11. Goodwill

Goodwill results from the Company’s acquisitions of Bols, Polmos Bialystok, Parliament, Russian Alcohol, Whitehall and Bols Hungary.


Goodwill, as at December 31, 2009	$	1,484,072
Foreign exchange impact		(31,086	)

Goodwill, as at December 31, 2010 (restated)	$	1,452,986

Impairment charges during the period		(930,127	)
Acquisitions during the period		270,631
Foreign exchange impact		(123,196	)

Goodwill, as at December 31, 2011 (restated)	$	670,294

Accumulated impairment related to goodwill as of December 31, 2011 amounts to $930.1 million. No impairment charges on goodwill were recognized in prior years.

Impairment test on goodwill performed as of September 30, 2011

During the third quarter of 2011, the Company was closely monitoring events or changes in circumstances that might impact the assumptions used in the four year business model and identified certain impairment indicators that would trigger the need for an impairment test, including sustained difference in enterprise market capitalization and book value, performance of reporting units below expectations, changing of sales channel and product mix, declining vodka markets in Poland and Russia and market disruptions from relicensing in Russia. The identified impairment indicators related to the following reporting units: Poland Core Business Unit and Russia Core Business Unit. Based on these events, the Company determined that it was more likely than not that the fair value of our reporting units was less than their respective carrying amounts and accordingly, the Company performed a goodwill impairment test as of September 30, 2011.

As of September 30, 2011, in order to support the value of goodwill, the Company calculated the fair value of the reporting units using a discounted cash flow approach based on the following assumptions:

•

Risk free rates for Poland and Russia used for calculation of discount rate were based upon yield of long term bonds denominated in US dollars issued by Polish and Russian governments as of September 30, 2011. When estimating discount rates to be used for the calculation we have taken into account current market conditions in Poland and Russia separately. As a result of our assumptions and calculations, the following discount rates of 9.09% and 11.03% for Poland and Russia, respectively, have been determined. These inputs were determined utilizing primarily Level 1 inputs.

•

The Company estimated the growth rates in projecting cash flows for each of our reporting group separately, based on a detailed four year plan related to each reporting unit. These inputs were determined utilizing primarily Level 2 inputs.

•

The Company estimated the terminal value growth rates of 2.5% for Polish unit and 3.5% for Russian reporting unit. These inputs were determined utilizing primarily Level 2 inputs.

Based on goodwill impairment test as of September 30, 2011, it was determined that the carrying value of our Core Business unit in Russia and Poland exceeded its fair value. The primary reasons for this was the continuous decline in spirits market in Poland and Russia, the cannibalization of premium brands by mainstream brands resulting in lower margins in Poland, as well as, relicensing process in Russia for wholesalers in the second and third quarter of current year that resulted in decrease in number of active wholesalers in the market. As a result, the Company completed step two of the impairment test, and compared the implied fair value of the reporting unit’s goodwill to the carrying amount of the reporting unit’s goodwill. As the carrying amount of the reporting unit’s goodwill for Core Business unit in Russia and Poland was greater than the implied fair value of a the underlying reporting units’ goodwill values, an impairment loss was recognized for the excess amounting to $546.8 million using the exchange rates as of September 30, 2011.

Impairment test on goodwill performed as of December 31, 2011

At December 31, 2011, the Company performed its annual impairment test of goodwill. The Company tested fair value of the following reporting units: Poland Core Business Unit, Russia Core Business Unit, Poland Fine Wines Unit, Russia Import Unit and Hungary Unit. In order to support its value, the Company calculated the fair value of the reporting units using a discounted cash flow approach based on the following assumptions:

•

Risk free rates for Poland, Russia and Hungary used for calculation of discount rate were based on the yield of long term bonds denominated in US dollars issued by Polish, Russian and Hungarian governments as of December 31, 2011. When estimating discount rates to be used for the calculation we have taken into account current market conditions in Poland, Russia and Hungary separately. As a result of our assumptions and calculations, the following discount rates of 9.54%, 11.03% and 12.27% for Poland, Russia and Hungary, respectively have been determined. These inputs were determined utilizing primarily Level 1 inputs.

•

The Company estimated the growth rates in projecting cash flows for each of our reporting group separately, based on a detailed five year plan related to each reporting unit. These inputs were determined utilizing primarily Level 2 inputs.

•

The Company estimated the terminal value growth rates of 2.5% for Polish reporting units, 3.25% for Russian reporting units and 2.7% for its Hungarian unit. These inputs were determined utilizing primarily Level 2 inputs.

Based on goodwill impairment test as of December 31, 2011, it was determined that the carrying value of our Core Business unit in Russia exceeded their fair value. The primary reasons for this was the continuous decline in spirits market, changes in consumer behavior and increasing discount pressures from customers in Russia. As a result, the Company completed step two of the impairment test, and compared the implied fair value of the reporting unit’s goodwill to the carrying amount of the reporting unit’s goodwill. As the carrying amount of the reporting unit’s goodwill for Core Business unit in Russia was greater than the implied fair value of a the underlying reporting units’ goodwill values, an impairment loss was recognized for the excess amounting to $383.3 million.

As a result of tests performed during 2011 described above total impairment charge recognized for the year ended December 31, 2011 amounts to $930.1 million.