Accounting principles

Company profile
Uponor is an international industrial group providing building and municipal infrastructure solutions. Uponor Group’s segment structure consists of the following three reporting segments: Building Solutions – Europe, Building Solutions – North America and Uponor Infra. Its segment business risks and profitability factors differ from each other with respect to the market and business environment as well as offering, services and customers. Group management, control and reporting structures are organised according to the business segments.

Uponor Group's parent company is Uponor Corporation, domiciled in Helsinki in the Republic of Finland. Its registered address is:

Uponor Corporation
P.O. Box 37 (street address: Äyritie 20)
FI-01511 Vantaa
Finland
Tel. +358 (0)20 129 211, Fax +358 (0)20 129 2841

The Financial Statements will also be available on the company website at http://investors.uponor.com and can be ordered from Uponor Corporation at the above-mentioned address.

At its meeting of 15 February 2018, Uponor Corporation’s Board of Directors approved the publication of these financial statements. According to the Finnish Limited Liability Companies Act, the shareholders have the opportunity to approve or reject the financial statements at the Annual General Meeting to be held after their publication. Furthermore, the Annual General Meeting can decide on the modification of the financial statements.

Basis of preparation
Uponor Group’s consolidated financial statements have been prepared in compliance with the International Financial Reporting Standards (IFRS), including International Accounting Standards (IAS) and their SIC and IFRIC interpretations valid on 31 December 2017. In the Finnish Accounting Act and ordinances based on the provisions of the Act, IFRS refer to the standards and their interpretations adopted in accordance with the procedures as set in regulation (EC) No 1606/2002 of the European Parliament and of the European Council. The consolidated financial statements also include additional information required by the Finnish Accounting Act and the Limited Liability Companies Act. The consolidated financial statements are presented in millions of euros (M€) and are based on the historical cost convention, unless otherwise specified in the accounting principles section below.

Use of estimates
The preparation of consolidated financial statements under IFRS requires the use of estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities on the date of the financial statements, as well as the reported amounts of income and expenses during the report period. Although these estimates are based on the management's best view of current events and actions, the actual results may ultimately differ from these estimates. In addition, judgement is required in the application of accounting policies.

Consolidation principles
The consolidated financial statements include the parent company, Uponor Corporation, and all companies in which the parent company holds more than half of the voting rights, either directly or through its subsidiaries. Subsidiaries include those companies in which Uponor Corporation has direct or indirect control of over 50 per cent of the voting rights or otherwise has power to govern the financial and operating policies, with the purpose of gaining financial benefit from their operations. Subsidiaries acquired or established during the year are included from the date the Group obtained control. Divested companies have been included up to their date of sale.

Intra-Group shareholdings are eliminated using the acquisition cost method. Accordingly, the assets and liabilities of an acquired company are measured at fair value on the date of acquisition. The excess of the acquisition cost over the fair value of the net assets has been recorded as goodwill. Based on the First-Time Adoption of IFRS 1, any company acquisitions made prior to the IFRS transition date (1 January 2004) are not adjusted for IFRS, but book value according to Finnish Accounting Standards (FAS) is applied to goodwill amounts. Intra-Group transactions, receivables, liabilities, unrealised gains and dividends between Group companies are eliminated in the consolidated financial statements.

Associated companies are entities over which the Group has 20–50 per cent of the voting rights, or over which the Group otherwise exercises a major influence. Joint ventures are arrangements in which the Group has a joint control with another entity. Holdings in associated companies and joint ventures over which the Group does not have over 50 per cent ownership of the voting rights or over which the Group does not excise a major influence are included in the consolidated financial statements using the equity method. Accordingly, the share of post-acquisition profits and losses are recognised in the income statement to the extent of the Group’s holding in the associated companies and joint ventures. When the Group’s share of losses exceeds the carrying amount it is reduced to nil and any recognition of further losses ceases unless the Group has an obligation to fulfil the associated company’s or joint ventures’ obligations. Joint ventures over which the Group has over 50 per cent ownership of the voting rights or over which the Group otherwise exercises a major influence are included in the consolidated financial statements using the acquisition cost method. Foreign currency translations and exchange rate differences Each company translates its foreign currency transactions into its own functional currency, using the rate of exchange prevailing on the transaction date. Outstanding monetary receivables and payables in foreign currencies are stated using the exchange rates on the balance sheet date. Exchange rate gains and losses on actual business operations are treated as sales adjustment items or adjustment items to materials and services. Exchange rate gains and losses on financial transactions are entered as exchange rate differences in financial income and expenses. In the consolidated financial statements, the income statements of the Group’s foreign subsidiaries are converted into euros using the average exchange rates quoted for the reporting period. All balance sheet items are converted into euros using the exchange rates quoted on the reporting date. The resulting conversion difference and other conversion differences resulting from the conversion of subsidiaries’ equity are shown as a separate item under equity. In addition, in the consolidated financial statements, exchange rate differences in the loans granted by the parent company to foreign subsidiaries in replacement of their equity are treated as translation differences. Realised translation differences in relation to the divestment of subsidiaries and the redemption of material shares in subsidiaries are recognised as income or expenses in the consolidated statement of comprehensive income.

