(7.) Accounting policies
The accounting policies applied in the previous year have been retained. Notes on the first-time adoption of new or amended standards and interpretations can be found in note (3). Items presented in the statement of financial position are broken down into current and non-current items. An asset or liability is classified as current if it is expected to be realised within twelve months of the end of the reporting period.
ESTIMATES AND ASSUMPTIONS Preparation of consolidated financial statements in line with IASB standards requires management to make estimates and assumptions that affect the amounts and reporting of recognised assets and liabilities, income and expenses and contingent assets and liabilities. Essentially the following matters are affected by estimates and assumptions:
- assessment of impairment on goodwill
- assessment of impairment on capitalised development costs
- measurement of intangible assets and items of property, plant and equipment
- assessment of impairment on trade receivables
- recognition and measurement of provisions for pensions and similar obligations
- recognition and measurement of other provisions
In goodwill impairment testing, the recoverable amount of cash-generating units is measured as the higher of fair value less costs to sell and value in use. Fair value is the best estimate of the amount obtainable at the end of the reporting period from the sale of a cash-generating unit in an arm’s length transaction. Value in use is the present value of the future cash flows expected to be derived from continuing use of a cash-generating unit.
The Wilo Group uses the value in use as calculated using the discounted cash flow method in impairment testing for goodwill. The discounted cash flows are based on the strategic planning for a period of five years.
The cash flows forecasts take into account past experience and are based on the best estimate of future development by the company’s management. Cash flows after the planning period are extrapolated using growth rates specific to the business area.
The most important assumptions on which the calculation of value in use is based include discounted cash flows, estimated growth rates, the weighted average cost of capital and tax rates. These estimates and the underlying method can have a significant influence on the respective values and ultimately on the amount of possible goodwill impairment. The Wilo Group reported goodwill of EUR 64,336 thousand as at the end of the reporting period (previous year: EUR 62,962 thousand). Further information can be found in “Intangible assets” and “Impairment of assets” (note (7)) and note (9.1).
For intangible assets and items of property, plant and equipment, the useful lives used consistently throughout the Group are based on management estimates. Moreover, if necessary, impairment tests determine the recoverable amount of an asset or the cash-generating unit assigned to the asset as the higher of fair value less costs to sell or the value in use.
Fair value is the best estimate of the amount obtainable at the end of the reporting period from the sale of an asset in an arm’s length transaction. The discounted future cash flow of the asset in question must be determined to calculate its value in use. The estimate of discounted future cash flows includes significant assumptions, e.g. the discount rate. Although the management presumes that its assumptions of general economic conditions, estimates of discounted future cash flow and of relevant expected useful lives are appropriate, a change in assumptions or circumstances could require a change in analysis. This could result in additional impairment losses in the future if the trends identified by the management reverse or if its assumptions or estimates prove to be incorrect. The Wilo Group reported property, plant and equipment of EUR 341,794 thousand as at the end of the reporting period (previous year: EUR 306,808 thousand).
Further information can be found in “Intangible assets”, “Property, plant and equipment” and “Impairment of assets” (note (7)) and under notes (9.1) and (9.2).
Credit risks and risks of default can arise for trade receivables to the extent that customers do not meet their payment obligations and asset losses occur as a result. The necessary write-downs are calculated taking into account the credit rating of the respective customer, any collateral and experience of historical default rates.
The actual default on payment by the customer can differ from the expected default on account of the underlying factors. The Wilo Group recognised total write-downs on trade receivables of EUR 20,721 thousand (previous year: EUR 17,018 thousand) as at the end of the reporting period. Further information can be found in “Financial assets” (note (7)) and note (9.6).
The amount and probability of utilisation are estimated for the recognition and measurement of other provisions. The measurement is based on the most likely settlement amount or the expected settlement amount if there are equal probabilities. The amount of actual utilisation can differ from estimates. The Wilo Group essentially reported provisions for possible warranty claims and provisions for bonuses and customer rebates under other provisions. In total, other provisions of EUR 47,214 thousand (previous year: EUR 44,928 thousand) were reported as at the end of the reporting period. Further information can be found in “Other provisions” (note (7)) and note (9.17).
