18	INTANGIBLE ASSETS

The movement in intangible assets and the related accumulated amortization as of December 31, 2016, 2017 and 2018 is as follows:


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Development costs			Land use rights		Other assets			Total
At January 1, 2016
Cost		192,227			96,751			716,125			82,134			42,761			326,723			3,623			13,288		15,425			1,489,057
Accumulated amortization and impairment		(21,995	)		(217	)		(298,232	)		(57,940	)		(32,543	)		(192,460	)		(3,623	)		—		(3,761	)		(610,771	)

Net carrying amount		170,232			96,534			417,893			24,194			10,218			134,263			—			13,288		11,664			878,286

Net initial carrying amount		170,232			96,534			417,893			24,194			10,218			134,263			—			13,288		11,664			878,286
Additions		—			—			118,222			—			16,477			17,772			—			—		19,255			171,726
Acquisition of subsidiary – Adexus (Note 33 a)		930			9,088			6,090			12,822			—			—			—			—		4,203			33,133
Transfers from assets under construction (Note 17)		—			—			—			—			—			—			—			—		1,257			1,257
Reclasifications		—			—			5,258			—			345			—			—			—		(5,603	)		—
Disposals – net cost		—			—			(1,395	)		—			—			(2,395	)		—			—		—			(3,790	)
Amortization		—			—			(28,206	)		(4,376	)		(8,043	)		(40,918	)		—			—		(1,200	)		(82,743	)
Impairment loss		(38,680	)		(15,628	)		—			—			—			—			—			—		—			(54,308	)
Translations adjustments		12,038			3,672			(102	)		171			1,024			—			—			—		(78	)		16,725

Net final carrying amount		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286

At December 31, 2016
Cost		205,195			109,511			844,213			95,127			60,607			342,100			3,623			13,288		34,294			1,707,958
Accumulated amortization and impairment		(60,675	)		(15,845	)		(326,453	)		(62,316	)		(40,586	)		(233,378	)		(3,623	)		—		(4,796	)		(747,672	)

Net carrying amount		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Development costs			Land use rights		Other assets			Total
At January 1, 2017
Cost		205,195			109,511			844,213			95,127			60,607			342,100			3,623			13,288		34,294			1,707,958
Accumulated amortization and impairment		(60,675	)		(15,845	)		(326,453	)		(62,316	)		(40,586	)		(233,378	)		(3,623	)		—		(4,796	)		(747,672	)

Net cost		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286

Net initial cost		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286
Additions		—			—			38,156			5,274			3,330			49,698			—			—		20,832			117,290
Capitalization of interest		—			—			26,015			—			—			—			—			—		—			26,015
Deconsolidation, net		(3,524	)		—			(17,354	)		—			(21	)		—			—			—		(2,767	)		(23,666	)
Transfers from assets under construction (Note 17)		—			—			(11,217	)		—			2,761			5,008			—			—		3,617			169
Derecognition - cost		—			—			(537	)		—			(1,572	)		—			—			—		(355	)		(2,464	)
Amortization		—			—			(24,609	)		(4,189	)		(8,091	)		(46,695	)		—			—		(2,973	)		(86,557	)
Impairment		(20,068	)		(29,541	)		—			—			—			—			—			—		—			(49,609	)
Translations adjustments		(4,124	)		975			13			369			1,196			—			—			—		177			(1,394	)

Net final cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070

At December 31, 2017
Cost		197,547			110,486			841,229			98,607			59,913			396,806			3,623			13,288		55,701			1,777,200
Accumulated amortization and impairment		(80,743	)		(45,386	)		(313,002	)		(64,342	)		(42,289	)		(280,073	)		(3,623	)		—		(7,672	)		(837,130	)

Net cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Development costs			Land use rights		Other assets			Total
At January 1, 2018
Cost		197,547			110,486			841,229			98,607			59,913			396,806			3,623			13,288		55,701			1,777,200
Accumulated amortization and impairment		(80,743	)		(45,386	)		(313,002	)		(64,342	)		(42,289	)		(280,073	)		(3,623	)		—		(7,672	)		(837,130	)

