3. Explanation of accounting and valuation methods
3.1. General principles
The valuation of the items in the consolidated financial statements is primarily at amortised cost. Derivative financial instruments and actuarial reserves for pension obligations in the form of plan assets, in particular, are recognised at fair value.
Individual line items of the income statement and the balance sheet have been aggregated to improve readability. These items are listed in the notes.
The income statement has been prepared using the cost of sales method. As such, the revenues recognised in the reporting period are compared with the costs incurred to achieve these revenues, categorised by the functional areas of production, sales and administration.
In the balance sheet, assets and liabilities are categorised as non-current (with maturities of more than one year) or current.
3.2. Recognition of income and expense
Revenues are recognised in accordance with IAS 18 when the goods or services are delivered if the amount of revenue can be estimated reliably and the flow of economic benefit is probable. Revenues are reduced by sales discounts.
Operating expenses are recognised when the service is used or as of the date they arise.
Interest is recognised as an expense or as income in the period in which it arises. Interest expense arising in connection with the purchase or production of certain assets is only capitalised if they are qualifying assets in accordance with IAS 23.
Dividends are recognised in profit or loss when the legal entitlement is vested.
3.3. Intangible assets including goodwill
This item primarily refers to acquired intangible assets, internally generated intangible assets and goodwill.
Acquired intangible assets (purchased rights and licences) are valued initially at cost (purchase price, directly attributable costs). Assets related to acquisitions (see also Note 3.6), such as contractual customer relationships, trademark rights and no-competition clauses, are recognised as acquired intangible assets, provided that the criteria of IFRS 3 and IAS 38 are fulfilled, and valued initially at fair value.
Internally generated intangible assets (such as internally generated software) are recognised provided that they fulfil the capitalisation criteria of IAS 38 (in particular with regard to demonstration of technical feasibility, of the intention and ability to use the asset, as well as of its reliable valuation). Production costs include the costs directly attributable to the development phase, as well as borrowing costs insofar as they can be capitalised under IAS 23. Research costs are recognised as an expense.
Acquired and internally generated intangible assets with finite lives are subject to scheduled amortisation after initial recognition. This is done on a straight-line basis under the assumption of the following useful lives:
Useful life in years
Production quotas acquired against payment
Useful lives are reviewed regularly to ensure they are appropriate. If necessary they are adjusted accordingly. If there is reason for an impairment on intangible assets with finite useful lives in accordance with IAS 36 and the recoverable amount is less than the amortised cost, impairment losses are recognised on these items (see also Note 3.6). If the reasons for the impairment losses are no longer valid, the relevant reversals of impairments are to be made.
Goodwill arises in conjunction with an acquisition (see also Note 3.16) if the total consideration transferred to the seller (purchase price and any future contingent considerations) exceeds the net amount of the identifiable assets acquired and the liabilities assumed. The positive difference is capitalised under IFRS 3.
Acquired and internally generated intangible assets with indefinite useful lives, as well as goodwill, are not subject to scheduled amortisation, but must be tested for impairment at least once a year in accordance with IAS 36 (see also Note 3.6). The impairment test for goodwill takes place at the level of the cash-generating unit to which the item was attributed upon initial recognition. Goodwill is assigned to the cash-generating unit that stands to benefit from the synergies of the business combination. According to IAS 36, a cash-generating unit is the smallest identifiable group of assets with cash inflow that is largely independent of cash inflow from other assets. Within the Nordzucker Group, the lowest possible level is deemed the one within the entity at which goodwill is monitored for internal management purposes. An impairment loss is recognised on goodwill when the recoverable amount attributed to the cash-generating unit for this item is less than the carrying amount of this cash-generating unit; goodwill must then be written down by the amount of this difference. The basis for calculating the recoverable amount is the value in use of the cash-generating unit. The cash-generating unit determines a present value model taking into account cash flows that are based on internal targets. Reversals of the impairment or increases in the carrying amount of goodwill cannot be carried out later.
Gains or losses resulting from the disposal or impairment of intangible assets are recorded on the income statement under ‘Other income’ or ‘Other expenses’.
