Note 1
Accounting policies for the consolidated financial statements
Basic information about the company
Kesko is the leading provider of trading sector services and a
highly valued listed company. Through its stores, Kesko offers
quality to the daily lives of consumers by providing products
and services at competitive prices. Kesko has about 2,000 stores
engaged in chain operations in the Nordic and Baltic countries,
Russia and Belarus.
Kesko's operations are divided into five reportable business
segments and other operating activities. The business segments
are Kesko Food operating in the grocery market, Rautakesko
engaged in the building and home improvement trade, VV-Auto
engaged in car importing, marketing and retailing, Anttila concentrating
on the department store trade, and Kesko Agro
engaged in the agricultural trade. In addition, other operating
activities comprise the reporting for Konekesko, engaged in the
machinery trade, Indoor engaged in the furniture and interior
decoration trade, Intersport Finland concentrating on the sports
trade, Musta Pörssi specialising in the home technology trade,
and Kenkäkesko engaged in the shoe trade.
The Group's parent company, Kesko Corporation, is a Finnish
public limited company constituted in accordance with the laws
of Finland. The company's business ID is 0109862–8, it is domiciled
in Helsinki, and its registered address is Satamakatu 3,
FI-00016 Kesko. Copies of Kesko Corporation's financial statements
and the consolidated financial statements are available
from Kesko Corporation, Satamakatu 3, FI-00016 Kesko, and from
the Internet, at www.kesko.fi.
General information
Kesko's consolidated financial statements have been prepared
in accordance with the International Financial Reporting Standards
(IFRSs) and International Accounting Standards (IASs), IFRS
standards and their IFRIC and SIC Interpretations valid at 31
December 2008 approved for adoption by the European Union
have been applied. The International Reporting Standards refer
to standards and their interpretations approved for adoption
within the EU in accordance with the procedure enacted in EC
regulation 1606/2002, included in the Finnish Accounting Standards
and regulations based on them. Accounting standards not
yet effective have not been adopted voluntarily.
The notes to the consolidated financial statements also
include compliance with the Finnish accounting and corporate
legislation.
All amounts in the consolidated financial statements are in
millions of euros and are based on original cost, with the
exception of items identified separately, which have been
measured at fair value in compliance with the standards.
With effect from 1 January 2008, the Group has adopted the
following new and revised standards:
Notes to the consolidated
financial statements
- IAS 39 Amendment: Reclassification of Financial Assets, and IFRS 7 Amendment: Reclassification of Financial Assets, effective 1 July 2008. The amendment permits certain financial assets to be reclassified out of the financial assets held for trading, or the available-for-sale financial assets categories in particular circumstances. The amendments have no effect on the company's financial statements.
- The following interpretations have become effective during the financial period but have no effect on the company's financial statements: IFRIC 11 IFRS 2: Group and Treasury Share Transactions, IFRIC 12: Service Concession Arrangements.
Use of estimates
The preparation of consolidated financial statements in conformity with IFRS requires the use of certain estimates and assumptions about the future that affect the reported amounts of assets and liabilities, contingent liabilities, and income and expense. The actual results may differ from these estimates and assumptions. Furthermore, the application of accounting policies is based on the management's judgements, for example, in the classification of assets and in determining whether risks and rewards incident to ownership of financial assets and leased assets have substantially transferred to the other party. The most significant estimates relate to the following.
Allocation of cost of acquisition
Assets and liabilities acquired in business combinations are measured at their fair values at the date of acquisition. The fair values on which cost allocation is based are determined by reference to market values to the extent they are available. If market values are not available, the measurement is based on the estimated earnings-generating capacity of the asset and its future use in Kesko's operating activities. The measurement of intangible assets, in particular, is based on the present values of future cash flows and requires management estimates regarding future cash flows and the use of assets.
Impairment test
The amounts recoverable from cash generating units' operating activities are determined based on value-in-use calculations. In the calculations, forecast cash flows are based on financial plans approved by the management, covering a period of 3–4 years (note 12).
Employee benefits
The Group operates both defined contribution pension plans and defined benefit pension plans. The calculation of items relating to employee benefits requires the consideration of several factors. Pension calculations under defined benefit plans in compliance with IAS 19 include the following factors that rely on management estimates (note 19):
- expected return on plan assets
- discount rate used in calculating pension expenses and obligations for the period
- future salary level
- employee service life
Consolidation principles
Subsidiaries
The consolidated financial statements combine the financial
statements of Kesko Corporation and all subsidiaries controlled
by the Group. Control exists when the Group owns more than
50% of the voting rights of a subsidiary or otherwise exerts
control. Control refers to the power to govern the financial and
operating policies of an enterprise so as to obtain benefits from
its activities. Acquired subsidiaries are consolidated from the
date on which the Group gains control until the date on which
control ceases. When assessing whether an enterprise controls
another enterprise, the potential voting rights that are currently
exercisable have been taken into account. The main subsidiaries
are listed in note 33.
