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2  Summary of significant accounting policies

 

2.1  Basis of preparation

These financial statements are the consolidated financial statements of Tecan Group Ltd. and its subsidiaries (together referred to as the ‘Group’) for the year ended December 31, 2018. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and their interpretations adopted by the International Accounting Standards Board (IASB). 

 

The financial statements are presented in Swiss francs (CHF), rounded to the nearest thousand. They are prepared on the historical cost basis except for derivative financial instruments and the contingent consideration, which are stated at their fair value.

 

The consolidated financial statements were authorized for issue by the Board of Directors on March 7, 2019. Final approval is subject to acceptance by the Annual General Meeting of Shareholders on April 16, 2019.

 

2.2  Critical accounting estimates and judgments

The preparation of these consolidated financial statements requires management to make assumptions and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and disclosure of contingent liabilities at the date of these financial statements. If in the future such assumptions and estimates deviate from the actual circumstances, the original assumptions and estimates will be modified as appropriate in the year in which the circumstances change.

The valuation of the following material positions is based on critical accounting estimates and judgments:

 

2.2.1  Revenue recognition – performance obligations satisfied over time

The Group applies the cost-to-cost method in accounting for performance obligations satisfied over time as outlined in the accounting and valuation principles (see note 2.7.1). The use of the cost-to-cost method requires management to determine the stage of completion by reference to the contract costs incurred for work performed to date in proportion to the estimated total contract costs. Based on the estimated stage of completion, a respective portion of the expected revenue is recognized. If circumstances arise that may change the original estimates of revenues, costs or extent of progress towards completion, estimates are revised. These revisions may result in increases or decreases in estimated revenues or costs and are reflected in the statement of profit or loss in the period in which the circumstances that give rise to the revision become known to the management. See note 4 and 21 for more details.

 

2.2.2  Performance share matching plan (PSMP) – matching share factor

The Group established performance share matching plans. The number of matching shares is determined based on the following formula: number of shares from initial grant plus number of shares from mandatory and voluntary investments multiplied by the matching share factor. The matching share factor is dependent on the achievement of specific performance targets. In any case, the matching share factor will not be lower than 0.0 or higher than 2.5. A change in estimate of the matching share factors applied in the current period, will impact the results of future periods. See note11 for more details.

 

2.2.3  Income taxes

At December 31, 2018, the net liability for current income taxes was CHF 14.0 million and the net asset for deferred taxes was CHF 12.1 million. Significant estimates are required in determining the current and deferred assets and liabilities for income taxes. Various internal and external factors may have favorable or unfavorable effects on the income tax assets and liabilities. These factors include, but are not limited to, changes in tax laws, regulations and/or rates (particularly in relation to the US tax reform), changing interpretations of existing tax laws or regulations (particularly in relation to the acceptance of intra-Group transfer prices), and changes in overall levels of pre-tax earnings. Such changes could impact the assets and liabilities recognized in the balance sheet in future periods.

 

2.2.4  Inventories – capitalized development costs

In 2010, the Group entered into an OEM agreement with a global diagnostics company. The agreement comprises the development and supply of a dedicated diagnostic instrument. The related customer-specific development costs were capitalized in the position inventories as part of the production costs. The delivery of the instruments, which takes place over a period of more than 10 years, started in October 2014. The customer requests the units with individual purchase orders. The Group recognizes the corresponding development costs in cost of sales upon fulfillment of the individual purchase orders. The remaining balance of capitalized development costs as of December 31, 2018 amounted to CHF 83.3 million.

 

At December 31, 2018, the net realizable value of the position was higher than the capitalized development costs. However, the assessment is highly dependent on the best estimate of the future sales quantity. A decrease in estimate could require write-downs in future periods.

 

2.2.5  Intangible assets – capitalized development costs

After the technical feasibility of in-house developed products has been demonstrated, the Group starts to capitalize the related development costs until the product is ready for market launch. However, there can be no guarantee that such products will complete the development phase or will be commercialized, or that market conditions will not change in the future, requiring a revision of management’s assessment of future cash flows related to those products. Such changes could lead to additional amortization and impairment charges. At the end of 2018, the Group has capitalized development costs in the amount of CHF 28.8 million as disclosed in note 19.

