The principal accounting policies applied in the preparation of these consolidated financial statements are described below. These policies have been consistently applied to all the information presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards, with application of the IFRS and IAS standards as well as IFRIC and SIC interpretations that were effective on 31 December 2009. In the Finnish Accounting Act and regulations enacted by virtue of it, International Financial Reporting Standards refer to standards and related interpretations approved for adoption within the EU according to the procedure described in regulation (EC) No 1606/2002. The notes to the consolidated financial statements also comply with the Finnish accounting and community legislation supplementing the IFRS regulations.
The consolidated financial statements have been prepared in euros, and figures are presented as thousands of euros. The financial statements have been prepared under the historical cost convention with the exception of available-for-sale investments for which a fair value can be determined from market prices and derivative contracts, which have been measured at fair value. Share-based payments have been recognised at fair value on the grant date.
Consolidation
The consolidated financial statements include parent Lassila & Tikanoja plc and all subsidiaries in which it directly or indirectly holds over 50% of the voting power. The subsidiaries are fully consolidated from the date on which control is transferred to L&T until the date that control ceases. Control means the right to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Acquired companies are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given as consideration and liabilities assumed, as well as costs directly attributable to the acquisition. Acquired identifiable assets and liabilities are recognised at acquisition-date fair value. The amount of acquisition cost that exceeds the Group’s portion of the fair value of the net assets acquired is recognised as goodwill. The excess of the fair value of the net assets of the acquired subsidiary over the cost is recognised directly in the income statement. For goodwill arising from business combinations made before the year 2004, the carrying amounts according to the accounting principles applied prior to IFRS are recognised. The first-time adoption standard is applied to these acquisitions, and the acquisitions have not been restated in preparation of the opening IFRS balance sheet (1 January 2004).
All intra-Group transactions, receivables, liabilities and unrealised margins, as well as distribution of profits within the Group, are eliminated in the consolidated financial statements. The distribution of profit for the period between equity holders of the parent company and the minority is presented in connection with the income statement, and the share of equity belonging to the minority is presented as a separate item in the consolidated statement of financial position under equity. The minority interest in accrued losses is recognised in the consolidated financial statements up to the amount of the investment at the maximum.
Business combinations between entities under shared control are measured using the purchase prices, as such acquisitions do not belong to the scope of application of IFRS 3 Business Combinations. With regard to the acquisition of minority interests, the difference between the acquisition cost and the acquired equity is recognised as goodwill.
Joint ventures are entities over which L&T has joint control. Joint ventures are accounted for by the proportionate method line by line. L&T’s share of the assets, liabilities, revenues, expenses and contingent liabilities of the joint ventures is included in the consolidated financial statements.
Foreign currency translation
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in euros, which is the parent’s functional currency.
Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Monetary assets denominated in foreign currency are translated into euros using the exchange rates in effect on the balance sheet date. Non-monetary assets are translated using the exchange rates on the dates prevailing at the dates of the transactions. There are no non-monetary assets denominated in foreign currency that are measured at fair value. Exchange rate gains and losses arising from foreign currency transactions and the translation of monetary assets are recognised in the income statement. Foreign exchange gains and losses on business transactions are included in the respective items above operating profit. Foreign exchange gains and losses on financial assets and liabilities are included in finance income or finance costs.
The income statements of the Group entities whose functional currency is not the euro are translated into euros at average exchange rates for the period, and the statements of financial positions at the exchange rates for the balance sheet date. The difference in exchange rates applicable to the translation of profit in the income statement and statement of financial position result in a translation difference recognised in the translation reserve within equity. Translation differences arising from the elimination of the acquisition cost of foreign subsidiaries, as well as translation differences in equity items accumulating after the acquisition, are recognised in the translation reserve. Non-current loan receivables for which settlement is neither planned nor likely to occur in the foreseeable future are treated as part of the net investment in subsidiaries. The translation differences on such receivables also are recognised in the translation reserve. When a subsidiary is sold, any accumulated translation differences are recognised in profit or loss as part of the total gain or loss on the sale.
Goodwill and fair value adjustments to the assets and liabilities arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated into euro at the closing rate.
