10 Intangible assets

The following useful lives have been determined for Other intangible assets:

The net book value of Other intangible assets includes non-recurring costs (consisting of design and development) on major aerospace contracts of £61 million (2006 – £50 million), computer software £17 million (2006 – £17 million), intellectual property rights arising from business combinations of £1 million (2006 – £3 million), brands/trademarks £3 million (2006 – £3 million), customer contracts and relationships £38 million (2006 (restated) – £31 million), proprietary technology and know-how £13 million (2006 – £7 million) and agreements not to compete £1 million (2006 – £nil). Intangible assets acquired in relation to production order backlog are included within customer contracts and relationships. No individual Other intangible asset is material to the Group.

Computer software under finance leases amounts to £2 million (2006 – £1 million).

All non-operating intangibles are recognised when they are controlled through contractual or other legal rights or are separable from the remainder of the business and other tangible assets and their fair value can be reliably measured. Details of the intangible assets considered and arising on the current year business combinations are set out in note 25 to these financial statements.

Impairment

An impairment test is a comparison of the carrying value of the assets of a business or cash generating unit (CGU) to their recoverable amount. Where the recoverable amount is less than the carrying value, an impairment results. During the year, all goodwill was tested for impairment, with no impairment charges resulting.

For the purposes of carrying out impairment tests, the Group’s total goodwill has been allocated to a number of CGUs and each of these CGUs has been separately assessed and tested. The allocation of goodwill by business segment is set out in note 2. The size of a CGU varies but is never larger than a primary or secondary reportable segment. In some cases, the CGU is an individual subsidiary or operation. The only amount of goodwill allocated to an individual CGU which is significant to the total Group goodwill is that attributable to a US Aerospace business of £67 million (2006 – £68 million).

All of the recoverable amounts were measured based on value in use except for current year acquisitions where market values have been used. Detailed forecasts for the next five years have been used in the majority of impairment tests except where a longer term more detailed forecast is available and appropriate. These forecasts are based on approved annual budgets and represent a best estimate of future performance.

A number of key assumptions have been made as a basis for the impairment tests. In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external sources of information and these are set out below. Where a reasonably possible change to an assumption would lead to an impairment, a sensitivity analysis has been provided which quantifies the amount of change required for an impairment to result.

Discount rates

A relative risk adjustment (or ‘beta’) has been applied to discount rates to reflect the risk inherent in specific CGUs. In determining the risk adjusted discount rate, management have applied an adjustment for risk of such companies relative to all other sectors on average, determined using an average of the betas of comparable listed companies.

Except for operations in India, where a rate of 16.0% has been factored into impairment models, the risk adjusted pre-tax discount range of rates set out below have been used for impairment testing. The range of rates reflects the mix of currencies within CGUs within the segments.

Driveline: 8.25%–13.0%

Powder Metallurgy: 9.75%–12.25%

OffHighway: 11.0%–12.25%

Aerospace: 9.75%–11.50%

Long term growth rates

To forecast beyond the five years covered by detailed forecasts, a long term average growth rate has been used. In each case, this is not greater than the published Oxford Economic Forecast average growth rate in gross domestic product for the next five year period in the territory or territories where the CGU is primarily based. This results in a range of real growth rates from 2.1% (2006 – 2.4%) for Japan to 7.7% (2006 – 7.9%) for India, with most other countries between 2.0% and 4.0% in both years. Nominal growth rates used in the calculations ranged from 2.7% to 13.4%.

Goodwill sensitivity analysis

In order to gauge sensitivity to likely and potential changes in discount rates and long term growth rates the impact of a 1% increase and/or decrease in each rate in isolation was reviewed. In no instance does such a change result in an impairment in segmental goodwill balances.

Driveline

In determining the recoverable amount of Driveline CGUs, it is necessary to make a series of assumptions to estimate future cash flows. The main assumptions include discount rates, long term growth rates, future sales prices and volumes (with reference to specific customer relationships and product lines), a realistic estimate of new business, the cost structure of each CGU and the ability to realise benefits from annual productivity improvements. Assumptions have also been made regarding input costs, including steel prices. It is not considered that a reasonably possible change in any of these assumptions would generate a different impairment test outcome to the one included in this annual report.

Aerospace

In addition to the discount rate and long term growth rate, the key assumptions used to determine the recoverable amount of Aerospace CGUs were specific volumes on certain US military and civil programmes, the achievement of forecast selling prices, the cost structure of each CGU and the ability to realise planned productivity improvements. It is not considered that a reasonably possible change in any of these assumptions would generate a different impairment test outcome to the one included in this annual report.

Other segments

For the remaining impairment tests, key assumptions related to sales volumes and prices, raw material input costs and achieving benefits from annual productivity improvements.