Inter IKEA Holding B.V. Annual Report FY17

Transcription

1 Inter IKEA Holding B.V. Annual Report FY17 KUNGSBACKA Drawer front 24.- * Price in the Netherlands (may vary per country)

2 Annual Report Table of contents REPORT FROM THE MANAGEMENT BOARD... 3 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET CONSOLIDATED PROFIT AND LOSS ACCOUNT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS COMPANY BALANCE SHEET COMPANY PROFIT AND LOSS ACCOUNT NOTES TO COMPANY FINANCIAL STATEMENTS OTHER INFORMATION INDEPENDENT AUDITOR S REPORT Inter IKEA Holding B.V. Annual Report FY17 Page 2 of 54

3 REPORT FROM THE MANAGEMENT BOARD (in millions of EUR, unless otherwise indicated) The Management Board of Inter IKEA Holding B.V. hereby presents its annual report for the 12- month period ended 31 August 2017 (FY17). General Inter IKEA Holding B.V. ( the Company ) is the ultimate parent company of the Inter IKEA Group ( the Group ). The Company is ultimately owned by Interogo Foundation. Around the globe, a large number of franchisees operate under the IKEA trademarks. At 31 August 2017, there were 11 franchisees having total retail sales of EUR 38.3 billion, including sales of services to IKEA customers, and operating 403 stores. Inter IKEA Systems B.V., a subsidiary of the Company, is the franchisor and owner of the IKEA Concept, including the IKEA trademarks. Inter IKEA Systems B.V. franchises systems, methods and proven solutions to franchisees worldwide for the sale of IKEA products under the IKEA trademarks. Inter IKEA Systems B.V. has the assignment to continuously develop the IKEA Concept and ensure its successful implementation in existing and new markets. The IKEA Concept rests on a firm foundation of a low-price offer in home furnishings. With the franchise business model we can expand the business, keep the concept together and maintain an entrepreneurial spirit all with the goal of achieving our vision of creating a better everyday life for the many people. IKEA franchisees implement the IKEA Concept by marketing and selling the IKEA product range. With the exception of the IKEA Delft store in the Netherlands, all IKEA stores operate under franchise agreements with Inter IKEA Systems B.V. Each IKEA franchisee has the responsibility to run, manage and develop its local business. All IKEA franchisees are independent from and unrelated to the Group. The Group is composed of three core businesses: Franchise, Range & Supply and Industry. The core business Range & Supply is responsible for developing and supplying the global IKEA product range, based on an assignment from Inter IKEA Systems B.V. From the relationship with the suppliers, where products get co-designed, to distribution and transport and setting the range for the IKEA franchisees. Together with other units, Range & Supply is responsible for creating range and product information. IKEA Industry is producer of wooden furniture and manufactures wood-based furnishings for IKEA. IKEA Industry also secures production capacities for growth. The aim of IKEA Industry is to create outstanding customer value in terms of quality and price. The Group s governance is also organised through the three core businesses with the related control, risk management structures and compliance tailored to their specific business characteristics. The Group s governance structure is based on two main considerations: to secure the growth and development opportunities of the IKEA Brand and the IKEA Concept, and to guarantee the Group s independence and ability to maintain a long-term perspective. The legal structure follows along the lines of governance with separate parent companies for each of the core businesses. The Company has two main governing bodies: a Management Board and a Supervisory Board. Inter IKEA Holding B.V. Annual Report FY17 Page 3 of 54

