Non-Consolidated Annual Report R 2007 year

Transcription

1 GRAJEWO R POLISH FINANCIAL SUPERVISION AUTHORITY Non-Consolidated Annual Report R 2007 year (prepared in accordance with Par of the Regulation of the Minister of Finance dated October 19th Dz.U. No. 209, item 1744) for issuers from the manufacturing, construction, trade or services sectors for the financial year 2007, covering the period from January 1st to December 31st 2007, including consolidated financial statements prepared in accordance with the IFRS currency: PLN Pfleiderer Grajewo Spółka Akcyjna (full name) Date of filing: April 29th 2008 GRAJEWO (abbreviated name) (postal code) Wiórowa (street) (telephone number) grajewo@pfleiderer.pl ( ) (NIP Tax Identification Number) wood products (sector according to the Warsaw Stock Exchange s classification) Grajewo (city/town) 1 (number) (fax number) (web site) (REGON Industry Registration Number)

2 PLN 000 EUR 000 FINANCIAL HIGHLIGHTS I. Sales revenue II. Operating profit/(loss) III. Profit/(loss) before tax IV. Net profit attributable to equity holders of the parent V. Net cash provided by (used in) operating activities VI. Net cash provided by (used in) investing activities VII. Net cash provided by (used in) financing activities VIII. Total net cash flow IX. Total assets X. Liabilities XI. Non-current liabilities XII. Current liabilities XIII. Equity XIV. Share capital XV. Weighted average number of shares XVI. Weighted average diluted number of shares XVII. Annualised net profit attributable to equity holders of the parent XVIII. Earnings per ordinary share (PLN/EUR) 2,87 1,09 0,76 0,28 XIX. Diluted earnings per ordinary share (PLN/EUR) 2,87 1,09 0,76 0,28 XX. Book value per share (PLN/EUR) 11,29 9,51 3,15 2,48 XXI. Diluted book value per share (PLN/EUR) 11,29 9,51 3,15 2,48 XXII. Declared or paid dividend per share (PLN/EUR) 1,09 1,28 0,30 0,33 SIGNATURES OF ALL MEMBERS OF THE MANAGEMENT BOARD Date First name and surname Position Signature April 29th 2008 Paweł Wyrzykowski President of the Management Board April 29th 2008 Rafał Karcz Member of the Management Board, Chief Financial Officer April 29th 2008 Krzysztof Lobert Member of the Management Board, Chief Operating Officer April 29th 2008 Dariusz Tomaszewski Member of the Management Board, Sales Director SIGNATURE OD THE PERSON RESPONSIBLE FOR ACCOUNT KEEPING Date First name and surname Position Signature April 29th 2008 Agnieszka Kabus Chief Accountant

3 Letter from the President to the Shareholders In 2007, the Company s sales revenue grew by 10% year on year. The profit on sales reported by the Company remained unchanged relative to the previous year s level, thus confirming that the Company s position on the market of wood-based products is firmly established. The Company s net margin stood at 20%. Such a significant increase in net profit was driven mainly by the dividend paid out by subsidiary Pfleiderer Prospan S.A. This attests to a strong financial standing of the Grajewo Group. In 2007, Pfleiderer Grajewo purchased 43% of shares in Pfleiderer Prospan S.A. and became its sole shareholder. The adopted sales policy focuses on the quality of customer relationships. Looking at the cost side, an increase in the prices of chemicals and energy was largely offset by the outcomes delivered by our operational efficiency enhancement programme, which is being implemented on an ongoing basis. The key objective behind the efforts undertaken by the Company s Management Board and its managerial staff was to achieve stability and continuity of the production process, with the aim of avoiding idle production capacity. Development-oriented investment projects were carried out by Pfleiderer Grajewo S.A. s subsidiaries. In 2007, the thin MDF board plant was completed and put into operation. The completion of the new investment project will enhance the product portfolio offered by the Group and, as a result, bring competitive advantages and contribute to further development of the Pfleiderer brand in Poland. The safe level of debt to equity provides a sound foundation for future investment projects, which will contribute to increasing the Company s value. The Company allocated all profit earned in 2006 to dividends. Investment projects were financed mainly with funds raised thanks to an increase in the value of the bond programme, with all the bonds acquired by Pfleiderer Grajewo s subsidiary, and with bank loans. The prudent debt management policy of Pfleiderer Grajewo S.A. and the Group provides a sound foundation for future investment projects while guaranteeing their financial security, which will contribute to increasing the market value of the Group s consolidated assets. Paweł Wyrzykowski President of the Management Board

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20 NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31ST 2007

21 CONTENTS MANAGEMENT BOARD S STATEMENT...2 NON-CONSOLIDATED FINANCIAL STATEMENTS...3 INCOME STATEMENT FOR THE FINANCIAL YEAR ENDED DECEMBER 31ST STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED DECEMBER 31ST BALANCE SHEET AS AT DECEMBER 31ST CASH-FLOW STATEMENT FOR THE FINANCIAL YEAR ENDED DECEMBER 31ST NOTES TO THE NON-CONSOLIDATED FINANCIAL STATEMENTS... 8 OTHER NOTES... 22

