The consolidated financial statements are based on the separate financial statements of the parent and the consolidated subsidiaries, which are prepared in accordance with uniform KION Group accounting policies.
Revenue is the fair value received for the sale of products and services and lease income (excluding VAT) after deduction of trade discounts and rebates. In accordance with IAS 18, revenue is recognised when it is sufficiently probable that a future economic benefit will accrue to the company and that it can be reliably measured. Other criteria may arise, depending on each individual transaction, such as:
Sale of goods
With the exception of items classified as 'sale with risk', revenue from the sale of goods is recognised when the KION Group delivers goods to a customer, the goods are accepted by the customer and the flow of benefits to the Group is considered to be probable. If a customer is expected to accept goods but has yet to do so, the corresponding revenue is only recognised when the goods are accepted. Appropriate provisions are recognised for risks relating to the sale of goods. In the case of revenue from agreements classified as 'sale with risk', the revenue is deferred over the term of the agreement if the risks and rewards remain substantially with the KION Group. The term 'sale with risk' is discussed in detail in the following section and under 'Leases' below.
Rendering of services
Revenue from services is recognised in the year in which the services are rendered. For services provided over several periods, revenue is recognised in accordance with the proportion of the total services rendered in each period (stage of completion). Unrealised revenue from long-term service agreements is therefore deferred over the average term of the agreements concerned and recognised in line with progressive costs.
Revenue from financial service transactions is recognised in the amount of the sales value of the leased asset if classified as a finance lease and in the amount of the lease payments if classified as an operating lease. As part of the financial services business, industrial trucks are also sold to finance partners who then enter into leases directly with the end customer (sale with risk). If significant risks and rewards remain with the KION Group as a result of an agreed residual value guarantee that accounts for more than 10 per cent of the asset's value or as a result of an agreed default guarantee, the proceeds from the sale are deferred and recognised as revenue on a straight-line basis over the term until the residual value guarantee or the default guarantee expires.
Interest income and royalties
Interest income is recognised proportionately in accordance with the effective interest method. Income from royalties is deferred in accordance with the substance of the relevant agreements and recognised pro rata.
Information on the deferral of lease income is contained in the disclosures on the accounting treatment of leases.
Cost of sales
The cost of sales comprises the cost of goods and services sold and include directly attributable material and labour costs as well as directly attributable overhead, including depreciation of production equipment and amortisation of certain intangible assets, as well as write-downs of inventories. Cost of sales also includes additions to warranty provisions, which are recognised in the amount of the estimated cost at the date on which the related product is sold.
Government grants are recognised at fair value provided that the Group has satisfied the necessary conditions for receiving the grant. Grants not related to capital expenditures are recognised in the income statement, under other income, in the period in which the expense intended to be covered by the grant is incurred. Grants for capital expenditures are deducted from the cost of the asset concerned and result in a corresponding reduction in depreciation over the subsequent periods.
Financial income and expenses
Net financial income mainly consists of interest expense on financial liabilities, interest income from financial receivables, gains and losses on financial instruments recognised through profit or loss, exchange rate gains and losses on financial activities and the interest expense on pension provisions. The expected return on plan assets relating to pension provisions is also included in financial income.
Interest income and expense are recognised in profit and loss in accordance with the effective interest method. The effective interest method is used for calculating the amortised cost of a financial asset or financial liability and the allocation of interest income and interest expense over the relevant periods. The effective interest rate is the interest rate at which the estimated future payments (including all fees that are part of the effective interest rate, transaction costs and other premiums and discounts) are discounted to the net carrying amount of the financial asset or liability over the shorter of the expected term of the financial instrument or other appropriate period.
Dividends are recognised in income when a resolution on distribution has been passed. They are reported in the income statement under other financial income/expenses.
Goodwill has an indefinite useful life and is not amortised. Instead, it is tested for impairment in accordance with IAS 36 ('Impairment of Assets') at least once a year, and more frequently if there are indications that the asset might be impaired.
