8.7
Notes

1. Operating segments

As announced in the December 2018 update on the recently sharpened ‘Lead Global. Win Local’-strategy new steps are taken to create a more performance focused, consumer centric bike and parts company. The most important decision is to focus on the European business and to run the North America business as a separate and non-core business. The main reason for this is to focus on elimination of profit dilution as well as to focus on the core business.

Initiatives related to the strategic pillar ‘Centralized and integrated Parts & accessories business’, including the appointment of a managing director for the Parts Core segment, furthermore changed the structure of Accell’s internal organization in a manner that caused the composition of its reportable segments to change. Due to its alignment with the Bikes segment certain European business from the Parts Core segment moved to the Bikes Core segment. Furthermore the Asian procurement activities changed from the segment Bikes to Corporate.

Taking all changes in consideration Accell identifies the following operational segments: (1) Bikes Core, (2) Parts Core, (3) Bikes Non-core and (4) Corporate. The corresponding information for earlier periods is restated.

The risk and return profile of each segment is determined by the nature of the products that are produced. Information related to each reportable segment is set out below. The earnings before interest and taxes is used to measure the performance because management believes that this information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industries.

Information about reportable segments 2018

 

 

Bikes Non-core assets and liabilities

The non-core assets of € 34.0 million can be broken down into brands of € 2.1 million (refer to note 10 Other intangible fixed assets), software of € 2.0 million, leasehold improvements of € 0.7 million, other financial assets of € 0.4 million, inventories of € 18.7 million, net (trade) receivables of € 8.9 million and € 1.2 million of bank balances. The non-core liabilities of € 55.1 million can be broken down into: € 50.9 of corporate financing, a warranty provision of € 0.6 million, deferred tax liabilities of € 0.5 million, deferred revenue of 0.2 million and other (trade) payables of € 2.9 million.

Information about reportable segments 2017

 

Geographical information

Geographical segments are based on the physical location of the assets. The sales to external customers reported in the geographical segments are based on the geographical location of the company. Previously it was based on geographic location of the customers. Comparatives for previous periods have been adjusted.

 

2. Personnel costs

Personnel costs are comprised of the following:

 

3. Depreciation, amortization and impairment losses

Depreciation, amortization and impairment losses comprise the following:

4. Other operating expenses

 

Selling expenses mainly include marketing costs, freight costs, other (outbound) logistics costs, delcredere costs and platform fees.

5. Net finance cost

Financial income and expenses comprise the following:

 

The policy regarding interest and currency risks is covered in note 24 Financial instruments - fair values and risk management.

6. Taxes

The effective corporate income tax charge comprises the following:

The effective tax rate consists of the reported tax charge for the current year, divided by the profit before taxes. The effective tax rate in 2018 amounts to 43.5% (2017: 65.2%). The tax rate was negatively impacted by not recognizing deferred taxes assets from tax losses in North America (-13.6%) and United Kingdom (-1.6%). A partial offset (+6.6%) came from the exempted fair value gain on the previously held interest in Velosophy (Note 25 Business combinations).

7. Earnings per share

The calculation of earnings per share and of diluted earnings per share is based on the following data:

8. Property, plant and equipment

Changes in property, plant and equipment are as follows:

 

Land and buildings with a carrying amount of € 4.4 million per 31 December 2018 have been pledged to security; on the one hand to the trustees of the UK pension fund (€ 2.9 million) and on the other hand to security of a bank loan (€ 1.6 million).

9. Goodwill

Changes in goodwill are as follows:

 

Goodwill is tested annually for impairment or more frequently if there are indications of impairment losses. For the purposes of this test, goodwill is allocated to cash-generating units (CGU’s). Allocation is made to the (group of) CGU’s that is expected to benefit from the business combination from which the goodwill arose. The CGU’s used in the assessment correspond with the operational segments.

The changes at the end of 2018 in the reporting structure resulting from Accell Group's decision to focus on the core business and to continue the North American activities separately as a non-core business have a direct influence on the composition of the CGU’s to which goodwill is allocated. As of December 2018, the goodwill was reallocated to the affected units, being CGU Bikes Core and CGU Bikes Non-core. This reallocation was carried out on the basis of the relative value approach, which reflects the contribution of the two units to the realizable value of CGU Bikes. CGU Bikes concerned the cash flow generating unit under which both were reported before the change of the reporting structure. In recent years, the contribution of CGU Bikes Non-core to the realizable value of CGU Bikes has been negative and therefore as of December 2018 the goodwill of CGU Bikes has been completely reallocated to CGU Bikes Core. The change in the CGU had no impact on the result of the impairment test.

The carrying amount of goodwill on segment level is divided as follows:

 

The following main assumptions are used in determining the value in use of the segments Bikes Core and Parts Core and are based on expected developments in specific markets and countries and the forecasted impact for Accell Group:

• expected average annual, organic turnover growth in the plan period 2019-2022 of 5.6% for Bikes Core (2017: 7.5%) and 8.4% for Parts Core (2017: 3.1%);
• expected average operating margin in the plan period 2019-2022 of 7.5% for Bikes Core (2017: 6.9%) and 6.8% for Parts Core (2017: 6.6%);
• trade working capital, based on the current ratio in relation to turnover of 28.4% for both Bikes Core (2017: 31.0%) and Parts Core (2017: 22.9%);
• a perpetual growth rate of 1.1% (2017: 1.5%), based on the weighted average risk free rate, is used for the estimates of the future cash flow after the initial plan period of 4 years;
• a post-tax weighted average cost of capital of 7.3% (2017: 7.6%) was used for the discounting of the cash flows. The discounting rate applied corresponds with a pre-tax weighted average cost of capital of 9.8% (2017: 10.1%).

