Print

The The consolidated financial statements of the Orion Group have been prepared in accordance with International Financial Reporting Standards (IFRS), applying IAS and IFRS standards as well as SIC and IFRIC interpretations effective as of 1 January 2010. International Financial Reporting Standards refer to the standards and their interpretations approved for application in the EU in accordance with the procedure stipulated in the EU's regulation (EC) No. 1606/2002 and embodied in the Finnish Accounting Act and provisions issued under it. The Notes to the consolidated financial statements have also been prepared in accordance with the requirements in Finnish accounting legislation and Community law that complement the IFRS regulations.

The information in the consolidated financial statements is based on historical cost convention, except for financial assets recorded at fair value through profit and loss, and available-for-sale investments, derivatives and share-based payments recorded at fair value.

Monetary figures in the financial statements are expressed in million euros unless otherwise stated.

Adoption of new standards, interpretations and amendments

For the financial year, the Group has adopted the following relevant standards, interpretations and amendments that became effective in 2010:

• IFRS 3 (Revised), Business Combinations

The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets. All acquisition-related costs should be expensed. The revised standard affects business combinations that take place after 1 January 2010.

The following standards, interpretations and amendments that became effective in 2010 did not have material effects on the consolidated financial statements:

• IAS 27 (Revised), Consolidated and Separate Financial Statements
• IFRIC 12, Service Concession Arrangements
• IFRIC 15, Agreements for the Construction of Real Estate
• IFRIC 16, Hedges of a Net Investment in a Foreign Operation
• IFRIC 17, Distributions of Non-cash Assets to Owners
• IFRIC 18, Transfers of Assets from Customers
• IFRIC 9 and IAS 39 (Amendment), Reassessment of Embedded Derivatives on Reclassification
• IAS 39 (Amendment), Financial Instruments: Recognition and measurement – Eligible Hedged Items
• IFRS 2 (Amendment), Share-based Payment – Group Cash-settled Share-based Payment Transactions

IASB published changes to 12 standards or interpretations in April 2009 as part of the annual improvements to standards. These changes do not have an impact on the consolidated financial statements.

The following new standards, interpretations and amendments to existing standards and interpretations will be adopted by the group as of 1 January 2011.These are not expected to have a material impact on the consolidated financial statements.

• IAS 24 (Revised), Related Party Disclosures
• IAS 32 (Amendment), Financial Instruments: Presentation – Classification of Rights Issues
• IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments
• IFRIC 14 (Amendment), Prepayments of a Minimum Funding Requirement

IASB published changes to 7 standards or interpretations in July 2010 as part of the annual Improvements to IFRSs project, which will be adopted by the group in 2011. The changes are still subject to endorsement by the European Union. The following presentation includes the changes but they will not have a material impact on the consolidated financial statements.

• IFRS 3 (Amendments), Business Combinations
• IFRS 7 (Amendment), Financial instruments: Financial statement disclosures
• IAS 1 (Amendment), Presentation of financial statements – statement of changes in eqity
• IAS 27 (Amendment), Consolidated and separate financial statements
• IAS 34 (Amendment), Interim financial reporting
• IFRIC 13 (Amendment), Customer loyalty programmes

The following standards and amendments to existing standards will be adopted in 2012 or later:

• IFRS 9*, Financial instruments, Financial Assets and Liabilities – Classification and Measurement. The standard was published in November 2009 and it represents the first milestone in the IASB's planned replacement of IAS 39. It addresses classification and measurement of financial assets. The standard will probably have an impact on accounting for financial assets in the group. The second part of IFRS 9 was published in October 2010. It complements previously issued IFRS 9, ‘Financial instruments' to include guidance on financial liabilities. The accounting and presentation for financial liabilities shall remain the same except for those financial liabilities for which the fair value option is applied. The Group will probably adopt the standard in its 2013 financial statements or later. Management is currently assessing the impact of the standard on the financial statements of the group.
• IFRS 7 (Amendment)*, Disclosures – Transfers of financial assets. The amendment adds disclosure requirements related to risk exposures derived from transferred assets. Additional disclosures, where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred asset, are required. The amendment can increase the disclosures in the notes to financial statements in the future. The amendment is not expected to have an impact on the consolidated financial statements.
• IAS 12 (Amendment)*, Income taxes. The amendment is not expected to have an impact on the consolidated financial statements.