Revenue recognition
Sales of services are recognised after the services have been provided. At plants producing materials for sale, the cost of materials is recognised in inventories. When the processed materials have no sales price, cost provisions are recognised in accrued expenses.
Sales of goods are recognised after the decisive risks and rewards connected to the ownership of the goods sold have been transferred to the buyer, and the amount of the revenue can be reliably measured.
Sales are shown net of indirect tax and discounts.
Interest income is recognised using the effective interest method. The Group’s dividend income is minor, and it is recognised when the right becomes vested if information on dividends is available at that time. Otherwise it is recognised on the date of payment.
Construction contracts
Contract revenue and contract costs are recognised on the basis of the stage of completion once the outcome of the project can be estimated reliably. Landfill closure contracts are recognised using the percentage-of-completion method. Their initiation and completion generally take place in different financial periods. The stage of completion of a contract is determined as the proportion of costs incurred from work completed up to the time of examination in relation to the estimated total contract costs. If the incurred costs and recognised profits exceed the progress billings, the difference is presented in the statement of financial position under accruals. If the incurred costs and recognised profits are less than the progress billings, the difference is presented under advances received.
When the outcome of a construction contract cannot be estimated reliably, the costs incurred are recognised as an expense in the period in which they are incurred, and revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable. If it is probable that the total contract costs will exceed total contract revenues, the expected loss is recognised as an expense immediately.
The collection of contaminated soil has not been treated as a construction contract because the outcome of the projects cannot be estimated reliably. According to the prudence principle, revenue from the contaminated soil collection operations will not be recognised as revenue until the soil has been finally disposed of. The costs of the projects are recognised as an expense in the period in which they are incurred.
Research and development
Research expenditure is recognised as an expense during the period in which it is incurred. The probable future revenues from new service concepts are evident at such a late stage that the portion to be recognised as an asset has no material importance, and thus the costs are not recognised as an asset.
Computer software development costs recognised as an asset in the statement of financial position are described in more detail in the following chapter.
Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition over the fair value of L&T’s share of the net identifiable assets of the acquiree on the date of acquisition. Goodwill is not amortised, but it is tested annually for impairment. Goodwill is presented in the statement of financial position at original cost less impairment losses, if any.
Intangible assets acquired in a business combination are measured at fair value. The useful lives of intangible assets are assessed to be finite or indefinite. In L&T, the intangible assets recognised in business combinations include items such as customer relations, non-competition agreements and environmental permits. They have finite useful lives varying between three and thirteen years.
Other intangible assets consist primarily of software and software licences.
The costs of software projects are recognised in other intangible assets starting from the time when the projects move out of the research phase into the development phase and the outcome of a project is an identifiable intangible asset. Such an intangible asset must provide L&T with future economic benefit that exceeds the costs of its development. The cost comprises all directly attributable costs necessary for preparing the asset to be capable of operating in the manner intended by the management. The largest cost items are consultancy fees paid to third parties, as well as salaries and other expenses for the Group’s personnel.
The amortisation period for computer software and software licences is five years.
Property, plant and equipment
Property, plant and equipment are stated at historical cost. The historical cost includes expenditure that is directly attributable to the acquisition of each asset. The financial costs attributable to the construction of the joint venture L&T Recoil’s re-refinery are capitalised as part of the cost of the asset and are depreciated over the expected useful life of the asset. As L&T Recoil’s borrowings have been taken out for the construction of the re-refinery, the actual borrowing costs have been capitalised in the acquisition cost.
In business combinations, property, plant and equipment are measured at fair value at the acquisition date. In the statement of financial position, property, plant and equipment are shown less depreciation and impairment, if any.
Property, plant and equipment are depreciated using the straight-line method over the expected useful lives excluding new landfills. The expected useful lives are reviewed on each balance sheet date and, if expectations differ substantially from previous estimates, the depreciation periods are adjusted to reflect the changes in the expectations for future economic benefits.
The depreciation in the financial statements is based on the following expected useful lives:
Buildings and structures: 5–30 years
Vehicles: 6–15 years
Machinery and equipment: 4–15 years
The maximum depreciation period for buildings and structures has been extended to 30 years, which is the expected useful life for some of the structures of the L&T Recoil production plant. Prior depreciation periods have not been changed.
