Goodwill and other intangible assets

The net book value of goodwill and other intangible assets as at 31 December 2012, 2011 and 2010 was as follows:


  Goodwill Number capacity Trade-marks Computer software Customer list Licences Other Total
Cost                
At 1 January 2010 6,105 578 371 35,866 1,557 1,502 868 46,847
Additions - 11 - 3,182 - 80 508 3,781
Acquisition through business combination 12,765 4 143 201 1,924 9,869 206 25,112
Disposals (35) (4) (57) (1,058) - (7) (95) (1,256)
Reclassification (1) (1) 133 (169) (27) (43) 108 -
At 31 December 2010 18,834 588 590 38,022 3,454 11,401 1,595 74,484
At 1 January 2011 18,834 588 590 38,022 3,454 11,401 1,595 74,484
Additions from internal developmet - - - 536 - - - 536
Other additions - 7 26 4,391 15 221 579 5,239
Acquisition through business combination 18,236 310 263 124 13,157 217 4,046 36,353
Disposals (84) (1) (24) (4,007) (4) (373) (229) (4,722)
Reclassification 49 - (114) 381 105 (83) (362) (24)
At 31 December 2011 37,035 904 741 39,447 16,727 11,383 5,629 111,866
At 1 January 2012 37,035 904 741 39,447 16,727 11,383 5,629 111,866
Additions from internal developmet - - - 921 - - - 921
Other additions - - - 4,924 - 216 1,524 6,664
Acquisition through business combination 1,130 - 2 1 64 - 9 1,206
Disposals (1) - (3) (5,144) - (197) (89) (5,434)
Reclassification - - (80) 11 - (160) 229 -
Foreign exchange (65) - - - (2) - - (67)
At 31 December 2012 38,099 904 660 40,160 16,789 11,242 7,302 115,156
Accumulated amortization and impairment losses
At 1 January 2010 (1,613) (149) (274) (10,850) (351) (707) (280) (14,224)
Amortization expense - (19) (36) (3,736) (148) (395) (244) (4,578)
Disposals 35 4 55 614 - 8 24 740
Impairment losses - (1) - (4,402) - - (1) (4,404)
Reclassification - - - 88 - - (88) -
At 31 December 2010 (1,578) (165) (255) (18,286) (499) (1,094) (588) (22,466)
At 1 January 2011 (1,578) (165) (255) (18,286) (499) (1,094) (588) (22,466)
Amortization expense - (28) (132) (4,752) (1,150) (1,158) (772) (7,992)
Disposals 84 - 2 3,634 - 209 223 4,152
Impairment losses (197) - - (11) - - (5) (213)
Reversal of impairment losses - - - 3,566 - - - 3,566
Reclassification - 1 (8) (59) 31 64 (5) 24
At 31 December 2011 (1,691) (192) (393) (15,908) (1,618) (1,979) (1,148) (22,929)
At 1 January 2012 (1,691) (192) (393) (15,908) (1,618) (1,979) (1,148) (22,929)
Amortization expense - (9) (107) (4,541) (1,260) (1,129) (1,317) (8,363)
Disposals - - - 3,987 - 176 22 4,185
Impairment losses - - - (274) - - (5) (279)
Reversal of impairment losses - - - 60 - - - 60
Reclassification - - 34 (15) 4 (107) 84 -
At 31 December 2012 (1,691) (201) (466) (16,691) (2,874) (3,039) (2,364) (27,326)
Net book value
At 31 December 2010 17,256 423 335 19,736 2,954 10,307 1,007 52,018
At 31 December 2011 35,344 712 348 23,539 15,109 9,404 4,482 88,937
At 31 December 2012  36,408  703  194  23,469  13,915  8,203  4,938 87,830

Interest amounting to 130, 172 and 12 was capitalized in intangible assets for the years ended 31 December 2012, 2011 and 2010, respectively.

Intangible assets with indefinite useful lives and Goodwill

The owned number capacity with a carrying amount of 694 (2011: 697, 2010: 402) are intangible assets with indefinite useful lives and are not amortized. These assets have no legal restrictions on the term of their use and the Group can derive economic benefits from their use indefinitely. These assets are tested for impairment annually or more frequently if there is an indication that the intangible assets may be impaired.

