21 JOTUN GROUP SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS 1 GENERAL In the process of applying Jotun Group’s accounting policies, management has made the following judgements, estimates and assumptions which may have significant effect on the amounts recognised in the consolidated financial statements: ACCOUNTS RECEIVABLE AND ALLOWANCE FOR BAD OR DOUBTFUL DEBTS Accounts receivable are assessed at nominal value less allowance for bad or doubtful debts. Allowances for bad or doubtful debts are recognised when there are objective indicators that the Group will not receive settlement in accordance with the original terms. The allowance for bad or doubtful debts represents the difference between the asset’s carrying amount and the fair value (estimated collectible amount). Management has used its best estimate in setting the fair value of account receivables. The carrying amount of accounts receivable at 31 December 2015 is NOK 4 104 million and allowance for bad or doubtful debts at year-end is NOK 184 million. See note 12 for more information. INVENTORIES AND ALLOWANCES FOR OBSOLETE GOODS Inventories are measured at the lowest of cost and net realisable value. Jotun Group’s products are sold in markets where there are limited observable market references available and this requires judgement in determining net realisable value. Management has used its best estimate in setting net realisable value for inventory. The carrying amount of inventory at 31 December 2015 is NOK 2 198 million and write-down at year-end is NOK 89 million. See note 9 for more information. PENSION LIABILITIES The cost of defined benefit pension plans and other post-employment medical benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population of bonds, on the basis that they do not represent high quality bonds. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country. Further details about the assumptions used are given in note 4. ENVIRONMENTAL PROVISIONS A number of factories have been inspected regarding environmental conditions in the ground. Actions have either been taken on own initiative or implemented on the order of local authorities. Inspections and measurements are made by independent specialists in the field. For cleanup projects where implementation is considered to be probable and for which reliable estimates have been done provisions are made accordingly. Provisions for remediation cost are made based on currently available facts; • Laws and regulations presently or virtually certain to be enacted • Conducted inspections, either taken on own initiative or implemented on the order of local authorities. Inspections and measurements are made by independent specialists in the field. • Prior experience in remediation of contaminated sites Future expenditures for remediation work depends on a number of uncertain factors which include, but are not limited to, the extent and type of remediation required. Environmental laws and regulations may change, and such changes may require the Group to make investments and/or increase costs. Due to uncertainties inherent in the estimation process, it is possible that such estimates could be revised in the near term, refer to note 10. IMPAIRMENT The Jotun Group has material non-current assets in the form of both tangible (property, plant and equipment) and intangible assets. An explanation of the details of and changes in these assets is presented in note 7 and note 8. The Group also has other non-current assets that mainly consist of investments in companies recognised using the equity method. These are disclosed in note 2 and are not covered in the description below. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the forecast for the next three years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the asset’s performance of the cash generating unit (CGU) being tested. Estimate uncertainty is in some cases considerable, both valuation and estimated useful life are based on future information that is always subject to a certain degree of uncertainty. The calculation of value in use is most sensitive to: Revenue growth – Factors concerning economic trends and the ability to gain market share are evaluated and included in the three year forecast period. Growth rates over the remaining estimated useful life of the assets beyond the forecast period are gradually reduced to general long term growth assumptions. Gross margins - Gross margins are based on average values achieved in the four years preceding the beginning of the forecast budget period. These are adjusted over the budget period for expected changes in product segment mix. Operating costs - Cost forecast for the projection forecast period are based on the historical development over the past four years, adjusted for anticipated efficiency improvements. Discount rates - Discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on a weighted average of required rates of return for the Group’s equity and debt (WACC). The required rate of return on the Group’s equity is estimated by using the capital asset pricing model (CAPM).The cost of debt is based on the interest-bearing borrowings the Group is obliged to service. DEFERRED TAX Deferred tax assets are recognised for all unused tax losses and temporary differences to the extent that it is probable that taxable profit will be available against which the losses and temporary differences can be utilised. Uncertainties exist with respect to determining the Group’s deferred tax assets and deferred tax liabilities. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Jotun Group has tax loss carry forwards amounting to NOK 1 159 million (2014: NOK 971 million). These losses relate to subsidiaries that have a history of losses and may not be used to offset taxable income elsewhere in the Group. Jotun’s operations in the United States of America, Spain and Brazil have substantial tax reducing timing differences that have not been recognised due to uncertainty with regard to utilisation. These subsidiaries have neither taxable temporary differences nor any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets. If the Group was able to recognise all unrecognised deferred tax assets, profit would increase by NOK 415 million. Further details on taxes are disclosed in note 6. NON-CONSOLIDATION OF ENTITY IN WHICH THE GROUP HOLDS THE MAJORITY OF OWNERSHIP INTEREST Jotun Group considers that it does not control Jotun Abu Dhabi Ltd. even though it holds 51.6 per cent of the ownership interest. The Group directly controls 35 per cent. However, the remaining 16.6 per cent is an indirect ownership through a non-controlling entity. As Jotun Group does not de facto control the majority of the voting rights of Jotun Abu Dhabi Ltd., the investment is classified as an associated company. Further details are given in note 2. NON-CONSOLIDATION OF ENTITY IN WHICH THE GROUP HOLDS A SIGNIFICANT OWNERSHIP INTEREST Jotun Group has a 50 per cent joint investment with China Ocean Shipping Company (COSCO) and Chokwang Paint in respectively China and South Korea. The companies are considered as jointly controlled as the shareholders jointly direct the operational activities of the companies. These investments are therefore accounted for using the equity method (refer note 2).
Jotun - Annual Report 2015
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