Net cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070

Net initial cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070
Additions		—			—			23,803			—			3,267			68,544			—			—		5,067			100,681
Capitalization of interest expenses		—			—			3,361			—			—			—			—			—		—			3,361
Desconsolidation, net		(20,086	)		(8,358	)		(22,758	)		(8,909	)		(10,153	)		—			—			—		(1,863	)		(72,127	)
Transfers from assets under construction (Note 17)		—			—			—			—			199			—			—			—		(199	)		—
Derecognition - cost		—			—			(16	)		—			(1,941	)		(4,126	)		—			—		—			(6,083	)
Amortization		—			—			(50,776	)		(7,996	)		(5,834	)		(41,930	)		—			—		(5,536	)		(112,072	)
Translations adjustments		(3,430	)		(4,301	)		199			(303	)		830			—			—			—		270			(6,735	)

Net final cost		93,288			52,441			482,040			17,057			3,992			139,221			—			13,288		45,768			847,095

At December 31, 2018
Cost		174,031			97,097			836,254			85,482			16,177			461,224			3,623			13,288		54,644			1,741,820
Accumulated amortization and impairment		(80,743	)		(44,656	)		(354,214	)		(68,425	)		(12,185	)		(322,003	)		(3,623	)		—		(8,876	)		(894,725	)

Net cost		93,288			52,441			482,040			17,057			3,992			139,221			—			13,288		45,768			847,095

Goodwill

Management reviews the results of its businesses on the basis of the type of economic activity carried on. At December 31, the goodwill of the cash-generating units (CGUs) is distributed as follows:


	2016		2017		2018
Engineering and construction		98,587		75,051		71,621
Electromechanical		20,737		20,737		20,737
Mining and construction services		13,366		13,366		—
IT equipment and services		5,102		930		930
Telecommunications services		6,728		6,720		—

		144,520		116,804		93,288

As a result of management’s annual impairment tests on goodwill, the recoverable amount of cash-generating units was determined on the basis of the greater their value in use and fair value less disposal costs. The value in use was determined on the basis of expected future cash flows generated by the evaluation of CGUs.

As a result of these assessments, an impairment was identified in 2016 and 2017 in two CGU’s, Vial y Vives-DSD, and Morelco S.A. and was accounted for as of December 31st, 2016 and 2017, respectively. The impairment loss was generated due to the decrease in the expected cash flows, as a result of the reduction of the contracts linked to the backlog. The amount of the impairment impacted the goodwill for S/20.1 million in 2017 (S/38.7 million in 2016). No impairment was identified during 2018.

The main assumptions used by the Group to determine fair value less disposal costs and value in use are as follows:


	Engineering and construction		Electro- mechanical		IT equipment and services		Telecommu- nication services
	%		%		%		%
2016
Gross margin		9.50% - 12.99%		11.10%		15.00% - 23.19%		11.75%
Terminal growth rate		3.00% - 4.00%		2.00%		2.00% - 3.00%		3.00%
Discount rate		9.66% - 12.72%		11.01%		21.74%		10.02%
2017
Gross margin		9.50%		8.00%		20.83%		4.26%
Terminal growth rate		3.00%		2.00%		2.90%		3.00%
Discount rate		11.18%		11.48%		10.17%		4.02%
2018
Gross margin		12.67%		7.63%		20.00%		—
Terminal growth rate		3.00%		2.00%		2.90%		—
Discount rate		12.55%		11.44%		15.39%		—

These assumptions have been used for the analysis of each CGUs for a period of 5 years.

Management determines budgeted gross margins based on past results and market development expectations. Average growth rates are consistent with those prevailing in the industry. The discount rates used are pre-tax or post-tax, as applicable, and reflect the specific risks associated with the CGUs evaluated.