Impairment testing is performed at the level of the individual cash-generating units (CGUs) or groups of CGUs. A CGU is defined as the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. CGUs are generally based on the lowest level of an entity at which - for internal management purposes - the management systematically monitors and controls the contribution to earnings made by the assets concerned, including goodwill. However, a CGU may not be larger than an operating segment as defined in IFRS 8 'Operating Segments'. In particular, CGUs are considered to be clearly defined and independent if the entity's management has prepared independent forecasts relevant to decision-making for the individual CGUs.
For the purposes of internal and external reporting, the activities of the KION Group are broken down into segments on the basis of their characteristics and risk profile. These segments also constitute CGUs.
The relevant CGUs for the purpose of goodwill impairment testing are defined at this level, as the structure of the internal reporting and management system, including the decision-relevant forecasts by the KION Group, is based on CGUs.
The goodwill relates to LMH and STILL. The recoverable amount of a CGU is determined by calculating its value in use on the basis of the discounted cash flow method.
Cash flow forecasts for the next five years were used to calculate value in use. The forecasts are based on past experience, current profits/losses on operations, the key management team's current assessment of future developments, and market assumptions. Cash flows beyond the five-year planning horizon were extrapolated using a growth rate of 1 per cent (2009: 1 per cent).
CGU cash flows are discounted using a weighted average cost of capital (WACC) that reflects current market assessments of the specific risks to individual segments. The underlying capital structure is determined by comparing peer group companies in the same sector.
The beta factor derived from the peer group is 1.09 (2009: 1.07). Yield curve data from Deutsche Bundesbank as at 31 December 2010 was used to determine the risk-free interest rate which was 3.45 per cent (2009: 4.25 per cent). The market risk premium taken from empirical studies was set at 5.5 per cent (2009: 5.0 per cent).
The risk-adjusted cost of borrowing before tax was based on an interest rate of 5.5 per cent (2009: 6.1 per cent). A leverage ratio of 32.2 per cent (2009: 28.3 per cent) was calculated, based on the capital structure determined for the peer group.
The interest rate determined for LMH and STILL by means of these parameters and used to discount the estimated cash flows was 10.3 per cent before tax (7.6 per cent after tax). The interest rates determined in 2009 were 10.8 per cent before tax and 8.1 per cent after tax.
The allocation of goodwill as at 31 December 2010, was as follows: LMH CGU, €954,802 thousand (31 December 2009: €952,513 thousand); STILL CGU, €552,208 thousand (31 December 2009: €552,283 thousand). No indications of impairment were identified in the impairment tests carried out as of 31 December 2010. Sensitivity analysis has enabled us to determine that no impairment losses need to be recognised for goodwill or intangible assets with an indefinite useful life, even if key assumptions vary within realistic limits.
Other intangible assets
Other purchased intangible assets with a finite useful life are recorded at cost less all cumulative amortisation and all cumulative impairment losses. If events or market developments suggest impairment has occurred, impairment tests are carried out on the carrying amount of items classified as other intangible assets with a finite useful life. The carrying amount of an asset is compared with its recoverable amount, which is defined as the higher of its value in use and its fair value net of costs to sell. If the reasons for recognising impairment losses in the past no longer apply, impairment losses not exceeding the amortised cost of the assets are reversed.
Other intangible assets with an indefinite useful life are recorded at cost. These assets are mainly the brand names that were capitalised as part of the purchase price allocation when the KION Group was acquired. The breakdown is as follows: LMH CGU, €468,400 thousand; STILL, €108,700 thousand; and OM, €7,000 thousand. Because they were recognised in the statement of financial position during the purchase price allocation, they were measured at their fair value during the purchase price allocation. They are not amortised, instead they are tested for impairment in accordance with IAS 36 at least once a year if there are indications that the asset might be impaired. The impairment test is performed in the same way as the impairment test for goodwill. Assessments of indefinite useful life are carried out in every period. Brand names are not amortised provided they have been established in the market for a number of years and there is no foreseeable end to their useful life.
Development costs are capitalised if the following can be demonstrated:
- the technical feasibility of the intangible asset;
- the intention to complete the intangible asset and use or sell it;
- the ability to use or sell the intangible asset;
- the extent to which the intangible asset is expected to generate future economic benefits;
- the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
- the ability to reliably measure the expenditure attributable to the intangible asset during its development.