For landfills completed in 2008 and later the Group applies the units of production method. Landfills are depreciated on the basis of the volume of waste received. This method reflects more closely than the straight-line method the expected future benefits to be derived from the landfills. As the Kerava landfill is about to be filled up, it will be fully depreciated using the straight-line method.
Land is not depreciated.
When an asset included in property, plant and equipment consists of several components with different estimated useful lives, each component is treated as a separate asset. Ordinary repair and maintenance costs are recognised in the income statement during the period in which they are incurred. Costs of significant modification and improvement projects are capitalised if it is probable that the projects will result in future economic benefits to the Group. Gains and losses on sales and disposal of property, plant and equipment are determined by comparing the net proceeds with the carrying amount and are recognised in other operating income or expenses.
Impairment of assets
The carrying amounts of assets are reviewed continuously for impairment. If any indication exists, an estimate of the asset’s recoverable amount is made for impairment testing. The need for impairment is assessed at the level of cash generating units – that is, the lowest level of unit that is primarily independent of other units and that generates cash flows that are separately identifiable.
The recoverable amount is the higher of an asset’s fair value less selling costs and its value in use. Value in use refers to the estimated future net cash flows available from an asset or cash generating unit, discounted to present value. An impairment loss is recognised in the income statement when an asset’s carrying amount exceeds its recoverable amount. An impairment loss recognised in prior periods is reversed if there is a change in the circumstances and the recoverable amount has changed.
Goodwill is tested for impairment annually or whenever there is any indication that it may be impaired. Recoverable amount calculations based both on values in use and on net sales price are made for the cash generating units to which the goodwill has been allocated. Impairment losses attributable to a cash generating unit are used to deducting first the goodwill allocated to the cash generating unit and, thereafter, the other assets of the unit on an equal basis. An impairment loss recognised on goodwill is not reversed.
Intangible assets under construction are software projects that cannot be tested separately for impairment as they do not generate separate cash flow. There is no need for impairment if it is stated at the end of the financial period that the projects will be completed and the software will be brought to use. The intangible assets under construction are, however, tested for impairment as a part of the cash generating unit to which they belong.
Leases
The Environmental Services division leases equipment, such as waste compactors, out to customers under long-term leases that transfer substantially all of the risks and rewards incidental to ownership to the lessee. Such leases are classified as finance lease, and net investment in them is recognised as a trade receivable at the commencement of the lease term. Each lease payment is apportioned between finance income and repayment of trade receivables. Finance income is allocated over the lease term on the basis of a pattern that reflects a constant periodic rate of return on the net investment.
The assets leased under a finance lease are recognised in property, plant and equipment at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. They are depreciated over the lease term or over their expected useful lives, if shorter. However, when there is reasonable assurance that the ownership of the leased asset will transfer to L&T by the end of the lease term, the asset will be depreciated using the method applied for a corresponding asset being utilised by the company. Liabilities arising from the lease agreements are recognised in borrowings. Each lease payment is apportioned between interest cost and reduction of finance lease liabilities. Finance costs are allocated to each period of the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Leases of assets and premises that do not transfer substantially all of the risks and rewards incidental to ownership to the lessee are classified as operating leases. The lease payments are recognised on a straight-line basis over the lease term as income or cost depending on whether L&T is the lessor or the lessee. Assets leased out under operating leases are recognised in property, plant and equipment and are depreciated over their expected useful lives using the method applied for corresponding property, plant and equipment being utilised by the company.
The joint venture L&T Recoil has signed a purchase agreement covering the procurement of hydrogen, hot oil and steam. Pursuant to this agreement, L&T Recoil undertakes to purchase the entire production of the production facilities for its re-refinery. The purchase agreement contains a lease as specified in IFRIC 4. This is classified as an IAS 17 compliant financial lease with the same term as the purchase agreement.
Financial instruments
Financial assets and liabilities are classified as loans and receivables, available-for-sale investments, financial assets and liabilities at fair value through profit or loss and as other financial liabilities. The classification is done when the asset or liability is acquired and is based on the purpose of the acquisition.
A financial asset is derecognised when the rights to the cash flows from the asset expire or when substantially all risks and rewards of the ownership of the asset have been transferred outside L&T.