*) This new or revised standard / interpretation has not been approved for application in the EU.

Consolidation Principles

Subsidiaries

The consolidated financial statements cover Orion Corporation and all companies directly or indirectly owned by it and controlled by the Group. A company is controlled by the Group when the Group owns more than 50% of the company's voting rights or has power to govern the financial and operating policies of the company so as to benefit from its operations.

Internal shareholdings have been eliminated using the purchase method of accounting. In the consolidated financial statements, acquired subsidiaries are fully consolidated from the date the Group acquires control, and divested subsidiaries are de-consolidated from the date control ceases. All intra-Group transactions, receivables and liabilities, distribution of profit and unrealised internal gains are eliminated in the compilation of the consolidated financial statements. The consolidated profit for the financial year is divided into portions attributable to owners of the parent company and non-controlling interest. The non-controlling interest is included in Group equity and is specified in the statement of changes in equity.

Associates and joint ventures

Associates are all companies over which the Group has significant influence but not control. Significant influence generally means a shareholding of 20% to 50% of the voting rights. Joint ventures are companies half-owned by the parent company or a subsidiary, and half-owned by another company outside the Group, and jointly controlled by them. Associates and joint ventures are incorporated into the consolidated financial statements using the equity method of accounting.

If the Group's share of the losses of an associate or joint venture exceeds the carrying amount, it is not consolidated unless the Group has made a commitment to fulfil the liabilities of the associate or joint venture.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, is the CEO and President of Orion Corporation, who makes the Group's strategic decisions.

Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of the Group's companies are measured using the currency of the primary economic environment in which the company operates (the functional currency). The consolidated financial statements are presented in euros, which is the functional currency of the parent company of the Group and the Group's presentation currency for the consolidated financial statements.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary items in foreign currencies at the end of the reporting period in the statement of financial position are measured using the exchange rates at the end of the reporting period. Foreign exchange gains and losses from translation of the items are recognised in the statement of comprehensive income. Exchange rate gains and losses related to business operations are included in the corresponding items above the operating profit line. Exchange rate differences resulting from hedges made for hedging purposes but not designated as hedging instruments are included as net amounts within other operating income or expenses. Exchange rate gains and losses related to financial liabilities and receivables in foreign currencies are included in finance income and expenses. Non-monetary items in foreign currencies in the statement of financial position which are not measured at fair value are measured using the exchange rate at the date of the transaction.

Group companies

The statements of comprehensive income and statements of financial position of all Group companies (none of which operates in a country with hyper-inflation) with a functional currency different from the Group's presentation currency are translated into euros as follows:

assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;
income and expenses for each statement of comprehensive income are translated at average exchange rates for the financial period;
all resulting exchange differences are recognised as a separate component of equity.
Exchange differences resulting from translation of net investments in foreign entities are recognised under translation differences in equity in compilation of the consolidated financial statements. The accumulated translation differences related to divested foreign entities, which are recognised in equity, are recognised as gains or losses on transfers in the consolidated statement of comprehensive Income.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the year-end exchange rate used for the financial statements.

Borrowing costs

Borrowing costs are recognised in the consolidated statement of comprehensive income as an expense in the period in which they are incurred. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

There were no acquisitions of qualifying assets and subsequent borrowing costs to be capitalised in the reporting period.