Capitalised development costs include all costs and overhead directly attributable to the development process. Following initial capitalisation, these costs and internally generated intangible assets, particularly internally generated software, are recorded at cost less cumulative amortisation and cumulative impairment losses. Internally generated intangible assets are not qualifying assets so finance costs are not capitalised. All non-qualifying research and development costs, if such costs arise, are expensed as incurred and reported on the income statement under research and development expenditure together with the amortisation of capitalised development costs.
The following useful lives are applied in determining the carrying amounts of other intangible assets:
Useful life of other intangible assets
Customer relationships/client base
Patents and licenses
As part of the financial services business, companies in the KION Group enter into leases as lessors and as lessees. In line with IAS 17, leases are classified as finance leases if substantially all of the risks and rewards incidental to ownership of the leased asset are transferred to the lessee. All other leases are classified as operating leases, again in accordance with IAS 17.
KION Group companies lease equipment, mainly various industrial trucks, to their customers in order to promote sales. The leases may be of a short-term or long-term nature.
In the case of long-term leases, industrial trucks are generally sold to leasing companies. The assets are then either leased back by KION Group companies and subleased to customers (described below as 'sale and leaseback subleases') or the leasing company itself enters into the lease with the customer (described below as 'sales with risk'). Long-term leases generally have a term of four to five years.
Short-term leases are entered into directly with customers, with economic ownership of the leased assets remaining with the KION Group companies. The assets are reported as leased assets in a separate item on the face of the statement of financial position. Short-term leases usually have a term of one day to one year.
If a KION Group company enters into a finance lease as the lessor, the future lease payments to be paid by the lessee are recognised as lease receivables at an amount equal to the net investment in the lease. Interest income is allocated to each reporting period in order to ensure a constant return on the outstanding net investment in the lease.
If the economic ownership of leased assets remains with a KION Group company as the lessor under an operating lease, the assets are reported as leased assets in a separate item on the face of the statement of financial position. The leased assets are recorded at cost and depreciated in accordance with the accounting policies for property, plant and equipment. Lease-related income is recognised on a straight-line basis over the terms of the leases.
If the risks and rewards incidental to sale and leaseback subleases are substantially borne by KION Group companies, the corresponding assets are reported as non-current leased assets and are depreciated over the term of the underlying leases. If substantially all of the risks and rewards are transferred to the end customer, a corresponding lease receivable is recognised. Long-term customer leases are funded for terms that match those of the leases; funding items are recognised as lease liabilities.
As part of the financial services business, industrial trucks are also sold to finance partners who then enter into leases directly with end customers.
If KION Group companies provide residual value guarantees amounting to more than 10 per cent of the value of a leased asset or a customer default guarantee, these transactions, which are classified as sale agreements under civil law, are recognised in accordance with the provisions on lessors with operating leases in conjunction with the IFRS principles for revenue recognition ('sale with risk'). Accordingly, the vehicles are recognised as assets in the statement of financial position at their cost on the date of the sale and written down to their guaranteed residual value, or zero, over the term of the lease between the finance partner and end customer. If the KION Group provides a residual value guarantee, a lease liability equivalent to the residual value obligation is recognised. For further information, please refer to the information provided in the 'Revenue recognition' section.
In addition to entering into leases for sales purposes, KION Group companies also lease buildings, machinery, office furniture and operating equipment for their own use, primarily using operating leases. The corresponding lease payments are recognised in the income statement on a straight-line basis over the term of the lease.
KION Group companies also lease assets for their own use using finance leases. In this case, the lower of the fair value of the leased asset or the present value of future lease payments is recognised at the inception of the lease under leased assets. A corresponding liability to the lessor is recognised as a lease liability in the statement of financial position.
Leased assets are depreciated over the shorter of their useful life or the term of the lease, unless title to the leased assets passes to the lessee when the lease expires, in which case the leased assets are depreciated and the lease liabilities are reversed over the useful life of the leased assets.
The difference between total lease liabilities and the fair value of leased assets represents the finance charge which is recognised in the income statement over the term of the leases at a constant rate of interest on the outstanding balance in each period.
At the end of the lease term, the leased assets are either returned or purchased, or the contract is extended.
