Accounting policies
General
The annual report has been prepared in accordance
with the Danish Financial Statements Act, Danish Accounting
Standards and the Copenhagen Stock Exchange regulations for
class D undertakings. The accounting policies are the same as
in 2003.
Consolidation
The consolidated financial statements include the undertakings.
The consolidated financial statements comprise William Demant
Holding A/S (the parent company) and the undertakings, in which
the parent company holds more than 50% of the voting rights,
or in which in some other manner it 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 its 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. Businesses 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 undertakings 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 fair values at the time of
acquisition. Provisions are made for any restructuring either
decided or announced on acquisition.
If acquisition cost exceeds the fair 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 in the acquiring business.
Minority interests
On computation of consolidated profits and shareholders’ equity,
the proportionate shares of profits and shareholders’ equity
of subsidiary undertakings ascribable to minority interests,
are recognised separately.
Translation of foreign currency
When first recognised, transactions in foreign currency 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 net financials,
depending on the purpose of the transaction.
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 adjustments arising from the
translation of profit and loss account items of foreign Group
undertakings from average rates to exchange rates on the balance-sheet
day are recognised via shareholders’ equity. Any exchange adjustments
from translation at the beginning of the year of shareholders’
equity of foreign subsidiary or associated undertakings at the
rates on the balance-sheet day are recognised via shareholders’
equity.
Any exchange adjustments 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 adjustments from the hedging of shareholders’
equity of such undertakings are recognised via shareholders’
equity.
Some
investments in foreign subsidiary undertakings are hedged
through financing in the currency of the particular country.
Where a foreign subsidiary undertaking finances an acquisition,
and where goodwill has been written off via shareholders’ equity
at the time of acquisition, the goodwill-related part of such
finance will be treated as hedging of exchange of any future
returns on the investment in such subsidiary undertaking.
Derivative financial instruments
Derivative financial instruments, primarily forward exchange
contracts and interest swaps, are measured at their fair values
and recognised under debtors and creditors.
Changes in fair values of derivative financial instruments
classified as and satisfying the criteria for hedging of the
fair value of a recognised asset or a recognised liability
are recognised in the profit and loss account together with
the changes in value of the hedged asset or hedged liability.
Changes in fair values of derivative financial instruments
classified as and satisfying the conditions for hedging of
future assets ties 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 recognised in the same
accounting item as the hedged asset or liability.
Profit and loss account
All major income and costs are recognised on an accruals basis.
The profit and loss account is broken down by function and
all costs including depreciation expenses are therefore charged
to production, distribution, administration or R&D functions.
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
Production costs comprise direct and indirect manufacturing
costs, including raw materials, consumables, maintenance costs,
salaries, depreciation on production plant as well as write-down
on inventories.
Research and 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 on capitalised R&D costs.
In the Group’s opinion, R&D activities cannot meaningfully
be divided into either the development of new products or
the further development of existing products, consequently
R&D costs are therefore generally charged to the profit
and loss account.
Distribution costs
Distribution costs Distribution costs include costs relating
to staff training, customer support, sales, marketing, distribution
and depreciation on tangible fixed assets used for production
purposes.
Administrative expenses
Administrative expenses include administrative staff costs,
office and IT costs as well as depreciation expenses and losses
on debtors.
Net
financials
These mainly consist of interest income and expenses. They
also include loan costs, realised and non-realised exchange
gains or losses, certain monetary items and value adjustments
at fair values.
Taxation
The parent company is jointly taxed with certain 100%-owned
Danish and foreign subsidiary undertakings. Corporation tax
is distributed among the jointly taxed undertakings according
to their proportionate shares of the joint income or loss
(full distribution with tax relief for losses). For the jointly
taxed Danish undertakings, 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 recognised
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 under the balance-sheet
liability method of any temporary differences between the
valuations for tax and accounting purposes of assets and liabilities.
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 tax on the
year’s profit. 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 are recognised at
their expected realisable values.
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 assets
Goodwill is capitalised as at 1 January 2002 and depreciated
on a straight-line basis over its estimated economic life.
Any goodwill acquired before 1 January 2002 was written off
via shareholders’ equity at the time of acquisition.
Patents and licences acquired from a third party are measured
at cost with the deduction of accumulated depreciation and
write-down expenses. Patents and licences are depreciated
over their estimated economic life.
Intangible assets are assessed annually to decide whether
their value has deteriorated. If so, the recoverable value
of such assets is calculated, upon which they are written
down to their recoverable values if lower than their carrying
values.
