Basis of preparation
DSM’s consolidated financial statements have been
prepared in accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union. DSM applied accounting policies that comply
with IFRSs effective at December 2005, the so-called IASB’s stable platform
for 2005. Details about the first-time adoption of IFRS by DSM can be found in
note 35.
Consolidation
The consolidated financial statements comprise the
financial statements of the parent entity, Royal DSM N.V., and its
subsidiaries as well as the proportion of DSM’s ownership of joint ventures
(together ‘DSM’ or ‘Group’). A subsidiary is an entity over which DSM has
control. Control is the power to govern the financial and operating policies
of the entity so as to obtain benefits from its activities. The financial data
of subsidiaries are fully consolidated. Minority interests in the Group’s
equity and income are stated separately. A joint venture is an entity in which
DSM holds an interest and which is jointly controlled by DSM and one or more
other venturers under a contractual arrangement. The financial data of joint
ventures are included in the consolidated financial statements according to
the method of proportionate consolidation.
Subsidiaries and joint ventures are consolidated from the acquisition date and
de-consolidated from the date on which DSM ceases to have control or joint
control, respectively. On consolidation all intra-group balances and
transactions and unrealized gains and losses from intra-group transactions are
eliminated. Unrealized losses are not eliminated if these losses indicate an
impairment of the asset transferred. In such cases a value adjustment for
impairment of the asset is made.
Segmentation
Segment information is presented in respect of the
Group’s business and geographical segments. The primary format, business
segments, reflects the Group’s management structure. Prices for transaction
between segments are determined on an arm’s length basis. Segment results,
assets and liabilities include items directly attributable to a segment as
well as those that can be allocated on a reasonable basis.
Foreign currency translation
The presentation currency of the Group is
the euro.
Each entity of the Group records transactions and balance sheet items in its
functional currency. Commercial transactions denominated in another currency
than the functional currency are recorded at the spot exchange rates
prevailing at the date of the transactions. Monetary assets and liabilities
denominated in a currency other than the functional currency of the entity are
translated at the closing rates at the balance sheet date. Exchange
differences resulting from the settlement of these transactions and from the
translation of monetary items are recognized in income.
On consolidation, the balance sheets of subsidiaries and joint ventures whose
functional currency is not the euro are translated into euro at the closing
rate. The income statements of these entities are translated into euro at the
average rates for the relevant period. Goodwill paid on acquisition is
recorded in the functional currency of the acquired entity. Exchange
differences arising from the translation of the net investment in entities
with another functional currency than the euro are recorded in equity
(Translation reserve). The same applies to exchange differences arising from
borrowings and other financial instruments in so far as they hedge the
currency exchange risk related to the net investment.
On disposal of an entity with a functional currency other than the euro the
cumulative exchange difference relating to the translation of net investment
is recognized in income. DSM has made use of the exemption in IFRS 1,
according to which the cumulative translation differences at the date of
transition to IFRS (1 January 2004) are deemed to be zero.
Distinction between current and non-current
An asset (liability) is classified as current when it is expected to be
realized (settled) within 12 months after the balance sheet date.
Emission rights
DSM is subject to legislation to encourage reductions
of greenhouse gas emission and has been awarded emission rights in a number of
jurisdictions, principally to cover emission of CO2. Emission rights are
reserved for meeting delivery obligations and are not recognized. Revenue is
recognized when surplus emission rights are sold to third parties. When actual
emissions exceed the emission rights available to DSM a provision is
recognized for the expenditure required to obtain the additional rights.
Intangible assets
Goodwill represents the excess of the cost of an
acquisition over DSM’s share in the net fair value of the identifiable assets,
liabilities and contingent liabilities of an acquired subsidiary, joint
venture or associate. Goodwill paid on acquisition of subsidiaries and joint
ventures is included in intangible assets. Goodwill paid on acquisition of
associates is included in the carrying amount of these associates. Goodwill is
tested for impairment annually and when there are indications that the
carrying value may not be recoverable. Any impairment is recognized in income.
Gains and losses on the disposal of an entity include the carrying amount of
goodwill relating to the entity sold.
It was DSM’s policy up to and including 1999 to charge goodwill paid
immediately against equity. In accordance with IFRS 1 this goodwill is not
recognized in the opening balance sheet but remains a deduction from equity.
From 2000 up to and including 2003, goodwill was capitalized and amortized
over its estimated useful life. DSM has made use of the exemption of IFRS 1
that permits entities to elect not to apply IFRS 3, Business Combinations,
retrospectively. The carrying amount of the goodwill on 31 December 2003
according to ‘NL GAAP’ is used as the deemed cost of the goodwill as at the
date of transition to IFRS (1 January 2004).