4 Financial information These Financial Statements are the first financial statements covering a full 12-month period. During 2016, the Company changed the end of its financial year from 31 December to 31 August with the purpose of aligning to the IKEA business cycle. The comparative figures (referred to as FY16) therefore cover an 8-month period from 1 January 2016 to 31 August The profit and loss account for the current year (referred to as FY17) covers a 12-month period from 1 September 2016 to 31 August Additionally, the range, supply and production activities were acquired at 31 August 2016 meaning these activities had no effect on the profit and loss account in FY16. Total revenues in FY17 amount to EUR 22.9 billion, mainly generated through sales of finished goods to IKEA franchisees and through charged franchise fees. The operating expenses are impacted by the acquisition of the range, supply and production activities as at 31 August The recognition of goodwill and intangible assets in the transaction have for the most part been released to the FY17 profit and loss account, resulting in an additional one-off expense for Depreciation and amortisation. The Group achieved a net profit of EUR 0.9 billion, being 4% of the revenues. The overall movement in the Group s liquidity was limited as the cash generated by operating activities after interest and financial charges was mainly used to repay its loans to the noncontrolling shareholder, Interogo Holding AG, and to distribute a dividend to Interogo Holding AG. The Group monitors its cash position by using a cash flow forecast model to ensure the cash position is always sufficient to meet the financial obligations towards staff members, creditors, the tax authorities and other third parties. The Group s balance sheet positions as per 31 August 2017 have not changed considerably when compared to 31 August The balance sheet has a solvency ratio of 22%. Risk management and financial instruments The IKEA vision is to create a better everyday life for the many people. It guides the entire organisation and the everyday work-life for IKEA co-workers worldwide. Our way of doing business is based on our culture and values. Risk management plays a crucial role in protecting the IKEA values and ensuring that the IKEA brand continues to be strong. As the owner of the IKEA brand, we are strongly committed to being a meaningful and trusted company whilst recognising our responsibility beyond homes, through the impact of our business and our role in society, we are accountable towards the people and the planet. Our risk management approach A structured and consistent approach to managing risk is key to achieving our objectives. The goal of risk management of the Group is to continuously protect our brand, people and assets based on a common methodology. Our risk management approach includes a systematic risk management process for the organisation to identify and anticipate risks, reduce their likelihood, Inter IKEA Holding B.V. Annual Report FY17 Page 4 of 54

5 and mitigate their impact should they materialise, or if possible navigate the risks into opportunities. Our work is based on common sense, honesty, openness, respect and integrity. The IKEA values promotes the responsibility of everyone to do the right thing. To support and ensure that the organisation is aligned with these values, the Inter IKEA Group Code of Conduct helps to guide our co-workers on what is expected of them. Our risk management approach provides senior management insights on key business risks and risk management practices in managing those risks with support from the risk and compliance function. Key business risks of the core businesses across the Group have been consolidated into a risk map for the Group. The risks are presented and discussed with the management of the different core businesses and presented to the Audit Committee of the Supervisory Board where the risk appetite as well as desired risk-levels are confirmed. The issue & crisis management set up continues to provide the organisation a robust way of handling issues and crisis. The reporting system alerts management on issues enabling coordination of efforts to minimise impacts across the organisation. Under the new constellation of the Group, the issue & crisis management approach has been harmonised in FY17. The Group is covered by a comprehensive insurance program ensuring certain risks are (partly) transferred to reduce the financial impacts of claims, damages or third party compensation. We take responsibility into ensuring the network of franchisees as well as the operations in our suppliers are aligned with the group culture and values. We therefore actively review the operations of our franchisees, as well as our suppliers against IKEA requirements. Key risks potentially impacting the Group In the course of achieving our strategic objectives, management pursued opportunities and undertaken business decisions in a responsible, risk conscious manner. Throughout the financial year, there has not been any occurrence of risks or uncertainties, which have had a significant financial impact. Specific measures, in addition to the approach mentioned above, are taken to reduce the likelihood of a number of key risks occurring and to reduce the impact to an acceptable level in line with the Group s risk appetite. Compliance with the legal and regulatory requirements Untimely or not responding to changes in the legislative and regulatory environment in the different countries, could constitute significant risks. The Group constantly monitors changes and aims for full compliance to applicable laws and regulations, especially on the emerging laws and legislations around data privacy, as well as legislations on anti-corruption in the countries where Inter IKEA Group entities and its franchisees are operating. The Group s risk appetite in this regard is low, in which we continuously strive for legal and regulatory compliance. Scarcity and depletion of natural resources Inter Ikea Group is a resource intensive business with sourcing activities all over the globe. Depending on the sourcing region and/or commodity, there will always be risks of severe negative environmental impact due to use of land, or non-sustainable harvesting or production practices. The Group has high ambitions for a sustainable future in both the resources we deploy as well as the circumstances of our suppliers in producing IKEA products. The requirements are therefore Inter IKEA Holding B.V. Annual Report FY17 Page 5 of 54