 

2.2.6  Impairment test on goodwill

At December 31, 2018 total goodwill amounted to CHF 133.5 million. The Group performed the mandatory annual impairment tests at the end of June for goodwill for Partnering Business and end of December for Life Sciences Business. Based on these tests, there was no need for the recognition of any impairment. However, the calculation of the recoverable amounts requires the use of estimates and assumptions. The key assumptions are disclosed in note 19.

2.3  Introduction of new and amended accounting standards and interpretations

The accounting policies are consistent with those applied in the previous year, except for the introduction of the following new or revised/amended standards and interpretations, effective as from January 1, 2018:

 

Standard/interpretation1

IFRIC 22 ‘Foreign Currency Transactions and 
Advance Consideration’

IAS 40 amended ‘Investment Properties’ – Transfers of Investment Properties

IFRS 2 amended ‘Share-based Payment’ – Classification and ­Measurement of Share-based Payment Transactions

IFRS 9 ‘Financial Instruments’

IFRS 15 ‘Revenue from Contracts with Customers’

  1. IAS = International Accounting Standards, IFRS = International Financial Reporting Standards, IFRIC = Interpretations as by the IFRS Interpretations Committee (formerly International Financial Reporting Interpretations Committee)

The impact of these changes on the consolidated financial statements is disclosed below:

 

2.3.1  IFRS 15 ‘Revenue from Contracts with ­Customers’

a)  Impact of adopting the new standard

IFRS 15 ‘Revenue from Contracts with Customers’ supersedes IAS 11 ‘Construction Contracts’, IAS 18 ‘Revenue’ and related interpretations. The new standard applies to all revenue arising from contracts with customers and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.

 

The Group adopted IFRS 15 using the full retrospective method with the initial application as of January 1, 2018 and adjusting the comparative information for the period beginning January 1, 2017. The adoption had the following impact:

 

 

Reported

Adjustment

Restated

CHF 1,000

 

 

 

Consolidated balance sheet at January 1, 2017

 

 

 

Trade accounts receivable (construction contracts in progress)

2,058

(2,058)

 – 

Contract assets

 –

1,885

1,885

Inventories

168,409

2,339

170,748

Current and non-current deferred revenue

 (80,324)

80,324

 – 

Current and non-current contract liabilities

 – 

 (82,051)

 (82,051)

Accrued expenses

(40,294)

400

(39,894)

Current provisions

(21,596)

(400)

(21,996)

Deferred tax liabilities

(14,752)

 (42)

(14,794)

 

 

 

 

Shareholder’s equity (retained earnings)

485,230

397

485,627

 

 

 

 

Consolidated balance sheet at December 31, 2017

 

 

 

Trade accounts receivable (construction contracts in progress)

1,514

 (1,514)

Contract assets

 –

1,123

1,123

Inventories

158,724

1,494

160,218

Current and non-current deferred revenue

(75,294)

75,294

Current and non-current contract liabilities

(76,643)

(76,643)

Accrued expenses

(45,176)

289

(44,887)

Current provisions

(15,056)

(289)

(15,345)

Deferred tax liabilities

(11,587)

26

(11,561)

 

 

 

 

Shareholder’s equity (retained earnings)

541,796

 (220)

541,576

 

 

Reported

Adjustment

Restated

CHF 1,000

 

 

 

Consolidated statement of profit or loss 2017

 

 

 

Sales

548,399

160

548,559

Cost of sales

(282,832)

 (845)

 (283,677)

 

 

 

 

Operating profit

80,481

 (685)

79,796

 

 

 

 

Income taxes

(13,130)

68

 (13,062)

 

 

 

 

Profit for the period

66,547

(617)

65,930

 

 

 

 

Earnings per share

 

 

 

  Basic earnings per share (CHF/share)

5.73

(0.06)

5.67

  Diluted earnings per share (CHF/share)

5.64

(0.05)

5.59

 

There was no material impact on the other comprehensive income or the statement of cash flows.

 

The adoption of IFRS 15 reduced the possibility to use the percentage of completion method and changed the timing of the revenue recognition for engineering services. In addition, the presentation in the balance sheet and certain disclosures were modified.

 

b)  New accounting policies

Accounting policies applied for revenue from contracts with customers: see note 2.7.1.

 

2.3.2  IFRS 9 ‘Financial Instruments’

a)  Impact of adopting the new standard

IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’ for all periods beginning on or after January 1, 2018, bringing together all three aspects of the accounting of financial instruments: classification and measurement, impairment and hedge accounting.

