Annual Report 1999 - Kemira

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Kemira Group’s financial statements have been prepared
in compliance with the relevant acts and regulations in force
in Finland and in accordance with the Group’s uniform accounting
principles. The Group’s accounting principles are
based on International Accounting Standards (IAS). Accordingly,
the financial statements also correspond to IAS, with
the exception of accounting for pension expenses, IAS 19,
which entered into force on 1 January 1999. Its effects on the
consolidated income statement and shareholders’ equity are
discussed and presented in Notes 23 and 24 to the consolidated
financial statements.
Principles of consolidation
The consolidated financial statements include the accounts of
the parent company, Kemira Oyj, and companies in which it
owns, directly or indirectly through subsidiaries, over 50 percent
of the voting rights. Certain real estate and housing companies,
and captive insurance companies, as well as companies
that had no operations during the financial year, have not
been consolidated. However, the effect of these companies
on the Group’s results and distributable reserves, in cases of
any significance, has been consolidated using the equity
method of accounting. Companies acquired during the accounting
period are consolidated from the date the responsibility
for their operations was transferred to the Group. Similarly,
units or companies sold during the fiscal year are included
in the income statement up to the date of disposition.
All intra-Group transactions have been eliminated as part of
the consolidation process. Acquisitions of companies are accounted
for under the purchase (past-equity) method of accounting.
The excess of the acquisition cost over fair value of
the net assets acquired is recorded as goodwill. Goodwill is
amortized over the useful life of the assets acquired, which
since 1998 has as a rule been a maximum of 5 years. Should a
longer amortization period be justified, it is a maximum of 10
years. The interests of minority shareholders in the net assets
and profit and loss of consolidated subsidiaries is reflected as
a separate item in the Group’s consolidated balance sheet and
income statement.
Companies in which the Group has a participating interest are
associated companies, in which the interest is 20-50%. Holdings
in associated companies are presented in the consolidated financial
statements using the equity method of accounting. Under
the equity method the Group’s proportionate share of the
associated companies’ net income for the financial year is included
in income and expenses from operations. Joint ventures
that are owned on a fifty-fifty basis with another shareholder
and in which the voting rights and management responsibility
are divided evenly between the shareholders have been consolidated
according to the proportionate method of accounting.
Other companies (voting rights owned less than 20 percent)
are stated at cost in the balance sheet and dividends received
are included in the income statement.
Items denominated in foreign currency, and foreign
currency and interest rate derivatives
In day-to-day accounting of each Group company, transactions
in foreign currencies are translated at the rates of exchange
prevailing on the dates of the transactions. At the end
of the accounting period the unsettled balances of foreign
currency transactions are valued at the rates of exchange prevailing
on the balance sheet date. Foreign exchange gains and
losses related to normal business operations are treated as adjustments
to sales and purchases, while those gains and losses
associated with financing and hedging of the total foreign exchange
position are recorded as financing income and expenses.
Derivative financial instruments to hedge currency and interest
rate risks have been recorded in the income statement simultaneously
with the commitment hedged. Derivative financial
instruments which are not considered as hedging instruments
are valued in the financial statements at the market
price in accordance with conservative accounting practice.
The interest portion of currency forwards is recorded as interest
income and expense over the terms of the contract, and
the differences in the foreign exchange rates are booked as a
credit or charged to income when the underlying hedged
transaction has been credited or charged to income in the financial
statements.
In the consolidated financial statements, the income statements
of foreign subsidiaries have been translated into euro
amounts using the average exchange rates and the balance
sheets have been translated using the year-end exchange
rates. The translation difference, which arises in translating
the income statement and balance sheet using the different
exchange rates, is entered in non-restricted equity.
The Group seeks to hedge the translation risk of its investment
in the net assets of foreign subsidiaries, which includes
the original cost of ownership plus any undistributed post-acquisition
profits and losses of those subsidiaries. Accordingly,
the foreign currency-denominated shareholders’ equity in the
Group’s non-Finnish subsidiaries are hedged against exchange
rate changes using long-term foreign currency-denominated
loans as well as forward and currency swap contracts.
In the consolidated financial statements, the exchange rate
gains and losses of such loans and forward and currency
swap contracts are credited or charged against the translation
differences arising from the translation of the shareholders’
equity amounts of the last confirmed balance sheets of the
subsidiaries. Other translation differences affecting shareholders’
equity are stated as an increase or decrease in the non-restricted
shareholders’ equity.
The foreign exchange rates on the balance sheet date are given
on page 17.
Pension arrangements
The Group has various pension schemes in accordance with
the local conditions and practices in the countries in which it
operates. The schemes are generally funded through payments
to separate funds or to insurance companies. Contributions
are based on periodic actuarial calculations and are
charged against profits.
The parent company’s pension arrangements have been
handled within the separate pension funds. The uncovered
liabilities of pension funds are presented in the parent
company’s financial statements in short-term interest-free
receivables and in short-term interest-free liabilities.
In 1999, IAS 19 was not applied, but the effect of applying the
standard on the Group’s net income and retained earnings
has been calculated and stated in Notes 23-24. The liability resulting
from the changeover to applying IAS 19, which came
into force in 1999, has been calculated at the Group level so
that the accumulated entitlement has been periodized over
the time of the employment according to the accrual rules for
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