6 high, for us and our suppliers. Controls are defined to ensure that all relevant parties adhere to our strict requirements to meet the Group s low risk appetite on sustainability matters. Product quality and safety compliance Our product design secures sellable products that correspond to the local regulatory requirements for safety. For Inter IKEA Group and our business partners, product safety and quality are top priorities. Non-compliance to both quality and safety requirements is therefore a risk which we take with the highest priority and our risk appetite in this regard is very low. In close cooperation with our franchisees and suppliers, the Group has clear processes in place to guarantee product quality and compliance with regulatory requirements in all markets. Information security and IT for growth IKEA culture is characterized by openness, honesty and trust. Sharing information is essential for improving our competitive advantage, securing future growth and ensuring the continuing business success of IKEA around the world. Information needs to be reliable, protected and treated with utmost care whilst respecting ethical values. This helps us to create lasting confidence in the IKEA brand. Considerable programs have been initiated within the Group to further secure compliance with relevant industry and legal standards whilst improving our IT infrastructure. The intensity of these programs reflects our low risk appetite in this regard. Tax With our worldwide operation, the Group is exposed to the local laws and regulations where we operate. As a good corporate citizen, in line with the IKEA values, we are committed to be compliant. In recent years there has been increased attention from both governments and media on taxation of multinational companies. We have been actively monitoring and addressing these developments by implementing a Group-wide tax control framework and simplifying the Group tax structure. The increasing requirements on multinational companies with regard to transfer pricing and transparency are high on the agenda. Financial Risks As of 1 September 2016, the Group supplies IKEA products to the franchisees. The Group has guaranteed local currency wholesale prices for a large portion of the product range in this financial year. The resulting foreign currency exchange rate risk is actively managed using derivative contracts. Market risk is the risk that changes in market prices, mainly due to interest rates and foreign exchange rates, will affect the Group s purchase transactions or the value of its financial instruments. Market risk exposures are limited since the Group actively uses derivative contracts and since there are almost no loans taken from external parties. Credit risk arises principally from the Group s trade and other receivables. The exposure to credit risk on sales of IKEA products and on franchise fee receivables are minimal since the majority of these sales are settled through frequent invoicing and fixed payments schedules. The Group monitors its cash position by using a cash flow forecast model. This model considers the maturity of its assets and liabilities and the projected cash flows from the operation with the aim to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and long term loans. This enables management to ensure that the cash position is sufficient to meet the financial obligations towards creditors and other third parties. Inter IKEA Holding B.V. Annual Report FY17 Page 6 of 54

7 The Group interest rate risk is limited given the fact that nearly all interest bearing loans have a fixed interest rate. The Group risk appetite towards financial risk is low. Financial and non-financial performance indicators The development of revenues is directly linked to the sales of all IKEA franchisees worldwide since these sales lead the Group s wholesale activities and form the base for the franchise revenues. Worldwide IKEA sales in FY17 increased by 4% compared to the same period in the previous year. It should be noted that due to the inclusion of the range, supply and production activities in the Profit and loss account starting FY17, there is little benefit for comparison to the FY16 profit and loss account. Social responsibility Social responsibility is anchored within the strategy of the Group and forms an integrated part of our business. We strive to create shared value between ourselves and our primary stakeholders: franchisees, co-workers, customers, suppliers and society as a whole. Our businesses and way of doing business are guided by the IKEA values, culture and our roots in Småland, Southern Sweden. Together they drive us to make the best possible use of the limited resources available. In addition, our values are built around principles for behaviour, both within the Group and towards business partners and other stakeholders. We have a long-term perspective on our business. Profitability and responsibility are not opposing forces, on the contrary, they are interdependent. We can only ensure long-term profitability by acting in a way that creates trust among all stakeholders. The Group s supplier code of conduct IWAY the IKEA way on purchasing products, materials and services was first introduced in IWAY specifies the requirements that we place on suppliers of products and services and details what they can expect in return from IKEA. In addition to the main document, there are several industry-specific supplements and a special code of conduct for child labour. IKEA suppliers are responsible for communicating the content of the IKEA Supplier code of conduct to their employees and sub-suppliers and ensuring that all required measures are implemented at their own operations. Co-workers With the base of IKEA values and leadership, together with compensation and benefits, the IKEA co-workers are provided with a safe working environment. The Inter IKEA Group code of conduct applies to all co-workers within the Group and can be found on our website. A key element in the HR policy is the training of our co-workers. Learning and know-how have been key focus areas over many years. Today, new learning platforms, online and offline, accessible to all IKEA franchisees, remain a vital area for development. We are introducing new training solutions with the objective to meet current and future expectations of our co-workers and customers. Inter IKEA Holding B.V. Annual Report FY17 Page 7 of 54

