Illustrative financial statements | 101

IFRS 3.61, In thousands of euro and trade- ment

2
IAS 38.118(c), (e) Note Goodwill marks costs Other Total

Cost
IFRS 3.B67(d)(i), Balance at 1 January 2010 3,545 1,264 4,111 - 8,920
IAS 38.118
IAS 38.118(e)(i) Acquisitions – internally developed - - 515 - 515
IAS 38.118(e)(vii) Effect of movements in exchange rates - (171) (75) - (246)
IFRS 3.B67(d)(viii), Balance at 31 December 2010 3,545 1,093 4,551 - 9,189
IAS 38.118

IFRS 3.B67(d)(i), Balance at 1 January 2011 3,545 1,093 4,551 - 9,189

IAS 38.118
IFRS 3.B67(d)(ii), Acquisitions through business combinations 9 541 170 - 80 791
IAS 38.118(e)(i)
IAS 38.118(e)(i) Other acquisitions – internally developed - - 1,272 - 1,272
IAS 38.118(e)(vii) Effect of movements in exchange rates - 186 195 - 381
IFRS 3.B67(d)(viii), Balance at 31 December 2011 4,086 1,449 6,018 80 11,633
IAS 38.118

Amortisation and impairment losses

IFRS 3.B67(d)(i), Balance at 1 January 2010 138 552 2,801 - 3,491
IAS 38.118
IAS 38.118(e)(vi) Amortisation for the year - 118 677 - 795
IAS 38.118(e)(iv) Impairment loss - - 285 - 285
IAS 38.118(e)(vii) Effect of movements in exchange rates - (31) (12) - (43)
IFRS 3.B67(d)(viii), Balance at 31 December 2010 138 639 3,751 - 4,528
IAS 38.118(c)

IFRS 3.B67(d)(i), Balance at 1 January 2011 138 639 3,751 - 4,528

IAS 38.118
IAS 38.118(e)(iv) Amortisation for the year - 129 646 10 785
IFRS 3.B67(d)(v) Impairment loss 116 - - - 116
IAS 38.118(e)(v) Reversal of impairment loss - - (100) - (100)
IAS 38.118(e)(vii) Effect of movements in exchange rates - 61 17 - 78
IFRS 3.B67(d)(viii), Balance at 31 December 2011 254 829 4,314 10 5,407
IAS 38.118

Carrying amounts
IAS 38.118(c) At 1 January 2010 3,407 712 1,310 - 5,429
IAS 38.118(c) At 31 December 2010 3,407 454 800 - 4,661
IAS 38.118(c) At 31 December 2011 3,832 620 1,704 70 6,226

Amortisation and impairment loss

IAS 38.118(d) The amortisation of patents, trademarks and development costs is allocated to the cost of inventory
and is recognised in cost of sales as inventory is sold; the amortisation of other intangible assets
is included in cost of sales. The impairment loss is recognised in cost of sales in the statement of
comprehensive income.

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102 | Illustrative financial statements

Explanatory note
1. IAS 36.132 An entity is encouraged to disclose assumptions used to determine the recoverable amount of
assets and cash-generating units, and this publication illustrates the disclosure of the discount
rate and terminal growth rate. Paragraph 134 of IAS 36 Impairment of Assets only requires these
disclosures for cash-generating units containing goodwill or indefinite-lived intangibles, which this
cash-generating unit does not have.

2. IAS 36.130(f) If the recoverable amount of an individual asset, including goodwill, or a cash-generating unit is
determined based on its fair value less costs to sell, and a material impairment loss is recognised
or, in the case of intangible assets other than goodwill (a reversal is prohibited for goodwill
impairments), is reversed during the period, then an entity discloses the basis used to determine fair
value less costs to sell.
IAS 36.130(c) If a material impairment loss is recognised for an individual asset, then an entity discloses:
•• the nature of the asset; and
•• if the entity reports segment information in accordance with IFRS 8, then the reportable segment to
which the asset belongs.
IAS 36.130(d)(iii) If a material impairment loss is recognised for a cash-generating unit, and the aggregation of assets
for identifying the cash-generating unit has changed since the previous estimate of recoverable
amount, then an entity describes the current and former way of aggregating assets, and the reasons
for changing the way in which the cash-generating unit is identified.
IAS 36.126(c), If applicable, an entity discloses the amount of impairment losses or reversals of impairment losses
(d) on revalued assets recognised in other comprehensive income during the period.