3.4. Property, plant and equipment
In accordance with IAS 16, property, plant and equipment is initially recognised at cost and subsequently depreciated on a straight-line basis over their expected useful lives. Costs include the purchase price, all directly attributable costs, estimated costs for future decommissioning and restoration obligations, as well as borrowing costs insofar as they can be capitalised under IAS 23.
The following useful lives are assumed for depreciation:
Property, plant and equipment
Useful life in years
Technical plant and machinery
Trailers and rolling stock
Other operating and office equipment
Useful lives are reviewed regularly to ensure they are appropriate. If necessary they are adjusted accordingly. Depreciation starts from the time at which the asset in question becomes ready for use. Production-related technical plant and machinery only used during the campaign are depreciated for the full year. If there is reason for an impairment in accordance with IAS 36 and the recoverable amount is less than the amortised cost, impairment losses are recognised on these items (see also Note 3.6). If the reasons for the impairment losses are no longer valid, the relevant reversals of impairments are to be made.
If the major opportunities and risks associated with ownership of rented or leased items of property, plant and equipment are borne by the tenant or lessee, then the items are to be recognised as an asset under IAS 17 on the lessee’s balance sheet. The asset is initially valued at the present value of the minimum lease payments, or at fair value for the leased item – whichever is lower. In exchange, a liability is to be recognised at an appropriate amount for the finance lease. The leased item is reduced by scheduled depreciation or impairment. If it is not sufficiently clear at the start of the lease whether or not ownership will be transferred to the lessee, the scheduled depreciation takes place either over the term of the leasing arrangement or the useful life – whichever is shorter. If this is not the case, the leased item must be depreciated over its useful life.
Gains or losses resulting from the disposal or impairment of items of property, plant and equipment are recorded on the income statement under ‘Other income’ or ‘Other expenses’.
3.5. Investment property
Property intended to be let to third parties is initially recognised at cost under IAS 40. For subsequent measurement, the Nordzucker Group consistently exercises the option of measuring investment property at cost, minus scheduled and unscheduled depreciation. Depreciation takes place on a straight-line basis over the useful life of 20 to 60 years. If there is reason for an impairment in accordance with IAS 36 and the recoverable amount is less than amortised cost, an impairment is recognised (see also Note 3.6), which is reversed if the reason for the impairment no longer exists in subsequent periods.
3.6. Impairment of intangible assets (including goodwill), property, plant and equipment as well as investment property
Under IAS 36, impairment losses are calculated by comparing the carrying amount with the recoverable amount. This impairment test is applied at the level of individual assets, provided that it is possible to estimate the recoverable amount for the individual asset. If this is not the case, the impairment test must be applied at the level of the cash-generating unit. The cash-generating unit is the smallest possible group of assets that generate largely independent cash inflows.
On each reporting date, a review is conducted to assess whether any indications for the impairment of assets exist. If such an indication exists, the recoverable amount of the asset or cash-generating unit must be determined and compared with the carrying amount. Impairment testing is carried out once a year for goodwill, other intangible assets with indefinite useful lives and for intangible assets not yet available for use – regardless of whether or not indications for impairment exist.
The recoverable amount of an asset or cash-generating unit equates to the higher of fair value less costs of disposal and value in use. For cash-generating units, the recoverable amount is generally calculated using the discounted cash flow method, taking into account cash flows based on internal targets. The cash flows are discounted at a rate which reflects current market assessments of the time value of money and the specific risks of the cash-generating unit.
An impairment is applied if the recoverable amount of the asset or cash-generating unit is lower than the corresponding carrying amount. For cash-generating units, any goodwill must first be reduced or eliminated. If the carrying amount is insufficient, other assets belonging to the cash-generating unit must be reduced proportionally.
With the exception of goodwill, a review must be conducted on each end of the reporting period to assess whether there are any reasons for whether a previously recognised impairment no longer exists or has been reduced. If this is the case, the carrying amount of the asset or cash-generating unit must be increased to its recoverable amount. As such, assets may not be attributed in excess of the amortised carrying amount as would have been determined in the absence of any prior impairment.
