Notes for P&L

Note 14 Intangible assets

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Accounting policy

Intangible assets are recognized at cost after deduction of accumulated amortization and potential impairment.

Research and development

Development expenditure, aimed at achieving new or improved products or processes, is recognized as an asset in the statement of financial position, if the product or process is technically and commercially viable, and the company has sufficient resources to complete the development process and subsequently use or sell the intangible asset.

The carrying amount includes directly attributable expenses, such as materials and services used and consumed in connection with processing and registering legal rights. Other development expenditure is recognized in profit or loss for the year as an expense when it arises.

As all development originates in products and market demand, there are no research expenses.

Patents

Acquired patents are capitalized as intangible assets.

Goodwill

Goodwill is recognized as an intangible asset with indefinite useful life. Over and above indication, non-amortizable assets such as goodwill are subject to annual impairment tests by measuring the asset’s recoverable amount. If the estimated recoverable amount is less than the carrying amount, the asset is impaired to its recoverable amount.

Depreciation and impairment

Amortization is recognized in profit or loss for the year on a straight-line basis over the estimated useful lives of intangible assets, unless such useful lives are indefinite. Useful lives are determined on the basis of expected commercial potential, earnings and the patent’s remaining term of validity and technical significance. Useful lives are reviewed at least yearly. Intangible assets with definite useful lives are amortized from the date when they are available for use. Amortizable assets are tested for impairment, if at the reporting date, there is an indication that a non-current asset is impaired. Intangible assets with an indefinite useful life or that are not ready for use are tested for impairment every year and as soon as there is an indication of impairment. The recoverable amount of goodwill is measured through a value in use measurement according to the discounted cash flow method. An impairment loss is recognized when an asset’s carrying amount exceeds its recoverable amount. An impairment loss is recognized as an expense in profit or loss.

Estimated useful lives are: 

Products	1.5-4 years
Platforms	1.5-10 years
Customer relations	10 years
Patents	4-5 years
Useful lives are reviewed yearly.

Estimates and judgments

Capitalized development expenditure

Significant estimates by management are necessary to determine whether expenses during the development phase should be capitalized as intangible assets, and which useful life these assets should have. These estimates focus on determining how long earnings potential exists for the products, and in turn, these estimates are based on the progress of markets, competitors and technology.

Impairment of goodwill and other acquired intangible fixed assets

The impairment test of goodwill and other acquired intangible fixed assets, the recovery value for the cash-generating unit, Delta ID Inc., has been calculated based on its value in use. The value in use is calculated as the present value of future expected cash flows according to management’s forecast. The most important assumptions in the forecast are sales and operating margin as well as the discount rate. A five-year cash flow forecast has been used. Sales have been assessed in the short term based on estimated customer demand, in the medium term based on third-party studies on the global market development for Iris Recognition and in the long term based on assumptions of a normalized growth rate. During the forecast period, an average growth rate of 48 percent has been estimated.  The operating margin has been initially assessed based on prevailing margins and subsequently based on industry experience. The operating margin is forecast at an average of 24 percent during the forecast period. After the end of the forecast period, a growth rate of 2 per cent has been assumed. The discount rate has been assessed based on the business's estimated weighted average cost of capital (WACC). WACC is estimated at 18.6 percent. During the year, goodwill has been written down by SEK 185 million, has been presented on the line Write downs. This write-down reflects a more focused strategy in the iris recognition area. This decision aligns with the recent launch of our 4^th generation iris recognition software platform, which leverages advanced machine learning (AI) to provide an effortless, prompt, and secure user experience. The company’s positive view of the long-term potential in iris recognition remains unchanged and, by addressing the rise in deepfake and privacy concerns regarding iris, our new iris recognition software platform reinforces Fingerprints' commitment to cutting-edge, touchless security solutions. The discount rate has been assessed based on the business’s calculated weighted average cost of capital (WACC). The WACC is calculated at 18.6 percent.

Impairment of capitalized development expenditure

In order to identify whether at the time of closing the accounts there is an indication that a fixed asset with a determinable useful period has decreased in value, the management assesses the commercial potential of each asset. In the impairment test of balanced development expenses, the recovery value for each product family has been calculated based on its value in use. The value in use is calculated as the present value of future expected cash flows according to management’s forecast. The most important assumptions in the forecast are sales and operating margin as well as the discount rate. A five-year cash flow forecast has been used. Sales have been assessed in the short term based on estimated customer demand, in the medium term based on third-party studies on global market development and in the long term based on assumptions about a normalized growth rate. The operating margin has initially been assessed based on prevailing margins and then based on industry experience. After the end of the forecast period, a growth rate of 2 percent has been assumed. During the year, retained capitalized development expenditure were written down by SEK 47.8 million, has been presented on the line Write downs. The write-down of capitalized R&D projects is a consequence of the phasing out of older projects that do not meet the required return on invested capital (ROIC). By reallocating resources to more promising initiatives, Fingerprints is refining its R&D portfolio to focus on innovations that are in line with long-term profitable growth. The discount rate has been assessed based on the business’s calculated weighted average cost of capital (WACC). The WACC is calculated at 17.6 percent.

The impairment of patent

For patents, no indication has been identified and thus no impairment testing has been performed for patents.

Sensitivity analysis 

A sensitivity analysis shows that an indication of impairment for capitalized development costs does not arise until a volume decrease of more than 20 percent or a ­
3 percent increase in WACC. For goodwill and other acquired intangible assets, neither a 2 percent increase in WACC nor a 10 percent decrease in volume would give rise to any impairment.

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