Effect of policy changes
The total effect of the changes in policies was an increase in the year’s pre-tax profit of DKK 3 million. The year’s tax resulting from the policy changes amounted to DKK 1 million, and the year’s profit after tax was consequently up by DKK 2 million (DKK 0 million in 2001). The balance sheet total thus increased by DKK 52 million (DKK 3 million in 2001), whereas shareholders’ equity at 31 December 2002 went up by DKK 32 million (DKK-6 million in 2001).

Comparative figures as well as key figures and ratios have been restated to match the changes in accounting policies.

Reclassification of items
In the annual report leasehold improvements have been reclassified from intangible to tangible fixed assets.

Consolidation
The consolidated financial statements include the undertakings shown on page 36. The consolidated financial statements comprise William Demant Holding A/S (parent company) and the undertakings in which the parent company holds more than 50% of the voting rights, or in which the Company in some other manner can or actually does exercise a controlling interest. The consolidated financial statements have been prepared on the basis of the financial statements for the parent company and subsidiary undertakings by aggregating uniform items. Based on pro rata consolidation the consolidated financial statements also include undertakings, which by agreement are managed jointly with one or more undertakings. Intra-group income and expenditure, shareholdings, intra-group accounts and dividends as well as non-realised intra-group profits on inventories are eliminated. 

Undertakings in which the Group holds between 20% and 50% of the voting rights or in some other manner can or actually does exercise a significant interest are considered to be associated and have been incorporated proportionately into the consolidated financial statements based on the equity method. 

Newly acquired or established subsidiary and associated undertakings are recognised in the profit and loss account from the time of acquisition or formation. Companies either sold or closed down are recognised until the date of divestment or closedown. Comparative key figures and ratios in respect of newly acquired or divested companies are not restated. 

On acquiring new undertakings the purchase method is applied, and the identified assets and liabilities of the newly acquired undertakings are measured at their present values at the time of acquisition. Provisions are made for any restructuring either decided or announced on acquisition. 

If the acquisition cost exceeds the present values of the assets and liabilities identified on acquisition (including any provisions for restructuring), any remaining positive differences (goodwill) are recognised in the balance sheet as goodwill under intangible fixed assets. Such goodwill is written off on a straight-line basis via the profit and loss account over the estimated economic life, however not exceeding 20 years. 

Minority interests 
On computation of consolidated profit and shareholders’ equity, the proportionate shares of profits and shareholders’ equity of subsidiary undertakings – ascribable to minority interests – are entered separately. 

Translation of foreign currency 
Transactions in foreign currencies are translated at the exchange rates ruling on the transaction day. 

Monetary items such as debtors and debts in foreign currency are translated into Danish kroner at their rates on the balance sheet day. Realised and non-realised exchange adjustments are recognised in the profit and loss account under gross profit or financial items. 

For independent foreign subsidiary undertakings, profit and loss account items are translated at the average exchange rates for the year, whereas balance sheet items are translated at the rates on the balance sheet day. Any exchange differences arising from the translation at average rates of profit and loss account items of foreign Group undertakings and balance-sheet items at the rates ruling on the balance-sheet day are recognised via shareholders’ equity. Any exchange differences from translation of the shareholders’ equity of foreign subsidiary undertakings at the beginning of the year at the rates on the balance-sheet day are recognised via shareholders’ equity. 

Any exchange differences from intra-group accounts with independent foreign subsidiary undertakings considered to constitute part of the total investment in such undertakings as well as any exchange differences from hedging of the shareholders’ equity of such undertakings are recognised via shareholders’ equity. 

Some investments in foreign subsidiary undertakings are balanced via financing in the currency off the particular country. Where a foreign subsidiary undertaking finances an acquisition, and where goodwill has been written of via shareholders’ equity at the time of acquisition, the goodwill-related part of such financing will be treated as hedging of exchange in connection with any future returns on the investment in such subsidiary undertaking. 

Derivative financial instruments 
Derivative financial instruments are measured at their present values and included under debtors and creditors. 

Changes in present values of derivative financial instruments classified as and satisfying the criteria for hedging of the present value of a recognised asset or a recognised liability are entered in the profit and loss account together with the changes in value of the hedged asset or hedged liability. 