Internal shareholdings are eliminated by using the acquisition
cost method. The cost of acquisition is determined on the basis
of the fair value of the acquired assets as on the date of acquisition,
the issued equity instruments and liabilities resulting
from or assumed on the date of the exchange transaction, plus
the direct expenses relating to the acquisition. The identifiable
assets, liabilities and contingent liabilities of the acquiree are
measured at the fair value on the date of acquisition, gross of
minority interest.
All intra-group transactions, receivables and payables, unrealised
gains and internal distribution of profits are eliminated
when preparing the consolidated financial statements. Unrealised
losses are not eliminated, if the loss is due to the impairment
of an asset. Minority interests in the net income are disclosed
in the income statement and the amount of equity
attributable to minority interest is disclosed separately in the
Group's equity.
Associates
Associates are enterprises in which the Group has significant
influence but not control. Significant influence mainly arises in
cases where the Group holds 20–50% of the company's voting
power, or otherwise has significant influence, but not control.
Associates are consolidated by using the equity method. A share
of an associate's net profit for the period corresponding to the
Group’s ownership interest is disclosed separately in the consolidated
financial statements. The Group's share of an associate's
post-acquisition net profit is added to the acquisition cost
of the associate's shares in the consolidated balance sheet.
Conversely, the Group’s share of an associate's net losses is
deducted from the acquisition cost of the shares. If the Group's
share of an associate's losses is in excess of the carrying
amount, the part in excess is not deducted unless the Group
has undertaken to fulfil the associate's obligations.
Unrealised gains between the Group and associates are eliminated
in proportion to the Group's ownership interest. Dividends
received from associates are deducted from the Group's
result and the cost of the shares. An investment in an associate
includes the goodwill generated by the acquisition. Goodwill is
not amortised. The associates are listed in note 50.
Joint ventures
Joint ventures are enterprises in which the Group and another party exercise joint control by virtue of contractual arrangements. The Group's interests in joint ventures are consolidated proportionally on a line-by-line basis. The consolidated financial statements disclose the Group's share of a joint venture's assets, liabilities, income and expenses. At the end of the accounting period, the Group has no joint ventures.
Mutual real estate companies
In compliance with IAS 31, mutual real estate companies are consolidated as assets under joint control on a line-by-line basis in proportion to ownership interest.
Foreign currency items
The consolidated financial statements are presented in euros,
which is both the functional currency of the Group’s parent
company and the reporting currency. On initial recognition,
the figures relating to the result and financial position of Group
entities located outside the euro zone are recorded in the functional
currency of their operating environment. The euro has
been adopted as the functional currency of the real estate
companies in St. Petersburg and Moscow in Russia, which is
why no significant exchange differences are realised from their
balance sheets for the Group.
Foreign currency transactions are recorded in euros by applying
the exchange rate at the date of the transaction. Foreign
currency receivables and liabilities are translated into euros
using the closing rate. Gains and losses from foreign currency
transactions, and from receivables and liabilities are recognised
in the income statement with the exception of those loan
exchange rate movements designated to provide a hedge
against foreign net investments and regarded as effective. These
exchange differences are recognised in equity, in compliance
with the rules of hedge accounting. Foreign exchange gains and
losses from operating activities are included in the respective
items above operating profit. Gains and losses from forward
exchange contracts and options used to hedge financial transactions,
and from foreign currency loans are included in financial
income and expenses.
The income statements of Group entities operating outside
the euro zone have been translated into euros at the average
rate of the reporting period, and the balance sheets at the closing
rate. The translation difference resulting from the use of different
rates is recognised in equity. The translation differences
arising from the elimination of the acquisition cost of subsidiaries
outside the euro zone, and the hedging result of net investments
made in them, are recognised in equity. In connection
with the disposal of a subsidiary, currency translation differences
are disclosed in the income statement as part of the gains
or losses on the disposal.
As of 1 January 2004, the goodwill arising from the acquisition
of foreign operations and the fair value adjustments of assets
and liabilities made upon their acquisition have been treated as assets and liabilities of these foreign operations and translated
into euros at the closing rate. The goodwill and fair value
adjustments of acquisitions made prior to 1 January 2004 have
been recorded in euros.
Financial assets
The Group classifies financial assets in the following categories:
1) financial assets at fair value through profit or loss, 2) available-
for-sale financial assets, and 3) loans and receivables. The
classification of financial assets is determined on the basis of
why they were originally acquired. Purchases and sales of
financial assets are recognised using the settlement date
method. Financial assets are classified as non-current assets if
they have a maturity date greater than twelve months after the
balance sheet date. If financial assets are going to be held for
less than 12 months, they are classified as current assets.
