Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017 and 2016
1 Summary of Significant Accounting Policies and Practices
A Description of Business
Giesecke & Devrient Gesellschaft mit beschränkter Haftung and subsidiaries (“G+D”or “Giesecke+Devrient”) is in the business of printing banknotes and securities, as well as the development and production of security paper and currency automation equipment. Giesecke+Devrient also develops and manufactures magnetic stripe cards and smartcards mainly for the telecommunications, banking, and health services industries. A further field of business includes security-related solutions for governments and public authorities, ranging from ID cards and travel documents to e-government solutions. New technologies comprise network solutions and secure mobile transaction solutions as well as a software system for mobile devices.
Giesecke+Devrient, headquartered in Prinzregentenstraße 159, 81677 Munich, Germany, is entered in the Commercial Register of the Munich District Court Dept. B under the number 4619. G+D has a strong international orientation with Germany being one of its major markets. Other key markets include the United States, Canada and China. As of December 31, 2017, G+D had subsidiaries in 32 countries and 11,600 employees worldwide, including 7,613 outside Germany.
The consolidated financial statements were approved by the Management Board on March 28, 2018.
B Basis of Presentation
The consolidated financial statements as of December 31, 2017 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.
MC Familiengesellschaft mbH was founded in 2012. MC Familiengesellschaft mbH became the Group parent company and prepared statutory consolidated financial statements in accordance with IFRS as of December 31, 2017.
It is possible that some figures do not precisely add up to the totals due to rounding differences.
C Consolidated Group and Principles of Consolidation
All material G+D subsidiaries, joint ventures and associates are included in the consolidated financial statements.
Affiliated companies are companies that are controlled by the Group. The Group controls a company if it is exposed to or has rights to variable returns from its involvement in the company and has the ability to affect the amount of these returns by using its power. Financial statements of subsidiaries are included from the time the Group obtains control and ceases when the Group loses control. Non-controlling interests are to be valued with the respective share of the net assets of the company acquired that can be identified at the date of acquisition. Changes in the ownership interest in a subsidiary that do not result in losing control, are to be accounted for as equity transactions.
Interests of the Group that are accounted for according to the equity method comprise interests in associated companies and joint ventures. Associated companies are companies in which the Group has significant influence, but which the Group does not control or jointly control in respect of financial and business policies. A joint venture is an arrangement whereby the Group has joint control of the arrangement and has rights to the net assets but does not have rights in assets and obligations for the liabilities of the arrangement.
The consolidated Group comprises 17 domestic and 55 foreign subsidiaries which are fully consolidated. Giesecke+Devrient has had a holding structure since January 2017, in which the divisions are fully consolidated as legally independent subgroups. The change in the Group structure as illustrated in section one of the Group management report has no impact on the consolidated financial statements. Although Giesecke+Devrient has less than half of the voting rights in Veridos Matsoukis S.A. Security Printing, Athens (36%), management has determined that G+D controls this company. This assessment is on the basis that G+D owns the majority of the voting rights in Veridos GmbH, Berlin, which in turn holds the majority of the voting rights in Veridos Matsoukis S.A. Security Printing, Athens. Additionally, seven joint ventures and/or associated companies are accounted for under the equity method. Giesecke+Devrient holds 16.29% of the equity shares and voting rights in Hansol Secure Co., Ltd., Seoul and 14,3% of the equity shares and voting rights in finally safe GmbH, Essen. The Group has classified its influence in Hansol Secure Co., Ltd., Seoul and finally safe GmbH, Essen as significant since Giesecke+Devrient has rights of co-determination in excess of its ownership percentage in material resolutions. The consolidated financial statements include all material companies which are presented in the schedule of shareholdings (see Note 37 “Shareholdings”).
Consolidated Group and Principles of Consolidation
The financial statements of the companies included in the consolidated financial statements are prepared using uniform accounting policies in accordance with IFRS.
Income and expenses, receivables, payables and provisions, as well as intragroup profits between companies included in the consolidated financial statements are eliminated.
A subsidiary is deconsolidated from the date it is no longer controlled by G+D.
Investments in joint ventures and associates accounted for using the equity method are initially recognized at cost and adjusted accordingly in subsequent periods. Intragroup profits from transactions with these companies are eliminated in proportion to the acquirer’s interest.
