AAK Annual Report 2020

AAK Annual Report 2020 72 Property, plant and equipment Land and buildings comprise mainly factory buildings and offices. All property, plant and equipment is carried at cost, less accumulated depreciation. Acquisition costs include expen- diture that is directly attributable to the acquisition of an asset. Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the assets will flow to the Group and the cost of the asset can be measured reliably. All other repairs and maintenance are expensed in the financial period in which they arise. Land is not depreciated. Depreciation of other property, plant and equipment is allocated on a straight-line basis over the estimated useful lives of the assets to reduce their cost to residual values. Depreciation periods of between 3 and 15 years are used for plant and machinery, equipment, tools, fixtures and fittings. Industrial buildings and research laboratories are depreciated over 20 and 25 years, respectively, and office buildings over 50 years. When an asset’s carrying amount may not be recoverable, the asset is immediately impaired to its recoverable amount. Assets’ residual value and useful life are reviewed at the end of every reporting period and adjusted as required. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the income statement. Impairment of non-financial assets Assets with indefinite useful lives are tested for impairment annually rather than being amor- tized. All assets are assessed in terms of impairment whenever events or changes in circum- stances indicate that an asset’s carrying amount exceeds its recoverable amount. Impairment reflects the excess of an asset’s carrying amount over its recoverable amount. The recover- able amount is either the asset’s fair value less any selling costs or its value in use, whichever is greater. For the purposes of assessment, assets are grouped on the basis of the lowest level at which there are separate identifiable cash flows (cash-generating units). Assets, other than financial assets and goodwill, for which impairment loss was previously recognized, are tested at the end of every reporting period to ascertain whether any reversal should be made. Inventories Inventories are stated at cost or net selling price, whichever is lowest. Cost is calculated using the first-in-first-out principle (FIFO) or weighted average prices. The nature and area of use of the product determines the method used. The cost of finished goods and work in progress includes direct material costs, direct labor and other direct manufacturing costs and a rea- sonable 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. Finan- cial 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 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 remunerations 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 per- formed or otherwise extinguished. 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 consequently 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. Note 2 | Summary of significant accounting policies