Key exchange rates for the euro

At the end of period                               Average

 

2017 2016 2017 2016
USD 1.1993 1.0541 1.1370 1.1032
SEK 0.8438 9.5525 9.6464 9.4713
CAD 1.5039 1.4188 1.4725 1.4589
DKK 7.4449 7.4344 7.4390 7.4451
NOK 9.8403 9.0863 9.3717 9.2626
RUB 69.3920 64.3000 66.1795 73.3091

Non-current assets held for sale and discontinued operations
Non-current assets held for sale and assets related to discontinued operations are formed once the company, according to a single co-ordinated plan, decides to dispose of a separate significant business unit, whose net assets, liabilities and financial results can be separated operationally and for financial reporting purposes (cash generating unit). Non-current assets held for sale are shown separately in the consolidated balance sheet. Profit or loss from a discontinued operation and gains or losses on its disposal are shown separately in the consolidated statement of comprehensive income. Assets related to non-current assets held for sale and discontinued operations are assessed at book value or, if it is the lower of the two, at fair value. Depreciation from these assets has been discontinued upon the date of classifying assets as noncurrent assets held for sale and discontinued operations. The Group has no assets classified as non-current assets held for sale at the end of the financial or a comparable period. The Group had discontinued operations related to the Irish infrastructure business sold in 2008; the Irish subsidiary was liquidated in 2016.

Revenue recognition
Sales of products are recognised as income once the risks and benefits related to ownership of the sold products have been transferred to the buyer, according to the agreed delivery terms, and the Group no longer has possession of, or control over, the products. Sales of services are recognised as income once the service has been rendered. Net sales comprise the invoiced value of the sale of goods and services net of indirect taxes, sales rebates and exchange rate differences. The Group uses percentage of completion method to recognise work-in-progress for long-term contracts in project business companies, when the outcome of the project can be estimated reliably. The percentage of completion is defined as the proportion of the individual project cost incurred to date from the total estimated project costs.

Research and development
Research costs are expensed as incurred and are included in the consolidated statement of comprehensive income in other operating expenses. Development costs are expensed as incurred, unless the criteria for capitalising these costs as assets are met. Product development costs are capitalised as intangible assets and are depreciated during the useful life of the asset, if future economic benefits are expected to flow to the entity and certain other criteria, such as the product’s technical feasibility and commercial usability, are confirmed. The Group does not have any capitalised development costs.

Employee benefits
The Group’s pension schemes comply with each country’s local rules and regulations. Pensions are based on actuarial calculations or actual payments to insurance companies. The Group applies defined contribution and defined benefit pension plans. Within the defined contribution plan, pension contributions are paid directly to insurance companies and, once the contributions have been paid, the Group has no further payment obligations. These contributions are recognised in the income statement for the accounting period during which such contributions are made.

For defined benefit pension plans, the liability is the present value of the defined benefit obligation on the balance sheet date less the fair value of plan assets. The pension obligation is defined using the projected unit credit method. The discount rate applied to calculating the present value of post-employment benefit obligations is determined by the market yields of long-term corporate bonds or government bonds. Costs resulting from the defined benefit pension plans are recognised as expenses for the remaining average period of employment.

Current service cost (benefit expense) and net interest cost on defined benefit obligation (net liability) are recognised in the income statement and presented under employee benefit costs. Re-measurement items on defined benefit plan obligations and plan assets, including actuarial gains and losses and return on plan assets (excluding interest income), are immediately recognised through other comprehensive income and such balances are permanently excluded from the consolidated income statement.

Operating profit
Operating profit is an income statement item, which is calculated by deducting expenses related to operating activities from net sales.

Borrowing costs
Borrowing costs are recognised in the income statement as they incur. Direct transaction expenses due to loans, clearly linked to a specific loan, are included in the loan’s original cost on an accrual basis and recognised as interest expenses using the effective interest method. Interest costs on borrowings to finance the construction of assets are capitalised as part of the cost during the period required to prepare and complete the property for its intended use.

Income taxes
Income taxes in the consolidated statement of comprehensive income comprise taxes based on taxable income recognised for the period by each Group company on an accrual basis, according to local tax regulations, including tax adjustments from the previous periods and changes in deferred tax. Deferred tax assets or liabilities are calculated, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, using the tax rate approved on the balance sheet date. Deferred tax assets are recognised to the extent that it appears probable that future taxable profit will be available, against which temporary differences can be utilised.

Intangible assets

Goodwill
Goodwill represents future economic benefits arising from assets that are not capable of being individually identified and separately recognised by the Group. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets of the acquired company on the date of acquisition. Goodwill is allocated to the business segments. Goodwill is not amortised, but is tested for impairment annually. Gains and losses on the disposal of a Group entity include any goodwill relating to the entity sold.

