Accounting policies
General
The 2005 annual report is presented in compliance with International Financial Reporting Standards (IFRS), as adopted by the EU, and further Danish disclosure requirements for listed companies.
The annual report of the parent company has been drawn up
in accordance with the provisions of the Danish Financial Statements Act for listed companies and Danish Accounting Standards.
The parent company’s accounting policies on recognition and measurement are consistent with the consolidated accounting policies apart from goodwill, which is amortised over its useful life in the parent company. In order to ensure uniform presentation, the terms and phrases used in the consolidated financial statements have as far as possible been applied in the financial statements of the parent company.
Any further Danish disclosure requirements in respect of consolidated financial statements are laid down in the IFRS order issued in compliance with the Danish Financial Statements Act and in regulations issued by the Copenhagen Stock Exchange, and for the parent company in the Danish Financial Statements Act and regulations issued by the Copenhagen Stock Exchange.
The consolidated financial statements also satisfy the International Financial Reporting Standards issued by the IASB.
Annual reporting figures are stated in Danish kroner (DKK).
Changes in corporate accounting policies as a result of the transition to IFRS
The annual report for 2005 is the Group’s first annual report presented in accordance with IFRS.
On transition to IFRS, the Group has applied IFRS 1, First-time Adoption of International Financial Reporting Standards. The opening balance sheet at 1 January 2004 and the restated comparative figures for 2004 have been drawn up in conformance with the standards and interpretation guidelines applicable on 31 December 2005. The opening balance sheet at 1 January 2004 was prepared as if these standards and interpretation guidelines had always been applied, except for the special
transition and commencement rules described below.
The transition to IFRS presentation of consolidated financial statements has necessitated changes in accounting policies on the recognition and measurement of certain significant areas:
 Business combinations
Share-based payment
Pension obligations etc.
The principal rule governing the treatment of amendments to accounting policies is that in the year of first-time adoption, the annual report must apply the new policies retroactively as if the entity had always applied such new accounting policies includ-ing the restatement of comparative figures. However, IFRS 1
provides exemptions to the principal rule on transition to IFRS accounting.
The Group has chosen to apply the following optional excep-tions in IFRS 1:
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Business combinations exercised before 1 January 2004 have not been restated in compliance with IFRS, except that any subsequent changes in the consideration as regards the acquired entities will be restated in the recognised goodwill. Reversed goodwill amortised in 2004 amounts to DKK 0.5 million. |
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Any exchange rate adjustments recognised in shareholders' equity on translation of foreign subsidiary undertakings have been reset at 1 January 2004. On transition to IFRS at 1 January 2004, the Group recognised pension obligations etc. At 1 January 2004 and 1 January 2005, shareholders' equity was reduced by DKK 6 million, with an impact on net profits for 2004 of DKK 0 million. |
Items have been reclassified.
Comparative figures for 2001 to 2003 included in the summary of financial highlights have not been restated as a result of the changed accounting policies.
Standards and interpretations not yet effective
Changes in standards and interpretations published but not yet effective at the time of publication of this annual report have not been incorporated into this report.
In Management’s opinion, the Group’s future implementation of these standards and interpretations will not have a significant impact on the annual report.
Changes to IAS 19, Employee Benefits, have been published but are not effective yet. The revised standard has been applied in this annual report.
Material accounting estimates, assumptions and uncertainties
Many items can only be estimated rather than measured accurately. Such estimates are based on the most recent information available at the time of presentation of the accounts.
In 2005, the Group changed its accounting estimates regarding the residual value of buildings, resulting in a positive impact on the year’s pre-tax profits by approximately DKK 4 million.
In connection with the practical application of the described accounting policies, Management has made normal valuations for accounting purposes of long-term assets, inventories, receivables and payables.
Consolidation
The consolidated financial statements comprise William Demant Holding A/S (the parent company) and the entities, in which the parent company, either directly or indirectly, holds more than 50% of the voting rights, or in which in some other manner it can or actually does exercise control. The consolidated financial statements have been prepared on the basis of the financial statements of the parent company and its subsidiary undertakings by aggregating uniform items. On pro rata consolidation, the consolidated financial statements also include entities, which by agreement are managed jointly with one or more
entities. Intra-group income and expenditure, shareholdings, intra-group balances 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 significant control, are considered associated and have been incorporated proportionately into the consolidated financial statements based on the equity method.