The calculation of provisions for pensions and similar post-employment obligations is based on key premises, such as the discounting rates, salary trends, life expectancies and assumptions regarding trends in healthcare. The discounting rates used are determined on the basis of the returns on government bonds of the same term and currency as at the end of the reporting period. Actual developments may differ from the premises assumed on account of the fluctuating market and economic situation. This can have a significant effect on the obligations for pensions and similar post-employment benefits. The resulting differences are recognised in other comprehensive income. Further information can be found in “Pensions and similar obligations” (note (7)) and note (9.16).
The assumptions and estimates are based on current knowledge and the data currently available. Actual developments can differ from estimates. If the actual amounts differ from those estimated, the carrying amounts of the relevant assets and liabilities are adjusted accordingly.
JUDGEMENTS Judgements must be made in the application of accounting policies. In particular, this applies to the following:
- Financial assets must be assigned to the categories “financial assets at fair value through profit and loss”, “financial assets held to maturity”, “loans and receivables” and “financial assets available-for-sale”.
- The cash-generating units for goodwill impairment testing are formed and defined by products and applications and are subject to management judgement.
- When using derivatives to minimise the financial risks of hedged items, it must be decided whether hedge accounting is to be used within the meaning of IAS 39.
EXPENSE AND REVENUE RECOGNITION Revenue is normally recognised when service is rendered or goods are delivered and the associated risks and rewards are substantially transferred to customers. Net sales are presented net of trade discounts and rebates. Cost includes all direct costs and overheads incurred in generating net sales, including depreciation on production machinery. This item also includes amounts recognised for guarantee provisions. Operating expenses are recognised in profit or loss when service is rendered or the expenses incurred. Interest income and interest expenses are recognised on an accrual basis.
ADMINISTRATIVE EXPENSES AND SELLING EXPENSES Administrative expenses and selling expenses include attributable labour and material costs plus depreciation applicable to each functional area.
RESEARCH AND DEVELOPMENT COSTS Development costs are capitalised as intangible assets at cost and amortised over their useful lives, provided the capitalisation criteria described in IAS 38 are met. Development costs that do not meet the capitalisation criteria in accordance with IAS 38 and research costs are reported as a separate line item in the income statement. In the year under review, development costs were capitalised in the amount of EUR 18,510 thousand (previous year: EUR 19,970 thousand), including EUR 1,290 thousand in capitalised borrowing costs (previous year: EUR 675 thousand).
BORROWING COSTS Borrowing costs are recognised in profit or loss, provided they do not relate directly to the acquisition, development or production of qualifying assets.
If this is the case, these direct borrowing costs are capitalised as incidental costs of acquisition of the qualified asset. Qualifying assets are assets which require a substantial period of time to bring them to a condition suitable for use or sale. In the 2016 financial year, borrowing costs were capitalised in the amount of EUR 1,290 thousand (previous year: 675). This figure related solely to capitalised development costs. The borrowing cost rate, which forms the basis for determining the capitalisable borrowing costs, was 3.42 percent in the year under review (previous year: 3.77 percent).
INTANGIBLE ASSETS Acquired intangible assets with a finite useful life are capitalised at cost and amortised on a straight-line basis over their useful lives (three to five years in the Wilo Group).
The amortisation for the financial year is allocated to the corresponding functional areas. In accordance with IFRS 3 and IAS 38 in conjunction with IAS 36, goodwill is not amortised but instead tested for impairment annually and whenever there is an indication that it has become impaired. If impairment testing of goodwill shows the goodwill to be impaired, the impairment loss is recognised under other operating expenses.
If the conditions of IAS 38 are met, development costs with a finite useful life are capitalised and amortised on a straight-line basis over their useful lives (ten years in the Wilo Group).
PROPERTY, PLANT AND EQUIPMENT Physical assets used in the business for longer than one year are measured at cost less straight-line depreciation. Cost comprises the purchase price plus all directly attributable costs incurred in bringing an asset to the location and condition necessary for it to be capable of operating. Useful lives are based on the standard depreciation of the assets.
