Financial Statements

Notes to the Consolidated Financial Statementsfor the year to 31 December 2008

13. Impairment

The Group is required to test goodwill for impairment on an annual basis or sooner when there are indicators that it might be impaired, and to test other intangible assets for impairment if there are indications that the assets might be impaired. The significant downturn in the UK housing market in early 2008 as well as the ongoing deterioration in the US market led to the Group performing a full impairment test on intangible assets at the half year reporting date. As a result, the Group fully impaired all remaining goodwill, brands and software development costs. The impairment losses recognised within operating expenses in the Group's income statement were as follows:

Business Segment: Goodwill
£m
Brands
£m
Software
development
costs
£m
2008
Total
£m
Goodwill
£m
Brands
£m
Software development costs
£m
2007
Total
£m
Housing United Kingdom 694.3 103.9 12.4 810.6 10.0 10.0
Housing North America 5.5 5.5 20.0 20.0
699.8 103.9 12.4 816.1 30.0 30.0

Housing United Kingdom

In the first half of 2008 it became apparent that the weakness seen in the US housing market in 2007 had extended to the UK housing market as mortgage availability reduced sharply and consumer confidence was eroded by both falling house prices and wider economic uncertainty. The effect of this on the UK business segment was seen in yearon- year declines in average selling prices and the number of completions (on a pro forma basis) and at the half year the UK business took a significant write down in the value of its inventory to reflect its revised estimate of the net realisable value of its land and work in progress. As a result, the Group performed a full impairment test on its other intangible assets and goodwill at the half year. The impairment test showed that the discounted cash flows forecast to be generated by the UK business segment were lower than the carrying value of the segment assets by an amount greater than the aggregate value of the goodwill, brands and capitalised software development costs associated with the segment and therefore, in accordance with IAS 36 Impairment of Assets, the Group fully impaired all remaining goodwill of £694.3m, brands of £103.9m and other intangible assets of £12.4m.

Housing North America

The US housing market experienced decline in 2007 and despite some initial stabilisation in early 2008 market conditions continued to decline across the year. In particular certain US markets which had remained resilient to the downturn in 2007 were affected in 2008, including the market to which the 2007 goodwill balance of £5.5m related. As a result the Group has now fully impaired the remaining goodwill of £5.5m associated with its North American Housing segment.

Key Assumptions

For the purpose of impairment testing of goodwill and other intangible assets, the Group's cash-generating units were determined at the level of business segment. The impairment tests were performed by comparing the carrying value of each cash-generating unit with its recoverable value, determined on the basis of the cash-generating unit's value in use. The value in use was calculated as the present value of the future cash flows expected to be derived over the next 20 years from the cash-generating unit related to the goodwill or intangible asset, using the latest management-approved business plan as the source of the cash flows for the first three years, and a pre-tax discount rate of 12% (2007:12%) which was considered to be the Group's view of an appropriate risk adjusted pre-tax discount rate for the UK housing market. The other key assumptions used in the value in use calculations for both business segments were as follows:

Initial three-year forecast period Decline in completions from 2007 pro forma*, based on industry forecasts for the UK and US housing markets
Average selling prices lower than 2008 average prices in the six months to 30 June 2008 based on industry forecasts for the UK and US housing markets
Gross margin consistent with experience to 30 June 2008, based on the Group’s past experience of build and infrastructure costs relative to selling prices
No account taken of expected but not yet committed operating cost savings
Years four and five Growth in annual completions, based on internal expectations of recovery in the UK and US housing markets by reference to industry forecasts by year five to levels consistent with the pro forma Group in 2007
Gross margin growth rate of 0%
Forecast period beyond year five Long-term growth rate of 0%

* Pro forma results reflect the aggregated total of completions or other relevant data points for the combined legacy businesses of Taylor Woodrow plc and George Wimpey Plc as if the merger were effected on 1 January 2007.

As noted above, the 2008 tests were performed as at 30 June 2008 for the purposes of the Group’s half year reporting. The UK housing market experienced significant and rapid decline in the second half of the year such that certain of the assumptions used would have been more conservative if the tests had been performed at the year-end date; in particular, the decline in average selling prices in the initial three-year forecast period would have been more acute than the decline assumed in the half year impairment test. However, as the half year test resulted in all goodwill and other intangible assets being fully impaired, this would not have had any impact on the level of impairment loss recorded by the Group.

Under IAS 36, an impairment of goodwill may not be reversed. Should the decline experienced in the UK market reverse, the brand and software development cost impairments may reverse in part or in whole, provided that by the time of the reversal these assets would not already have been fully amortised through the continued charging of systematic amortisation over their useful lives.