Changes in present values of derivative financial instruments classified as and satisfying the conditions for hedging of future assets or liabilities are recognised direct via shareholders’ equity. Any income or cost relating to such hedging transactions is transferred from shareholders’ equity on realisation of the hedged financial instruments and included in the same accounting item as the hedged asset or liability. 

Profit and loss account 
All major income and costs are entered on an accruals basis. The profit and loss account is broken down by function and all costs including depreciation expenses are therefore related to production costs, distribution costs, administrative expenses and R&D costs, regardless of the objectives of the particular undertaking. 

Net revenue 
The invoicing principle is applied as income criterion. Net revenue represents the year’s sales with the deduction of commissions, discounts and returns. 

Production costs 
These comprise direct and indirect manufacturing costs including salaries and depreciation expenses. 

Research & development costs 
These include all costs that do not satisfy the criteria for capitalisation in connection with research and development, prototype construction, the development of new business concepts as well as depreciation expenses of capitalised R&D costs. 

R&D costs will be capitalised if the conditions for capitalisation via the balance sheet are fulfilled including an assessment of whether future earnings will suffice to cover such R&D costs. Moreover in the Group’s opinion, the prerequisite for capitalisation via the balance sheet is normally that the development of the product has been completed and that all necessary public registration approvals have been received. Otherwise R&D costs will be charged to the profit and loss account in line with the payment of such costs. 

Distribution costs 
Distribution costs include costs relating to staff training, customer support, sales, marketing as well as distribution and depreciation expenses. 

Administrative expenses 
Administrative expenses include administrative staff costs, office and IT costs as well as depreciation expenses. 

Taxation 
The parent company is jointly taxed with certain 100%-owned Danish and foreign subsidiary undertakings. Corporation tax is distributed among the jointly taxed companies according to their proportionate shares of the joint income or loss (full distribution with tax relief for losses). For the jointly taxed Danish companies, the tax rate for current and deferred taxes is 30%. 

Tax on the year’s profit includes current tax and any changes in deferred tax. Any additions, deductions or allowances in respect of the Danish on-account tax scheme are included in current tax. Tax on movements in shareholders’ equity is entered direct via shareholders’ equity. Current tax includes tax payable computed on the basis of the estimated taxable income for the year and any prior-year tax adjustments. 

A provision is made for deferred tax on any timing differences between the valuations for tax and accounting purposes. Deferred tax is reported as a balance sheet liability. Deferred tax is computed on the basis of the current tax rules and rates in the particular countries. Any effect on deferred tax due to changes in tax rates is reflected in the profit and loss account. The tax value of a loss that may be set off against any future taxable income will be carried forward and set off against deferred tax in the same legal tax unit and jurisdiction. Any deferred tax assets (net) are conservatively estimated and recognised in the balance sheet. 

Any tax payable on the sale of shares in a subsidiary undertaking is recorded in the balance sheet if such shares are likely to be sold within a short period of time. 

Balance sheet 
Intangible fixed assets 
As at 1 January 2002 goodwill is capitalised and depreciated on a straight-line basis over its estimated economic life, however maximum 20 years. Goodwill acquired before 1 January 2002 was written off via shareholders’ equity at the time of acquisition. 

Costs relating to intangible fixed assets produced by Group undertakings, including R&D costs, are capitalised if the conditions for capitalisation are thought to be satisfied. Otherwise such costs are charged to the profit and loss account at the time of payment. 

Patents and licences acquired from a third party are measured at cost with the deduction of accumulated depreciation expenses. Patents are written down on a straight-line basis over the remaining patent period, and licences are depreciated over their estimated economic life, however maximum 20 years. 

Intangible fixed assets are written down to their recoverable amount if lower than the value for the accounting purposes. Individual assets and groups of assets are currently tested for write-down purposes. 

Tangible fixed assets 
Tangible fixed assets are recognised at cost. Tangible fixed assets are depreciated on a straight-line basis over their estimated economic life. 

Buildings	33-50 years
Technical plant and machinery	3-5 years
Fixtures, tools and equipment	3-5 years
IT hardware and software	3 years
Leasehold improvements	over the lease period

Assets acquired at less than DKK 50,000 are fully charged to the profit and loss account in the year of acquisition. 