Under IFRS, all business combinations are accounted for using the acquisition method. The acquirer allocates the cost of a business combination by recognizing the acquiree’s identifiable assets, liabilities, and contingent liabilities that satisfy the recognition criteria at their fair value on the date control over the entity is obtained (acquisition date). The full amounts of identifiable assets and liabilities and contingent liabilities irrespective of the company’s ownership interest are recognized at their fair values. Any excess of the purchase price over the fair value of the identifiable assets, liabilities, and contingent liabilities less any minority interests is recognized as goodwill. Where the fair value exceeds the purchase price, the resulting amount is recorded in the income statement.
Non-controlling interests are measured at the fair value of the proportionate identifiable net assets. In a business combination achieved in stages, interests held at the time of transfer of control are revalued and the resulting gain or loss is recognized in profit or loss. An adjustment of conditional purchase price components that were reported as liability at the acquisition date is recognized in profit or loss for business combinations. Transaction costs are recognized as expenses at the time they are incurred.
After having gained control of a subsidiary, the difference between the purchase price and the proportionate share of equity for additional shares acquired is charged against retained earnings. Transactions which do not result in loss of control have no impact on the income statement and are recorded as equity transactions.
Remaining interests are measured at fair value at the time of loss of control. In the case of non-controlling interests, the reporting of negative balances is permitted, i.e. future losses are allocated in proportion to the participation without restriction.
D Use of Estimates
The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period.
Information about significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements and those through which a considerable risk can arise or a material adjustment will be required within the fiscal year ending on December 31, 2017, is included in the following notes:
- Note 1 (j) “Goodwill and Other Intangible Assets”
- Note 1 (n) “Provisions”
- Note 19 “Income Taxes”
- Note 24 “Business Combinations”
E Foreign Currency Translation
Transactions in foreign currency are translated into euros using the exchange rate on the date of the transaction. At the balance sheet date, monetary assets and liabilities are remeasured using the closing rate. Non-monetary assets and liabilities denominated in foreign currency are translated using the historical exchange rate as of the date of the transaction
The individual functional currency of each of the Group companies is the currency of the primary economic environment in which the entity operates. The assets and liabilities of foreign subsidiaries with functional currencies other than the euro are translated using period-end exchange rates, while the revenues and expenses are translated using average exchange rates during the period. Differences arising from the translation of assets and liabilities in comparison with the translation of the prior periods are included in cumulative translation adjustment and reported as a separate component of equity.
For significant currencies, the average and closing rates for the fiscal years ended December 31 are as follows:
|1 euro equals X units of foreign currency||Rates – December 31, 2017||Rates – December 31, 2016|
|US dollar – USD||1.1293||1.1993||1.1066||1.0541|
|Australian dollar – AUD||1.4729||1.5346||1.4886||1.4596|
|British pound – GBP||0.8761||0.8872||0.8189||0.8562|
|Canadian dollar – CAD||1.4264||1.5044||1.4496||1.4202|
|Chinese renminbi – RMB||7.6644||7.8039||7.3664||7.3188|
|Swedish krona – SEK||9.6369||9.8438||9.4673||9.5525|
F Financial Instruments
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial assets include, in particular, cash and cash equivalents, accounts receivable trade, loans, other receivables, marketable securities, and derivative financial instruments.
For regular-way purchases and sales of all categories of financial assets, with the exception of derivative financial instruments, the date of initial recognition in the balance sheet or of derecognition is the settlement date, i.e. the date on which an asset is delivered to or by an entity. The trade date is determinant for derivative financial instruments.
Financial liabilities include accounts payable trade, liabilities to banks, finance lease obligations, and derivative financial liabilities.
Financial assets and liabilities are generally measured at fair value on initial recognition. Financial assets, which are not valued at fair value through profit or loss, include the direct acquisition costs. The fair value is the estimate of the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (i.e. to estimate an exit price).
A financial asset is derecognized when the contractual rights to the cash flows relating to the financial asset expire, that is, when the asset is realized, forfeited or is no longer under the control of the company. Up to now, G+D has not exercised the right to record financial assets as financial assets measured at fair value through profit or loss at the time of initial recognition. The measurement category “held-to-maturity investments” is also not used. Interest income was not recorded on impaired financial assets.
Cash and Cash Equivalents/Short-term Investments
Giesecke+Devrient considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. These are valued at amortized cost.
Highly liquid commercial paper with an original maturity up to three months is also classified as cash and cash equivalents and is measured at fair value.