The impairment test in 2018 shows a substantial headroom in goodwill. Accell Group believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed the recoverable amount of the cash-generating units Bikes Core and Parts Core.

10. Other intangible fixed assets

The changes in other intangible fixed assets are as follows:

As per 31 December 2018 trademarks mainly consist of the brands Raleigh and Diamondback from the acquisition of Raleigh Cycle (€ 23.2 million), Babboe (€ 10.1 million) and Ghost (€ 9.4 million). Furthermore the brands Redline, Nishiki, Carraro, IZIP and Van Nicholas respectively from the acquisitions of SBS, Hellberg, Carraro, Currie and Van Nicholas are valued for a total amount of € 4.4 million. The trademark Babboe has a finite useful life of 15 years. The other trademarks have indefinite useful lives.

The carrying amount of the trademarks at segment level is specified as follows:

The trademarks with indefinite life are tested annually for impairment, or more frequently if there are indications of impairment losses. The principal assumptions used in the annual impairment test include the budgeted expectations regarding the turnover of the trademarks, royalty fees of the trademarks and discounting of the cash flows applying the post-tax weighted average cost of capital of 7.3% (2017: 7.6%), which corresponds with a pre-tax weighted average cost of capital of 9.8% (2017: 10.1%). For the trademarks generating cash flows in North America a post-tax weighted average cost of capital of 8.8% (2017: 8.3%), which corresponds with a pre-tax weighted average cost of capital of 10.9% (2017: 10.8%). This testing has led to no impairment loss in 2018. Prior to the annual test an impairment loss of € 0.5 million is recorded in respect of the trademarks Diamond and Viper due to the close of business as well as € 0.1 million in respect of the trademark Beeline.

The customer lists and licenses consist of the Turkish dealer network, an extension of a licensing agreement and the customer list of Comet. The useful life of these respective assets is estimated at 20 years, 10 years and 20 years and are amortized as from 2012, 2013 and 2015 onwards. During 2018 an impairment loss of   € 0.7 million is recorded in respect of the customer list of Comet due to disappointing results from the customer list.

The other intangible fixed assets relate to capital expenditure on software, patents and development of mainly e-bikes. During 2018 an additional impairment loss of € 0.3 million in respect of development cost has been recorded due to changes in the business case and an impairment loss of 0.2 million on patents put out of use.

Amortization expenses and impairment losses are accounted for in the income statement within depreciation.

11. Subsidiaries

The consolidated financial statements 2018 include Accell Group N.V., in Heerenveen, as well as the financial information of the following companies.

Subsidiaries that are immaterial to the consolidated financial statements are not included in the overview above. A complete list of subsidiaries is filed with the Trade Register of the Chamber of Commerce in Leeuwarden, the Netherlands.

In January 2019, as a subsequent event, an agreement was reached on the sale of Delta Metal Technology Ltd. The China-based company manufactures around 123 thousand frames for the benefit of the Accell Group and also reported a third party revenue of € 0.8 million in 2018 (segment Bikes Core). Component production does not belong to the strategic activities of Accell Group and in combination with the perspective of sustained cost increases, the divestment process has accelerated. The transfer of shares takes place on 1 April 2019 and at net book value and has no adverse effect on turnover or result.

 

These associates and joint ventures are of strategic nature; the voting rights are equal to the percentage interest held.

The changes in the non-consolidated companies are as follows:

Summary of the financial data for the interests in non-consolidated companies:

12. Inventories

 

During 2018 inventories were written down by € 4.6 million to lower net realizable value (2017: € 9.5 million). At balance sheet date inventories with a carrying amount of approximately € 12.3 million (2017: € 21.2 million) are valued at lower net realizable value. Inventories furthermore include goods in transit of € 78.2 million (2017: € 68.0 million) related to shipped goods for which Accell Group had acquired the economic ownership, but which have not yet been received.

13. Trade receivables

The nominal value of the trade receivables is considered close to equal to the fair value. Trade receivables are non-interest-bearing and, depending on the season, are governed by a 30-150 day term of payment. The loss allowance for expected lifetime credit losses per 31 December 2018 is based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The provision for incurred credit losses per 31 December 2017 is determined on the basis of an individual assessment of overdue trade receivables. The policy regarding credit risks is covered in note 24 Financial instruments - fair values and risk management.

14. Other receivables

 

 

15. Cash, cash equivalents and bank overdrafts

16. Equity

The consolidated equity is equal to the equity in the company financial statements. The notes and movement schedules of equity are included in the company financial statements.

17. Interest-bearing loans

This note provides information about the contractual terms and conditions of the outstanding interest-bearing loans and borrowings. For more information about Accell Group’s exposure to interest rate risk a reference is made to note 24 Financial instruments – fair values and risk management.

 

The terms and conditions of outstanding interest-bearing bank loans are as follows:

 

In 2017, Accell Group entered into a financing agreement with a syndicate of six banks for the financing of the group. The banks participating in the syndicate are ABN AMRO Bank, BNP Paribas, Deutsche Bank, HSBC, ING Bank and Rabobank. The financing is unsecured and consists of € 100 million in bank loans and a revolving credit facility of € 275 million (working capital financing), of which € 100 million in seasonal facility from December to July, for an initial period of 5 years.