Property, plant and equipment

Tangible assets comprise mainly factories, offices and research centres, and machines and equipment for manufacturing, research and development. Tangible assets are measured at their historical cost, less accumulated depreciation and impairment, and are depreciated over their useful life using the straight-line method. The residual value and useful life of tangible assets are reviewed when necessary, but at least at every year end for the financial statements, and adjusted to correspond to probable changes in the expectations of economic benefits. The estimated useful lives are as follows:

• buildings 20–50 years
• machinery and equipment 5–10 years
• other tangible assets 10 years

Land is not depreciated. Repair and maintenance costs are recognised as expenses for the period. Improvement investments are capitalised if they are expected to generate future economic benefits. Gains and losses on disposals of tangible assets are recognised in the consolidated statement of comprehensive income. Other tangible assets include improvements to rented premises, asphalting, environmental improvements and works of art.

Intangible assets

Research and development costs

Research costs are expensed as incurred in the consolidated statement of comprehensive income, because economic benefits related to them materialise at such a late stage that the proportion to be capitalised is not material, therefore the costs are not capitalised. Intangible assets generated from development are recognised in the statement of financial position only if the conditions of IAS 38, Intangible assets, are met. As approvals by the authorities are required for pharmaceutical development projects, and there are other uncertainties related to development, the Group has not capitalised its internal development costs.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired company at the date of acquisition. Goodwill is measured at cost less accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to cash-generating units or groups of cash-generating units that are expected to benefit from the business combination. Cash-generating units have been grouped according to operating segment. The goodwill in the Consolidated statement of financial position arose prior to the adoption of IFRS, and it corresponds to the carrying amount according to the previous financial reporting standards, which was used as the deemed cost on 1 January 2004 when making the transition to IFRS.

Marketing authorisations and licences for products not yet launched

Marketing authorisations and licences for products not yet launched relate to products for which the company has marketing rights but selling has not yet commenced. The selling of a product can commence only when the authorities have granted authorisation for marketing of the product. Marketing authorisations and licenses for products not yet launched are stated in the statement of financial position at cost less accumulated impairment. When the marketing authorisation for a product has been issued and selling of it has commenced, the asset is transferred from intangible assets in progress to intangible assets. Using the straight-line method, the marketing authorisations are depreciated over their useful life, which is five to fifteen years.

Other intangible assets

Other intangible assets include marketing authorisations, trademarks, patents, software licences, and product and marketing rights. Acquired intangible assets are measured at their historical cost, less accumulated depreciation and impairment. The assets are depreciated over their useful life, usually three to ten years, using the straight-line method.

Impairment of property, plant, equipment and intangible assets

At the end of each reporting period, the Group assesses whether there are indications that an asset may be impaired. If there are any such indications, the respective recoverable amount is assessed. The recoverable amount is the higher of the asset's fair value less selling costs and value in use, which is obtained by discounting the present value of the future cash flow from that asset. The discount rate is the weighted average cost of capital (WACC), calculated before tax and using Standard & Poor's index for the healthcare industry as the debt-to-equity ratio. The index corresponds to the potential and risks of the asset under review.

An impairment loss is recognised in the consolidated statement of comprehensive income for the amount by which the asset's carrying amount exceeds its recoverable amount. An impairment loss other than on goodwill is reversed if there is a change in the circumstances and the asset's recoverable amount exceeds its carrying amount. An impairment loss is not reversed to more than what the carrying amount of the asset would have been had there been no impairment loss.

Goodwill is tested for impairment at least annually. Goodwill is tested for impairment at the level of the group of cash generating units that forms the operating segment Pharmaceuticals business. The Pharmaceuticals business area comprises the following cash-generating units: Proprietary Products, Specialty Products, Animal Health and Fermion. An impairment loss on goodwill is not reversed.

Pre-launch intangible assets, comprising mainly marketing authorisations and marketing licenses, are tested for impairment at least annually, or more frequently if there is an indication of impairment.

Each marketing authorisation and marketing licence is tested for impairment separately. Impairment is recognised in the consolidated statement of comprehensive income under Other operating expenses, which include expenses not allocable to specific operations.

