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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
2011 and2010, most development costs have been expensed,
except some costs relating to the FluidizedBedReactor (FBR) project
inRECSilicon and some furnace development activities inRECWafer
(see note 6) and development of software systems for own use.
(D) Embedded derivatives
According to IAS 39
Financial Instruments: Recognition and
Measurement
an embedded foreign currency derivative in a host
contract for the sale of a non-financial itemwhere the price is
denominated in a foreign currency is closely related to the host
contract provided it is not leveraged, does not contain an option
feature, and requires payments denominated in one of the following
currencies:
(i) The functional currency of any substantial party to that
contract;
(ii) The currency in which the price of the related good or service
that is acquired or delivered is routinely denominated in
commercial transactions around the world (such as the US
dollar for crude oil transactions); or
(iii) A currency that is commonly used in contracts to purchase or
sell non-financial items in the economic environment in which
the transaction takes place (e.g. a relatively stable and liquid
currency that is commonly used in local business transactions
or external trade).
REC’s understanding is that the exception in (ii) above is not relevant for
theproducts soldbyREC. RECbelieves that there aredifferent
interpretations in practice for number (iii) above. REChas interpreted
this narrowly, and that this exception is relevant only for a fewcountries
that REChas trade relationswith and that it usually refers to the
situation inwhich the local currency of a country is not stable, causing
businesses in that environment generally to adopt amore stable and
liquid currency for internal and cross-border trade. For REC thismeans
thatmost contracts that are not denominated in the functional
currency of any substantial party to that contract contain embedded
currency derivatives thatmust be separated and fair valued. Currently,
this is relevant for somewafer sales contracts inUSD.
Competent standard setting bodies or others may provide
clarifications in the future that can affect REC’s future
interpretation of these IAS 39 regulations.
(E) Leases
IFRIC4
Determiningwhether an Arrangement contains a Lease
requires that the determination of whether an arrangement is or
contains a lease should be based on the substance of the
arrangement. If an arrangement contains a lease, the requirements of
IAS 17
Leases
shall apply to the lease element of the arrangement.
Other elements of the arrangement not within the scope of IAS 17
shall be accounted for in accordancewith other standards.
Some arrangements in which the REC Group is a party include
payments for the right to use the assets and payments for other
elements in the arrangement (e.g. for output from a facility). The fair
value of the assets, the lease and other elements in the
arrangement may not be available for the REC Group, and the
REC Group has to make its best estimate of these values. This may
also affect the determination of whether the leases are finance or
operating leases. In some instances, REC Group is not able to
reliably estimate these values. In addition, a contract may also
require substantial judgment to decide if it contains right to use an
asset according to IFRIC 4 and consequently if it includes a lease.
For the 2011 and 2010 note disclosures the future minimum
payments for lease and other elements in some arrangements in
REC Silicon and RECWafer Pte Ltd have been determined to
contain operating leases but are reported as part of purchase
commitments (see note 29) as the REC Group is not able to reliably
estimate and separate the values of the different components.
RECWafer has several capacity contracts that have been
determined to contain leases and purchases of goods and services.
The lease parts are for production facilities and equipment for
production and recovery of exhausted slurry, and contain operating
and finance leases (see notes 6 and 29). The contracts are
separated into finance leases, operating leases and commodity
and service executory contracts, based on estimates of fair values
of the different components.
In 2007, REC Solar determined that a lease of a production building
was a finance lease.
The conclusions, carrying amounts and note disclosures were, among
other things, affected by the RECGroup’s estimates of fair values.
4.2 KEY SOURCES OF ESTIMATION UNCERTAINTY
– CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with
International Financial Reporting Standards requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, as well as the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Certain amounts included in or affecting the REC Group’s
financial statements and related disclosures must be estimated,
requiring management to make assumptions with respect to values
or conditions which cannot be known with certainty at the time the
financial statements are prepared. A ‘‘critical accounting estimate’’
is one which is both important to the portrayal of the company’s
financial condition and results and requires management to make
estimates about the effect of matters that are inherently uncertain,
and which are subjective or complex. Management evaluates such
estimates on an ongoing basis, based upon historical results and
experience, consultation with experts, utilizing trends and other
methods considered reasonable in the particular circumstances,
as well as forecasts as to how these might change in the future.
(A) Impairment
The REC Group tests annually whether goodwill or intangible assets
not ready for their intended use, have suffered any impairment.