8 Information on male/female ratio The Group s Management Board and Supervisory Board members are 100% male. Diversity and inclusiveness are actively pursued within the Group, resulting in persons with different backgrounds, nationalities and gender holding management positions within the Group. We believe the current male/female ratio throughout the Group is sufficient to achieve a balanced leadership. Sustainability The IKEA Sustainability Direction provides a common framework for all trademark users to develop and integrate sustainability strategies and tactics into their own business plans, but gives flexibility for local, market relevant approaches and solutions. All IKEA franchisees now are able to categorise their sustainability work into the three same change drivers: 1. Inspire and enable millions of customers to live a more sustainable life at home by developing and promoting products and solutions that help customers save or generate energy, reduce or sort waste, use less or recycle water, at the lowest possible price. 2. Strive for resource and energy independence by securing long-term access to sustainable raw materials, having a positive impact on the communities where we source materials and using resources within the limits of the planet, and through producing as much renewable energy as the energy we consume and driving energy efficiency throughout our value chain. 3. Take a lead in creating a better life for the people and communities impacted by our business. Further extend our code of conduct throughout our value chain; be a good neighbour, support human rights and act in the best interest of children. The Group will now begin to strengthen the sustainability direction across all three change drivers, and in doing so will evaluate how and where to set future minimum requirements on all IKEA trademark users. This will support a more uniform approach regardless of operating company and geographic location. Environmental issues No material environmental issues occurred during FY17. Especially within Core Business Industry, much attention is given to compliance with environmental regulations through regular equipment verification and condition checks, and through active air emission monitoring and documentation. Research and development The IKEA Concept rests on a firm foundation: a low-price offer in home furnishing products. As the franchisor, Inter IKEA Systems B.V. is continuously developing the IKEA Concept to ensure its implementation remains successful in new and existing markets, and the company works to meet consumer needs in life at home as well as new opportunities and challenges that arise from the world around us. Developments include the review and re-establishment of different areas of the IKEA Concept to align multichannel retailing and which allow us to remain forward-looking in Inter IKEA Holding B.V. Annual Report FY17 Page 8 of 54

9 areas such as Brand Development, Sustainability, People and Environment, Social Media and Market Potential & Expansion. Planned projects range from repositioning in certain markets to automating our goods flow and further digitalisation of the IKEA catalogue. Range has the responsibility to develop, design and produce home furnishing solutions available to everyday home furnishing needs. The foundation of all product development is the idea that even with a thin wallet people should still be able to create a beautiful home with functional, safe and healthy products. The products are designed in accordance with the principles of democratic design, meeting requirements on form, function, quality, sustainability and low price. Each year approximately 2,000 new articles are introduced. The Company expects to continue its research and development activities, as well as investing in strategic development projects, material and techniques, range and production capacity. To meet the needs of today s customers, multichannel retailing is an essential focus area impacting our total value chain. Outlook for financial year FY18 We expect retail sales growth by our franchisees in FY18, building on the development of FY17. The expected growth directly contributes to our franchise fee and wholesale revenue for FY18. The Company expects to finance its investments primarily from its own funds and not enter into external funding. Since the FY17 operating expenses are impacted downward by the amortisation of goodwill and intangible assets due to the acquisition of the range, supply and production activities as at 31 August 2016, the net profit for FY18 is expected to be higher than in FY17. During FY18, we will continue to invest in research activities and in the development of our core businesses Franchise, Range & Supply and Industry. Most importantly, we will continue to invest in our co-workers who contribute to realising the Group s goals every day. Inter IKEA Holding B.V. Annual Report FY17 Page 9 of 54

10 MANAGEMENT BOARD Torbjörn Lööf (Chairman) Anders Gårlin Martin van Dam Delft, 5 December 2017 Inter IKEA Holding B.V. Annual Report FY17 Page 10 of 54

11 CONSOLIDATED BALANCE SHEET (before profit appropriation, in millions of EUR) 31/08/17 31/08/16 Fixed assets Intangible fixed assets (5) 8,243 8,932 Tangible fixed assets (6) 1,451 1,336 Financial fixed assets (7) Total fixed assets 9,940 10,590 Current assets Inventories (8) 3,998 4,284 Receivables (9) 4,435 3,783 Cash and cash equivalents (10) Total current assets 8,717 8,369 TOTAL ASSETS 18,657 18,959 EQUITY AND LIABILITIES Group equity (11) 4,194 4,258 Provisions (12) Non-current liabilities (14) 7,861 8,601 Current liabilities (15) 6,105 5,562 TOTAL EQUITY AND LIABILITIES 18,657 18,959 (See accompanying notes) Inter IKEA Holding B.V. Annual Report FY17 Page 11 of 54

12 CONSOLIDATED PROFIT AND LOSS ACCOUNT (in millions of EUR) 31/08/17 31/08/16 Revenues 23,188 2,174 Changes in inventories of finished products Other revenues 29 2 Total revenues (18) 22,878 2,176 Cost of raw materials and consumables 18,688 1,292 Cost of outsourced work and other external costs Salaries and wages Social charges Pension expenses 91 7 Depreciation and amortisation Other operating expenses Total operating expenses (19) 21,582 1,625 Operating result 1, Financial income Financial expense Financial income and expense (20) Income before taxes 1, Income tax (21) Net result (See accompanying notes) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions of EUR) 31/08/17 31/08/16 Net result Change in unrealised derivatives 65 0 Remeasurement pension provisions -2-4 Translation differences on foreign operations Other Total comprehensive income Inter IKEA Holding B.V. Annual Report FY17 Page 12 of 54