Trademarks

This item mainly includes the brands acquired in the business combination processes with Vial y Vives S.A.C. (S/75.4 million) in August 2013, Morelco S.A.S. (S/33.33 million) in December 2014 and Adexus S.A. (S/9.1 million) in August 2016. Management determined that the brands from Vial y Vives, Morelco and Adexus have indefinite useful lives; consequently, annual impairment tests are performed on these intangible assets as explained in paragraph a) above.

As a result of these evaluations, as of December 31, 2017, and 2016, the Vial y Vives - DSD brand partially deteriorated, the amount of the impairment was S/29.5 million and S/15.6 million respectively. It was not necessary to evaluate the impairment of goodwill in Stracon GyM S.A. because in March 2018 the Company sold its interest (87.59%) for a total of US$76.8 million (equivalent to S/248.8 million), generating a profit of S/41.9 million.

The main assumptions used by the Group to determine fair value less cost of sales are as follows:


	Engineering and construction						IT Equipment Services
	Morelco			Vial yVives- DSD			Adexus
	%			%			%
2016
Average revenue growth rate		14.39	%		24.53	%		12.60	%
Terminal growth rate		3.00	%		4.00	%		3.00	%
Discount rate		11.85	%		9.87	%		16.05	%
2017
Average revenue growth rate		9.60	%		25.00	%		9.19	%
Terminal growth rate		3.00	%		4.00	%		3.00	%
Discount rate		11.18	%		14.80	%		16.63	%
2018
Average revenue growth rate		12.25	%		19.58	%		17.93	%
Terminal growth rate		3.00	%		3.00	%		2.90	%
Discount rate		12.55	%		14.00	%		12.40	%

Concessions

The intangibles of Norvial S.A. as of December 31, 2018, mainly comprise: i) the EPC Contract for S/70 million (S/78 million as of December 31, 2017), ii) the construction of the second section of the “Ancon-Huacho-Pativilca” highway and the cost of capitalized indebtedness at effective interest rates between 7.14% and 8.72% for S/19 million and S/3 million, respectively (S/331 million and S/26 million, respectively as of December 31, 2017 at interest rates between 7.14% and 8.72%), iii) road improvement for S/20 million (S/17 million as of December 31, 2017), iv) Implementation for road safety for S/4 million (S/4 million as of December 31, 2017), v) capitalization of the work of the second roadway for S/310 million (there was no movement as of December 31, 2017), (vi) disbursements for land adquisition for S/5 million (S/5 million as of December 31, 2017), (vii) Other intangible assets contracted for the delivery process of the S/5 million Concession (S/4 million as of December 31, 2017). During 2018 debt costs of S/3 million have been capitalized (S/26 million in 2017). See Note 2.20.

Cost of well’s development

Through one of its subsidiaries, GMP S.A., the Group operates and extracts oil from two fields (Lot I and Lot V) located in the province of Talara, in northern Peru. Both fields are operated under long-term service contracts in which the Group provides hydrocarbon extraction services to Perupetro.

On December 10, 2014, the Peruvian State granted the subsidiary GMP S.A. the right to exploit for 30 years the oil lots III and IV (owned by the Peruvian State - Perupetro) located in the Talara basin, Piura, of 230 and 330 wells, respectively. The total expected investment in both lots amounts to US$350 million; operations began in April 2015.

As part of the Group’s obligations under the service contracts, it is necessary to incur certain costs to prepare the wells located in Lots I, III, IV and V. These costs are capitalized as part of the intangible assets with a value of S/68 million during 2018 (S/99 million in 2017 and S/80 million in 2016), which includes the capitalization of the provision for dismantling wells for S/3 million (S/50 million during 2017).

The lots are amortized on the basis of the useful lives of the wells (determined as five years for lots I and V and units produced for lots III and IV), which is less than the total service contract period with Perupetro.

Amortization of intangible assets

Amortization of intangibles is broken down in the income statement as follows:


	2016		2017		2018
Cost of sales and services (Note 27)		59,682		67,381		98,318
Administrative expenses (Note 27)		4,890		3,002		4,856
(+) Amortization discontinued operations		18,171		16,174		8,898

		82,743		86,557		112,072