 

The Group applied IFRS 9 retrospectively, with the initial application date of January 1, 2018 and adjusting the comparative information for the period beginning January 1, 2017.

The introduction of IFRS 9 had no impact, neither on the balance sheets as at January 1 and December 31, 2017 nor on the statement of profit or loss and other comprehensive income 2017. The following table compares the original measurement categories under IAS 39 with the new measurement categories under IFRS 9 for each class of the Group’s financial assets and liabilities as at ­January 1, 2017 and December 31, 2017.

 

 

Original classification under IAS 39

New classification 
under IFRS 9

Original carrying

amount under IAS 39

New carrying

amount under IFRS 9

CHF 1,000

 

 

 

 

Financial asset classes

 

 

 

 

Cash and cash equivalents

Loans and receivables

Amortized cost

246,744

246,744

Receivables

Loans and receivables

Amortized cost

95,763

95,763

Rent and other deposits

Loans and receivables

Amortized cost

997

997

Currency forwards

Derivatives

Mandatorily FVTPL

3,074

3,074

 

 

 

 

 

Balance at January 1, 2017

 

 

346,578

346,578

 

 

 

 

 

Financial liability classes

 

 

 

 

Current bank liabilities

Other financial liabilities

Amortized cost 

1,103

1,103

Payables and accrued expenses

Other financial liabilities

Amortized cost

49,929

49,929

Currency forwards

Derivatives

Mandatorily FVTPL

6,822

6,822

Bank loans

Other financial liabilities

Amortized cost

1,660

1,660

Contingent considerations

Fair value (IFRS 3)

FVTPL (IFRS 3)

9,273

9,273

 

 

 

 

 

Balance at January 1, 2017

 

 

68,787

68,787

 

 

Original classification under IAS 39

New classification 
under IFRS 9

Original carrying

amount under IAS 39

New carrying

amount under IFRS 9

CHF 1,000

 

 

 

 

Financial asset classes

 

 

 

 

Cash and cash equivalents

Loans and receivables

Amortized cost

309,412

309,412

Receivables

Loans and receivables

Amortized cost

112,382

112,382

Rent and other deposits

Loans and receivables

Amortized cost

1,107

1,107

Currency forwards

Derivatives

Mandatorily FVTPL

1,174

1,174

 

 

 

 

 

Balance at December 31, 2017

 

 

424,075

424,075

 

 

 

 

 

Financial liability classes

 

 

 

 

Current bank liabilities

Other financial liabilities

Amortized cost 

4,329

4,329

Payables and accrued expenses

Other financial liabilities

Amortized cost

58,904

58,904

Currency forwards

Derivatives

Mandatorily FVTPL

1,283

1,283

Bank loans

Other financial liabilities

Amortized cost

1,229

1,229

Contingent considerations

Fair value (IFRS 3)

FVTPL (IFRS 3)

11,639

11,639

 

 

 

 

 

Balance at December 31, 2017

 

 

77,384

77,384

b)  New accounting policies

Accounting policies applied for financial instruments: see note 2.7.8.

 

2.3.3  Other changes

The adoption of the new interpretation and amended standards did not result in substantial changes to the Group’s accounting policies.

2.4  New standards and interpretations not yet applied

The following new and revised/amended standards and interpretations have been issued, but are not yet effective and are not applied early in these consolidated financial statements:

 

Standard/interpretation1

Effective date 
for the Group

IFRIC 23 ‘Uncertainty over Income Tax Treatments’

Reporting year 2019

IAS 19 amended ‘Employee benefits’ – ­Curtailment or Settlement 

Reporting year 2019

IAS 28 amended ‘Investments in Associates and Joint Ventures’ – Long-term Interests in Associates and Joint Ventures

Reporting year 2019

IFRS 9 amended ‘Financial Instruments’  – Prepayment Features with Negative ­Compensation

Reporting year 2019

IFRS 16 ‘Leases’

Reporting year 2019

Annual Improvements to IFRSs 2015–2017

Reporting year 2019

Conceptual Framework for Financial ­Reporting

Reporting year 2020

IAS 1 ‘Presentation of Financial Statements’ amended and IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ amended – Definition of Material

Reporting year 2020

IFRS 3 ‘Business Combinations’ – Definition of a Business

Reporting year 2020

IFRS 10 amended ‘Consolidated Financial Statements’ and IAS 28 amended ‘­Investments in Associates and Joint Ventures’  – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

