Accounting policies for consolidated financial statements
The consolidated financial statements of the Novozymes Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and additional Danish requirements on the presentation of accounts. Novozymes has prepared its consolidated financial statements in accordance with all the IFRS standards in force. The fiscal year for the group is January 1 – December 31, 2011. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, with the exception of the following items, which are recognized at fair value:
- Available-for-sale financial assets
Some of the information required pursuant to IFRS is contained in the sections Report and Management. The rest can be found in the following sections.
The Novozymes Report does not contain the financial statements for the parent company, Novozymes A/S. The financial statements for the parent company can be found online under Financial statements for Novozymes A/S at www.report2011.novozymes.com. Together, The Novozymes Report and the financial statements for the parent company, Novozymes A/S, form the Annual Report that will be sent to the Danish Business Authority.
Impact of new accounting standards
In 2011, the following standard and amendments with relevance for Novozymes were brought into effect and implemented:
- Revised IAS 24 "Related Party Disclosures"
- Amendments to IFRS 7 "Disclosures – Transfers of Financial Assets"
- Amendments to IFRIC 14 "Prepayment of a Minimum Funding Requirement"
- IFRIC 19 "Extinguishing Financial Liabilities with Equity Instruments"
The implementation of these has not led to further specifications in the Notes or to changes in recognition and measurement.
Standards and amendments issued by IASB with effective date after December 31, 2011, or not adopted by the EU and therefore not implemented, comprise:
- IFRS 9 "Financial Instruments"
- IFRS 10 "Consolidated Financial Statements"
- IFRS 11 "Joint Arrangements”
- IFRS 12 "Disclosures of Interests in Other Entities”
- IFRS 13 "Fair Value Measurement”
- Revised IAS 28 "Investments in Associates and Joint Ventures"
- Amendments to IAS 1 "Presentation of Items of Other Comprehensive Income"
- Amendments to IAS 19 "Employee Benefits"
Implementation of these will lead to further specifications in the Notes and reclassifications but no material changes in recognition and measurement.
Significant accounting policies
The consolidated financial statements comprise the financial statements of Novozymes A/S (the parent company) and all the companies in which the Group owns more than 50% of the voting rights or otherwise has control or similar de facto control (subsidiaries), as well as joint ventures. The consolidated financial statements are based on the financial statements for the parent company and subsidiaries, and are prepared by combining items of a uniform nature and subsequently eliminating intercompany transactions, internal stockholdings and balances, and unrealized intercompany profits and losses. All the financial statements used for consolidation are prepared in accordance with the Group’s accounting policies.
The Group’s holdings in joint ventures regarded as jointly controlled entities are consolidated using the proportionate consolidation method by including its proportional share of their assets, liabilities, revenue, and costs line by line.
On acquisition of new companies, the assets, liabilities, and contingent liabilities of each new company are recognized at fair value at the time of acquisition. Goodwill is adjusted for changes in the purchase price after acquisition and changes in the fair value of the acquired identifiable assets, liabilities, and contingent liabilities since the acquisition date until 12 months afterward. Newly acquired companies are recognized as from the date of acquisition, and no adjustment is made to comparative figures.
In acquisitions where less than 100% of a company is acquired, the Group can choose between goodwill recognized at its full fair value or solely at the Group's percentage owned of goodwill (partial goodwill). The goodwill recognized at the time of acquisition will not be changed in connection with later acquisitions of minority interest, irrespective of whether full or partial goodwill is chosen.
Translation of foreign currencies
The consolidated financial statements are presented in Danish kroner (DKK). Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction date. Monetary items denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Financial statements of foreign subsidiaries are translated into Danish kroner at the exchange rates prevailing at the balance sheet date for assets and liabilities, and at average exchange rates for income statement items.
Goodwill arising on the acquisition of new companies is treated as an asset belonging to the new foreign subsidiaries and translated into Danish kroner at the exchange rates prevailing at the balance sheet date.
Realized and unrealized foreign exchange gains and losses are recognized under Financial income or Financial costs, with the exception of unrealized gains and losses relating to hedging of future cash flows, which are recognized in Other comprehensive income. The following exchange rate differences are also recognized in Other comprehensive income, translated at the exchange rates prevailing at the balance sheet date:
- Translation of foreign subsidiaries’ net assets at the beginning of the year
- Translation of foreign subsidiaries’ income statements from average exchange rates to the exchange rates prevailing at the balance sheet date
- Translation of long-term intercompany balances, which are considered to be an addition to net assets in subsidiaries
- Fair value adjustment of financial liabilities that qualify for hedging of net assets in foreign subsidiaries
The Group’s employees are covered by stock option programs comprising equity-settled and cash-settled programs.
The fair value of the employee services received in exchange for the grant of stock options is computed using the value of the granted stock options.
