Notes to the consolidated financial statements
For the financial year ended 31 December 2018
1. General information
Accell Group N.V. (“Accell Group”) in Heerenveen, the Netherlands, is the holding company of a group of legal entities. An overview of the data required pursuant to articles 2:379 and 2:414 of the Netherlands Civil Code is enclosed in note 11 Subsidiaries of the financial statements. Accell Group with its group of companies is internationally active in the design, development, production, marketing and sales of innovative and high-quality bicycles, bicycle parts and accessories.
2. Basis of preparation
A | Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRSs) and with Section 2:362(9) of the Dutch Civil Code.
The consolidated financial statements were authorized for issue by the Board of Directors on 11 March 2019.
B | Basis of measurement
The consolidated financial statements have been prepared on historical cost basis except for the following items, which are measured on an alternative basis on each reporting date:
- derivative financial instruments: measured at fair value;
- share-based payments arrangements: measured by reference fair value in accordance with IFRS 2;
- net defined benefit obligation (asset): measured at the fair value of plan assets, less the present value of the defined benefit obligation;
- contingent consideration assumed in a business combination at fair value.
C | Functional and presentation currency
These consolidated financial statements are presented in euro, which is Accell Group’s functional currency.
D | Use of estimates
In preparing these consolidated financial statements, Accell Group has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized prospectively.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2018 is included in the following notes:
- NOTES 9 AND 10 | goodwill and other intangible assets impairment test: key assumptions underlying recoverable amounts, including the recoverability of development costs;
- NOTE 18 | measurement of defined benefit obligations: key actuarial assumptions;
- NOTE 20 | recognition of deferred tax assets: availability of future taxable profit against which tax losses carried forward can be used;
- NOTE 21 | recognition and measurement of provisions: key assumptions about the likelihood and magnitude of an outflow of resources;
- NOTE 24 | financial instruments - fair values and risk management.
Measurement of fair values
A number of Accell Group’s accounting policies and disclosures require fair value measurement, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, Accell Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
- LEVEL 1 | quoted prices (unadjusted) in active markets for identical assets or liabilities.
- LEVEL 2 | inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
- LEVEL 3 | inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Accell Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
Further information about the assumptions made in measuring fair values is included in the following notes:
- NOTE 19 | share-based payment arrangements;
- NOTE 24 | financial instruments - fair values and risk management;
- NOTE 25 | business combinations.
E | Changes in accounting policies
As of 1 January 2018 there have been a number of changes made to the accounting policies due to the application of the new standards IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’. Also amendments to IFRS 2 ‘Classification and Measurement of Share-Based Payments Transactions’ and IFRIC 22 ‘ Foreign Currency Transactions and Advance Consideration’ have been implemented but they did not have any impact on the accounting policies of Accell Group. The new accounting policies are set out in note 3J (Financial instruments) and 3K (Impairments) for IFRS 9 and in note 3B (Revenue) for IFRS 15.
IFRS 9 ‘Financial Instruments’
Classification and measurement
IFRS 9 contains three classification categories for financial assets: ‘measured at amortized cost’, ‘fair value through other comprehensive income’ (FVOCI) and ‘fair value through profit and loss’ (FVPL). The standard eliminates the existing IAS 39 categories: ‘loans and receivables’, ‘held to maturity’ and ‘available-for-sale’. Accell Group has neither investments classified as ‘held to maturity’ nor assets currently classified as ‘available-for-sale’ and for the other categories (e.g. receivables, derivatives and financial liabilities) IFRS 9 brings no change in classification and measurement for Accell Group.
Accell Group uses the modified retrospective approach for the implementation of IFRS 9 impairments. Therefore the 2017 comparative figures in the 2018 financial statements are not restated and any impact of IFRS 9 is recognized directly in equity per 1 January 2018. As a result of adopting IFRS 9 also the amendments to IAS 1 ‘Presentation of Financial Statements’ are applicable which requires impairment of financial assets to be presented as a separate line item in the income statement.
