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Intangible Assets

12 Months Ended

Dec. 31, 2019

17	INTANGIBLE ASSETS

The movement in intangible assets and the related accumulated amortization as of December 31, 2017, 2018 and 2019 is as follows:


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Land use rights			Other assets			Total
At January 1, 2017
Cost		205,195			109,511			844,213			95,127			60,607			342,100			13,288			37,917			1,707,958
Accumulated amortization and impairment		(60,675	)		(15,845	)		(326,453	)		(62,316	)		(40,586	)		(233,378	)		—			(8,419	)		(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		—			—			(11,217	)		—			2,761			5,008			—			3,617			169
Derecognition - net		—			—			(537	)		—			(1,572	)		—			—			(355	)		(2,464	)
Amortization		—			—			(24,609	)		(4,189	)		(8,091	)		(46,695	)		—			(2,973	)		(86,557	)
Impairment loss		(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			13,288			59,324			1,777,200
Accumulated amortization and impairment		(80,743	)		(45,386	)		(313,002	)		(64,342	)		(42,289	)		(280,073	)		—			(11,295	)		(837,130	)

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

At January 1, 2018
Cost		197,547			110,486			841,229			98,607			59,913			396,806			13,288			59,324			1,777,200
Accumulated amortization and impairment		(80,743	)		(45,386	)		(313,002	)		(64,342	)		(42,289	)		(280,073	)		—			(11,295	)		(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		—			—			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		—			—			—			—			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			13,288			58,267			1,741,820
Accumulated amortization and impairment		(80,743	)		(44,656	)		(354,214	)		(68,425	)		(12,185	)		(322,003	)		—			(12,499	)		(894,725	)

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

At January 1, 2019
Cost		174,031			97,097			836,254			85,482			16,177			461,224			13,288			58,267			1,741,820
Accumulated amortization and impairment		(80,743	)		(44,656	)		(354,214	)		(68,425	)		(12,185	)		(322,003	)		—			(12,499	)		(894,725	)

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

Net initial cost		93,288			52,441			482,040			17,057			3,992			139,221			13,288			45,768			847,095
Additions		—			—			26,645			—			3,745			102,022			—			5,212			137,624
Capitalization of interest expenses		—			—			2,725			—			—			—			—			802			3,527
Transfers from assets under construction		—			—			—			—			672			—			—			(672	)		—
Derecognition - net		(930	)		—			—			—			(2,015	)		—			—			(4,106	)		(7,051	)
Amortization		—			—			(49,049	)		(3,682	)		(5,308	)		(43,552	)		—			(3,687	)		(105,278	)
Impairment loss		(33,089	)		—			(3,213	)		—			—			—			(2,468	)		—			(38,770	)
Impairment reversal		—			20,676			—			—			—			—			—			—			20,676
Translations adjustments		(1,902	)		(2,471	)		—			(114	)		(21	)		—			—			—			(4,508	)
Reclassifications		—			49			(15,198	)		(12,760	)		19,410			(3,717	)		—			12,216			—

Net final cost		57,367			70,695			443,950			501			20,475			193,974			10,820			55,533			853,315

At December 31, 2019
Cost		93,887			73,836			710,290			72,810			48,073			558,530			13,288			113,057			1,683,771
Accumulated amortization and impairment		(36,520	)		(3,141	)		(266,340	)		(72,309	)		(27,598	)		(364,556	)		(2,468	)		(57,524	)		(830,456	)

Net cost		57,367			70,695			443,950			501			20,475			193,974			10,820			55,533			853,315

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:


	2017		2018		2019
Engineering and construction		75,051		71,621		36,632
Electromechanical		20,737		20,737		20,735
Mining and construction services		13,366		—		—
IT equipment and services		930		930		—
Telecommunications services		6,720		—		—

		116,804		93,288		57,367

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 evaluations in 2019, an impairment was identified in Morelco S.A.S. for S/33 million and Adexus S.A. for S/0.9 million. Through the subsidiary GyM S.A., the loss due to deterioration in Morelco was generated by the decrease in expected flows as a result of the reduction in the contracting of new projects during the year. Additionally, the Company impaired the value of goodwill in Adexus, because the subsidiary submitted a request for bankruptcy reorganization before the courts of justice of Chile, under the law 20720 of that country (Note 36 B).