Borrowings and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade and other receivables are included in this category, and they are recognised in the statement of financial position at historical cost less credit adjustments and impairment losses.
Available-for-sale investments include shares as well as certificates of deposit and commercial papers. By definition, the category includes financial assets that do not belong to actual business and are not in production use on the one hand, and financial assets that can be sold to obtain working capital for business operations on the other hand. The financial instruments in this category are measured at fair value. All unlisted shares are, however, measured at cost or at cost less impairment loss, if any, as the markets for these shares are inactive and their fair value cannot be measured reliably.
Available-for-sale investments are included in non-current assets if management intends not to dispose of the investment within 12 months of the balance sheet date. All purchases and sales of available-for-sale investments are recognised on the settlement date. Any change in fair value between the trade date and settlement date is recognised in equity.
In the financial statements, available-for-sale investments are measured at fair value at market prices of the balance sheet date. Changes in fair values are recognised considering tax effects in the revaluation reserve within equity and transferred to the income statement when the asset is sold or becomes due. Changes in fair values are transferred to the income statement also when the fair value of an investment has been permanently impaired.
Financial assets and liabilities at fair value through profit or loss are derivative financial instruments to which hedge accounting is not applied. Accounting policies applied to them are described below under Derivative financial instruments and hedge accounting.
Borrowings are recognised in the statement of financial position at the settlement date at fair value on the basis of the consideration received including transaction costs that are directly attributable to the acquisition or issue. Subsequently these financial liabilities are measured at amortised cost using the effective interest rate method.
Trade and other current non-interest-bearing payables are recognised in the statement of financial position at cost. Their fair value is considered to equal to or approximate the cost.
Derivative financial instruments and hedge accounting
L&T’s derivative financial instruments included interest rate swaps to hedge the cash flow of variable-rate borrowings against interest rate risk, forward contracts to hedge the loans granted to foreign subsidiaries against currency risk as well as crude oil put options and future contracts purchased to hedge the sales price risk associated with the upcoming base oil production of a re-refinery under construction for the joint venture L&T Recoil. The forward contracts were terminated and L&T Recoil’s crude oil put options were sold in late 2008.
Derivatives are recognised initially in the statement of financial position at cost, which is their fair value at the time of acquisition. After acquisition, they are measured at fair value at each balance sheet date. The fair values of interest rate swaps, forward contracts and crude oil options are based on that day’s market prices. The fair values of the options at balance sheet date are determined by using option pricing models. Any gains and losses arising from fair valuation are accounted for in the manner determined by the purpose of the derivative financial instrument.
All interest rate hedges and currency hedges meet the criteria set for efficient hedging in the Group’s risk management policy. Hedge accounting in accordance with IAS 39 was not applied to some interest rate swaps, neither was it applied to the terminated foreign currency forward contracts, but changes in the fair values of these items were recognised in the income statement as finance income or costs. Neither did L&T apply hedge accounting to the oil hedges made in the name of the joint venture, nor were any changes in the fair values recognised in full as other operating income or expenses in the income statement.
Derivatives for which hedge accounting is not applied are classified as financial assets and liabilities held for trading. Positive fair values of all derivatives are recognised in derivative receivables in the statement of financial position. Any negative fair values of derivatives are recognised correspondingly in derivative liabilities. All fair values of derivatives are included in current assets or liabilities.
Hedge accounting is applied to cash flow hedges only. With regard to interest rate swaps for which L&T applies hedge accounting, the relationship between the hedged liability and the interest rate swap is documented together with the risk management objectives. At the commencement of a hedge and in connection with each closing of the accounts, L&T assesses the hedging instrument’s ability to offset any changes in cash flows. To the extent that cash flow hedging is efficient, changes in fair value are recognised in the hedging reserve within equity. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under IAS 39, the gain or loss on the hedging instrument remains in equity until the hedged cash flow becomes realised. If the hedged cash flow no longer is expected to be realised, the gain or loss incurred on the hedging instrument is recognised immediately through profit or loss. The ineffective portion a hedging relationship is also recognised through profit or loss.
The economic characteristics and risks of interest options included in borrowing agreements are embedded derivatives closely related to the host contracts. L&T does not, under IAS 39, account for them separately from the host contracts.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, bank deposits redeemable on demand, as well as other short-term liquid investments. Their maturity is no longer than three months from the acquisition date and they are recognised as of the settlement date and measured at historical cost.