Other property, plant and equipment
Property, plant and equipment are recorded at cost less straight-line depreciation and impairment losses. The cost of internally generated machinery and equipment includes all costs directly attributable to the production process and an appropriate portion of production overhead. This includes production-related depreciation and proportionate costs for administration and social insurance / employee benefits.
The cost of property, plant and equipment is reduced by the amount of any government grants received. Expenses for maintenance and repairs are recognised in income to the extent that they are not required to be capitalised. Borrowing costs are capitalised for certain items of property, plant and equipment whose acquisition or production exceeds one year and the definition of a qualifying asset is met. No borrowing costs were capitalised in the year under review.
Depreciation of property, plant and equipment is recognised on a straight-line basis and reported in functional costs. The useful lives and depreciation methods are reviewed annually and adjusted to reflect changes in conditions.
The following useful lives are applied in determining the carrying amounts of items of property, plant and equipment:
Useful life of other property, plant and equipment
Plant and machinery
Office furniture and equipment
If there are certain indications of impairment, property, plant and equipment assets are tested for impairment by comparing the residual carrying amount of the assets with their recoverable amount, which is defined as the higher of value in use and fair value less costs to sell. If the residual carrying amount is greater than the recoverable amount, an impairment loss is recognised for an asset.
The KION Group calculates the recoverable amount primarily on the basis of value in use. In determining value in use, the expected future cash flows are discounted using a risk-adjusted discount rate, taking into account the current and future level of earnings and segment-specific, technological, economic and general trends.
If an impairment test for an item of property, plant and equipment is performed at the level of a cash-generating unit to which goodwill is allocated and results in the recognition of an impairment loss, first the goodwill and, subsequently, the assets must be written down in proportion to their relative carrying amounts. If the reason for an impairment loss recognised in prior years no longer applies, impairment losses not exceeding the amortised cost of the asset concerned are reversed. This does not apply to goodwill.
In accordance with the equity method, associates and joint ventures are measured as the proportion of the interest in the equity of the investee. They are initially recorded at cost. In subsequent periods, the KION Group's interest in the profit or loss generated after acquisition is recognised in income. Other changes in the equity of associates and joint ventures are recognised in other comprehensive income in the consolidated financial statements in proportion to the Group's interest in the associate or joint venture.
If the Group's interest in the losses made by an associate or joint venture exceeds the carrying amount of the proportionate equity attributable to the Group, no additional losses are recognised. Any goodwill arising from the acquisition of an associate or joint venture is included in the carrying amount of the investment in the associate or joint venture. When an associate or joint venture is sold, the Group's interest in its goodwill is taken into account in determining the gain or losses on disposal.
If there is evidence that an associate or joint venture may be impaired, the carrying amount of the investment in question is tested for impairment.
Other financial assets
The investments in non-consolidated affiliated companies and (long-term) equity investments that are reported in other non-current financial assets are recorded at cost less impairment losses, as observable fair values are not available and reliable results cannot be obtained using other permitted measurement techniques. At present there is no intention to sell these financial instruments. At each reporting date, financial assets or groups of financial assets are tested for impairment. Impairment losses are recognised in income as appropriate.
Primary financial assets are initially recognised and derecognised in the financial statements on their settlement dates.
Under IAS 39 ('Financial Instruments: Recognition and Measurement'), securities allocated to current or non-current financial assets are classified according to those carried at fair value through profit and loss (FAHfT), available for sale (AfS) and held to maturity (HtM).
The KION Group did not designate any securities as carried at fair value through profit and loss (FAHfT) in the reporting year. The FAHfT category therefore only includes financial derivatives that do not form part of a formally documented hedge.
Available-for-sale financial instruments (AfS) are carried at fair value. If they are equity investments for which no market price is available, they are recorded at cost. Unrealised gains and losses, including deferred taxes, are reported in other comprehensive income until they are realised.
Carrying amounts are tested for impairment on every reporting date and whenever indications of impairment arise. If there is an objective indication of impairment (such as a borrower being in significant financial difficulties), an impairment loss must be recognised directly in the income statement.