Financial assets at fair value through profit or loss are classified
as current assets. Financial assets are derecognised when the
contractual rights to the cash flow of the financial asset expire
or have been transferred to another party, and when the risks
and rewards of ownership have been transferred.
At each reporting date, the Group assesses whether there is
any indication that a financial asset may be impaired. If any
such indication exists, the recoverable amount of the asset is
estimated. The recoverable amount is the fair value based on
the market price or the present value of cash flows. The fair
value of investment instruments is determined on the basis of
a maturity-based interest rate quotation. The rates of commercial
papers include a maturity-based margin, which equals the
amount expected to be received from the sale of the commercial
papers in current market conditions. An impairment loss is recognised
if the carrying amount of a financial asset exceeds its
recoverable amount. The impairment loss is disclosed in the
financial expenses of the income statement, net of interest
income.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include instruments initially classified as financial assets at fair value through profit or loss (the Fair Value Option). These instruments are accounted for based on fair value and they include investments in bond and hedge funds, as defined by the Group's treasury policy, as well as investments in other interest-bearing papers with over 3-month maturities. The interest income and fair value changes of these financial assets, as well as any commissions returned by funds are presented on a net basis in the income statement in the interest income of the class in question. In addition, financial assets at fair value through profit or loss include all derivatives that do not qualify for hedge accounting in compliance with IAS 39. Derivatives are carried at fair value using prices quoted in active markets. The results of derivatives hedging purchases and sales are recognised in other operating income or expenses. The results of derivatives used to hedge financial items are recognised in financial items, unless the derivative has been designated as a hedging instrument.
Available-for-sale financial assets
Available-for-sale financial assets include non-derivative assets designated as available for sale at the date of initial recognition. Available-for-sale financial assets are measured at fair value at the balance sheet date and their fair value changes are recognised in equity. The fair value of publicly quoted financial assets is determined based on their market value. Financial assets not quoted publicly are measured at cost if their fair values cannot be measured reliably. The dividends from equity investments included in available-for-sale financial assets are recognised in financial items in the income statement. The interest income from available-for-sale financial assets is recognised in the financial items of the relevant class.
Loans and receivables
Loans and receivables are non-derivative assets with fixed or measurable payments, and they are not quoted in active markets. The Group's loans and other receivables include trade receivables. They are recognised at amortised cost using the effective interest method.
Cash and cash equivalents
Cash and cash equivalents are carried at cost. Cash and cash equivalents include cash on hand and balances with banks. The cash and cash equivalents in the consolidated balance sheet also include amounts relating to the retail operations of division parent companies, used as cash floats in stores, or amounts being transferred to the respective companies.
Financial liabilities
Financial liabilities have initially been recognised at their cost, net of transaction costs. In the financial statements, financial liabilities are measured at amortised cost using the effective interest rate method. The arrangement fees related to lines of credit are amortised over the validity period of the credit. Financial liabilities having a maturity period of over 12 months after the balance sheet date are classified as non-current liabilities. Those having a maturity period of less than 12 months after the balance sheet date are classified as current liabilities.
Derivative financial instruments and hedge accounting
When acquired, derivative financial instruments are carried at
fair value and subsequently measured at fair value at the balance
sheet date. The recognition of changes in the fair value of
derivatives depends on whether the derivative instrument
qualifies for hedge accounting, and if so, on the hedged item.
When entered into, derivative contracts are treated either as
fair value hedges of receivables or liabilities, or in the case of
interest rate risk and electricity price risk, as cash flow hedges,
as hedges of net investments in a stand-alone foreign entity,
or as derivative contracts that do not meet the hedge accounting
criteria. The results of instruments hedging commercial currency
risks, in other words, the derivatives that do not meet the
hedge accounting criteria, are recognised in profit or loss in
other operating income or expenses. The portion of derivatives
hedging financial transactions to be recognised in the income
statement is included in financial items.
When a hedging arrangement is entered into, the relationship
between the item being hedged and the hedging instrument,
as well as the objectives of the Group's risk management are
documented. The effectiveness of the hedging relationship is
tested regularly and the effective portion is recognised, against
the change in the fair value of the hedged item, in translation
differences in equity, or in the revaluation surplus. The ineffective
portion is recognised in financial items or other operating
income and expenses depending on its nature. The effective
portion of the fair value change of instruments hedging cash
flow, such as a long-term credit facility, is recognised in the
equity hedging reserve. The value change of currency derivative
instruments relating to the credit facility is recognised in the
loan account, and the fair value changes of interest rate derivative
instruments in other non-interest-bearing receivables or
debt.
Hedge accounting is discontinued when the hedging instrument
expires or is sold, the contract is terminated or exercised.