Short-term investments with durations between three months and one year are classified as current financial assets.
Accounts Receivable Trade and Other Receivables, net
Accounts receivable trade and other receivables, net are allocated to the category “loans and receivables”. They are measured at fair value at the time of initial recognition, which represents the acquisition costs at the date of acquisition. The valuation at subsequent balance sheet dates is at amortized cost. At the same time, credit risk impairments in the form of specific allowances for doubtful accounts are carried out. Specific defaults lead to derecognition of the receivables affected. In addition, lump-sum specific allowances are also recorded. The indication of a possible impairment begins when the agreed payment terms are exceeded, moreover when the start of insolvency proceedings or similar becomes known. Allowances on accounts receivable trade and other receivables are recorded in separate allowance accounts.
Income and expenses in connection with the recognition and reversal of specific allowances, lump-sum specific allowances, as well as direct derecognitions of receivables are recorded in selling expenses. Non- and low-interest-bearing non-current receivables are recorded at the present value of the expected future cash flows when the interest effect is material. For such amounts, the subsequent valuation is made using the effective interest method. Assets are classified as non-current when the remaining duration at the balance sheet date exceeds 12 months.
Marketable Securities and Investments
G+D’s marketable securities are classified as trading or available-for-sale securities and are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. The trading securities contain shares in a closed and fully consolidated special fund, which invests in publicly traded equity and debt securities and common stocks in Nxt-ID, Inc. The available-for-sale securities comprise shares in investment funds, which serve as insolvency insurance to cover the provision for preretirement part-time working arrangements and preferred stocks in Nxt-ID, Inc. Highly liquid commercial paper with an original maturity of up to three months is classified as cash and cash equivalents and is measured at fair value.
Unrealized gains and losses on trading securities are included in income on a current basis.
Unrealized gains and losses on available-for-sale securities are included in accumulated income and expenses recognized directly in equity. Impairments are recognized through profit and loss on other than temporary declines in value. An impairment is recorded on equity securities when there is a permanent or significant reduction in the fair value below the original acquisition costs. For debt securities, an impairment is recorded when there is a considerable decline in the creditworthiness of the debtor. If, in a subsequent period, the fair value increases and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss shall be reversed in the income statement (for equity securities the reversal is recognized directly in equity).
Equity investments in other related companies are recognized at cost, since an active market price does not exist and their fair market value cannot be reliably determined.
Other Financial Assets
With the exception of derivative financial instruments, other financial assets recognized as assets are allocated to the measurement category “loans and receivables”. The valuation is in accordance with the explanation provided for accounts receivable trade and other receivables, net. If there are indications of an impairment for financial assets which are valued at amortized cost, an impairment is carried out to the extent of the lowest possible realizable amount. Irrecoverable financial assets are derecognized. An impairment is reversed when the reasons for the impairment recorded no longer prevail.
With the exception of derivative financial instruments, financial liabilities recorded as liabilities are allocated to the measurement category “financial liabilities measured at amortized cost”. The initial valuation of these financial liabilities is at fair value and in subsequent periods at amortized cost using the effective interest method. Transaction costs are deducted from the acquisition costs, in as much as they are directly attributable. Liabilities are classified as non-current when the remaining maturity as of the balance sheet date exceeds 12 months.
The valuation of accounts payable trade is in accordance with the procedures noted previously for financial liabilities.
A financial liability is derecognized when the underlying obligation relating to the liability is fulfilled, terminated or extinguished.
Giesecke+Devrient has not made use of the option to designate financial liabilities as financial liabilities measured at fair value through profit or loss at the time of initial recognition in the balance sheet.
Derivative Financial Instruments
Derivative financial instruments are used to manage the foreign currency exposure incurred in the normal course of business in the form of forward exchange contracts.
Currency risks from contracts with a nominal volume exceeding USD10.0 million are generally secured via forward exchange contracts within the scope of a micro hedge and presented as fair value hedges in the balance sheet. If the conditions for hedge accounting in accordance with IAS 39 are fulfilled, Giesecke+Devrient classifies and documents the hedge as a fair value hedge during the period. A fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment. Documentation of the hedging relationship includes the objectives and strategy of the company’s risk management, the nature of the hedging activity, the risk covered by the hedge, a description of the hedge instrument and the hedged item, as well as a description of the method used in measuring its effectiveness. The hedge is expected to be highly effective in offsetting changes in fair value attributable to the hedged risk and is assessed on an ongoing basis throughout the financial period for which the hedge was designated. Changes in fair value of the derivatives, as well as changes in the market values of their corresponding hedged items, are recognized in net financial income. The fair values of the hedged items are recognized as current financial assets and current financial liabilities. If derivative financial instruments no longer meet the criteria for hedge accounting, they are classified as held for trading.