Impairment of financial assets
The Group assesses on each balance sheet date whether there is objective evidence that any financial asset item is impaired. If there is evidence of impairment, the cumulative loss in the fair value reserve is recognised in profit or loss. Impairment losses on shares classified as financial assets available for sale are not reversed through profit or loss, as is the case with impairment losses recognised on fixed income instruments that are subsequently reversed.
Doubtful debts are reviewed each month. If there is objective evidence that the balance sheet values of the receivables exceed their recoverable amounts, the difference is recognised as an impairment loss in other operating expenses in the income statement. The criteria for recognising an impairment loss on a receivable include the debtor’s substantial financial difficulties, corporate restructuring, a credit loss recommendation issued by a collection agency or extended default on payments. If the difference between the balance sheet value of receivables and the recoverable amounts is reduced later, the impairment loss will be cancelled through profit or loss.
Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The inventories of L&T Biowatti and Environmental Products are measured using the weighted average cost method. The value of other inventories is determined using the FIFO method.
At its recycling plants, L&T processes recyclable materials into materials for sale. The cost of the inventories of these materials comprises raw materials, direct labour costs, other direct costs of manufacturing and a proportion of variable and fixed production overheads based on normal operating capacity.
Employee benefits
Retirement benefit obligations
Pension plans are categorised as defined benefit and defined contribution plans. Under defined contribution plans the Group pays fixed contributions for pensions, and it has no legal or factual obligation to pay further contributions. All pension arrangements that do not fulfil these conditions are considered defined benefit plans. Contributions to defined contribution plans are recognised in the income statement in the financial period to which they relate. L&T operates pension schemes in accordance with local regulations and practices in the countries in which it operates, and these are mainly defined contribution plans.
L&T operates some minor defined benefit plans originating from business acquisitions. Some of these defined benefit pension plans are the Group’s own responsibilities while some are covered by pension insurance. The obligations have been calculated for each plan separately using the projected unit credit method. Pension costs are recognised in the income statement over employees’ periods of service in accordance with actuarial calculations. The discount rate used for determining the present value of a retirement benefit obligation is based on the swap interest rate curve plus a risk premium and the estimated duration of the retirement benefit obligation. The risk premium is based on bonds issued by companies with AAA credit rating. The pension plan assets measured at fair value on the balance sheet date, the share of unrecognised actuarial gains and losses, as well as any past-service costs are deducted from the present value of the retirement benefit obligation to be recognised in the statement of financial position.
The portion of the actuarial gains and losses that exceeds the greater of 10% of the retirement benefit obligations and 10% of the fair value of plan assets is recognised in the income statement over the expected remaining working lives of the persons participating in the scheme.
Past-service costs are recognised as expenses in the income statement on a straight-line basis over their vesting period.
Share-based payment
IFRS 2, Share-based Payment, has been applied to the share-based incentive programme and the share option plans that have been granted after 7 November 2002 and had not become vested before 1 January 2005.
Share options
The cost recognition of an option plan is based on fair value determined on the grant date and the final amount of benefits granted. The fair value is measured using the Black-Scholes option pricing model. The fair value on the grant date is recognised as an expense on a straight-line basis during the vesting period. In this respect, the expense recognition is not reversible, regardless of whether the recipient subsequently has exercised the share option. The offset item for any income statement recognition always is recognised in equity, and therefore it does not affect the amount of equity as a whole.
Non-market vesting conditions are not taken into account in the determination of the fair value of benefits granted. The rate of rejection of options is expected to be 0% on the grant date. The estimate of the number of options to be exercised is reviewed quarterly, and the amount of benefits included in the cost recognition is adjusted to correspond to the amount that is expected to become finally vested once the vesting period expires. The effects of any changes are recognised in the income statement and in equity.
When options are exercised, the proceeds from share subscriptions are recognised in equity. Proceeds received from share subscriptions based on options issued prior to the new Finnish Companies Act becoming effective are recognised in accordance with the terms and conditions of the plan in share capital and share premium. Such are options issued in 2005. Proceeds from options issued after the new Finnish Companies Act becoming effective are recognised net of any transaction costs in accordance with the terms and conditions of the plan in non-restricted equity fund. Such are options issued in 2008.
