The Group evaluates the possible existence of a loss of value each year that would oblige it to reduce the carrying amounts of its assets. As a result of the crisis caused by the spread of Covid-19, impairment analysis carried out by the Group in the financial year determined that losses be recognised for impairment losses.

 

11.1 Key assumptions used to calculate value in use

The value in use of each CGU is determined discounting its future cash flows. These are estimated based on the result for the year and the records of at least five previous years. Given the uncertainty stemming from the current economic environment, macroeconomic information from external information sources has been analysed and with Group Management’s business knowledge, different evolution and forecast possibilities have been made on the most likely basis, taking the effect of the pandemic into account.

The evolution of the key assumptions in the analysed hotels has taking the business knowledge of Group Management into account as well as the expected recovery of the sector after the Covid-19 pandemic. In this regard, the assumed projections are based on the Management’s budget for 2021, which assumes a dramatic fall in revenues compared to 2019 due to the negative effect that the Covid-19 pandemic has had on tourism, one of the most affected sectors. It is estimated that the loss of business in 2020 will be recovered in the next three years, beginning in the second half of 2021 once mobility restrictions are eased as vaccination progresses and therefore consumer confidence recovers. The Group’s strong positioning in the countries where it operates, the good locations of the portfolio and the high recognition of its brands are key factors in the assumed recovery period up to 2023 and 2024, when it is hoped to reach the figures of the period prior to the pandemic, which was the 2019 financial year.

There are a number of factors that are considered by the Group’s Management to make the projections, which are:

• Estimate of external sources specialising in the hotel sector, along with investment banks with reference to the recovery of the hotel sector.
• Estimate of GDP (Gross Domestic Product) growth issued by the International Monetary Fund (IMF) in its report published in October of each year for the next five years.
• Knowledge of the business/asset/local situation of the local Management of each Business Unit to which each CGU belongs.
• Historical results obtained by the CGUs.
• Investments in repositioning the CGUs.

These factors are reflected in the cash flows through the following working hypotheses used to obtain the projections:

• Income from accommodation is projected as the product of percentage occupation, and average rate per room (“ADR” Average Daily Rate: is the ratio of the total income from rooms in a specific period divided by the rooms sold in that specific period) and the total rooms available per year.
• The other revenues are projected based on the average of the relationship between the revenue from accommodation and those revenues.
• Staff costs are calculated based on the average staff costs with a growth in the inflation index (CPI).
• Direct expenses are directly associated with each of the revenues and are projected on the basis of an average ratio, while undistributed
expenses are projected based on the average ratio between these and direct expenses.
• For its part, tax is calculated from the tax rates applicable in each country.

The discount rates were calculated by a third party using the Weighted Average Cost of Capital (WACC) methodology: Weighted Average Cost of Capital (WACC), as follows:

WACC=Ke*E/(E+D) + Kd*(1-T)*D/(E+D)

Where:
Ke: Cost of Equity
Kd: Cost of Financial Debt
E: Own Funds
D: Financial Debt
T: Tax Rate

The Capital Asset Pricing Model (CAPM) is used to estimate the cost of equity (ke).

The main variables used by a third party to calculate the discount rate are as follows:

• Risk-free rate: is obtained from the standard average profitability of state bonds in each country including an adjustment for country risk and an inflation differential where appropriate.
• Market risk premium: defined as 6.5% (6.8% in 2019), based on market reports.
• Beta or systematic risk: Using a sample of listed companies whose businesses are comparable to our business, the sector’s risk differential is estimated in relation to the average risk on the global market. In addition, the adjusted average financial structure of the aforementioned sample of companies was considered (63% Own Funds, 37% Debt) to calculate the re-leveraged beta coefficient, as well as the relevant tax rate in each country.
• Debt cost, estimated as an average differential over the Euribor at 12 months over 10 years, plus an adjustment for inflation and country risk in countries with a currency other than the Euro.

