Note Financial risk management and hedge accounting
3
Note Critical accounting estimates and assumptions in applying accounting policies
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Foreign currency contracts and the foreign currency components
in sales and purchase contracts are valued at actual
market foreign currency forward rates. The raw material price
components in sales and purchase contracts are valued
at actual market forward prices for identical or similar raw
materials. Inventory is valued at actual market spot prices for
identical or similar raw materials. Interest rate swap contracts
are valued at actual market interest rates.
Hedge accounting
Inventory hedging at fair value
Future contracts, and purchase and sales contracts not
deemed to be assets for own use are used for hedging,
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,
which means that they cannot be exempted from derivative
accounting. Since the quality of the underlying raw materials
used for hedging differs from the quality of the hedged raw
materials, some inefficiency is likely. AAK minimizes this
inefficiency by reducing the basis risk between hedged raw
material risks and the underlying raw materials used as
hedging contracts. Due to the basis risk involved, AAK uses
the “dollar offset” method for testing the hedge efficiency of
the fair value of raw materials. Hedge efficiency testing in
2018 confirmed that the fair-value hedge of raw materials
qualifies for hedge accounting.
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.
Fair-value hedge of currency risk on sales contracts
qualifying for exemption under assets for own use
The hedging instruments used are future contracts and
purchase contracts. As the currency risk of the hedge instruments
is identical to the currency risk of the hedged contracts,
no material basic risk exists. AAK therefore only uses the
“critical match” method to test the hedge efficiency of currency
risk on sales contracts that qualify for own use exemption
and that may consequently be exempted from derivative
accounting. The hedge efficiency testing in 2018 confirmed a
perfect critical match.
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.
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