22 MANAGEMENT BOARD S STATEMENT In compliance with the requirements laid down in the Regulation of the Minister of Finance on current and periodic information to be published by issuers of securities, dated October 19th 2005 (Dz. U. of 2005, No. 209, item 1744), the Management Board of Pfleiderer Grajewo S.A. represents that to the best of its knowledge the annual non-consolidated financial statements for the year ended December 31st 2007 and the comparable data, have been prepared in compliance with the applicable accounting standards and give a fair and clear view of the Company`s assets, financial standing and financial results, and that the annual non-consolidated Directors Report on the operations of the Company presents a true picture of its development, achievements and standing, including a description of the key risks and threats. The Management Board of Pfleiderer Grajewo S.A. represents that the qualified auditor of financial statements who audited the annual non-consolidated financial statements was appointed in compliance with applicable laws, and that both the auditing firm and the qualified auditors who performed the audit meet the conditions required to issue an impartial and independent opinion, in accordance with the applicable provisions of Polish law. Paweł Wyrzykowski President of the Management Board Krzysztof Lobert Member of the Management Board, Chief Operating Officer Rafał Karcz Member of the Management Board, Chief Financial Officer Dariusz Tomaszewski Member of the Management Board, Sales Director Grajewo, April 29th

23 NON-CONSOLIDATED FINANCIAL STATEMENTS Income Statement for the Financial Year Ended December 31st 2007 Note Jan 1 - Dec 31 Jan 1 - Dec Sales revenue 695, ,522 Cost of sales 3 557, ,178 Profit on sales 138, ,344 Other operating income 1 27,096 1,984 Selling costs 3 18,376 18,105 General and administrative expenses 3 42,480 49,553 Other operating expenses 2 3,456 1,888 Operating profit 100,972 68,782 Financial income 4 93,292 23,424 Financial expenses 4 36,139 23,906 Net financial income/(expenses) 57,153 (482) Profit before tax 158,125 68,300 Corporate income tax 5 15,769 13,986 Net profit 142,356 54,314 Basic earnings per share (PLN) Diluted earnings per share (PLN)

24 Statement of Changes in Equity for the Financial Year Ended December 31st 2007 Share capital Share premium account Statutory reserve funds Retained earnings Total Balance as at Jan , ,806 88,039 87, ,255 Net profit ,314 54,314 Total income and expenses for period ,314 54,314 Transfer of part of 2005 net profit to statutory reserve funds (434) 0 Dividend (63,519) (63,519) Balance as at Dec , ,806 88,473 77, ,050 Balance as at Jan , ,806 88,473 77, ,050 Net profit , ,356 Total income and expenses for period , ,356 Transfer of part of 2006 net profit to statutory reserve funds (223) 0 Dividend (54,090) (54,090) Balance as at Dec , ,806 88, , ,316 4

25 Balance Sheet as at December 31st 2007 Assets Note Dec Dec restated Property, plant and equipment 6 183, ,571 Intangible assets 7 8,243 10,148 Investments in related undertakings 8 703, ,279 Other non-current financial assets Non-current loans advanced to related undertakings 8 41, ,099 Non-current assets 937, ,465 Inventories 11 83,736 51,866 Income tax receivable Trade and other receivables 12 73, ,532 Cash and cash equivalents 13 2,346 10,960 Current loans advanced to related undertakings 8 49,533 0 Currency forwards 4,182 0 Non-current assets held for sale 14 2,701 0 Current assets 215, ,595 Total assets 1,153, ,060 Equity Share capital 15 16,376 16,376 Share premium account 289, ,806 Statutory reserve funds 88,696 88,473 Retained earnings 165,438 77,395 Total equity 560, ,050 Liabilities Overdraft facility 17 63,101 19,140 Liabilities under bank loans, borrowings and other debt instruments ,000 20,000 Employee benefits 18 4,132 5,027 Deferred income tax liability 10 9,340 7,540 Non-current liabilities 176,573 51,707 Overdraft facility 17 12,238 18,104 Liabilities under bank loans, borrowings and other debt instruments Liabilities to related undertakings under debt securities , ,000 Trade and other payables 19 73,988 80,321 Employee benefits 18 11,870 15,698 Current liabilities 416, ,303 Total liabilities 592, ,010 Total equity and liabilities 1,153, ,060 5