Other intangible assets
Other intangible assets include trademarks, patents, copyrights, software licences and customer relations. Intangible assets are recognised in the balance sheet at historical costs less accumulated depreciation, according to the expected useful life and any impairment losses.

Property, plant and equipment
Group companies’ property, plant and equipment are stated at historical cost less accumulated depreciation, according to the expected useful life and any impairment losses. Interest costs on borrowings to finance the construction of these assets are capitalised as part of the cost during the period required to prepare and complete the property for its intended use.

Ordinary repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the asset’s carrying amount when it is probable that the Group will incur future economic benefits in excess of the originally assessed standard of performance of the existing asset.

Gains or losses on the disposal, divestment or removal from use of property, plant and equipment are based on the difference between the net gains and the balance sheet value. Gains are shown within other operating income and losses under other operating expenses.

Depreciations
Group companies’ intangible assets and property, plant and equipment are stated at historical cost less accumulated straight-line depreciation, according to their expected useful life and any impairment losses. Land is not depreciated, as it is deemed to have an indefinite life, but depreciation is otherwise based on estimated useful lives as follows:

The residual value and useful life of assets are reviewed on each balance sheet date and, if necessary, adjusted to reflect any changes in expectations of financial value.

Government grants
Any grants received for the acquisition of intangible or tangible assets are deducted from the asset’s acquisition cost and recorded on the income statement to reduce the asset’s depreciation. Other grants are recognised as income for the periods during which the related expenses are incurred. Such grants are shown as deductions from expenses related to the target of the grant.

Impairment
The balance sheet values of assets are assessed for impairment on a regular basis. Should any indication of an impaired asset exist, the asset’s recoverable amount will be assessed. The asset’s recoverable amount is its net selling price less any selling expenses, or its value in use, whichever is higher. The value in use is determined by reference to the discounted future net cash flow expected from the asset. Discount rates correspond to the cash generating unit’s average return on investment before taxes. Impairment is measured at the level of cash generating units, which is the lowest level that is primarily independent of other units and whose cash flows can be distinguished from other cash flows.

Whenever the asset’s carrying amount exceeds its recoverable amount, it is impaired and the resulting impairment loss is recognised in the income statement. An impairment of property, plant and equipment and other intangible assets, excluding goodwill, will be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. Impairment is not reversed over the balance sheet value that existed before the recognition of impairment losses in the previous financial periods. Any impairment loss on goodwill is not reversed.

Goodwill is assessed for impairment at least annually, or if any indication of impairment exists, more often.

Leases
Lease liabilities, which expose the Group to the risks and rewards inherent in holding such leased assets, are classified as finance leases. These are recognised as tangible assets on the balance sheet and measured at the lesser of the fair value of the leased property at the inception of the lease or the present value of the minimum lease payments. Similarly, lease obligations, from which financing expenses are deducted, are included in interest bearing liabilities. Financing interests are recognised in the consolidated statement of comprehensive income during the lease period. An asset acquired under finance lease is depreciated over its useful life or within the shorter lease term.

Leases, which expose the lessor to the risks and rewards inherent in holding such leases, are classified as other leases. These rents are recognised as expenses during the lease period.

The assets leased by the Group, where the lessee bears the risks and rewards inherent in holding such leases, are treated as finance leases and recognised as receivables on the balance sheet at their present value. The Group has no finance lease receivables.

Inventories
Inventories are stated at the lower of cost or net realisable value, based on the FIFO principle. The net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and sale. In addition to the cost of materials and direct labour, an appropriate proportion of production overheads is included in the inventory value of finished products and work in progress.

Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, if it is probable that an outflow of resources will be required to settle the obligation or if the settlement of an obligation will cause a legal loss and a reliable estimate of the amount of obligation can be made. Provisions can include inter alia environmental provisions, warranty provisions, restructuring costs and onerous contracts. Changes in provisions are included in relevant expenses on the consolidated statement of comprehensive income. The amount of provisions is
reviewed on every balance sheet date and the amounts are revised to correspond to the best estimate at that moment.

Contingent assets and liabilities
A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of uncertain future events not wholly within the control of the entity. Such present obligation that probably does not require a settlement of a payment obligation or the amount of which cannot be reliably measured is also considered to be a contingent liability. Contingent liabilities are disclosed in the notes to the financial statements.

Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at bank and other short-term, highly liquid investments, whose maturity does not exceed three months. Cash and cash equivalents are carried in the balance sheet at cost. The bank account credit limit in use is recognised under current interest-bearing liabilities.

Financial assets
Financial assets are classified as follows: financial assets at fair value through profit and loss, held-to-maturity investments, loans and receivables, and available-for-sale financial assets. Sales and purchase of financial assets are recognised at their trading date.

