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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
multi wafer production lines in Norway and Singapore the way REC
management found most advantageous. Therefore, at year-end
2010 RECmanagement judgment was that the future cash inflows
for the multi wafer production lines could not be determined
individually, and the multi wafer producing assets in Norway and
Singapore were included in the same cash-generating unit.
The integrated plant in Singapore produces wafers and solar
cells that currently primarily are intermediate products in REC
Singapore’s production of solar modules. At December 31, 2010,
RECmanagement evaluated that there existed active markets for
multi wafers and multi cells, and previously the Singapore plant was
not regarded as one cash-generating unit.
The identification of cash-generating units requires judgment by
the management. Even though not a decisive factor, the structure
now suggests thatWafer Multi Norway andWafer Multi Singapore
are not part of the same cash-generating unit, and that Singapore is
evaluated as one. The cost structure is different between the
entities, and any decisions to reduce or close production are now
expected to be made based on geographical location.
For the companies and plants that were included in the previous
RECWafer Multi cash-generating unit, the structure and segment
reporting has been changed. The change did not immediately impact
the wafer product streams, but over time a change has developed.
Earlier it was planned to deliver wafers fromREC Singapore to
RECWafer Norway’s external customers. However, the wafers are
no longer regarded as “interchangeable” and the customers now
tend to demand traceability to the plant. Management believes this
indicates that the wafers are not homogenous.
The Solar industry is gradually becoming more dominated by
integrated players. REC Singapore is run as one integrated site and
will reduce or increase capacity through its value chain based on
sales forecasts for solar modules. In Singapore, REC produces
intermediate products that will be produced to optimize its own
value chain. Management no longer believes that there is an active
market (as defined in IAS 36) for wafers and solar cells produced by
REC Singapore, and that cash inflows for wafers and solar cells in
Singapore are not independent from cash inflows for solar modules.
Consequently, REC Singapore is now regarded as one cash-
generating unit. REC has a number of sales companies that sell
REC Singapore solar modules, and these are included in the
REC Singapore cash-generating unit.
At the end of 2010, the cell production assets in Norway
(REC ScanCell) and in Singapore were regarded as one cash-
generating unit. The solar cell production in REC ScanCell was
closed down in 2011 and is consequently evaluated separately
for the impairment tests at December 31, 2011.
At the end of 2010, the module production in Singapore was
evaluated as a separate cash-generating unit, but is now included
in the REC Singapore cash-generating unit. The solar modules
production in REC ScanModule in Glava was closed down in 2010.
BASIS FOR THE IMPAIRMENTTESTS
Recoverable amounts for the cash-generating units are primarily
based on value in use, except for assets that are taken out of use.
Value in use has been estimated by discounted cash flows. The
budget process in 2011, as for 2010, was affected by the
significant uncertainty of future development in key assumptions,
such as future prices, costs and efficiency. The future market
development is highly uncertain.
At the end of 2011, the Board of Directors approved a budget for
2012 and was presented business plan figures for 2013 – 2016.
Some further work has been conducted on the business plan figures
that are used as basis for the impairment tests, primarily to update
for recent developments and additional information, due to general
quality assurance and to comply with IAS 36 requirements.
The carrying amounts of the cash-generating units include tangible
fixed assets, intangible assets and net working capital. EBITDA less
capital expenditure and change in working capital has been used as
estimates of cash flows for the calculation of recoverable amounts.
Estimated tax on EBIT has also been included as appropriate to be
consistent with the discount rates used, see below. Assets that are
under construction or for which the investments are committed are
included, with estimated capital expenditure to complete and
estimated future cash flows from their operations. However, REC is
according to IAS 36 not allowed to include effects of improvements
or enhancements to the assets’ performance. The industry is
dependent upon such improvements, which will be the basis for a
cost competitive position going forward. The exclusion of such
investments had a negative effect on some of the estimated values
in use, especially for REC Singapore.
To arrive at the estimated recoverable amount, the REC Group uses
an estimated stable cash flow and a growth rate factor to estimate
a terminal value of infinite future cash flows. However, for the
Singapore entities, the period has been limited to the lease term
of the land (2038). A growth rate factor of zero for the period
subsequent to 2016 has been used in the calculations at year-end
2011, which is the same as for 2010. This is below the average
expected growth rate for the photovoltaic industry. Growth rates
used for the industry take into consideration effects of future
capital expenditure and technology improvements that cannot be
included the same way in the impairment test. The lower growth
rate also reflects that prices are expected to decline until grid
parity is reached. At the same time it is expected that cost savings
will be realized through the value chain, among other things due to
these price reductions.
According to IAS 36, cash flows and discount rates shall be pre-tax.
In deciding the discount rate in practice for the cash-generating
units, REC believes that the best basis and what is most commonly
used is theWACC (weighted average cost of capital). The cost of a
company’s market value of debt and equity capital, weighted
accordingly to reflect its expected long-term capital structure,
gives itsWACC. TheWACC rates used to discount future cash flows
are based on ten year government and swap interest rates (except
for REC Singapore where a rate for each year is used) in the relevant