3. IAS 36.126 If an entity classifies expenses based on their function, then any loss is allocated to the appropriate
function. In our view, in the rare case that an impairment loss cannot be allocated to a function,
then it should be included in other expenses as a separate line item if significant (e.g. impairment
of goodwill), with additional information given in a note. This issue is discussed in our publication
Insights into IFRS (3.10.430.20).
In our view, an impairment loss that is recognised in published interim financial statements should
be presented in the same line item in the annual financial statements, even if the asset subsequently
is sold and the gain or loss on disposal is included in a line item different from impairment
losses in the annual financial statements. This issue is discussed in our publication Insights into
IFRS (3.10.430.30).

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 Illustrative financial statements | 103

in one of the Group’s factories in the Standard Papers segment is €400 thousand. An impairment
test was triggered during the year because the regulation that would allow this new process to be
implemented was delayed, such that the benefit of the new process will not be realised as soon
as previously expected. The recoverable amount of the CGU (the factory using the process) was
estimated based on its value in use, assuming that the regulation would be passed by July 2012 and
using a pre-tax discount rate of 12% and a growth rate of 2% from 2016. The recoverable amount
was estimated to be higher than the carrying amount of the CGU, and no impairment was required.
IAS 1.125, 129 Management considers it possible that the new regulation will be delayed a further year to July 2013.
Revenue from the unmodified process continues to decline and the effect of a further delay of a year
would be an impairment of approximately €100 thousand in the carrying amount of the factory.
Impairment loss and subsequent reversal
IAS 36.130(a), (d)(i) During 2010, due to regulatory restrictions imposed on the manufacture of a new product in the
Standard Papers segment, the Group assessed the recoverable amount of the related product line.
The product line relates to a cutting edge new product that was expected to be available for sale
in 2011. However, a regulatory inspection in 2010 revealed that the product did not meet certain
environmental standards, necessitating substantial changes to the manufacturing process. As a
result, production was deferred and the expected launch date was delayed.
IAS 36.130(e) The recoverable amount of the CGU (the production line that will produce the product) was
estimated based on its value in use,2 assuming that the production line would go live in August 2013.
Based on the assessment in 2010, the carrying amount of the product line was determined to be
€1,408 thousand higher than its recoverable amount, and an impairment loss was recognised (see
below). In 2011, following certain changes to the recovery plan, the Group reassessed its estimates
and €493 thousand of the initially recognised impairment has been reversed.
IAS 36.130(g) The estimate of value in use was determined using a pre-tax discount rate of 10.5% (2010: 9.8%).
IAS 36.126(a), (b), The impairment loss and its subsequent reversal was allocated pro rata to the individual assets
130(b), (d)(ii) constituting the production line (part of the Standard Papers segment) as follows.
Original
In thousands of euro carrying Loss Reversal
amount in 2010 in 2011

Plant and equipment (see note 16) 1,987 1,123 (393)

Capitalised development costs 504 285 (100)
2,491 1,408 (493)
IAS 36.126(a), (b) The impairment loss and subsequent reversal were recognised in cost of sales.3

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104 | Illustrative financial statements

Explanatory note
1. IAS 36.133 When goodwill allocated to a CGU arose in a business combination in the reporting period, that
goodwill is tested for impairment before the end of that reporting period. However, when the
acquisition accounting can be determined only provisionally, it also may not be possible to complete
the allocation of goodwill to CGUs before the end of the annual period in which the business
combination occurred. In such cases, an entity discloses the amount of unallocated goodwill,
together with the reason for not allocating the goodwill to CGUs. However, the allocation of goodwill
to CGUs should be completed before the end of the first annual reporting period beginning after the
acquisition date. This issue is discussed in our publication Insights into IFRS (3.10.480.20).