Acquired licenses, patents and application software are carried at cost less
straight-line depreciation and less any impairment losses. The expected useful
lives vary from 4 to 10 years. Costs of software maintenance and new releases
are expensed when incurred. Capital expenditure that is directly related to
the development of application software is recognized as intangible asset and
amortized over its estimated useful life (5-8 years).
Research costs are expensed when incurred. Where the recognition criteria are
met, development expenditure is capitalized and amortized over its useful life
from the moment the product is launched commercially. The carrying amount of
an intangible asset from development is reviewed for impairment at each
balance sheet date or earlier upon indication of impairment. Any impairment
losses are recorded in income.
Property, plant and equipment
Property, plant and equipment is carried
at cost less depreciation calculated on a straight-line basis and less any
impairment losses. Interest during construction is capitalized. Expenditures
relating to major scheduled turnarounds are capitalized and depreciated over
the period up to the next turnaround.
The items of property, plant and equipment are systematically depreciated over
their estimated useful lives. Reviews are made annually of the estimated
remaining lives of the most important individual productive assets, taking
account of commercial and technological obsolescence as well as normal wear
and tear. The initially assumed expected useful lives are in principle: for
buildings 10-50 years; for plant and machinery: 5-15 years; for other
equipment 4-10 years. Land is not depreciated.
An item of property, plant and equipment is derecognized upon disposal or when
no future economic benefits are expected to arise from continued use or the
sale of the asset. Any gain or loss arising on derecognition of the asset is
included in income.
Associates and financial assets
An associate is an entity over which
DSM has significant influence but no control, usually supported by a
shareholding that entitles DSM to between 20% and 50% of the voting rights.
Investments in associates are accounted for by the equity method of
accounting, which involves recognition in income of DSM’s share of the
associate’s profit or loss for the year. DSM’s interest in an associate is
carried in the balance sheet at its share in the net assets of the associate
together with goodwill paid on acquisition, less any impairment loss.
When DSM’s share in the loss of an associate exceeds the carrying amount of
the associate, including any other receivables, the carrying amount is reduced
to nil. No further losses are recognized, unless DSM incurs obligations of the
associate which it has guaranteed or is otherwise committed to.
Unrealized profits and losses from transactions with associates are eliminated
according to DSM’s percentage ownership of these entities.
Securities comprise of interests in entities in which DSM has no significant
influence that are accounted for as available-for-sale securities. These
securities are measured against fair value with changes in fair value being
recognized in equity (Fair value reserve). In case a reliable fair value can
not be established the securities are held at cost. Available-for sale
securities are tested for impairment with other than temporary declines in
value being charged to income. On disposal the cumulative fair value
adjustments of the related securities are released from equity and included in
income. Proceeds from other securities held at cost are recognized in income
on disposal (Net finance costs).
Loans and long-term receivables are measured at amortized cost, if necessary
with deduction of a value adjustment for bad debts. The proceeds are
recognized in income (Net finance costs).
Impairment losses
When there are indications that the carrying amount
of a non-current asset (an item of intangible assets, property, plant and
equipment, or financial assets) may exceed the estimated recoverable amount
(the higher of its value in use and fair value less costs to sell), the
possible existence of an impairment loss is investigated. In case an asset
does not generate largely independent cash inflows, the recoverable amount is
determined for the cash-generating unit to which the asset belongs. In
assessing the value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
When the recoverable amount of an asset is less than its carrying amount, the
carrying amount is impaired to its recoverable amount. An impairment loss is
reversed when there has been a change in estimate that is relevant for the
determination of the asset’s recoverable amount since the last impairment loss
was recognized. Impairment losses for goodwill will never be reversed.
Inventories
Inventories are stated at the lower of cost and net
realizable value. The first-in, first-out (FIFO) method of valuation is used.
The cost of finished goods and intermediates includes directly attributable
costs and related production overhead expenses. Net realizable value is
determined as the estimated selling price in the ordinary course of business,
less the estimated costs of completion and the estimated costs necessary to
make the sale. Products whose manufacturing cost cannot be calculated because
of joint cost components are stated at net realizable price after deduction of
a margin.
Current receivables
Current receivables are stated at face value less
an allowance for bad debts.
Current investments
Deposits held at call with banks with a remaining
maturity of more than 3 months and less than 12 months are classified as
current investments. They are measured at amortized cost. Proceeds from these
deposits are recognized in income (Net finance costs).
Cash and cash equivalents
Cash and cash equivalents comprise cash at
bank and in hand and deposits held at call with banks with a remaining
maturity of less than 3 months. Bank overdrafts are included in current
liabilities. Cash and cash equivalents are stated at nominal value.