13 CONSOLIDATED CASH FLOW STATEMENT (in millions of EUR) 31/08/17 31/08/16 Operating result 1, Adjusted for: - Depreciation/amortisation Other value adjustments Changes in provisions Changes in financial fixed assets Changes in working capital Cash flow from business operations 1, Interest received 9 16 Interest paid Income tax paid Cash flow from operating activities Investments in: - Intangible fixed assets Tangible fixed assets Acquisition of group companies Cash flow from investing activities Issuance of debt -6 0 Repayment of debt 57 0 Repayment of borrowings Take-up of long-term debt Take-up of short-term debt 1,269 0 Dividend paid -1, Cash flows from financing activities Net cash flow Exchange rate and translation differences on cash 4 0 Changes in cash and cash equivalents Cash and cash equivalents at beginning Cash and cash equivalents at end Net movement in cash Inter IKEA Holding B.V. Annual Report FY17 Page 13 of 54

14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE INFORMATION Inter IKEA Holding B.V. ( the Company ), was incorporated on 30 September 1992, is registered in Delft (Chamber of Commerce registration number ) and has its corporate seat at Olof Palmestraat 1 in Delft. Inter IKEA Holding BV is the ultimate parent of a group of companies that together form the Inter IKEA Group. The Company has issued class A and class B shares. The class A shares are held by Interogo Foundation, giving Interogo Foundation control over the Company. Class B shares are held by Interogo Holding AG. The operation of Inter IKEA Group is organised in three core businesses; Franchise, Range & Supply and Industry. The main activities of the group of which the Company is the parent, consist of the following: - IKEA Franchising: Inter IKEA Systems B.V. is the franchisor and the owner of the IKEA Concept, including the IKEA trademarks. Inter IKEA Systems B.V. franchises systems, methods and proven solutions to franchisees worldwide for the sale of IKEA products under the IKEA trademarks. - IKEA Range & Supply is responsible for developing and supplying the Global IKEA range. This means IKEA Rang & Supply works with the value chain end to end from supplier to customer. - IKEA Industry is the largest producer of wooden furniture in the world and manufactures wood-based furniture for IKEA customers. IKEA Industry secures production capacities for growth. These financial statements cover the financial reporting period for the financial year During the year 2016, the Company has changed the end of its financial year from 31 December to 31 August. By changing its financial year, it is now in line with the IKEA business cycle. The financial statements 2016 cover the 8 months period from 1 January 2016 to 31 August 2016 and therefore the profit and loss account is non-comparable to the current period. In case of the profit and loss account, related information 2016 means 1 January 2016 up to and including 31 August 2016 and 2017 means 1 September 2016 up to and including 31 August BASIS OF PREPARATION Both the company financial statements and the consolidated financial statements have been prepared in accordance with Title 9, Book 2 of the Netherlands Civil Code. The accounting policies applied for measuring assets and liabilities and the determination of result are based on the historical cost convention, unless otherwise stated in the further principles. The Company s financial information is included in the consolidated financial statements. For this reason, in accordance with Section 402, Book 2 of the Dutch Civil Code, the Company s separate profit and loss account exclusively states the share of the result of participating interests after tax and the company result after tax. The financial statements have been prepared on the basis of the going concern assumption. Inter IKEA Holding B.V. Annual Report FY17 Page 14 of 54

