6. Intangible assets
The recognition of business combinations as defined in IFRS 3 may result in differences between the consideration transferred and the (proportional) revalued share of equity acquired. If the difference is negative, the acquisition cost and the purchase price allocation must be reviewed. If the negative difference is reconfirmed, it is recognised in profit or loss. Positive differences result in goodwill (for general information on the treatment and impairment of goodwill, see note 3. Consolidation methods, and note 22. Procedures and effects of impairment tests).
Acquired intangible assets are recognised at acquisition cost less straight-line amortisation and any impairment losses, unless their useful life is classified as indefinite. Assets with a determinable limited useful life are amortised on the basis of that expected useful life, which equals three to eight years for software and three to 40 years for rights. Customer relationships capitalised in connection with a business acquisition, which have a determinable useful life because of potential market liberalisation, are amortised on a straight-line basis over five to 15 years. The expected useful lives and amortisation curves are determined by estimating the timing and distribution of cash inflows from the corresponding intangible assets over time. Intangible assets with an indefinite useful life are measured at cost and tested annually for impairment (see note 22. Procedures and effects of impairment tests).
Internally generated intangible assets must meet the requirements of IAS 38 in order to be capitalised. This standard distinguishes between research and development expenses. As in the previous year, no development expenses were capitalised because the recognition criteria were not met.
Service concessions that meet the requirements of IFRIC 12 are classified as intangible assets. Expenses and income are recognised according to the percentage-of-completion-method at the fair value of the compensation received. The percentage of completion is assessed according to the cost-to-cost method. The requirements defined in IFRIC 12 are in particular currently met by the hydro- power station Ashta as well as the sewage treatment plant project Zagreb, both of which are included at equity.
7. Property, plant and equipment
Property, plant and equipment are carried at acquisition or production cost less straight-line depreciation and impairment losses. The acquisition or production cost also includes the estimated expenses for demolition and disposal if there is an obligation to decommission or demolish the plant and equipment or to restore property at the end of the asset’s useful life. The present value of the estimated demolition and/or disposal costs is capitalised along with the acquisition or production cost and also recognised as a liability (provision). Production costs for internally generated fixed assets include appropriate material and manufacturing overheads in addition to direct material and labour costs.
Ongoing maintenance and repairs to property, plant and equipment are recognised in profit or loss, provided this work does not change the nature of the asset or lead to additional future benefits. If these measures enhance the value of the respective asset, the related expenses must be retroactively capitalised as part of the acquisition or production cost.
If the construction of property, plant and equipment continues over an extended period of time, the assets are classified as “qualifying assets”. The borrowing costs incurred during the construction period are then capitalised as a part of the production cost in accordance with IAS 23. In keeping with EVN’s accounting policies, a project gives rise to a qualifying asset only if construction takes at least twelve months.
Property, plant and equipment are depreciated from the time they are available for use. Depreciation for property, plant and equipment subject to wear and tear is calculated on a straight-line basis over the expected useful life of the relevant asset or its components. The expected economic and technical life is evaluated at each balance sheet date and adjusted if necessary.
Straight-line depreciation is based on the following useful lives, which are uniform throughout the Group:
|7. Expected useful life of property, plant and equipment||Years|
|Buildings||10 – 50|
|Transmission lines and pipelines||15 – 50|
|Machinery||10 – 33|
|Meters||5 – 40|
|Tools and equipment||3 – 25|
When property, plant and equipment are retired, the acquisition or production cost and accumulated depreciation are reported as a disposal. The difference between the net proceeds from the sale and the carrying amount are recognised in other operating income or expenses.
8. Investments in equity accounted investees
Investments in equity accounted investees are initially recognised at cost and subsequently measured at the proportional share of net assets at amortised cost plus any applicable goodwill. The carrying amounts are increased or decreased each year by the proportional share of net profit or loss, distributed dividends, other changes in equity and fair value adjustments from a preceding business combination that are carried forward. Any goodwill included in the carrying amount is not subject to scheduled amortisation in accordance with IFRS 3 and is neither reported separately in accordance with IAS 28 nor tested annually for impairment in accordance with IAS 36. An assessment is made as of each balance sheet date in accordance with IAS 39 to determine whether there are internal or external signs of impairment. If there are any such indications, the investment in the equity accounted investee must be tested for impairment in accordance with IAS 36. Confirmation of impairment leads to the recognition of an impairment loss to the earnings of the equity accounted investee (see note 22. Procedures and effects of impairment tests).
The share of results from equity accounted investees with operational nature (see note 66. Disclosures of interests in other entities) is reported as part of results from operating activities (EBIT).
9. Financial instruments
A financial instrument is a contract that gives rise to a financial asset in one company and a financial liability or an equity instrument in another company.
