Annual Report 2015

7.6 Notes to the consolidated financial statements

For the financial year ended 31 December 2015

General information

Accell Group N.V. (“Accell Group”) in Heerenveen, the Netherlands, is the holding company of a group of legal entities. An overview of the data required pursuant to articles 2:379 and 2:414 of the Netherlands Civil Code is enclosed on page 139 of the financial statements. Accell Group with its group of companies is internationally active in the design, development, production, marketing and sales of innovative and high-quality bicycles, bicycle parts and accessories and fitness equipment.

Accell Group’s consolidated financial statements for the year ended 2015 have been prepared in accordance with International Accounting Standards Board (IASB) standards as approved by the European Commission which are applicable as at 31 December 2015.

The financial data of Accell Group are incorporated in the consolidated financial statements. An abbreviated income statement is therefore presented for the parent company, as permitted under article 2:402 of the Netherlands Civil Code.

Accounting policies

The financial statements have been prepared at historical cost, unless stated otherwise.

The accounting policies outlined below were applied consistently for all the periods presented in these consolidated financial statements.

Application of new and revised International Financial Reporting Standards (IFRSs)

Amendments to IFRSs that are mandatorily effective for the current year
No new IFRSs became effective from 1 January 2015. Accell Group has adopted the following amendments to IFRSs that are mandatorily effective for the 2015 financial year:

• amendments to IAS 19 Defined benefit plans: Employee contributions; and
• IFRS Annual improvements to IFRSs 2010-2012 Cycle; and
• IFRS Annual improvements to IFRSs 2011-2013 Cycle.

The application of the amendments has no material impact on the disclosure or amounts recognised in Accell Group’s consolidated financial statements.

New and revised IFRSs not yet (mandatorily) effective
All of the following new standards, amendments and interpretations are effective (and EU endorsed) from 1 January 2016 unless otherwise stated.

Accell Group does currently believe the following amendments to IFRSs will or could apply to Accell Group, but adoption would have no material impact on the consolidated results or financial position of Accell Group:

• amendments to IFRS 11 (Accounting for acquisitions of interests in joint operations), IAS 1 (Disclosure initiative) and IAS 16 and IAS 38 (Clarification of acceptable methods of depreciation and amortisation),
• annual improvements to IFRSs 2012-2014 Cycle.

The following new and amended standards are expected not to apply to Accell Group:

• IFRS 14 Regulatory Deferral accounts; and
• amendments to IAS 16 and IAS 41 (Agriculture: bearer plants), IAS 27 (Equity method in separate financial statements) and IFRS 10, IFRS 12 and IAS 28 (Investment entities: applying the consolidation exception).

Accell Group is currently assessing the impact of the following new standards that are not yet effective and is yet to quantify the potential impact:

• IFRS 9 Financial Instruments (effective from the year ending 31 December 2018); and
• IFRS 15 Revenue from Contracts with Customers (effective from the year ending 31 December 2018); and
• IFRS 16 Leases (effective from the year ending 31 December 2019).

Correction of error in pension asset

The valuation of the UK pension plan is adjusted in the balance sheet following a recommendation by the Netherlands Authority for the Financial Markets (“AFM”) about the application of accounting standards regarding pensions. In the prior financial statements Accell Group applied a degree of caution in the valuation of the UK pension plan. In view of the long-term nature and uncertainties when valuing such plans, Accell Group limited the amount of capitalised economic benefit to the total of the annual contributions made by the company to the pension plan. According to the AFM the maximum economic benefit, as calculated in accordance with IAS 19 and IFRIC 14, must be reflected in the balance sheet and it does not suffice to disclose a valuation surplus in a note to the financial statements. In the financial statements 2015 Accell Group adjusted the valuation of its UK pension plan as well as the comparative figures 2014. Based on IAS 8 (prior period errors) and IFRS 3.50 the correction of the valuation of the UK pension plan must be adjusted from the Raleigh acquisition balance sheet for 2012; the adjustment therefore results in a reduction of goodwill. Besides the adjustment leads, on the basis of IAS 19.123 and IAS 19.124, to a pension interest gain in the income statement. The adjustment in this manner also comprises a deferred tax liability. The following adjustments are recorded:

Consolidation

The consolidated financial statements include the financial statements of Accell Group and its subsidiaries, being the group companies and other legal entities in which Accell Group has either a direct or indirect controlling interest with regard to the financial and operational policies.