Share-based incentive programme
Lassila & Tikanoja plc’s Board of Directors decided on 24 March 2009 on a share-based incentive programme to form a part of the incentive and commitment scheme for the company’s key personnel. Payment of the reward is subject to reaching the financial targets set by the Board. The criteria for the determination of the rewards are decided annually. Potential rewards to be paid for the year 2009 will be based on the EVA result of the Group. The programme includes three earnings periods one year each, of which the first one began on 1 January 2009 and the last one ends on 31 December 2011. Potential rewards will be paid during the year following each earnings period partly as shares and partly in cash. The fair value of the share is its market price on the grant date.
Provisions
A provision is recognised when L&T has a legal or actual obligation toward a third party resulting from past events and the event involves a probable payment obligation in an amount that can be estimated reliably. A liability of uncertain timing and amount is recognised as a provision. In other cases a liability is recognised in accrued expenses.
Environmental provisions are recognised when it is probable that an obligation has arisen and its amount can be estimated reliably. Environmental provisions related to the restoration of sites are made at the commencement of each project. The costs recognised as a provision, as well as the original acquisition cost of assets, are depreciated over the useful life of the asset. Provisions are discounted to present value. The most significant provisions recognised in the statement of financial position are the site restoration provisions for landfills and the contaminated soil processing site.
Borrowing costs
The revised standard IAS 23 requires that the borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be included in the acquisition cost of that asset. The revised standard shall be applied to the qualifying assets for which the commencement date for capitalisation of the borrowing costs is on or after 1 January 2009, the effective date of the standard.
Transaction costs directly attributable to the issue of a financial liability have been included in the historical cost of the liability and have been recognised as interest expense during the expected life of the liability applying the effective interest method already before the effective date of the standard.
Government grants
Government grants or other grants relating to actual costs are recognised in the income statement when the group complies with the conditions attached to them and there is reasonable assurance to that the grants will be received. They are presented in other operating income. Government grants directly associated with the recruitment of personnel, such as employment grants, apprenticeship grants and the like, are recognised as reductions in personnel expenses. Grants for acquisition of property, plant and equipment are recognised as deductions of historical cost. The grant is recognised as revenue over the life of a depreciable asset by way of a reduced depreciation charge.
Income taxes
The Group’s income taxes consist of current tax and deferred tax. Tax expenses are recognised in the income statement with the exception of items directly recognised in equity, in which case the tax effect is recognised correspondingly in equity. Current tax is determined for the taxable profit for the period according to prevailing tax rates in each country. Taxes are adjusted by the current tax for previous periods, if any.
Deferred tax assets and liabilities are recognised for all temporary differences between the tax bases of assets and liabilities and their carrying amounts. Principal temporary differences arise from goodwill amortisation performed under FAS, depreciation on property, plant and equipment and revaluation of derivative financial instruments and measurement at fair value in business combinations. Deferred tax is measured at the tax rates enacted by the balance sheet date. No deferred tax is recognised for impairment of goodwill that is not tax-deductible. A deferred tax asset is recognised only to the extent that it is probable that taxable profit will be available against which the deferred tax asset can be utilised.
Critical judgments in applying the Group’s accounting policies
The Group’s management makes judgments when making decisions on the choice and application of accounting policies. In particular, this concerns cases in which valid IFRS standards provide for alternative methods of recognition, measurement or presentation. A significant choice of accounting policy is to use the proportionate method, not the equity method, in the consolidation of joint ventures within the Group.
Critical accounting estimates and judgements
The preparation of financial statements in accordance with IFRS require the management to make such estimates and assumptions that affect the carrying amounts at the balance sheet date for assets and liabilities and the amounts of revenues and expenses.. Actual results may differ from the estimates and assumptions. The items wherein critical estimates and judgements have been made are described below.
