Annual Report 1999 - Kemira

pension arrangements (Projected Unit Credit method). The
pension calculations are based on studies carried out by actuaries.
Research expenditure is expensed. Development expenditure
is also expensed except for major projects for which investment
decisions have been made. These are capitalized. Capitalized
development costs are presented in the item “Other
long-term expenditures” and amortized over their economic
life, not exceeding, however, five years.
Net sales
Net sales include the total invoicing value of products sold
and services provided less sales tax, discounts, rebates and foreign
exchange differences in accounts receivable.
Extraordinary income and expenses
Extraordinary income and expenses consist of items not incurred
in the normal course of business, such as exceptionally
large one-time expenses arising from the closures of plants
and the reorganization of operations and divestments of entire
businesses.
Income and expenses of recurring nature and connected with
operations, for example, gains and losses on the sales of fixed
assets, are included in operating income.
Extraordinary items of the parent company include Group
contributions received and paid.
Direct taxes
The consolidated financial statements include direct taxes,
which are based on the taxable results of the Group companies
for the accounting period calculated according to local tax
rules, and the change in the deferred tax liability and asset.
The Group’s deferred tax liabilities and assets have been calculated
according to IAS 12 which came into force from the
beginning of 1998 and which is allowed by the Finnish legislation.
The deferred tax liability has been calculated for all
significant temporary differences, which have been obtained
by comparing the book value of each balance sheet item and
the taxation value. Deferred tax assets are included in the financial
statements only if the company considers that the
temporary difference or tax loss will probably be realized in
the near future and that the taxable unit will probably generate
a sufficient amount of taxable income in order to be able
to make use of the tax claim. Tax assets on confirmed losses
have been stated observing particular caution. In calculating
the deferred tax liability, the tax rate enacted at the time of
preparing the financial statements has been applied.
The effect of the change that has been made in calculating
taxes has been reported in its entirety in the direct taxes for
1998 and for revaluation items it is included directly in shareholders’
equity. The figures for comparison years have not
been changed. The effect of the change on taxes for 1998 is
discussed in the Notes to the financial statements.
The tax charged in the income statement of the parent company
comprises direct taxes calculated on an accrual basis.
The untaxed reserves of the parent company are shown as a
separate item. Provision for deferred tax liability for the untaxed
reserves has not been made in the balance sheet of the
parent company.
Research and development expenditure
Fixed assets and depreciation
Non-current (fixed) assets are generally stated at cost, except
for certain land and water areas and buildings which are stated
at revalued amounts, less accumulated depreciation, as
applicable.
Depreciation is calculated on a straight-line basis so as to
write off carrying value of fixed assets over their expected
useful lives. The depreciation periods adopted are as follows:
Machinery and equipment
Buildings and constructions
Other capitalized expenses
Goodwill on consolidation
3–15 years
25 years
5–10 years
5–10 years
As a general rule, interest expense is not capitalized, except
in the United States. However, interest expenses related to
capital borrowed to finance major capital investment projects
can, when specifically approved by the Board, be capitalized
as part of the total investment costs.
Gains and losses on the sale of fixed assets are included either
in income and expenses of operations or in extraordinary
items, depending on the nature of the transaction. In recent
years, new revaluations have not been made within the Group.
Large, seldom performed maintenance works
Large, seldom performed maintenance works are treated as a
capital expenditure as from 1999 and acquisition costs are depreciated
over their useful lifetimes (IAS 37). Previously, provisions
for expenses were booked for them in advance. The
effect of the change on net income and shareholders’ equity
is stated in Note 16.
Leasing
Leasing payments are treated as rental expenses except for finance
leasing agreements, in which the leased property is
presented as part of the Group’s fixed assets and the leasing
debt is shown as a long-term liability. In respect of finance
leasing agreements, the depreciation on the leased property
and the interest expense on the debt are shown in the income
statement instead of leasing rents.
Inventories
Inventories are stated at the lower of cost or net realizable
value. Cost is determined on a first in first out (FIFO) basis.
Net realizable value is the amount which can be realized from
the sale of the asset in the normal course of business, after allowing
for the costs of realization. The cost of finished goods
and work in process include an allocable proportion of production
overheads.
Securities and other short-term investments
Securities and other short-term investments are a part of the
Group’s cash management and are stated at lower of cost or
market.
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