26 Cash-Flow Statement for the Financial Year Ended December 31st 2007 Cash flows from operating activities Jan 1 - Dec 31 Jan 1 - Dec 31 Note restated Net profit 142,356 54,314 Adjustments (40,165) 54,445 Depreciation and amortisation 29,996 28,679 Foreign exchange gains/(losses) 401 (4,258) Interest and dividends (60,142) 3,740 Sale of intangible assets and property, plant and equipment (20,553) (1,055) Corporate income tax accrued 15,769 13,986 Change in receivables 25,426 (14,493) Change in inventories (31,870) 3,467 Change in liabilities (16,768) 20,936 Change in liabilities under factoring agreements 13,394 0 Other adjustments 4,182 3,443 Cash provided by operating activities 102, ,759 Interest received Interest paid (97) 0 Corporate income tax paid (14,004) (9,357) Net cash provided by operating activities 88, ,060 Cash flows from investing activities Sale of non-current assets 21,874 1,254 Interest received 9,149 5,636 Dividends and other profit distributions 77, Other cash provided by financial assets 2,962 12,786 Acquisition of shares in a subsidiary undertaking (345,065) (79,712) Acquisition of property, plant and equipment and intangible assets (21,386) (22,646) Repayment of loans advanced 116, ,582 Loans advanced (106,729) (144,524) Net cash used in investing activities (246,109) (63,638) Cash flows from financing activities Decrease in loans and borrowings (100,000) (240,000) Increase in loans and borrowings 223, ,527 Issue of debt securities 111,429 73,312 Decrease in finance lease liabilities (180) (360) Dividend paid (54,090) (63,519) Interest paid (26,283) (11,927) Net cash provided by financing activities 154,

27 Note Jan 1 - Dec Jan 1 - Dec Change in cash (2,748) 36,455 Cash at beginning of period (7,144) (43,599) Cash at end of period 25 (9,892) (7,144) 7

28 Notes to the Non-Consolidated Financial Statements for the Year Ended December 31st 2007 Notes to the Non-Consolidated Financial Statements Overview Pfleiderer Grajewo S.A. is a publicly traded joint-stock company registered in Poland. The company, under its former name of Zakłady Płyt Wiórowych of Grajewo, was originally registered on July 1st 1994 by the District Court, Commercial Court of ŁomŜa, in the Commercial Register in Section B under entry No On May 9th 2001, it was registered by the District Court of Białystok, XII Commercial Division of the National Court Register, under entry No. KRS On September 18th 2002, the Management Board of Pfleiderer Grajewo S.A. received the decision of the District Court of Białystok on entering the Company s new name in the National Court Register. Accordingly, on September 18th 2002, the Company s former name was changed into Pfleiderer Grajewo S.A. The Company s registered office is situated at ul. Wiórowa 1, Grajewo, Poland. In accordance with the Polish Classification of Business Activities, Pfleiderer Grajewo S.A. is registered under No E. Pfleiderer Grajewo S.A. is the parent undertaking of the following companies: Pfleiderer Prospan S.A. of Wieruszów, Pfleiderer OOO of Novogrod (Russia), Pfleiderer MDF OOO of Novogrod (Russia), Silekol Sp. z o.o. of Kędzierzyn Koźle, Pfleiderer MDF Sp. z o.o. of Grajewo, Jura Polska Sp. z o.o. of Grajewo, UniFloor Sp. z o.o. of Wieruszów, and Pfleiderer Service Sp. z o.o. of Grajewo. The non-consolidated financial statements of the Pfleiderer Grajewo S.A. for the year ended December 31st 2007 were approved for publication by virtue of the Management Board s resolution of April 29th The scope of business of Pfleiderer Grajewo S.A.: The Company s business activities, as specified in its Articles of Association, include: manufacture of melamine-faced and raw chipboards and other wood and wood-based products manufacture of other wood products coating and impregnation of paper and cardboard Composition of the Management Board and the Supervisory Board of the Parent Undertaking and Changes in the Reporting Period As at December 31st 2007, the Management Board of Pfleiderer Grajewo S.A. was composed of 1. Paweł Wyrzykowski - President 2. Krzysztof Lobert - Member 3. Rafał Karcz - Member 4. Dariusz Tomaszewski - Member On March 9th 2007, Mr Zbigniew Dudek resigned from the position of Management Board Member and Production Director at Pfleiderer Grajewo S.A. and at Pfleiderer Prospan S.A. (subsidiary of Pfleiderer Grajewo S.A.), with effect from March 31st With effect from December 20th 2007, Mr Krzysztof Lobert was appointed Management Board Member and Chief Operating Officer at Pfleiderer Grajewo S.A. Furthermore, Mr Krzysztof Lobert was appointed Management Board Member and Chief Operating Officer at Pfleiderer Prospan S.A. of Wieruszów, a subsidiary of Pfleiderer Grajewo S.A., also with effect from December 20th