Any cumulative gain or loss existing in equity remains in equity
until the forecast transaction has occurred.
Measurement principles
The fair value of forward agreements is determined by reference to the market price of the balance sheet date. The fair value of interest rate swaps is calculated on the basis of the present value of future cash flows using the market prices at the balance sheet date. The fair value of forward exchanges is determined by measuring the forward contracts at the forward rate of the balance sheet date. Currency options are measured by using the counterparty's price quotation, but the Group verifies the price with the help of the Black-Scholes method. Electricity and grain derivatives are measured at fair value using the market quotations of the balance sheet date.
Hedging a net investment in a stand-alone foreign entity
The Group applies hedge accounting in accordance with IAS 39 to hedge foreign currency net investments in foreign operations. Forward exchanges or foreign currency loans are used as hedging instruments. Spot price changes in forward exchanges are recognised as translation differences under equity, and changes in the interest rate difference are recognised as income under financial items. The exchange differences of foreign currency loans are stated as translation differences under equity. When a foreign entity is disposed of partially or wholly or wound up, the accumulated gains or losses from hedging instruments are recognised in profit or loss.
Embedded derivatives
The Group has prepared process descriptions to identify embedded derivatives and applies fair value measurement. Fair value is determined using the market prices of the measurement date and the value change is recognised in the income statement. In the Kesko Group, embedded derivatives are included in firm commercial contracts denominated in a currency which is not the functional currency of either party and not commonly used in the economic environment in which the transaction takes place.
Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition over
the fair value of the Group's share of the net assets and liabilities
of an enterprise at the date of the acquisition. The goodwill
of companies acquired prior to 1 January 2004 corresponds
to their carrying amounts reported in accordance with the previous
accounting practices, and the carrying amount is used as
the deemed cost. The classification and accounting treatment of
business combinations entered into prior to 1 January 2004
were not adjusted in preparing the consolidated IFRS opening
balance sheet.
Goodwill is not amortised but tested annually for impairment
and whenever there is an indication of impairment. For testing
purposes goodwill is allocated to the cash generating units.
Goodwill is measured at original cost and the share acquired
prior to 1 January 2004 at deemed cost net of impairment. Any
negative goodwill is immediately recognised as income in
accordance with IFRS 3.
Intangible assets with indefinite useful lives are not amortised.
They are tested for impairment annually and whenever
there is an indication of impairment. These intangible assets
include trademarks capitalised upon acquisition.
The costs of intangible assets with definite useful lives are
stated in the balance sheet and recognised as expenses during
their useful lives. Such intangible assets include software
licences and customer relationships to which acquisition cost
has been allocated upon acquisition, and leasehold interests
that are amortised during their probable terms. The estimated
useful lives are:
computer software and licences 3–5 years
customer and supplier relationships 10 years
Research and development expenses
The Group has not had such development expenses which, under certain conditions, should be recognised as assets and written off during their useful lives in accordance with IAS 38. Therefore the cost of research and development activities has been expensed as incurred.
Computer software
The labour costs and other direct expenditure of persons employed by the Group, working on development projects related to the acquisition of new computer software, are capitalised as part of the software cost. In the balance sheet, computer software is included in intangible assets and its cost is written off during the useful life of the software. Software maintenance expenditure is recognised as an expense as incurred.
Tangible assets
Tangible assets mainly comprise land, buildings, machinery and
equipment. Tangible assets are carried at original cost net of
planned depreciation and any impairment. The tangible assets
of acquired subsidiaries are measured at fair value at the date
of acquisition.
The machinery and equipment of buildings are treated as
separate assets and any significant expenditure related to their
replacement is capitalised. Subsequent expenditure relating to
a tangible asset is only added to the carrying amount of the
asset when it is probable that future economic benefits relating
to the asset will flow to the enterprise and that the cost of the
asset can be reliably measured. Other repair, service and maintenance
expenditure of fixed assets is recognised as an expense
as incurred.
Tangible assets are written off on a straight-line basis during
their estimated useful lives.
The residual values, useful lives and depreciation methods
applied to tangible assets are reviewed at least at the end of
each accounting period. If the estimates of useful life and the
expected pattern of economic benefits are different from previous
estimates, the change in the estimate is accounted for in
accordance with IAS 8.
The depreciation of a tangible asset ceases when the asset is
classified as held for sale in accordance with IFRS 5. Lands are
not depreciated.
Gains and losses from sales and disposals of tangible assets
are recognised in the income statement and presented as other
operating income and expenses.
Investment properties
Investment properties are properties held by the enterprise
mainly to earn rentals or for capital appreciation. The Group
does not hold real estate classified as investment properties.
Impairment
At each reporting date, the Group assesses whether there is any
indication that an asset may be impaired. If any such indication
exists, the recoverable amount of the asset is estimated.