Primary financial instruments
The following measurement categories are used by EVN:
- Available for sale financial assets (“AFS”)
- Loans and receivables (“LAR”)
- Financial assets designated at fair value through profit or loss and derivative financial instruments with a positive or negative fair value (“@FVTPL”)
- Financial liabilities measured at amortised cost (“FLAC”)
In accordance with the requirements of IFRS 7 for disclosures in the notes, the following table presents EVN’s primary financial instruments by class together with the corresponding measurement categories:
|9. Classes and measurement categories of primary financial instruments||Measurement category|
|Other non-current assets|
|Lease receivables and accrued lease transactions||LAR|
|Receivables arising from derivative transactions||Hedge Accounting, @FVTPL|
|Current receivables and other current assets|
|Trade and other receivables||LAR|
|Receivables arising from derivative transactions||Hedge Accounting, @FVTPL|
|Cash and cash equivalents|
|Cash on hand and cash at banks||LAR|
|Non-current loans and borrowings|
|Other non-current liabilities|
|Accruals of financial transactions||FLAC|
|Liabilities arising from derivative transactions||Hedge Accounting, @FVTPL|
|Current loans and borrowings||FLAC|
|Other current liabilities|
|Other financial liabilities||FLAC|
|Liabilities arising from derivative transactions||Hedge Accounting, @FVTPL|
Primary financial instruments are recognised in the consolidated statement of financial position when EVN is contractually entitled to receive payment or other financial assets from another party. Purchases and sales at prevailing market conditions are reported as of the settlement date.
Primary financial instruments (with the exception of the financial assets designated @FVTPL) are initially recognised at fair value plus transaction costs. Subsequent measurement is based on the classification to the measurement categories listed above and the rules applicable to the individual categories. These rules are described in the notes to the individual items on the consolidated statement of financial position.
The securities reported under other non-current assets are measured @FVTPL because they are managed on a portfolio basis. The net results of financial instruments recognised as @FVTPL include interest. Nonderivative financial assets that are not classified under loans and receivables or @FVTPL are assigned to the measurement category AFS.
All financial assets that fall under the scope of application of IAS 39, with the exception of financial assets designated at fair value in profit or loss, are tested for objective signs of impairment as of each balance sheet date. For financial assets, impairment is determined in accordance with the respective measurement category in accordance with IAS 39 and recognised accordingly. For equity instruments assigned to the valuation category AFS, impairment losses are recognised when there is a significant or longer decline in fair value below the acquisition cost. EVN defines a significant or longer decline in fair value as a decline of more than 20% as of the valuation date or a permanent decline over a period of nine months.
Derivative financial instruments
The derivative financial instruments used by EVN include swaps, forwards and futures.
The main instruments used by EVN to manage and limit existing exchange rate and interest rate risks in the financial sector are foreign currency and interest rate swaps.
EVN uses swaps, futures and forwards to limit energy sector risks arising from changes in commodity and product prices as well as changes related to electricity transactions.
The forward and futures contracts concluded by EVN for the purchase or sale of electricity, natural gas and CO2 emission certificates serve to hedge the purchase prices for expected electricity, natural gas or CO2 emission certificates as well as the selling prices for planned electricity production. If physical delivery is effected based on the expected procurement, sale or usage requirements, the requirements of the so-called “own use exemption” under IAS 39 are met, which do not represent derivative financial instruments in terms of IAS 39, but represent pending purchase and sale transactions, which must be assessed for possible impending losses in accordance with the requirements of IAS 37. If the requirements for the own use exemption are not met – for example, by transactions for short-term optimisation – the contracts are recorded as derivatives in accordance with IAS 39.
Derivative financial instruments are recognised at cost when the contract is concluded and at fair value in subsequent periods. The fair value of derivative financial instruments is determined on the basis of quoted market prices, information provided by banks or discounting-based valuation methods whereby the counterparty risk is also included. Derivative financial instruments are reported as other (current or non-current) assets or other (current or non-current) liabilities.
The accounting treatment of the changes in the fair value of derivatives used for hedging purposes depends on the type of the hedging transaction.
Cash flow hedges are used to hedge energy price risks and interest rate risks arising from financial liabilities.
The effective portions of the gains and losses arising from the fair value measurement of derivative financial instruments classified in accordance with IAS 39 as cash flow hedges on the balance sheet are recorded under other comprehensive income under the valuation reserve without recongition in profit or loss, taking into account deferred tax liabilities/assets in accordance with IAS 39. The ineffective portion is immediately recognised in profit or loss. The cumulative amount recognised in equity remains in the other comprehensive income and is transferred as reclassification adjustment from equity to profit or loss in the same period or periods in which the hedged business transaction affects profit or loss, or the expected transaction is no longer expected to occur. The maturity of the hedging instrument is coordinated with the occurrence of the future transaction.
If the hedging instrument expires, is sold, terminated or exercised without a replacement or the continuation forming part of the documented hedging strategy of the company, or the criteria for the accounting as hedging instrument are no longer met, the amounts recognised to date under other comprehensive income remain in equity as a separate item until the expected transaction has occurred. If the occurrence of an expected transaction is no longer counted on, the amount cumulatively recognised under equity up to this point is transferred to profit or loss.
The hedging relationship between the underlying transaction and the hedging instrument as well as their effectiveness are analysed and documented at the conclusion of the relationship and subsequently at regular intervals.
Fair value hedges are used to hedge currency risks.
Derivative financial instruments classified under IAS 39 as fair value hedges serve to hedge recognised assets or liabilities against the risk of a change in fair value. For fair value hedges, in addition to the fair value change of the derivative, the contrasting fair value change of the underlying transaction, as far as it represents the hedged risk, is recognised in profit or loss. The earnings are generally shown under the item in the consolidated statement of operations under which the underlying transaction is reported. The value fluctuations of the hedging transactions are essentially offset by the value fluctuations of the hedged transactions.
If the hedging instrument expires, is sold, terminated or exercised without a replacement or the continuation forming part of the documented hedging strategy of the company, or the criteria for the accounting as hedging instrument are no longer met, accounting as hedging instrument is to be discontinued.