The estimated useful life of a building is between 10 and 60 years; leasehold improvements and buildings on third-party land are depreciated over the shorter of the lease term or their useful life. The useful lives for technical equipment and machinery are up to 14 years. Operating and office equipment subject to normal use are depreciated over 3 to 13 years. Significant parts of an asset that meet the criteria set out in IAS 16 are accounted for using the component approach. The depreciation for the financial year is allocated to the corresponding functional areas.
ASSETS HELD FOR SALE Non-current assets or disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition and its sale must be highly probable. Assets held for sale are no longer written down, and are instead measured at the lower of fair value less costs to sell and carrying amount.
LEASES Wilo does not lease out any items itself, instead acting as a lessee only. Leases that meet the classification criteria for finance leases under IAS 17 are initially recognised as assets and liabilities at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. If it is not reasonably certain that the lessee will obtain ownership by the end of the lease term, the leased asset is fully depreciated on a straight-line basis over the shorter of the lease term and its useful life. In such a case, the useful life is taken as a basis. On first-time recognition of finance leases under IAS 17, the capitalised amount and the liability are identical. Leased property is returned to the lessor at the end of the lease term.
Where consolidated companies are lessees under operating leases, lease payments are recognised on a straight-line basis over the term of the lease in profit or loss.
IMPAIRMENT OF ASSETS At the end of each reporting period it is assessed whether there is any indication that an asset may be impaired. Depreciable assets are tested for impairment if there is an indication that their carrying amount may exceed their recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use.
Goodwill is tested for impairment once per financial year when the annual financial statements are prepared at the end of the reporting period and whenever there are indications that it may have become impaired. In impairment testing, the recoverable amount of cash-generating units is measured as the higher of fair value less costs to sell and value in use. Fair value is the best estimate of the amount obtainable at the end of the reporting period from the sale of a cash-generating unit in an arm’s length transaction. Value in use is the present value of the future cash flows expected to be derived from a cash-generating unit.
The recoverable amount is measured using the discounted cash flow method on the basis of approved planning over a strategic planning horizon of five years. An appropriate, unit-specific growth factor is applied. The plans are based on past experience and projected market development. The product divisions of the Wilo Group are broken down by product groups and applications to form the cash-generating units. The cash-generating units at the Wilo Group are the Heating, Ventilation, Air-Conditioning and Clean and Waste Water product divisions.
The impairment test for goodwill performed in the 2016 financial year showed that there was no need for recognising an impairment loss.
In impairment testing, goodwill and all other assets are allocated to cash-generating units and compared to the value in use of the respective cash-generating unit. If the value in use of a cash-generating unit is lower than the total carrying amount of the goodwill and all other assets allocated to it, an impairment loss must be recognised in profit or loss. An impairment loss is deducted from the goodwill allocated to the cash-generating unit and then pro rata from the other assets in the unit. Impairment losses are reported in other operating expenses in profit and loss.
The Wilo Group uses the value in use of each division as its recoverable amount for the purposes of goodwill impairment testing. Goodwill is also recoverable if the key parameters, in particular the discount rate before tax and the long-term growth rate, are implemented in a sensitivity analysis.
The main assumptions used to determine the value in use of each division for goodwill impairment testing are shown below:
The discount rate used in annual impairment testing of cash-generating units is determined on the basis of market data. A rate of 11.6 or 12.3 percent before income taxes was used for the cash-generating units in the 2016 financial year (previous year: 11.4 percent or 12.1 percent before income taxes). As in the previous year, the long-term growth factor for the cash-generating units is 0.1 percent or 0.7 percent.
2016 financial year
taxes in %
The impairment test for capitalised development costs performed in the 2016 financial year also did not result in any need for impairment.
INVESTMENTS CARRIED AT EQUITY Investments in associates and joint ventures are reported in investments carried at equity.
Associates are those entities in which the Wilo Group has significant influence, but not control or joint control, over the financial and operating policies.