Financial leased assets are recognised in the balance sheet at the lower of market value or the present value of future rental payments at the time of acquisition. Financially leased assets are depreciated on the same basis as the Group’s other tangible fixed assets. Any capitalised remaining rental is shown as a liability in the balance sheet. 

For operational leases, rentals are expensed over the term of the lease. Lease commitments are included under contingent liabilities at nominal values. 

Financial fixed assets 
The parent company’s interests in subsidiary undertakings are measured on the basis of the equity method, i.e. such interests are entered in the balance sheet at their proportionate values of net worth. Loans granted by or to the parent company, which are considered part of the overall investment, are included in the value of shares in these undertakings. The parent company’s proportionate shares of pre-tax profits from subsidiary undertakings are included in the profit and loss account after proportionate deduction of any differences in non-realised intra-group profits and with deduction of depreciation on consolidated goodwill acquired after 1 January 2002. 

Interests in associated undertakings are entered on the same basis as subsidiary undertakings. 

Accumulated net revaluation of interests in subsidiary and associated undertakings is retained for a “reserve for net revaluation based on the equity method” and entered under shareholders’ equity. 

Inventories 
Raw materials, components and merchandise are recognised at the lower of cost or net market price. Finished goods or goods in process are measured at direct cost, direct payroll and consumables as well as a proportionate share of indirect production overheads. Indirect production overheads include the proportionate share of overhead costs directly related to finished goods or goods in process. 

Inventories are measured at cost on a First In First Out basis, i.e. the most recent deliveries will be in stock. Non-marketable goods or slow-moving items are written down. 

Debtors 
Debtors are measured at amortised cost. Provisions are made for bad debts computed on the basis of an assessment of the particular risks. 

Other securities and participating interests 
Securities including investments in shares and bonds are measured at their present values on the balance sheet day. Participating interests whose present values cannot be reliably determined are measured at cost. 

Own shares 
On buyback or sale of own shares, the acquisition cost or divestment sum is entered directly via distributable reserves under shareholders’ equity. The reduction in capital on cancellation of own shares will reduce the share capital by an amount corresponding to the nominal value of such shares. The amount is transferred to distributable reserves. 

Provisions for liabilities 
Provisions for liabilities include redundancy payments, pensions, guarantees and restructuring costs etc. Provisions for liabilities are recognised where as a result of an earlier event the Group has a legal or actual liability and any redemption of such liability will draw on the Company’s financial resources. 

On acquisition of undertakings provisions for restructuring decided or announced on or before the day of acquisition are considered part of the acquisition cost and entered under goodwill or consolidated goodwill. 

Mortgages and loans 
Mortgages and loans to mortgage credit institutes or credit institutes are recognised at the proceeds after deduction of transaction costs on the raising of such loan or mortgage. In subsequent periods mortgages and loans are entered at amortised cost corresponding to the capitalised value using the effective interest rate for the difference between proceeds and nominal values to be recognised in the profit and loss account over the term of the loan. 

Other debts are measured at amortised cost, which more or less matches their cash values. 

Cash-flow statement 
The cash-flow statement is based on the indirect method and reflects the Group’s net cash position by operating, investing and financing activities. 

Cash flows from operating activities include inflows from the year’s operations, adjusted for operating items not affecting liquid funds and movements in working capital. Working capital includes current assets excluding liquid assets and short-term debts adjusted for repayment of long-term debts, bank debts and dividends. 

Cash flows from investing activities include inflows generated by the purchase or sale of fixed assets. 

Cash flows from financing activities include payments to or from shareholders and the raising or repayment of long-term or shortterm debts not included in the working capital. 

Liquid assets are cash funds and securities with the deduction of bank debts. 

Cash flows cannot be compiled exclusively on the basis of the published accounting material. 

Segment information 
The William Demant Group’s activities are based on a single business segment, i.e. the development, manufacturing and sale of products and equipment designed to facilitate people’s hearing and communication. Consequently only geographic segment information is provided. 

Fixed assets in this segment consist of all the fixed assets used for the direct operation of the segment including intangible fixed assets, tangible fixed assets and participating interests in associated undertakings. 

Segment liabilities comprise liabilities linked with segment operations including trade creditors and services as well as other creditors.