27
JOTUN GROUP
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND
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:
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 a detailed forecast for the first three
years, and after year 3 from projections based on an estimated long-term
growth rate for the remaining useful life of the assets. The cash flows do
not include restructuring activities that the Group is not yet committed to,
or significant future investments that will enhance the assets’ performance
in the cash generating unit (CGU) being tested. Uncertainty in cash flow
estimates is in some cases considerable, as both valuation and estimated
useful life are based on future information that is always subject to
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 period. These
are adjusted over the forecast period for expected changes in product
segment mix.
Operating costs – Cost forecasts for the projection 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.
PRODUCT LIABILITY CLAIMS
Product liability claims consist of a number of separate and specific
warranty claims arising from products sold. By nature, the related amounts
and timing of any outflows are difficult to predict. Assumptions used
to calculate provisions for product liability claims are based on technical
assessments of product failures and the related expected repair costs for
each specific case. It is expected that most of these costs will be payable in
the next financial year (see note 10), and all will have been payable within
three years after the reporting date.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR BAD OR DOUBTFUL DEBT
Accounts receivable are assessed at nominal value less allowance for bad
or doubtful debt. Allowances for bad or doubtful debt are recognised
when there are objective indicators that the Group will not receive
settlement in accordance with the original terms. An allowance for bad
or doubtful debt represents the difference between the asset’s carrying
amount and fair value (estimated collectible amount). Management has
used its best estimate in setting the fair value of accounts receivable. The
carrying amount of accounts receivable as of 31 December 2017 is NOK
4 209 million and allowance for bad or doubtful debt at year-end is NOK
199 million. See note 13 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, requiring use of judgement in
determining net realisable value. Management has used its best estimate
in setting net realisable value for inventory. The carrying amount of
inventory as of 31 December 2017 is NOK 2 576 million and write-down
at year-end is NOK 126 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 obligations, 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 and its long-term nature, a defined benefit
obligation is highly sensitive to changes in underlying assumptions.
All assumptions are reviewed at each reporting date. In determining
the appropriate discount rate, the interest rates of corporate bonds in
the respective currency with at least AA rating and with extrapolated
maturities corresponding to the expected duration of the defined benefit
obligation, are used as a basis. Financial data for these bonds is further
reviewed for quality, and those bonds having excessive credit spreads are
omitted, as they are considered to not represent high quality bonds.
Mortality rates are based on publicly available mortality tables for the
specific countries. Future salary increases and pension increases are based
on expected future inflation rates for the respective countries. 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 costs are made based on the following;
• 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 made by independent specialists in the
field
• Prior experience in remediation of contaminated sites
Future expenditures for remediation work depend 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. Further
reference is made to note 10.
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 level of future taxable
profits, together with future tax planning strategies.
Jotun Group has tax loss carry forwards amounting to NOK 1 465 million
as of 31 December 2017 (2016: NOK 1 244 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, Brazil, India, Spain, South Africa and Pakistan 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 492 million. Further
details on taxes are disclosed in note 6.
NON-CONSOLIDATION OF ENTITY IN WHICH THE JOTUN 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 JOTUN 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).
1 ASSUMPTIONS