The initial period of the financing is 5 years, but the financing agreement contains extension options that can be exercised after year 1 and / or year 2 of the initially agreed period. In 2018 the option was partially exercised and an extension of 12 months took place.

After the balance sheet date, Accell Group has decided to make a voluntary repayment of € 25 million in the first quarter of 2019 on the term loans of € 100 million nominal. In addition, the extension option was exercised at the start of 2019 extending the financing agreement by 12 months to March 2024.

The financial ratios in the financing agreement are:

• Term loan leverage ratio;
• Solvency ratio.

In addition, a 'borrowing reference' applies, which is a dynamic limit on working capital financing.

Accell Group complies with the terms and conditions of the financial ratios as of 31 December 2018 as well as 31 December 2017, as well as for all interim test dates.

Term loan leverage ratio

The term loan leverage is determined by dividing the designated outstanding loans under the financing agreement by the normalized EBITDA. The term loan leverage ratio may not exceed 2.5 (tested on a quarterly basis over the previous twelve months).

The 'designated loans outstanding under the financing agreement' include the outstanding amounts under the € 100 million term loan (including Schuldschein) and the working capital financing insofar as used for acquisitions of companies (excluding acquired working capital). The latter is permitted with the approval of the bank syndicate.

EBITDA means the result from operating activities (EBIT) plus the amount of the amortization and depreciations on assets and the share in the result of non-consolidated participating interests. Normalized EBITDA means, with respect to a certain period, the EBITDA in that period adjusted for:

• EBITDA of acquired companies during the relevant period for the part of that period prior to the time of acquisition;
• EBITDA attributable to a group company (or any part of Accell Group) sold during the relevant period for the part prior to the date of sale;
• on instruction by Accell Group, exceptional costs incurred in the relevant period including reorganization costs, impairment losses on fixed assets or costs associated with the sale of assets related to discontinued operations.

Solvency ratio

The solvency ratio is determined by net assets divided by balance sheet total, both adjusted for intangible assets and related deferred taxes. The solvency ratio may not be less than or equal to 25% (tested on a half-yearly basis over the previous twelve months).

Borrowing reference

The borrowing reference states that the net debt, after deduction of the outstanding amounts under the € 100 million term loan (including Schuldschein) and the working capital financing used for approved acquisitions, may not exceed the lowest of:

1. The sum of:
   1. The highest of 50% of the carrying amount of the qualifying inventories minus the total trade creditors of Accell Group and zero; and
   2. 65% of the carrying amount of the qualifying trade debtors;
2. The revolving credit facility made available under the financing agreement.

Reconciliation of movements of liabilities to cash flows arising from financing activities 2018

Reconciliation of movements of liabilities to cash flows arising from financing activities 2017 

18. Defined benefit pension plans and other long-term employee benefits

  

 

Defined benefit plan United Kingdom

Accell Group funds defined benefits for qualifying employees. The main defined benefit plan is the plan in the United Kingdom (UK), which accounts for approximately 91% of the defined benefit obligation and for more than 99% of the plan assets. The UK plan is subject to UK laws and is administered by a separate fund that is legally separated from the UK group company. The trustees of this fund are appointed by the company. Pension benefits are related to the member’s final salary at retirement and their length of service. Since December 2002, the defined benefit section of this pension scheme has been closed to future accrual. On the basis of the deed and rules of the UK plan the company has an unconditional right in the form of refunds when there is a surplus and the fund has no further obligations or in case when there is a surplus at the time when the plan is wound up.

The UK plan exposes the company to actuarial risks such as market risk, interest rate risk and inflation risk. The scheme does not expose the company to any unusual scheme-specific risk. The scheme’s investment strategy is to invest approximately 39% in matching assets (index related UK government bonds gilts and investment property bonds) and approximately 61% in return seeking assets (being diversified growth funds, bond portfolios and property). This strategy reflects the scheme’s risk profile and the trustees’ and company’s attitude to risks.

GMP-equalization United Kingdom

In line with the recent Lloyds judgement which has ruled that Guaranteed Minimum Pensions (“GMPs”) must be equalized across males and females, 2.2% have been added to the liabilities as at the measurement date and treated as past service cost of € 1.4 million via the income statement. This is an approximate scheme-specific allowance based on a GMP model, which takes into account high-level summary data of the Scheme. However, it is only by carrying out member by member calculations that the true value of GMP equalization can be ascertained, so as and when this is carried out for the Scheme (which will be most likely instigated by the Trustees over the coming years), this allowance will be amended.

To put this approach into the language of the methods considered in the Lloyds case:

• For all pensions paid to date – the Method C2 is used to estimate the cost – this allows for the cumulative impact of any differences in pension between males and females to date, allowing for interest to be applied on any back payments.
• For all pensions payable in future – an actuarial equivalence method (i.e. a D type methodology) is used to estimate the cost – this allows for the expected difference in the value of the future benefits payable to males and females.

The overall cost produced is expected to be similar to the estimated cost if any of the C2 or D type methodologies were used for the combined periods.

Other defined benefit plans

In addition, Accell Group sponsors a funded defined benefit plan for qualified employees in Taiwan, a fixed unfunded defined benefit plan in Germany and an unfunded defined benefit plan in Hong Kong. The defined benefit plans of Accell Group have no contributions from employees anymore, because the plans are mainly frozen.