Fair value measurement of assets and liabilities acquired in business combinations
Assets and liabilities acquired in business combinations are measured at fair value according to IFRS 3. Whenever possible, the management uses available market values when determining the fair values. When this is not possible, the measurement is based on the historical revenues from the asset. In particular, the measurement of intangible assets is based on discounted cash flows and requires the management to make estimates on future cash flows and the future use of assets, along with their effect on the Group’s financial position. Although these estimates are based on the management’s best knowledge, actual results may differ from the estimates (Note 2 Business acquisitions). The carrying amounts of assets are reviewed continuously for impairment. More information about this is provided in the section “Impairment of assets” under the accounting policies.
Goodwill impairment testing
In testing of goodwill for impairment, the recoverable amounts of the cash generating units to which the goodwill belongs are determined on the basis of value-in-use calculations. These calculations require the judgment by the management. Though the assumptions used are appropriate according to the management’s judgment, the estimated cash flows may differ fundamentally from those realised in the future (Note 13 Goodwill impairment tests).
Distribution of dividend
Dividend is recognised as a liability in the statement of financial position after the resolution of the Annual General Meeting.
Application of new or amended IFRS standards
Amendments to standards effective from the beginning of 2009:
• IFRS 8 Operating Segments. The standard replaced the Segment Reporting standard (IAS 14) and requires that reporting be done from the management’s viewpoint. Segment information shall be presented on the same basis as that used for internal reporting provided to the management and on the accounting policies applied in that reporting. The adoption of IFRS 8 did not impose any significant changes on the Group’s segment reporting as the segment reporting is based on the internal reporting structure. As of 1 June 2009, business operations were regrouped into three divisions: Environmental Services, Property and Office Support Services and Renewable Energy Sources (L&T Biowatti). The company’s internal reporting, as well as the segments reported externally, will be changed to reflect the new divisions at the beginning of 2010.
• IAS 23 (Amendment) Borrowing Costs (effective from 1 January 2009). The standard requires that the acquisition cost of an asset fulfilling certain preconditions, such as a production facility, shall include borrowing costs immediately attributable to the acquisition, construction or manufacture of the asset. The Group has previously recognised borrowing costs as expenses in the financial period during which they have been incurred. Finance costs associated with the construction of the L&T Recoil re-refinery were an exception, and they were capitalised as a portion of the acquisition cost.
• IAS 1 (Amendment) Presentation of Financial Statements (effective from 1 January 2009 ). The revised standard will change the presentation of the income statement and the statement of changes in equity. All owner changes in equity are presented in the statement of changes in equity, while non-owner changes in equity are presented in the consolidated statement of comprehensive income. As the amendment deals with presentation only, it has no impact on the earnings per share.
• IFRS 7 (Amendment) Financial Instruments: Disclosures (effective from 1 January 2009). The amendment requires a more extensive disclosure of the fair value measurement of financial instruments. The standard introduces a three-level fair value disclosure hierarchy where classification depends on the significance of input based on observable market data. Furthermore, the amendment clarifies and enhance disclosure requirements about liquidity risk arising from financial instruments.
• IFRIC 13 Customer Loyalty Programmes (effective from 1 July 2008, EU approval pending) clarifies the accounting practices for customer loyalty programmes. The adoption of the standard does not affect the Group’s accounting policies because the Group does not operate any customer loyalty programmes.
• IFRS 2 (Amendment) Share-based Payment (effective from 1 January 2009). The amendment deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. The amendment will not have any impact on the financial statements.
• IAS 1 (Amendment) Presentation of Financial Statements and IAS 32 (Amendment) Financial Instruments: Disclosure and Presentation – Puttable Financial Instruments and Obligations Arising on Liquidation (effective from 1 January 2009, EU approval pending). The amended standards require the entities to classify puttable financial instruments as equity, while they have previously been classified as debt. The interpretation will not have any impact on the consolidated financial statements.
• IFRS 1 (Amendment) First-time Adoption of IFRS and IAS 27 (Amendment) Consolidated and separate financial statements (effective from 1 January 2010) – Cost of and investment in a subsidiary, jointly controlled entity or associate. The amendments will not have any impact on the consolidated financial statements, because they are applied to first-time adopters of IFRS.
The IASB has published the following new or revised standards and interpretations that have not been early applied by the Group. The Group will adopt them as of their effective date or the beginning of the financial period following the effective date when the effective date is other than the beginning date of the financial period. IFRS 9 Financial Instruments is an exception and the Group will adopt it as of the beginning of 2011 at the earliest.
