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NOTE 4 – CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS IN APPLYING ACCOUNTING
POLICIES
In preparing these financial statements, the Group management and Board of Directors must make estimates and assumptions
that affect the recognized amounts of assets and liabilities, revenues and expenses, and other information, especially regarding
contingent liabilities. The estimates and assumptions for accounting purposes dealt with in this section are deemed the most
critical for a proper understanding of the financial statements, in view of their degree of significance in judgments and uncertainty.
Our estimates and assumptions in this regard change as the circumstances for AAK’s operations change.
Impairment testing of goodwill
The Group tests goodwill for any impairment on an annual basis or whenever events or objective circumstances indicate that
the fair value of acquisition-related goodwill may have declined – for example, because of changes in the business climate
or decisions to dispose of or discontinue certain operations. To determine whether the value of goodwill has decreased, the
cash-generating unit to which the goodwill is attributable must be valued and this is done by discounting the cash flow of the
unit. In applying this method, the Company relies on several factors, such as profit/loss, business plans, financial forecasts and
market data. See also note 15.
Impairment test of other non-current assets
AAK’s property, plant and equipment and intangible non-current assets, excluding goodwill, are recognized at cost less accumulated
amortization/depreciation and any impairment. Besides goodwill, AAK recognizes no intangible assets with unlimited useful
life. Depreciation/amortization is applied over the estimated useful life to an estimated residual value. Both the useful life and
residual value are reviewed at least once at the end of each financial period.
The carrying amount of the Group’s non-current assets is tested whenever events or changes in circumstances indicate that
the carrying amount cannot be recovered. The carrying amount of intangible assets not yet finished for use is tested each year. If
such an analysis indicates that the carrying amount is too high, the recovery value of the asset is established, which is either the
net sales value or the value in use, whichever is greatest. Value in use is measured as the expected future discounted cash flow
from the assets or the cash-generating unit to which the asset belongs.
Income tax
The Group is liable to pay taxes in many countries. Extensive reviews and testing are necessary to establish worldwide provisions
for income tax liabilities. There are many transactions and calculations for which the final tax is uncertain. The Group recognizes
a liability for anticipated tax audit issues based on assessment of whether an additional tax liability will arise. In cases where the
final tax for these matters differs from the amounts first recognized, these differences will impact current and deferred tax assets
and tax liabilities in the period when these determinations are made.
Disputes
According to our best assessment, neither the Parent nor any subsidiary is currently involved in any legal proceedings or
arbitration proceedings that are deemed to have any significant negative impact on the business, its financial position or its
performance.
Application of IAS 39
Future contracts or fixed price contracts are used to hedge raw material price risk. Moreover, the Group employs currency
hedging on all of its transaction risks. This means that the gross contribution of every sales contract is hedged. As part of internal
monitoring, the market value of all sales contracts and raw material purchases (including inventory) is valued with respect to both
raw material prices and currency prices, which is not possible under IAS 39 without applying hedge accounting based on fairvalue
hedging.
The majority of purchase and sales contracts for physical delivery are deemed to be derivative instruments and are valued at
fair value in the income statement. See also note 2.
Pension obligations
The present value of pension obligations depends on multiple factors determined on an actuarial basis using a number of
assumptions. The assumptions used to determine net cost (income) for pensions include the discount rate. Each change in
these assumptions will affect the carrying amount of pension obligations.
The Group determines a suitable discount rate at the end of each year. This is the rate used to determine the present value
of assessed future payments that are expected to be demanded to settle the pension obligations. When determining a suitable
discount rate, the Group considers the interest rates of high-quality mortgage bonds that are denominated in the currency in
which the benefits will be paid, and that have terms of maturity equivalent to the assessments for the pension obligation in
question. See also note 9.
Restructuring
A provision for restructuring is recognized when the Group has adopted a comprehensive and formal restructuring plan, and the
restructuring has either been started or published. No provisions are made for future operating expenses.