3.7. Investment subsidies
Government grants representing grants for assets under IAS 20 (i.e. being investment subsidies) are only recorded if there is sufficient reason to believe that a company within the Nordzucker Group is likely to fulfil the associated conditions and the grant will be received. Subsidies are not subtracted from the corresponding asset but are considered as deferred income under ‘Other liabilities’. The deferred income is subsequently released to profit or loss (i.e. via the income statement) over the useful life or depreciation period of the corresponding item of property, plant and equipment.
3.8. Financial instruments
Financial instruments are defined in IAS 32; the relevant accounting and disclosure principles can be found in IAS 39 and IFRS 7. The term financial instruments covers both financial assets and financial liabilities. Financial assets include cash and cash equivalents, contractual rights to receive cash or other financial assets such as trade receivables, derivative financial instruments with positive fair value and equity instruments of another company. Financial liabilities include contractual obligations to deliver cash and cash equivalents or other financial assets. These include, for example, borrowings, current loans, trade payables and derivative financial instruments with negative fair value.
Only financial assets are included under ‘Other financial investments’, ‘Financial assets’, ‘Trade receivables’, ‘Receivables from related parties’ and ‘Cash and cash equivalents’. The items ‘Financial liabilities’, ‘Trade payables’, ‘Liabilities towards related parties’ and ‘Other financial liabilities’ only comprise financial liabilities.
For the initial recognition, financial instruments must be assigned to measurement categories as listed in IAS 39. The subsequent valuation of the items is determined by the measurement category. There are four measurement categories for financial assets (‘Financial assets at fair value through profit or loss’, ‘Held-to-maturity investments’, ‘Loans and receivables’, ‘Available-for-sale financial assets’). Financial liabilities may be assigned to two measurement categories (‘Financial liabilities at fair value through profit or loss’, ‘Financial liabilities measured at amortised cost’). In the reporting period and comparative period, no financial assets were assigned to the measurement category ‘Held-to-maturity investments’. In addition, there were no reclassifications from one measurement category to another.
Financial assets and liabilities must be recognised as soon as a company becomes a party to the contractual provisions of the financial instrument. Within the Nordzucker Group, regular purchases and sales are recognised on the settlement date (the day on which the asset is supplied to or by the company). Initial recognition is at fair value. The principles of IFRS 13 are applied to determine fair value. For items not measured at fair value through profit or loss, transaction costs must be taken into account in the initial carrying amount.
The Nordzucker Group has not used the voluntary option of designating financial assets or financial liabilities upon initial recognition as at fair value through profit or loss (fair value option).
After initial recognition, financial instruments in the category ‘Financial assets/liabilities at fair value through profit or loss’ are to be recognised at fair value. This includes derivative financial instruments that are not part of an effective hedging relationship as set out in IAS 39 (see also Note 3.14). Changes in value are recognised through profit or loss (i.e. in the income statement). The subsequent measurement of items in the measurement category ‘Available-for-sale financial assets’ is also at fair value. However, having considered for the effects of tax, changes in fair value are recognised without effect on profit or loss in other comprehensive income (i.e. in the statement of comprehensive income and not in the income statement). If fair value for items in the measurement category ‘Available-for-sale financial assets’ cannot be reliably determined, the items are to be valued at cost.
For derivative financial instruments that are part of an effective hedging relationship as set out in IAS 39 (see also Note 3.14), no measurement category is assigned. The instruments are also recognised at fair value. However, value changes are recognised also in other comprehensive income (i.e. in the statement of comprehensive income) depending on the type of hedging relationship.
Following initial recognition at amortised cost, financial assets in the measurement category ‘Loans and receivables’ and financial liabilities in the measurement category ‘Financial liabilities measured at amortised cost’ are measured using the effective interest method.