29 Notes to the Non-Consolidated Financial Statements for the Year Ended December 31st 2007 On April 7th 2008, Mr Paweł Wyrzykowski, President of the Management Board of the Company, was appointed Member of the Management Board of Pfleiderer AG of Neumarkt. In connection with this appointment, Mr Paweł Wyrzykowski intends to resign from the position of President of the Management Board of Pfleiderer Grajewo S.A. The date of his resignation depends on the date of appointment of Mr Wyrzykowski s successor to the position of President of the Management Board of Pfleiderer Grajewo S.A. The resignation will take effect no earlier than on September 1st 2008 and no later than on January 1st Mr Paweł Wyrzykowski will assume his duties as member of the Management Board of Pfleiderer AG only after he has resigned as President of the Management Board of Pfleiderer Grajewo S.A. Composition of the Supervisory Board of Pfleiderer Grajewo S.A. as at December 31st 2007: 1. Robert Hopperdietzel - Chairman 2. Michael Ernst - Member 3. Wojciech Szymon Kowalski - Member 4. Derrick G. Noe - Member 5. Hans H. Overdiek - Member On January 11th 2007, the General Shareholders Meeting removed Mr Martin Rong from his position on the Supervisory Board, and appointed Mr Robert Hopperdietzel in his place. By virtue of the Extraordinary General Shareholders Meeting s resolution of March 7th 2008, Mr Derrick G. Noe was removed from the Supervisory Board and Mr Michael Wolff was appointed in his place. Periods Covered by the Non-Consolidated Financial Statements and the Comparable Data These non-consolidated financial statements cover the year ended December 31st 2007, while the comparable financial data and notes relate to the year ended December 31st 2006 Accounting Policies a) Compliance Statement These non-consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards endorsed by the European Union ( the EU IFRS ). The EU IFRS include all the International Accounting Standards, International Financial Reporting Standards, and their Interpretations, except for those Standards and Interpretations, discussed below, which are still to be endorsed by the European Union and Standards and Interpretations which have been endorsed by the European Union but have not come into force yet. The Company has not used the option of early application of the new Standards and Interpretations which have already been published and endorsed by the European Union but which are to come into force after the balance-sheet date, except for IFRIC 11. Furthermore, as at the balance-sheet date the Company had not completed the work on estimating the impact of the new Standards and Interpretations which are to become effective after to balance-sheet date on the non-consolidated financial statements for the period in respect of which those Standards and Interpretations will be applied for the first time. 9

30 Notes to the Non-Consolidated Financial Statements for the Year Ended December 31st 2007 Standards and Interpretations endorsed by the EU Standards and Interpretations endorsed by the EU Anticipated change in accounting policies Impact on financial statements (if any) Effective for periods beginning on or after: IFRS 8 Operating Segments IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker. An operating segment is a component of an entity for which discrete financial information is available and reviewed regularly by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. The Company expects that the new standard will have a considerable impact on the presentation and disclosure of information on its operating segments in the financial statements. January 1st

31 Notes to the Non-Consolidated Financial Statements for the Year Ended December 31st 2007 Standards and Interpretations pending endorsement by the EU Standards and Interpretations pending endorsement by the EU Anticipated change in accounting policies Impact on financial statements (if any) Effective for periods beginning on or after: Revised IAS 23 Borrowing costs The revised standard will require capitalisation of borrowing costs relating to assets whose preparation for intended use or sale requires significant amount of time. The Company has not yet completed the analysis of the impact of the revised standard on its operations. January 1st 2009 Revised IAS 1 Presentation of Financial Statements The revised standard requires that the information provided in the financial statements be aggregated based on the criteria of similarity and implements the statement of comprehensive income. Items of income and expense and items making up other comprehensive income may be presented either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). The Company is considering whether to present one statement of comprehensive income or two separate statements. January 1st 2009 IFRIC 12 Service Concession Arrangements The Interpretation provides guidance to private sector entities with respect to the recognition and measurement issues arising in connection with accounting for transactions related to service concessions granted to private sector entities by public sector entities. The Interpretation does not apply to the Company s operations as it has not entered into any concession agreements. January 1st 2008 IFRIC 13 Customer Loyalty Programmes The interpretation addresses accounting by entities that grant loyalty award credits (such as 'points' or travel miles) to customers who buy other goods or services. Specifically, it explains how such entities should account for their obligations to provide free or discounted goods or services ( awards ) to customers who redeem award credits. Such entities are obliged to allocate part of their sales revenue to awards in loyalty programmes. That part of sales revenue is recognised only when entities meet their liabilities. The Company does not expect the interpretation to have any impact on the financial statements. July 1st

32 Notes to the Non-Consolidated Financial Statements for the Year Ended December 31st 2007 Standards and Interpretations pending endorsement by the EU Anticipated change in accounting policies Impact on financial statements (if any) Effective for periods beginning on or after: IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The interpretation specifies 1) when refunds from the plan or reductions in future contributions to the plan should be treated as available under Par. 58 of IAS 19; 2) how the minimum funding requirement may affect the availability of reductions in contributions to the plan; and 3) when the minimum funding requirement may lead to an obligation. The Company does not operate in countries where minimum funding requirements, limiting the employer s ability to receive a refund or reduction of contributions, are in force. January 1st 2008 An employer does not have to recognise an additional obligation in accordance with IFRIC 14, unless the contributions paid as part of the minimum funding requirement may not be returned to the Company. Revised IFRS 3 Business Combinations The standard was revised to include certain business combinations to which it had not applied previously. The definition of a business was specified in greater detail. The scope of contingent liabilities to which the cost of business combination could be charged was reduced. Transaction costs no longer form a part of the purchase price. The standard contains amended rules governing the recognition of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods. The revised standard gives entities the option to measure minority interests at fair value. The Company has not yet completed the analysis of the impact of the revised standard on its operations. July 1st 2009 Amendments to IAS 27 Consolidated and Separate Financial Statements In connection with the revised IFRS 3 (above), the following changes were made with respect to IAS 27: - change in the definition of minority interests; The Company has not yet completed the analysis of the impact of the revised standard on its operations. July 1st regulation of the manner of recognising transactions with minority shareholders; - change in the manner of disclosing transactions as a result of which the company loses control over a given entity; - new disclosure requirements. 12