The actuarial calculations pursuant to IAS 19 were carried out at 31 December 2018 by actuaries of certified actuarial firms. The principal assumptions used for the purposes of the actuarial valuations are based on the following weighted averages:

 

Amounts recognized in the income statement in respect of these defined benefit plans are as follows:

 

Amounts recognized in other comprehensive income in respect of these defined benefit plans are as follows:

 

The defined benefit obligation and fair value of plan assets are specified as follows:

The movement in the present value of the defined benefit obligation is as follows:

 

The movement in the fair value of the plan assets is as follows:

The fair value of the plan assets is categorized as follows:

The fair values of the above equity investments and debt securities are determined based on quoted market prices in active markets. The actual return on plan assets was € 0,1 million in 2018 (2017: € 4.9 million). The average duration of the defined benefit obligation is 17 years as per 31 December 2018 (2017: 17 years).

Significant actuarial assumptions for the determination of the defined benefit obligation are the discount rate and the expected salary increase. The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions at the end of the reporting period. In the analyses the interdependence of inputs has not been considered:

• if the discount rate is 0.1% higher, the defined benefit obligation would decrease by € 0.9 million;
• if the discount rate is 0.1% lower, the defined benefit obligation would increase by € 1.0 million;
• if the expected salary growth increases by 0.1%, the defined benefit obligation would increase by € 0.6 million;
• if the expected salary growth decreases by 0.1%, the defined benefit obligation would decrease by € 0.6 million.

The sensitivity analyses are prepared at the end of the reporting period using the same methods as applied in the defined benefit obligation in the balance sheet. The sensitivity analyses may not be representative of the actual change in the defined benefit obligation. It is unlikely that the changes in the assumptions would occur in isolation of one another as some of the assumptions are correlated.

Accell Group expects to make a contribution of € 0.1 million in 2019 with regard to the defined benefit plans.

Other long-term employee benefits

Other long-term employee benefits relate to the provision for future anniversary bonuses and resignation payments in some countries. The provision is based on contractual obligations and assumptions with respect to expectations of death and resignation. The provision for deferred employee benefits is expected to have a duration between one and five years. 

19. Share-based payments

Accell Group has a restricted share plan and an option plan.

Restricted share plan

Accell Group has a restricted share plan whereby conditional shares can be granted to the members of the Board of Directors and to directors of subsidiaries who contribute significantly to the result of Accell Group. Both share plans are share-based payments plans with vesting conditions. The grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. The conditions have been incorporated into the fair value at grant date by applying a discount to the valuation obtained.

The shares that have been conditionally granted are comprised of the following:

 

The fair value will be charged to the income statement according to the straight-line method spread over the period between grant date and the time that the shares become unconditional, whereby adjustment will be made for the expected number of shares to be distributed. After final award, a lock-up period of 2 years applies for members of the Board and 3 years for directors of subsidiaries.

Option plan

The company has an option scheme for the Board of Directors. The Supervisory Board bases itself on the realization of the targets agreed with the Board of Directors for the allocation of options to the directors. The outstanding and granted option rights have been explained and specified in note 29 Remuneration of the Board of Directors and the Supervisory Board.

The fair value of the employee share options has been measured using an option valuation model (Black-Scholes-Merton). Service and non-market performance conditions attached to the transactions were not taken into account in measuring fair value. The inputs used in the measurement of the fair values at grant date of the equity-settled share-based payment plans were as follows:

 

Expected volatility has been based on an evaluation of the historical volatility of the Accell Group N.V.’s share price, particularly over the historical period commensurate with the expected term. The expected term of the instruments has been based on historical experience and general option holder behavior.

The reconciliation to personnel expenses is as follows:

 

In the event of full exercise of the option entitlements granted to date and the vesting of the conditional shares the number of issued shares would increase by 0.2%. According to company policy, the options and shares granted are not covered by the company’s purchase of its own shares. In case of equity-settlement new shares are issued by the company at the moment options are exercised.

20. Deferred taxes

Deferred taxes comprise the following:

The movement in the deferred tax assets is as follows:

 

The movement in the deferred tax liabilities is as follows:

 

For some subsidiaries Accell Group has insufficient assurance that future taxable profits will be available to realize the related tax benefits of carry forward losses of € 126.3 million (2017: € 90.2 million). As a result no deferred tax assets are recognized for these carry forward losses. These unused carry forward losses are mainly carry forward losses in North America and the United Kingdom and partially relate to the global results of the Raleigh group before the acquisition by Accell Group in 2012. The carry forward period of these unused tax benefits is 1-5 years for € 2.6 million, 5-10 years for € 2.2 million, 10-20 years for € 55.4 million and indefinite for 66.1 million.

21. Provisions

 

Warranty provisions represent the estimated costs under warranty obligations for goods delivered and services rendered as at balance sheet date. The provision is based on estimates using historical warranty information. The provision for warranty obligations are expected to have a duration between one and five years. Other provisions mainly relate to a an environmental provision and some smaller restructuring provisions with a duration of less than one year.

22. Deferred revenue

 

Deferred revenue consists mainly of receipts in respect of extended warranty to be realized in the coming five years.

23. Other current liabilities

24. Financial instruments - fair values and risk management

This note explains Accell Group’s exposure to financial risks and how these risks could affect its future financial performance. Current year profit and loss information has been included where relevant to add further context.

 

 

Financial risk management is predominantly controlled by the central treasury department (‘Group Treasury’) under policies approved by the board of directors. Group treasury identifies, evaluates and hedges financial risks in close co-operation with the group companies. The board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and use of derivative financial instruments.