Financial assets at fair value through profit and loss include financial assets held for trading and measured at fair value. Financial assets at fair value through profit and loss have been acquired principally for the purpose of generating a profit from short-term fluctuations in market prices. Derivative instruments, for which hedge accounting is not applied, are included in financial assets at fair value through profit and loss. Interest and currency derivatives, for which no hedge accounting is applied, are recognised in the balance sheet at historical cost and valued at fair value on each balance sheet date. Fair value is determined using market prices on the balance sheet date, or the present value of estimated future cash flows. Changes in the fair value of financial assets at fair value through profit and loss, and unrealised and realised gains and losses, are included in financial income and expenses in the period in which they occur. Financial assets at fair value through profit and loss are presented under the other current assets in the balance sheet.

Held-to-maturity investments are assets with a fixed maturity, which the enterprise has the positive intent and ability to hold to maturity. Held-to-maturity assets are measured at amortised cost using the effective interest rate method. The Group did not have any held-to-maturity investments during the financial period. Loans and receivables are non-derivative assets with fixed or determinable payment dates that are not quoted in the active markets or held for trading purposes.

Loan and receivables are measured at amortised cost. Accounts receivable are carried at expected fair value, which is the original invoice amount less the provision made for impairment of these receivables. A provision for impairment of accounts receivable is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, the probable bankruptcy of the debtor or default in payments are considered as probable indicators of the impairment of accounts receivable. Impairment of a loan receivable is assessed with the same criteria as an impairment of accounts receivable.

Available-for-sale financial assets consist of holdings in listed and non-listed companies and investments. Available-forsale assets are measured at fair value based on market prices on the balance sheet date, or using the net present value method of cash flows, or another revaluation model. If the fair value of a holding or investment cannot be measured reliably, it will be measured at cost. Changes in the fair value of available-for-sale assets are recognised in the fair value reserve under shareholders’ equity, taking tax consequences into account. Changes in the fair value will be re-entered from shareholders’ equity into the consolidated statement of comprehensive income when the asset is disposed of or has lost its value to the extent that an impairment loss must be recognised.

Financial liabilities
Financial liabilities at fair value through profit and loss are measured at their fair value. This group includes those derivatives for which hedge accounting is not applied and whose fair value is negative. Other financial liabilities are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method. Transaction costs are included in the original book value of financial liabilities. Other financial liabilities include non-current and current interest-bearing liabilities and accounts payable.

Derivative contracts and hedge accounting
Financial derivatives are used for hedging purposes and are initially recognised in the balance sheet at fair value and are subsequently re-measured at fair value on each reporting period’s balance sheet date. At the contract date derivatives are classified as either cash flow hedges, hedges of net investments in foreign entities or hedges that hedge accounting is not applied to. For derivatives that hedge accounting is not applied to the changes in fair value are recognised under financial items in the consolidated statement of comprehensive income. The fair values of derivatives are determined on the basis of publicly quoted market prices.

Cash flow hedging is applied to electricity derivatives and interest rate derivatives. Net investment hedging is applied to certain currency derivatives that hedge foreign currency risk in internal loans classified as net investments in foreign entities. Hedge programmes are documented according to the requirements of IAS 39, and the efficiency of hedge accounted derivatives is tested both at the inception of, and during, the hedge.

Fair value changes of derivatives, which are designated as cash flow hedges, are recognised in other comprehensive income in the hedge reserve to the extent that the hedge is effective. The spot price part of the fair value changes of currency derivatives designated as hedges of net investment in foreign entities, are recognised in other comprehensive income in the translation differences whereas the interest rate differential part of the fair value changes is recognised under financial items. Accumulated fair value changes in other comprehensive income are released into the consolidated statement of comprehensive income in the period during which the hedged cash flow affects the result, while electricity derivatives are recognised under cost of goods sold and interest rate derivatives under financial items.

The ineffective portion of the fair value change of cash flow hedges is recognised under cost of goods sold for electricity derivatives and under financial items for interest rate derivatives.

Share-based payments – Management incentive scheme
The costs relating to share-based payments are recorded in the income statement and the corresponding liability for share-based payments settled in cash is deferred. The recognised liability is measured at fair value on every balance sheet date. For equity-settled share-based payment transactions, an increase corresponding to the expensed amount is recorded in equity.

Treasury shares
Treasury shares are presented in the financial statements as a reduction in shareholders’ equity. Treasury shares are taken into account in calculating key figures and ratios according to IAS 33.

Dividends
Dividends proposed by the Board of Directors are not recognised in the financial statements until their proposal is approved by the shareholders in the Annual General Meeting.

Accounting policies requiring consideration by management and essential uncertainty factors associated with estimates
Estimates and assumptions regarding the future must be made during the preparation of the financial statements, and the outcome may differ from the estimates and assumptions. Furthermore, the application of accounting principles requires consideration.

Group management needs to make decisions regarding the selection and application of accounting principles. These judgements are in particular required in those cases in which the IFRS in force provide the opportunity to choose between various accounting, valuation or presentation methods.