15 The financial statements are presented in euros, which is also the Company s functional currency. All financial information in euros has been rounded to the nearest million. The figures for 2016 have been adjusted in order to make them comparable to current year s presentation. These adjustments relate to the provisional accounting for the acquisition of the range, supply and industry activities and are disclosed in note SIGNIFICANT ACCOUNTING POLICIES General Assets and liabilities are measured at nominal value, unless otherwise stated in the further principles. An asset is recognised in the balance sheet when it is probable that the expected future economic benefits, that are attributable to the asset, will flow to the entity and the cost of the asset can be measured reliably. A liability is recognised in the balance sheet when it is expected to result in an outflow of resources embodying economic benefits and the amount of the obligation can be measured reliably. An asset or liability that is recognised in the balance sheet, remains on the balance sheet if a transaction (with respect to the asset or liability) does not lead to a major change in the economic reality with respect to the asset or liability. An asset or liability is no longer recognised in the balance sheet when a transaction results in all or substantially all rights to economic benefits and all or substantially all of the risks related to the asset or liability being transferred to a third party. Income is recognised in the profit and loss account when an increase in future economic potential related to an increase in an asset or a decrease of a liability has arisen, the size of which can be measured reliably. Expenses are recognised when a decrease in the economic potential related to a decrease in an asset or an increase of a liability has arisen, the size of which can be measured with sufficient reliability. Revenue and expenses are allocated to the period to which they relate. Revenues are recognised when the company has transferred the significant risks and rewards of ownership of the goods to the buyer. Assumptions and estimates The preparation of the financial statements requires management to form opinions and to make estimates and assumptions that have an impact on the application of principles and the reported values of assets and liabilities and of income and expenditure. Actual results may differ from these estimates. The estimates and the underlying assumptions are constantly assessed. Revisions of estimates are recognised in the period in which the estimate is revised and in future periods for which the revision has consequences. The following accounting policies are in the opinion of management the most critical for the purpose of presenting the financial position and require estimates and assumptions. The useful life of fixed assets; Obsolesence of stock; Impairments; Inter IKEA Holding B.V. Annual Report FY17 Page 15 of 54

16 Provisions; and Taxation. Refer to the accounting policies of the respective balance sheet items for details on the assumptions made. Basis of consolidation The consolidated financial statements include the financial data of The Company, its subsidiaries in the group, other group companies and other companies over which The Company can exercise control or of which it conducts the central management. Subsidiaries are participating interests in which The Company (and/or one or more of its subsidiaries) can exercise more than half of the voting rights in the general meeting, or can appoint or dismiss more than half of the managing directors or supervisory directors. Group companies are participating interests in which the company has a majority interest, or in which it can exercise decisive influence (control) by other means. In assessing whether controlling interest exists, potential voting rights are taken into account that can be exercised in such a way that they will provide the company with more or less influence. The consolidated financial statements are prepared by applying uniform accounting policies for measurement and determination of result of the group. For an overview of all subsidiaries included in the Group, reference is made to the listing of subsidiaries that has been filed by the Company at the Chamber of Commerce. Newly acquired participating interests are consolidated as from the date that decisive influence (control) can be exercised. Participating interests disposed of remain included in the consolidation until the date of loss of this influence. In the consolidated financial statements, intra-group shareholdings, debts, receivables and transactions are eliminated. Also, the results on transactions between group companies are eliminated to the extent that the results are not realised through transactions with third parties outside the group. For a transaction whereby the company has a less than 100% interest in the selling group company, the elimination from the group result is allocated pro rata to the minority interest based on the interest of the minority in the selling group company. Translation of foreign currencies Each entity in the Group determines its own functional currency; items included in the financial statements of each entity are measured using that functional currency. Transactions denominated in foreign currencies are initially carried at the functional exchange rates applying on the date of transaction. Monetary balance sheet items denominated in foreign currencies are translated at the functional exchange rates applying on the balance sheet date. Exchange differences resulting from the settlement of monetary items, or resulting from the translation of monetary items denominated in foreign currency, are recognised in the profit and loss account in the period in which they arise, except for exchange differences on monetary items that are part of a net investment in a foreign operation. Non-monetary assets and liabilities denominated in foreign currency that are measured at historical cost, are translated into euros at the functional exchange rates applying on the transaction date. Inter IKEA Holding B.V. Annual Report FY17 Page 16 of 54

17 The assets and liabilities that are part of the net investment in a foreign operation are translated into euros at the exchange rate prevailing on the balance sheet date. The income and expenses of such a foreign operation are translated into euros at the average exchange rate for the year. Currency translation differences are recognised in the translation reserve within equity. Offsetting Assets and liabilities are only offset in the financial statements, if and to the extent that: an enforceable legal right exists to offset the assets and liabilities and settle them simultaneously; and the intention is to settle the assets and liabilities on a net basis or simultaneously. Financial instruments Financial instruments include trade and other receivables, cash, loans and other financing commitments, trade payables and other amounts payable. These financial statements contain the following financial instruments: financial instruments held for trading (financial assets and liabilities), loans granted and other liabilities, other financial liabilities and derivatives. Financial and non-financial contracts may contain terms and conditions that meet the definition of derivative financial instruments. Such an agreement is separated from the host contract if its economic characteristics and risks are not closely related to those of the host contract, a separate instrument with the same terms and conditions as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value with changes in fair value recognised in the profit and loss account. Financial instruments embedded in contracts that are not separated from the host contract are recognised in accordance with the host contract. Derivatives separated from the host contract are, in accordance with the measurement policy for derivatives for which no cost price hedge accounting is applied, measured at cost or lower fair value. A financial asset or a financial liability is recognised in the balance sheet when the contractual rights or obligations in respect of that instrument arise. A financial instrument is no longer recognised in the balance sheet when there is a transaction that results in a transfer to a third party of all or substantially all of the rights to economic benefits and all or substantially all of the risks related to the position. A purchase or sale according to standard market conventions is, by class of financial assets and financial liabilities, systematically recognised or derecognised in the balance sheet on the settlement date (date of transfer). Financial instruments, including the derivative financial instruments separated from the host contracts, are recognised initially at fair value, including discounts/premium and any directly attributable transaction costs. If instruments are not subsequently measured at fair value with value changes recognised in the profit and loss account, any directly attributable transaction costs are included to the initial measurement. Inter IKEA Holding B.V. Annual Report FY17 Page 17 of 54