If objective facts in favour of reversing impairment losses are present on the reporting date, reversals are recorded in an appropriate amount. Reversals may not exceed the amortised cost that would have arisen if the impairment loss had not been recognised. In the case of debt instruments, reversals of impairment losses are recognised in the income statement.
Held-to-maturity financial assets are carried at amortised cost less impairment losses in accordance with the effective interest method.
In the consolidated financial statements, current and deferred taxes are recognised on the basis of the tax laws of the jurisdictions involved. Deferred taxes are recognised in other comprehensive income if they relate to transactions also recognised in other comprehensive income.
Deferred tax assets and liabilities are recognised in accordance with the liability method for all temporary differences between the IFRS carrying amounts and the tax base, as well as for temporary consolidation measures.
Deferred tax assets also include tax refund claims resulting from the expected utilisation of existing tax and interest loss carryforwards in subsequent periods and this utilisation is reasonably certain according to current forecasts. Deferred tax assets were recognised for interest carryforwards for the first time to extent that they are expected to be used in the future based on information available at the reporting date.
Deferred taxes are determined on the basis of the tax rates that will apply or are expected to apply at the realisation date in accordance with the current legal situation in each country concerned. In accordance with the provisions in IAS 12, deferred tax assets and liabilities are not discounted.
Deferred tax assets are offset against deferred tax liabilities to the extent that they have the same maturity and relate to the same taxation authority.
Inventories are recorded at the lower of cost and net realisable value.
Raw materials and merchandise are carried at average cost.
The cost of finished goods and work in progress includes direct costs and an appropriate portion of the material and production overhead and production-related depreciation directly attributable to the production process. Administrative costs and social insurance / employee benefits are included to the extent that they are attributable to the production process. Borrowing costs as defined by IAS 23 are not a component of cost as they are not qualifying assets as defined by IAS 23.4.
Net realisable value is the selling price that can be realised less the estimated costs of completion and the estimated costs necessary to make the sale. The amount recognised is an average value or a value determined in accordance with the FIFO method.
Write-downs are recognised for inventory risks resulting from duration of storage, impaired recoverability, etc. Write-downs are reversed up to a maximum of cost if the reasons for their recognition no longer apply.
Receivables and other assets are carried at fair value, including directly attributable transaction costs, in the first period they are recognised. In subsequent periods they are measured at amortised cost using the effective interest method. Appropriate valuation allowances are recognised for identifiable individual risks. Low-interest or non-interest-bearing receivables due in more than one year are carried at their present value.
Derivative financial instruments
Derivative financial instruments comprise currency forwards, interest rate swaps and options and are used for hedging purposes to reduce exchange-rate and interest-rate risks.
In accordance with IAS 39 (Financial Instruments: Recognition and Measurement), all derivative financial instruments must be measured at their fair value irrespective of an entity's purpose or intention in entering into the derivative contract. Changes in the fair value of derivative financial instruments in a formally documented hedge are reported in the income statement (for fair value hedges) or in other comprehensive income (for cash flow hedges).
The KION Group currently only uses cash flow hedges for exchange-rate and interest-rate risks.
In the case of cash flow hedges, derivatives are employed to hedge future cash flow risks from existing underlying transactions or planned transactions. The effective portion of changes in the fair value of derivatives is initially recognised in other comprehensive income, and is subsequently reclassified to the income statement when the revenue from the corresponding underlying transaction is realised. The ineffective portion of the changes in fair value is recognised immediately in net financial income/expenses.
If the criteria for hedge accounting are not satisfied, changes in the fair value of derivative financial instruments are recognised in the income statement.
In the case of hedges of net investments in foreign subsidiaries, the translation risks resulting from investments with a different functional currency are hedged. Unrealised gains and losses on hedging instruments are reported in other comprehensive income until the company is sold. In the past financial year, KION Group companies have not entered into any hedges for net investments in foreign subsidiaries.
Further information on risk management and accounting for derivative financial instruments can be found under note 33.
Retirement benefit obligation
The retirement benefit obligation is calculated in accordance with the projected unit credit method. Future pension obligations are measured on the basis of the pro rata vested benefit entitlements as at the reporting date and discounted to its present value. The calculation includes assumptions about future changes in certain parameters, such as expected salary and pension increases, and mortality factors affecting the amount of future benefits. Pension provisions are reduced by the fair value of the plan assets used to cover the Group's benefit obligation. Plan assets are measured at fair value.