The hedging relationship between underlying transaction and the hedging instrument as well as their effectiveness are analysed and documented at the conclusion of the relationship and subsequently at regular intervals.
The derivatives used by EVN for hedging purposes constitute effective protection. The fair value changes of the derivatives are mostly offset by compensating value changes of the underlying transactions.
10. Other investments
Other investments include shares in associated companies which are not included in the consolidated financial statements due to immateriality. These shares are recorded at cost less any necessary impairment losses. The remaining other investments are assigned to the valuation category AFS and are recognised in the consolidated statement of financial position at fair value. If fair value cannot be reliably determined, these investments are included at cost less any necessary impairment losses. Fair value is determined on the basis of share prices wherever possible. Unrealised profits or losses are recognised in other comprehensive income. An impairment loss (see note 9. Financial instruments) is recognised in profit or loss. When financial assets are sold, the unrealised profits or losses previously recognised in other comprehensive income are transferred to profit or loss.
11. Other non-current assets
Securities recorded under non-current assets are initially recognised as @FVTPL. These assets are recorded at cost as of the acquisition date and subsequently measured at fair value as of the balance sheet date. Changes in fair value are recognised in the consolidated statement of operations.
Originated loans are classified as LAR. Interest-bearing originated loans are recorded at amortised cost, while interest-free and low-interest originated loans are reported at their present value. All identifiable risks are taken into consideration by means of valuation adjustments.
Lease receivables and accrued lease transactions are related to the international project business of the Environmental Services Segment. They are classified as finance leases according to IAS 17 in conjunction with IFRIC 4 (see note 23. Leased and rented assets).
Receivables arising from derivative transactions are recognised at their fair values. Gains and losses arising from changes in the fair value of derivative financial instruments are either recognised in profit or loss in the consolidated statement of operations or in other comprehensive income (see note 9. Financial instruments).
The measurement of non-current primary energy reserves and miscellaneous other non-current assets is based on acquisition or production cost or the lower net realisable value on the balance sheet date.
The measurement of inventories is based on acquisition or production cost or the lower net realisable value as of the balance sheet date. For marketable inventories, these values are derived from the current market price. For other inventories, these figures are based on the expected proceeds less future production costs. If the generation of electricity from primary energy inventories does not cover the full production cost, this electricity is carried at the lower replacement cost (which represents the best available measurement basis). Primary energy inventories held for trading purposes are carried at fair value (commodity exchange price, level 1 in accordance with IFRS 13) less selling costs. Risks arising from the length of storage or reduced marketability are reflected in experience-based reductions. The moving average price method is used to determine the consumption of primary energy inventories as well as raw materials, auxiliary materials and fuels.
The CO2 emission certificates allocated free of charge in accordance with the Austrian Emission Certificate Act are recognised at an acquisition cost of zero based on IAS 20 and IAS 38, due to the rejection of IFRIC 3 by the European Commission. Any additional purchases of CO2 emission certificates are recognised at cost, whereby additions to provisions for shortfalls are based on the fair value as of the balance sheet date.
13. Trade and other receivables
Current receivables are generally reported at amortised cost, which equals the acquisition cost less impairment losses for the components of the receivables that are expected to be uncollectible. Possibly impaired receivables are grouped together on the basis of comparable default risk (especially the time outstanding) and tested together for impairment; any necessary impairment losses are then recognised. The impairment losses, which are recognised in the form of individual bad debt allowances by way of adjustment accounts, are sufficient to reflect the expected default risks. Specific default incidents result in derecognition of the related receivable.
Amortised costs, less any applicable impairment losses, can be considered appropriate estimates of the current value because the remaining term to maturity is generally less than one year.
Exceptions to the above procedure are derivative financial instruments which are recognised at fair value, and foreign currency items, which are measured at the exchange rates in effect on the balance sheet date.
Current securities are classified as AFS and measured at their fair value. Changes in fair value are recorded under other comprehensive income without recognition in profit or loss. When the securities are sold, these gains or losses are transferred to profit or loss.
15. Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand deposits. These items are reported at current rates. Cash balances in foreign currencies are translated at the exchange rate in effect on the balance sheet date.
16. Non-current assets held for sale
Non-current assets or groups of assets whose sale is sufficiently probable are classified as held for sale when the necessary approvals have been issued and the requirements of IFRS 5 have been met. If necessary, the carrying amount of these assets is reduced to the lower fair value less costs of disposal. Depreciation and amortisation are terminated up to the point of sale. These assets are presented separately from other assets on the balance sheet. Any gain or loss not recognised up to the date on which a non-current asset is sold is recognised on the derecognition date. The non-current assets reported as held for sale in 2015/16 are related to the intended sale of EVN-Pensionskasse Aktiengesellschaft (“EVN Pensionskasse”), Maria Enzersdorf (see note 44. Non-current assets held for sale).
In contrast to borrowings, equity is defined by the IFRS framework as the “residual interest in the assets of an entity after deducting all of its liabilities”. Equity is thus the residual value of a company’s assets and liabilities.
Treasury shares held by EVN are not recognised as securities pursuant to IAS 32, but are instead reported at their (repurchase) acquisition cost and offset against equity. Any profit or loss resulting from the resale of treasury shares relative to the acquisition cost increases or decreases capital reserves.
The items recorded under other comprehensive income include certain changes in equity that are not recognised through profit or loss as well as the related deferred taxes. For example, this position contains the currency translation reserve, unrealised gains or losses from the fair value measurement of other investments (available for sale financial instruments), the effective portion of changes in the fair value of cash flow hedges as well as all remeasurements according to IAS 19. This item also includes the proportional share of gains and losses recognised directly in equity accounted investees.