During 2012 the Group concluded contracts under the investment programme subject of which was research and development. Main area of research is development of software, hardware, clouds models, which may be used as a standard solution on promotion of the services provided by the Group to government and private customers.

The aggregate amount of research and development expenditure recognized as an expense is 0 (2011:71; 2010:0).

The Group, on an annual basis, performs testing for impairment of goodwill and intangible assets with indefinite lives.

At each reporting date the Group performs impairment testing of goodwill allocated to CGUs that were acquired upon business combinations. Principal approaches which were used to determine value in use of cash-generating units, to which goodwill has been allocated, are disclosed in Note 6.

Carrying amount of goodwill and intangible assets with indefinite useful lives are represented in the table below:


  31 December 2012 31 December 2011 31 December 2010
CGU Goodwill before impairment loss Intangible assets with indefinite useful lives before impairment loss Goodwill before impairment loss Intangible assets with indefinite useful lives before impairment loss Goodwill before impairment loss Intangible assets with indefinite useful lives before impairment loss
Natsionalnye telecommunikatsii 16,955 290 16,955 290 - -
Skylink 10,653 - 10,653 - 10,653 -
Volgograd GSM 1,280 20 1,280 20 - -
Nizchegorodskaya sotovaya sviaz 1,076 - 1,076 - 1,076 -
MRF Dalniy Vostok 1,068 - 973 - 973 -
Rostelecom International (former Teleset Networks Public Company Limited)  934 - 1,680 - 1,680 -
MRF Severo-Zapad 911   911   911  
MRF Volga 811 - 210 - 210 -
Globus Telecom 636 359 636 359 636 359
RTComm.RU 596 - 596 - 596 -
GNC Alfa 589 - - - - -
Severen telecom 432 - 432 - 432 -
MRF Sibir 183 - - - - -
Other 284 28 138 28 89 43
Total 36,408 697 35,540 697 17,256 402

As a result of impairment testing no loss was recognised in 2012 (2011:197; 2010:nil).

Discount rate and operating income before amortization and depreciation (OIBDA) margin are the key assumptions to which calculations of value in use of CGUs with goodwill and indefinite useful life intangible assets allocated to are the most sensitive. Management approach to gross margin projection is based on historical actual results and growth rate forecasts which correlates to industry growth rate.

The table below demonstrates the sensitivity analysis of impairment, the effect of a reasonably possible change in key assumptions on which determination of CGU recoverable amount is based in case such change resulted in impairment loss as at 31 December 2012:


CGU Increase in discount rate Impairment loss Increase in discount rate which resulted in equality of recoverable and carrying amount Decrease of OIBDA margin Impairment loss Decrease in  OIBDA margin which resulted of recoverable amount is equal to carrying amount
Rostelecom International (former Teleset Networks Public Company Limited) 0.50% (52) 0.36% 5% (368) 1.32%
Volgograd GSM 1.00% (125) 0.72% 5% (458) 2.17%
Nizchegorodskaya sotovaya sviaz 1.50% (321) 1.12% 5% (2,115) 1.67%
Globus Telecom 1.00% (66) 0.49% 5% (363) 0.70%
GNC Alfa 0.50% (25) 0.16% 5% (151) 0.36%

Impairment Testing of Other Intangible Assets

At each reporting date the Group performs impairment testing of intangible assets not yet available for use and intangible assets with indefinite useful lives. Principal approaches and assumptions which were used to determine value in use of cash-generating units, to which these intangible assets belong, are disclosed in Note 6.

2012 impairment testing

As at 31 December 2012 no impairment loss in respect of other intangible assets were recognised.

2011 impairment testing

As at 31 December 2010 impairment loss on billing system Amdocs was recognized due to the absence of intentions to implement and use it. However, in 2011 management approved the decision to implement customer relations management system (further – CRM) on Amdocs platform. According to the agreement with vendor of software billing system licenses were converted into CRM licenses. As a result, previously recognized loss in respect of licenses amounting to 3,419 was reversed in the statement of comprehensive income for 2011 and recognised in the line Depreciation, amortisation and impairment losses.

2010 impairment testing

As a result of the impairment testing performed as at 31 December 2010, the Group recognized impairment losses on intangible assets (including on Amdocs): Rostelecom (1,080), Volgatelecom (1,044), Southern Telecommunications Company (828), North-West Telecom (628), CenterTelecom (356), Sibirtelecom (348) and Far East Telecom (120).

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