The financial data of subsidiaries acquired during the financial year are consolidated from the date that Accell Group acquired a controlling interest. The financial data of subsidiaries disposed during the financial year are included in the consolidation until the date that Accell Group ceased to hold control. If necessary, the figures in the subsidiaries’ financial statements are adjusted to bring the statements in line with the accounting standards applied by Accell Group.

The financial data of the consolidated subsidiaries are fully included in the consolidated financial statements after elimination of all intercompany balances and transactions. Unrealised profits and losses on intercompany transactions are eliminated from the consolidated income statement.

Associates and joint ventures with an equity participation of 50% or less and where Accell Group does not have control, are valued according to the equity method or valued proportional interest in the fair value. Unrealised profits on intercompany transactions are eliminated pro rata based on the Accell Group interest in the company. Unrealised losses are also eliminated pro rata but only to the extent that there is no evidence for impairment losses.

A list of consolidated subsidiaries and non-consolidated companies is provided in note 12 of the note to the consolidated financial statements.

Business combinations

Acquisitions of subsidiaries are accounted for by the purchase accounting method. On acquisition date, the acquisition price is applied to the sum of the fair value of the assets acquired, the liabilities incurred or assumed and the equity instruments issued by Accell Group in exchange for the controlling interest in the company acquired.

Identifiable assets, liabilities and contingent liabilities of the companies acquired that meet the criteria for accounting under IFRS 3 are recorded at their fair value on the acquisition date. The changes in the fair value of contingent liabilities are accounted for in the income statement. Costs relating to the acquisition of business combinations are expensed directly into the income statement.

Foreign currency

The income statement and balance sheet are stated in euros, which is the functional currency of Accell Group and the presentation currency for the consolidated financial statements. Receivables, debts and liabilities in foreign currencies are converted at the exchange rate on the balance sheet date.

In order to hedge its currency risks Accell Group uses derivative financial instruments. The basis for these currency derivatives is detailed under “Financial instruments”.

Transactions in foreign currencies during the reporting period are recorded at the exchange rates applying on the transaction date insofar the currency is not part of hedging instruments. Currency differences arising from this conversion are recorded in the income statement.

Assets and liabilities of foreign subsidiaries are translated using the exchange rates applicable on the respective balance sheet dates. The income statements of foreign subsidiaries are converted at the weighted average monthly exchange rates applying for the periods involved. Differences arising from this conversion are recorded as gain or loss in the translation reserve of shareholders’ equity. These translation differences are recognised in the income statement at the time when these subsidiaries are disposed.

Estimates

Certain estimates and assumptions are made by Accell Group when preparing the consolidated financial statements. These estimates and assumptions have an impact on assets and liabilities, disclosure of off-balance assets and liabilities at balance sheet date, and income and expense items for the reporting period.

Important estimates and assumptions mainly relate to provisions, pensions and other employee benefits, goodwill and other intangible assets, deferred tax assets and liabilities. Actual results may differ from these estimates and assumptions.

All assumptions, expectations and forecasts that are used as a basis for estimates in the consolidated financial statements represent an outlook as accurate as possible for Accell Group. These estimates only represent Accell Group’s interpretation as of the dates on which they were prepared. Estimates relate to known and unknown risks, uncertainties and other factors that can lead to future results differing significantly from those forecasted.

Revenue recognition

Revenue comprise the fair value of the consideration received or receivable from sale of goods in the ordinary course of Accell Group's activities, minus any discounts granted and value added taxes. Accell Group recognises revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to Accell Group. Revenues related to the delivery of bicycles, bicycle parts and accessories and fitness equipment are recognised at the moment of delivery and/or transfer of legal title. Revenue from rendering services is accounted for in proportion to the services rendered as at balance sheet date.

Corporate income tax

Corporate income tax consists of current taxes and deferred taxes. Current taxes are based on the taxable result for the year and are calculated at the rates that are effective on the balance sheet date. Differences between commercial and taxable results are caused by temporary and permanent differences. Deferred tax assets and liabilities are recorded for temporary differences between the values of assets and liabilities based on the accounting policies applied in these financial statements and those applied for tax purposes. The carrying value of deferred tax assets is assessed on each balance sheet date and is adjusted downwards insofar as it is unlikely that sufficient future taxable profits will be available.

Deferred taxes are calculated against the rate that is expected to apply at the time of settlement. Deferred taxes are recorded in the income statement, unless they are related to items that are directly included in shareholders’ equity. In that case, the deferred taxes are also recorded in shareholders’ equity.