The estimates made in connection with preparing the financial statements reflect the management’s best view at the time of the closing of the accounts. These estimates are affected by historical experience and assumptions regarding future developments, which are regarded as well-founded at the time of closing the accounts. On a regular basis, the Group monitors the realisation of these estimates and assumptions through internal and external information sources. Any changes in estimates and assumptions are recognised in the financial statements for the period during which such corrections are made, and all subsequent financial periods.

Estimates have been used in determining the size of items reported in the financial statements, including, among other things, the realisability of certain asset items, such as deferred tax assets and other receivables, the economic useful life of property, plant and equipment, provisions, pension liabilities and impairment on goodwill.

From the Group’s perspective, the most significant uncertainty factors are related to impairment testing on goodwill and the defined benefit-based pension obligations. The application of the related accounting policies requires the use of estimates and assumptions that also have a large impact. Uncertainty factors in connection with impairment testing on goodwill relate to the assumptions made on future cash flows and determining the discount rate. The Group’s weighted average capital cost rate (WACC), determined by reporting segment, is used as the discount rate in impairment tests. The book value of the defined benefit-based pension obligation is based on actuarial calculations, which in turn are based on the assumptions and estimates of a discount rate used for assessing plan assets and obligations at their current value, the expected rate of return on plan assets and developments in inflation, salary and wage levels.

Items affecting comparability
Items affecting comparability are exceptional transactions that are not related to normal business operations. The most common items affecting comparability are capital gains and losses, inefficiencies in production related to plant closures, additional write-downs, or reversals of write-downs, expenses due to accidents and disasters, provisions for planned restructurings, environmental matters, penalties, and changes in legislation and legal proceedings. The Group’s management exercises its discretion when taking decisions regarding the classification of items affecting comparability.

New and amended IFRSs and Interpretations adopted in 2017
The following new and revised IFRSs have been adopted from 1 January 2017 in these consolidated financial statements. The application of these new and revised IFRSs has not had any material impact on the amounts reported for the current and prior years but may affect the accounting for future transactions and events.

  • Amendments to IAS 7 Disclosure Initiative. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The Group’s liabilities arising from financing activities consist of borrowings and certain other financial liabilities (note 23). A reconciliation between the opening and closing balances of these items is provided in note 23. Apart from the additional disclosure in note 23, the application of these amendments has had no impact on the Group's consolidated financial statements.
  • Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses. The amendments clarify how an entity should evaluate whether there will be sufficient taxable profits against which it can utilise a deductible temporary difference. The application of these amendments has had no impact on the Group's consolidated financial statements as the Group already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments.
  • Annual Improvements to IFRSs 2014-2016 Cycle. In the annual improvement process, the non-urgent but necessary amendments to IFRS are collected and issued annually. The nature of the improvements depends on the standards, but they do not have material impact on the consolidated financial statements. The Group has applied the amendments to IFRS 12 included in this Annual Improvements to IFRSs Cycle in the current year. The other amendments included in this package are not yet mandatorily effective and they have not been earlier adopted by the Group (see note on standards not yet effective). IFRS 12 states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests. The application of these amendments has had no effect on the Group's consolidated financial statements as none of the Group’s interests in these entities are classified, or included in a disposal group that is classified, as held for sale.

Application of new and revised IFRSs in issue but not yet effective
IASB has published the following new or revised standards which the Group has not yet adopted. The Group will adopt each standard as from the effective date, or if the effective date is other than the first day of the reporting period, from the beginning of the next reporting period after the effective date. The effects of these new and amended standards are under investigation, unless otherwise stated below.

  • IFRS 9 Financial Instruments (effective in the EU for annual periods beginning on or after 1 January 2018).
    IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.
    Key requirements of IFRS 9:
  • all recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies) in other comprehensive income, with only dividend income generally recognised in profit or loss.
  • with regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of a financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of such changes in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.
  • in relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised.
  • the new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced.

Uponor will apply the IFRS 9 standard as of the financial period starting on January 1, 2018. Based on an analysis of the Group’s financial assets and financial liabilities as at 31 December 2017 on the basis of the facts and circumstances that exist at that date, Group management have assessed the impact of IFRS 9 to the Group’s consolidated financial statements. Uponor does not expect the application of IFRS 9 to have a material impact on financial performance nor financial position of the company.

Classification and measurement
All financial assets and financial liabilities will continue to be measured on the same bases as is currently adopted under IAS 39. According to IFRS 9 financial assets will be classified in three measurement categories: fair value through other comprehensive income, at amortised cost, and fair value through profit or loss instead of IAS 39’s four categories. The classification depends on the company’s business model and cash flow characteristics in financial assets.

Impairment
Financial assets measured at amortised cost, listed redeemable notes that will be carried at FVTOCI under IFRS 9, finance lease receivables, amounts due from customer under construction contracts, and financial guarantee contracts will be subject to the impairment provisions of IFRS 9. The Group expects to apply the simplified approachto recognize lifetime expected credit losses for its trade receivables as required or permitted by IFRS 9.