33 Notes to the Non-Consolidated Financial Statements for the Year Ended December 31st 2007 Standards and Interpretations pending endorsement by the EU Anticipated change in accounting policies Impact on financial statements (if any) Effective for periods beginning on or after: Amendments to IFRS 2 Share-Based Payment The amended standard clarifies the impact of conditions other than vesting conditions on the valuation of equity instruments. The Company has not yet completed the analysis of the impact of the revised standard on its operations. January 1st 2009 Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable financial instruments and obligations arising on liquidation The amendments to IAS 32 implement an exemption from the rule provided for in IAS 32 and pertaining to the classification of puttable financial instruments. Consequently, certain puttable financial instruments may be classified as components of equity. In accordance with the requirements following from the amendments, certain financial instruments that represent a residual interest in an entity s net assets, which would otherwise be disclosed as financial liabilities, may be recognised in equity, provided that the financial instruments and the overall capital structure of the entity issuing such instruments meet specified conditions. The Company has not yet completed the analysis of the impact of the revised standard on its operations. January 1st

34 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 b) Basis for the Preparation of the Financial Statements These non-consolidated financial statements were prepared in compliance with the historical cost convention, with the exception of financial derivatives which were measured at fair value. All figures disclosed in the non-consolidated financial statements are expressed in PLN, with values rounded to the nearest thousand, unless indicated otherwise. The functional currency of the Company is the Polish złoty (PLN). The preparation of non-consolidated financial statements in accordance with the IFRS requires the Company to perform estimates and make assumptions affecting the values disclosed in the financial statements and supplementary notes to the statements. While the assumptions and estimates used are based on the Management Board s best knowledge of current actions, operations and events, the actual results may differ from projections. The estimates and related assumptions are subject to review on an ongoing basis. Any change in accounting estimates is recognised in the period in which such change occurred, or in current and future periods if the performed estimate change relates to both the current and future periods. The accounting principles and procedures presented below were applied to all periods covered by the annual non-consolidated financial statements. c) Transactions in Foreign Currencies Any transaction expressed in a foreign currency is disclosed in PLN on the transaction date, translated at the ask or bid exchange rate for a given currency as determined for the transaction date by a given company s bank. Cash items of assets and liabilities expressed in foreign currencies are translated as at the balance-sheet date at the mid exchange rate quoted by the National Bank of Poland for a given currency for that date. Currency-translation differences on the settlement of transactions expressed in foreign currencies and balance-sheet valuation of foreign-currency assets and liabilities are recognised in the income statement. Non-cash items of assets and liabilities valued at historical cost in foreign currencies are translated at the mid exchange rate quoted by the National Bank of Poland for a given currency for the transaction date. Non-cash balance-sheet items expressed in foreign currencies and measured at fair value are translated at the mid exchange rate quoted by the National Bank of Poland for a given currency for the fair value measurement date. Exchange rates applied to translate the balance-sheet items Dec Dec EUR USD GBP d) Financial Derivatives The Company uses financial derivatives to hedge its currency-exchange and interest-rate risk exposures related to its operating, financing or investing activities. At the time of initial recognition, financial derivatives are disclosed at acquisition cost; thereafter they are measured at fair value. Gains and losses on measurement at fair value are immediately disclosed in the income statement. However, if financial derivatives are classified as hedging instruments, the disclosure of gains or losses on measurement at fair value depends on the type of the item hedged with such derivatives. 14