Where all relevant criteria are met, hedge accounting is applied to remove the accounting mismatch between the hedging instrument and the hedged item. This will effectively result in recognizing interest expense at a fixed interest rate for the hedged floating rate loans and inventory at the fixed foreign currency rate for the hedged purchases.

A. Derivatives

Accell Group has the following derivative financial instruments:

 

i. Classification of derivatives

Derivatives are only used for economic hedging purposes and not as speculative investments. The accounting policy for the cash flow hedges is set out in section 6.6. Further information about the derivatives used by Accell Group is provided below.

ii. Hedging reserves

The cash flow hedge reserve disclosed in section 6.5 relate to the following hedging instruments:

There were no reclassifications from the cash flow hedge reserve to profit or loss during the period in relation to the foreign currency forwards.

iii. Hedge ineffectiveness

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.

For hedges of foreign currency purchases, the group enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item. The group therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the group uses the hypothetical derivative method to assess effectiveness.

In hedges of foreign currency purchases, ineffectiveness may arise if the timing of the forecast transaction changes from what was originally estimated, or if there are changes in the credit risk of Accell Group or the derivative counterparty.

Accell Group holds an interest rate swap that has the same critical terms as the hedged item, such as reference rate, reset dates, payment dates, maturities and notional amount. Accell Group does not hedge 100% of its loans, therefore the hedged item is identified as a proportion of the outstanding loans up to the notional amount of the swaps. As all critical terms matched during the year, the economic relationship was 100% effective.

Hedge ineffectiveness for interest rate swaps is assessed using the same principles as for hedges of foreign currency purchases. It may occur due to:

• the credit value/debit value adjustment on the interest rate swaps which is not matched by the loan, and
• differences in critical terms between the interest rate swaps and loans.

There was no ineffectiveness during 2018 or 2017 in relation to the interest rate swaps.

B. Market risk

i. Foreign exchange risk

Exposure

Accell Group’s exposure to foreign currency risk from recognized financial assets and liabilities not denominated in functional currencies at the end of the reporting period is limited as the significant exposure in USD, JPY and TWD are respectively 98%, 103% and 99% hedged with foreign currency forwards.

Instruments used

Accell Group operates internationally and is exposed to foreign exchange risk, primarily the USD, JPY and TWD. Foreign exchange risk arises from future commercial transactions and recognized assets and liabilities denominated in a currency that is not the functional currency of the relevant group entity. The risk is measured through a forecast of highly probable purchase transactions denominated in foreign currencies. The risk is hedged with the objective of minimizing the volatility of Accell Group’s currency cost of highly probable forecast inventory purchases.

Accell Group’s risk management policy is to hedge between 75% and 100% of its forecasted purchases in foreign currencies up to 12 month in advance (July until June), subject to a review of the cost of implementing each hedge. As an exception to this policy it has been decided to hedge the EURGBP and GBPUSD exposure of the UK operations for the full calendar year 2019 to mitigate the currency risk surrounding a potential Brexit.

For the year ended 31 December 2018, approximately 89% of inventory purchases were hedged in respect of foreign currency risk. At 31 December 2018, 99% of forecasted inventory purchases during the first six month of 2019 qualified as ‘highly probable’ forecast transactions for hedge accounting purposes.

Accell Group uses foreign currency forwards to hedge its exposure to foreign currency risk. Under the group’s policy the critical terms of the forwards must align with the hedged items.

Accell Group designates the full change in fair value of the forward contract (including forward points) in hedge relationships. The spot component is determined with reference to relevant spot market exchange rates. The differential between the contracted forward rate and the spot market exchange rate is defined as the forward points. It is discounted, where material.

Hedge of net investment in foreign entity

Due to its international operations Accell Group holds net investments in foreign operations, mainly in USD, CHF, GBP and TRY and to a smaller extend in TWD and CNY, and as such is exposed to foreign exchange risk. The risk management strategy is not to hedge the foreign exchange risk in net investments in foreign operations.

Effects of hedge accounting on the financial position and performance

The effects of the foreign currency related hedging instruments on Accell Group’s financial position and performance are as follows:

 

ii. Cash flow and fair value interest rate risk

Accell Group’s main interest rate risk arises from borrowings with variable rates, which expose the group to cash flow interest rate risk. Accell Group manages its exposure to interest rate risk through the proportion of fixed and variable rate net debt in its total net debt portfolio. Such a proportion is determined once per year by the Board of Directors on recommendation of Group Treasury as part of the annual budget process. During 2018 and 2017, Accell group’s borrowings at variable rate were mainly denominated in EUR.

Accell Group’s borrowings and receivables are carried at amortised cost. The borrowings are periodically contractually repriced (see below) and to that extent are also exposed to the risk of future changes in market interest rates. The exposure of Accell Group’s borrowing to interest rate changes and the contractual re-pricing dates of the borrowings at the end of the reporting period are as follows:

 

An analysis by maturities is provided in note 17 Interest-bearing loans. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowings.

Instruments used by the group

The swap currently in place cover approximately 53% (2017: 32%) of the variable loan principal outstanding. The fixed interest rates of the swap is 0,64% (2017: 2,46%) and the variable margins of the loans are between 1,0% and 1,85% above the 3-month EURIBOR which at the end of the reporting period was -0,31% (2017: -0,33%).

The swap contract require settlement of net interest receivable or payable every 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt.