IFRS 9 replaces the ‘incurred loss model’ in IAS 39 with an ‘expected credit loss (ECL) model’ and therefore impairments will be recognized earlier. The ECL model is applicable for all financial assets measured at amortized cost and/or at fair value through other comprehensive income (OCI). Accell Group applies the simplified approach to measure expected credit loss for trade receivables. While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial. The impact of the new impairment rules is a higher impairment loss (provision) of € 0.8 million for trade receivables and a reclassification of € 3.0 million in the income statement.
Accell Group has elected to adopt the general hedge accounting requirements of IFRS 9 and to use the prospective implementation approach. IFRS 9 requires the hedge relationships to be aligned with the risk management objectives and strategy and to apply a more qualitative and forward looking approach to assessing hedge effectiveness. All hedge relationships at 1 January 2018 under IAS 39 continue to qualify as a hedge relationship under IFRS 9. However the used accounting policy option by Accell Group under IAS 39 is no longer permitted. IFRS 9 requires that if a hedge of a forecast transaction later results in the recognition of a non-financial item, that the gains and losses from the hedging reserve are transferred to the initial cost of the related inventories as an adjustment to the basis. At 1 January 2018 the basis adjustment results in an upward adjustment of € 3.5 million to the carrying amount of total inventories.
IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 establishes a framework for determining whether, how much and when revenue is recognized from contracts with customers. IFRS 15 supersedes existing standards and interpretations related to revenue. For implementation the full retrospective method is applied, meaning prior period financial information will be restated if impacted. The restatement only relates to additional disclosures because the recognition and measurement criteria did not lead to any adjustments.
The majority of Accell Group’s contracts are contracts with customers in which the sale of goods is generally expected to be the only performance obligation. The timing of the transfer of control varies depending on the individual terms of the sales agreement. For sales of bicycles, parts and accessories, usually transfer occurs when the product is delivered to the customer. However, for some international shipments the transfer occurs on loading the goods onto the relevant carrier at the port.
Generally, for such products the customer has no right of return. The point in time of revenue recognition is consistent with previous practice. With respect to performance obligations, Accell Group provides warranties for general repairs and does not provide extended warranties or maintenance services in its contracts with customers. The warranties serve to guarantee that the bicycle, part or accessory functions as intended and meets the agreed specifications. As such, these warranties are assurance-type warranties which will continue to be accounted for under IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, consistent with previous practice.
With respect to the measurement principles it is relevant that some contracts with customers provide customer programs and incentive offerings, including special pricing agreements, promotions, advertising allowances and other volume-based incentives. Currently, Accell Group recognizes revenue from the sale of bicycles, parts and accessories measured at the fair value of the consideration received or receivable, net of accruals for customer incentives and returns (if the customer has a refund right). If revenue cannot be reliably measured, Accell Group defers revenue recognition until the uncertainty is resolved. Such provisions give rise to variable consideration under IFRS 15, and will be required to be estimated at contract inception. IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. This is consistent with Accell Group’s previous practice to assess individual contracts to determine the estimated variable consideration and related constraint.
The practical expedients provided will not be applied by Accell Group.
Impact on the financial statements
The following tables shows the impact on the line items of the financial statements. Line items not affected by the changes have not been included.
|Balance sheet||31 December 2017||IFRS 9||1 January 2018 revised|
|€ x 1,000||€ x 1,000||€ x 1,000|
|Deferred tax assets||3,437||-872||2,565|
|Income statement||2017||IFRS 9||2017 revised|
|€ x 1,000||€ x 1,000||€ x 1,000|
|Other operating expenses||-127,142||3,025||-124,117|
|Net impairment losses on financial assets||-||-3,025||-3,025|
3. Significant accounting policies
Accell Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements, taking into account the mentioned change in accounting policies in note 2E.
A | Basis of consolidation
Accell Group accounts for business combinations using the acquisition method when control is transferred to Accell Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss.
Any contingent consideration payable is measured at fair value at the acquisition date. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Subsidiaries are entities controlled by Accell Group. Accell Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.