The recoverable amount of goodwill and intangible assets with
indefinite useful lives is assessed every year whether or not
there is an indication of impairment. In addition, an impairment
test is performed whenever there is an indication of
impairment.
The recoverable amount is the higher rate of an asset's fair
value less the costs of disposal, and its value in use. Often it is
not possible to assess the recoverable amount for an individual
asset. Then, as in the case of goodwill, the recoverable amount
is determined for the cash generating unit to which the goodwill
or asset belongs. The recoverable amount of available-forsale
financial assets is the fair value based on either the market
price or the present value of cash flows.
An impairment loss is recognised if the carrying amount of an
asset exceeds its recoverable amount. The impairment loss is
disclosed in the income statement. An impairment loss recognised
for an asset in prior years is reversed if there has been
an increase in the reassessed recoverable amount. The reversal
of an impairment loss of an asset should not exceed the carrying
amount of the asset without an impairment loss recognition.
For goodwill, a recognised impairment loss is not reversed
under any circumstances.
Leases
In accordance with IAS 17, leases that substantially transfer all
the risks and rewards incident to ownership to the Group are
classified as finance leases. An asset leased under a finance
lease is recognised in the balance sheet at the lower rate of its
fair value at the inception date and the present value of minimum
lease payments. The rental obligations of finance leases
are recorded in interest-bearing liabilities in the balance sheet.
Lease payments are allocated between the interest expense and
the liability. Finance lease assets are amortised over the shorter
period of the useful life and the lease term.
Leases in which assets are leased out by the Group, and substantially
all the risks and rewards incident to ownership are
transferred to the lessee, are also classified as finance leases.
Assets leased under such contracts are recognised as receivables
in the balance sheet and are stated at present value. The financial
income from finance leases is determined so as to achieve
a constant periodic rate of return on the remaining net investment
for the lease term.
Leases in which risks and rewards incident to ownership are
not transferred to the lessee are classified as operating leases.
Lease payments related to them are recognised in the income
statement on a straight-line basis over the lease term.
In sale and leaseback transactions the sale price and the
future lease payments are usually interdependent. If a sale and
leaseback transaction results in a finance lease, any excess of
sales proceeds over the carrying amount is not immediately recognised
as income. Instead it is deferred and amortised over the
lease term. If a sale and leaseback transaction results in an
operating lease and the transaction is established at fair value,
any profit or loss is recognised immediately.
If the sale price is below fair value, any profit or loss is recognised
immediately unless the loss is compensated by future
lease payments at below market price, in which case the loss is
deferred and amortised over the period for which the asset is
expected to be used. If the sale price is above fair value, the
excess over fair value is deferred and amortised over the period
for which the asset is expected to be used. If the fair value at
the time of a sale and leaseback transaction is less than the carrying
amount of the asset, a loss equal to the amount of the
difference between the carrying amount and fair value is recognised
immediately.
Inventories
Inventories are measured at the lower rate of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs to sell. The cost is primarily assigned by using the weighted average cost formula. The cost of certain classifications of inventory is assigned by using the FIFO formula. The cost of finished goods comprises all costs of purchase including freight. The cost of self-constructed goods comprise all costs of conversion including direct costs and allocations of variable and fixed production overheads.
Trade receivables
Trade receivables are recognised at the original invoice amount. Impairment is recognised when there is objective evidence of impairment loss. The Group has established a uniform basis for the determination of impairment of trade receivables based on the time receivables have been outstanding. In addition, impairment is recognised if there is other evidence of a debtor's insolvency, bankruptcy or liquidation. Losses on loans and advances are recognised as an expense in the income statement.
Assets held for sale and discontinued operations
Assets (or a disposal group) and assets and liabilities relating
to discontinued operations are classified as held for sale, if
their carrying amount will be recovered principally through the
disposal of the assets rather than through continuing use. For
this to be the case, the sale must be highly probable, the asset
(or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary,
the management must be committed to selling and the
sale should be expected to qualify for recognition as a completed
sale within one year from the date of classification.
Non-current assets held for sale (or assets included in the
disposal group) and assets and liabilities linked to a discontinuing
operation are measured at the lower rate of the carrying
amount and fair value net of costs to sell. After an asset has
been classified as held for sale, or if it is included in the disposal
group, it is not depreciated. If the classification criterion
is not met, the classification is reversed and the asset is measured
at the lower rate of the carrying amount prior to the classification
less depreciation and impairment, and recoverable
amount. A non-current asset held for sale and assets included
in the disposal group classified as held for sale are disclosed
separately in the balance sheet. Liabilities included in the disposal
group of assets held for sale are also disclosed separately
in the balance sheet. The profit from discontinued operations
is disclosed as a separate line item in the income statement.