• lFRS 3 (Amendment) Business combinations (effective from 1 July 2009). The standard contains several significant changes to the treatment of business combinations effected after the adoption of the amended standard and they have a material impact on the Group’s financial statements. The amendments affect the amount of goodwill to be recognised from acquisitions and items recognised in the income statement both in the period of the acquisition and in the periods where additional payments or additional acquisitions are made. For example, a contingent consideration is recognised at acquisition-date fair value and revaluations, if any, are recognised through profit or loss. Transaction costs such as attorney’s and consultant’s fees are no longer included in the acquisition cost but they are recognised in profit or loss. A minority interest may be measured either at fair value or at the minority interest’s proportionate share of the acquiree’s net assets. According to the transitional provisions, business combinations that were effected before the adoption of the standard will not be restated.
• IAS 27 (Amendment) Consolidated and separate financial statements (effective from 1 July 2009). The revised standard requires that the effects of changes in interest in a subsidiary are recognised in equity, when there is no change in control. When control in a subsidiary is lost, any remaining interest is measured at fair value through profit or loss. A similar accounting treatment will be applied to investments in associates (IAS 28) and interests in joint ventures (IAS 31). As a consequence of the amendment, losses of a subsidiary may be attributed to minority interests also when they exceed the minority interest.
• IAS 39 (Amendment) Financial instruments: Recognition and measurement (effective from 1 July 2009). Amendments relate to hedge accounting. They clarify the guidance by IAS 39 concerning one-sided hedging of a hedged item and hedging against inflation risk, if the hedged item is a financial asset or financial liability. The amendment will not have any impact on the financial statements.
• IFRIC 17 Distributions of Non-cash Assets to Owners (effective from 1 October 2009). The interpretation gives guidance on the recognition and measurement of distributions of non-cash assets to owners. The dividend payable shall be measured at the fair value and the difference between the dividend paid and the carrying amount of the net assets distributed recognised in profit or loss. The interpretation will not have any impact on the financial statements because it is improbable that the Group should distribute non-cash assets to owners.
• IFRIC 18 Transfers of Assets from Customers (effective from 1 October 2009). The interpretation clarifies requirements of IFRS standards concerning agreements in which the entity receives from its customers an item of property, plant and equipment or cash to be used to acquire or construct such an item that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both. The interpretation does not have any impact on the consolidated financial statements because the Group does not have any agreements to which the interpretation should be applied.
• IFRS 2 (Amendment) Share-based Payment – Group cash-settled share-based payment transactions (effective from 1 January 2010, EU approval pending). The amendments clarify that an entity that acquires goods or services must apply IFRS 2 although the entity has no obligation to settle the cash-settled share-based payment transactions with the supplier. The interpretation does not have any impact on the consolidated financial statements.
• IAS 32 (Amendment) Financial Instruments: Presentation – Classification of Rights Issues (effective from 1 February 2010, EU approval pending). The amendment addresses the accounting for (classification) of issues of rights, options or warrants that are denominated in a currency other than the functional currency of the issuer. The amendment does not have any impact on the consolidated financial statements.
• IFRS 1 (Amendment) First-time Adoption of IFRS A revised standard version was issued in November 2008, where the structure of the standard has been clarified but which includes no changes to the content (effective from 1 January 2010). The amendments will not have any impact on the consolidated financial statements, because they are applied to first-time adopters of IFRS.
• Improvements to IFRSs (effective from 1 January 2010). With the Annual improvements method, necessary, but non-urgent, amendments to IFRSs are collected to a set and dealt with once a year. A total of 12 standards are affected by these amendments, and the impacts of the changes vary by standard. They are not expected to have a material impact on the Group’s financial statements.
• IAS 24 (Revised) Related Party Disclosures (effective from 1.1.2011, EU approval pending). The revised standard simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. The amendment will not have any impact on the consolidated financial statements.
• IFRS 9 Financial Instruments (effective from 1 January 2013 or from the beginning of the financial period following the effective date at the latest, EU approval pending), the Phase I in the replacement of IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets. The following phases of the amendments will address the classification and measurement of financial liabilities, impairment of financial assets and hedge accounting. Management has not yet assessed the materiality of the amendments to the Group.