35 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 The fair value of an interest rate swap is an estimated amount which the Company would receive or pay if it realised the swap transaction as at the balance-sheet date, considering the then current interest rates and credit standing of the parties to the swap transaction. The fair value of a forward is its quoted market price as at the balance-sheet date, being the present value of the quoted price of the forward. e) Property, Plant and Equipment (i) Owned Property, Plant and Equipment Property, plant and equipment are recognised in the books at acquisition or production cost, less depreciation charges and impairment losses. The acquisition cost comprises the price for which a given asset was purchased (i.e. amount due to the seller, less any deductible taxes: VAT and excise tax), the public charges (in the case of imports), and the costs directly related to the acquisition and adaptation of the asset for use, including the cost of transport, loading, unloading and storage. Rebates, discounts and other similar concessions and returns decrease the asset acquisition cost. The production cost of property, plant and equipment or a tangible asset under construction comprises all the expenses incurred by a company to construct, install, adapt or improve such asset until the day on which the asset was placed in service (or, where the asset has not been placed in service, until the balance-sheet date), including nondeductible VAT or excise tax. The production cost comprises also the estimation of the cost of dismantling and removing items of property, plant and equipment, as well as of restoring them to their initial condition, if such estimation is required. If a specific item of property, plant and equipment consists of separate and material components with different economic useful lives, such components are treated as separate assets. (ii) Property, Plant and Equipment Used under Lease Agreements Lease agreements under which the Company assumes all the risks and benefits resulting from the ownership of the property, plant and equipment, are classified as finance lease agreements. Capitalised property, plant and equipment used under lease agreements are depreciated over their estimated useful economic lives. Lease agreements under which the lessor retains substantially all potential risks and benefits resulting from the ownership of the leased asset are classified as operating lease agreements. Payments under operating lease agreements are expensed over the lease term, using the straight-line method. (iii) Subsequent Expenditure The Group undertakings capitalise future expenditure on replacement of an item of property, plant and equipment, if such expenditure may be reliably estimated and if the Company is likely to derive economic benefits from such replacement. Other expenditure is charged to the income statement as cost on an ongoing basis. (iv) Depreciation Items of property, plant and equipment, or substantial and individual elements thereof, are depreciated over their useful economic lives using the straight-line method and taking into account the residual value (net price for which a given asset is expected to be sold at liquidation). Land is not depreciated. The Company has adopted the following length of useful lives for particular categories of tangible assets: Perpetual usufruct right to land Buildings Plant and equipment Vehicles Other tangible assets 87 years 25 to 40 years 3 to 25 years 5 to 8 years 4 to 8 years 15

36 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 f) Intangible Assets (i) Other Intangible Assets Intangible assets acquired in a separate transaction are recognised at acquisition cost less amortisation charges and impairment losses. Expenditure on internally generated goodwill or trademarks is charged to the income statement at the moment such expenditure is incurred. (ii) Amortisation Intangible assets are amortised with the straight-line method over their useful economic lives, unless their lives are indefinite. Goodwill and intangible assets with indefinite useful economic lives are tested for impairment as at each balance-sheet date. Other intangible assets are amortised from the date of their placement in use. The estimated useful economic lives of intangible assets are as follows: Licences Computer software 2 to 3 years 2 years g) Investments All investments are initially recognised at fair value, or in the case of financial assets not classified as carried at fair value through profit or loss at fair value increased by the transaction costs directly attributable to the acquisition or issue of the financial asset. Financial instruments held for sale are classified as financial instruments at fair value through profit or loss. Any gains or losses from such instruments are recognised in the income statement. Investments classified as available for sale are recognised at fair value. Any gains or losses resulting from changes in the fair value of such investments are recognised directly in equity until the time of their sale, derecognition or disposal, or until impairment loss is identified, whereupon the total gains or losses previously disclosed under equity are transferred to the income statement. Financial assets other than derivatives with fixed or identifiable payments and fixed maturities are classified as assets held to maturity if the Company wants and is able to hold them to maturity. Investments intended to be held for an indefinite period are not classified as assets held to maturity. Non-current investments which are to be held to maturity (e.g. bonds) are recognised at amortised cost, using the effective interest rate. The amortised cost includes discount or premium obtained at acquisition of an investment, amortised over the period of its life to maturity. Gains or losses on investments recognised at amortised acquisition cost are disclosed under income upon derecognition of a given investment from the balance sheet or identification of impairment loss. Fair value of investments traded on active financial markets is determined with reference to the closing purchase prices quoted on a given market on the balance sheet date. Fair value of investments for which no quoted price exists is determined with reference to current market value of another instrument with substantially the same features or based on the expected cash flows on the investment s underlying asset. All standardised transactions of purchase and sale of financial assets are recorded at the transaction date, i.e. on the date on which the Company agrees to purchase an asset. Standardised transactions of purchase or sale of financial assets are purchase or sale transactions in which the date of delivery of assets to the other party is generally specified by regulations or market practice. h) Trade and Other Receivables Trade receivables are valued at amounts payable, less valuation allowances, if any. A valuation allowance calculated for a given receivable reflects the risk connected with the receivable. The Company creates allowances based on an analysis of the receivables maturity structure and of 16