Actuarial gains and losses, including deferred taxes, are recognised in other comprehensive income. The cost of additions to pension provisions is allocated to functional costs. The interest cost on the pension obligation and the expected return on plan assets are reported in net financial income/expenses. Further details can be found in note 26.
Other provisions are recognised when the Group has a legal or constructive obligation to a third party as the result of a past event that is likely to lead to a future outflow of resources and that can be reliably estimated. A provision is recognised in the amount of the mean of the range of probabilities. Measurement includes indirect and direct costs.
Provisions for identifiable risks and contingent liabilities are recognised in the amount that represents the best estimate of the cost required to settle the obligations existing on the reporting date that cannot be offset by recourse claims. The settlement amount also includes estimated future cost increases as of the reporting date. Provisions with a maturity of more than twelve months are discounted using the standard market interest rate. The discount rate is a before-tax rate that reflects current market expectations for the time value of money and the specific risks inherent in the liability. Accrued interest is recognised in interest expense.
Warranty provisions are recognised on the basis of past or estimated future claim statistics. Individual provisions are recognised for claims that are known to the Group. The corresponding expense is recognised in cost of sales at the date on which the revenue is recognised.
Provisions for expected losses from onerous contracts and other business obligations are measured on the basis of the work yet to be performed.
A restructuring provision is recognised when a KION Group company has prepared a detailed, formal restructuring plan and this plan has raised a valid expectation in those affected that the company will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. The measurement of a restructuring provision only includes the direct expenditures arising from the restructuring and not associated with the ongoing activities of the company concerned.
Financial liabilities and other financial liabilities
Financial liabilities and other financial liabilities are initially recognised at fair value at the time they are entered into. Directly attributable transaction costs are deducted for all financial liabilities that are not subsequently designated as fair value through profit or loss.
Non-current financial liabilities and other financial liabilities are then recorded at amortised cost. Any differences between historical cost and the settlement amount are recognised in accordance with the effective interest method.
Assumptions and estimates
The preparation of the IFRS consolidated financial statements requires the use of assumptions and estimates for certain line items that affect recognition and measurement in the statement of financial position and the income statement. The actual amounts realised may be different from these estimates. Estimates are applied in particular:
- in assessing the need for and the amount of impairment losses on intangible assets, property, plant and equipment and inventories;
- in determining the useful life of non-current assets,
- to the recognition and measurement of defined benefit pension obligations, provisions for tax and other provisions; and
- in assessing the recoverability of deferred tax assets.
Goodwill is tested for impairment annually, at the level of the cash-generating unit to which goodwill is allocated, by considering the Group's five-year operating forecasts and assuming division-specific growth rates for the period thereafter. Any material changes to these factors might result in the recognition of impairment losses.
Defined benefit pension obligations are calculated on the basis of actuarial parameters. As differences due to actuarial gains and losses are recorded in other comprehensive income, any change in these parameters would not affect the net profit for the current period. For further details about sensitivity analysis of the impact of certain assumptions, please refer to the information about provisions.
Significant estimates are involved in calculating provisions for tax. These estimates may change on the basis of new information and experience. Where necessary, the KION Group's accounting departments receive assistance from external legal advisers and tax consultants when making the estimates required.
The recognition and measurement of other provisions is based on an estimate of the probability of the future outflow of resources, supplemented by past experience and the circumstances known to the Group at the reporting date. Accordingly, the actual outflow of resources for a given event may be different from the amount recognised in other provisions.
Deferred tax assets on tax loss carryforwards and interest carryforwards are recognised on the basis of an estimate of the future recoverability of the tax benefit, i.e. an assumption as to whether sufficient taxable income or tax relief will be available against which the carryforwards can be utilised. The actual amount of taxable income in future periods, and hence the actual utilisation of tax loss carryforwards and interest carryforwards, may be different from the estimates made when the corresponding deferred tax assets were recognised.
Changes are recognised in profit or loss when they become known and assumptions are adjusted accordingly.