18. Goodwill
| 2017 | 2016 | |||||||
| £m | £m | |||||||
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Cost at 1 January |
5,965 | 5,162 | ||||||
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Exchange adjustments |
(228 | ) | 814 | |||||
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Additions through business combinations (Note 38) |
— | 7 | ||||||
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Transfer to assets held for sale |
(3 | ) | (18 | ) | ||||
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Cost at 31 December |
5,734 | 5,965 | ||||||
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Net book value at 1 January |
5,965 | 5,162 | ||||||
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Net book value at 31 December |
5,734 | 5,965 | ||||||
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Goodwill is allocated to the Group’s segments as follows: |
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| 2017 | 2016 | |||||||
| £m | £m | |||||||
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Pharmaceuticals |
3,172 | 3,288 | ||||||
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Vaccines |
1,302 | 1,353 | ||||||
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Consumer Healthcare |
1,260 | 1,324 | ||||||
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Net book value at 31 December |
5,734 | 5,965 | ||||||
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The recoverable amounts of the cash generating units are assessed using a fair value less costs of disposal model. Fair value less costs of disposal is calculated using a discounted cash flow approach, with a post-tax discount rate applied to the projected risk-adjusted post-tax cash flows and terminal value.
The discount rate used is based on the Group WACC of 7%, as most cash generating units have integrated operations across large parts of the Group. The discount rate is adjusted where appropriate for specific country or currency risks. The valuation methodology uses significant inputs which are not based on observable market data, therefore this valuation technique is classified as level 3 in the fair value hierarchy.
Details relating to the discounted cash flow models used in the impairment tests of the Pharmaceuticals, Vaccines and Consumer Healthcare cash generating units are as follows:
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| Valuation basis | Fair value less costs of disposal | |||||||||
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| Key assumptions | Sales growth rates | |||||||||
| Profit margins | ||||||||||
| Terminal growth rate | ||||||||||
| Discount rate | ||||||||||
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Taxation rate
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| Determination of assumptions | Growth rates are internal forecasts based on both internal and external market information. | |||||||||
| Margins reflect past experience, adjusted for expected changes. | ||||||||||
| Terminal growth rates based on management’s estimate of future long-term average growth rates. | ||||||||||
| Discount rates based on Group WACC, adjusted where appropriate. | ||||||||||
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Taxation rates based on appropriate rates for each region.
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| Period of specific projected cash flows | Five years | |||||||||
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| Terminal growth rate and discount rate | Terminal growth rate | Discount rate | ||||||||
| Pharmaceuticals | 1% p.a. | 7% | ||||||||
| Vaccines | 2% p.a. | 7% | ||||||||
| Consumer Healthcare | 2% p.a. | 7% | ||||||||
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The terminal growth rates do not exceed the long-term projected growth rates for the relevant markets, reflect the impact of future generic competition and take account of new product launches.
In each case the valuations indicated sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an impairment of the related goodwill. Goodwill is monitored at the segmental level.
The Pharmaceuticals cash generating unit comprises a collection of smaller cash generating units including assets with indefinite lives with a carrying value of £228 million (2016 – £211 million). The Consumer Healthcare cash generating unit also comprises a collection of smaller cash generating units including brands with indefinite lives with a carrying value of £8.51 billion (2016 – £9.03 billion).
Details of indefinite life brands are given in Note 19, ‘Other intangible assets’.