Joint ventures are based on joint arrangements whereby the Wilo Group and a third party have joint control of the arrangement and rights to the net assets of the arrangement.
Associates and joint ventures are accounted for using the equity method. They are recognised at cost at the acquisition date. Cost includes transaction costs directly attributable to the acquisition. At subsequent reporting dates, the carrying amount is increased or reduced by the changes in equity attributable to the Wilo Group’s equity interest. There were no significant intragroup profits or losses from transactions between Group companies and investments carried at equity in the past financial year.
FINANCIAL ASSETS The Wilo Group’s financial assets comprise loans and receivables, acquired equity and debt securities, cash and derivative financial instruments that are assets. Within the Wilo Group, these financial assets are reported under trade receivables, other financial assets and cash.
Financial assets are recognised and measured in line with IAS 32, IAS 39 and IFRS 13. In accordance with IAS 32, financial assets are reported in the consolidated statement of financial position if the Wilo Group has a contractual right to receive cash or other financial assets from another party.
Purchases and sales of non-derivative financial assets are accounted for on the settlement date, i.e. the date of delivery and transfer of ownership. Derivative financial instruments are accounted for at the trade date. A financial asset is initially recognised at fair value. For financial assets not subsequently measured at fair value through profit or loss, transaction costs that are directly attributable to the acquisition are also taken into account. Non-interest-bearing receivables or receivables subject to low interest rates with a term of more than one year are carried at the present value of the expected future cash flows on first-time recognition. For financial assets with a remaining term of less than one year, the fair value is assumed to be the same as the nominal value.
Subsequent measurement is in line with the classification of financial assets into the following categories in accordance with IAS 39, each of which is subject to different measurement rules:
- Financial assets at fair value through profit and loss and financial assets held for trading comprise financial assets held for trading. Any changes in the fair value of financial assets in this category are recognised in profit or loss at the time their value increases or decreases. Only derivative financial instruments not used as hedge accounting instruments are allocated to this category in the Wilo Group.
- Loans and receivables are non-derivative financial assets that are not quoted on an active market whose payments are fixed or determinable and that were not allocated to a different category on initial recognition. Subsequent measurement is at amortised cost. This category includes trade receivables in addition to receivables and loans classified as other financial assets. The interest income from items in this category is calculated using the effective interest method, provided they are not current receivables and the effect of discounting is immaterial.
- Held-to-maturity investments are non-derivative financial assets that are quoted on an active market with fixed or determinable payments and a fixed maturity to which they are held. These are measured at amortised cost using the effective interest method. No financial assets of this category were reported by the Wilo Group as at 31 December 2016 or 2015.
- Available-for-sale financial assets comprise non-derivative financial assets that are not classified in one of the above categories. These include in particular equity securities (e.g. shares and other interests in companies) which are contained in other financial assets.
Available-for-sale financial assets are measured at fair value. If there is no quoted price and the fair value cannot be determined with sufficient reliability, they are measured at amortised cost. Any changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income. This does not apply in the case of permanent or significant impairment losses or for currency-related changes in the value of debt instruments, which are recognised in profit or loss. The cumulative gains and losses from fair value measurement recognised in other comprehensive income are not taken to profit or loss until the financial assets are derecognised. In cases where the fair value of equity and debt securities can be determined, this is recognised as fair value. If no quoted market price exists and no reliable estimate of fair value can be made, these financial assets are measured at cost less impairment losses.
Available-for-sale financial assets in the Wilo Group consist mainly of investments in companies for which no quoted market price exists and no reliable estimate of fair value can be made. These comprise shares in unconsolidated subsidiaries and associated companies not accounted for at equity.
No financial instruments were reclassified to a different measurement category in the year under review or the previous year.
If financial assets measured at amortised cost show objective, substantial indications of impairment, they are tested to see if the carrying amount of the asset exceeds the present value of the expected future cash flows discounted using the original effective interest rate; an impairment loss is recognised if this is the case. The difference is deducted from the carrying amount of the financial asset in profit or loss either directly or by way of an allowance account. For equity securities classified as available-for-sale, an impairment loss is recognised if major, adverse changes have taken place in the issuer’s environment or the fair value of the equity security is substantially below cost over a longer period. The loss is calculated as the difference between the current fair value and the carrying amount of the financial instrument. Indications of impairment include several years of operating losses in a company, a reduction in market value, material deterioration of credit rating, significant defaults on payment, particular breaches of contract, the high probability of insolvency or other forms of financial restructuring on the part of the debtor or the disappearance of an active market.
If the reasons for impairment losses recognised in the past no longer apply, they are reversed as appropriate to the maximum of the amortised cost. Impairment losses on equity securities classified as available-for-sale are reversed in other comprehensive income.
Financial assets are derecognised if the contractual rights to payments from the financial assets no longer exist or the financial assets are transferred with all material risks and rewards.
INVENTORIES Raw materials and supplies and merchandise are measured at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. Work in progress and finished goods are carried at cost. This includes all costs directly attributable to production and appropriate portions of production overheads. Production overheads include production-related depreciation, pro rata administration costs and pro rata social security costs. Cost does not include borrowing costs. Discounts are recognised on raw materials and supplies and merchandise for quality and functional defects and for risks of failure to sell. Inventories are measured as at the end of the reporting period at the lower of cost and net realisable value.
DERIVATIVES AND HEDGING The Wilo Group uses derivatives solely to reduce exchange rate, interest rate and commodity price risk. These instruments are hedges from an economic perspective, but do not meet the requirements of IAS 39 for hedge accounting. The Wilo Group therefore does not use hedge accounting as defined by IAS 39 for derivatives.
Measurement is performed using standard measurement methods based on market parameters specific to each instrument. The fair value of forward exchange contracts and cross-currency interest rate swaps is calculated using net present value models, while the fair value of options is calculated using option pricing models. Where possible, the relevant market prices and interest rates at the end of the reporting period are used as the input parameters for these models.
The fair value of forward exchange contracts is determined using the middle spot exchange rate as at the end of the reporting period and taking into account the forward premiums and discounts for the remaining contract term with respect to the agreed forward exchange rate. The fair value of cross-currency interest rate swaps is determined by discounting the expected cash flows using applicable market rates with the same term as at the reporting date. Commodity futures are measured on the basis of current quoted market prices, taking corresponding forward premiums and discounts into account. In contrast, currency and commodity options are measured using option pricing models. The fair value of derivative financial instruments is calculated by banks.
Changes in the fair value of derivatives as at the end of the reporting period are taken directly to profit and loss under other net finance costs. Income and expenses from the realisation of derivatives are disclosed in the income statement in the item in which the effects of hedged items are reported. Income or expenses from the realisation of currency derivatives are recognised under other operating income or expenses, provided the hedged item is assigned to the operating area and the income and expenses from the measurement of this item were recognised accordingly in the same item. If the item relates to financial activity, the realised income and expenses from the currency forward or currency option are reported in other net financial income. Income or expenses from the realisation of cross-currency interest rate swaps are reported in net interest income. Income or expenses from the realisation of commodity derivatives without physical delivery are reported in cost of sales.
OTHER RECEIVABLES AND ASSETS Other receivables and assets primarily include tax receivables, advance payments, employer pension liability assets, deferrals and receivables from employees that are not financial assets. These other receivables and assets are measured at amortised cost.
DEFERRED TAXES Deferred tax assets and deferred tax liabilities are recognised in accordance with IAS 12 for all temporary differences between the carrying amount of an asset or liability in the IFRS financial statements and its tax base.
Deferred tax assets are also recognised in respect of the expected utilisation of unused tax loss carryforwards in subsequent years provided the tax loss carryforwards are sufficiently likely to be utilised. Deferred tax assets are tested for impairment as at the end of the reporting period. The Wilo Group also recognises deferred tax liabilities for the tax expenses to arise on the expected profit distributions by the consolidated subsidiaries to WILO SE in 2017.
Deferred tax assets and liabilities are measured at the tax rates that apply or that are expected to apply at the realisation date according to the current legal situation in the individual countries.
Deferred tax assets are only offset against deferred tax liabilities if they relate to the same taxation authority and have matching terms. Information on the deferred taxes as at 31 December 2016 is provided in note (8.9).
GOVERNMENT GRANTS In accordance with IAS 20, a government grant is only recognised if there is reasonable assurance of compliance with the conditions attached to it and that the grant will be received. Research and investment grants received by the Wilo Group are recognised in profit or loss over the periods necessary to match them to the costs they are intended to compensate. They are recognised as deferred income and reversed to profit and loss over the term of the subsidised assets.
EQUITY Treasury shares are measured at cost and reported separately as a deduction from equity. Treasury shares in the notional amount of EUR 1,477 thousand (previous year: EUR 1,916 thousand) are openly deducted from issued capital.
FINANCIAL LIABILITIES Financial liabilities comprise primary liabilities and derivative financial instruments with negative fair values. Derivative liabilities are classified as financial liabilities at fair value through profit and loss or financial liabilities held for trading in accordance with IAS 39. In the Wilo Group, financial liabilities consist of liabilities due to banks, trade payables and liabilities reported under other financial liabilities.
In accordance with IAS 32, primary liabilities are recognised in the consolidated statement of financial position if the Wilo Group has a contractual obligation to transfer cash or other financial assets to another party. Primary liabilities are measured at the cost of consideration or the cash received on first-time recognition. Non-interest-bearing and low-interest liabilities with a term of more than one year are discounted if the time value of money is not immaterial. For liabilities with a term of less than one year, the fair value is assumed to be the same as the settlement amount. Transaction costs that are directly attributable are also recognised for all financial liabilities not subsequently measured at fair value and then amortised over their term using the effective interest method.
In subsequent measurement, finance lease liabilities are carried at the present value of the lease payments. All other financial liabilities classified as financial liabilities measured at amortised cost are carried at their settlement amount or amortised cost using the effective interest method.
Financial liabilities are derecognised if the contractual obligations are discharged, cancelled or expire.
Financial assets and financial liabilities are generally reported without offsetting.
OTHER LIABILITIES Other liabilities mainly comprise tax liabilities, advance payments received, deferrals and liabilities to employees that are not financial liabilities as defined by IAS 32. These are measured at amortised cost.
PENSIONS AND SIMILAR OBLIGATIONS Provisions are recognised for uncertain liabilities from pension obligations and other post-employment benefits. In accordance with IAS 19, pension obligations for defined benefit commitments are calculated using the internationally recognised projected unit credit method. The calculations are based on actuarial appraisals and biometric parameters.
Actuarial gains and losses and gains and losses from the remeasurement of plan assets are recognised in full in other comprehensive income.
The expense relating to pension obligations, with the exception of the interest portion reported in net finance costs, is allocated to the relevant functional areas. The amount of pension obligations is determined using actuarial methods, for which estimates are essential. The calculations for pension obligations use the following parameters, shown here on a weighted-average basis:
Calculation parameters for pension obligations
|Figures in %||31 Dec. 2016||31 Dec. 2015|
The net interest expense is calculated by multiplying the net pension liability by the discount rate of 1.67 percent (previous year: 2.32 percent).
The actuarial present value of pension obligations calculated using the projected unit credit method is reduced by the amount of the corresponding assets at the third-party pension provider if the requirements of IAS 19 for plan assets are met.
OTHER PROVISIONS Provisions for taxes include current income tax liabilities. Other provisions are recognised in accordance with IAS 37 when there is a present obligation to a third party resulting from a past event, settling the obligation will probably require an outflow of resources and the amount of the obligation can be reliably estimated. Non-current provisions for obligations not expected to result in an outflow of resources in the next year are recognised at the net present value of the expected outflow of resources. The discount rate is based on market interest rates.
The settlement amount includes expected cost increases. Provisions are remeasured as at the end of each reporting period. Provisions are not offset against rights of recourse.