Provisions for pensions and obligations similar to pensions
Under the terms of a company agreement, EVN AG is required to pay a supplementary pension on retirement to employees who joined the company prior to 31 December 1989. This commitment also applies to employees who, within the context of the legal unbundling agreement for the spin-off of the electricity and natural gas networks, are now employed by Netz Niederösterreich GmbH. The amount of this supplementary pension is based on performance as well as on the length of service and the amount of remuneration at retirement. EVN, in any case, and the employees, as a rule, also make contributions to the EVN Pensionskasse pension fund and the resulting claims are fully credited toward pension payments. Therefore, EVN’s obligations toward both retired employees and prospective beneficiaries are covered in part by provisions for pensions as well as by defined contribution payments on the part of EVN Pensionskasse.
For employees who joined the company after 1 January 1990, the supplementary company pension has been replaced by a defined contribution plan that is financed through EVN Pensionskasse. This pension fund invests its pension fund assets primarily in different investment funds in accordance with the provisions of the Austrian Pension Fund Act. Pension commitments were also made to certain employees, which require EVN to pay retirement benefits under certain conditions.
Provisions for obligations similar to pensions were recognised for liabilities arising from the vested claims of current employees and the current claims of retired personnel and their dependents to receive benefits in kind in the form of electricity and natural gas.
The projected unit credit method is used to determine the provisions for pensions and obligations similar to pensions. The expected pension payments are distributed according to the number of years of service by employees until retirement, taking expected future increases in salaries and pensions into account.
The amounts of the provisions are determined by an actuary as of each balance sheet date based on an expert opinion. The measurement principles are described in note 53. Non-current provisions. All remeasurements – at EVN AG, only gains and losses from changes in actuarial assumptions – are recognised under other comprehensive income in accordance with IAS 19.
As in the previous year, the biometric measurement principles applicable to the provisions for pensions were based on the Austrian mortality tables “Rechnungsgrundlagen AVÖ 2008-P – Rechnungsgrundlagen für die Pensionsversicherung – Pagler & Pagler”.
The applied interest rate is based on the market yields for first-class, fixed-interest industrial bonds as of the balance sheet date, whereby the timing of the benefits was taken into account.
The service cost added to the provision is reported under personnel expenses, while the interest component of the addition is included under financial results.
Provision for severance payments
Austrian corporations are required by law to make one-off severance payments to employees whose employment began before 1 January 2003 if they are dismissed, in case of dissolution of the employment relationship by mutual consent or when they reach the legal retirement age. The amount of such payments is based on the number of years of service and the amount of the respective employee’s remuneration at the time the severance payment is made.
Employees in Bulgaria and Macedonia are entitled to severance payments on retirement, which are based on the number of years of service. With regard to severance compensation entitlements, the other EVN employees are covered by similar social protection measures contingent on the legal, economic and tax framework of the country in which they work.
The provision for severance payments was calculated according to actuarial principles. This provision was measured using the same parameters as the provisions for pensions and obligations similar to pensions (the measurement principles are described in note 53. Non-current provisions). All remeasurements – at EVN, only gains and losses from changes in actuarial assumptions – are recognised under other comprehensive income in accordance with IAS 19.
The applied interest rate is based on the market yields for first-class, fixed-interest industrial bonds as of the balance sheet date, whereby the timing of the benefits was taken into account.
The service cost added to the provision is reported under personnel expenses, while the interest component of the addition is included under financial results.
The obligation to make one-off severance payments to employees of Austrian companies whose employment commenced after 31 December 2002 has been transferred to a defined contribution plan. The payments to this external employee fund are reported under personnel expenses.
The other provisions reflect all recognisable legal or factual commitments to third parties based on past events, where the amount of the commitments and/or the precise starting point was still uncertain. In these cases, a reliable estimate of the amount of the obligation is required. If a reliable estimate is not possible, a provision is not recognised. These provisions are recognised at the discounted settlement amount. They are measured based on the expected value or the amount most likely to be incurred.
The applied discount rates are pre-tax rates that reflect actual market expectations for the interest rate effect. The risks attributable to a specific liability are reflected in the estimate of future cash flows.
The provisions for service anniversary bonuses required by collective wage and company agreements are measured using the same parameters as the provisions for pensions and obligations similar to pensions. A new regulation in the collective agreement for salaried employees of utility companies entitles salaried employees whose employment relationship began after 31 December 2009 to a service anniversary bonus equalling one month’s salary after 15, 20, 25, 30 and 35 years and to one-half month’s salary after 40 years. This new regulation was taken into account accordingly. All remeasurements – at EVN, only gains and losses from changes in actuarial assumptions – are recognised with respect to jubilee benefits through profit or loss in accordance with IAS 19. The service cost added to the provision is reported under personnel expenses, while the interest component of the addition is included under financial results.
Waste disposal and land restoration requirements related to legal and perceived commitments are recorded at the present value of the expected future costs. Changes in the estimated costs or the interest rate are offset against the carrying amount of the underlying asset. If the decrease in a provision exceeds the carrying amount of the asset, the difference is recognised through profit or loss. The depreciation amount is to be corrected in accordance with the residual carrying amount and depreciated over the remaining useful life. If the asset has reached the end of its useful life, all subsequent changes to the provisions shall be recognized in profit or loss.
Provisions for onerous contracts are recognised at the amount of the unavoidable outflow of resources. This represents the lower of the amount that would result from performance of the contract and any compensatory payments to be made in the event of non-performance.
Liabilities are reported at amortised cost, with the exception of liabilities arising from derivative financial instruments or liabilities arising from hedge accounting (see note 9. Financial instruments). Costs for the procurement of funds are considered part of amortised cost. Non-current liabilities are discounted by applying the effective interest method.
With respect to financial liabilities, bullet loans and borrowings with a remaining term to maturity of over one year are classified as non-current and items with a remaining term to maturity of less than one year are reported under current loans and borrowings (for information on maturities see note 51. Non-current loans and borrowings).
If the fulfilment of a liability is expected within twelve months after balance sheet date, the liability is classified as current.
Construction subsidies and investment grants do not reduce the acquisition or production cost of the corresponding assets. They are therefore reported as liabilities in the consolidated statement of financial position in analogous application of IAS 20.
Construction subsidies – which constitute payments made by customers as part of previous investments in network construction – represent an offset to the acquisition cost of these assets. In the electricity and natural gas network business they are related to supply obligations by EVN. The granting of investment subsidies generally requires an operational management structure that complies with legal requirements and has been approved by the authorities. Construction and investment subsidies are released on a straight-line basis over the average useful life of the respective assets.
20. Revenue recognition
Realisation of revenue (in general)
Revenues from the end customer business are determined as of the balance sheet date in part based on statistical procedures used in the billing systems and accrued in line with the quantities of energy and water supplied during the reporting period. Revenues are recognised when EVN has provided a billable service to the customer.
Interest income is reported pro rata temporis using the effective interest rate of the asset. Dividends are recognised when a legal entitlement to payment arises.
IFRIC 18 regulates the accounting treatment for business transactions in which a company receives from its customers an asset or cash which is then used to acquire or construct an asset to provide the customer with access to a network or with an ongoing supply of goods or services. The construction subsidies received by EVN fall in part under the scope of application of IFRIC 18. Construction subsidies in the electricity and natural gas network business are related to EVN’s supply obligations. They are accrued as liabilities and released on a straight-line basis over the useful life of the related property, plant and equipment. The reversals of deferred income from construction subsidies are reported under other operating income.
Electricity and natural gas network regulatory authorities define and evaluate appropriate “target revenue” for the individual market participants at regular intervals. Revenue above or below the target is recorded under the regulatory account and taken into consideration for future tariff adjustments.
In Austria, the amendment to the Electricity Economy and Organisational Act (“Elektrizitätswirtschafts- und -organisationsgesetzes 2010”, ElWOG), which took effect on 3 March 2011, introduced a new ex-post regulation procedure for network operator revenue in the form of a regulatory account (§ 50 ElWOG). This system was also integrated into the Natural Gas Act of 2011 (“§ 71 Gaswirtschaftsgesetz 2011”, GWG). The purpose of the newly established regulatory account is to provide every network operator with compensation for differences between actual revenue and the officially established revenue by means of a “virtual account“. In accordance with § 50 ElWOG and § 71 GWG, these differences are taken into account in determining the cost basis for the next payment period.
In accordance with current opinions on the accounting treatment of regulatory deferral accounts, regulatory assets and regulatory liabilities were not recognised (see note 2. Reporting in accordance with IFRS).
Receivables from the project business (in particular, PPP projects – Public Private Partnership) and the related revenue are accounted for by applying the percentage of completion (PoC) method. Projects are subject to individual contract terms that specify fixed prices. The percentage of completion is determined using the cost-to-cost method. This entails recognising revenue and profits at the ratio of the costs actually incurred to the estimated total costs for the project. Reliable estimates of the total costs, selling prices and actual costs incurred are available. Changes in the estimated contract costs and any related losses are recognised in profit or loss as incurred. The technological and financial risks that might occur during the remaining project period are estimated for each project, and a corresponding contingency fee is included in the estimated contract costs. Impending losses on the valuation of projects not yet invoiced are expensed as incurred. Impending losses are recognised when it is probable that the total contract costs will exceed the contract revenues.
21. Income taxes and deferred taxes
The income tax expense reported in the consolidated statement of operations comprises the current income tax expense for fully consolidated companies, which is based on their taxable income and the applicable income tax rate, as well as the change in deferred tax assets and deferred tax liabilities.
The following income tax rates were applied in calculating current income taxes:
|21. Corporate income tax rates %||2015/16||2014/15|
|Country of residence|
|Germany – Environmental Services||30.3||30.3|
|Germany – Generation||33.7||33.5|
|1) Taxes on corporate profits are levied when dividends are paid to the shareholders. Retained earnings are not taxed.|
EVN has made use of the possibility of forming joint tax groups by forming one joint tax group as of 30 September 2016 (previous year: two tax groups). EVN AG is a member of a corporate tax group whose top-tier corporation is NÖ Landes-Beteiligungsholding GmbH, St. Pölten. The taxable profit of the companies belonging to these groups is assigned to the respective superior group member or top-tier corporation. As an offset for the transferred taxable results, the tax group contracts include a tax charge that is based on the stand-alone method.
Transferred tax losses are kept on record as internal loss carryforwards for the respective tax group members and offset against future positive earnings. Exceptions to this procedure are the contracts concluded with the group members WEEV Beteiligungs GmbH and Burgenland Holding AG, which call for a negative tax charge for these two companies if their taxable results are negative and the group’s total results are positive. In other cases, the loss is recorded as an internal loss carryforward and refunded in later years in the form of a negative tax charge as soon as it is covered by positive earnings.
The transfer of losses from foreign subsidiaries within the framework of group taxation leads to the recognition of a liability equal to the nominal amount for the future corporate income tax obligation.
Future changes in the tax rate are taken into account if the relevant law has been enacted by the time the consolidated financial statements are prepared.
Deferred taxes are calculated according to the liability method at the tax rate expected when short-term differences are reversed. Deferred tax assets and deferred tax liabilities are calculated and recognised for all temporary differences (i.e. the differences between the carrying amounts in the consolidated financial statements and the annual financial statements prepared for tax purposes that will balance out in the future).
Deferred tax assets are recognised only if it is probable that there will be sufficient taxable income or taxable temporary differences to utilise these items. Tax loss carryforwards are recognised as deferred tax assets. Deferred tax assets and deferred tax liabilities are presented as a net amount in the consolidated financial statements if there is a legal right and intention to offset these items.
22. Procedures and effects of impairment tests
All assets that fall under the scope of application of IAS 36 are tested as of the balance sheet date to determine whether there are sufficient internal or external signs of impairment. Property, plant and equipment and intangible assets with definite useful lives are subject to scheduled depreciation and amortisation, and must only be tested for impairment if there are clear signs of a possible lasting decline in value. In contrast, goodwill and intangible assets with indefinite lives must be tested for impairment at least once each year.
The impairment testing of goodwill and assets for which no expected future cash flows can be identified is based on an assessment of the respective cash-generating unit (CGU). The CGUs that generate separate cash flows and – in the case of impairment tests of goodwill – derive benefits from the synergies resulting from the given business combination must be identified for the purpose of assignment.
The decisive criterion for classifying property, plant and equipment to a CGU is its technical and commercial ability to generate indepen- dent revenues. In the EVN Group, this definition applies to electricity and heat generation plants, electricity, natural gas and water distribution systems, windparks, electricity purchasing rights, data transmission lines and facilities in environmental business.
In assessing impairment, the higher of the net selling price and the value in use of the CGU is compared to the carrying amount of the CGU and the carrying amount of the asset. The net selling price corresponds to the fair value less costs of disposal.
The value in use constitutes a subjective company value assessed from the point of view of the management. The calculation of the value in use comprises the assessment of the future cash flows from the continued use of the asset and the assessment of an adequate discount rate for future cash flows.
In calculating the value in use, expansion investments or restructuring measures are not taken into consideration; specific synergies of fair value measurement may be taken into consideration. The calculation of the value in use is generally based on a detailed planning period of a maximum of five years, followed by a consistent perpetual annuity.
The fair value less costs of disposal is basically calculated in accordance with the fair value measurement hierarchy defined in IFRS 13. Since it is generally not possible to derive market values for the CGUs and assets of EVN under evaluation, the assessment of the fair value is effected in accordance with the fair value hierarchy of level 3. The fair value less costs of disposal for a CGU is calculated with a WACC-based discounted cash flow method, which is conceptually similar to the value in use procedure, but includes adjustments to the parameters in the DCF model to reflect the market participant’s viewpoint. Contrary to the value in use, the planning horizon corresponds to the technical useful life of a CGU.
The calculation of both the fair value less costs of disposal and the value in use is based on the expected future cash inflows and outflows, which are basically derived from internal medium-term forecasts. The cash flow forecasts are based on the latest financial forecasts approved by the management and cover a period for which reliable forecasts can be prepared. The expected electricity prices are derived from the quotations on the futures market on the European Energy Exchange AG, Leipzig. The assumptions for additional time periods, which are only relevant for the calculation of the fair value less costs of disposal, are based on an average of two forecasts by well-known energy service providers in the energy sector. Contrary to the previous valuations, in the valuations up to 30 September 2016, the low case (previously: central case) of price forecasts of the two energy service providers was used. This was due to the lower price quotations on the stock exchanges and the connected lower long-term electricity price expectations. The formation of averages is effected in order to achieve a balanced view of the future development of electricity prices, thus taking fully into account the risks that could influence electricity prices in the future. The calculation of the fair value less costs of disposal and the value in use incorporates future expected revenues as well as operating, maintenance and repair expenses, whereby in case of property, plant and equipment as well as intangible assets, the condition of the respective asset is taken into consideration.
A weighted average cost of capital which includes the deduction of income tax (WACC) is used as the discount rate. The equity component of the WACC reflects the risk-free interest rate, a country-specific premium plus a risk premium that incorporates the market risk and an appropriate beta coefficient based on peer group capital market indicators. The debt component of the WACC equals the basis interest rate plus a country-specific premium and a risk premium that reflects EVN’s rating. The equity and debt components are weighted according to a capital structure that is appropriate for the CGU based on peer group data at market values. The resulting WACC is used to discount the cash flows in the respective CGU.
For the purpose of assessing the recoverable amount of a CGU, EVN initially assesses the fair value less costs of disposal by generally accepted valuation procedures. If the amount calculated falls below the carrying amount of the CGU, the value in use is calculated if necessary.
If the recoverable amount is lower than the carrying amount, the carrying amount must be reduced to this lower value and an impairment loss must be recognised. If the carrying amount of a CGU exceeds the recoverable amount, the goodwill, if available, is written down by the resulting difference. Any further impairment leads to a proportional reduction of the carrying amounts of the CGU’s remaining assets. The respective assets are written up if the reason for impairment ceases to exist. The increase in the carrying amount resulting from the write-up may not exceed the amortised acquisition or depreciated production cost. In accordance with IAS 36, goodwill written down in connection with an impairment test may not be revalued, even if the reasons for impairment have ceased to exist.
The carrying amounts of goodwill are as follows:
|22. Allocation of goodwill to cash-generating units EURm||2015/16||2014/15|
|International project business||52.9||52.9|
Other CGUs include the goodwill in the CGU Hollabrunn. In 2015/16 an impairment loss of EUR 0.5m was recognised to the original goodwill of EUR 0.5m (see note 36. Intangible assets).
The major assumptions used to calculate the value in use for goodwill are the cash flow forecasts, the discount rate (WACC) and the growth rate after the end of the detailed planning period.
The carrying amount of the net assets of the CGU “International project business“ was EUR 237.1m. The recoverable amount was determined on the basis of the fair value less costs of disposal (level 3 under IFRS 13) and was EUR 357.3m. An after-tax WACC of 5.84% (previous year 7.98%) was used as discount rate. The present value model underlying the valuation includes a detailed planning period of four years, followed by a general planning phase until 2030 and a perpetual yield with a growth rate of 0.0% (previous year: 0.0%). The recoverable amount for the CGU was thus 50.7% over its carrying amount.
An increase (decrease) of 1% in the WACC during 2015/16, ceteris paribus, would have led to a surplus of EUR 76.1m (surplus coverage of EUR 180.5m) in the net assets of the CGU. An increase (decrease) of 1% in the growth factor during 2015/16, ceteris paribus, would have led to a surplus coverage of EUR 144.3m (surplus of EUR 103.0m) in the coverage of net assets in the CGU. Based on an after-tax WACC of 9.51%, the recoverable amount would represent the carrying amount.
23. Leased and rented assets
In accordance with IAS 17, a leased asset is allocated to the lessee or lessor based on the transfer of significant risks and rewards incidental to the ownership of the asset.
Non-current lease receivables arising in connection with PPP projects carried out by the Environmental Services Segment – in which a facility is built, financed and then operated on behalf of the customer for a fixed period of time, after which the plant becomes the property of the customer – are classified as finance leases in accordance with IAS 17 in conjunction with IFRIC 4, and recognised as such in EVN’s consolidated financial statements.
Rented assets obtained through finance leases are capitalised by the lessee at the fair value or the lower present value of the minimum lease payments, and depreciated on a straight-line basis over their expected useful life or the shorter contract period. Payment obligations resulting from future lease payments are reported as liabilities. Assets obtained through operating leases are attributed to the lessor, and the related lease payments are expensed by the lessee in equal amounts over the term of the lease.
24. Accounting estimates and forward-looking statements
The preparation of the consolidated financial statements in accordance with generally accepted IFRS accounting methods requires estimates and assumptions that have an effect on the assets, liabilities, income and expenses reported in the consolidated financial statements and on the amounts shown in the notes. The actual values may differ from these estimates. The assumptions and estimates are reviewed on a regular basis.
In particular, the following assumptions and estimates can lead to significant adjustments in the carrying amounts of individual assets and liabilities in future reporting periods.
Impairment tests require estimates, especially for future cash surpluses. A change in the general economic, industry or company environment may reduce cash surpluses and therefore lead to signs of impairment. The weighted average cost of capital (WACC) is used to determine the recoverable amounts based on capital market methods. The WACC represents the weighted average interest paid by a company for equity and debt. The weighting applied to the interest on the equity and debt components – which reflects a capital structure at market values – was derived from an appropriate peer group. Given the current volatility on the financial markets, the development of the cost of capital (and above all the country risk premiums) is monitored on a regular basis (see note 22. Procedures and effects of impairment tests).
For the valuation of the generation portfolio, the price structure beginning with the fifth year (when predictable market prices are no longer available on the electricity exchanges) was based on average forecasts from two well-known market research institutes and information service providers in the energy sector. The most recent studies, which are updated annually due to the current volatility on the electricity markets, were used in each case.
The sensitivity of these assumptions for EVN’s two largest energy generation plants, based on the carrying amount, is explained below. These plants are the Steag-EVN Walsum power plant, which is included as a joint operation based on the proportional share owned (see note 37. Property, plant and equipment), and Verbund Innkraftwerke GmbH, which is included at equity (see note 38. Investments in equity accounted investees).
The most important premises and judgmental decisions used to determine the scope of consolidation are described under note 4. Scope of consolidation.
In March 2014, the Bulgarian State Energy and Water Regulatory Commission (EWRC/the regulatory authority) initiated administrative proceedings to revoke the licence of EVN Bulgaria EC. EWRC justified this action with reference to the offset by EVN Bulgaria EC of certain receivables due from the national electricity company Natsionalna Elektricheska Kompania EAD (NEK). The regulatory authority claims this offset led to the reduction of NEK’s cash reserves and impaired the company’s ability to meet its legal obligations. The administrative proceedings are currently pending. The valuation of the Bulgarian assets is based on current assumptions. The investment protection proceedings currently in progress at the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) will continue to be pursued, with the intention of obtaining compensation for the disadvantages of the regulatory decisions.
In Moscow, the anti-monopoly commission (FAS) issued a legally binding directive that declared a 1 June 2010 decision by the city government to be in violation of competitive law. The original decision by the city government transferred the thermal waste utilisation plant no. 1 to the investor EVN and also required and authorised an increase in the capacity to 700,000 tonnes per year. The proceedings initiated by EVN against the government measures were unsuccessful; a final appeal is still pending. On the grounds of the government measures to annul the investment agreement, the project corporation for the implementation of the project of MPZ1 filed a request for arbitration as of 27 April 2016 with the London Court of International Arbitration against the corporation Tabrin OÜ (now Veealliance) with corporate seat in Tallinn, Estland, and as of 11 October 2016 filed an action for repayment of payments made for obtaining rights from an investment agreement with the city of Moscow. The developments related to the thermal waste utilisation plant no. 1 in Moscow already raised considerable doubts over the realisation of this project in the financial year 2013/14 and led to the recognition of a valuation allowance on the existing leasing receivable and the reclassification of the carrying amount of the saleable aggregate components to inventories. It is assumed that the plant will not be constructed and approriate compensation must be demanded from the customer or project seller. Further developments on this project, including the cancellation or reversal of existing supply agreements with subcontractors, could lead to changes in presentation and values during the coming financial years (see notes 40. Other non-current assets and 41. Inventories).
The project company founded to construct the Duisburg-Walsum power plant, in which EVN holds an investment of 49.0%, filed an arbitration claim against the general contractor consortium, Hitachi Ltd and Hitachi Power Europe GmbH, on 17 December 2013 and a lawsuit against an insurance company on 10 December 2013. The claims are based on damages incurred by the project company due to the delayed completion of the Duisburg-Walsum power plant. They cover lump-sum compensation for the delay, delay-related added costs, pre-financed repair costs and damages arising from the inability to receive allocations of CO2 emission certificates as well as claims against an insurance company. The Hitachi consortium filed claims against the project company in a countersuit. In a related lawsuit, the insurance company has filed a claim for repayment of previous payments on account. In the legal proceedings against the insurance company, a partial judgment on the underlying basis for the claim and a partial final judgment were issued in favour of the project company on 1 July 2015, which state that the facts of the case indicate the insurance company is required to pay compensation for the damage to the power plant in April 2011. Both the insurance company and the project company (here with regard to the accep- tance of attorneys’ costs) have filed appeals against these decisions. The amount of the insurance compensation to which the project company is entitled will be decided in a separate court proceeding. Statistics from the power plant’s first operating period point to higher specific heat consumption, and therefore lower effectiveness, than promised by the general contractor. A control measurement has since confirmed this conclusion. On 16 September 2015 another arbitration claim was thus filed against the general contractor consortium Hitachi Ltd and Hitachi Power Europe GmbH Hitachi. The outcome of these proceedings could lead to valuation adjustments in future periods (see note 37. Property, plant and equipment).
EVN AG and Verbund Thermal Power GmbH & Co KG iL operate the Dürnrohr power plant based on a contract dated 28 April 1980 and 16 April 1980, whereby one of the two blocks was assigned to each of the contract partners for management and operation. In December 2014 Verbund terminated the existing management contract as of 30 June 2015 and, in April 2015, stated its intention to permanently shut down its block at the joint Dürnrohr power plant. This decision subsequently led to an increase in maintenance and operating costs for EVN. EVN takes the view that this cancellation is legally invalid because the existing contract was concluded for the technical service life of the equipment in the Dürnrohr power plant and therefore remains unchanged and in force. The company has therefore filed an action for a declaratory judgment with the Commercial Court in Vienna. The outcome of these proceedings could lead to valuation adjustments in future periods (see note 37. Property, plant and equipment).
The measurement of the existing provisions for pensions and obligations similar to pensions as well as the provisions for severance payments is based on assumptions for the discount rate, retirement age, life expectancy and future pension and salary increases that may lead to changes in measurement during future periods. Moreover, future increases or decreases in electricity and natural gas tariffs could lead to changes in the measurement of obligations similar to pensions. The inclusion of the pension scheme contribution as defined by the remuneration law for Lower Austrian civil servants (NÖ Landes- und Gemeindebezügegesetz) could also lead to lower pensions provisions in the future (see note 53. Non-current provisions).
Assumptions and estimates are also required to determine the useful life of non-current assets (see notes 6. Intangible assets and 7. Property, plant and equipment) and the provisions for legal proceedings and environmental protection (see note 18. Provisions) as well as estimates for other obligations and risks (see note 67. Other obligations and risks). In addition, it is necessary to make assumptions and estimates for the valuation of receivables and inventories (see notes 12. Inventories and 13. Trade and other receivables). These estimates are based on historical data and other assumptions considered appropriate under the given circumstances.
25. Principles of segment reporting
The identification of operating segments is based on the internal organisational and reporting structure and information prepared for internal management decisions (the “management approach”). The Executive Board of the EVN Group (the chief operating decision-maker as defined in IFRS 8) reviews internal management reports on each operating segment at least once each quarter. EVN has defined the following operating segments: Generation, Energy Trade and Supply, Network Infrastructure Austria, Energy Supply South East Europe, Environmental Services and Strategic Investments and Other Business. This conforms in full to the internal reporting structure. The assessment of all segment information is consistent with IFRS. EBITDA is used as an indicator to measure the earning power of the individual segments. For each segment, EBITDA represents the total net operating profit or loss before interest, taxes, amortisation of intangible assets and depreciation of property, plant and equipment for the companies included in the segment, taking intragroup income and expenses into account (see note 61. Segment reporting).