USD cash flows are monthly forecasted on a rolling basis over a twelve month period. If the net exposure between USD cash inflows and outflows is above USD15.0 million for more than three months, hedge accounting via a foreign currency forward contract with matched maturities is entered into. These are recorded as cash flow hedges in the financial statements. Forecasted cash flows are hedged by means of a cash flow hedge. The documentation for hedge accounting includes the goals and the strategy of risk management, the nature of the hedging activity, the hedged risk, the designation of the hedging instrument and the underlying transactions, as well as a description of the method to measure its effectiveness. In terms of achieving compensation of risks from fair value changes relating to the hedged risk, the hedged relationships are considered as highly effective. They are regularly reviewed to check whether they were highly effective for the reporting period for which they were designated. The portion of the changes in the fair value of derivatives which qualify as effective hedges is recognized in changes in income directly in equity. The ineffective portion is recognized in the income statement in financial result, net. The fair values of the underlying transactions are recorded as current financial assets and current financial liabilities in the balance sheet. The amounts recognized as changes in income directly in equity are reclassified from equity to the profit and loss statement in the period in which the hedged forecasted cash flows have an impact on the income statement. If the requirements for hedge accounting are no longer fulfilled, the derivative financial instruments are no longer treated as hedge accounting and are classified as held for trading.
G+D does not otherwise apply hedge accounting in managing foreign currency exposure. These derivative financial instruments therefore qualify as “held-for-trading” and are recorded at fair value at the balance sheet date as either an asset or a liability. Changes in fair value are recognized in the income statement as financial income or expense. The fair market values of forward exchange contracts are calculated on the basis of the applicable spot market rates as well as the forward contract premium or discount compared to the contracted forward contract rate.
Giesecke+Devrient identifies derivative instruments embedded in host contracts and accounts for them separately according to the provisions of IAS 39 “Financial Instruments: Recognition and Measurement”. These derivatives consist solely of foreign currency derivatives embedded in certain firm sales and purchase contracts denominated in a currency that is neither the functional currency of G+D nor of the contractual counterparty and which is also not a currency in which transactions are commonly denominated in the jurisdiction in which the transaction is to occur.
The fair values of the external and embedded foreign currency derivatives are recorded as current financial assets and liabilities in the balance sheet.
In fiscal year 2011, derivative financial instruments were used for the purpose of hedging interest rate risks the first time. Effective January 1, 2012, G+D applies hedge accounting for derivative financial instruments for the purpose of hedging interest rate risks. Giesecke+Devrient applies hedge accounting in the form of a cash flow hedge for an interest rate swap and a cross currency swap to secure interest and currency exchange rate risks. A cash flow hedge secures expected future cash flows. Documentation of the hedge relationship includes the objectives and strategy of the company’s risk management, the nature of the hedging activity, the risk covered by the hedge, a description of the hedge instrument and the hedged item, as well as a description of the method used in measuring its effectiveness. With regard to the hedged risk, the hedging relationships are expected to be highly effective in offsetting risks arising from changes in the fair value and are regularly assessed to determine whether they have been highly effective throughout the financial reporting periods for which they were designated. Changes in the fair value of these derivatives that qualify as an effective hedge are recognized as other earnings with no effect in the profit and loss. The ineffective portion is recognized as financial or interest income (net) in the profit and loss. The fair values of the underlying transactions are recognized as current and non-current financial assets and as current and non-current other liabilities as well as financial debt in the balance sheet. The amounts which were recognized in other comprehensive income are reclassified from equity to the profit and loss in the period in which the expected hedged cash flows influence the profit and loss. If derivative financial instruments no longer meet the criteria for hedge accounting, they are classified as held for trading. The market value of the hedge is calculated based on PAR FX-Forward rates at the balance sheet date within an effective interest rate model.
The relevant classes of financial instruments used by G+D include the measurement categories in accordance with IAS 39, cash and cash equivalents, short-term investments, receivables and payables from construction contracts, as well as finance lease obligations, financial guarantees and derivative financial instruments that are eligible for hedge accounting.