Hedge accounting
As the new hedge accounting requirements will align more closely with the Group’s risk management policies, with generally more qualifying hedging instruments and hedged items, an assessment of the Group’s current hedging relationships indicates that they will qualify as continuing hedging relationships upon application of IFRS 9. Additionally, the requirements for hedge effectiveness testing will become easier. Similar to the Group’s current hedge accounting policy, the management does not intend to exclude the forward element of foreign currency forward contracts from designated hedging relationships. IFRS 9 requires the economic relationship between the hedged item and the hedging instrument and same hedge ratio that is actually used in risk management. Moreover, the Group has already elected to basis adjust non-financial hedged items with gains/losses arising from effective cash flow hedges under IAS 39, which is mandatory under IFRS 9. Documentation requirements differ from IAS 39 requirements, but are still mandatory under IFRS 9.
Nevertheless, under IFRS 9, basis adjustments are not considered a reclassification adjustment and therefore they would not affect other comprehensive income. Currently, gains/losses arising from effective cash flow hedges that are subject to basis adjustments are presented in other comprehensive income as amounts that may be subsequently reclassified to profit or loss.

  • IFRS 15 Revenue from Contracts with Customers (effective in the EU for annual periods beginning on or after 1 January 2018). IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the good or service underlying the particular performance obligation is transferred to the customer. Furthermore, IFRS 15 requires extensive disclosures.
    The principles in IFRS 15 are applied using the following five steps:
  1. Identify the contract(s) with a customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognise revenue

The Group will adopt the new standard IFRS 15 Revenue from customer contracts as of January 1, 2018. The Group will adopt the new standard using the full retrospective method. During 2017, the Group performed an assessment of IFRS 15 impacts and as a result, no significant accounting changes were identified and are not expected. However, impact on processes, controls and agreements has been considered.

The Group’s revenue streams and impact of implementing IFRS 15
Revenue streams, sale of goods and rendering of services including project business, were analysed based on the Group’s reporting segments presented in the segment information note 2. The Group’s most significant revenue stream is sale of goods representing approximately 96% of the total revenue. In connection with the contract analysis the Group identified certain customers and contracts that were affected. However, the impacts are not significant and some minor updates on processes, controls and agreements have been adopted. Each revenue stream will be described separately below and additionally, the impacts will be discussed step by step.

  • Sale of goods
    The Group is delivering goods to the customer where each good provided to the customer is distinct from the other goods provided to the customer.

The Step 1 of IFRS 15 revenue recognition model starts with identifying the contract to provide goods and services to customers. Based on the IFRS 15 assessment, the Group will not have any changes compared to the current practice for identifying the contracts with customers. A typical contract with the customer consists of a frame agreement and a purchase order. Accordingly, only frame agreements do not meet the contract criteria in accordance with IFRS 15 and to establish a customer contract a separate purchase order is always required for sale of goods as the customer commitment is received only after receiving the purchase order.

The Step 2 of IFRS 15 revenue recognition model consists of identifying performance obligations in the contract. According to IFRS 15, a performance obligation is a promise (explicit or implicit) to transfer to a customer either a distinct good or service or a series of distinct goods or services that are substantially the same and have the same pattern of transfer. Based on the assessment, the Group delivers goods to the customer and each good is considered distinct from the other goods provided to the customer. The Group will not have any significant changes compared to the current practice.

The Step 3 of IFRS 15 revenue recognition model consists of determining the transaction price. The basis for the new requirements for determining the transaction price is the amount to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer. Transaction price may vary because of variable consideration. IFRS 15 requires the variable consideration to be estimated at contract inception and constrained to prevent over-recognition of revenue. The application of the constraint will not have a significant impact in terms of revenue recognition as variable considerations in the sale of goods are immaterial and for instance annual bonuses are already treated in accordance with IFRS 15 requirements.

The Step 4 of IFRS 15 revenue recognition model requires entities to allocate the transaction price to the performance obligations after having determined the separate performance obligations and the transaction price in previous phases (Step 2 and Step 3, respectively). Based on the assessment, there are no expected changes that would take a place in terms of allocating the transaction price to the performance obligations in the contracts.

The Step 5 of IFRS 15 revenue recognition model sets out the criteria when to recognise revenue. The Group has assessed that the revenue recognition will take place at a point in time generally when the goods are
delivered to the customer and the customer has accepted the delivery and the control over the good is transferred to the customer. The exact timing of the control transfer will be analysed contract by contract taking into account the delivery terms, customer acceptance clauses and customer’s ability to benefit from the goods delivered. There are no expected changes compared to the Group’s current practice.

  • Rendering of services including project business

Rendering of services including project business represents approximately 4% of the total revenue of the Group.Typically the promised goods and services in the contract are not distinct from each other and therefore, in most of the cases the Group accounts for the goods and services as a single performance obligation.