Assets held for sale
Non-current assets or assets and liabilities
related to a disposal group are separately disclosed as assets and/or
liabilities held for sale when such assets are available for immediate sale
and when the sale is highly probable. These conditions are usually met as from
the date a first draft of an agreement to sell is ready for discussion. Assets
and liabilities classified as held for sale are measured at the lower of
carrying amount and fair value less costs to sell. For non-current assets
classified as held for sale depreciation is terminated.
Shareholders’ equity
DSM’s ordinary shares and cumulative
preference shares are classified as equity. The consideration paid for
repurchased DSM shares (treasury shares) is deducted from Shareholders’ equity
until the shares are withdrawn or reissued. Dividend to be distributed to
holders cumulative preference shares is recognized as a liability in the
period in which the Supervisory Board of Directors approves the proposal for
profit distribution. Dividend to be distributed to holders of ordinary shares
is recognized as a liability in the period in which the Annual General Meeting
of Shareholders approves the proposal for dividend.
Borrowings
Borrowings are initially recognized at cost, being the fair
value of the proceeds received, net of transaction costs. Subsequently,
borrowings are stated at amortized cost using the effective interest method.
Amortized cost is calculated by taking into account any discount or premium.
Interest expenses are accrued for and recorded in income for each period.
Where the interest rate risk relating to a long-term borrowing is hedged, and
the hedge is regarded as effective, the carrying amount of the long-term loan
is adjusted for changes in fair value of the interest component of the loan.
Provisions
Provisions are recognized when all of the following
conditions are met: 1) there is a present legal or constructive obligation as
a result of past events; and 2) it is probable that a transfer of economic
benefits will settle the obligation; and 3) a reliable estimate can be made of
the amount of the obligation.
If the effect of the time value of money is material, provisions are
determined by discounting the expected cash flows at a pre-tax rate. Where
discounting is used, the increase in the provision due to the passage of time
is recognized as borrowing cost. However, the interest costs relating to
pension obligations are included in pension costs.
Any provision for costs that will arise from future site restoration is made
when the investment project concerned is taken into operation. These are
included in Property, plant and equipment, along with the historic cost of the
relating asset, and depreciated over the useful life of the asset.
Income tax expense
Income tax is accounted for using the balance sheet
liability method. Income tax expense is recognized in the income statement
except to the extent it relates to an item recognized directly within
shareholders’ equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted at the balance sheet date, and any adjustment to tax
payable in respect to previous years. Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between
the bases of assets and liabilities and their reported amounts. Deferred tax
assets and liabilities are measured at the tax rates and under the tax laws
that have been enacted or substantially enacted at the balance sheet date and
are expected to apply when the related deferred tax assets are realized or the
deferred tax liabilities are settled. Deferred tax assets are recognized to
the extent that it is probable that future taxable profits will be available
against which the deductible temporary differences and unused tax losses can
be utilized. If necessary a value adjustment is deducted. Deferred tax assets
and liabilities are stated at face value.
Deferred tax liabilities relating to withholding taxes are included only if
and to the extent that DSM intends to distribute the profits made by
subsidiaries in the form of dividend in the near future.
Pensions and other post-employment benefits
The Group operates a
number of defined benefit plans and defined contribution plans throughout the
world, the assets of which are generally held in separately administered
funds. The pension plans are generally funded by payments from employees and
by the relevant Group companies. The Group also provides certain additional
post-employment healthcare benefits to retired employees in the United States.
These benefits are unfunded.
For defined benefit plans, pension costs are determined using the projected
unit credit method.
Actuarial gains and losses are recognized in
income, spread over the average remaining service lives of employees, using
the corridor approach. Prepaid pension costs relating to defined benefit plans
are capitalized only if they lead to refunds to the employer or to reductions
in future contributions to the plan by the employer. Payments to defined
contribution plans are charged as an expense as they fall due.
Share-based compensation
The costs of option plans are measured by
reference to the fair value of the options at the date at which the options
are granted. The fair value is determined using the Black-Scholes option
pricing model, taking into account market conditions linked to the price of
the DSM share. The costs of these options are recognized in income (Employee
benefits), together with a corresponding increase in equity (Reserve for
share-based compensation) during the vesting period in the case of
share-settled options. In the case of cash-settled options (share appreciation
rights) the contra-account is Other liabilities. No expense is recognized for
options that do not ultimately vest, except for options where vesting is
conditional upon a market condition, which are treated as vesting,
irrespective of whether or not the market condition is satisfied, provided
that all other performance conditions are satisfied.
Leases
Finance leases, which transfer to the Group substantially all
the risks and benefits incidental to ownership of the leased item, are
capitalized at the inception of the lease at the fair value of the leased
property or, if lower, at the present value of the minimum lease payments. All
other leases are operating leases.