Deferred tax assets and liabilities are offset if there is a legal right to do so and the same fiscal authority levies the taxes.

Share-based payments

The company’s long term incentive plan for the Board of Directors comprises restricted shares and stock options. The Supervisory Board awards shares and options to the directors based on the realisation of targets set in agreement with the Board of Directors and the expected contribution that the members of the Board of Directors will make to the further development of the company. The options granted are unconditional once awarded and must be held for at least three years after they are awarded and have a maximum duration of eight years. Restricted shares awarded since 2009 are conditional. Two years after the initial award, the definitive number of restricted shares will be determined based on, among other, the total shareholders’ return of Accell Group shares compared to the total return of the Midcap index of Euronext in Amsterdam in a period of three consecutive years. After definitive award, restricted shares have to be held for another two years.

In addition, the company also has a restricted share plan for directors of subsidiaries that have made a significant contribution to the results of  Accell  Group.  After  closing  the  financial year, conditional  shares  are  allocated to the directors if the pre-determined targets for the financial year have been achieved. These shares become unconditional when a participating director remains in the employment of the company three years after the conditional award.

The stock options and share plans qualify as share-based payment transactions settled in equity instruments and are stated at fair value when awarded. This fair value is recorded as an expense on a straight- line basis during the awarding period, based on the company’s estimate of the shares that will ultimately be awarded and adjusted to compensate for the effect of non-market-standard awarding conditions. The fair value of the stock options is determined using an option valuation model (Black-Scholes-Merton). The expected life used in the model is adjusted, according to the company’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations.

Lease agreements

Lease agreements are classified as financial lease agreements if the economic benefits and obligations related to the underlying asset are largely at the risk and for the account of Accell Group. All other lease agreements are classified as operational lease agreements.

Lease payments for operational lease agreements are charged to expenses on a straight-line basis over the duration of the agreement.

Property, plant and equipment

Property, plant and equipment are valued at historical cost less accumulated depreciation and any accumulated impairment losses. Government grants received which directly relate to property, plant and equipment are deducted from the historical cost.

Depreciation is calculated on the basis of the straight-line method. As such, the historical cost, less any residual value, is depreciated over the expected economic life. Land is not depreciated.

The gain or loss of divestments of property, plant and equipment is determined as the difference between the proceeds from sale and the carrying value of the asset. The gain or loss is accounted for in the income statement.

Impairment of non-current assets other than goodwill

On each balance sheet date, Accell Group reviews whether there is any indication that non-current assets may be subject to impairment. If there are such indications, the recoverable amount of the asset involved is estimated in order to determine the extent to which an impairment loss may apply. If it is not possible to determine the recoverable amount of the individual asset, then Accell Group determines the recoverable amount of the cash-generating unit to which the asset belongs.

An impairment loss applies if the carrying value of an asset exceeds its recoverable amount. The recoverable amount is the higher of its fair value less cost of disposal and its value in use; the value in use being the present value of the expected future cash flows from the use of the asset and its ultimate disposal. A pre-tax discount rate is applied to determine present value, whereby the percentage provides a good indication from the assessment of the current market conditions regarding time value of money and the asset’s specific risks.

An impairment loss is charged to the income statement in the period in which it occurs, unless it relates to a revalued asset. In that case, the impairment is accounted for as a reduction of the revaluation.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities at the time the subsidiary is acquired. Goodwill is measured at cost less any accumulated impairment losses.

Goodwill is attributed to the (group of) cash-generating units of Accell Group that are expected to benefit from the synergy created by the combination, to determine impairment losses. Goodwill is tested for impairment annually or more frequently if there is any indication that goodwill might have to be impaired. If the recoverable amount of the (group of) cash-generating units is less than its carrying amount, the impairment loss reduces the carrying amount of the goodwill.

The recoverable amount of a cash-generating unit is determined based on the value in use, which is based on expected cash flows. These cash flows are based, among other things, on realised results in the past. Once a goodwill impairment loss is recognised it is not reversed in a subsequent period.

Upon the disposal of a subsidiary and/or activities, the attributable amount of goodwill is included in the determination of the gain or loss upon disposal.

Other intangible assets

Trademarks, patents and customer lists

Intangible assets include trademarks, patents and customer lists, acquired in a business combination by Accell Group and recognised separately from goodwill. Separately acquired intangible assets are stated at fair value. Intangible assets with a limited life, such as patents and customer lists, are depreciated on a straight-line basis over the expected economic life, for patents generally estimated at five years and for customer lists generally estimated at ten to twenty years.