Step 1. Based on the IFRS 15 assessment, the Group does not expect to have any changes compared to the current practice for identifying the contracts with customers. However, some impact on processes and controls has been considered.
Combining contracts: IFRS 15 requires entities to analyse whether individual contracts should be combined for the purposes of revenue recognition. Based on the assessment, the revenue recognition model will be applied in most cases to individual contracts with a customer. However, there are some occasions where the Group has entered into two contracts near the same time with the same customer. As the contracts have been negotiated as a package with a single commercial objective they will be combined for the revenue recognition purposes. However, the impact of this change is insignificant and it will not impact on the comparison figures for 2017.

Step 2. Based on the assessment in most of the cases the performance obligations will remain unchanged. There are, however, certain occasions where goods or services currently treated separately will need to be combined into one performance obligation. As a result, there will not be any significant changes compared to the current practice.
Warranties: IFRS 15 distinguishes between two types of warranties. Assurance-type of warranty promises the customer that the deliverable is as specified in the contract whereas service-type warranty provides a service to the customer in addition to assurance that the deliverable is as specified in the contract. Based on the assessment, the Group has not identified any changes in terms of revenue recognition as extended warranties are considered immaterial.

Step 3. Variable consideration: Based on the assessment, the Group’s contracts may include variable considerations relating to penalties for delay. The Group does not expect that application of the constraint will have an impact in terms of revenue recognition as variable considerations (i.e. penalties) are immaterial and the likelihood is very minor.

Step 4. Based on the assessment, there are no expected changes that would take a place in terms of allocating the transaction price to the performance obligations in the contracts.

Step 5. The Group has assessed that the rendered services including project business are satisfied over time given that the Group’s performance does not create an asset with an alternative use to the Group, the Group has an enforceable right to payment for performance completed to date or Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. The Group has not identified any significant changes in terms of the revenue recognition and no changes will take place regarding the comparison figures for 2017.

Presentation and disclosure requirements
The presentation and disclosure requirements in IFRS 15 are more detailed than under current IFRS. The presentation requirements represent a significant change from current practice and significantly increases the volume of disclosures required in the Group’s financial statements. Many of the disclosure requirements in IFRS 15 are new and the Group has assessed that the impact of some of the disclosures will be significant. Also, extended disclosures are expected as a result of the significant judgement made when assessing the contracts. In addition, as required by IFRS 15, the Group will disaggregate revenue recognised from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. In 2017, the Group continued testing of appropriate systems, internal controls, policies and procedures necessary to collect and disclose the required information.

  • IFRS 16 Leases (effective for annual periods beginning on or after 1 January 2019). IFRS 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. It will supersede the current guidance including IAS 17 Leases and the related interpretations when it becomes effective. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinction of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right-ofuse asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. Furthermore, extensive disclosure are required by IFRS 16.

The Group will adopt the new standard IFRS 16 Leases as of January 1, 2019. The Group considers adopting the new standard using the modified retrospective application method. Under modified retrospective approach:

  • Lessee does not restate comparative figures
  • For leases previously classified as operating leases under IAS 17, a lessee recognises a lease liability measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application
  • A lessee measures the right-of use asset on a lease-by-lease basis, at either an amount equal to lease liability or as if standard always has been applied, but using a discount rate based on the lessee’s incremental borrowing rate at the date of initial application

During 2017, the impact on Group’s consolidated financial statements by the new requirement to recognise a rightof- use asset and a related lease liability were analysed on a high-level. Based on the assessment, the right-of-use assets of the Group will consist mainly of real estate (offices and warehouses including land area), cars and forklifts. The Group has not identified any service-type of contracts that would include identified right of-use asset. Thus, the operating lease commitments mentioned in Note 26 will cover, for the most part, the lease arrangements that will be recognized as right-of use assets in the future. The impact analysis and implementation considerations including possible development of contract database, investment process and controls as well as systems will continue during 2018.

  • Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2018). The amendments clarify the following:
    • In estimating the fair value of a cash-settled share-based payment, the accounting for the effects of vesting and non-vesting conditions should follow the same approach as for equity-settled share-based payments.
    • Where tax law or regulation requires an entity to withhold a specified number of equity instruments, equal to the monetary value of the employee’s tax obligation, to meet the employee’s tax liability, which is then remitted to the tax authority, i.e. the share-based payment arrangement has a ‘net settlement feature’. Such an arrangement should be classified as equity-settled in its entirety, provided that the share-based payment would have been classified as equity-settled had it not included the net settlement feature.
    • A modification of a share-based payment that changes the transaction from cash-settled to equity-settled should be accounted for as follows:
      • the original liability is derecognised;
      • the equity-settled share-based payment is recognised at the modification date fair value of the equity instrument granted to the extent that services have been rendered up to the modification date; and
      • any difference between the carrying amount of the liability at the modification date and the amount recognised in equity should be recognised in profit or loss immediately.

