Wärtsilä Corporation has adopted the International Financial Reporting Standards (IFRS) in the preparation and presentation of its interim and annual financial statements as of 1 January 2005. This review describes the preliminary main impacts of the transition to IFRS on the financial information for 2004, which was originally reported according to the Finnish Accounting Standards (FAS) set for public listed companies in Finland. The IFRS accounting principles are included as an appendix to this review. The FAS accounting principles are published in the Financial Review section of Wärtsilä’s Annual Report 2004.
Wärtsilä publishes its financial statements for 2004 according to IFRS in its interim reports, i.e. for the first three, six and nine months of the year, and for the full year 2004.
The financial statements according to IFRS have been drawn up using the standards in force in December 2004. Under the transition provisions for IAS 32 and IAS 39 covering the treatment of financial instruments, no comparative data need be prepared according to these standards for 2004. Instead, IAS 32 and IAS 39 will be applied from 1 January 2005, when the translation adjustments will be entered directly under shareholders’ equity.
Wärtsilä Group’s primary segments under IFRS are its Power Businesses and Imatra Steel. These segments supply various products and services with differing risks and returns and are therefore reported separately. The Power Businesses operate in two market segments, ship propulsion systems and onshore power plants. The two are interconnected, however, offering customers applications and service based on the same basic product. The main products in both the ship power and onshore power plant markets are diesel and gas engines and their service. R&D, design and manufacturing of these engines take place in the same R&D centres and factories, and the manufacturing process is the same for both markets. Similarly, the products are distributed and serviced through the same Wärtsilä subsidiaries. A proportion of total capacity costs cannot be allocated directly to specific market segments. This proportion is significant and varies throughout the year’s interim reporting periods, and for this reason cannot be reasonably allocated. Customers in both market segments operate globally and are capital-intensive corporations. Trends in these two markets are strongly dependent on global economic development.
Imatra Steel’s customers belong to the automotive and mechanical engineering industries. The company manufactures special engineering steels and forged steel components.
Under FAS pension obligations were reported in accordance with local legislation and practice in each operating country. The adoption of IFRS increases the pension obligation arising from defined benefit plans by EUR 32.7 million in the opening balance sheet at 1 January 2004. Most of this increase is due to the need to enter the disability pension obligation under the Finnish pension system (Employees’ Pensions Act, TEL) in the opening balance sheet at 1 January 2004. Changes in the system’s calculation principles, due to come into force on 1 January 2006, will mean that a one-time item of EUR 27.3 million arising from the disability pension is entered in the fourth-quarter interim accounts for 2004. Under the new calculation principles the disability part of TEL pensions will be treated as a defined contribution plan in the IFRS statements.
The other employee benefit obligations on the transition date total EUR 8.0 million. These apply mainly to compensation for long-term employment in the company. Under previous local practice, these obligations were not included in provisions because they were previously treated as defined contribution plans.
The EUR 10.0 million conditional state development credit granted in the Netherlands is treated under IFRS as an interest-bearing loan. Under FAS it was entered as a contingent liability.
On the transition date 1 January 2004 goodwill totalling EUR 362.0 million was reviewed for each cash-generating unit to determine any need for write-downs, based on discounted future cash flows. The review resulted in a EUR 3.4 million write-down on the Biopower business. Biopower was part of the Power Plants business and under FAS valuation principles no write-down was considered necessary in the 2003 financial statements.
Goodwill totalling EUR 8.1 million arising from the acquisition of assets has been transferred from intangible assets to goodwill.
Goodwill has not been amortized from the transition date. Amortization of goodwill under FAS in 2004, EUR 27.4 million, is entered in the income statement.
A EUR 130 million restructuring provision and write-down was entered in the FAS financial statements for 2003 based on a restructuring programme approved by the Board of Directors in December 2003. Negotiations with personnel were completed during the first quarter of 2004 and it was only then that the IFRS criteria for provisions were considered to have been met. Accordingly, EUR 66.0 million of the restructuring provision at the transition date, 1 January 2004, has been reversed. Of this amount, EUR 63.8 million has been entered as a provision and one-time item in the first-quarter accounts for 2004. The provision was increased by EUR 2.1 million in the fourth quarter after completion of the restructuring programme in the Netherlands.
Capitalization of R&D costs
The research and development costs of new products and technologies have been capitalized, once the IAS capitalization criteria have been met, from the year in which it has been possible to establish their technical feasibility and future economic benefits. Development costs totalling EUR 27.0 million between 1999 and 2003 were capitalized on 1 January 2004 after deductions for planned depreciation.
Assets available for sale
Other shares are classified as assets available for sale. Under the transition exemptions permitted by the IAS 32 and IAS 39 standards on financial instruments, comparative IFRS figures for financial instruments are not calculated since IAS 39 only took effect on 1 January 2005. Hence the IFRS values of Wärtsilä’s shares shown here correspond with the figures in the original financial statements. Application of IAS 39 to Wärtslä’s shares available for sale would have increased the opening balance sheet by EUR 146.9 million.
Valuation of inventories
Further clarification of the valuation principles has been provided. The main impact of the change is to systematically include freight and cash discounts in inventories.
Tangible fixed assets
The value of tangible fixed assets has increased as a result of more systematic finance leasing capitalization and the consolidation of small companies. Under FAS these small companies were not considered significant.
Properties totalling EUR 20.7 million and not used by the Group have been transferred to investment properties.
Deferred taxes have been entered under IFRS adjustments in the opening balance sheet to the extent that they have created taxable or tax-deductible temporary differences between the closing of the accounts and the taxation date. Deferred tax assets on confirmed losses have been adjusted if it is sufficiently probable that the losses can be used in the future. Deferred tax adjustments at the transition date totalled EUR 28.4 million.
The IFRS reconciliation calculation is unaudited.
IFRS comparative figures, encl. 1
Accounting Principles, encl. 2