Basic HTML Version
74
Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
increased uncertainty of future profit forecasts, and REC has
recognized only parts of the deferred tax assets (see note 18).
(D) Provisions
REC has provided somewarranties in connection with the sale of
solar modules and PVsystems. REC solar modules sold from
September 1, 2011 include a ten year limited product warranty and a
25 year linear power output warranty, that guarantees at least 97
percent output during the first year of performance and amaximum
0.7 percent reduction of power output per year fromyear 2-25. Solar
modules sold prior to this has a five year limitedwarranty that the
product is free of defects inmaterials andworkmanship, a ten year
limitedwarranty of 90 percent power output and a 25 year limited
warranty of 80 percent power output of the solar modules (“old
warranty”).Warranties are customary in themarket for solar modules.
Thewarranties are not sold stand alone. If a defect occurs or the
product does not reach thewarranted power output levels during the
warranty period, RECwill, at its sole option repair or replace or supply
additional modules, or refund the current market price of an
equivalent product at the time of the claim (for the oldwarranty
the original price, with annual reduction for the output warranty).
The RECGroup believes that thematerials in the solar modulesmade
by REC are capable of producing a relatively steady output for a
period of at least 25 years. However, neither the RECGroup nor any
of its competitors have a 25-year history. Management’s estimates
of warranty provisions take this into consideration.
During 2011 additional tests have been made, research has been
studied and REC believes the quality of its modules have improved.
It is also expected that the cost of producing modules will be
further reduced going forward, which will also reduce the outflow
of economic resources needed to fulfill any warranty claims. REC
believes the risk for claims under the warranties are low, but cannot
rule out the possibility that a large claimmay occur as there is past
history for claims under the product warranty and newmaterials
and production processes are introduced. In determining the
estimated provision, REC has made references to the estimates
made by its competitors. As the estimates and timing are highly
uncertain, REC has not discounted the provisions but instead
estimated it as a percentage of revenues at the time of sale of
the modules. The warranty provision at December 31, 2011 was
0.8 percent of revenues from sale of solar modules. This is in line
with the previous year, but in addition came some other short-term
specific events that were identified, especially problems with
junction boxes discovered at the end of 2008 (see note 20).
REC guarantees minimum performance of some PV systems that
are constructed and sold by REC (liquidated damages for any
shortfall of guaranteed power output for twenty years), primarily
measured during the second year of operation. REC has evaluated
that it is not probable that REC will incur outflow of economic
resources under this guaranty, and has not recognized any provision.
REC also has a limited warranty for faults and defects during the
first two years of operation of a PV system, for which only a minor
provision has been recognized.
The REC Group has at December 31, 2011 also recognized
significant provisions for restructuring, onerous contracts and
asset retirement and restoration obligations. A large part of these
relates to the decisions to close down the cells and parts of the
wafer production capacities in Norway, and the restoration of the
leased land in Singapore after the end of the lease period. See note
20 for more information.
Management believes that the assumptions are reasonable, but
they are inherently uncertain and unpredictable and, as a result,
future estimates and actual results may differ significantly from the
current estimates.
(E) Embedded derivatives
REC has wafer sales contracts for which embedded derivatives
have been separated and accounted for as derivatives (see note
4.1(D)). The contracts state future cash flows, with some limited
adjustment mechanisms. However, REC has experienced that
contracts have been terminated, renegotiated or not complied with.
Consequently, REC needs to estimate the future cash flows in the
separate contracts. If it is probable that a customer will not honor
the contract or that changes will be agreed, REC has made
downwards adjustments of the estimated future cash flows. The
reductions of estimated cash flows were significant in 2009, and
the estimated cash flows were increased during 2010. During 2011
the estimated cash flows have again been significantly reduced.
Estimating fair value of these embedded derivatives also requires
use of discounting, and the estimation of credit risk in the discount
rates is uncertain as these are not readily observable in the market
(see notes 3, 11, 25 and 30).