AAK Annual Report 2018

a reasonable allocation of indirect manufacturing expenses based on normal production capacity, excluding borrowing costs. Net selling price is the estimated sale price in the ordinary course of business, less costs of completion and applicable variable costs to sell. Financial income and expenses Financial income consists of interest income on funds invested, dividend income and gains on hedging instruments recognized in profit or loss. Dividend income is recognized when the right to receive payment has been established. Results from the sale of financial instruments are recognized when the risks and benefits associated with ownership of the instruments have been transferred to the buyer and the Group no longer has control of the instrument. Financial expenses consist of interest expenses on loans, the effect of the resolution of present value calculations for provisions, impairment of financial assets and those losses on hedging instruments recognized in profit or loss. Borrowing expenses are recognized in profit or loss, except where they are directly attributable to the acquisition, construction or production of assets that take considerable time to complete for their intended use or sale, in which case they are included in the cost of those assets. No borrowing expenses have been capitalized during the past two years. Exchange gains and losses are recognized net. Financial instruments as from January 1, 2018 From January 1, 2018 the group classifies its financial assets in the following categories: Amortized cost Fair value through profit or loss The classification is dependent on AAK’s business model for managing the financial assets and the contractual terms of the cash flows. Management establishes the classification of financial assets at initial recognition. Management reclassifies debt instruments when and only when its business model for managing those assets changes. Measurement At initial recognition, the group measures a financial asset at its fair value plus, in case of a financial asset not at fair value through profit or loss, transaction costs that are directly attrib- utable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Recognition and derecognition A financial asset or financial liability is recognized in the balance sheet when AAK enters a contract for the instrument (i.e. on the relevant business day). A financial liability is recognized when the counterparty has performed and a contractual duty to pay arises, even if no invoice is received. A financial asset is derecognized when the rights to cash flow in the contract mature or the rights are transferred in a transaction that transfers essentially all risks and remuner- ations from ownership to the assets transferred. This also applies to parts of financial assets. A financial liability is removed from the balance sheet when the duty in the contract is performed or otherwise extin- guished. This also applies to parts of financial liabilities. Debt instruments All of AAK’s debt instruments are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest and are conse- quently measured at amortized cost. These are included in current assets, except for items with a maturity of more than 12 months after the end of the reporting period, which are classified as non-current assets. Interest income from these financial assets are included in financial income using the effective interest method. The Group’s financial instruments measured at amortized cost consist of accounts receivables and other receivables, as well as cash and cash equivalents in the balance sheet. Equity instruments The group subsequently measures all equity investments at fair value through profit or loss. Impairment From January 1, 2018, the Group assesses on a forward- looking basis the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. The expected credit loss rates are calculated based on payment profiles and the corresponding historical credit losses experienced within the same 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. Trade receivables and contract assets are written off when there is no reasonable expectation of recovery. Indications that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group. Impairment losses on trade receivables and contract assets are presented as net impair- ment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. Derivatives Derivative instruments are recognized in the balance sheet on the date of contract and at fair value, both initially and upon subsequent revaluation. The method of recognizing gain or loss arising from revaluation depends on whether the deriva- tive is identified as a hedging instrument, and, in such event, the nature of the item being hedged. The Group has identified hedging of fair value regarding a recognized asset or liability or a firm commitment (fair-value hedging). When the transaction is undertaken, the Group documents the economic relationship between the hedging instrument and the hedged item, as well as the hedge’s role in the 2 Note Summary of significant accounting policies 69