The comparative information in the income statement has
been adjusted for operations classified as discontinued during
the latest financial period being reported. Consequently, the
profit from discontinued operations is presented as a separate
line item also for the comparatives.
Provisions
A provision is recognised when the Group has a present legal
or constructive obligation as a result of a past event, and it is
probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, and that a
reliable estimate can be made of the amount of the obligation.
Provision amounts are reviewed at each balance sheet date and
adjusted to reflect the current best estimate. Changes in provisions
are recorded in the income statement in the same item in
which the provision was originally recognised. The most significant
part of the Group's provisions relates to warranties given
to products sold by the Group, and to onerous leases.
A warranty provision is recognised when a product fulfilling
the terms is sold. The provision amount is based on historical
experience about the level of warranty expenses. Leases become
onerous if the leased premises become vacant, or if they are
subleased at a rate lower than the original. A provision is recognised
for an estimated loss from vacant lease premises over the
remaining lease term, and for losses from subleased premises.
Pension plans
The Group operates both defined contribution plans and
defined benefit plans. The contributions payable under defined
contribution plans are recognised as expenses in the income
statement of the period to which the payments relate. In
defined contribution plans, the Group does not have a legal
or constructive obligation to make additional payments, in case
the payment recipient is unable to pay the retirement benefits.
In defined benefit plans, after the Group has paid the amount
for the period, an excess or deficit may result. The pension obligation
represents the present value of future cash flows from
payable benefits. The present value of pension obligations has
been calculated using the Project Unit Credit Method. The assets
corresponding to the pension obligation of the retirement benefit
plan are carried at fair values at the balance sheet date.
Actuarial gains and losses are recognised in the income statement
for the average remaining service lives of the employees
participating in the plan to the extent that they exceed 10 percent
of the higher rate of the present value of the defined benefit
plans and the fair value of assets belonging to the plan.
Relating to the arrangements taken care of by the Kesko Pension
Fund, the funded portion and the disability portion under
the Finnish Employees' Pension Act are treated as defined benefit
plans. In addition, the Group operates a pension plan in
Norway which is treated as a defined benefit plan.
Share-based payments
The share options issued as part of the Group management's incentive and commitment programme are measured at fair value at the grant date and expensed on a straight-line basis over the option's vesting period. The expenditure determined at the issue date is based on the Group's estimate of the number of options expected to vest at the end of the vesting period. The fair value of the options has been calculated using the Black-Scholes option pricing model.
Revenue recognition policies
Net sales include the sale of products, services and energy. The
sale of services and energy account for an insignificant portion
of net sales. For net sales, sales revenue is adjusted by indirect
taxes, sales adjustment items and the exchange differences of
foreign currency sales.
Revenue from the sale of goods is recognised when the significant
risks of ownership of the goods have transferred to the
buyer, and it is probable that the economic benefits associated
with the transaction will flow to the Group. Normally revenue
from the sale of goods can be recognised at the time of delivery of the goods. Revenue from the rendering of services is recognised
after the service has been rendered and when a flow of
economic benefits associated with the service is probable.
Interest is recognised as revenue on a time proportion basis.
Dividends are recognised as revenue when the right to receive
payment is established.
Other operating income and expenses
Other operating income includes income other than that associated with the sale of goods or services, such as rent income, store site and chain fees and various other service fees and commissions. Profits and losses from the sale and disposal of tangible assets are recognised in the income statement and disclosed in other operating income and expenses. Other operating income and expenses also include realised and unrealised profits and losses from derivatives used to hedge currency risks of trade.
Borrowing costs
Borrowing costs are recognised as an expense in the period in which they are incurred. Borrowing costs are not capitalised as part of asset costs. Directly attributable transaction costs clearly associated with a certain borrowing are included in the original amortised cost of the borrowing and amortised to interest expense by using the effective interest method.
Income taxes
The taxes disclosed in the consolidated income statement recognise
the Group companies' taxes on current net profits on an
accrual basis, prior period tax adjustments and changes in
deferred taxes. The Group companies' taxes are calculated from
the taxable profit of each company determined by local jurisdiction.
Deferred tax assets and liabilities are recognised for all temporary
differences between the tax bases and carrying amounts of
assets and liabilities. Deferred tax has not been calculated on
goodwill insofar as goodwill is not tax deductible. Deferred tax
on subsidiaries' undistributed earnings is not recognised unless
a distribution of earnings is probable, causing tax consequences.
Deferred tax is calculated using tax rates enacted by the balance
sheet date, and if the rates change, at the new rate
expected to apply. A deferred tax asset is recognised to the
extent that it is probable that it can be utilised against future
profit. The Group's deferred tax assets and liabilities are offset
when they relate to income taxes levied by the same taxation
authority.