Government grants

Government grants related to research activities are recognised as decreases in the research expenses incurred in the corresponding reporting period. If an authority decides to convert an R&D loan into a grant, that is recognised in the consolidated statement of comprehensive Income under Other operating income. Government grants related to the acquisition of tangible or intangible assets are recognised as decreases in their acquisition costs. Such grants are recognised as income in the form of reduced depreciation during the useful life of the asset.

Leases

 

Group as lessee

Lease agreements under which the Group has substantially all the risks and rewards of ownership of the assets are classified as finance leases. Finance leases are recorded in the statement of financial position under assets and liabilities at the commencement of the lease, either at the fair value of the asset or the present value of the minimum lease payments if lower.

Assets acquired under finance leases are depreciated in the same manner as any non-current assets, either over the useful life of the assets or over a shorter lease term. Each lease payment is allocated between the loan reduction and finance charge so that the interest rate on the outstanding loan remains constant. Finance lease liabilities are recorded under the non-current and current interest-bearing liabilities in the statement of financial position.

If the lessor retains the risks and rewards of ownership, the lease is treated as an operating lease, and payments made under an operating lease are recognised as an expense on a straight-line basis over the period of the lease.

Group as lessor

The Group is not a lessor in any finance lease agreements.

Arrangements that contain a lease

The Group has entered into purchase contracts, which include a lease element. Determining whether an arrangement is, or contains, a lease according to interpretation IFRIC 4 Determining whether an Arrangement contains a Lease shall be based on the substance of the arrangement and requires an assessment of whether:

• fulfilment of the arrangement is dependent on the use of a specific asset or assets, and
• the arrangement conveys a right to use the asset

If an arrangement contains a lease, IAS 17 shall be applied to the lease element of the agreement. The other elements of the arrangement shall be handled in accordance with applicable IFRSs.

Employee benefits

Pension obligations

The Group has pension plans in accordance with each country's local regulations and practices. The Group has both defined contribution and defined benefit plans. In the defined contribution plans, the Group pays fixed contributions to separate entities. The Group has no legal or constructive obligations to pay further contributions if the recipient of the contributions is unable to pay the employee benefits. The benefit plans other than the defined contribution plans are defined benefit plans. The payments to the defined contribution plans are recognised as expenses in the consolidated statement of comprehensive income in accordance with the contributions payable for the period.

The Group's most important defined benefit pension plans are in Finland, where statutory insurance under the Employees' Pensions Act (TyEL) has been arranged through the Orion Pension Fund for the Group's clerical employees and supplementary pension security for some of the clerical employees. There is also one company outside Finland, Orion Diagnostica as of Norway, with a defined benefit pension plan, but it is not substantial. In addition, the Group management has defined benefit pension plans taken out with life assurance companies. The obligations under the defined benefit pension plans have been calculated separately for each plan.

The pension expenses related to the defined benefit pension plans have been calculated using the projected unit credit method. The pension expenses are recognised as expenses by distributing them over the whole estimated period of service of the personnel. The amount of the pension obligation, less the fair value of plan assets, is the present value of the estimated future pensions payable, and the discount rate applied is the interest rate of low-risk bonds issued by companies with a maturity that corresponds to that of the pension liability as closely as possible. The interest rate is derived from bonds issued in the same currency as the benefits payable.

When the transition to IFRS was made, all actuarial gains and losses were recognised in the equity stated in the opening statement of financial position in accordance with the exemption under IFRS 1. After this, any actuarial gains and losses, to the extent that they exceed fluctuation limits, will be recognised in the consolidated statement of comprehensive Income and allocated over the average remaining term of service of the personnel. The fluctuation limits are the greater of the following: 10% of the present value of the defined benefit obligation, or 10% of the fair value of the plan assets.

