 31, 2017	2018	2019	2020	2021	2022
Inflation rate in Russia	4.0%	4.0%	4.0%	4.0%	4.0%
Inflation rate in European countries	2.9%	2.9%	2.9%	2.8%	2.8%
Pre-tax discount rate, %	9.19%-17.72%	9.19%-17.72%	9.19%-17.72%	9.19%-17.72%	9.19%-17.72%

For the year ended December 31, 2018	2019	2020	2021	2022	2023
Inflation rate in Russia	5.0%	4.3%	3.8%	4.0%	4.0%
Inflation rate in European countries	3.3%	3.3%	3.1%	3.1%	3.0%
Pre-tax discount rate, %	11.10%-23.60%	11.10%-23.60%	11.10%-23.60%	11.10%-23.60%	11.10%-23.60%

As of December 31, 2018, the Group performed the impairment testing for the following number of CGUs by segments: Steel – 3, Mining – 6 and Power – 2.

Impairment of goodwill

According to the results of the impairment analysis of goodwill, an impairment loss as of December 31, 2018 was recognized in the following CGU:


Cash generating units	Impairment loss on goodwill at December 31, 2018
Southern Kuzbass Power Plant (SKPP)		2,382

Total		2,382

Goodwill at SKPP was written down to nil as of December 31, 2018 due to the breakdown of generating equipment and increased raw materials cost, that led to the increased idle and maintenance costs and reduced generating capacity forecasts.

According to the results of the impairment analysis of goodwill, no impairment loss as of December 31, 2017 was recognised.

Impairment of non-current assets

According to the results of the impairment analysis, impairment of non-current assets was identified for the following CGUs as of December 31, 2018:


Cash generating units	Impairment loss on non-current assets identified as a result of impairment tests at December 31, 2018
Korshunov Mining Plant (KMP)		1,151
Izhstal		781
Southern Kuzbass Power Plant (SKPP)		337

Total		2,269

The carrying value of property, plant and equipment at KMP was written down to nil as of December 31, 2017. However, during 2018, new non-current assets were acquired for the purpose to maintain production volumes in accordance with the license agreement obligations. As of December 31, 2018, estimated future cash flows remain negative due to high transportation cost per tonne and significant costs of large-scale stripping works in order to fulfil required level of extraction. Therefore, an additional impairment of property, plant and equipment at KMP of RUB 1,151 million was recognised as of December 31, 2018.

Impairment of property, plant and equipment at Izhstal of RUB 781 million was caused by the shift of production technology to casting own steel instead of acquiring billets, increased projected cost of purchased scrap metal and continued growth in long-term production costs. The remaining carrying value of the property, plant and equipment of Izhstal was RUB 1,799 million.

Impairment of non-current assets at SKPP of RUB 337 million represents the remaining loss allocated after the reduction of carrying value of goodwill at SKPP as described above. The remaining carrying value of the property, plant and equipment of SKPP was RUB 1,889 million.

According to the results of the impairment analysis, impairment of non-current assets was identified for the following CGUs as of December 31, 2017:


Cash generating units	Impairment loss on non-current assets identified as a result of impairment tests at December 31, 2017
Korshunov Mining Plant (KMP)		2,271
Izhstal		2,130
Bratsk Ferroalloy Plant (BFP)		151

Total		4,552

Carrying value of property, plant and equipment and the mineral licenses at KMP of RUB 1,631 million and RUB 640 million, respectively, was written down to nil as of December 31, 2017 due to the decline in long-term forecast for iron ore prices, increase in transportation cost per tonne and growth of stripping costs required for removal of landslide deformations. Impairment of non-current assets at Izhstal of RUB 2,130 million was caused by significant increase in production costs for raw materials, specifically by increase in purchase price for electrodes expected to be maintained for a long-term period. The remaining carrying value of the property, plant and equipment of Izhstal was 2,871 RUB million. Impairment of property, plant and equipment at BFP of RUB 151 million was recognised due to the extension of planned period of furnace shutdown for compulsory repair works. The remaining carrying value of the property, plant and equipment and mineral licenses of BFP was RUB 1,258 million.

Carrying value of individual items of the non-current assets for the respective entities including the underground mining workings at SKCC was impaired due to changes in the Group’s management plans to invest funds into the ongoing construction projects and, as a result, the inability of these assets to generate future economic benefits in the current market conditions:


Subsidiaries	Impairment loss on non-current assets identified for individual items of assets at December 31, 2018
Southern Kuzbass Coal Company (SKCC)		2,533
Other		38

Total		2,571

The carrying value of individual items of the non-current assets for the respective entity was impaired due to the refusal by the regulatory authorities to extend the term of mineral license for exploration and extraction as of December 31, 2017:


Subsidiaries	Impairment loss on non-current assets identified for individual items of assets at December 31, 2017
Southern Kuzbass Coal Company (SKCC)		1,529

Total		1,529

Sensitivity analysis

Reasonably possible change in key assumptions used in calculations of value in use could impact recoverable amount which was most sensitive to the growth of discount rate, cash flows growth rates after the forecasted period and change in operating profit due to changes in sales and extraction volumes, sales prices and costs.

Based on the sensitivity analysis carried out as of December 31, 2018, a 5% decrease in future planned revenues would trigger impairment of goodwill, property, plant and equipment and mineral licenses of RUB 10,016 million at SKCC, impairment of goodwill of RUB 4,715 million at Yakutugol, additional impairment of property, plant and equipment of RUB 1,889 million at SKPP, impairment of property, plant and equipment and mineral licenses at BFP of RUB 1,216 million.

For the cash-generating units, which were not impaired in the reporting period and for which the reasonably possible changes could lead to impairment, the recoverable amounts would become equal to their carrying amounts if the assumptions used to measure the recoverable amounts changed by the following percentages: increase in discount rate by 1.85% at Elga coal deposit or decrease in sales prices by 4.9%, 2.8% and 2.4% at Elga coal deposit, SKCC and Yakutugol, respectively. The recoverable amounts of Elga coal deposit, SKCC and Yakutugol based on initial key assumptions exceed the carrying amounts by RUB 62,103 million, RUB 12,895 million and RUB 4,415 million, respectively. The recoverable amount approximates the carrying amount of BFP and a reasonable possible change in sales prices could lead to impairment.

Reasonably possible changes in other key assumptions used in assessing recoverable amount of CGUs as of December 31, 2018 do not lead to excess of carrying value over recoverable amount.

Based on the sensitivity analysis carried out as of December 31, 2017, a 5% decrease in future planned revenues would trigger impairment of goodwill of RUB 2,279 million at SKPP, additional impairment of property, plant and equipment and mineral licenses at BFP of RUB 1,258 million, impairment of property, plant and equipment of RUB 2,651 million at Izhstal.