In 2018, no provision for impairment was recorded. Additionally, 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. In 2017, an impairment was identified in two CGU’s, Vial y Vives-DSD, and Morelco SA

and was accounted for as of December 31st, 2017. 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 impairment impacted the goodwill for S/

20.1 million in 2017

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
	%			%
2017
Gross margin		9.50	%		8.00	%
Terminal growth rate		3.00	%		2.00	%
Discount rate		11.18	%		11.48	%
2018
Gross margin		12.67	%		7.63	%
Terminal growth rate		3.00	%		2.00	%
Discount rate		12.55	%		11.44	%
2019
Gross margin		12.43	%		8.86	%
Terminal growth rate		3.00	%		2.00	%
Discount rate		11.83	%		11.40	%

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

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

trademark

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, 2019, the Vial y Vives - DSD the

trademark

impairment was reversed for S/20.7 million (equivalent to CLP4,782 million). Management considered that the market value of the

trademark

has increased due to the increase of projects in execution and projects and award process.

In 2018, no provision for impairment was recorded.

As of December 31, 2017, the Vial y Vives - DSD

trademark

partially deteriorated, the amount of the impairment was S/29.5 million.

Additionally, in 2019, the Company impaired the value of the Adexus

trademark

, because the subsidiary submitted a request for bankruptcy reorganization before the courts of justice of Chile, under the law 20,720 of that country (Note 36 B).

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


	Engineering and construction
	Morelco			Vial y Vives- DSD
	%			%
2017
Average revenue growth rate		9.60	%		25.00	%
Terminal growth rate		3.00	%		4.00	%
Discount rate		11.18	%		14.80	%
2018
Average revenue growth rate		12.25	%		19.58	%
Terminal growth rate		3.00	%		3.00	%
Discount rate		12.55	%		14.00	%
2019
Average revenue growth rate		5.70	%		19.58	%
Terminal growth rate		3.00	%		2.00	%
Discount rate		11.83	%		14.12	%

Concessions

As of December 31, mainly include intangibles of Norvial S.A.:


	2018		2019
EPC Contract		70,133		62,319
Construction of the second tranch of the “Ancon- Huacho-Pativilca” highway		12,463		4,809
Cost of capitalized indebtedness at effective interest rates between 7.14% and 8.72%		9,836		950
Road improvement		15,558		14,449
Implementation for road safety		6,283		8,152
Work capitalization of second roadway		310,417		314,614
Disbursements for land adquisition		4,757		4,233
Other intangible assets contracted for the delivery process		6,775		7,477

Total Norvial S.A.		436,222		417,003
Other concessions		45,818		26,947

		482,040		443,950

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. The expiration date of these contracts are December 2021 and October 2023 for Lot 1 and Lot V, respectively.

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. The investment committed is estimated at US$400 million and corresponds to the drilling of 230 wells in Lot III and 330 wells in Lot IV. The drilling began in April 2015 in both lots.

As part of the Group’s obligations under the infrastructure, 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/108 million during 2019 (S/68 million in 2018 and S/99 million in 2017), which includes the capitalization of the provision for dismantling wells and

facilities

in Lots I, III, IV and V, for S/36 million (S/3 million during 2018).

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 consolidated income statement as follows:


	2017		2018		2019
Cost of sales and services (Note 26)		67,381		98,318		99,589
Administrative expenses (Note 26)		3,002		4,856		5,689
(+) Amortization discontinued operations		16,174		8,898		—

		86,557		112,072		105,278