Note 10 - Intangible Assets

12 Months Ended

Dec. 31, 2019

Statement Line Items [Line Items]

Disclosure of intangible assets [text block]

NOTE 10. INTANGIBLE ASSETS

			Customer						Other intangible
[US$ thousands]	Goodwill		relationships		Technology		Trademarks		assets			Total
Cost
Cost as of January 1, 2018		421,578		40,700		14,545		70,600		2,020			549,443
Additions (1)		-		-		4,132		-		27			4,159
Disposals		-		-		-		-		-			-
Exchange differences		-		-		-		-		-			-
As of December 31, 2018		421,578		40,700		18,677		70,600		2,047			553,602
Additions (1)		-		-		3,545		-		-			3,545
Disposals		-		-		-		-		-			-
Exchange differences		-		-		-		-		-			-
As of December 31, 2019		421,578		40,700		22,222		70,600		2,047			557,147
Amortization and impairment
As of January 1, 2018		-		3,477		4,028		-		1,741			9,246
Amortization for the year		-		2,980		4,094		-		261			7,335
Disposals		-		-				-		-			-
Exchange differences		-		-				-		-			-
As of December 31, 2018		-		6,457		8,122		-		2,002			16,581
Amortization for the year		-		2,980		5,203		-		2			8,185
Disposals		-		-		-		-		-			-
Exchange differences		-		-		-		-		(4	)		(4	)
As of December 31, 2019		-		9,437		13,325		-		2,000			24,762
Net book value as of December 31, 2018		421,578		34,243		10,555		70,600		45			537,022
Net book value as of December 31, 2019		421,578		31,263		8,897		70,600		47			532,385

	Goodwill	Customer relationships	Technology	Trademarks	Other intangible assets
Useful life	Indefinite	Up to 15 year	Up to 5 year	Indefinite	Up to 5 years
Amortization method		Straight-line	Straight-line		Straight-line

(

1

)

Represents capitalized development expenditure net of grants received from the Norwegian government.

Goodwill and our brand of Opera (the trademark) have indefinite useful lives and are tested for impairment at least annually. Both assets were initially recognized in

November 2016

through the acquisition of Opera Norway AS with subsidiaries, consisting of

one

segment – “the Consumer business”. Due to growth and expansion into new businesses in

2019,

including microlending, management organized the Group into

four

operating segments effective from

2019:

Browser and News, Fintech, Retail and Other. The goodwill and the trademark that previously was allocated to the Consumer business CGU was reallocated to the Browser and News CGU.      

The Group performed its annual impairment test of Browser & News CGU as of

December 2019

as required by IFRS.      

The carrying amount of the Browser & News CGU as of

December 31, 2019

was

US$577,376

thousand (

December 31, 2018:

US$580,705

thousand). In addition to goodwill and trademark it included customer relationships, trade and other receivables, trade and other payables and other assets and liabilities allocated to Browser & News CGU.

For carrying out the annual impairment testing, a discounted cash flow model is used to determine the value in use for the cash generating unit with goodwill and intangible assets with indefinite lives. The projected cash flows are based on the most up-to-date forecast that have been approved by management and do

not

include cash flows arising from future enhancements. The approved forecast is for

2020

only as management does

not

approve forecasts for a longer period. Because the length of the projection period for the cash flow forecast where a CGU has goodwill or intangible assets with indefinite lives is into perpetuity, we have identified a “steady state” set of assumptions for the cash flows based an approach where we estimate cash flows for the years

2021

to

2023

and then using the estimated cash flows in

2023

as the basis for the terminal value. This

two

-stage approach is aimed to take cash flows to a level at which they can be regarded as reflecting maintainable earnings and to the period in a mid-point of the cycle – i.e.,

not

at peak or trough of the cycle. Beyond

2023,

the cash flows are extrapolated using constant nominal growth rates.

The value-in-use calculation demonstrates that the value in use exceed the carrying amount of the CGU, i.e. it was

not

impaired.

Key assumptions

Key assumptions used in the calculation of value in use are the nominal cash flows in the forecast period, including revenue growth rate, discount rate, and estimated long-term growth.

Cash flows

Cash inflows in the Browser & News CGU are expected to grow over the projected period reaching its long-term stable level. The cash inflows are forecasted for each product and country where we have sufficient and reliable data on which to base the projections. Our PC browser revenue is expected to grow steadily, reflecting an expectation that we will continue to strengthen our position in western markets. This will bring users with strong monetization potential. Our mobile revenues are expected to increase faster, including in developing markets by continuous product development and the undertaking of cost-effective and efficient marketing and distribution initiatives.

Forecasted cash outflows are partly based on actual costs in

2019

and a bottom-up assessment for the relevant operating unit. Operating expenditures are expected to grow, primarily due to user acquisition initiatives by engaging more publishers and monetization partners, which is expected to increase our revenue, but also our cost of revenue as we pay a share of the revenues generated to these parties. The estimated increase in users will also lead to an uplift in hosting costs that are variable by its nature, like content delivery networks, bandwidth and cloud services.

Discount rate

The discount rate represents the current market assessment of the risk specific to the Browser & News CGU. The discount rate is based on the after-tax Weighted Average Cost of Capital (WACC) derived from the Capital Asset Pricing Model (CAPM) methodology and incremental borrowing rate, assuming cash flows in U.S. Dollars. The WACC calculation is based on a risk-free rate of

1.9%

(

2018:

3.0%

), in

2019

based on the

10

-year US Treasury Rate, and a market risk premium of

5.2%

(

5.68%

in

2018

). The estimated beta for equity was

1.4

(

2018:

1.20

). The equity to total capital ratio was

100%

(

2018:

97%

). This resulted in a post-tax WACC of

13.1%

(

2018:

10.6%

).

Long-term growth

In estimating the long-term growth in the terminal value, we estimated long-term GDP growth in the relevant regions. We assumed

no

growth in labor force as well as

no

improvement in labor productivity, which results in

zero

real GDP growth. Moreover, for estimating long-term inflation we used IMF’s inflation estimates for

2024,

broken down across regions as the basis. Based on this we estimated a long-term nominal growth rate

3%

for the Browser & News CGU (

2018:

2.5%

).

Sensitivity

We have simulated a variety of sensitivities to the key assumptions, including revenue growth rate, operating expenditure (as % of revenue), capital expenditure necessary for maintenance, long-term growth and the WACC. Since Opera is in a high-growth period, we consider changes of +/-

3

percentage points for the

three

former metrics and narrower +/-

1

percentage point for the long-term growth and WACC to be reasonable possible changes.

No

reasonable possible change in the key assumptions would result in the CGU being impaired as of

December 31, 2019.

The following thresholds would trigger an impairment loss:

● Decrease in annual revenue growth in the projected period of 3.8  percentage points.

● Increase in operating expenditure as percent of revenue by more than 12.3  percentage points.

● Increase of WACC by more than 3.1  percentage points.

No

economically reasonable changes to capital maintenance expenditure and the long-term growth rate would trigger the CGU to be impaired. For instance, there is

no

positive value of long-term growth that would result in impairment.