Within the Nordzucker Group, the financial assets included under the item ‘Cash and cash equivalents’ are assigned to the measurement category ‘Loans and receivables’. This includes bank balances, cash in hand and current balances with banks which have an initial remaining term of up to three months. Amortised cost is frequently the same as the nominal value.
On each end of the reporting period, it must be identified whether an impairment of a financial asset or a group of assets exists according to IAS 39. There must be objective indications of a loss event (e.g. severe financial difficulties of the issuer or debtor, breach of contract, concessions made to debtors for economic or legal reasons in connection with the debtor’s financial difficulties, an increased probability of insolvency, a significant or prolonged decline in the fair value below its cost), and this must have a reliably estemated effect on expected future cash flows. For financial assets in the measurement categories ‘Held-to-maturity investments’ and ‘Loans and receivables’, any impairment amount is calculated by comparing the carrying amount with the present value of the expected future cash flows (discounted using the effective interest rate). For items in the measurement category ‘Available-for-sale financial assets’, a comparison must be made between acquisition cost and fair value.
3.9. Assets held for sale
Under IFRS 5, items classed as ‘Assets held for sale’ include non-current assets and disposal groups classified as ‘held for sale’. This classification applies if the relevant carrying amount will be recovered principally through a sales transaction rather than through continuing use. In addition, the items must be available for immediate sale in its present condition and the sale must be deemed highly probable, and expected to occur within one year.
Non-current assets are not subject to depreciation, provided that they are categorised as ‘held for sale’ or belong to a disposal group categorised as ‘held for sale’. Non-current assets or disposal groups that are classified as ‘held for sale’ must be measured immediately after being classified as such, as well as before subsequent ends of reporting periods, at either the carrying amount or fair value less costs to sell, whichever is lower.
If a non-current asset is no longer classified as ‘held for sale’ or no longer belongs to a disposal group classified as ‘held for sale’, and if it is again presented as a non-current item and is at the time of the decision not to sell, it is measured either at the recoverable amount or – if this is lower – at the carrying amount prior to classification, adjusted for all depreciation or revaluations that would have been recorded in the absence of classification.
Under IAS 2, inventories are measured at the lower of cost and net realisable value. The cost of inventories include all costs of acquisition and production, as well as any costs incurred in transferring inventories to their current location and in their current condition. Costs are determined using weighted averages. Costs include all direct costs attributable to producing the asset as well as indirect costs attributable to production. Borrowing costs are not included in costs as the Group’s products are not qualifying assets under IAS 23.
The net realisable value is the estimated selling price in the ordinary course of business less estimated costs to completion and estimated costs to sell. The net realisable value of work in progress is inferred from the net realisable value of finished goods and services less the outstanding costs of completion. Semi-finished goods from production processes are measured using their respective full cost approach. Indirect costs are allocated according to production volume and the amount of production work carried out in-house. If the recognised amounts for finished products and goods are higher than fair value as of the end of the reporting period, the inventories are written down to net realisable value. Sugar stocks from internal production presented under finished products are recognised at cost, unless they are recognised at lower net realisable value in view of sales opportunities. Costs include production costs, indirect costs attributable to the production department and straight-line depreciation for wear and tear. The production costs of quota sugar also include the plant portion of the production levy of EUR 6.00 per tonne.
An impairment loss for inventories to the net realisable value is reversed if the reasons for recognising the loss no longer exist.
3.11. Provisions for pensions
Under IAS 19, provisions must be made for pension commitments in the form of defined benefit plans where the company primarily bears the actuarial risk (that the benefits will result in higher costs than expected) and the investment risk (that the assets invested will not be sufficient to provide the benefits expected). Provisions are presented as a net liability, i.e. the capital accrued to finance the pension payments (actuarial reserves) is offset against the defined benefit obligation (reflecting the future pension payments to the employee) if the actuarial reserves shows the defining characteristics of plan assets.
The valuation of the defined benefit obligation is made using actuarial methods (projected unit credit method). This method assumes that each period of service gives rise to an additional unit of benefit entitlement; as such, the defined benefit obligation increases successively until the employee retires. Future payouts are subject to a discount rate, which is calculated on each end of the reporting period based on market returns on high-quality corporate bonds. The method takes into account both actuarial and demographic assumptions (such as expected mortality, fluctuations, early retirement, for example), as well as financial assumptions (such as discount rates and future salary trends, for example).