Share-based payments

The benefits under the share-based incentive plan for key employees approved by the Board of Directors are recognised as an expense in the consolidated statement of comprehensive income during the vesting period of the benefit. The equity-settled portion is measured at fair value at the time of granting the benefit, and an increase corresponding to the expense entry in the consolidated statement of comprehensive income is recognised in equity. The cash-settled portion is recognised as a liability, which is measured at fair value at the end of the reporting period. The fair value of shares is the closing quotation for B shares on the day of granting the benefit. Non-market vesting conditions, such as individual goals and result targets, affect the estimate of the final number of shares and amount of associated cash payments. The estimate of the final number of shares and associated cash payments is updated at the end of each reporting period. Changes in estimates are recognised in the consolidated statement of comprehensive income.

Inventories

Inventories are presented in the statement of financial position as the value of the purchase or production costs, or the net realisable value if lower. The cost is based on the weighted average price method. Inventories are valued at the cost of the materials consumed plus the cost of conversion, which comprises costs directly proportional to the amount produced and a systematically allocated share of fixed and variable production overheads.

The net realisable value is the estimated selling price obtainable through normal business, less the estimated expenses incurred in finalising the product and selling it.

Financial assets

The Group's financial assets are classified in the following categories: financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets.

The classification is based on the purpose for which the financial assets were acquired, and they are classified at initial recognition.

Financial assets at fair value through profit or loss

Financial assets recognised at fair value through profit or loss are financial assets held for trading. A financial asset is classified as held for trading if it has been acquired principally for sale in the short term. Derivatives that do not qualify for hedge accounting are also classified as held for trading. Derivatives held for trading and financial assets are included in the current assets if their maturities are less than 12 months from the end date of the reporting period.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in active markets. They are included in the current assets in the statement of financial position, except for assets that have maturities over 12 months from the end date of the reporting period, which are classified as non-current assets. The Group's loans and receivables also include "trade receivables" and some "other receivables" related to cash and cash equivalents in the statement of financial position.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that have been specially classified in this category or have not been classified in any other category. They are included in the non-current assets unless the intention is to hold them for less than 12 months from the end date of the reporting period, in which case they are included in the current assets.
Available-for-sale assets include available-for-sale investments and money market investments in the statement of financial position. Available-for-sale financial assets include shares in unlisted companies and debt instruments with maturities over three months.

Recognition and measurement

All purchases and sales of financial assets are recognised on the trade date, which is the date on which the Group commits to purchase or sell an asset. Investments in financial assets that are not recognised at fair value through profit or loss are initially recognised at fair value, including transaction costs. Financial assets at fair value through profit or loss are initially recognised at fair value, and transaction costs are recognised as expenses in the Income Statement.

A financial asset is derecognised in the statement of financial position when the Group no longer has the contractual rights to receive the cash flows or when it has substantially transferred the risks and cash flows from the asset to outside the Group.

Financial assets recognised at fair value through profit or loss are later measured at fair value based on the quoted market price on the end date of the reporting period. Available-for-sale financial assets are measured at fair value, or if their fair value cannot be determined reliably, they are measured at cost, less any impairment. Loans and other receivables are measured at amortised cost using the effective interest rate method.

Unrealised and realised gains and losses due to changes in fair value relating to assets in "Financial assets at fair value through profit or loss" are recognised through profit or loss in the accounting period in which they arise in either "Other operating income and expenses" or "Finance income and expenses", depending on whether operating or finance items have been hedged.

Changes in the fair value of assets classified as available-for-sale financial assets are recognised in items in other comprehensive income. Accumulated fair value adjustments are transferred from equity through profit or loss when an investment is sold or its value is impaired so that an impairment loss should be recognised. Interest on available-for-sale debt instruments is recognised in finance income using the effective interest rate method.

Impairment of financial assets

Assets recognised at amortised cost in the statement of financial position
At the end of each reporting period, it is assessed whether there is any objective evidence that an item in the Group's financial assets might be impaired. If there is any objective evidence of impairment of the value of some category of financial asset, an impairment loss is calculated and recognised through profit or loss.