The most significant temporary differences arise from defined
benefit plans, tangible assets (depreciation difference, finance
lease) and measurement at fair value of asset items in connection
with business acquisitions.
Dividend distribution
The dividend proposed by the Board to the Annual General Meeting has not been deducted from equity. Instead dividends are recognised on the basis of the resolution of the Annual General Meeting.
New IFRS standards and interpretations
The IASB (International Accounting Standards Board) published
the following standards, amendments to standards, and interpretations
whose application will become mandatory in 2009.
They will be adopted by the Group as they become effective.
IAS 1 (Amendment): Presentation of Financial Statements
(effective from accounting periods beginning after 1 January
2009). The amendment of the standard will have an impact on
the face of financial statements as it, for example, separates
changes in a company's equity relating to transactions with
owners from non-owner changes. Non-owner changes are presented
in a statement of comprehensive income. The Group's
management assesses that the amendment of the standard will
have its main impact on the presentation of the income statement
and the statement of changes in equity. The amendment
has been endorsed by the European Union.
IAS 23 (Amendment): Borrowing Costs (effective from accounting
periods beginning after 1 January 2009). The amendment of
the standard removes the option of immediately expensing borrowing
costs attributable to the acquisition, construction or
production of a qualifying asset as part of the cost of that asset.
These borrowing costs are eligible for capitalisation as part of
the cost of the asset. The Group presently recognises, as previously
permitted, borrowing costs for the accounting period in
which they incur. The Group's management assesses that the
amendment will not have a significant impact on the Group's
profit. The amendment has been endorsed by the European
Union.
IAS 32 (Amendment): Financial Instruments: Presentation, and
IAS 1 (Amendment) Presentation of Financial Statements (effective
from accounting periods beginning after 1 January 2009):
Puttable Financial Instruments and Obligations Arising on Liquidation.
The Group's management assesses that the amendment
will not have an impact on the consolidated financial statements.
The amendments have been endorsed by the European
Union.
IFRS 1 (Amendment): First-Time adoption of IFRS, and IAS 27
(Amendment) Consolidated and Separate Financial Statements.
The amendments will not have an impact on the consolidated
financial statements. The amendments have not yet been
endorsed by the European Union.
IFRS 2 (Amendment): Share-based Payments. The amendment
clarifies that vesting conditions are service conditions and performance
conditions only. All other features shall be included in
the grant date fair value. The amendment also provides for the
treatment of cancellations in different situations. The Group's
management assesses that the amendment will not have a
material impact on the consolidated financial statements. The
amendment has been endorsed by the European Union.
IFRS 8 Operating Segments (effective from accounting periods
beginning after 1 January 2009). The revised IFRS 8 supersedes
IAS 14 Segment Reporting. The standard requires the 'management
approach' in the sense that segment information shall be
reported on the same principles as those used internally by the
management for monitoring segment performance. The Group's
management assesses that the standard will not change the
present segment reporting in any material way, because the business segments determined in accordance with internal
reporting are the Group's primary reporting format. The standard
has been endorsed by the European Union.
IFRIC 13 Customer Loyalty Programmes (effective from accounting
periods beginning after 1 July 2008). The interpretation is
applied to the recognition and measurement of refunds linked
to customer loyalty systems. Presently the Group recognises the
expenditure of customer loyalty programmes in other operating
expenses. The Group's management assesses that the interpretation
will impact the Group's net sales, but the impact will not
be material. The interpretation will not impact the Group's
operating profit. The interpretation has been endorsed by the
European Union.
IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction. The interpretation
is applied to post-employment defined benefit plans according
to IAS 19, and to other long-term defined employee benefits
when there is a minimum funding requirement. The interpretation
also limits the measurement of the defined benefit asset to
the present value of economic benefits available in the form of
refunds from the plan or reductions in future contributions to
the plan. The Group's management assesses that the interpretation
will not have a material impact on the consolidated financial
statements. The interpretation has been endorsed by the
European Union.
IFRIC 15 Agreements for the Construction of Real Estate. The
interpretation provides guidance on how to determine whether
an agreement for the construction of real estate is within the
scope of IAS 11 Construction Contracts or IAS 18 Revenue and,
accordingly, when revenue from the construction should be recognised.
The interpretation will not have an impact on the consolidated
financial statements. The interpretation has not yet
been endorsed by the European Union.
IFRIC 16 Hedges of a Net Investment in a Foreign Operation.
The interpretation clarifies the accounting treatment of hedges
of net investments in foreign operations. This means that a
hedge of a net investment in a foreign operation relates to differences
in the functional currency, not in the presentation currency.
In addition, the hedging instrument can be held by any
entity within a Group. The Group's management assesses that
the interpretation will not have a material impact on the consolidated
financial statements. The interpretation has not yet
been endorsed by the European Union.