Cost components with a bearing on pension provisions include service cost, net interest (interest expense, interest income), actuarial gains or losses, return on plan assets. In the income statement, the service cost (i.e. the increase in the present value of a defined benefit obligation arising from a service provided during the reporting period) is recorded in the items ‘Production costs’, ‘Distribution costs’ and ‘Administrative expenses’, while the net interest is recorded under ‘Financial expenses’. Net interest is calculated by multiplying the net liability with the discount rate of the defined benefit obligation. Actuarial gains or losses andreturn on plan assets are recognised without effect on profit or loss in other comprehensive income (i.e. in the statement of comprehensive income and not in the income statement). Actuarial gains and losses are defined as changes in the present value of the defined benefit obligation as a result of experience adjustments (effects of variations in past actuarial assumptions and actual developments) and effects of changes in actuarial assumptions. Return on plan assets is the variation between the actual rate for the plan asset and the interest based on the discount rate for the defined benefit obligation.
3.12. Other provisions
The item ‘Other provisions’ includes personnel-related provisions for anniversaries, partial early retirement, early retirement and severance pay obligations, as well as obligations for profit-sharing, bonuses and other gratuities. Under IAS 19, these are recognised depending on the characteristics of the obligation – either according to the rules for short-term employee benefits, the rules for other (i.e. not considered as pension benefits) long-term employee benefits, or according to the rules for long-term employee benefits resulting from the termination of an employment relationship (termination benefits).
The item ‘Other provisions’ also includes recultivation obligations and other provisions (e.g. for onerous contracts or imminent losses). Under IAS 37, these kinds of provisions are recognised if a present (legal or factual) obligation has arisen as a result of a past event, which will probably result in an outflow of resources and if the extent of the provisions can be reliably estimated. The measurement is based on the best-possible estimate of the expenses required to fulfil the obligation before the end of the reporting period. Long-term provisions must be discounted with an interest rate commensurate to the risk.
Other provisions take into account all recognisable legal and factual obligations of the Nordzucker Group towards third parties.
3.13. Deferred taxes
Under IAS 12, deferred taxes are recognised for future tax assets and liabilities resulting from temporary differences between the value of assets and liabilities for tax purposes and their carrying amount in the IFRS financial statements, and for tax loss carry-forwards. Deferred taxes are measured on the basis of the fiscal legislation enacted at the end of each reporting period for the reporting periods in which the differences are expected to reverse or in which it is likely that tax loss carry-forwards will be used. Deferred tax assets for tax loss carry-forwards are only recognised if it is sufficiently likely that they will be realised in the near future. Deferred tax assets are only offset against deferred tax liabilities if specific conditions are fulfilled.
The offsetting entry of deferred taxes is made within the income statement under the item ‘Income taxes’ – unless the tax results from a transaction or event that is recognised directly in equity during the same period or another period either under other comprehensive income (i.e. in the statement of comprehensive income) or in any other place.
3.14. Derivative financial instruments and hedge accounting
Due to the nature of its business, the Nordzucker Group is exposed to interest rate, exchange rate and other market risks. Derivative financial instruments are used as a means of managing these risks.
Accounting of derivative financial instruments is governed by the principles set out in IAS 39. Derivative financial instruments are either accounted for separately or they are part of an effective hedging relationship (‘hedge accounting’). Hedge accounting means addressing hedged items and hedging instruments that are documented as being linked from a financial point of view in such a way that the compensatory effects on the income statement resulting from changes in market prices occur in the same period. If a hedging relationship is designated, recognition of gains and losses from hedged items and hedging instruments is based on special hedge accounting rules. There is a hedge accounting option for every scenario. However, the application of hedge accounting rules is tied to certain conditions. For one thing, the hedging relationship must be documented. In addition, the hedge must be effective, i.e. the fair value or cash flow changes of hedged items and hedging instruments must be offset within a specific range.