G Risk Management and Foreign Currency Exposure Policies
Risk management for the entire Group is coordinated centrally. Policies for risk management, foreign currency exposure, and documentation requirements are set forth in guidelines and procedures issued by the corporate treasury department. These guidelines are examined and updated on a regular basis. The approval of the guidelines is the responsibility of management.
Derivative financial instruments are used by G+D solely to reduce the risks inherent within its worldwide business. As such, Giesecke+Devrient does not hold or issue derivative financial instruments for speculative purposes.
Refer to Note 22 “Financial Risk” for additional related disclosures.
Inventories are carried at cost. Cost is determined using the weighted average, FIFO (first-in first-out) or standard cost method. Finished goods and work-in-progress inventories include direct material, labor, and manufacturing overhead costs, which are based on the normal capacity of the production facilities. Items in inventory are written down at the balance sheet date if their net realizable value is lower than their carrying amount.
I Non-current Assets Held for Sale
Non-current assets are classified as held for sale if they are available for immediate sale in their present condition, subject only to terms that are usual and customary for sales of such assets and their sale is highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell.
J Goodwill and Other Intangible Assets
Intangible assets consist of purchased intangible assets, such as standard software, licenses, patents, water rights, know-how, goodwill, and internally developed intangible assets.
Intangible assets with definite useful lives are valued at cost and are amortized on a straight-line basis over their estimated economic useful lives.
Development costs are capitalized when the requirements of IAS 38, “Intangible Assets”, are fulfilled. Capitalized development costs recognized include production costs less accumulated depreciation and impairments. Production costs comprise direct material and personnel costs as well as directly attributable material and manufacturing overhead costs and production-related depreciation. Borrowing costs that are directly attributable to a qualifying asset are capitalized. Such costs are amortized on a straight-line basis over the estimated economic useful lives. Research costs are expensed in the period in which they are incurred.
The useful lives of intangible assets with definite useful lives are generally as follows:
|Capitalized development costs/ Technology||3–10|
|Software, rights, customer base etc.||2–15|
Goodwill is not amortized but rather tested at least annually for impairment. Reversals of impairments on goodwill are not permitted.
At least once a year, Giesecke+Devrient evaluates the recoverability of goodwill at the cash-generating unit (CGU) level or group of CGUs applying a one-step impairment test. Where the recoverable amount (value in use equal to the present value of future cash flows) of the CGU or group of CGUs, to which the goodwill was allocated, is less than the carrying amount, an impairment loss is recognized. If the impairment loss exceeds the goodwill of the CGU, the excess is allocated to the other assets (generally property, plant and equipment and intangible assets) of the CGU or group of CGUs pro rata on the basis of the carrying amount of each asset.
The most critical assumptions in the calculation of the fair value less costs to sell and the calculation of the value in use are based on include estimated growth rates, weighted average capital costs and tax rates. Such premises, as well as the underlying methodology, can materially influence the respective values and therefore impact the determination of a potential impairment of the goodwill. As far as property, plant and equipment, as well as intangible assets, are tested for impairment, the determination of the recoverable amount is based on estimates of the management.
K Property, Plant and Equipment
Property, plant and equipment are valued at cost less accumulated depreciation. Depreciation of property, plant and equipment is calculated on the straight-line method over the estimated economic useful lives of the assets. Depreciation on an asset commences once it has been placed in service.
The cost of self-constructed property, plant and equipment comprises the direct cost of materials and direct manufacturing expenses, plus appropriate allocations of material and manufacturing overheads as well as production and output-related general and administrative costs. Borrowing costs that are directly attributable to a qualifying asset are capitalized.
The acquisition or manufacturing costs also include estimated dismantling and removal costs as well as costs relating to the restoration of the location to its original state.
Any investment allowances or grants received reduce the acquisition or manufacturing costs of the assets for which they were granted.
If an item of property, plant and equipment is comprised of several components with differing useful lives, the separate components are depreciated over the individual useful lives. Expenses for the day-to-day repair and maintenance of property, plant and equipment are normally charged against income.