Loss of control
When Accell Group loses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, and any non-controlling interests and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. This fair value becomes the initial carrying amount for the purpose of subsequently accounting for the retained interest as an associate, joint venture or financial asset.
Interests in equity-accounted investees
Accell Group's interests in equity-accounted investees comprise interests in associates and a joint venture.
Associates are those entities in which Accell Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which Accell Group has joint control, whereby Accell Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in associates and the joint venture are accounted for using the equity method. They are recognized initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include Accell Group’s share of the profit or loss and OCI of equity-accounted investees, until the date on which significant influence or joint control ceases.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of Accell Group’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
B | Revenue
The accounting policies for revenue from contracts with customers are explained in note 2E Changes in accounting policies.
C | Finance income and finance costs
Accell Group’s finance income and finance costs include:
- interest income;
- interest expense;
- bank fees;
- dividend income;
- foreign currency gain or loss on financial assets and financial liabilities.
Interest income or expense is recognized using the effective interest method. Dividend income is recognized in profit or loss on the date that Accell Group’s right to receive payment is established.
D | Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of group companies at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the exchange rate when the fair value was determined. Non-monetary items that are measured based on historical cost in a foreign currency are not translated again at a later stage.
Foreign currency differences are generally recognized in profit or loss. However, foreign currency differences arising from the translation of qualifying cash flow hedges to the extent the hedges are effective are recognized in other comprehensive income.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into euro at exchange rates at the reporting date. The income and expenses of foreign operations are translated into euro at the exchange rates at the dates of the transactions.
Foreign currency differences are recognized in OCI and accumulated in the translation reserve, except to the extent that the translation difference is allocated to non-controlling interests.
When a foreign operation is disposed of in its entirety or partially such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If Accell Group disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When Accell Group disposes of only part of an associate or joint venture while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss.
If the unwinding of a monetary balance, which is either collectable from or payable to a foreign operation is neither planned nor probable in the foreseeable future, than the foreign currency differences of this monetary balance is considered part of the net investment in the foreign operation. Accordingly these currency differences are included in other comprehensive income and recorded in the translation reserve.
Hedge of a net investment in foreign operation
Accell Group applies no hedge accounting to foreign currency differences arising between the functional currency of the foreign operation and Accell Group’s functional currency (euro).
E | Employee benefits
Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if Accell Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Share-based payment transactions
The grant-date fair value of equity-settled share-based payment awards granted to employees is recognized as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.
Defined contribution plans
Obligations for contributions to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.
Defined benefit plans
Accell Group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets.
The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for Accell Group, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.
Remeasurement of the net defined benefit liability, which comprise actuarial gains and losses and the return on plan assets (excluding interest), are recognized immediately in other comprehensive income. Accell Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss.
When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. Accell Group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.
Other long-term employee benefits
Accell Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognized in profit or loss in the period in which they arise.
F | Income tax
Income tax expense comprises current and deferred tax. It is recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.
Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends.
Current tax assets and liabilities are offset only if certain criteria are met.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:
- temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;
- temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that Accell Group is not able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future;
- taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized; such reductions are reversed when the probability of future taxable profits improves. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will be available against which they can be used.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which Accell Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset only if certain criteria are met.
G | Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out (fifo) principle. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.
H | Property, plant and equipment
Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Any gain or loss on disposal of an item of property, plant and equipment is recognized in profit or loss (depreciation).
Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognized in profit or loss. Land is not depreciated.
The estimated useful lives of property, plant and equipment are as follows:
|Plant and equipment||3 - 12 year|
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
I | Intangible assets and goodwill
Recognition and measurement
Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.
Trademarks, commonly arising on the acquisition of subsidiaries, are measured at cost less any accumulated depreciation and accumulated impairment losses. The acquired trademarks are positioned in the middle and upper segments and mostly have a long history and tradition in the local and international markets in which they operate. Trademarks can have an indefinite or definite useful life. Useful life is based on an analysis of all relevant factors to determine whether there is a foreseeable limit to the period over which the asset is expected to generate net cash inflows.
