REC Silicon Annual Report 2019

53 Notes to the consolidated financial statements, REC Silicon Group REC Silicon Annual Report 2019 INVESTMENTS INVESTMENT IN ASSOCIATES The Group entered into a joint arrangement in China; Shaanxi Non-Ferrous Tian Hong REC Silicon Materials Co., Ltd. (Yulin JV) in February 2014. On February 1, 2018, REC Silicon Pte. Ltd (REC Silicon) and Shaanxi Non-Ferrous Tian Hong New Energy Co. Ltd. (SNF) entered into a supplemental agreement in relation to outstanding capital contributions. The Framework Agreement provided that SNF would make REC Silicon’s outstanding capital contribution of USD 169million to the Yulin JVand the equity ownership of the Yulin JVwould be adjusted to SNF holding 85 percent and REC Silicon holding 15 percent. REC Silicon agreed to and paid the Yulin JVUSD 0.6million in interest to the Yulin JV in March 2018. In addition, REC Silicon agreed to a penalty of USD 10.4million to be paid to SNF in annual installments. The first installment of USD 2.1million was paid in Q1 of 2018, the second installment of USD 3.1million was paid in Q2 2019. The final installment of USD 5.2million is due in March of 2020. The remaining installment amount has been reported as a liability in the consolidated statement of financial position at December 31, 2019. REC Silicon has retained an option to either buy back the 34 percent equity interest fromSNF pursuant to a valuation and public bidding process as required by PRC state-owned asset disposal regulations or continue to maintain solely a 15 percent equity interest in the Yulin JV. Under this option, after a three-year period, RECmay appoint an appraiser acceptable to both parties to appraise the value of the 34 percent equity interest in the Yulin JV. If the resulting valuation is higher than the valuation REC expects, or if the valuation determined by the state-owned asset disposal regulation is higher, REC has the right to choose not to buy back the 34 percent equity interest and may choose to sell its remaining 15 percent equity interest in the Yulin JV. The corporate governance of the Yulin JVwas also adjusted in relation to the new equity interest structure. The Board of Directors of the Yulin JVwas adjusted to five directors, of which four are appointed by SNF and one is appointed by REC. REC will nominate the Chief Technology Officer while the remaining executive management of the Yulin JV is nominated by SNF. Upon a buy-back by REC of the 34 percent equity interest, the corporate governance structure is to be restored to the terms of the original Yulin JV contract. During the fourth quarter of 2019, Company management determined that REC Silicon’s 15 percent ownership share of the Yulin JVno longer afforded it the control necessary to justify the use of the equity method of accounting. While REC Silicon continues to exert significant influence over the technical aspects of operating the manufacturing facility, the Company’s ability to influence decisions related to the work force, operational planning, purchasing, finance, and other areas of oversight and control have diminished through time. As a result, the method of accounting for this investment in associates was changed from the equity method to the fair value method during the fourth quarter. When the accounting method of an investment is changed from the equity method to fair value, all deferred gains and losses are recognized in profit / loss. The remaining deferred gain associated with the sale of technology to the Yulin JVof USD 29.7million has been included in profit/loss from investments in associates in the consolidated statement of income during the fourth quarter of 2019. The release of the deferred gain resulted in a carrying value for the investment of USD 73.3million. During the Group’s review of impairment indicators, impairment indicators were identified that could result in the impairment of the Company’s investment in the Yulin JV. The market value of the investment was estimated using a similar method used to evaluate the impairment of cash generating units described in note 3. In addition, assumption used to estimate the value of the Yulin JVare consistent with those used for impairment testing in note 3 fixed assets. Discounted estimated future cash flows fromYulin JV operations over a 5-year period with the last year used as a basis for the terminal value. A discount rate of 13.5 percent was estimated on an after-tax basis and adjusted to estimate the equivalent before tax discount rate of 15.1 percent. The estimated value of the investment in the Yulin JVexceeded the carrying amount of the investment. Therefore, an impairment loss of USD 43.6million has been included in the loss from investments in associates. The total loss from investments reported in the Consolidated Statement of Income is USD 24.2million which consists primarily of a loss of USD 9.9million reclassification of currency losses from other comprehensive income, a gain USD 29.7million due to the recognition of deferred income due associated with the sale of technology to the Yulin JV, and a loss of USD 43.6million due to impairment. In addition, the loss for 2019 includes USD 0.3million for REC Silicon’s share of the JV’s profit and loss for the period during which the JVwas reported using the equity method of accounting. 9