Newly acquired or newly established subsidiary or associated undertakings are recognised in the consolidated financial statements from the time of acquisition or formation. Divested or discontinued entities are recognised until the date of their divestment or discontinuation. Comparative figures and financial highlights in respect of newly acquired or divested entities have not been restated.
On acquiring new entities, the purchase method is applied, under which the identified assets and liabilities of the newly acquired entities are measured at their fair values at the time of acquisition. Any tax effects of revaluations will be taken into account.
The cost of the acquired enterprise includes the fair value of the consideration paid plus costs directly attributable to the acquisition. If the final consideration sum is conditional upon one or more future events, such adjustments will only be recognised in cost if the particular event is likely to happen and its effect on cost can be reliably calculated.
If cost exceeds the fair values of the assets, liabilities and contingent liabilities identified on acquisition, any remaining positive differences (goodwill) are recognised in the balance sheet under intangible assets and tested for impairment at least annually. If the carrying amount of an asset exceeds its recoverable amount, it will be written down to such lower recoverable amount.
Translation of foreign currency
On initial recognition, transactions in foreign currency are translated at the exchange rates ruling at the date of the transaction.
Receivables, payables and other monetary items in foreign currency are translated into Danish kroner at their rates on the balance sheet date. 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.
Tangible and intangible assets, inventories and other non-
monetary assets, purchased in foreign currency and measured on the basis of historical cost, are translated at the rates of exchange at the date of the transaction.
For subsidiary and associated undertakings presenting financial statements in foreign currency, profit-and-loss-account items are translated at the average exchange rates for the year, where-as balance sheet items are translated at the rates on the balance sheet date.
Any exchange adjustments arising from the translation at the beginning of the year of balance sheet items of foreign Group undertakings at the exchange rates on the balance sheet date as well as the translation of profit-and-loss-account items from average rates to the exchange rates on the balance sheet date are recognised direct in shareholders’ equity. Similarly, exchange adjustments resulting from changes made directly in
the shareholders’ equity of a foreign entity are also recognised direct in shareholders’ equity.
Any exchange adjustments of amounts receivable from or payable to subsidiary undertakings, which are considered part of the parent company’s total investment in the particular entity, are recognised direct in shareholders’ equity.
Derivative financial instruments
Derivative financial instruments, primarily forward exchange contracts and interest swaps, are measured at their fair values and recognised as receivables and payables.
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 fair 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 transactions, are recognised direct in shareholders’ equity. On realisation of the hedged transactions, the accumulated changes
will be recognised as part of the particular transactions.
Share-based incentive programmes
Share-based incentive programmes, solely enabling staff to buy shares in the parent company (equity-settled share-based payment schemes), are measured at the fair values of the equity instruments at the grant date and recognised in the profit and loss account as staff costs over the vesting period. The item is set off directly against shareholders’ equity.
Profit and loss account
Income and costs are recognised on an accruals basis. The profit and loss account is broken down by function and all costs including depreciation and impairment losses are therefore charged to production, distribution, administration or R&D functions.
Net revenue
Net revenue is recognised in the profit and loss account on delivery and transfer of risk to buyer.
If interest-free credit extending beyond the normal credit
period has been agreed, the fair value of the consideration
is calculated by discounting future payments to net present values. The difference between the fair and nominal values of the consideration is recognised in the profit and loss account under net financials.
Production costs
Production costs are costs paid to generate revenue. Commercial businesses recognise cost of goods sold as production costs, and manufacturers recognise costs of raw materials, consumables and production staff as well as maintenance, depreciation and impairment losses on tangible assets and intangible assets used in the production process.
Research and development costs
These include all costs that do not satisfy capitalisation criteria relating to research and development, prototype construction, the development of new business concepts as
well as amortisation of capitalised development costs.
As the Group’s product development activities cannot
meaningfully be allocated to either the development of new products or to the further development of existing products, development costs are recognised in the profit and loss account.
Distribution costs
Distribution costs include costs relating to staff training, sale, marketing and distribution as well as depreciation and impairment losses on assets used for distribution purposes.
Administrative expenses
Administrative expenses include administrative staff costs, office expenses as well as depreciation and impairment losses on assets used for administrative purposes and bad debts.