Effects of hedge accounting on the financial position and performance

The effects of the interest rate swap on the financial position and performance are as follows:

 

iii. Sensitivity

In respect of foreign exchange risk Accell Group is primarily exposed to changes in the EURUSD, EURJPY and EURTWD exchange rates. The sensitivity of the profit or loss to changes in the exchange rates arises mainly from USD and JPY denominated financial instruments and the impact on other components of equity arises from foreign forward exchange contract designated as cash flow hedges. The impact of foreign exchange risk from net investment risk is ignored

In respect of interest rate risk the profit or loss is sensitive to higher/lower interest cost from borrowings as a result of changes in interest rates. Equity change as a result of an increase/decrease in the fair value of the cash flow hedges of borrowings through other comprehensive income.

 

Profit and loss is less sensitive to movements in the exchange rates in 2018 than 2017 because the foreign exchange hedge ratio in 2018 (100%) was higher than in 2017 (92%) and the interest rate hedge ratio in 2018 (53%) was higher than in 2017 (32%). Equity is more sensitive to movements in the exchange rates in 2018 than 2017 because the FX hedge ratio in 2018 (100%) was higher than in 2017 (92%) and the interest rate hedge ratio in 2018 (53%) higher than in 2017 (32%).

C. Credit risk

Credit risk arises from cash and cash equivalents and favorable derivative financial instruments with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables.

i. Risk management

Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a rating between B+ to AA- based on Fitch or S&P ratings are accepted.

If wholesalers and retailers are independently rated, these ratings are used. Otherwise, if there is no independent rating, management assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the board. The compliance with the credit limits set for wholesalers and retailers is regularly monitored by line management. Wholesalers and retailers with accounts receivables balances greater than € 0.1 million are required to be insured through the global credit insurance program of Accell Group. Sales to consumers are required to be settled in cash or using major credit cards, mitigating credit risk.

There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions.

The derivatives are entered into with bank and financial institution counterparties, which are rated BB- to AA-, based on Fitch or S&P ratings.

ii. Impairment of financial assets

Accell Group’s trade receivables for sales of inventory are subject to the expected credit loss model. While other financial assets, other receivables and cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due.

The expected loss rates are based on the payment profiles of sales over a period of 12 month before 31 December 2018 or 1 January 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables.

On that basis, the loss allowance as at 31 December 2018 and 1 January 2018 (on adoption of IFRS 9) was determined as follows for trade receivables:

 

The loss allowances for trade receivables as at 31 December 2018 reconcile to the opening loss allowances as follows:

 

Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with Accell Group, and a failure to make contractual payments for a period of greater than 360 days past due.

Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.

Previous accounting policy for impairment of trade receivables

In the prior year, the impairment of trade receivables was assessed based on the incurred loss model. Individual receivables which were known to be uncollectible were written off by reducing the carrying amount directly. The other receivables were assessed collectively to determine whether there was objective evidence that an impairment had been incurred but not yet been identified. For these receivables the estimated impairment losses were recognized in a separate provision for impairment. 

Accell Group considered that there was evidence of impairment if any of the following indicators were present:

• significant financial difficulties of the debtor;
• probability that the debtor will enter bankruptcy or financial reorganization;
• default or late payments.

Receivables for which an impairment provision was recognized were written off against the provision when there was no expectation of recovering additional cash.

D. Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due. Due to the dynamic nature of the underlying businesses, Group Treasury maintains flexibility in funding by maintaining availability under committed credit lines.

Management monitors rolling forecasts of Accell Group’s liquidity reserve (comprising the undrawn borrowing facilities below) and cash on the basis of expected cash flows. This is generally carried out at local level in the operating companies of Accell Group in accordance with practice and limits set by Group Treasury. These limits vary by location to take into account the liquidity of the market in which the operating entity operates. In addition, Accell Group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.

i. Financing arrangements

Accell Group has access to the following undrawn borrowing facilities at the end of the reporting period:

 

Out of the € 275 million revolving credit facility, as set out in note 17 Interest-bearing loans, € 75 million are allocated to bank overdraft facilities. The bank overdraft facilities may be drawn at any time and are committed for the same tenor as the long-term funding facilities.

ii. Maturities of financial liabilities

The tables below analyses Accell Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for:

1. all non-derivative financial liabilities, and
2. net and gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows.

The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the end of the reporting period.

After the 2018 balance sheet date, Accell Group has decided to make a voluntary repayment of € 25 million on the term loans in the first quarter of 2019. The nominal term loans amounting to € 100 million are included in the time scale '> 5 years'. In this time scale, the extension option applied early 2019 has already been processed. The termination date of the group financing, including the term loans, has been extended by 12 months to March 2024.

E. Capital management

There were no major changes in Accell Group's approach to capital management during the year. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management monitors the return on capital as well as the level of dividends to ordinary shareholders.

In order to achieve this overall objective, the Accell Group’s capital management, amongst other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. There have been no breaches in the financial covenants of any interest-bearing loans and borrowing in the current period.

F. Fair value measurement

1. Accounting classification and fair values

The following table shows the carrying amount and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

 

2. Fair value measurement

i. Valuation techniques

The fair value of the forward exchange contracts and interest rate swaps is determined on the basis of other inputs than quoted rates/prices that are observable (level 2). For the determination of the fair value, generally accepted valuation methods are used. The determined value in this way is equal to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Forward exchange contracts

Discounted future cash flow model is used as valuation technique. The fair value is determined using (interpolated) quoted forward exchange rates at the reporting date and discounted with the appropriate discount factor derived from the appropriate swap curve.