Lease payments for finance leases
are apportioned to finance charges and reduction of the lease liability so as
to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are charged directly against income. Capitalized
leased assets are depreciated over the shorter of the estimated useful life of
the asset or the lease term. Operating lease payments are recognized as an
expense on a straight-line basis over the lease term.
Revenue
Revenue from the sale of goods is recognized when the
significant risks and rewards of ownership are transferred to the buyer. Net
sales represent the invoice value less estimated rebates and cash discounts,
and was excluding value-added taxes.
Royalty income is recognized (Other operating revenue) on an accruals basis in
accordance with the substance of the relevant agreements. Interest income is
recognized on a time-proportion basis using the effective interest method.
Dividend income is recognized when the right to receive payment is established.
Government grants
Government grants are recognized at their fair value
where there is reasonable assurance that the grant will be received and all
related conditions will be complied with. When the grant relates to an expense
item, it is recognized as income over the periods necessary to match the grant
on a systematic basis to the costs that it is intended to compensate. Where
the grant relates to an asset, the fair value is initially recognized as
deferred income (Other non-current liabilities) and then released to income
over the expected useful life of the relevant asset by equal annual amounts.
Research and development
Research expenditure is charged to income in
the period in which it is incurred. Internal development expenditure is
charged to income in the period in which it is incurred unless it meets the
recognition criteria for intangible assets.
Derivative financial instruments
The Group uses derivative financial instruments (‘derivatives’) such as
foreign currency contracts and interest rate swaps to hedge risks associated
with foreign currency and interest rate fluctuations.
Financial
derivatives are initially recognized in the balance sheet at cost and
subsequently measured at their fair value on each balance sheet date. The
method of recognizing the resulting gains or losses is dependent on the nature
of the item being hedged.
When derivative contracts are entered into, the Group designates them as
either: hedges of the fair value of recognized assets or liabilities; hedges
of firm commitments or forecast transactions or as hedges of net investments
in entities with a functional currency other than the euro.
Changes in the fair value of derivatives designated and qualifying as fair
value hedges are immediately recognized in income, together with any changes
in the fair value of the hedged assets or liabilities attributable to the
hedged risk.
Changes in the fair value of derivatives designated and qualifying as cash
flow hedges are recognized in equity (Hedging reserve). Upon recognition of
the related asset or liability the cumulative gain or loss is transferred from
the Hedging reserve and included in the carrying amount or in income.
Changes in the fair value of derivatives designated and qualifying as net
investment hedges are recognized in equity (Translation reserve). Gains and
losses accumulated in the Translation reserve are included in income when the
net investment is disposed of.
Gains or losses relating to the ineffective portion of fair value hedges, cash
flow hedges and net investment hedges are immediately recognized in income.
Exceptional items
Exceptional items relate to material non-recurring
items of income and expense arising from circumstances such as:
-
write-downs of inventories to net realizable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-downs;
-
restructurings of the activities of an entity and reversals of any provisions
for the cost of restructurings;
-
disposals of property, plant and equipment;
-
disposals of investments;
-
discontinued operations;
-
litigation settlements;
-
other reversals of provisions
Exceptional items are reported separately to give a better understanding of
the underlying results of the period.
Effect of new accounting standards
DSM did not opt for early adoption
of the following new standards, amendments to standards, and new IFRIC
interpretations, which are mandatory for annual periods beginning on or after
1 January 2006 or later years:
-
IFRS 6 Exploration for and Evaluation of Mineral Resources
-
IFRS 7 Financial Instruments: Disclosures
-
Amendment to IAS 1: Capital Disclosures
-
Amendment to IAS 19: Actuarial Gains and Losses, Group Plans and Disclosures
-
Amendment to IAS 21: Net Investment in a Foreign Operation
-
Amendment to IAS 39: Cash Flow Hedge Accounting of Forecast Intragroup
Transactions
-
Amendment to IAS 39: The Fair Value Option
-
Amendment to IAS 39 and IFRS 4: Financial Guarantee Contracts
-
IFRIC 4 Determining whether an Arrangement contains a Lease
-
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
-
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste
Electrical and Electronic Equipment
-
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies
-
Amendment to IAS 39: The Fair Value Option
-
Amendment to IAS 39 and IFRS 4: Financial Guarantee Contracts
-
IFRIC 4 Determining whether an Arrangement contains a Lease
-
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
-
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste
Electrical and Electronic Equipment
-
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies
DSM expects that the adoption of these new standards, amendments to standards
and new IFRC interpretations in future periods will have no material impact on
DSM’s financial statements.