2. IAS 36.99 Instead of calculating recoverable amount, an entity may use its most recent previous calculation of the
recoverable amount of a cash-generating unit containing goodwill, if all of the following criteria are met:
•• there have been no significant changes in the assets and liabilities making up the unit since the
calculation;
•• the calculation resulted in a recoverable amount that exceeded the carrying amount of the unit by a
substantial margin; and
•• based on an analysis of the events and circumstances since the calculation, the likelihood that the
current recoverable amount would be less than the current carrying amount of the unit is remote.

3. IAS 36.44(b) The risk-free rate generally is obtained from the yield on government bonds that have the same
or a similar time to maturity as the asset or cash-generating unit, often leading to 10- or 20-year
government bonds being considered as a proxy for the longest time horizon available. This issue is
discussed in our publication Insights into IFRS (3.10.300.120).

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 Illustrative financial statements | 105

For the purpose of impairment testing, goodwill is allocated to the Group’s operating divisions. The
aggregate carrying amounts of goodwill allocated to each CGU are as follows.

IAS 36.134(a) In thousands of euro 2011 2010

European paper manufacturing and distribution 2,676 2,135

Timber products 960 1,076
3,636 3,211

IAS 36.135
Multiple units without significant goodwill 196 196
3,832 3,407
IAS 36.134(c), (e) The European paper manufacturing and distribution CGU’s impairment test was based on fair value
less costs to sell in 2010. In the past year there have been minimal transactions between competing
businesses in the same sector and/or generally similar size companies in the industry due to current
credit conditions. As a result, management has determined that using an Enterprise to EBITDA ratio
to value the business is no longer appropriate, and fair value less costs to sell has been estimated
using discounted cash flow projections.
IAS 36.134(c), (d) The recoverable amount of the Timber products CGU was based on its value in use and was
determined by discounting the future cash flows to be generated from the continuing use of the CGU
IAS 1.125, 36.134(f) with the assistance of independent valuers. Value in use in 2011 was determined in a similar manner
as in 2010. The carrying amount of the CGU was determined to be higher than its recoverable amount
and an impairment loss of €116 thousand (2010: nil) was recognised. The impairment loss was
allocated fully to goodwill, and is included in cost of sales.
Key assumptions used in discounted cash flow projection calculations
IAS 36.134(d)(i), (iv), Key assumptions used in the calculation of recoverable amounts are discount rates, terminal value
(v), 134(e)(i), (iv), (v) growth rates and EBITDA margins. These assumptions are as follows.
Terminal value Budgeted
Discount rate growth rate EBITDA growth
In percent 2011 2010 2011 2010 2011 2010

European paper manufacturing and

distribution (fair value less costs to sell) 6.7 n/a 3.0 n/a 5.2 n/a
Timber products (value in use) 8.6 9.0 1.8 2.0 13.0 14.0

Discount rate
IAS 36.134(e)(ii) The European paper manufacturing and distribution discount rate is a post-tax measure estimated
based on past experience, and industry average weighted average cost of capital, which is based on
a possible range of debt leveraging of 40% at a market interest rate of 7%.
IAS 1.125 The Timber products discount rate is a pre-tax measure based on the risk-free rate for 10-year bonds3
issued by the government in the relevant market, adjusted for a risk premium to reflect both the
increased risk of investing in equities and the systemic risk of the specific Group division.

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106 | Illustrative financial statements

Explanatory note
1. IAS 36.33, 35 The value in use calculation (used for timber products in these illustrative financial statements) is
based on reasonable and supportable assumptions concerning projections of cash flows approved
by management (as part of the budget) and adjusted to the requirements of IFRSs. These cash flow
forecasts should cover a maximum of five years unless a longer period can be justified. The cash
flows after the forecast period are extrapolated into the future over the useful life of the asset or
CGU using a steady or declining growth rate that is consistent with that of the product, industry or
country, unless there is clear evidence to suggest another basis; these cash flows form the basis
of what is referred to as the terminal value. This issue is discussed in our publication Insights into
IFRS (3.10.230.10).

