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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
Property, plant and equipment, other intangible and financial assets
are tested for impairment when circumstances indicate there may
be a potential impairment. Factors management considers
important and which could trigger an impairment review include;
significant fall in market values; a significant underperformance
relative to historical or projected future operating results;
significant changes in the use of the assets or the strategy for the
overall business, including assets that are decided to be phased out
or replaced and assets that are damaged or taken out of use;
significant negative industry or economic trends; and significant
cost overruns in the development of assets. In practice, the
significant drop in sales prices during 2011 has been a strong
impairment indicator.
The recoverable amounts of assets and cash-generating units have
primarily been determined based on value-in-use calculations. These
calculations require the use of estimates including, but not limited to
estimates of future performance, revenue generating capacity of the
assets, reinvestment levels and assumptions of the futuremarket
conditions. Changes in circumstances and inmanagement’s
evaluations and assumptionsmay give rise to impairment losses in
the relevant periods. According to IAS 36
Impairment of assets
, cash
flowprojections shall exclude any estimated future cash inflows or
outflows expected to arise from future restructurings or from
improving or enhancing the asset’s performance. To the best of
management’s judgment, the cash flows do not include restructuring
or effects fromexpansion and enhancement investments that are not
committed. However, in the cash flowestimates with ongoing
reduction in prices and costs and a number of process improvement
initiatives initiated and planned (see note 7), RECmay not have been
able to identify and exclude all effects that relates to asset
enhancements or new technologies according to IAS 36. In 2011,
significant impairment charges were recognized (see notes 6 and 7).
Financial assets are also periodically reviewed for objective evidence
of impairment. See note 8 for impairment of shares in the associate
MainstreamEnergy Inc. in 2011. In 2010, provisions for losses on
trade receivables were recognized (see notes 3, 12 and 30).
The uncertain future market developments and operational risks
and the sensitivity to changes in key assumptions have increased
the risk that impairments may occur also in future periods.
(B) Depreciation and amortization
Depreciation and amortization are based on management
estimates of the future useful lives of property, plant and
equipment and intangible assets. Estimates may change due to
technological developments, competition, changes in market
conditions, expectations for replacements or disposal of assets and
other factors. Technological developments are difficult to predict
and the REC Group’s views on the trends and pace of development
may change over time. Management periodically reviews the
expected future useful lives of property, plant and equipment and
intangible assets taking into consideration the factors mentioned
above and other important factors. In case of significant changes in
estimated useful lives, depreciation and amortization charges are
adjusted prospectively (see note 6). In the case of replacements or
disposals any remaining carrying value will be recognized to the
statement of income, net of any proceeds receivable.
Significant changes in key assumptions (especially sales prices) in
the impairment tests in 2011 gave rise to material impairment
charges. This has reduced the remaining depreciable amounts, and
some assets have been decided to be taken out of use because they
are no longer competitive (in 2011 it was decided to close down
parts of the production capacity in Norway). Impairment of assets
that are still in use has to a minor extent affected REC’s evaluation
of useful lives for these assets.
(C) Income taxes
The REC Group is subject to income taxes in several jurisdictions.
Judgment is required in determining the provision for income taxes.
There are transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business.
The REC Group recognizes liabilities for anticipated tax audit issues
based on estimates of whether additional taxes will be due. Where
the final tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact
the income tax and deferred tax provisions in the period in which
such determination is made. If the actual outcome differs from
management’s current estimates, REC Group will need to increase
or decrease current and deferred tax assets or liabilities.
TheRECGroup companies performsignificant transactionswith
each other andwith other related parties. These are primarily sale
of products to the next step in the production chain, financing
arrangements and to some extent services for the benefit of the other
party. TheRECGroup companies shall negotiate terms and conditions
as between unrelated parties, including transfer prices. For some of
the products there are limited directly comparable sales to external
parties and the information on directly comparable transactions
between external parties are limited. For some of the products, prices
in the spotmarket and in long-termcontracts are significantly
different. In addition prices in long-termcontracts vary significantly,
among other things based on at which point in time the contractswere
entered into and the length of the contracts. Tax authorities of the
different countriesmay have different views on the transfer prices
usedwith potential negative effects for theRECGroup.
Several entities in the REC Group reported losses for 2011 and
2010, giving rise to deferred tax assets. IAS 12
Income Taxes
states that a deferred tax asset shall be recognized for all
deductible temporary differences to the extent it is probable that
taxable profit will be available against which the deductible
temporary difference can be utilized. When an entity has a history of
recent losses, the entity recognizes a deferred tax asset arising
from unused tax losses only to the extent that the entity has
sufficient taxable temporary differences or there is convincing
other evidence that sufficient taxable profit will be available against
which the unused tax losses can be utilized by the entity. IAS 12 also
states that unused tax losses is strong evidence that future taxable
profit may not be available. Even though parts of the losses result
from identifiable causes which may be regarded as unlikely to recur,
the current highly volatile and uncertain market development has