To be defined

  1. IAS = International Accounting Standards, IFRS = International Financial Reporting Standards, IFRIC = Interpretations as by the IFRS Interpretations Committee (formerly International Financial Reporting Interpretations Committee)

 

The Group intends to adopt these standards, if applicable, when they become effective. The impact of these changes on the consolidated financial statements is disclosed below: 

 

2.4.1  IFRS 16 ‘Leases’

IFRS 16 addresses the principles for the recognition, measurement, presentation and disclosures of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. At the commencement date of a lease, a lessee will recognize a liability to make lease payments (lease liability) and an asset representing the right of use of the underlying asset during the lease term (right-of-use asset). Lessees will be required to separately recognize the interest expense related to the lease liability and the depreciation expense related to the right-of-use asset. 

 

In accordance with IAS 17, all operating lease arrangements are currently reported off-balance sheet (see note 27.2).

 

The Group will apply IFRS 16 on January 1, 2019, using the modified retrospective approach. The cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance as at January 1, 2019, with no restatement of comparative information.

 

Based on the numbers currently available, the Group estimates that it will recognize right-of-use assets (mainly for rental properties) of CHF 48.6 million and corresponding lease liabilities in the same amount as at January 1, 2019. The adoption of the standard will result in a portion of the costs currently recorded as operating lease expenses being recognized as interest expenses within the financial result. Given the current low interest rate environment, the Group does not expect the effects of the adoption IFRS 16 to have a material impact on the operating profit.

 

2.4.2  Other changes

Other changes, individually and in the aggregate, are not expected to have a significant impact on the balance sheet, results of operations and cash flows of the Group upon adoption.

 

2.5  Consolidation principles

 

2.5.1  Subsidiaries

Subsidiaries are entities controlled by the Group. The Group ­controls an entity when it is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. 

 

On the loss of control, the Group derecognizes the assets and ­liabilities of the subsidiary, any non-controlling interests and other components of equity related to the subsidiary. Any resulting gain or loss is recognized in profit or loss.

 

When control is transferred in the event of a business combination, the Group is applying the acquisition method at the acquisition date. 

 

2.5.2  Transactions eliminated upon consolidation

Intra-Group balances and transactions, and any unrealized profits arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements.

 

2.6  Foreign currency translation

Generally, all Group companies have identified their local currency as their functional currency. Transactions in other currencies are ­initially reported using the exchange rate at the date of the trans­action. Gains and losses from the settlement of such transactions, as well as gains and losses on translation of monetary assets and liabilities denominated in other currencies, are included in net profit. 

 

Translation differences arising on intra-Group loans that, in substance, are part of the net investment in a foreign operation, are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the foreign operation. 

Upon consolidation, assets and liabilities of Group companies using functional currencies other than Swiss francs (foreign entities) are translated into Swiss francs (presentation currency) using year-end exchange rates. Revenues, expenses and cash flows are translated at the average exchange rates for the year. Translation differences due to the changes in exchange rates between the beginning and the end of the year and the difference between net profits translated at the average and year-end exchange rates are recognized in other comprehensive income. On the disposal of a foreign operation, the identified cumulative currency translation differences relating to that foreign operation, recognized in other comprehensive income and accumulated in the separate component of equity, are reclassi­fied from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognized.

 

2.7  Accounting and valuation principles

 

2.7.1  Revenue recognition, contract assets and liabilities

Sale of standard instruments and other goods such as spare parts, trade products, consumables or reagents – The sale of standard instruments and other goods is generally considered as one performance obligation. The Group recognizes revenue at the point in time, when control of the asset is transferred to the customer, generally upon delivery.

 

Sale of complex instruments – The sale of complex instruments ­generally follows the same principles as the sale of standard instruments. However, as the sale of a complex instrument requires significant installation and application work at the customer’s site, control of the asset is only transferred and accordingly revenue recognized upon the written acceptance by the customer. For sales orders with multiple instruments and high integrations costs, the Group determines the number of performance obligations individually and assesses whether the performance obligation(s) is/are satisfied over time. For revenue to be recognized over time, the following criteria must be fulfilled cumulatively: The Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

 

Sale of customized instruments (‘Partnering Business’) – The sale of customized instruments comprises the development and supply of instruments with a customer-specific design. The development (adaption of existing Tecan-technology to the customer’s specifications) and supply of the instruments is generally considered as one performance obligation due to the limited usability of and control over the pure development result for the customer. Therefore, the related customer-specific development costs are capitalized in the position inventories as part of the production costs. Once the ­development is completed, the customer requests the units with individual purchase orders. The Group recognizes the corresponding development costs in cost of sales upon fulfillment of the individual purchase orders.