Criteria applied by the Group in stating that there is objective evidence of impairment:

• issuer's or debtor's considerable financial problems
• breach of contract terms, such as neglecting payments or payments long overdue
• high probability of bankruptcy or other financial restructuring of debtor

An impairment loss recognised through profit or loss concerning an asset included in loans and receivables is measured as the difference between the carrying amount of the asset and the present value of the estimated cash flows discounted at the effective interest rate. If, in a subsequent period, the amount of the impairment loss relating to an asset is objectively viewed as having decreased due to an event occurring after the impairment was originally recognised, the previously recognised impairment loss is reversed through profit or loss.

Assets classified as available for sale
At the end of each reporting period, it is assessed whether there is any evidence that an item in the Group's financial assets might be impaired. For debt securities, the Group applies the above-mentioned criteria. For assets classified as available-for-sale equity accounted investments, a significant or prolonged decrease in fair value below acquisition cost is deemed as evidence of impairment of the asset. If there is such evidence, the accumulated loss in fair value reserve is transferred through profit or loss. An impairment loss relating to equity accounted investments is not reversed through profit or loss, but any later reversal of impairment loss on debt instruments is recognised through profit or loss.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, bank deposits and assets in bank accounts, and liquid debt instruments. Liquid debt instruments are short-term certificates of deposit and commercial paper with maturities of no more than three months issued by banks and companies.

Financial liabilities

Financial liabilities are initially recognised in accounting at fair value less transaction costs. Subsequently, non-derivative financial liabilities are measured at amortised cost using the effective interest rate method.

Financial liabilities include non-current and current liabilities. Non-current interest-bearing liabilities include loans raised by the Group from financial institutions and pension companies, product development loans and liabilities for assets leased under finance lease agreements of over 12 months duration. The credit limits of bank accounts to the extent that they are used and commercial paper issued by the Company are included in interest-bearing current liabilities, as are any repayments of capital of non-current interest-bearing liabilities due in the next 12 months.

Under "Derivative financial instruments and hedging" there is more information on held-for-trading derivative financial instruments included in other current and non-current liabilities.

Derivative financial instruments and hedging

Derivatives are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured at their fair value using the price quotations at the end of the reporting period. Derivatives are recognised under other receivables and liabilities in the statement of financial position.

The Group does not apply IFRS hedge accounting to foreign exchange derivatives that hedge items in foreign currencies in the statement of financial position or hedge highly probable forecast cash flows, even though they have been acquired for hedging purposes in accordance with the Group's treasury policy. These derivative contracts are classified as financial assets held for trading, and the change in their fair value is recognised through profit and loss under either Other income and expenses or Financial income and expenses, depending on whether, from the operational perspective, sales revenue or finance items have been hedged.

Cash flow hedging

The Group applies hedge accounting in accordance with IFRS to electricity derivative contracts that hedge highly probable forecast cash flows associated with electricity purchases. The change in the fair value of the effective portion of qualifying derivative instruments that hedge cash flow is directly recognised against the fair value reserve included in the equity. The gains and losses recognised in equity are transferred to the consolidated statement of comprehensive income in the period during which the hedged electricity purchases are recognised in the consolidated statement of comprehensive income. The ineffective portion of qualifying derivative instruments is recognised in the consolidated statement of comprehensive income under Other operating income and expenses.

Provisions

A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

A restructuring provision is recognised when the Group has compiled a detailed restructuring plan, launched its implementation or informed the parties concerned.

A contingent liability is a potential liability based on previous events. It depends on the realisation of an uncertain future event beyond the Group's control. Contingent liabilities include obligations that will most likely not lead to a payment or its size cannot be reliably determined. Contingent liabilities are disclosed in the Notes.

Income taxes

The income tax expense in the consolidated statement of comprehensive income includes taxes based on the operating profit of the Group companies for the financial year, tax adjustments for previous financial years and changes in deferred tax assets and liabilities. For items recognised directly in equity, the corresponding tax effect is also recognised in equity. Income tax based on the taxable income of the financial period is calculated on the basis of the tax rate in force in each country.