Research and development
Expenditure on research activities is recognized in profit or loss as incurred. Development expenditure is capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and Accell Group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognized in profit or loss as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortization and any accumulated impairment losses.
Other intangible assets
Other intangible assets, including customer relationships, licenses and patents, that are acquired by Accell Group and have finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses.
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.
Amortization is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognized in profit or loss. Goodwill and trademarks with an indefinite useful life are not amortized.
The estimated useful lives are as follows:
|Customer lists||10 - 20 year|
|Software||3 - 7 year|
|Development expenditure||3 - 5 year|
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
J | Financial instruments
From 1 January 2018 Accell Group classifies non-derivative financial assets into the following categories: those to be measured subsequently at fair value (either through OCI or through profit or loss) and those to be measured at amortized cost The classification depends on the business model for managing the non-derivative financial assets and the contractual terms of the cash flows. Accell Group reclassifies debt investments when and only when its business model for managing those assets changes.
Accell Group classifies all non-derivative financial liabilities as subsequently measured at amortized cost except when the fair value option is used to designate a non-derivative financial liability as at fair value through profit or loss.
Non-derivative financial assets and financial liabilities - recognition and derecognition
Accell Group initially recognizes loans and receivables on the date they originate. All other financial assets and financial liabilities are initially recognized on the trade date when Accell Group becomes a party to the contractual provisions of the instrument.
Accell Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognized financial assets that is created or retained by Accell Group is recognized as a separate asset or liability.
Accell Group derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss as other income or finance costs.
Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, Accell Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.
Non-derivative financial assets - measurement
At initial recognition, a non-derivative financial asset is measured at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.
Non-derivative financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Subsequent measurement of debt instruments (excluding equity investments) depends on the group’s business model for managing the asset and the cash flow characteristics of the asset. Three measurement categories are available:
- amortized cost: non-derivative financial assets that are held within a business model whose objective is to collect contractual cash flows and those cash flows represent solely payments of principal and interest on the principal amount outstanding. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss in other income/expense. Impairments are presented as separate line item in the statement of profit or loss;
- fair value through other comprehensive income (FVOCI): non-derivative financial assets that are held within a business model whose objective is to collect contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest. Movements in the carrying amount are taken through OCI, except for the recognition of impairments, interest income and foreign exchange results which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss in other income/expense. Interest income from these financial assets is included in finance income using the effective interest rate method. Impairments are presented as separate line item in the statement of profit or loss;
- fair value through profit or loss (FVPL): non-derivative financial assets that do not meet the criteria for amortized cost or FVOCI. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss in the period in which it arises.
All equity investments are initially and subsequently measured at fair value through profit or loss. Changes in the fair value are recognized in profit or loss as other income/expenses, if applicable. Dividends from such investments are recognized in profit or loss as net finance cost when Accell Group’s right to receive payments is established.
There are currently no non-derivative financial assets at fair value through other comprehensive income (FVOCI), no non-derivative financial assets at fair value through profit and loss nor (material) equity investments.
Non-derivative financial liabilities - measurement
Non-derivative financial liabilities are initially recognized at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortized cost using the effective interest method.
With exception of the contingent consideration in respect of the Velosophy acquisition there are currently no non-derivative financial liabilities at fair value through profit and loss.
Derivative financial instruments and hedge accounting
Accell Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss except when the derivate is designated as a qualifying cash flow hedging instrument. Derivatives are presented as assets when the fair value is positive and as liabilities when the fair value is negative.
At the inception of the hedge transaction Accell Group documents the relationship between the hedging instruments and the hedged items, its risk management objectives, together with the methods selected to assess hedge effectiveness. In addition, Accell Group documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of the hedged items. When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income (OCI) and accumulated in the hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.
When forward contracts are used to hedge forecast transactions, Accell Group designates the full change in fair value of the forward contract (including forward points) as the hedging instrument. Gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognized in the cash flow hedge reserve within equity.
Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss, as follows:
- Where the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), the deferred hedging gains and losses (including forward points) are included within the initial cost of the asset. The deferred amounts are ultimately recognized in profit or loss as the hedged item affects profit or loss through cost of materials.
- The gain or loss relating to the effective portion of the interest rate swaps hedging variable rate borrowings is recognized in profit or loss within finance cost at the same time as the interest expense on the hedged borrowings.
When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss.
Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognized as a deduction from equity. Income tax relating to transaction costs of an equity transaction are accounted for in accordance with IAS 12.
K | Impairment
Non-derivative financial assets
Accell Group recognizes an allowance for expected credit losses (ECLs) for all non-derivative financial instruments not held at fair value through profit or loss. From 1 January 2018 Accell Group has four types of financial assets that are subject to the expected credit loss model: other financial assets, trade receivables, other receivables and cash and cash equivalents.
ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that Accell Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. Accell Group establishes an impairment loss allowance on a collective and individual assessment basis, by considering past events, current conditions and forecasts of future economic conditions.
ECLs are recognized in two stages:
- for financial assets for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL);
- for financial assets for which there has been a significant increase in credit risk since initial recognition, a loss allowance is recognized for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, reasonable and supportable information is considered that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on Accell Group’s historical experience and informed credit assessment, including forward-looking information.
A financial asset is in default when:
- the borrower is unlikely to pay its credit obligations in full, without recourse by Accell Group to actions such as recovering inventory or credit insurance (if any); or
- the financial asset is more than 90 days past due.
ECLs is the maximum contractual period over which Accell Group is exposed to credit risk.
For trade receivables Accell Group applies a simplified approach in calculating ECLs. Therefore changes in credit risk are not tracked, but instead a loss allowance is recognized based on lifetime ECLs at each reporting date. Accell Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The impairment loss allowances for non-derivative financial assets measured at amortized cost are deducted from the gross carrying amount of the assets. Impairment losses related to financial assets are presented separately in the consolidated income statement. When Accell Group considers that there are no realistic prospects of recovery of the asset, the relevant amount is written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, then the previously recognized impairment loss is reversed through profit or loss.
An impairment loss in respect of an equity-accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognized in profit or loss, and is reversed if there has been a favorable change in the estimates used to determine the recoverable amount.
At each reporting date, Accell Group reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and trademarks with an indefinite life are tested annually for impairment.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash generating units. Goodwill arising from a business combination is allocated to (groups of) cash generating units that are expected to benefit from the synergies of the combination.
The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects both current market assessments of the time value of money and the risks specific to the asset or cash generating unit.
An impairment loss is recognized if the carrying amount of an asset or cash generating unit exceeds its recoverable amount. Impairment losses are recognized in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit, and then to reduce the carrying amounts of the other assets in the cash generating unit on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
L | Provisions
Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.
M | Statement of cash flows
Accell Group has centralized its cash management with the execution of payments in the operations by group companies. Accell Group consists of manufacturing entities, trading companies and hybrids, which for example all start building up inventories for the season at different moments in time resulting in a varying demand for liquidity. The centralized cash management aims to optimize the cash allocation within Accell Group, where excess cash in the one entity is made to use in the other entity.
The cash management includes cash pools, cash and bank overdrafts. The centralized cash management, including foreign exchange management, is executed with these instruments. Long-term bank loans and a revolving credit facility are held for financing purposes.
Cash pools are an important element of cash management. The cash pools are made available by banks that participate in the syndicate that provided the group financing. The cash pools consist of a large number of bank accounts with fluctuating balances per account. On a monthly basis it are different bank accounts that forms the credit balance (gross) and debit balance (gross) per cash pool. The net balance of a single cash pool, if overdrawn, reduces the available amount from the revolving credit facility, has the same conditions as the revolving credit facility and is repayable on demand. As a result the cash pools have a hybrid nature; on the one hand it is a cash management tool and on the other hand it has a bridging nature at specific times.
Besides the cash pools Accell Group has other regular bank accounts and bank overdrafts at its disposal. These accounts however only represent a limited part of the net cash balance. One part of the bank accounts and bank overdrafts are with banks from the syndicate that provided the group financing; the other part is with local banks for specific purposes.
All together the cash pools, cash and bank overdrafts reflect Accell Group’s cash management and are the components of the item cash and bank overdrafts in the cash flow statement. Cash flows exclude movements between items that constitute the cash and bank overdrafts because these components are part of Accell Group’s cash management rather than part of its operating, investing and financing activities.
4. New and revised standards not yet adopted
A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2019, which Accell Group has not applied in preparing these consolidated financial statements:
IFRS 16 'Leases'
In January 2016, the IASB issued IFRS 16 ’Leases’, which introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with exemption options for leases with a term shorter than 12 months and low value assets. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. There will be only minor changes to the current accounting for lessors. The standard also requires entities to provide users of financial statements with more informative and relevant disclosures. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted, however the IFRS 16 accounting standard will be applied for the first time in our 2019 reports. The initial application of IFRS 16 will have a material impact on the group’s financial statements.
At inception of a contract, Accell Group assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. Accell Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component.
At the lease commencement date a right-of-use asset and a lease liability are recognized. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if Accell Group is reasonably certain to exercise that option. Currently lease terms vary from 2 to 10 years.
Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 ‘Impairment of Assets’. This will replace the previous requirement to recognize a provision for onerous lease contracts.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, Accell Group’s incremental borrowing rate. Generally, the incremental borrowing rate (‘IBR’) is used as the discount rate. Subsequently the lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from among others a change in an index or rate, extension or termination option.
When the lease liability is remeasured, a corresponding adjustment is made to the carrying amount of the right-of-use asset or if the carrying amount of the right-of-use asset is reduced to zero an impairment loss is recorded in profit or loss.
Accell Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
- applied the recognition exemption for low value assets (smaller or equal to € 5,000);
- applied the exemption not to recognize right-of-use assets and lease liabilities for lease terms shorter than 12 months;
- applied a single discount rate to a portfolio of leases with similar characteristics;
- excluded initial direct costs from measuring the right-of-use asset at the date of initial application;
- used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.
Effective 1 January 2019, Accell Group adopted IFRS 16 using the modified retrospective approach, which means that the prior-year figures will not be adjusted. Accell Group has made an analysis of all the lease contracts to ensure that they fulfill the criteria to account for a right-of-use asset and subsequently depreciate it according to IFRS 16. The identified lease contracts relate to buildings (78%), cars (18%), machinery (3%) and other assets (1%).
On initial application, Accell Group has elected to record right-of-use assets based on the corresponding lease liability. Right-of-use assets and lease liability of € 33 million, were recorded at 1 January 2019, with no net-impact on Retained earnings. The weighted-average discount rate applied is 1.67%
In contrast to the presentation to date of operating lease expenses, in future depreciation charges on right-of-use assets and the interest expense from unwinding of the discount on the lease liabilities will be recognized in the income statement. Based on Accell Group’s leases at 1 January 2019 depreciation and amortization and interest expenses are expected to increase by around € 10.9 million and € 0.7 million respectively. On the other hand, the other operating expenses will decrease by a similar amount because the operating lease costs are no longer included.
Although IFRS 16 has no impact on the cash position, it will impact the classification within the statement of cash flows:
- improvement of ‘net cash flow from operating activities’ due to the cancellation of lease costs;
- integration of the reimbursement of the lease liability in ‘net cash flow from financing activities’.
The ability to meet bank covenants is not impacted by the implementation of IFRS 16, because IFRS 16 is excluded in the covenants.
Other standards and interpretations
Amended standard IFRS 9 ‘Prepayment Features with Negative Compensation’ and the new interpretation IFRIC 23 ’Uncertainty over Income Tax Treatments’ are not expected to have a significant impact on Accell Group’s financial statements.