 

Engineering services without delivery of instruments – Engineering services are generally considered as one performance obligation. Revenue is recognized upon finalization of the project (at a point in time). For larger engineering orders the Group assesses whether the performance obligation is satisfied over time. For revenue to be recognized over time, the following criteria must be fulfilled cumulatively: The Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

 

Performance obligations satisfied over time – method of revenue recognition and presentation (sale of complex instruments and engineering services) – The progress is generally measured by using a cost-to-cost approach: costs incurred for the work performed to date in proportion to the estimated total project costs. According to the progress, pro rata sales are recognized in the statement of profit or loss. In the balance sheet, projects in progress – netted against customers’ advances – are recognized as net assets (included in the position ‘contract assets’) or net liabilities (included in the position ‘contract liabilities’). When it is probable that the total costs will exceed contract revenue, the rules of IAS 37 – ‘Onerous Contracts’ are applied.

 

Service contracts – Revenue from service contracts is recognized over time based on the time elapsed.

 

Warranty obligations – The Group provides standard warranties for the repair of defects that existed at the time of sale, as required by law. These warranties qualify as assurance-type warranties under IFRS 15, which the Group accounts for under IAS 37 ‘Provisions’. In addition, the Group offers warranty extensions to its customers. Such warranty extensions are accounted for as service-type warranties according to IFRS 15, representing separate performance obligations to which the Group allocates a portion of the consideration based onthe relative stand-alone selling price. For these service-type warranties, revenue is recognized over time based on the time elapsed.

 

Bundles of goods and services – Typically, instruments are sold together with other goods and services. The sale of other goods such as spare parts or consumables and services such as additional training or application work that are part of the same contract with a customer (bundles of goods and services), but qualify for the identification of separate performance obligations, are recognized separately from the sale of the instrument as revenues. The consideration (including any discounts) is allocated in proportion to the relative stand-alone selling prices of the identified performance obligations.

 

2.7.2  Segment reporting

Segment information is presented in the same manner as in the internal reporting to the chief operating decision maker. The chief operating decision maker, responsible for strategic decisions, for the assessment of the segments’ performance and for the allocation of resources to the segments, is the Board of Directors of ­Tecan Group Ltd.

 

The following reportable segments were identified: 

  • Life Sciences Business (end-customer business): The business segment ‘Life Sciences Business’ supplies end users with automated workflow solutions directly. These solutions include laboratory instruments, software packages, application knowhow, services, consumables and spare parts.
  • Partnering Business (OEM business): The business segment ‘Partnering Business’ develops and manufactures OEM instruments and components that are distributed by partner companies under their own names.

The operating segments are equivalent to the reportable segments. No operating segments have been aggregated. Segment assets, purchases of property, plant and equipment and intangible assets as well as segment liabilities are not reported to the chief operating decision maker. 

 

2.7.3  Government research subsidies

The Group receives government grants for research activities, which are unconditional. They are recognized as income when earned.

 

2.7.4  Employee benefits – retirement and long-service leave benefit plans (IAS 19)

The Group has both defined contribution and defined benefit retirement plans. Defined contribution plans are retirement benefit plans under which the Group pays fixed contributions into a separate fund and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. All other retirement benefit plans are defined benefit plans.

Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions.

The liability recognized in the balance sheet in regard to defined benefit retirement benefit plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets for funded plans. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method, considering possible risk sharing arrangements.

When the calculation results in a benefit to the Group, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. 

 

The components of defined benefit costs are as follows:

  • Service costs, which are recognized in the statement of profit or loss within operating result
  • Interest expense or income on net liability or asset, which is recognized in the statement of profit or loss within financial result
  • Remeasurements, which are recognized in other comprehensive income

Service costs include current service costs, past service costs and gains or losses on plan curtailments and settlements. When the benefits of a plan are changed, or when a plan is curtailed or settled, the portion of the changed benefits related to employee service in prior periods (past service costs), or the gains or losses on curtailments and settlements, are recognized immediately in profit or loss when the plan amendments or curtailments and settlements occur. 

 

Interest expense or income is calculated by applying the discount rate to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during the period as a result of contribution and benefit payments.