Estimated economic useful lives of G+D’s property, plant and equipment are as follows:
|Buildings||up to 50|
|Technical equipment and machinery||2–23|
|Other plant and office equipment||2–23|
L Impairment of Intangible Assets and Property, Plant and Equipment
Impairment of other intangible assets and items of property, plant and equipment is identified by comparing the carrying amount with the recoverable amount (the higher of fair value less costs to sell and value in use). If no future cash flows generated independently of other assets can be allocated to the individual assets, recoverability is tested on the basis of the cash-generating unit to which the assets can be allocated. Impairment losses are reversed, with the exception of goodwill, if the reasons for recognizing the original impairment loss no longer apply.
When concluding an agreement, the Group determines whether such an agreement is or contains a lease.
Beneficial ownership of leased assets is attributed to the contracting party in the lease, to which substantially all risks and rewards incidental to ownership of the asset are transferred.
If substantially all the risks and rewards are attributable to the lessor (operating lease), the leased asset is recognized by the lessor. Measurement of the leased asset is then governed by the accounting policies applicable to that asset. During the term of the lease, the operating lease payments are recognized in the income statement by the lessor and the lessee.
If substantially all the risks and rewards incidental to ownership of the leased asset are transferred to the lessee (finance lease), the lessee must recognize the leased asset. At the commencement of the lease term, the leased asset is measured at fair value or the lower present value of the future lease payments and depreciated over the shorter of the estimated economic useful life and the lease term. The lessee recognizes a lease liability at the commencement of the lease term. In subsequent periods, the lease liability is reduced using the effective interest method and the carrying amount is adjusted accordingly.
Pension Provisions and Similar Obligations
Obligations for pensions and other postretirement benefits and related expenses and income are determined in accordance with actuarial measurements. These measurements are based on key assumptions, including discount rates, salary trends, pension trends, biometric probabilities and assumptions about the trend of health insurance benefits. The discount factors applied reflect the interest rates achieved at the balance sheet date for senior, fixed-interest bonds with commensurate maturities. As a result of a fluctuating market and economic situation, the underlying assumptions may deviate from the actual development, which can have a significant impact on the obligations for pensions and other postretirement benefits upon termination of employment.
Pension provisions under defined benefit plans are measured in accordance with the projected unit credit method. Thereby, not only the pensions and acquired expectancies known about at the reporting date but also increase in compensation and pensions expected in the future are taken into account. Actuarial gains or losses and other re-measurements of the net obligation are determined at the reporting date and recorded through other comprehensive income (changes in equity not affecting profit or loss for the period).
In order to determine the discount rate for the measurement of the pension provisions and similar obligations, Giesecke+Devrient uses the Mercer Pension Discount Yield Curve Method. This is a method for determining the interest rate that conforms with IAS 19. The new method is based on a selection of AA-rated corporate bonds in accordance with Bloomberg analyses. Net interest expense, i.e. the interest portion of the allocation to the provision less the expected return on plan assets, is reported in interest expense. The amount payable in conjunction with defined contribution plans is reported as an expense.
When the benefits of a plan change or a plan is cut, the resulting change in the relevant past service performance or the gain or loss from the curtailment is immediately recognized in the income statement. The Group recognizes gains and losses from the settlement of a defined benefit pension plan at the time of settlement.
Pre-retirement Part-time Work Agreements
An obligation under pre-retirement part-time work is recognized from the point in time at which the employee is entitled under an individual agreement to the premature termination of his employment. For pre-retirement part-time work agreements in conjunction with the block model, the continuously accruing settlement arrears and the obligation to pay top-up amounts are measured separately. Both obligations are recorded in installments applying actuarial principles from the start of the active phase until the end of the employment phase. In the passive phase, the present value of the future payments is provided. The net interest portion included in the pre-retirement part-time work expenses is reported as interest expense.
A provision for the expected warranty-related costs is established when the product is sold. Estimates for accrued warranty costs are primarily based on historical experience.
Provision for Restructuring Costs
A provision for restructuring costs is recorded where a legal or constructive obligation exists. A constructive obligation for restructuring costs arises only when there is a detailed formal plan identifying key features of the plan and its implementation and a valid expectation on the part of those affected, either by starting to implement the plan or announcing its main features to those affected by it. A restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both necessarily entailed by the restructuring and not associated with the ongoing activities of G+D.
Provision for Onerous Contracts
The calculation of provisions for onerous contracts is to a significant extent based on estimates. Such estimates are mainly related to the status of the projects, the fulfillment of the services requested, changes regarding the volume of the projects, the update of budgeted costs as well as applied customized and runtime-specific discount rates.