Assets with an indefinite useful life, such as trademarks, are not depreciated, but are tested for impairment, as described for goodwill. Trademarks have an indefinite useful life, because the brands acquired are positioned in the middle and upper segments and mostly have a long history and tradition in the local and international markets in which they operate.

Software
Software is classified as intangible asset or as property, plant and equipment, depending on which element is more significant. When the software is not an integral part of the related hardware, software is treated as an intangible asset. Software is depreciated from the date when the software is used on a straight-line basis over the estimated economic useful life of three to five years.

Development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred. An intangible asset arising from development is recognised if, and only if, all the following criteria have been met:

• the asset is uniquely identified and the costs can be determined separately;
• the technical feasibility of the asset has been sufficiently demonstrated;
• it is probable that the asset will generate future economic revenues;
• the development expenditures can be measured.

Capitalised development costs are depreciated from the date when used on a straight-line basis over the estimated economic useful life, which is expected to be three to five years.

Inventories

Raw materials and consumables and trading products are stated at the lower of cost or net realisable value. The cost of purchase of inventories comprise the purchase price and a systematic allocation of cost of transport, import duties and other non-recoverable taxes. Lower net realisable value is determined through individual assessment of inventories.

Semi-finished and finished goods are stated at the lower of conversion cost or net realisable value. Lower net realisable value is determined through individual assessment of inventories. Cost of conversion include direct material consumption, direct labor and machining costs, plus all other costs that can be attributed directly to production. Net realisable value is based on the expected selling price, less cost to complete and sell.

Goods in transit are shipped goods, of which Accell Group obtained the economic ownership and which have not been received on balance sheet date. Goods in transit are stated at cost.

Assets held for sale

Non-current assets (or disposal groups) are classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Assets held for sale are stated at the lower of carrying amount or fair value less cost to sell. Any impairment losses are recorded in the income statement, when classified as assets held for sale.

Equity

Ordinary shares are classified as equity. Proceeds from the issue of ordinary shares less directly attributable costs of the issue of shares are accounted for as a change in share capital and share premium reserve.

Financial instruments

Trade receivables

Trade receivables are initially recorded at fair value. Trade receivables are after initial recognition recorded at amortised cost, using the effective interest rate method less a provision for impairment losses, if necessary. Interest income is included on the basis of the effective interest rate unless there is no material effect on the current assets. Provisions are determined on the basis of an individual assessment of the recoverability of the receivables. Given the short term nature the nominal value is considered to be equal to the fair value as well as the amortised cost.

Cash and cash equivalents

Cash and cash equivalents consist of petty cash and bank balances with a term of less than twelve months. Current account liabilities to credit institutions are included under current liabilities. Cash and cash equivalents are stated at nominal value.

Bank loans

Interest-bearing bank loans are initially recorded at fair value. Transaction costs that can be attributed directly to procuring the loans, if material, are included in the valuation when initially recorded. These liabilities are initially recorded at amortised cost using the effective interest rate method. In view of the characteristics of the bank loans, the nominal value is considered to be equal to the fair value as well as the amortised cost.

Trade payables

Amounts due to trade creditors are initially recorded at fair value. These liabilities are after initial recognition recorded at amortised cost using the effective interest rate method. In view of the short-term nature of these liabilities, their nominal value is considered to be equal to the fair value as well as the amortised cost.

Derivative financial instruments

Other financial instruments, such as interest swaps, currency future contracts, currency future swaps and options used by Accell Group are stated on the balance sheet at their fair value. The fair value is determined either on the basis of the net present value of future cash flows or using the binomial option valuation model.

Cash flow hedging

Changes in the fair value of a derivative that is highly effective are recorded in the hedging reserve of equity. To the extent that the hedge is ineffective, changes in the fair value are recognised in the income statement immediately. In the event that the hedge results in the inclusion of a non-financial asset or non-financial liability, then the amounts that were included in equity (in accordance with IAS 39.98b) are transferred to the initial cost of the related asset or liability.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in equity at that time remains in equity and is recognised in the income statement when the anticpated transaction occurs. When an anticipated transaction is no longer expected to occur, the cumulative gain or loss recognised in equity is immediately transferred to the income statement.