 

Remeasurements arising from defined benefit plans comprise actuarial gains and losses, the return on plan assets (excluding interest income) and the effect of the asset ceiling (if applicable). Remeasurements are recognized in other comprehensive income and cannot be reclassified to profit or loss. 

 

Long-service leave benefits: The method of accounting for liabilities concerning long-service leave benefits is similar to the one used for defined benefit retirement plans.

 

2.7.5  Employee benefits – termination benefits (IAS 19)

Termination benefits result from either the Group’s decision to terminate the employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment. The event that gives rise to an obligation is the termination of employment rather than employee service. A liability for termination benefits is recognized at the earlier of when the Group can no longer withdraw the offer of the termination benefits and when the Group recognizes any related restructuring costs.

 

2.7.6  Employee benefits – share-based payment (IFRS 2)

The Group has introduced several equity-settled share-based compensation plans, for which the fair value of shares or share options granted is recognized within operating result and a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the shares or share options (vesting period). The amount recognized as an expense is adjusted by an expected forfeiture rate to reflect the expected number of shares or share options that will vest.

 

The fair value of the shares granted represents the market value of one Tecan share adjusted for expected dividend payments during the vesting period. The fair value of the share options granted is measured using a trinomial model, taking into account the terms and conditions upon which the share options were granted. 

 

2.7.7  Income taxes

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of profit or loss except to the extent that it relates to items recognized in ­other comprehensive income or directly in equity (transactions with owners), in which case it is recognized in other comprehensive income or equity.

 

Deferred taxes are provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affects neither accounting profit nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.

 

Deferred tax assets resulting from temporary differences and tax loss carry-forwards are recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 

 

In addition, deferred taxes are provided on expected dividend distributions in the foreseeable future from subsidiary companies (non-recoverable withholding taxes).

 

2.7.8  Financial instruments

 

2.7.8.1  Cash and cash equivalents and receivables

Measurement category: Financial assets at amortized cost without significant financing component

 

These financial assets are initially measured at the transaction price (nominal value). Subsequently the transaction price is reduced by impairment losses (see below). Foreign exchange gains/losses and impairment are recognized in profit or loss. Any gain or loss on de-recognition is recognized in profit or loss.

 

Accounting for impairment losses on receivables: The Group recognizes an allowance for impairment that represents its estimate of lifetime expected credit losses, applying the simplified approach according to IFRS 9. The Group has established a provision matrix that is based on the Group’s historical credit loss experience, adjusted for forward-looking factors specific to the economic environment.

 

Cash and cash equivalents comprise cash balances and time deposits with a term of three months or less from the date of acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

 

2.7.8.2  Rent and other deposits

Measurement category: Financial assets at amortized cost with ­significant financing component

These financial assets are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently the financial instrument is measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains/losses and impairment are recognized in profit or loss. Any gain or loss on de-recognition is recognized in profit or loss.

 

2.7.8.3  Derivatives and contingent considerations

Measurement category: Financial assets and liabilities at fair value through profit or loss (FVTPL)

 

These financial assets and liabilities are initially measured at fair ­value without any transaction costs, the latter being directly expensed. Subsequently these financial instruments continue to be measured at fair value. Net gains and losses are recognized in profit or loss.

 

The Group uses derivative financial instruments to economicallyhedge certain exposures to foreign exchange rate risks. Hedge ­accounting is not applied.

 

2.7.8.4  Unquoted equity investment

Measurement category: Financial assets at fair value through other comprehensive income (FVOCI)

 

This category only includes equity instruments which the Group intends to hold for the foreseeable future. The classification is determined upon initial recognition on an investment-by-investment basis and is irrevocable.

 

The financial asset is initially measured at fair value plus transaction costs that are directly attributable to its acquisition. Subsequently the financial instrument continues to be measured at fair value. Net gains and losses are recognized in other comprehensive income and are not recycled to profit or loss on de-recognition. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment.

 

2.7.8.5 Current bank liabilities, payables and ­accrued expenses

Measurement category: Financial liabilities at amortized cost without significant financing component

 

These financial liabilities are Initially measured at the transaction price (nominal value). Subsequently these financial instruments continue to be measured at the transaction price. Foreign exchange gains/losses are recognized in profit or loss. Any gain or loss on de-recognition is recognized in profit or loss.