Net financials
These mainly consist of interest income and expenses. They also include borrowing costs as well as certain realised and non-realised exchange gains or losses.
Tax
The parent company is jointly taxed with its Danish subsidiary undertakings and the Danish affiliated company, William Demant Invest A/S. Current corporation tax is distributed among the jointly taxed Danish companies in proportion to their taxable incomes.
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 Tax Prepayment Scheme are included
in current tax. Tax on movements in shareholders’ equity is recognised direct in 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. Exchange gains or losses on deferred taxes are recognised
in the year’s adjustments of deferred tax.
Current tax payable or receivable is recognised in the balance sheet calculated on the year’s taxable income adjusted for any prepaid tax. The tax rates on the balance sheet date are used on calculation of the year’s taxable income.
Deferred tax is, under the balance-sheet liability method, recognised on all temporary differences between the carrying amount and tax-based value of assets and liabilities. 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 which may be set off against any future taxable income will be carried forward and set off against deferred tax in the same legal tax entity and jurisdiction. Any deferred tax assets are recognised at their estimated realisable values.
Deferred tax of temporary differences relating to investments in subsidiary or associated undertakings is recognised, unless the parent company is able to control the time of realisation of such deferred tax, and if such deferred tax is not likely to be released as current tax in the foreseeable future.
Balance sheet
Intangible assets
On initial recognition, goodwill is recognised and measured as the difference between the cost of the acquired entity and the fair value of the assets acquired and of liabilities and contingent liabilities assumed, see Consolidation.
On recognition of goodwill, goodwill is allocated to each of
the corporate activities generating independent inflows (cash-generating units). The definition of a cash-generating unit complies with the corporate managerial structure, internal management control and reporting.
Goodwill is not amortised but tested for impairment at least annually. If the recoverable amount of a cash-generating unit is less than the carrying amount of the tangible and intangible assets, including goodwill, which can be attributed to the cash-generating unit, such assets will be written down.
Any goodwill acquired before 1 January 2002 was written off against shareholders’ equity at the time of acquisition.
Patents and licences acquired from a third party are measured at cost less accumulated amortisation and impairment losses. Patents and licences are amortised over their estimated useful lives, maximum 20 years.
Provided certain criteria are satisfied, development costs are recognised as intangible assets and measured at cost less accumulated amortisation and impairment losses.
Tangible assets
Tangible assets are recognised at cost less accumulated depreciation and impairment losses. Cost is defined as the acquisition sum and any costs directly relating to the acquisition. As regards Group-manufactured assets, cost includes any costs directly attributable to the production of such assets including materials, components, sub-suppliers and wages.
Interest expenses on loans directly attributable to the production of tangible assets are recognised in cost if they pertain to the production period. Other borrowing costs are recognised in the profit and loss account.
If the acquisition or use of an asset requires the Group to incur costs for the demolition or reestablishment of such asset, the estimated costs hereof are recognised as a provision or part of the cost of the particular asset.
The cost of a total asset is divided into various elements, which will be depreciated individually if their useful lives are not the same.
The basis of depreciation is cost less estimated residual value after the end of the useful life of an asset.
Tangible assets are depreciated on a straight-line basis over their estimated useful lives with the exception of land.
| Buildings |
33-50 years |
| Technical installations |
10 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 |
Depreciation methods, useful lives and residual values are reviewed annually.
Tangible assets are written down to the recoverable amount if this is lower than carrying amount.
Assets held under finance leases are recognised in the balance sheet at the lower of market value and present value of future lease payments at the time of acquisition. Assets held under finance leases are depreciated on the same basis as the Group’s other tangible assets. Any capitalised remaining lease obligation is recognised as a liability in the balance sheet.
Impairment of tangible and intangible assets
The carrying amounts of tangible and intangible assets with determinable useful lives are tested for any indication of impairment on the balance sheet date. If so, the recoverable amount of the particular asset is estimated to determine the need for impairment. Recoverable goodwill amounts will be assessed whether or not impairment indicators exist.
The recoverable amount is assessed for the smallest cash-generating unit that includes the asset. The recoverable amount is assessed as the higher of the fair value of the asset or the cash-generating unit less costs to sell and net present value.
If the recoverable amount of an asset or a cash-generating unit is deemed to be lower than its carrying amount, the asset or cash-generating unit is written down to its recoverable amount.