37 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 individual debtors collection track record, or after a given case is submitted to court, or a debtor is put in liquidation or is declared bankrupt. i) Factoring An entity may transfer financial assets in such a way that a part of them will not qualify for derecognition. If the entity neither transfers nor retains substantially all the risk and rewards related to holding of the transferred financial asset and retains control over the transferred financial asset, it continues to recognise the transferred asset to the extent of its continuing involvement. The extent of the entity s continuing involvement in the transferred asset is the extent to which the entity is exposed to the risk of changes in the value of the transferred asset. If an entity continues to recognises an asset to the extent of its continuing involvement, it also recognises the related liability, which is measured in such a way as to reflect the rights and obligations that the entity retained with respect to the asset. j) Inventories Inventories are recognised at the lower of their acquisition or production cost or net realisable price. Net realisable price is the selling price estimate made in the course of business, less estimated cost to complete and estimated costs necessary to close the sale. The acquisition and production costs are determined in the following manner: Materials and goods for resale acquisition cost; decreases are measured using the weighted average method. Finished products and work in progress cost of direct materials and labour and an appropriate portion of indirect production costs, calculated on the basis of normal production capacity, net of the costs of external financing. k) Cash and Cash Equivalents Cash and cash equivalents comprise cash at banks and cash in hand, as well as short-term deposits with original maturities of up to three months. The balance of cash and cash equivalents disclosed in the cash-flow statement comprises the cash and cash equivalents net of any amounts outstanding under overdraft facilities, which form an integral part of the Company s liquidity management system. l) Impairment Losses (i) Financial Assets An impairment loss on a financial asset is recognised if there is objective evidence of impairment as a result of one or more events which may have an adverse impact on future cash flows related to a given financial asset. The amount of an impairment loss on a financial asset carried at amortised cost is estimated as the difference between the asset s carrying amount and the present value of the future cash flows, discounted using the original effective interest rate. Impairment losses on financial assets available for sale are computed by reference to the assets present fair value. As at each balance-sheet date, an entity assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. Other financial assets are divided into groups with similar credit risk and assessed for impairment collectively. Impairment losses are recognised in the income statement. If a decrease in the fair value of financial assets available for sale was recognised directly in the revaluation capital reserve, accumulated losses, previously 17

38 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 recognised in the revaluation capital reserve, are recognised in the income statement. Impairment losses are reversed if a subsequent increase in the recoverable value can be objectively attributed to an event occurring after the impairment recognition date. Impairment losses related to investments in equity instruments classified as available for sale are not reversed through profit or loss. If the fair value of debt instruments classified as available for sale increases and the increase can be objectively attributed to an event occurring after the impairment recognition date, the previously recognised impairment loss is reversed with the reversal amount disclosed in the income statement. (ii) Non-Financial Assets The carrying value of non-financial assets other than biological assets, investment property, inventories and deferred tax asset is tested for impairment as at every balance-sheet date. If the Company has a reason to suspect that a given asset s value has been impaired, it estimates its recoverable amount. The recoverable amount of goodwill, intangible assets with unspecified useful lives and intangible assets which are not yet ready for use is established as at each balance-sheet date. An impairment loss is recognised when the carrying value of an asset or a cash-generating unit is higher than its recoverable amount. A cash-generating unit is the smallest identifiable group of assets which generates cash inflows that are largely independent of the cash flows from other assets or groups of assets. Impairment losses are recognised in profit or loss. Impairment of a cash-generating unit is initially recognised as a decrease in goodwill allocated to that cash-generating unit (a group of cash-generating units), and subsequently as a decrease in the carrying value of the other assets belonging to that cashgenerating unit (a group of cash-generating units) on a pro-rata basis. The recoverable amount of assets of cash-generating units is higher of an asset's fair value less costs to sell and its value in use. Value in use is calculated by discounting present value of estimated future cash flows with a pre-tax interest rate that reflects current market assessments of the time value of money and the risks specific to the asset. In the case of assets which do not generate independent cash flows, value in use is estimated for the assets smallest identifiable cash-generating unit. Impairment losses on goodwill are not reversible. As far as other assets are concerned, at each balancesheet date impairment losses recognised in prior periods are reviewed to determine if there is any evidence that they no longer exist or have decreased. An impairment loss recognised in prior periods is reversed if the estimates used to determine the asset s recoverable amount have changed. An impairment loss is reversed only up to the carrying amount of the asset (net of amortisation and depreciation) that would have been disclosed had no impairment loss been recognised. m) Non-Current Assets Held for Sale Non-current assets (or assets and liabilities representing a disposal group) whose carrying value is expected to be realised through a sale transaction rather than a continuing use are classified as held for sale. Immediately before classification as held for sale, the non-current assets or disposal group (or the components thereof) are measured in accordance with the accounting policies applied by the Company. The non-current assets or disposal group are measured at the lower of carrying value and fair value less cost to sell on classification as held for sale. An impairment charge (if any) on the non-current assets or disposal group is first recognised as goodwill decrease, and then as a decrease in the carrying value of the other components on a proportional basis, provided that the impairment does not affect the value of inventories, financial assets, deferred tax assets, assets arising from employee benefits, investment property and biological assets, which are continued to be measured in accordance with the accounting policies applied by the Group. Any impairment recognised on initial classification of a non-current asset or disposal group as held for sale is recognised in the income statement. Any gain or loss on remeasurement of a non-current asset or disposal group is recognised in the income statement. Any gains on measurement at fair value are recognised only up to the amount of previously recorded impairment losses. 18