The fair value of stock-based payment on the grant date is recognized as an employee cost over the period in which the stock options are vested. In measuring the fair value, account is taken of the number of employees expected to gain entitlement to the options as well as the number of options the employees are expected to gain. This estimate is adjusted at the end of each period such that only the number of options to which employees are entitled, or expected to be entitled, is recognized.
The value of equity-settled programs is offset against Shareholders’ equity. The value of cash-settled programs, which are offset against Other payables, is adjusted to fair value at the end of each period, and the subsequent adjustment in fair value is recognized in the income statement under Financial income or Financial costs.
Government grants received relating to research and development costs are recognized under Other operating income, net, based on the percentage completion of the projects. Grants received relating to investments in property, plant and equipment are offset against the cost price of the eligible assets.
The consolidated financial statements provide information on the Group’s operating segments in a manner that is consistent with the internal reporting to the Board of Directors and Executive Management. In addition, information is provided on geographical allocation.
Operating lease costs are recognized in the income statement on a straight-line basis over the period of the lease. Liabilities relating to non-cancelable contracts are specified in the Notes.
Key figures are prepared in accordance with the "Recommendations and Key Figures 2010" of the Danish Society of Financial Analysts.
Revenue covers sales of goods and services for the year less goods returned, and volume and cash discounts. Sales are recognized at the time of risk transfer relating to the goods sold, provided that the revenue can be measured on a reliable basis and is expected to be received.
The Group has entered into few agreements where the other contracting party undertakes sales to third parties and the profit is distributed between the Group and the other contracting party on the basis of a predetermined formula. Sales are recognized using information on the other contracting party’s realized sales, and a liability is recognized for the distribution of the profit, which is calculated and settled with final effect once a year.
The Group has entered into commission agreements where agents undertake sales to third parties in return for commission on realized sales. These sales are recognized when they are realized. A liability is recognized when it is permitted for goods to be returned and this is likely.
Research and development costs
Research costs are expensed as incurred. Development costs pertaining to ongoing optimization of production processes for existing products, or to development of new products, where lack of approval by the authorities, approval by customers, and other uncertainties mean the development costs do not fulfill the criteria for recognition in the balance sheet, are expensed as incurred.
Other operating income, net
Other operating income, net, comprises grants from public authorities and customers for research projects and collaborations, and income, net, of a secondary nature in relation to the main activities in the Group. This item also includes non-recurring income items, net, in respect of damages, outlicensing, etc.
Corporation tax, comprising the current tax liability, change in deferred tax for the year, and possible adjustments relating to previous years, is recognized in the income statement, except to the extent that it relates to items recognized either in Other comprehensive income or directly in Shareholders’ equity. Deferred tax is measured using the balance sheet liability method and comprises all temporary differences between the accounting and tax values of assets and liabilities. No deferred tax is recognized for goodwill, unless amortization of goodwill for tax purposes is allowed. Deferred tax is measured and recognized to cover retaxation of losses in jointly taxed foreign subsidiaries if this is expected to be realized on the divestment of stock or when recapture of tax losses becomes applicable. The tax value of tax-loss carry-forwards is included in the calculation of deferred tax to the extent that the tax losses can be expected to be utilized in the future.
Deferred tax is measured according to current tax rules and at the tax rate expected to be in force on elimination of the temporary differences. Changes in deferred tax due to tax rate changes are recognized in the income statement, except to the extent that they relate to items recognized either in Other comprehensive income or directly in Shareholders’ equity.
Novozymes A/S and its Danish subsidiaries are jointly taxed with the Danish companies in the Novo A/S Group. The tax for the individual companies is allocated in full on the basis of the expected taxable income.
Intangible assets other than goodwill are measured at cost less accumulated amortization and impairment losses. Goodwill is not subject to amortization.
Costs associated with large IT projects for the development of software for internal use are capitalized if they are incurred with a view to developing new and improved systems.
Amortization is based on the straight-line method over the expected useful lives of the assets, as follows:
- Completed IT development projects are amortized over the useful life. Booked IT development assets are amortized over 3–5 years
- Acquired patents, trademarks, licenses, and know-how are amortized over their useful lives. Patents and trademarks are amortized over their useful lives, normally identical to the patent period, and licenses are amortized over the agreement period. Booked patents, trademarks, licenses, and know-how are amortized over 7–15 years
Some assets are amortized over a shorter period.
Property, plant and equipment
Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Borrowing costs in respect of construction of major assets are capitalized.
Depreciation is based on the straight-line method over the expected useful lives of the assets, as follows:
- Buildings: 12–50 years
- Plant: 5–16 years
- Other equipment: 3–16 years
The assets’ residual value and useful life are reviewed on an annual basis and adjusted if necessary at each balance sheet date.
Impairment of intangible assets and property, plant and equipment
Goodwill is tested for impairment annually or whenever there is an indication that the asset may be impaired.