Impairment losses are recognised in the profit and loss account. On any subsequent reversal of impairment due to changes in the assumptions of the computed recoverable amount, the carrying amount of an asset or cash-generating unit is increased to the adjusted, estimated recoverable amount, however maximum to the carrying amount which such asset or cash-generating unit would have had, had it not been impaired.
Other long-term assets
The parent company’s investments in subsidiary undertakings are measured according to the equity method, i.e. such investments are recognised in the balance sheet at their proportionate equity value. Loans granted by or to the parent company, which are considered part of the overall investment, are
included in the equity value of these entities. The parent company’s proportionate shares of pre-tax profits or losses from subsidiary undertakings are recognised in the profit and loss account after net changes for the year in non-realised intra-group profits and less amortisation and impairment
losses, if any, of goodwill acquired after 1 January 2002.
Investments in associated undertakings are recognised on the same basis as investments in subsidiary undertakings, however goodwill is not amortised on recognition of profit or loss in the consolidated financial statements.
The accumulated net revaluation of investments in subsidiary undertakings is retained in the parent company under “Net revaluation under the equity method” and recognised under shareholders’ equity.
Receivables are measured at cost on acquisition and are subsequently adjusted at amortised cost. The risk of impairment is assessed on an individual basis.
Inventories
Raw materials, components and goods for resale are measured at the lower of cost and net realisable value. Group-manufactured goods and work in progress are measured at the value of direct costs of materials, direct labour costs 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 Group-manufactured goods and work in progress.
Inventories are measured at cost using the FIFO method, i.e. the most recent deliveries are considered to be in stock.
Receivables
Receivables are measured at amortised cost. Impairment losses are recognised for bad debts based on an individual assessment of each risk.
Own shares and dividend
On the buy-back or sale of own shares, the acquisition cost or divestment sum is recognised direct under Other reserves in shareholders’ equity. The capital reduction 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 in
shareholders’ equity until adoption at the annual general meeting, upon which such dividend will be recognised as a liability.
Pension obligations etc.
The Group has entered into pension plans or similar commitments with some of its employees.
As regards defined contribution plans, the Group pays regular, fixed contributions to independent pension companies. Such contributions are recognised in the profit and loss account in the period in which employees have performed work entitling them to contributions under a pension plan. Contributions
payable are recognised in the balance sheet as a liability.
As regards defined benefit plans, an actuarial calculation is made regularly of the accrued value in use of future benefits payable under the pension plan. The value in use less fair value of any assets attached to the pension plan is recognised in the balance sheet under pension obligations.
The year’s pension costs based on actuarial estimates and financial forecasts at the beginning of the year are recognised
in the profit and loss account. Any differences between the forecast development in pension assets or liabilities and the realised values are designated actuarial gains or losses and recognised direct in shareholders’ equity.
Other long-term employee benefits are similarly recognised
by applying actuarial calculations. Actuarial gains or losses
on such benefits are recognised in the profit and loss account immediately.
Provisions
Provisions 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 is likely to draw on corporate financial resources.
Liabilities other than provisions
Mortgages and loans from mortgage credit institutions or other credit institutions are recognised at their proceeds less borrowing costs. Subsequently, financial liabilities are measured at amortised cost. Thus, the difference between proceeds and nominal values is recognised in the profit and loss account over the term of the loan.
Other debts are measured at amortised cost using the effective interest method. Thus, the difference between proceeds and nominal values is recognised in the profit and loss account under net financials over the term of the loan.
Warranty commitments include commitments in relation to the remedying of defective products within the warranty period. Cash flow statement
The cash flow statement is presented using the indirect method and reflects the Group’s net cash flows from operating, investing and financing activities.
Cash flows from operating activities include cash flows from the year’s operations, adjusted for operating items not generating cash and for movements in working capital.
Cash flows from investing activities include cash flows generated from the acquisition or divestment of entities and other long-term assets as well as the purchase, development, improvement or sale of intangible and tangible assets.
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.
Cash and cash equivalents comprise cash funds less interest-bearing, short-term bank debts.
Cash flows cannot be compiled exclusively on the basis of the published accounting records.
Segmental information
The William Demant Holding 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.
Segmental information is provided in compliance with corporate risks, accounting policies and financial control.
Segmental information includes items directly attributable to the individual segment as well as items reliably attributable to the various segments.
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