The application of the amendments in the future is not anticipated to have a significant impact on the Group’s consolidated financial statements. The amendments have not yet been endorsed for use in the EU.

  • Annual Improvements to IFRSs 2014-2016 Cycle (effective for annual periods beginning on or after as indicated below). The Annual Improvements include amendments to a number of IFRSs which are not yet mandatorily effective for the Group. They are summarised below. The package also includes amendments to IFRS 12 which is mandatorily effective for the Group in the current year – see note [X] for details of application.
    • The amendments to IFRS 1 delete certain short-term exemptions in IFRS 1 because they are redundant.
    • The amendments to IAS 28 clarify that the option for a venture capital organisation and other similar entities to measure investments in associates and joint ventures at FVTPL is available separately for each associate or joint venture, and that election should be made at initial recognition of the associate or joint venture. In respect of the option for an entity that is not an investment entity (IE) to retain the fair value measurement applied by its associates and joint ventures that are IEs when applying the equity method, the amendments make a similar clarification that this choice is available for each IE associate or IE joint venture. The amendments apply retrospectively with earlier application permitted.

Both sets of amendments are effective for annual periods beginning on or after 1 January 2018. The amendments have not yet been endorsed for use in the EU. The application of the amendments in the future is not anticipated to have any impact on the Group’s consolidated financial statements as the Group is not a first-time adopter of IFRS or a venture capital organisation. Furthermore, the Group does not have any associate or joint venture that is an investment entity.

  • Amendments to IAS 40 Transfers of Investment Property (effective for annual periods beginning on or after 1 January 2018). The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets, or has ceased to meet, the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that situations other than the ones listed in IAS 40 may evidence a change in use, and that a change in use is possible for properties under construction (i.e. a change in use is not limited to completed properties). Entities can apply the amendments either retrospectively (if this is possible without the use of hindsight) or prospectively. Specific transition provisions apply. The amendments have not yet been endorsed for use in the EU. The application of these amendments is anticipated to have an impact on the Group's consolidated financial statements in future periods should there be a change in use of any of its properties.
  • IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (effective for annual periods beginning on or after 1 January 2018). IFRIC 22 addresses how to determine ´the date of the transaction´ for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income, when consideration for that item has been paid or received in advance in a foreign currency which resulted in the recognition of a non-monetary asset or non-monetary liability (e.g. a non-refundable deposit or deferred revenue). The Interpretation specifies that the date of transaction is the date on which the entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the Interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration. Entities can apply the Interpretation either retrospectively or prospectively. Specific transition provisions apply to prospective application. The interpretation has not yet been endorsed for use in the EU. The application of the amendments in the future is not anticipated to have an impact on the Group’s consolidated financial statements. This is because the Group already accounts for transactions involving the payment or receipt of advance consideration in a foreign currency in a way that is consistent with the amendments.
  • IFRIC 23 Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after 1 January 2019). The interpretation addresses the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. It specifically considers:
    • Whether tax treatments should be considered collectively
    • Assumptions for taxation authorities’ examinations
    • The determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates
    • The effect of changes in facts and circumstances

Early adoption of the interpretation is permitted. The interpretation has not yet been endorsed for use in the EU. The Group is currently assessing the impact of the interpretation on the consolidated financial statements of the Group.

  • Amendments to IFRS 9 Prepayment Features with Negative Compensation (effective for annual periods beginning on or after 1 January 2019).The amendments will change the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at amortized cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negative compensation payments. The amendments are to be applied retrospectively and early application is permitted. The amendments have not yet been endorsed for use in the EU. The Group is currently assessing the impact of the amendments on the consolidated financial statements of the Group.
  • Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2019). The amendments clarify that an entity applies IFRS 9 ´Financial Instruments´ to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. Earlier application of the amendments is permitted. The amendments have not yet been endorsed for use in the EU. The Group is currently assessing the impact of the amendments on the consolidated financial statements of the Group.
  • Annual Improvements to IFRS Standards 2015-2017 Cycle (effective for annual periods beginning on or after 1 January 2019). The improvements make amendments to the following standards:
    • IFRS 3 and IFRS 11 – The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.
    • IAS 12 – The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognized in profit or loss, regardless of how the tax arises.
    • IAS 23 – The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings.

The Group is currently assessing the impact of the amendments on the consolidated financial statements of the Group. The amendments have not yet been endorsed for use in the EU.

  • IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021). IFRS 17 requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. The standard supersedes IFRS 4 ´Insurance Contracts´ and is to be applied retrospectively unless impracticable. Earlier adoption permitted if both IFRS 15 and IFRS 9 have also been applied. The standard has not yet been endorsed for use in the EU. The Group is currently assessing the impact of the amendments on the consolidated financial statements of the Group.

Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent’s profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the re-measurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s profit or loss only to the extent of the unrelated investors’ interests in the new associate or joint venture. The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. The application of these amendments is anticipated to have an impact on the Group's consolidated financial statements in future periods should such transactions arise.