Giesecke+Devrient records provisions for onerous contracts for contracts in which the unavoidable costs of meeting the obligations exceed the expected benefits. The unavoidable costs under a contract reflect the minimum net costs of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it. Before a separate provision for an onerous contract is established, any impairment loss that has occurred on assets dedicated to that contract is recognized.
Other provisions are recognized where there are legal or constructive obligations to third parties on the basis of past transactions or events that will probably require an outflow of resources to settle, and this outflow can be reliably measured. They are carried at their expected settlement amount, taking into account all identifiable risks, and may not be offset against potential reimbursements, for example, via insurance claims. The settlement amount is calculated on the basis of the best estimate. Provisions are discounted where the effect of the time value of money is material.
Changes in estimates of the amount and timing of payments or changes in the discount rate applied in measuring provisions for decommissioning, restoration, and similar obligations are recognized in the same amount for the related asset. Where the decrease in the amount of a provision is greater than the carrying amount of the related asset, the excess is recognized immediately in profit or loss.
O Recognition of Revenue, Interest and Dividends
Revenue is generally recognized when a product is shipped and title is transferred to the customer or services are performed. If product sales require customer acceptance, revenues are recognized generally upon acceptance by the customer. For arrangements requiring installation of a product at the customer location, where installation is essential to the functionality of the product, revenue is recognized when the product is delivered and installed at the customer location.
In certain instances, G+D is the general contractor concerning the construction of paper mills, special facilities (e.g. production of security products), and personalization centers. The fulfillment of these types of contracts usually extends over a long period and can last up to several years until final completion. For construction contracts, the percentage-of-completion method is applied, provided that the revenue and expenses can be estimated reliably. The percentage of completion is generally determined using the output method (e.g. agreed milestones) or the cost-to-cost method. Profit recognized in the period is calculated by multiplying the contract revenues and costs by the percentage of completion less the results recognized in prior periods.
For long-term customer contracts in which the major components consist of the production, modification, or customizing of software, the percentage-of-completion method is also used for revenue recognition.
Giesecke+Devrient has contractual arrangements in which it performs multiple revenue-generating activities, mainly for cards, passports and ID documents. For arrangements involving multiple revenuegenerating activities (e.g. the delivery of card bodies and personalization services) the immediate recognition of revenue is only possible under certain circumstances. In these cases, the revenue allocation is based upon the relative fair values of the individual components of the total arrangement. The amount allocable to the delivered elements is limited to the amount that is not contingent upon delivery of additional elements.
Interest is recognized using the effective interest method. Dividends are recognized when the shareholder’s right to receive payment is established.
Where grants are received for certain assets, they are offset against the acquisition or manufacturing costs of the related assets and therefore reduce the acquisition costs. The grants/allowances are released to the income statement in installments in the form of a reduction in depreciation expense.
Other types of grants are recorded in the income statement in the period in which the entitlement arises.
Q Deferred Taxes
Deferred tax assets and liabilities are recognized for temporary differences between the carrying amounts in the consolidated balance sheet and the tax base, as well as for tax loss carryforwards that are expected to reduce tax expense in future periods.
R Statement of Cash Flows
The statement of cash flows is prepared in accordance with IAS 7 and shows the cash inflows and outflows during the fiscal year classified by cash flows from operating activities, investing activities and financing activities. The cash flows from operating activities are presented using the indirect method, in which earnings are adjusted for non-cash transactions. Moreover, items attributable to cash flows from investing activities and financing activities are eliminated. Cash flows from interest received and interest paid, as well as dividends received, are allocated to cash flows from operating activities. Cash outflows for the acquisition of additional shares in affiliated companies under common control are classified as cash flows from financing activities.
The cash flow funds comprise the balance sheet line item “cash and cash equivalents”. Cash and cash equivalents include cash on hand and cash at banks, as well as cash from funds and investments with an original maturity of up to three months.
S Change in Accounting and Valuation Policies
The amendment to IAS 7 “Disclosure Initiative” improves information about changes in the company’s debt position. The company discloses changes in such financial liabilities resulting from cash received and cash paid which are shown in the cash flow statement under cash flows from financing activities. Related financial assets are also included in the disclosures (for example, assets from hedges).
Changes affecting cash, changes resulting from the acquisition or disposal of companies, exchange rate related changes, changes in fair values and other changes are to be disclosed.