Provided certain criteria are satisfied, R&D costs are
recognised under intangible assets and measured at cost with
the deduction of accumulated depreciation expenses. R&D
costs are capitalised if the conditions for capitalisation
are thought to be satisfied, taking into account whether future
earnings are able to adequately cover such R&D costs.
In the Group’s opinion, the prerequisite for capitalisation
is normally that the development of the particular product
has been completed and that all required registration approvals
have been obtained. If not, R&D costs are charged to the
profit and loss account in line with the payment of such costs.
In the Group’s opinion, its R&D efforts cannot meaningfully
be divided into either the development of new products or
the further development of existing ones, consequently R&D
costs are expensed as previously.
| Goodwill |
maximum 20 years |
|
Patents
and licences |
maximum
20 years |
Tangible fixed assets
Tangible fixed assets are recognised at cost with the addition
of capitalised interest with the deduction of accumulated
depreciation and write-down expenses. Tangible fixed assets
are depreciated on a straight-line basis over their estimated
useful life with the exception of land. Assets are currently
tested for write-down purposes.
| Buildings |
33-50 years |
|
Manufacturing 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 charged to the profit
and loss account in the year of acquisition.
Financially 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
recognised 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 asset investments
The parent company’s interests in subsidiary undertakings
are measured on the basis of the equity method, i.e. such
interests are recognised 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 recognised in the profit and loss account after proportionate
deduction of any differences in non-realised intra-group profits
and with the deduction of depreciation on consolidated goodwill
acquired after 1 January 2002.
Interests in associated undertakings are recognised on the
same basis as subsidiary undertakings.
The accumulated net revaluation of interests in subsidiary
and associated undertakings is retained in a 'Reserve for
net revaluation based on the equity method' and recognised
under shareholders’ equity.
Debtors are measured at cost on acquisition and subsequently
adjusted at amortised cost. The risk of bad debts is assessed
on an individual basis.
Securities related to investments in shares and bonds are
measured at their fair values on the balance-sheet day. Investments,
for which a reliable fair value cannot be estimated, are measured
at cost.
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 capacity costs directly related
to finished goods or goods in process.
Inventories
are measured at cost on a First-In-First-Out (FIFO) basis,
i.e. the most recent deliveries are considered to be in stock.
Non-marketable goods or slow-moving items are written
down as required.
Debtors
Debtors are measured at amortised cost. Provisions are made
for bad debts based on an assessment of the particular risks.
Prepayments and accrued expenses mainly include prepaid costs.
Own shares and dividend
On the
buyback or sale of own shares, the acquisition cost or divestment
sum is recognised direct 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
proposed dividend is recognised as a separate item under shareholders’
equity until adoption at the annual general meet ing, upon
which such dividend will be recognised as a liability.
Provisions for liabilities
Provisions for liabilities include redundancy payments, pensions,
trade-related guarantees, returned goods, 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 where the redemption of any such liability
will draw on the corporate financial resources.
On acquisition of undertakings, provisions for restructuring
decided or announced on or before the day of acquisition are
considered part of acquisition cost and recognised under good
will or consolidated goodwill.
Mortgages and loans
Mortgages and loans from mortgage credit institutes or credit
institutes are recognised at the proceeds after the deduction
of transaction costs on the raising of such loan or mortgage.
In subsequent periods, mortgages and loans are recognised
at amortised cost, so that the difference between the proceeds
and the nominal values is recognised in the profit and loss
account over the term of the loan.
Other debts include payable taxes and duties, holiday pay,
guarantees and obligations in respect of returned products
etc. Prepayments and accrued income primarily include prepayments
from customers and accrued income from service contracts.
Other debts are measured at amortised cost, which more or
less matches their nominal 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, undertakings or activities.
Cash flows from financing activities include payments to or
from shareholders and the raising or repayment of long-term
or short-term 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.
Segmental 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
segmental information is provided.
Fixed assets in this segment consist of all the fixed assets
used for the direct operation of the segment including intangible
assets, tangible fixed assets and participating interests
in associated undertakings.
Segmental liabilities consist of liabilities linked with segment
operations including trade creditors and services as well
as other creditors.
Transition to IFRS
in 2005
The consolidated financial statements for 2005 will be
drawn up in compliance with International Financial Reporting
Standards (IFRS). The preliminary evaluation indicates that
changes relate primarily to goodwill. The impact is not thought
to be significant.
Under IFRS, goodwill arisen on business combinations is not
amortised. In the profit and loss account and shareholders’
equity for 2004, included in the restatement figures for 2005,
amortised goodwill amounting to DKK 0.5 million will be restated.
Goodwill will be tested annually for impairment, and the restated
goodwill shown in the balance sheet on 1 January 2004 is considered
the future basic value.
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