For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, termed as cash-generating units. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is first allocated to reduce the carrying amount of goodwill and then pro rata on the basis of the carrying amount of the other assets. The recoverable amount is the higher of an asset’s fair value less expected costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or the cash-generating unit to which the asset belongs. As a rule of thumb the recoverable amount is calculated as the present value of expected future net cash flows.
If the recoverable amount for the cash-generating unit again exceeds the carrying amount, the recognized impairment losses for goodwill are not reversed subsequently.
Property, plant and equipment and finite-lived intangible assets
The Group regularly reviews the carrying amounts of its property, plant and equipment and finite-lived intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount is reduced to the recoverable amount.
Impairment losses are reversed only to the extent of changes in the assumptions and estimates underlying the impairment calculation.
Inventories are measured at cost determined on a first-in first-out basis or net realizable value where this is lower.
The cost of Work in progress and Finished goods comprises direct production costs such as raw materials and consumables, energy, and labor directly attributable to production, and indirect production costs such as employee costs, and maintenance and depreciation of plant, etc.
If the expected selling price less any completion costs and costs to execute sales (net realizable value) of inventories is lower than the cost, the inventories are written down to net realizable value.
Financial assets and liabilities
The Novozymes Group categorizes financial assets and liabilities as follows: Financial assets/liabilities at fair value through profit or loss, Loans and receivables, Hedge accounting, Available-for-sale financial assets, and Financial liabilities.
Financial assets/liabilities measured at fair value through profit or loss is the part of derivatives that cannot be designated as hedge accounting, e.g., accrued interest on currency swaps and time value of currency options. Loans and receivables are non-derivatives with fixed or determinable payments that are not listed on an active market. Loans and receivables are entered in the balance sheet under the following items: Trade receivables, Other receivables, and Cash at bank and in hand. The items are measured at amortized cost or net realizable value equivalent to nominal value less allowances for doubtful receivables, whichever is lower.
Hedge accounting consists of positive and negative fair values of derivatives, which are itemized in the balance sheet under Other financial assets and Other financial liabilities respectively.
Derivatives used to hedge assets and liabilities are measured at fair value on the balance sheet date, and value adjustments are recognized as Financial income or Financial costs.
Derivatives used to hedge future cash flows are measured at fair value on the balance sheet date, and value adjustments are recognized in Other comprehensive income.
Derivatives used to hedge net investments in foreign subsidiaries are measured at fair value, and value adjustments are recognized in Other comprehensive income.
Income and costs relating to cash flow hedges and hedging of net investments in subsidiaries are transferred from Other comprehensive income on realization of the hedged item and are recognized as Financial income or Financial costs.
Derivatives are recognized on the settlement date, while other financial instruments are recognized on the transaction date.
Available-for-sale financial assets are the remaining category of financial assets not included above. Available-for-sale financial assets are itemized in the balance sheet as Other financial assets and are measured at fair value (share price) on the balance sheet date. Unrealized fair value adjustments are recognized in Other comprehensive income. Value adjustments are transferred from Other comprehensive income to Financial income or Financial costs when realized. Write-offs are recognized as Financial costs.
Financial liabilities are entered in the balance sheet under the following items: Other financial liabilities, Trade payables, and Other payables.
The cost price and proceeds from the sale of treasury stock are recognized directly in Shareholders’ equity as a separate item. Among other things, the company’s holding of treasury stock is used to hedge employees’ exercise of granted stock options.
The dividend proposed for the financial year is included in Retained earnings until approved at the Annual Shareholders’ Meeting.
Provisions are recognized where a legal or constructive obligation has been incurred as a result of past events, and it is probable it will lead to an outflow of financial resources. Provisions are measured at the present value of the expected expenditure required to settle the obligation.
Costs relating to defined contribution plans are recognized in the income statement in the financial year to which they relate.
Prepayments and deferred income
Prepaid expenses under Other receivables comprise expenses paid relating to subsequent financial years such as rent, insurance premiums, subscription fees, and interest.
Deferred income under Other payables comprises payments received relating to income in subsequent years, such as revenue and interest.
Prepayments and deferred income are measured at amortized cost.
Statement of cash flows and financial resources
The Statement of cash flows and financial resources for the Group, which is compiled using the indirect method, shows cash flows from operating, investing, and financing activities, and the Group’s cash and cash equivalents at the beginning and end of the year.
Cash flow from operating activities comprises net profit adjusted for non-cash items, paid financial items, corporate tax paid, and change in working capital. Cash flow from investing activities comprises payments relating to the acquisition and sale of companies and minority stock, intangible assets, and property, plant and equipment.
Cash flow from financing activities comprises proceeds from borrowings, repayment of principal on interest-bearing debt, payment of dividends, proceeds from stock issues, and the purchase and sale of treasury stock and other securities.
Cash and cash equivalents comprises cash at bank and in hand less current bank loans due on demand. Financial resources comprises cash and cash equivalents plus undrawn committed credit facilities.