18 Fair value The fair value of a financial instrument is the amount for which an asset can be sold or a liability settled, involving parties who are well informed regarding the matter, willing to enter into a transaction and are independent from each other. The fair value of listed financial instruments is determined on the basis of the exit price. The fair value of non-listed financial instruments is determined by discounting the expected cash flows to their present value, applying a discount rate that is equal to the current risk-free market interest rate for the remaining term, plus credit and liquidity surcharges. The fair value of derivatives involving the exchange of collateral is determined without the credit or liquidity surcharges since this risk is mitigated by the collateral exchange. Derivatives and hedge accounting Derivatives are stated at fair value with recognition of all changes in value in the profit and loss account, except where hedge accounting is used to hedge the variability of future cash flows that affect the profit and loss account (cash flow hedge accounting). Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured to their fair value. Fair values are obtained from valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, unless the possibility to offset exists, then the values will be netted per counterparty. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument. The commercial flows of the group are subject to currency risk. As part of its treasury activities certain derivatives are designated as hedges of highly probable future cash flows attributable to a forecast transaction in foreign currencies. Hedge accounting is used for derivatives designated in this way provided certain criteria are met. If cash flow hedge accounting is used, the effective portion of the fair value changes of the derivatives is initially recognised in other comprehensive income. As soon as the expected future transactions lead to the recognition of gains or losses in the profit and loss account, the respective amounts are transferred from other comprehensive income to the profit and loss account. The net result of these gains and losses is recognised as financial income and expenses. If a hedged position in respect of an expected future transaction leads to the recognition in the balance sheet of a non-financial asset or a non-financial liability, the company adjust the cost of this asset by the hedging results. This is done through a transfer from other comprehensive income of the results that have been deferred in this reserve until such time. If a derivative no longer meets the conditions for hedge accounting, expires or is sold, or if the company has decided to no longer apply hedge accounting, the hedging relationship is terminated. The gains or losses recognised at the time of the termination of the hedging relationship remain in equity until the expected future transaction takes place. If the transaction is no longer expected to take place, the deferred gain or loss on the hedge recognised in equity is taken to the profit and loss account. The Company uses generic hedge accounting documentation, documenting the specific hedge relationships in the dedicated treasury management system business solutions and regularly Inter IKEA Holding B.V. Annual Report FY17 Page 18 of 54

19 assesses the effectiveness of the hedging relationships by establishing whether the hedge is effective or that there is no over-hedging. The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items as well as its risk management objective and strategy for undertaking hedge transactions together with methods selected to assess hedge effectiveness. Inter IKEA Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in future cash flows (the hedged items). The effectiveness test is performed by comparing the critical attributes of the hedging instrument with the hedged item, namely currency pair, maturity date and notional amount. If there is an over hedge, the related value based on the lower of cost or fair value is recognised directly in the profit and loss account. Impairment Financial assets, e.g. long-term loans receivable, that are measured at (amortised) cost, are assessed at each reporting date to determine whether there is objective evidence that they are impaired. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, with negative impact on the estimated future cash flows of that asset, which can be estimated reliably. Objective evidence that financial assets are impaired includes default or delinquency by a debtor, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers, indications that a debtor or issuer is approaching bankruptcy, or the disappearance of an active market for a security. The entity considers evidence of impairment for financial assets measured at amortised cost both individually and on a portfolio basis. All individually significant assets are assessed individually for impairment. Those individually significant assets found not to be individually impaired and assets that are not individually significant are then collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the company uses historical trends of the probability of default, the timing of collections and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. A previously recognised impairment loss is reversed if the decrease of the impairment can be related objectively to an event occurring after the impairment was recognised. The reversal is limited to at most the amount required to measure the asset at its original amortised cost at the date of reversal had the impairment not been recognised. An impairment loss in respect of a financial asset stated at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognised in the profit and loss account and reflected in an allowance account against loans and receivables or investment securities held to maturity. Interest on the impaired asset Inter IKEA Holding B.V. Annual Report FY17 Page 19 of 54