In addition, the IASB published improvements to standard 34
as part of its annual improvements to the IFRSs. The following
is a summary of the changes which, according to the Group
management's assessment, can have an impact on the Group's
financial statements:
IAS 1 (Amendment): Presentation of Financial Statements. The
amendment clarifies that only part of the financial assets classified
as held for trading in compliance with IAS 39 belong to current
assets. The Group's management assesses that the amendment
will not have a material impact on the Group's financial
statements. The amendment has not yet been endorsed by the
European Union.
IAS 16 (Amendment): Property, Plant and Equipment. Enterprises
whose ordinary activities include leasing out assets and
subsequent disposal shall present the revenue from such assets
in net sales and transfer the carrying amounts of the assets to
inventories when the asset is made available for sale. The
Group's management assesses that the interpretation will not
have a material impact on the Group's financial statements. The
amendment has not yet been endorsed by the European Union.
IAS 19 (Amendment): Employee Benefits. The amendments
clarify, among other things, that when a plan amendment
reduces benefits for future service, the reduction relating to
future service is a curtailment and any reduction relating to past
service is negative past service cost, if it reduces the present
value of defined benefit plan obligation. The Group's management
assesses that the amendment will not have a material
impact on the Group's financial statements. The amendment
has not yet been endorsed by the European Union.
IAS 28 (Amendment): Investments in Associates (and consequent
amendments to IAS 32 Financial Instruments: Disclosure
and Presentation, and IFRS 7 Financial Instruments: Disclosures).
For impairment testing, an investment in an associate is treated
as an individual asset, and impairment losses are not allocated
to individual assets included in the investment, for example,
goodwill. Impairment reversals are recognised as adjustments
to the carrying amount of the investment to the extent that the
recoverable amount of the associate increases. The Group's
management assesses that the amendment will not have a
material impact on the Group's financial statements. The
amendment has not yet been endorsed by the European Union.
IAS 38 (Amendment): Intangible Assets. A prepayment can
only be recognised as an asset when the payment has been
made before receiving the related goods or services. This means
that an expense arising from mail order catalogues is recognised
when the Group has received them and not when they are
delivered to customers. The Group's management assesses
that the amendment will not have a material impact on the
Group's financial statements. The amendment has not yet been
endorsed by the European Union.
IAS 39 (Amendment): Financial Instruments: Recognition and
Measurement. The amendments clarify, among other things, the
classification of derivatives in situations involving changes in
hedge accounting, the definition for instruments held for trading,
and provide for the use of the effective interest method in
re-measuring the carrying amount of a debt instrument when
hedge accounting is discontinued. The Group's management
assesses that the amendment will not have a material impact
on the Group's financial statements. The amendment has not
yet been endorsed by the European Union.
In 2010, the Group will adopt the following standards and
interpretations published by the IASB:
IFRS 3 (revised): Business Combinations. The revised standard
continues to apply the acquisition method to business combinations,
with some significant changes. For example, all payments
to purchase a business are to be recorded at fair value
at the acquisition date, with some contingent payments subsequently
re-measured at fair value through income. Goodwill
may be calculated based on the parent’s share of net assets or it
may include goodwill related to the minority interest. All transaction
costs will be expensed. The Group's management assesses that the change will affect the accounting for business
acquisitions. The revised standard has not yet been endorsed for
application in the EU.
IAS 27 (revised): Consolidated and Separate Financial Statements.
The revised standard requires that all transactions with
non-controlling interests be recorded in equity if there is no
change in control. Consequently, minority transactions will no
longer result in goodwill or profits and losses. The standard also
specifies the accounting for transactions when control is transferred.
The Group's management assesses that the change will
have an impact in possible business arrangement situations.
The revised standard has not yet been adopted by the European
Union.
IAS 39 (Amendment): Financial Instruments: Recognition and
Measurement Eligible Hedged Items. According to the amendment,
inflation cannot be separately designated as a hedged
item in a fixed-interest loan. The Group's management assesses
that the amendment will not have an impact on the Group's
financial statements. The change has not yet been endorsed by
the European Union.
IFRS 5 (Amendment): Non-current Assets Held for Sale and
Discontinued Operations. The amendment clarifies that if a plan
for a partial disposal involves lost control, the related subsidiary's
total assets and liabilities are classified as held for sale,
and when the criteria for a discontinued operation are met,
appropriate information shall be disclosed. The Group's management
assesses that the amendment will not have a material
impact on the Group's financial statements. The change has not
yet been endorsed by the European Union.
IFRIC 17 Distributions of Non-Cash Assets to Owners. The interpretation
clarifies the measurement of asset distributions in a
situation where the company distributes assets other than dividends
to its shareholders. The Group's management assesses
that the interpretation will not have a material impact on the
Group's financial statements. The interpretation has not yet
been endorsed by the European Union.