For any hedging instrument to be classified as a cash-flow hedge, Accell Group applies the following criteria:

• the hedge is expected to be effective in compensating for changes in anticipated future cash flows which can be attributed to the hedged risk; and
• the effectiveness of the hedge can be reliably measured; and
• the required documentation regarding the relatonship between the hedged risk and the hedge instrument is available from the start of the hedge; and
• there must be a high probability that the recorded transactions will actually take place; and
• the hedge has been assessed throughout its duration, and it has been determined that the hedge will be effective during the reporting period.

Provisions

General

Provisions are recognised to cover present legal or constructive obligations, arising from events on or before the balance sheet date, where it is likely that the company will have to meet these obligations and to the extent that the obligations can be estimated reliably. The amount recognised is the best estimate of Accell Group of the expenditure required to settle the present obligation at the end of the reporting period. If material, the liabilities are discounted to their present value.

Provisions for pensions

Defined benefit pension plans

The pension provision reflects the company’s commitments arising from defined benefit pension plans. Individual rights to post-employment benefit plans are accumulated depending on criteria such as age, seniority and salary level. Pension liabilities are discounted to determine the present value; the fair value of plan assets is deducted from this amount. Actuarial calculations are determined by qualified actuaries using the Projected Unit Credit Method. Liabilities resulting from defined benefit obligations are calculated for every plan separately. In case a defined benefit pension plan results in a surplus, this plan is presented as a pension asset in the balance sheet.

Accell Group recognises a profit or a loss on the settlement of defined benefit plans, when the settlement occurs. Actuarial profit and losses are recognised in the statement of other comprehensive income.

Defined benefit pension plans accounted for as defined contribution plans

The majority of the Dutch operating companies have stationed their pension plans at Metalektro, the pension fund for the metal sector. These multi-employer sector plans generally qualify as defined benefit plans. Metalektro informed Accell Group that the multi-employer sector plan qualify as a defined contribution plan. Accordingly, Accell Group accounts for this plan as a defined contribution plan in the financial statements. Pension expenses for the reporting period consist of the pension premium payable for that period.

Defined contribution plans

Liabilities under defined contribution plans are accounted for as expenses as soon as they are due. Payments under government pension plans are treated as payments under defined contribution plans if the liabilities of Accell Group are equivalent to the liabilities under a defined contribution plan.

Provision for deferred employee benefits

Other long-term employee benefits, including anniversary bonuses, are based on actuarial calculations.

Warranty provisions

Warranty provisions represent the estimated cost of warranty obligations for goods delivered and services rendered as at the end of the reporting period. If material discounting takes place to present value. Warranty claims are charged to the provision.

Cash flow statement

The cash flow statement is prepared using the indirect method. The cash balance in the cash flow statement consists solely of immediately available cash and cash equivalents. Cash flows in foreign currencies are translated using the exchange rate on the transaction date. Expenditures for interest and corporate income taxes are included in the cash flow from operating activities. Pay-outs of cash dividends are included in the cash flow from financing activities. The purchase consideration for businesses acquired during the year, as well as the dividends received and considerations received for businesses sold during the year, are included in the cash flow from investing activities as well as receipts from interests. Cash acquired in an acquisition of a business is deducted from the purchase consideration. Non-cash items or effects are excluded from the cash flow statement. Currency translation effects on cash and cash equivalents in foreign currencies are presented in the cash flow statement in order to achieve reconciliation between the cash and cash equivalents at the beginning and the end of the reporting period.

Segment information

IFRS 8 requires Accell Group to identify operational segments separately on the basis of internal reports that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. As from the financial year 2015, based on the requirements set out above, Accell Group identifies the following operational segments: Bicycles and Parts & accessories.

The segment Bicycles , which target the middle and upper segments of the market includes among others children’s bicycles, comfortable and luxury city bicycles, racing bikes and electrical bikes. The segment Parts & accessories target the middle and upper segments of the aftermarket of bicycle parts and accessories and the remaining fitness activities. Operating companies are not identified as an operational segment individually, but are combined to an operational segment since operating companies show the same economic features and are also comparable as regards to the nature of products, services and production processes, clients for their products and services and distribution channels of products and services. A number of operating companies in the segment Bicycles also recognise limited-related revenue in bicycle parts and accessories. A number of operating companies in the segment Parts & accessories also recognise limited bicycle revenue. Internal transfer prices between the operating segments are determined on a commercial basis, which is comparable to the approach adopted with third parties.

The geographical segments are derived from the physical location of the assets. The sales to customers reported in the geographical segments are based on the geographical location of the customers.