20 continues to be recognised by using the asset's original effective interest rate. Trade and other receivables Receivables are short-term in nature, initially measured at fair value and subsequently at amortized costs (except for derivatives) less allowance for uncollectible amounts. Financial liabilities Financial liabilities are recognised initially at fair value, which includes directly attributable transactions costs, and subsequently carried at amortised cost. If there is a transfer of a financial asset that does not qualify for derecognition in the balance sheet, the transferred asset and the associated liability are not offset. Intangible fixed assets An intangible fixed asset is recognised in the balance sheet if: it is probable that the future economic benefits that are attributable to the asset will flow to the Company; and the cost of the asset can be measured reliably. Costs relating to intangible fixed assets not meeting the criteria for capitalisation are immediately recognised in the profit and loss account. Intangible fixed assets are carried at the lower of cost of acquisition or production net of accumulated amortisation and recoverable amount (being the higher of value in use and fair value less costs to sell). Intangible fixed assets are amortised on a straight-line basis over their expected useful economic lives. Proprietary Rights The Proprietary Rights include the IKEA trademark, protection rights, intellectual property rights and the rights to the IKEA catalogue. The IKEA trademark and concept have shown strong income and cash flow performance over the last decades. We have the intent and ability to support the IKEA brand and concept with marketplace spending for the foreseeable future. We therefore believe that the Proprietary Rights have an indefinite life. However, applicable Dutch accounting principles require us to amortise these Proprietary Rights based on expected economic life. Determining an expected life of the Proprietary Rights requires management assessment and is based on a number of factors, including: expected usage of the IKEA brand and concept, development of our market share, expectations on market development, consumer awareness and anticipated future expansion. Based on these factors, the economic life is set at 45 years. At the end of each financial year, the recoverable amount of the Proprietary Rights is assessed for impairment, even if there is no indication of impairment. The accounting principles for the recognition of an impairment are included under the section Impairment of fixed assets. Goodwill Goodwill represents the excess of the cost of the acquisition of the participating interest (including transaction costs directly related to the acquisition) over the company s interest in the net realisable value of the assets acquired and the liabilities assumed of the acquired entity, less Inter IKEA Holding B.V. Annual Report FY17 Page 20 of 54

21 cumulative amortisation and impairment losses. Internally generated goodwill is not capitalised. Goodwill paid upon the acquisition of foreign group companies and subsidiaries is translated at the exchange rates at the date of acquisition. The expected useful life for Goodwil related to transaction in which the legal entities that hold the range, supply and production activities transferred to Inter IKEA Holding B.V. is determined at 1 year. Reacquired rights Reacquired rights relate to the following: the Company has granted IKEA of Sweden AB the right to develop products and establish the IKEA product range, the Company has granted IKEA Supply AG a purchase agreement. These rights have been reacquired during the transaction in which the entitities performing the range, supply and prduction activities were acquired by Inter IKEA Holding B.V. The remaining useful life for the reacquired rights has been determined during the transaction: 5 years for IKEA of Sweden AB and 1 year for IKEA Supply AG. Software in development Externally developed software is capitalised on the balance sheet and depreciated over a term of 3 years. Tangible fixed assets Land and buildings, machinery and equipment, contruction in progress and other assets are stated at cost less accumulated depreciation and impairment losses. The cost comprises the price of acquisition or manufacture, plus other costs that are necessary to bring the assets to their location and in condition for their intended use. Expenditure is only capitalised when it extends the useful life of the asset. Costs of major rebuilding, repairs or maintenance are recognised as part of the cost, when incurred and if the recognition criteria are met, using the component approach. All other repair and maintenance costs are charged directly to the profit and loss account. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each item of the tangible fixed assets. Land and prepayments on tangible fixed assets are not depreciated. Depreciation starts as soon as the asset is available for its intended use, and ends at decommissioning or divestment. The following depreciation periods (in years) are applied: Land and Buildings: 0-25 Machinery and equipment: 3-15 Financial fixed assets Long-term loans receivable Loans granted and other receivables are financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these loans and receivables are carried at amortised cost based on the effective interest rate method, less impairment losses. Deferred tax assets The valuation of deferred tax assets is explained under the heading Corporate income tax. Inter IKEA Holding B.V. Annual Report FY17 Page 21 of 54