11. INTANGIBLE ASSETS

The breakdown and changes for intangible assets are shown as follows:

The changes in 2010 were as follows:

In regard to “goodwill”:

• the increases in 2011 are related to acquisition of the companies OJSC Kirov Tyre Plant and LLC Amtel-Russian Tyres, with head office in Russia: please refer to the section “Business combinations” for more information;
• impairment refers to the goodwill allocated to the cash generating unit Eco Technology, and to the operating segment “Other activities,” recognised in the income statement at “Amortisation, depreciation and impairment,” and commented on below.

The allocation of goodwill by operating segment, the cash generating units (CGU) to which it was allocated for the impairment testing and the method used to assess the recoverable amount are shown in the following table:

The goodwill deriving from the acquisition in Russia, euro 85,736 thousand (at the exchange rates in effect on December 31, 2011), has not been allocated to any CGU for the time being, insofar as its value at December 31, 2011 is provisional. It will be defined in 2012, as indicated in the preceding section “Business combinations.”

Goodwill was tested for impairment at December 31, 2011, relying on independent appraisals. 
This involved estimating the recoverable amount of the CGU and comparing it with the net carrying amount of the relevant assets, including goodwill.

Value in use corresponds to the discounted value of the future cash flows that are expected to be associated with the CGU, using a rate that reflects the specific risks of the single CGU at the measurement date.

In applying this method management uses numerous assumptions, including estimates of future sales increases, operating cash flows, the rate of growth of terminal values and the weighted average cost of capital (discount rate).

In regard to the Consumer and Industrial CGU, the forecast cash flows refer to the “2012-2014 Business Plan” announced to the financial community on November 9, 2011, and cover a two-year period (2012 and 2013). It was decided to use a two-year time horizon considering the divergence in the 2014 financial year between the value of certain variables forecast by management in the Business Plan and consensus data accepted by leading financial analysts.

In regard to the Eco Technology CGU, the cash flows refer to the “2012-2014 Strategic Plan of the Environmental Products and Services Business Unit” approved by the Pirelli Eco Technology Board of Directors on November 7, 2011, and use a time horizon of three years (2012, 2013 and 2014).

The calculation also factored in the hypothetical flow deriving from the disposal of CGU at the end of the explicit period (assumed to be the discounted value of the perpetual return of the flow generated in the last year of the projection).

The discount rates, defined as the average cost of capital net of taxes, applied to prospective cash flows, and the used growth factors are shown in the following table:

On the basis of these tests, no impairment loss was revealed in regard to the Consumer and Industrial CGU, while the goodwill allocated to the Eco Technology CGU was impaired entirely (euro 4,860 thousand).

A sensitivity analysis of the results for the Consumer and Industrial CGU was also carried out.
In all cases the values in use remain higher than the carrying amounts even assuming a change in key parameters such as:

• a change in discount rates by 50 basis points;
• a change in the growth rate by 50 basis points.

The increase in the item “software application”, amounting to euro 6,811 thousand, refers principally to the Digital Innovation system, for which two macro-initiatives were undertaken in the knowledge management area: the Group intranet that gives access not only to corporate information but also useful work tools (e.g. applications, KPI, alerts, etc.) and the enterprise search engine.