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 Illustrative financial statements | 107

IAS 36.134(d)(ii), (iv) Terminal value growth rate

Both the European paper manufacturing and timber products divisions have five years of cash flows
included in their discounted cash flow models.1 A long-term growth rate into perpetuity has been
determined as the lower of the nominal GDP rates for the country in which the division is based and
the long-term compound annual growth rate in EBITDA estimated by management.
Budgeted EBITDA growth
Budgeted EBITDA is expressed as the compound annual growth rates in the initial five years of the
plans used for impairment testing and has been based on past experience adjusted for the following.
●● In the first year of the business plan revenue was projected using the same rate of growth
experienced in 2011. The anticipated annual revenue growth included in the cash flow projections for
the years 2013 to 2016 has been based on average growth levels experienced over the five years.
●● Timber sales price growth was assumed to be a constant small margin above inflation for the next
five years in line with information obtained from external brokers who publish a statistical analysis
of long-term market price trends.
●● Prices were assumed to increase in line with inflation for the next five years.
●● Weighted probabilities of significant one-off environmental costs have been factored into the
budgeted EBITDA growth, reflecting various potential regulatory developments in a number of
European countries in which the CGU operates. Environmental costs are assumed to grow with
inflation in other years.
Sensitivity to changes in assumptions
Following an impairment in the Group’s timber products CGU, the recoverable amount is equal
to the carrying amount. Therefore, any adverse movement in a key assumption would lead to a
further impairment.
IAS 36.134(f) The estimated recoverable amount of the European paper manufacturing and distribution division
exceeds its carrying amount by approximately €300 thousand (2010: €250 thousand). Management
has identified two key assumptions for which there could be a reasonably possible change that could
cause the carrying amount to exceed the recoverable amount. The following table shows the amount
that these two assumptions are required to change individually in order for the estimated recoverable
amount to be equal to the carrying amount.
Change required for
carrying amount to equal
recoverable amount
In percent 2011 2010

Pre-tax discount rate 1.6 n/a

Budgeted EBITDA growth (4.4) n/a
The values assigned to the key assumptions represent management’s assessment of future trends
in the forestry, pulp and paper industries and are based on both external sources and internal sources
(historical data).
Development costs
IAS 23.26(a), (b) Included in capitalised development costs is an amount of €37 thousand (2010: €12 thousand), that
represents borrowing costs capitalised during the year using a capitalisation rate of 5.1% (2010: 5.4%).

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108 | Illustrative financial statements

Explanatory note
1. IAS 41.43 Entities are encouraged, but not required, to provide a quantified description of each group of
biological assets, distinguishing between consumable and bearer biological assets or between
mature and immature biological assets. The basis for making such distinctions is disclosed in that
case.
IAS 41.54(a)–(f) When fair value cannot be determined reliably, an entity discloses:
•• a description of the biological assets;
•• an explanation of why fair value cannot be measured reliably;
•• the depreciation method and useful lives used;
•• if possible, the range of estimates within which fair value is highly likely to lie; and
•• the gross carrying amount and the accumulated depreciation, aggregated with accumulated
impairment losses, at the beginning and end of the reporting period.
IAS 41.55 When biological assets are measured at cost less accumulated depreciation and accumulated
impairment losses, an entity discloses separately any gain or loss recognised on the disposal of
such biological assets, and a reconciliation of changes in their carrying amount at the beginning
and at the end of the reporting period, including impairment losses, reversals of impairment losses
and depreciation.
IAS 41.56 If the fair value of biological assets measured previously at cost less accumulated depreciation and
accumulated impairment losses becomes reliably measurable, then an entity discloses:
•• a description of the biological assets;
•• an explanation of why fair value has become reliably measurable; and
•• the effect of the change.
IAS 41.49(a) An entity discloses the existence and carrying amounts of biological assets whose title is restricted,
and the carrying amount of biological assets pledged as security for liabilities.
IAS 41.49(b) An entity discloses the amount of commitments for the development or acquisition of biological
assets.
IAS 41.50(e) An entity discloses increases in biological assets due to business combinations.
IAS 41.53 If an agricultural activity is exposed to climatic, disease and other natural risks, and an event occurs
that gives rise to a material item of income and expense, then an entity discloses the nature and
amount of the item of income and expense.

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