39 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 n) Equity (i) Acquisition of Treasury Shares In the event of acquisition of treasury shares, the consideration paid, along with direct transaction costs, is recognised as change in equity. Acquired treasury shares are recognised as a decrease in equity. (ii) Dividends Dividends are recognised as liabilities in the period in which the dividend resolution was adopted. o) Interest-Bearing Loans and Borrowings All loans and borrowings are initially disclosed at cost equal to their fair value, less cost of obtaining a loan. Following initial recognition, interest-bearing loans and borrowings are recognised at amortised cost, using the effective interest rate method. Amortised cost includes cost of obtaining a loan as well as discounts or premiums obtained when the liability is settled. p) Employee Benefits (i) Retirement Severance Pays The Company does not maintain its own pension plan. The Company participates in the national social security system, paying an appropriate percentage of gross pay to the Social Security Authority (ZUS) as contributions. Such contributions are recognised when paid. In accordance with the remuneration rules effective at the Company, employees are entitled to receive retirement severance pays (upon retirement). The Company s liabilities under severance pays are determined by estimating the amount of future remuneration of the employee in the period in which the employee will reach retirement age, and by estimating the amount of the future severance pay. The severance pays are discounted to present value. Liabilities under severance pays are disclosed pro rata to the expected length of employment. The value of future liabilities is calculated by a qualified actuary using the projected unit cost method. The employee turnover is estimated based on historical data and projections concerning future employment levels. Any changes between the balance of employee benefits payable as at the beginning and the end of a reporting period are disclosed in the income statement. (ii) Length-of-Service Awards The Company s employees receive length-of-service awards whose amount is related to the length of service at the Company and the amount of remuneration received at the time when the employee acquires the right to the award. The liabilities under length-of-service awards are determined by estimating the amount of future remuneration of the employee in the period in which the employee will acquire the right to receive individual length-of-service awards and by estimating the award amount. The awards are discounted to present value. The value of future liabilities is calculated by a qualified actuary, using the projected unit cost method. The employee turnover is estimated based on historical data and projections concerning future employment levels. (iii) Bonus Scheme The Company offered to selected employees an opportunity to participate in a bonus scheme under which they could benefit from appreciation of Pfleiderer Grajewo stock. Participation in the scheme was based on individual agreements. 19

40 Notes to the Non-Consolidated Financial Statements for the Financial Year Ended December 31st 2007 Fair value of the liability towards employees under the management bonus scheme is measured as at the grant date, and subsequently recognised over the vesting period. Following initial recognition, the fair value of the liability is measured again as at each balance-sheet date and the scheme settlement date. Any changes in the fair value of the liability are disclosed in the income statement in correspondence with the liability amount. All changes of the fair value of the liability are disclosed as cost of employee benefits. Fair value of the liability under the bonus scheme is computed in accordance with the Black-Scholes option pricing model, taking into account the terms and conditions of the options granted. The bonus scheme was ended on October 31st (iv) Payments in the Form of the Parent Undertaking s Shares As part of a programme providing for payments in the form of the parent undertaking shares, the Company employees have the possibility to acquire shares in Pfleiderer AG. The fair value of a stock option granted is disclosed as an expense under salaries and wages, with a corresponding increase in equity. The fair value is measured as at the option grant date and recognised over the vesting period. The fair value of options is estimated with the use of the Black-Scholes model, with due regard to the terms and conditions on which the options were granted. The amount charged to costs is adjusted to reflect the number of options outstanding at a given time, except where the right to an option expires because the price of the underlying shares has not reached the vesting level. r) Provisions Provisions are created when the Company has a liability (legal or following from commercial practice) resulting from past events and when it is probable that a discharge of this liability would cause an outflow of funds representing economic benefits, and the amount of the liability may be reliably estimated. If the effect of time value of money is significant, the amount of provisions is determined by discounting projected future cash flows to present value at gross discount rates reflecting the current market estimates of the time value of money and risks, if any, related to a given liability. If the discounting method is applied, an increase in provisions as a result of lapse of time is disclosed as cost of external funding. s) Trade and Other Payables Trade and other payables are recognised at amortised cost. t) Revenue (i) Revenue from Sales of Finished Products/Goods for Resale and Services Revenue from sales of finished products/goods for resale is recognised at the fair value of the payment received, less the value of any returns, discounts and rebates. Revenue is recognised in the income statement after significant risks and benefits incidental to the ownership of finished products and goods for resale have been transferred to the purchaser, and if the revenue amount may be reliably estimated. Revenue from provision of services is recognised in the income statement pro rata to the degree of completion of a service as at the balance-sheet date. The progress is determined on the basis of the works performed. The revenue is not recognised if the future economic benefits, determination of the costs incurred, or the possibility of return of finished products/goods for resale is highly uncertain, or if the Company is engaged in the management of the sold finished products/goods for resale on a permanent basis. (ii) Interest Interest income is recognised in the income statement on an accrual basis, using the effective interest rate method. 20