The value measure for the initial and subsequent recognition of derivative financial instruments is fair value. The fair value of certain derivatives may be both positive or negative; depending on that they are either financial assets or financial liabilities. Fair value must be determined in accordance with the principles set out in IFRS 13. If no market prices for active markets are available, fair value is determined using the present value or option pricing models, whose significant input factors (e.g. market prices, interest rates) are derived from price quotations or other directly or indirectly observable input factors.
Stand-alone derivative financial instruments, i.e. those that are not part of an effective hedging relationship according to IAS 39, are always assigned to the measurement categories ‘Financial assets/liabilities at fair value through profit or loss’. Value changes are recognised in the income statement under either ‘Financial income’ or ‘Financial expenses’.
For derivative financial instruments in an effective hedging relationship no measurement category is assigned. They are also recognised at fair value, although their recognition depends on the type of hedge (fair-value hedge, cash flow hedge) or on the characteristics of the hedge as either with an effect on profit or loss (i.e. in the income statement) or with no effect on profit or loss under other comprehensive income (i.e. in the statement of comprehensive income).
Within the Nordzucker Group, interest rate derivatives are always integrated into hedging relationships as cash flow hedges. Stand-alone derivatives are also used to hedge currency and market risks.
3.15. Transactions and items in foreign currencies
Under IAS 21, a foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency. A foreign currency is defined as any currency other than the functional currency of the company. Foreign currency transactions are business transactions for the acquisition or sale of goods or services in a foreign currency, borrowing activity or leases in a foreign currency, or acquisitions or sales of assets or debt in a foreign currency by any other means. Foreign currency items are balance sheet items that are received or borrowed in foreign currency (and which were related with foreign currency transactions before initial recognition).
Foreign currency transactions or foreign currency items are translated into the functional currency initially at the spot exchange rate valid on the day of the transaction.
Subsequent recognition of foreign currency items depends on whether they are monetary or non-monetary items. Monetary items in a foreign currency are to be translated into the functional currency by each end of the reporting period using the closing rate (i.e. the spot exchange rate at the end of the reporting period); exchange differences must generally be recognised through profit or loss (i.e. in the income statement). Non-monetary items – provided that they are recognised at cost – are to be translated into the functional currency using the exchange rate on the day of their initial recognition. Non-monetary items recognised at fair value must be translated using the exchange rate that was valid on the day of their recognition (i.e. generally using the closing rate). Exchange differences from non-monetary items should be treated like all other gains or losses, i.e. they are either recognised with an effect on profit or loss or with no effect on profit or loss under other comprehensive income (i.e. in the statement of comprehensive income).
Business combinations are presented using the purchase method in accordance with IFRS 3. The acquisition costs of a business combination are defined as the total consideration paid, measured at fair value as of the acquisition date and the non-controlling interests in the acquired entity. For every business combination the acquirer measures the non-controlling interests in the acquired entity either at fair value or at their pro rata share of the identified net assets of the acquired entity. Costs incurred in the course of the business combination are recognised as expenses in profit or loss.
If the Group acquires an entity it determines the appropriate classification and designation of the financial assets and liabilities assumed in accordance with the terms of the contract, economic circumstances and the conditions at the acquisition date. This also includes separating embedded derivative financial instruments from their host contract.
For business combinations in stages, the fair value of the equity interest held by the purchaser in the acquired entity is measured as of each acquisition date and the resulting gain or loss is recognised in the income statement.
The agreed contingent consideration is recognised at fair value as of the acquisition date. Subsequent changes in the fair value of a contingent consideration that constitutes an asset or a liability are generally recognised either in the income statement or in other comprehensive income in accordance with IAS 39. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity.
Goodwill is initially recognised at cost, which is defined as the excess of total consideration transferred and the amount of any non-controlling interest over the identifiable assets acquired and the liabilities assumed. If this consideration is below the fair value of the net assets of the company, the difference is recognised in the income statement.