Deferred tax is computed on all temporary differences between the carrying amount and the taxable value. Deferred tax assets due to confirmed tax losses of Group companies are imputed only to the extent that they can be utilised in the future. The largest temporary differences arise from depreciation on property, plant and equipment, and defined benefit pension plans. Deferred taxes are computed using the tax rates valid at the end of the reporting period.

Revenue recognition

Sales of goods and services

Consolidated net sales include revenue from sales of goods and services adjusted for indirect taxes, discounts and exchange differences on sales in foreign currencies. Net sales also include milestone payments under contracts with marketing partners, which are paid by the partner as a contribution to cover the R&D expenses of a product during the development phase and are tied to certain milestones in research projects. In addition, net sales include royalties from the products licensed out by the Group.

Revenue from sales of goods is recognised when the significant risks and rewards of ownership of the goods have been transferred to the buyer. Revenue from services is recognised when the service has been provided. Milestone payments are recognised when the R&D project has progressed to a phase that, in accordance with an advance agreement with the partner, triggers the partner's obligation to pay its share. Royalties are recorded on an accrual basis in accordance with the licensing agreements.

Interest and dividend income

Interest income is recognised using the effective interest rate method and dividend income when the right to receive payment is established.

Contents of the function-based consolidated statement of comprehensive income

Cost of goods sold
The cost of goods sold comprises wages and salaries, materials, procurement and other costs related to manufacturing and procurement.

Selling and marketing expenses
The expenses of selling and marketing operations comprise costs related to the distribution of products, field sales, marketing, advertising and other promotional activities, including the related wages and salaries.

Research and development expenses
R&D expenses comprise wages and salaries, materials, procurement of external services and other costs related to R&D.

Administrative expenses
Administrative expenses include general administrative and Group management costs. The functions also bear the depreciation of the assets they use, as well as some administrative overheads in accordance with the cost matching principle.

Critical accounting estimates and assumptions

When compiling the financial statements, the management had to make certain estimates and assumptions concerning the future that have an impact on the items included in the financial statements. The actual values may differ from these estimates. The estimates are mainly related to impairment testing of assets, the measuring of receivables and liabilities related to defined benefit pension plans, the recognition of provisions and income tax. In addition, the application of accounting policies calls for the exercise of judgement.

Within the Group, the principal assumptions concerning the future and the main uncertainties relating to estimates at the end of the reporting period that constitute a significant risk of causing a material change in the carrying values of assets and liabilities within the next financial year are the following:

Impairment testing

Actual cash flows can differ from estimated discounted future cash flows because changes in the long-term economic life of the Company's assets, the forecast selling prices of products, production costs and the discount rate applied in the calculations can lead to the recognition of impairment losses,

Employee benefits

The Group has various pension plans to provide for the retirement of its employees or to provide for when the employment ends. Various statistical and other actuarial assumptions are applied in calculating the expenses and liabilities of employee benefits, such as the discount rate, the estimated rate of return on pension plan assets, estimated changes in the future level of wages and salaries, and employee turnover. The statistical assumption made can differ considerably from the actual trend because of, among other things, a changed general economic situation and the length of the period of service. The effect of changes in actuarial assumptions is not recorded directly in Group earnings, since this could have a significant impact on the Group's earnings for the financial year. The effect of these changes is recognised over the remaining estimated period of service.

Income taxes

In preparing the financial statements, the Group estimates, in particular, the basis for recording deferred tax assets. For this purpose, an estimate is made of how probable it is that the subsidiaries will generate sufficient taxable income against which unused tax losses or unused tax assets can be utilised. The factors applied in making the forecasts can differ from the actual figures, and this can lead to expense entries for tax assets in the consolidated statement of comprehensive Income.

 

Updated Mar 31st 2011