 

2.7.8.6  Bank loans

Measurement category: Financial liabilities at amortized cost with significant financing component

 

These financial liabilities are initially measured at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently these financial instruments are measured at amortized cost using the effective interest method. Interest expenses and foreign exchange gains/losses are recognized in profit or loss. Any gain or loss on de-recognition is recognized in profit or loss.

 

2.7.9  Borrowing costs

The Group capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are expensed. During the reporting period, no asset qualified for capitalization of borrowing costs (previous year: none).

 

2.7.10  Inventories

Inventories are stated at the lower of purchase or production cost and net realizable value. Production costs include raw materials, components and semi-finished products, direct production costs (internal labor and external services) and production overheads. The Group applies the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Provisions are made for slow-moving items and obsolete items are written off. 

 

2.7.11  Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see separate accounting policy). The cost of self-constructed assets includes the cost of materials, direct labor and an appropriate proportion of production overheads and borrowing costs, if they are directly attributable to a qualifying asset.

 

Assets acquired under lease contracts, which provide the Group with substantially all benefits and risks of ownership are classified as finance leases and capitalized at amounts equivalent to their fair value or, if lower, the estimated present value of the underlying minimum lease payments. The corresponding rental obligations, net of finance charges, are included in liabilities. Leased assets are depreciated over their estimated useful lives. There were no items of property, plant and equipment under finance lease as per the balance sheet date (previous year: none). Payments made under operating leases are charged against income on a straight-line basis over the period of the lease.

 

Depreciation is charged to the statement of profit or loss on a straight-­line basis over the estimated useful lives of items of property, plant and equipment from the date they are available for use. The estimated useful lives are as follows:

 

Land

indefinite useful life

Buildings

25 years

Leasehold improvements

shorter of useful life or lease term

Furniture and fittings

4 – 8 years

Machines and motor vehicles

2 – 8 years

Tools in connection with OEM contracts

units of production method

EDP equipment

3 – 5 years

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

 

Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment (component approach).

 

Costs for repair and maintenance are recognized as an expense as incurred. 

 

2.7.12  Intangible assets

Software – Expenditure on the implementation of software, including licenses and external consulting fees, is capitalized.

 

Research costs – Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred. 

 

Development costs – Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, external services, personnel, temporary employees, overhead and borrowing costs, if they are directly attributable to a qualifying asset. Other development expenditure is recognized in profit or loss as incurred. 

 

Intangible assets acquired in a business combination – All identifiable intangible assets that are recognized applying the acquisition method are stated initially at fair value. The following valuation methods are used in order to determine the fair values at the acquisition date: multi-period excess earnings method, relief from royalty method and replacement cost approach. 

 

Intangible assets are measured at cost less accumulated amortization (see below) and impairment losses (see separate accounting policy). Amortization is charged to the statement of profit or loss on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortized from the date they are available for use. The estimated useful lives are as follows:

 

Software

3 – 5 years

Development costs

3 – 5 years

Patents

3 – 5 years

Acquired brand

2 – 13 years

Acquired technology

6 – 10 years

Acquired client relationships

7 – 17 years

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. 

 

2.7.13  Goodwill

Goodwill represents the future economic benefits arising from a business combination that are not capable of being individually identified and separately recognized as assets or liabilities.

For acquisitions, the Group measures goodwill at the acquisition date as

  • the fair value of the consideration transferred, plus
  • the recognized amount of any non-controlling interests in the acquiree, plus
  • if the business combination is achieved in stages, the fair value of existing equity interest in the acquiree, less
  • the net recognized amount of the identifiable net assets acquired.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

After initial recognition, the Group measures goodwill at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the goodwill might be impaired. 

 

2.7.14  Impairment

The carrying amount of the Group’s non-financial assets other than inventories, assets arising from construction contracts and deferred tax assets, is reviewed at each balance sheet date to determine whether there is any indication of impairment. If such indication exists, the asset’s recoverable amount, being the higher of its fair value less costs of disposal and its value in use, is estimated. Goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually. An impairment loss is recognized in the statement of profit or loss whenever the carrying amount of an asset or its ­cash-generating unit exceeds its recoverable amount. 

 

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reviewed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. An impairment loss in respect of goodwill is not reversed.

 

2.7.15  Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows.

 

A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical data.

 

2.7.16  Treasury shares

In case the Group purchases own shares, the consideration paid is recognized as treasury shares and presented as a deduction from equity until these shares are cancelled or sold. Any consideration received from the sale of these shares is recognized in equity.