The disclosures are presented in the form of a reconciliation from the opening balance in the balance sheet to the ending balance in the balance sheet. Applying these changes did not have a material impact on the consolidated financial statements of G+D.
The amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses”clarify the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value. Applying these changes did not have a material impact on the consolidated financial statements of G+D.
Within the scope of the “Annual Improvement” project (2014 –2016), three IFRS standards were amended, of which only the following was applicable in 2017:
IFRS 12 clarifies that IFRS 12 disclosures generally also apply to investments in subsidiaries, joint ventures or associates which are classified as held for sale within the scope of IFRS 5; an exception to this are the disclosures in accordance with IFRS 12.B10 – B16 (Financial Information). Applying these changes did not have a material impact on the consolidated financial statements of G+D.
The IASB has published a number of further announcements. The recently implemented standards, as well as those yet to be implemented, have had no major impact on the consolidated financial statements of G+D.
T New and Changed Accounting Pronouncements
In addition to the new standards and interpretations listed below which may have a significant influence on the consolidated financial statements, a series of further standards and interpretations were passed which are not expected to have a significant effect on the consolidated financial statements:
Endorsed by the EU
IFRS 9 which was issued in July 2014 replaces the existing guidelines in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidelines on the classification and measurement of financial instruments, including a new model of expected credit losses to calculate the impairment of financial assets, as well as the new general accounting standards for hedge accounting. It also adopts guidance for the recognition and derecognition of financial instruments from IAS 39. These changes become effective for the first time in fiscal years which begin on or after January 1, 2018. The standard was endorsed by the European Union. G+D is currently examining the effects of its application on the consolidated financial statements.
In May 2014, the IASB published the new Standard IFRS 15 „Revenue from Contracts with Customers”. The objective of the new standard is to consolidate the vast number of accounting rules which were part of diverse standards and Interpretations relating to revenue recognition up till now.
Simultaneously, basic uniform principles are being determined that are applicable for all branches and all kinds of revenue transactions. In April 2016, some clarifications to IFRS 15 were published which mainly concern the identification of separate performance obligations and the differentiation between principal and agent.
IFRS 15 is to be applied for the first time for the fiscal year beginning on or after January 1, 2018. The Group will apply IFRS 15 for the first time for the fiscal year beginning on January 1, 2018 (year of transition to IFRS 15). The Group will adopt the modified retrospective method for the transition to IFRS 15 with the cumulative effect recognized on January 1, 2018. Consequently, the Group will not apply the requirements of IFRS 15 in each comparative period. In doing so, the Group will make use of practical simplifications relating to IFRS 15. In this context, it is foreseen explicitly not to restate such contracts on January 1, 2018 that begin and were fulfilled within the same fiscal year or which were fully performed on January 1, 2018.
Product sales in the business sectors Currency Technology and Mobile Security are currently recognized as revenue with the delivery of products to the customer. This is defined as the point in time in which the customer accepts the products and the related risks and rewards.
In accordance with IFRS 15, revenue is recognized when the customer gains control of the asset. In several contracts for the sale of customer specific products such as banknotes and bank cards, the Group already transfers the power of control during the production phase. Revenues relating to such contracts are realized during the production phase.
The Group estimates that this will lead to revenue recognition – as well as the associated costs – for such contracts over time which means before the delivery to the customer.
The increased scope for judgements relating to variable consideration affects the determination of amount and timing of revenue recognition across all business fields.
Above all, the required disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers enhanced extensively with IFRS 15.
The project of implementing the new standard has not yet been finalized. During the period of first time adoption, it is expected that the change from realizing revenue at a point in time to over time will lead to an increase in equity.
IFRS 16 introduces a uniform accounting model whereby leases are to be recorded in the balance sheet of the lessee. A lessee records a right-of-use asset which represents the right to use the underlying asset as well as a lease liability for lease payments obligations. There are exceptions for short-term leases and leases relating to low-value assets. The accounting by the lessor is comparable to the current standard – that is to say that the lessor still continues to classify lease arrangements as finance or operating leases.
IFRS 16 replaces the existing guidance on leases including IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease.
The standard is to be applied for the first time in the first reporting period of a fiscal year beginning on or after January 1, 2019. Early adoption is permitted for companies that apply IFRS 15 Revenues from Contracts with Customers at the time of initial application of IFRS 16 or before. G+D is currently examining the effects of its application on the consolidated financial statements.
The respective standards will be adopted when they become obligatory.