Below are the pre-tax discount rates of the major countries:

The evolution of the key assumptions in hotels with indications of impairment at 31 December 2020 in the major countries in euros was as follows:

The after-tax discount rates used by the Group for these purposes range in Europe from 7.3% to 11.5% (5.5% and 8.2% in 2019) and in Latin America from 10.6% to 16.2% (9.4% and 14.6% in 2019) without taking into account Argentina, whose after-tax discount rate has been calculated taking into account its hyperinflationary economic situation and varies between 44.6% in 2021 and 35.6% in 2025, based on the estimate of inflation. In this regard, the cash flows resulting from the impairment tests were also calculated after tax. In addition, the book value to which the value-in-use is compared does not include any deferred tax liabilities which could be associated with the assets.

Using a post-tax discount rate and post-tax cash flows is consistent with paragraph 51 of IAS 36, which states that “estimated future cash flows will reflect assumptions that are consistent with the manner of determining the discount rate”. In addition, the result of the post-tax flows updated at a post-tax discount rate would obtain uniform results with respect to the impairment test if a pre-tax rate were used and, therefore, the impairment and reversion accounting records would be uniform.

 

11.2 Sensitivity analysis

Furthermore, the Group has carried out a sensitivity analysis for each of the CGUs, and for the groups of CGUs where goodwill is allotted.

For each scenario, each hypothesis has been considered individually, recording the impact on impairment for each of them. Scenario 1 is a negative one where the discount rate is raised 100 b.p. above the rate used in the test and a growth rate lower by 100 b.p., i.e. with minimum growth, and falls in occupancy and ADR of 1% which would lead to additional impairment to that registered in 2020.

In scenario 2, it is a positive scenario where the discount rate is sensitized 100 bp below the rate used in the test, a growth rate of 100 bp and with occupancy increases of 100 bp and an average ADR of 1%, which would lead to having registered a lower deterioration than that registered in 2020.

A sensitivity analysis of the results of the impairment analysis given variations in the following scenarios, including the impacts that the amendment of each scenario would have without affecting the rest, for the main goodwill, is set out below:

In addition, a sensitivity analysis of the results of the impairment analysis of the most significant CGUs that have associated property, plant and equipment, intangible assets and rights of use is set out below:

11.3 Impairment losses

If the recoverable amount of an asset is estimated to be lower than its carrying amount, the latter is reduced to the recoverable amount by recognising the corresponding reduction through the consolidated comprehensive profit and loss statement.

If an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the limit of the original value at which such asset was recognised before the loss of value was recognised.

The Group recognised an impairment loss of 76,258 thousand euros (4.889 thousand euros in 2019), as it is summarised below:

  • Property, plant and equipment: impairment amounting to 61,250 thousand euros was recognised in 2020 for certain tangible assets; this impairment mainly corresponds to real estate and is a result of the worsening of future expectations of cash flows for different reasons,
    including the opening of competitors’ hotels or the loss of an important customer and the worsening of the outlook due to the Covid-19 situation. (4,289 thousand euros in 2019). On the other hand, there was a reversal of 4,523 thousand euros resulting from the improvement in expectations, recorded under the heading “Gains/(Net losses) from asset impairment” on the consolidated comprehensive income statement for 2020 (9,288 thousand euros in 2019).
  • Right of use: it has been registered an impairment of the Right of use amounting to 4,333 thousand euros (reversal of 2,175 thousand euros 2020) (Note 8).
  • Goodwill: it has been registered an impairment amounting to 14,098 of the goodwill of NH Hoteles Deutschland, GmbH and NH Hoteles Austria, GmbH (2,721 thousand euros in 2019). This impairment is derived from the worsening due to openings of competitors and deterioration of the business prospects due to Covid-19 situation.
  • Other intangible assets: it has been registered under the heading “Gains/(Net losses) from asset impairment” on the consolidated comprehensive income statement for 2020, impairment losses amounting to 1,497 thousand euros and reversal of impairment amounting to 337 thousand euros (436 thousand euros in 2019).
  • Real Estate investments: it has been registered a reversal of impairment of real estate investments amounting to 60 thousand euros.

The breakdown of impairment to tangible assets by country is as follows (in thousands of euros):

The recoverable amount of the CGUs subject to impairment or reversal (not the entire portfolio of the Group) is as follows: