Basis of preparation
The Annual Report has been prepared in accordance with the International Financial Reporting Standards as approved by the EU and additional Danish disclosure requirements applying to listed companies.
Accounting policy changes
Effective from the 2008/09 financial year, the Coloplast Group has implemented the revised IAS 39 “Financial instruments: Recognition and Measurement” and the revised IFRS 7 “Financial instruments: Disclosures and Presentation” as well as IFRIC 12-14, 16 and 18. The implementation of IAS 39, IFRS 7 and IFRIC 12-14, 16 and 18 did not affect the financial statements.
New financial reporting standards adopted
Other new or revised standards and interpretations, which are of relevance for the Group but have not yet been implemented, have not been included in this Annual Report. This applies to the newly revised IAS 1 "Presentation of Financial Statements", IAS 23 "Borrowing Costs", IAS 34 "Interim Financial Reporting", IFRS 2 "Share-based Payment" and the new IFRS 8 "Segment information", all of which have been adopted by the EU, as well as the following standards which have yet to be adopted by the EU: amendment to IAS 32 "Financial instruments: Disclosure" and IAS 39 "Financial instruments: Recognition and measurement" as well as IAS 18 "Revenue", IAS 21 "Foreign Currency Translation", IAS 27 "Consolidated and Separate Financial Statements" and IFRS 3 "Business Combinations". Nor have the IFRIC 15, 17 and 18 interpretations been implemented. All of the standards not yet in force will apply for 2009/10. None of these standards and interpretations are expected to have a material effect on the Group's financial statements.
The annual report is prepared on the basis of the historical cost principle, modified in that certain financial assets and liabilities are measured at fair value. Subsequent to initial recognition, assets and liabilities are measured as described below in respect of each individual item.
The financial statement items of individual Group entities are measured in the currency used in the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in Danish kroner (DKK), which is the functional and presentation currency of the Parent Company.
Foreign currency translation
Transactions denominated in foreign currencies are translated into an entity's functional currency at the exchange rate prevailing at the transaction date.
Monetary items denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date. Exchange adjustments arising as the difference between the exchange rates at the balance sheet date, and the exchange rates at the transaction date of monetary items, are recognised in the income statement as financial income or expenses.
On translation of entities with a functional currency other than DKK balance sheet items are translated at the exchange rates at the balance sheet date and income statement items are translated at the exchange rates at the transaction date. The resulting exchange adjustments are taken directly to equity under the exchange adjustment reserve.
Foreign exchange adjustments of balances which in reality represent an addition to or a deduction from the subsidiary's equity are recognised in equity under the exchange adjustment reserve.
Foreign exchange adjustments of debt denominated in foreign currencies, which hedge the net investment in a foreign subsidiary, are recognised in equity under the exchange adjustment reserve.
On realisation of a net investment in a foreign subsidiary, exchange adjustments of the net investment and the hedge of the net investment, which have been taken to equity, are transferred to the income statement as part of the gain.
Consolidation, business combinations and associates
The consolidated financial statements comprise Coloplast A/S (the Parent Company) and enterprises in which the Group holds more than 50% of the voting rights or otherwise exerts a controlling influence (subsidiaries).
The consolidated financial statements are prepared by aggregating the audited financial statements of the Parent Company and the individual subsidiaries, all of which are prepared in accordance with the Group's accounting policies. Intra-group transactions, balances, dividends and unrealised gains and losses on transactions between group enterprises are eliminated.
Enterprises, which are not subsidiaries but in which the Group holds at least 20% of the voting rights or otherwise exerts a significant influence, are regarded as associates. The Group's proportionate share of unrealised gains and losses on transactions between the Coloplast Group and associates is eliminated.
Enterprises recently acquired or divested are included in the consolidation in the period in which the Coloplast Group has control of the enterprise.
Comparative figures are not adjusted to reflect acquisitions. Divested activities are shown separately as discontinued operations.
Acquisitions are accounted for using the purchase method, according to which the assets and liabilities and contingent liabilities of enterprises acquired are measured at fair value at the date of acquisition.
The excess value/goodwill on acquisition of subsidiaries or associates is calculated as the difference between the cost of the acquired enterprise and the fair value of the group companies' proportionate share of identifiable assets less liabilities and contingent liabilities at the date of acquisition.
In cases where the fair value of identifiable acquired assets, liabilities or contingent liabilities subsequently turns out to differ from the values calculated at the date of acquisition, the excess value/goodwill is adjusted up to 12 months after the date of acquisition, if the conditions could have been known at the date of the acquisition. Goodwill arising in connection with the acquisition of a subsidiary is recognised in the balance sheet under intangible assets in the consolidated financial statements and tested annually for impairment. Goodwill arising in connection with acquisitions of subsidiaries before 1 October 2002 has been written off against equity.
Public grants comprise grants for research, development and other investments. Grants for investments are recognised as deferred income, which is subsequently recognised as income as the investment is amortised, depreciated or written down. Other grants are recognised as income on a systematic basis, so that they are matched with the related costs which they compensate. Grants are recognised in the income statement from the date, when the conditions attaching to them are deemed to be complied with.
In defined contribution plans, the Group makes regular payments of fixed contributions to independent pension funds and insurance companies. The Group is under no obligation to pay additional contributions.
Costs for defined contribution plans are recognised in the income statement as Coloplast assumes an obligation to make the payment.
In defined benefit plans, the Group is under an obligation to pay a defined benefit on retirement. The actuarially calculated present value less the fair value of any plan assets is recognised in the balance sheet under provision for pension and similar obligations or in pension assets in the balance sheet, and any changes can under certain circumstances be recognised in equity, and otherwise in the income statement. Changes in actuarial gains and losses, which do not exceed 10% of the present value of the net pension obligations, are not recognised. Changes representing more than 10% of the present value of the individual pension obligations are recognised over the expected average remaining working lives of the employees.
Share options are granted to Executive Management and executives.
For equity-settled schemes, the fair value of options is determined at the grant date. The option value is subsequently recognised over the vesting period as staff costs. For cash-settled schemes, the fair value of options vested during the period is recognised as staff costs, whereas the fair value adjustment of vested options from previous periods is recognised under financial items. Option schemes granted before 30 September 2005 are treated as cash-settled schemes.
Derivative financial instruments
Derivative financial instruments are recognised in the balance sheet under other receivables and other payables, respectively, and are adjusted in an ongoing process to fair value (repurchase value).
Adjustment of derivative financial instruments used to hedge expected future transactions (effective) is taken to the fair value reserve under equity. The reserve is recognised in the income statement on realisation of the hedged transactions. If a derivative financial instrument used to hedge expected future transactions expires, is sold or no longer qualifies for hedge accounting, any accumulated fair value reserve remains in equity until the hedged transaction is concluded. If the transaction is no longer expected to be concluded, any fair value reserve accumulated under equity is transferred to the income statement.
Adjustments of the fair value of other derivative financial instruments are recognised in financial income and expenses in the income statement as they occur.
Revenue comprises income from sales of goods and services after deduction of any price reductions, quantity discounts or cash discounts. Sales are recognised in the income statement in the year in which the risk related to the goods passes to the customer or in which the service is rendered, and the amounts can be reliably measured and are expected to be received.
Cost of sales
Cost of sales comprise the cost of goods and services sold during the year.
Distribution costs comprise costs relating to the distribution and sales of goods and services, salaries of sales staff, advertising and exhibition expenses, depreciation of assets used for distribution purposes as well as other indirect costs incurred in connection with sales and distribution.
Administrative expenses comprise expenses relating to administrative staff and management, including office costs, salaries and depreciation of assets used for administrative purposes.
Research and development costs
Research and development costs comprise costs relating to the Group's research and development activities, including clinical studies, registration and maintenance of patents, depreciation and amortisation and salaries directly or indirectly attributable to the Group's research and development activities.
Research costs are recognised in the income statement as incurred.
Costs incurred in respect of development activities are recognised as intangible assets, if the criteria for capitalising development costs are met. The amortisation of such development projects is included in research and development costs or cost of sales.
Other operating income and expenses
Other operating income comprise income of a secondary nature in relation to the Group's activities, including gains on the sale of intangible assets and property, plant and equipment.
Other operating expenses comprise expenses of a secondary nature in relation to the Group's activities, including losses on the sale of intangible assets and property, plant and equipment.
Special items comprise major items of income and expense of a non-recurring nature. These items are presented separately to facilitate the comparability of the income statement and to provide a clearer picture of the operating results.
Income from investments in associates
Investments in associates are recognised according to the equity method, i.e. at the proportionate share of the net asset value of these companies calculated according to the Group's accounting policies.
Financial income and expenses
Financial income and expenses include interest, financing costs of finance leases, realised and unrealised foreign exchange adjustments, fair value adjustments of share options, fees, market value adjustments of securities and dividend received on shares recognised under securities.
Coloplast A/S is jointly taxed with wholly owned Danish subsidiaries. Full allocation is made of the joint taxable income. The jointly taxed Danish enterprises are covered by the Danish on-account tax scheme.
Additions, deductions and allowances relating to the on-account tax scheme are included in financial income and expenses.
Current tax on the net profit or loss for the year is recognised as an expense in the income statement together with any change in the provision for deferred tax. Tax on changes in equity is taken directly to equity.
Full provision is made for deferred tax on the basis of all temporary differences in accordance with the balance sheet liability method. The differences arise between the tax base of assets and liabilities and their carrying amounts.
No provision is made for the tax that would arise from the sale of investments in subsidiaries, if the investments are not expected to be disposed of within a short period of time.
Deferred tax is measured on the basis of the tax rates applicable at the balance sheet date.
Deferred tax assets are recognised to the extent that it is probable that future positive taxable income will be generated, against which the temporary differences and tax losses can be offset. Deferred tax assets are measured at expected net realisable values.
Minority interests comprise minority shareholders' share of the profit or loss for the year.
Intangible assets are measured at cost less accumulated amortisation and impairment losses. Amortisation is made on a straight-line basis over the expected useful lives of the assets, which are:
Development projects 3-5 years
Software 3-5 years
Acquired patents and trademarks 7-15 years
No amortisation of goodwill is done, but instead goodwill is tested minimum once a year for impairment; see section below on impairment losses.
For other intangible assets, the amortisation period is determined on the basis of Management's best estimate of the expected economic lives of the assets. The expected economic lives are assessed at least annually, and the amortisation period is determined based on the latest assessment. For purposes of calculating amortisation, the residual value of the assets is nil, unless a third party has committed to purchasing the asset after its use or there is an active market for the asset. Except for goodwill all intangible assets has a definable life.
Gains or losses on the disposal of intangible assets are stated as the difference between the selling price less costs to sell and the carrying amount at the date of disposal and are included in the income statement under other operating income or other operating expenses, respectively.
Development projects are recognised at the date when each individual project is expected to be exploited commercially. From this date, the directly associated costs will be recognised as an intangible asset in the balance sheet provided they can be measured reliably and there is sufficient certainty of the future earnings. Costs incurred earlier in the development phase are recognised under research and development costs in the income statement.
Borrowing costs are not included as part of cost.
Property, plant and equipment
Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Cost comprises the cost of acquisition and expenses directly attributable to the acquisition until the asset is ready for use. In the case of assets manufactured by the company, cost comprises materials, components, sub-supplier services, direct labour and costs directly attributable to the manufactured asset.
Borrowing costs are not included as part of cost.
Leases, under which substantially all risks and rewards of ownership of an asset are transferred, are classified as finance leases. Other leases are classified as operating leases. Assets held under a finance lease are measured in the balance sheet at fair value or at the present value of future minimum lease payments at the date of acquisition, if this is lower. The capitalised residual lease liability is recognised in the balance sheet as a liability, and the interest element of the lease payment is recognised as an expense in the income statement as incurred. Assets held under finance leases are depreciated according to the same principles as the Group's other property, plant and equipment.
Depreciation is provided on a straight-line basis over the expected useful lives of the assets. The expected useful lives are:
Land no depreciation
Buildings 25 years
Building installations 10 years
Plant and machinery 5-10 years
Other fixtures and fittings, tools and equipment 3-7 years
At the balance sheet date, the residual values, remaining useful lives and depreciation pattern of the assets are assessed. Any changes to these are treated as changes to accounting estimates.
Gains and losses on the sale or scrapping of an item of property, plant and equipment are recognised in the income statement as other operating income and other operating expenses, respectively.
Investments in associates are recognised and measured at net asset value. Other equity investments and securities, mainly comprising unlisted equity investments and the like, are recognised and measured at fair value. If the fair value cannot be determined reliably, such items are measured at cost, however. Fair value adjustments are taken under equity. Any impairment loss is made based on an individual assessment of the expected future cash flow from the investment. Impairment losses of equity investments, measured at cost because the fair value cannot be determined reliably, are not reversed. Receivables held to maturity at initial recognition are measured at amortised cost. Receivables not held to maturity are measured at fair value.
Goodwill is tested for impairment annually or whenever there is an indication of impairment, while the carrying amount of other intangible assets, property, plant and equipment and investments measured at cost or amortised cost are assessed, if there is an indication of impairment. If a write-down is required, the carrying amount is written down to the higher of net selling price or value in use. For the purpose of assessing impairment, assets are grouped in the smallest group of assets that generates identifiable cash inflows (cash-generating units). The cash-generating units are defined as the smallest identifiable group of assets, that generates cash inflows and which are largely independent of cash flows from other assets or groups of assets.
Inventories are measured at the lower of cost and net realisable value. Cost is determined using the FIFO principle. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and indirect production overheads. Borrowing costs are not recognised. Net realisable value is the expected selling price less cost of completion and costs to sell.
Receivables are mainly trade receivables and, in the Parent Company's case, current receivables from subsidiaries. On initial recognition, receivables are measured at fair value adjusted for acquisition costs, and subsequently they are measured at amortised cost. Receivables are written down on the basis of individual assessment.
Prepayments include costs paid relating to subsequent financial years and are measured at cost.
Securities recognised as current assets consist of trading portfolios, mainly comprising listed bonds, and are measured at fair value. Returns on and fair value adjustments of securities are recognised in the income statement under financial income and expenses.
Cash and cash equivalents
Cash and cash equivalents, recognised under current assets, comprise bank deposits and cash at hand and are measured at fair value.
Dividend is recognised in the balance sheet as a liability when adopted at the annual general meeting. Proposed dividend payments for the financial year are recognised in equity and disclosed in an income statement note to the financial statements. The purchase and selling price of and dividend on treasury shares are deducted from or added to equity, as the case may be. Hedge reserve relates to gains and losses from changes in the fair value of hedge instruments.
Provisions are recognised when the Group has a legal or constructive obligation arising from a past event, and it is probable that an outflow of the Group's financial resources will be required to settle the obligation.
Provisions are measured as the Management's best estimate of the amount with which the liability is expected to be settled.
The Group recognises a provision for the replacement of products covered by warranties at the balance sheet date. This provision is calculated based on experience.
Debt is recognised at fair value less expenses paid and subsequently at amortised cost.
Presentation of discontinued operations
Discontinued operations comprise activities that form a substantial part of a business when its activities and cash flows can be clearly distinguished, operationally or for financial reporting purposes, from the rest of the entity and where the entity has either been disposed of or classified as held for sale and such sale pursuant to a formal plan is expected to take place within 12 months. Discontinued operations also comprise entities which in relation to an acquisition have been classified as “held for sale”.
Cash flow statement
The consolidated cash flow statement, which is presented according to the indirect method, shows the Group's cash flow from operating, investing and financing activities as well as the Group's cash and cash equivalents and short-term debt to credit institutions at the beginning and end of the year. Cash and cash equivalents comprise cash, securities and debt to credit institutions recognised under current assets and current liabilities, respectively.
Cash flows from operating activities are calculated as Coloplast's share of the Group's results adjusted for non-cash operating items, changes in working capital and income taxes paid.
Cash flows from investing activities comprise purchases and sales of intangible assets, property, plant and equipment, investments and payments in connection with acquisitions and divestments of enterprises. Cash flows from financing activities comprise financing from the company's shareholders and raising of loans, repayment of interest-bearing debt as well as payment of dividends.
Information is provided about business segments and geographical segments as the primary and secondary segments, respectively.
The primary business segment comprises the following business areas: the Medical care division, which consists of the business areas Ostomy Care, Urology & Continence Care and Wound & Skin Care. The secondary segment is divided into sales in Europe, the Americas and the Rest of the World.