Interest rate swaps

Discounted future cash flow model is used as valuation technique. The market value of a swap is calculated as the sum of two different loans. In case of a fixed – floating swap, the interest on the first loan is based on a fixed rate, while the interest on the second loan is based on a floating rate. Each individual loan (also known as the leg of a swap) has its own market value. This market value is the sum of the individual future cash flows, discounted with the appropriate discount factor. The individual future cash flows are based on the rate from the contract (fixed leg) or on a forward interest rate curve (floating leg). The fair value is subject to a credit risk adjustment that reflects the credit risk of Accell Group and of the counterparty.

Contingent consideration

The determination of the fair value of the contingent consideration is explained in note 25 Business combinations.

Other financial liabilities

Discounted cash flows are used as valuation technique. The valuation model considers the present value of expected payment, discounted using a risk-adjusted discount rate.

ii. Transfers between Level 1 and 2

There were no transfers from Level 1 to Level 2 or from Level 2 to Level 1 in 2018 (and 2017).

25. Business combinations

Velosophy

In March 2007 Accell Group acquired 35% of the outstanding ordinary shares of Velosophy. On 9 August 2018 Accell Group acquired  the remaining 65% of the outstanding ordinary shares of Velosophy and obtained control of Velosophy. Velosophy is a fast-growing innovative player in e-cargo bike solutions for consumers and the business market. Velosophy is the owner of Babboe, the European market leader in family cargo bikes, the new premium cargo bike brand CarQon, and Centaur Cargo, a specialist in B2B cargo bikes for ‘last mile deliveries’. By making this acquisition, Accell Group accelerates its innovation strategy, which is among others focused on the development of urban mobility solutions.

The goodwill of € 20.8 million arising from the acquisition consists of the strategic advantage Accell Group gains by acquiring the leading player in the e-cargo bike market, the value of the workforce and the synergies and economies of scale expected from combining the operations of Accell Group and Velosophy.

The goodwill recognized is expected not to be deductible for income tax purposes. The following table summarizes the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the non-controlling interest in Velosophy and the consideration paid for Velosophy.

The contingent consideration arrangement requires Accell Group to pay the former owners of Velosophy up to a maximum amount of € 5.9 million if EBITDA targets in 2018 and 2019 and a revenue target in 2019 are met. The potential undiscounted amount of all future payments that Accell Group could be required to make under the contingent consideration arrangement is between € 0 and € 5.9 million.

The fair value of the contingent consideration arrangement of € 4.9 million is estimated by applying the income approach. The fair value measurement is based on significant inputs that are not observable in the market, which IFRS 13 Fair Value Measurement refers to as Level 3 inputs. Key assumptions include a discount rate range of 9%-30% and assumed probability-adjusted revenues in Babboe between € 22.7 million and 29.7 million, Carqon of € 2.9 million and Centaur Cargo of € 2.5 million. During 2018 a unwind of the discount of        € 0.2 million was recorded in net finance cost in Accell Group's income statement for the year ended 31 December 2018, resulting in a contingent consideration of € 5.1 million per 31 December 2018. As of 31 December 2018, neither the amount recognized for the contingent consideration arrangement, nor the range of outcomes or the assumptions used to develop the estimates had changed.

Accell Group recognized a gain of € 9.5 million as a result of measuring at fair value its 35% equity interest in Velosophy held before the business combination. The gain is included in the income from equity-accounted investees in Accell Group's income statement for the year ending 31 December 2018.

The revenue included in the consolidated income statement since 9 August 2018 contributed by Velosophy was € 9.8 million. Over the same period Velosophy contributed a net loss of € 0.1 million to the net result. Had Velosophy been consolidated from 1 January 2018 the consolidated income statement would have included net revenues of € 23.8 million and a net profit of € 1.8 million.

Acquisition-related costs amounted to € 0.6 million. These cost are included in other operating expenses in Accell Group's income statement for the year ended 31 December 2018.

Beeline

In the period September 2016-September 2017 Accell Group acquired 32% of the outstanding shares of Beeline Bikes (‘Beeline’). On 28 March 2018 Accell Group acquired  the remaining 68% of the outstanding shares and obtained control of Beeline. Beeline, launched 5 years ago in Silicon Valley, is a pioneering mobile bike service company based on a licensing concept that delivers a turn-key sales, service and data collection solution tailored for Independent Bicycle Dealers (IBD’s) in North America.

The goodwill of € 3.4 million arising from the acquisition consists of the synergies that the mobile model and technology platform offer with Accell Group’s traditional brick and mortar channels. Beeline enables Accell Group to offer expansion to its IBD partners; it brings convenience, high-touch service, and an experiential and data-driven solution that rapidly expands our consumer reach while bolstering value to our growing network in North America.

None of the goodwill recognized is expected to be deductible for income tax purposes. The following table summarizes the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the non-controlling interest in Beeline and the consideration paid for Beeline.

Accell Group recognized a loss of € 0.3 million as a result of measuring at fair value its 32% equity interest in Beeline held before the business combination. The loss is included in the income from equity-accounted investees in Accell Group's income statement for the year ending 31 December 2018.

The net loss included in the consolidated income statement since 28 March 2018 contributed by Beeline was     € 1,6 million. Had Beeline been consolidated from 1 January 2018 the consolidated statement of comprehensive income would have a net loss of € 1.9 million.

Acquisition-related costs amounted to € 0.2 million. These cost are included in other operating expenses in Accell Group's income statement for the year ended 31 December 2018.

The following table summarizes the amounts recognized for acquired assets and liabilities at the acquisition date:

 

26. Dividend

The dividend in respect of financial year 2017 was determined at € 0.50 per share or as stock dividend during the General Meeting of Shareholders of 25 April 2018. After the period in which shareholders could report their preference, 44% of the shareholders opted for the stock dividend. On 18 May 2018 € 7.4 million was distributed as cash dividend and 341.480 shares were issued as stock dividend and added to issued share capital.

The Board of Director proposes to make available to the shareholders a dividend with stock option of € 0.50 per share with respect to the current year. The dividend proposal is subject to approval by the General Meeting of Shareholders on 24 April 2019 and is not reflected as a liability in these financial statements.

27. Off-balance sheet commitments

The total off-balance sheet commitments, presented at nominal value, consist of:

Accell Group has commitments from operating lease agreements for buildings and land, IT equipment, machinery and cars for use in its normal business operations. The commitments arising from marketing and merchandising mainly concern sponsoring obligations. The other liabilities not included in the balance sheet mainly include software licensing commitments and commitments related to e-commerce initiatives.

28. Contingent assets and liabilities

Accell Group’s most significant contingent assets and liabilities are described below.

Per 31 December 2018 Accell Group holds a contingent liability for a conditional compensation for post combination services, with a maximum of € 1.5 million, which is payable to Velosophy management. The compensation is conditional on certain revenue and EBITDA targets for the start-ups Centaur Cargo and Carqon.

Per 31 December 2018 Accell Group holds a contingent liability for a conditional retention bonus, with a maximum of € 1.8 million, which is payable to key employees in North America.

Per 31 December 2018 Accell Group holds contingent claim of € 1.2 million in respect of custom duties and a contingent warranty claim of € 0.6 million.

The other contingent liabilities include a number of customs guarantees with a total amount of € 0.9 million.

29. Remuneration of the Board of Directors and the Supervisory Board

Board of Directors

The company’s remuneration policy is reflected in the remuneration report that has been presented to the General Meeting of Shareholders for approval. The bonuses reflected in the financial statements relate to the financial year and depend on the targets set by the Supervisory Board. For 2018 a bonus varying between 11% and 50% of the salary will be paid.

The remuneration of the individual members of the Board of Directors is as follows:

 

The resignation of Mr. Sybesma as CFO and Mr. Snijders Blok as COO in 2018

Mr. Sybesma stepped down from the Board of Directors at the General Meeting of Shareholders on 25 April 2018. His employment contract has been terminated taking into account the contractual notice period of six months. Mr. Sybesma is exempt from work during this notice period. He was also paid a termination payment of € 738,755. The amount of this compensation and the amount involved in the payment of salary during the notice period (€ 183,000) are recognized in the profit and loss account 2018 and included in the amount in the column 'termination benefit’ of the table on the remuneration of the individual members of the Board of Directors (see above).

Mr. Snijders Blok stepped down from the Board of Directors at the General Meeting of Shareholders on 25 April 2018, while retaining his other duties and since then reporting directly to the CEO. In the meantime, the employment contract between Accell Group and Mr. Snijders Blok has also been terminated.

Due to the termination of their employment, Mr. Sybesma and Mr. Snijders Blok are unable to meet the conditions set for the granted conditional options in 2016 and 2017 and the conditional shares granted in 2016, 2017 and 2018.

The stock option entitlements that have been granted comprise of the following:

 

After awarding the options, the options vest immediately but remain in lock-up for 3 years. After the lock-up period there is an exercise period of 5 years. The average exercise price of the exercised options during 2018  is € 19.37. At 31 December 2018 the intrinsic value of the options is nil because the share price of Accell Group N.V. was € 18,84 and that is lower than the exercise prices of the options.

The conditional shares that have been granted comprise of the following:

 

After vesting there is a lock-up period for the shares of 2 years.

At the end of 2018 Mr. Anbeek holds 2,000 shares of Accell Group N.V and Mr. Both holds 5,618 shares.

Internal pay ratio

The pay ratio of the Board of Directors compared to the average employee compensation during 2018 is 14:1 (2017: 15:1). The pay ratios can vary over time as a result of the Accell Group’s annual performance. This performance impacts the remuneration of the Board of Directors more than of all other employees.

The ratio consists of the average remuneration of the Board of Directors compared to the average cost of all other employees of Accell Group. The average remuneration of the Board of Directors is calculated from the sum of the fixed salary, short-term incentives, share based payments, pensions and other benefits of the four members (2.8 FTE) of the Board of Directors. The average cost of all other employees is calculated from the personnel costs (Note 2 Personnel expenses) and the average number of employees during the year (3,327 FTE) minus 2.8.

Supervisory Board

The remuneration of the individual members of the Supervisory Board is as follows:

 

30. Related parties

Identification of related parties

In addition to the Board of Directors and Supervisory Board (Note 29 Remuneration of the Board of Directors and the Supervisory Board) Accell Group recognizes related party relationships with its associates and joint ventures (Note 11 Subsidiaries).

Associates and joint ventures

The transactions during the financial year and balances outstanding at year-end between group companies and associates and joint ventures are presented below:

 

The amounts outstanding are not provided for and will be settled in cash and cash equivalents. No guarantees have been given or received. No expense has been recognized for bad or doubtful debts in respect of the amounts owed by related parties. All sales and purchases are prices on an arm’s length basis. Transactions and balances between Accell Group and its non-consolidated companies have not been eliminated for consolidation purposes.

31. Auditor fees

The total costs for the services rendered by KPMG Accountants N.V. and her network consist of: