Notes to the consolidated financial statements (IFRS)
ACCOUNTING POLICIES FOR THE CONSOLIDATED ACCOUNTS
Tieto Corporation (business identity code 0101138-5) is a Finnish public limited IT service and software company organized under the laws of Finland and domiciled in Espoo: Keilalahdentie 2-4, 02101 Espoo, Finland. The company is listed on NASDAQ Helsinki and Stockholm. The Board of Directors approved the consolidated financial statements to be published on 6 February 2018. According to the Limited Liability Companies Act, the shareholders have the right at the Annual General Meeting to approve, disapprove or change the consolidated financial statements after the publication.
Basis of preparation and accounting principles for the consolidated financial statements
Basis of preparation
These consolidated financial statements of Tieto Corporation are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The consolidated financial statements are presented in millions of euros and have been prepared under historical cost conventions, unless otherwise stated in these accounting policies.
New and amended standards adopted by the Group
In preparing these financial statements, the Group has followed the same accounting policies as in the annual financial statements for 2016. The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2017:
- Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12, and
- Disclosure initiative – amendments to IAS 7.
The adoption of the amendments to IAS 12 did not have any impact on the current period or any prior period and is not likely to affect future periods. The amendments to IAS 7 require disclosure of changes in liabilities arising from financing activities, see note 21.
New standards and interpretations not yet adopted:
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2017 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below.
IFRS 9 Financial Instruments
IFRS 9 addresses the following aspects of Financial Instruments accounting:
- Recognition and derecognition
- Classification and measurement, including impairment
- Hedge accounting
The Group has adopted the standard on its mandatory date at 1 January 2018.
The Group does not expect IFRS 9 implementation to have a material impact on its Statement of Financial Position or Statement of Profit or Loss and Other Comprehensive Income.
With respect to classification and measurement, the Group has evaluated the asset groups within the scope of IFRS 9 using both business model and contractual cash flow tests. Due to the results of these tests, the Group does not expect to change its accounting treatment for most of its assets, except for trade account receivables sold via non-recourse factoring, which are held to sell within the business model and hence will be accounted at fair value through profit or loss (FVTPL), instead of amortized cost, and presented separately in the Statement of Financial Position.
There will be no impact on the Group’s accounting for financial liabilities.
With regards to the new impairment methodology (from incurred to expected credit losses), the Group has preliminarily estimated that if the IFRS 9 methodology had already been implemented in the 2016 reporting period, the overall result at last year-end would have been as follows:
|EUR million||As reported in 2016
|If IFRS 9 had
been applied to
the same balances1)
|Expected credit losses on trade receivables||1.5||~0.9|
|Expected credit losses on contract assets||-||~0.2|
|1) using only historical loss experience, since making any further adjustments would be using hindsight|
The Group has no open cash flow hedge relationships with changes in fair value accounted in equity. Accordingly, the Group does not expect a significant impact on the accounting for its hedging relationships.
The Group plans to take advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 will generally be recognized in retained earnings as at 1 January 2018.
Further information on the IFRS 9 requirements and the Group's interpretation can be found in text below.
Classification & Measurement
The new classification model for financial assets is more principles-based than the current requirement under IAS 39 Financial Instruments: Recognition and Measurement. Financial assets are classified according to their contractual cash flow characteristics and the business models under which they are held.
There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities, except for derivatives, for which there is no change provided by IFRS 9. The derecognition rules have been transferred from IAS 39 Financial Instruments: Recognition and Measurement and have not been changed.
The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under IAS 39. IFRS 9 also widens the scope of assets that are now subject to impairment, including also Contract Assets. Due to this, the Group believes that impairment losses are likely to become more volatile, but not necessarily higher, for assets in scope of IFRS 9 impairment.
The Group expects to have the most significant impact from impairment calculations for Trade receivables.
The Group has performed its external customer segmentation, based on customer location and industry, so that each customer segment would bear similar credit characteristics. When calculating ECL, the Group will take into consideration historical loss rates for each receivables age band, calculated based on customer payment behavior during past 3 years, rates then being adjusted by Groups assessment of overall market situation in each customer country group.
The impact from ECL for Contract assets is expected to be of a low value. The Group expects to use the same customer segmentation and rates as applied to Trade receivables not yet due.
The Group has decided to calculate Lifetime expected credit losses for its Lease receivables balances, but the effect of such policy choice and overall ECL for this position is also expected to be of a low value.
The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The Group has no open cash flow hedge relationships with changes in fair value accounted in equity. Accordingly, the Group does not expect a significant impact on the accounting for its hedging relationships.
Disclosures and Transition
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 is based on the principle that revenue is recognized when control of a good or service transfers to a customer.
IFRS 15 is mandatory for financial years commencing on or after 1 January 2018. The Group will adopt IFRS 15 in its consolidated financial statements for the year ending 31 December 2018, using the retrospective approach.
The business models consist of continuous services, software solutions, projects and consulting. Goods mainly include sales of software licences. Revenue comprises the fair value for the sale of IT services and goods, net of value-added tax, discounts and exchange rate differences.
Management has assessed the effects of applying the new standard and does not expect it to have a material impact on the Group’s financial statements. The impact on 2017 net sales is expected to be less than EUR 0.5 million.
The assessment focused on the following areas that were expected to be affected by IFRS 15:
Transition revenue and costs incurred in the initial phase of continuous operating service contracts. Currently revenue is recognized during transition and costs are expensed as they arise. Under IFRS 15 set-up activities do not result in the transfer of a promised good or service and are not identified as a performance obligation to the customer. The costs of set-up activities are not expensed but recognized as an asset under IFRS 15, provided that the defined criteria are met. Based on the assessment, the proportion of set-up activities in current transition contracts is not significant, and therefore the impact on the Group’s financial statements is not expected to be material.
Software licences and other goods. Currently sales of goods are recognized when the decisive risks and rewards that are connected with the ownership of the goods sold are transferred to the buyer and the seller retains neither a continuing right to dispose of the goods nor effective control of those goods. In product business the contracts with customers typically include software licences, implementation and maintenance. Depending on the customization and integration level the software licences are currently recognized separately at transfer of risks and rewards to the buyer, or together with the implementation service when customization is significant and the licence is not functional apart from service. The application of IFRS 15 may result in some alignments in identification of performance obligations that could partly affect the timing of the recognition of licence revenue, but no material impact is expected.
Software as a service (SaaS). The Group has recently signed several SaaS contracts with customers. The contracts comprise implementation project and continuing service contracts. Based on the assessment, the implementation projects for these contracts include set-up activities and implementation services covering customer onboarding to a standardized, module-based software with some customization that is not regarded as significant. The implementation services are identified as distinct performance obligations from continuing SaaS service. Set-up activities are accounted for similarly as for transition in connection to the operating services. Set-up in current SaaS contracts is not expected to have a material impact on the Group’s financial statements.
Warranty obligations. The Group provides warranties for software or application delivery projects and does not provide extended warranties with services in its contracts with customers. Based on the assessment, the warranties are assurance-type warranties. Currently the warranties for time- and material-based contracts are accounted for as deferred revenue over the project period. Under IFRS 15 the warranties will be accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The impact on the Group’s financial statements will not be material.
Common for all business models
Variable consideration. Under IFRS 15 the variable consideration will be required to be estimated at contract inception. IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. The most usual variable elements in the transaction price consist of different types of discounts. Based on the assessment, no major change in timing of the revenue is expected.
Overall, the timing of revenue recognition is not expected to change significantly. Revenue from service contracts is currently based on service volumes or time and materials and recognized over the accounting period in which the service is rendered or project completed. The Group will account for continuous services in a contract as a series of distinct goods or services, as one performance obligation, when the criteria defined in IFRS 15 are met.
Under IFRS 15 revenue will be recognized over time provided that the defined criteria in IFRS 15 are met. The Group has assessed that the services are generally satisfied over time given that either the customer simultaneously receives and consumes the benefits provided by the Group, or the Group’s performance does not create an asset with an alternative use for the Group, in which case there is an enforceable right to payment for work completed to date.
When using the retrospective approach, the Group will apply the requirements of IFRS 15 to each comparative period presented and adjust its consolidated financial statements. The Group plans to use the practical expedients permitted by IFRS 15 when an entity applies the standard retrospectively.
IFRS 16 Leases
IFRS 16 was issued in January 2016. It will result in almost all leases being recognized on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases.
The accounting for lessors will not significantly change.
The standard will affect primarily the accounting for the Group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of EUR 180.8 million, see note 32.
However, the group has not yet assessed what adjustments, if any, are necessary for example because of the change in the definition of the lease term and the different treatment of variable lease payments and of extension and termination options. It is therefore not yet possible to estimate the amount of right-of-use assets and lease liabilities that will have to be recognized on adoption of the new standard and how this may affect the group’s profit or loss and classification of cash flows going forward.
IFRS 16 is mandatory for financial years commencing on or after 1 January 2019. At this stage, the Group does not intend to adopt the standard before its effective date.
There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.
The consolidated financial statements include the Parent company Tieto Corporation and all subsidiaries over which the Parent company has direct or indirect control generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Subsidiaries are consolidated from the date of acquisition until the date of divestment.
The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statement of comprehensive income.
Intra-group receivables, payables and transactions including dividends and internal profit are eliminated on consolidation.
Tieto Corporation holds interests in joint ventures for which it has right to the net assets of the arrangement and hence equity accounts for its interest according to IFRS 11 'Joint operations'. Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group's share of the post-acquisition profits or losses and movements in other comprehensive income. When the group's share of losses in a joint venture equals or exceeds its interests in the joint ventures, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.
Non-controlling interests are shown separately under consolidated shareholders' equity.
The Group's operating model comprises of a matrix structure of service lines and industry groups, of which the service line dimension constitutes the main operating segments. The reportable operating segments in the service line dimension are Technology Services and Modernization, Business Consulting and Implementation, Industry Solutions and Product Development Services. The operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Leadership Team that makes strategic decisions.
Goodwill is allocated to the Cash Generating Units, which include several countries and therefore goodwill is not included in the country specific non-current assets presented in the segment information.
Foreign currency translation
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in euro, which is the Group's presentation currency.
Foreign currency transactions are translated at the exchange rate prevailing on the transaction date. The foreign currency monetary items are translated using period end exchange rates. The foreign currency non-monetary items held at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined or remeasured. Other non-monetary items are recorded at the exchange rate prevailing on the transaction date.
For internal, long-term loans to subsidiaries, when classified as net investment in foreign operation as per IAS 21, all related unrealized foreign exchange gains and losses are recognized in profit or loss statement in the separate financial statements. In consolidated financial statements, such exchange differences are recognized initially in the other comprehensive income and reclassified from equity to profit or loss on disposal of net investment.
Other foreign exchange gains and losses related to business operations are included in operating profit except when deferred in other comprehensive income as qualifying cash flow hedges. Foreign exchange gains and losses associated with financing are reported in financial income and expenses.
The results and financial positions of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
- assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
- income and expenses for each income statement are translated at average exchange rates;
- all resulting exchange differences are recognized in other comprehensive income.
When a subsidiary is sold, any translation differences are recognized in the consolidated income statement as part of the gain or loss on the sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognized in other comprehensive income.
Revenue is recognized in accordance with the requirements of IAS 11 'Construction contracts' and 18 'Revenue'. Revenue comprises the fair value for the sale of IT services and goods, net of value-added tax, discounts and exchange rate differences. Services mainly include the development of customized software solutions, maintenance of software solutions, and processing and network services. Goods mainly include sales of software licenses.
Sales of services are recognized in the accounting period in which the service is rendered. Revenue from fixed price projects and similar types of customer agreements is recognized according to the stage-of-completion method, which is calculated monthly by comparing costs of completed work hours against total estimated costs of work hours to finalize the project. Stage-of-completion method is used provided that the degree of completion can be assessed reliably and the amount of the income and costs related to the service contract can be estimated reliably. If these conditions are not met, revenue only equal to costs incurred to date is recognized to the extent that such costs are expected to be recovered. The operations are steered based on project performance and direct costs are linked to deliveries in services lines, which constitute the main operating segments. In the follow-up of the customer projects, the project is considered as loss-making when the total direct costs are estimated to exceed the total expected revenue and a provision corresponding to the uncovered direct costs is immediately recognized.
Sales of goods are recognized when the decisive risks and rewards that are connected with the ownership of the goods sold are transferred to the buyer and the seller retains neither a continuing right to dispose of the goods, nor effective control of those goods.
Transition costs incurred in the initial phase of continuous operating service contracts are expensed as they arise. Revenue from the operating service contracts is based on service volumes and is recognized when the services are rendered.
The reported order backlog includes all signed customer orders that have not been recognized as revenue.
Other operating income
Other operating income mainly includes gains from both asset and business disposals, rental income and government grants. Gains from discontinued operations are included in the net profits of the discontinued operations.
Government grants relating to costs are deferred and recognized as Other operating income over the period necessary to match them with the costs that they are intended to compensate. Investment grants related to acquisitions of property, plant and equipment and intangible assets are deducted from the cost of the asset in question in the statement of financial position and recognized as income on a systematic basis over the useful life of the asset in the form of reduced depreciation expense.
Research and development costs
Research costs are expensed as incurred. Development expenditures related to major new business concepts and software products are capitalized as intangible assets when their future recoverability can reasonably be established and the following criteria can be demonstrated: the technical feasibility of completing the intangible asset so that it will be available for sale and use, the intention to complete the intangible asset and use or sell it, the ability to use or sell the intangible asset, the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. In addition, the ability to demonstrate how the intangible asset will generate future economic benefits is required and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Intangible assets are carried at cost less any accumulated amortizations and accumulated impairment losses.
The tax expense for the period includes current taxes of the Group companies based on taxable profit for the year, together with tax adjustments for previous years and changes in deferred taxes. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity.
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using the tax rates and laws which have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The most significant temporary differences arise from depreciation differences, tax losses carried forward and intangible assets. Deferred taxes are accounted for temporary differences except for the following: goodwill not deductible for taxation purposes, the initial recognition of an asset or liability in a transaction other than a business combination that affect neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they will probably not be reversed in the foreseeable future.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. The deferred tax assets and liabilities arising from consolidation are recognized in the consolidated balance sheet if it is probable that the related tax effects will occur.
Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group's interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree.
Impairment testing of goodwill
Goodwill acquired in a business combination is tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of impairment testing goodwill is allocated to each of the cash-generating units (CGU) or groups of CGUs, which are expected to benefit from the synergies of the combination. Each unit or group of units represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. If the carrying amount of goodwill exceeds its recoverable amount an impairment loss equal to the difference is recognized.
The recoverable amount is the higher of value in use represented by the net present value of future cash flows and the fair value less costs to sell.
Acquired intangible assets are capitalized at cost. Intangible assets acquired in business combinations are capitalized at fair value at the acquisition date. The useful lives of the intangible assets are assessed to be either finite or indefinite. Intangible assets with finite useful lives are amortized over their useful lives with the straight-line method. Intangible assets with indefinite useful lives are tested for impairment annually or if events or changes in circumstances indicate that such carrying amount may not be recoverable.
Intangible assets recognized by the Group in business combinations are usually customer or technology related and have finite useful lives. Marketing related intangible assets are not generally recognized by Tieto because normally the value of acquired business constitutes of customer relationships, technologies and personnel (which is included in goodwill) and therefore the marketing related intangible assets do not generally have separately recognizable fair value.
The Group applies the following useful lives:
|Other intangible rights||3–10|
|Allocated intangible assets, technology related||3–10|
|Allocated intangible assets, customer related||2–10|
Property, plant and equipment
Land is not depreciated. Other fixed assets are carried at cost less accumulated depreciation. Government grants received are deducted from the cost. Property, plant and equipment acquired in business combinations are measured at fair value at the acquisition date. Depreciation is charged according to plan based on the estimated economiclives of the individual assets and accounted for in accordance with the straight-line method. The assets' residual useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets procured under finance lease agreements are capitalized as fixed assets and depreciated during the estimated useful lives.
The group applies the following economic lives:
|Buildings and structures||25–40|
|Data processing equipment 1)||1–5|
|Other machinery and equipment||5|
|Other tangible assets||5|
|1) Purchases of personal computers are expensed immediately.|
Leases of lessees
Lease agreements are classified as finance and operating leases. Assets procured under finance lease agreements are capitalized as fixed assets and depreciated during the estimated useful lives. The annual rents are disclosed as amortization of the finance lease liability and interest expenses.
Leases in which a significant portion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.
Leases of lessors
If an arrangement conveys a right to use a specific asset to a purchaser, often together with related services the assets, mainly technical equipment, are classified as embedded finance leases. Sales derived from these embedded finance leases are recognized at the beginning of the agreement period. The annual payments are disclosed as amortization of the finance lease loan receivable and interest income.
Financial assets are classified into the following categories
- At fair value through profit or loss
Derivatives, comprising foreign exchange forward contracts, currency options, power derivatives and interest rate swaps.
- Loans and receivables
Fixed-term deposits, principally comprising of funds held with banks and other financial institutions, and short-term and long-term loan receivables, as well as trade and other receivables, are classified as loans and receivables. In the balance sheet, they are reported according to their nature either in trade and other receivables, loan receivables or cash and cash equivalents (current assets) or in loan receivables or other non-current assets (non-current assets). Investments in money market instruments are reported as short-term deposits under cash and cash equivalents.
- Available-for-sale financial assets
Investments in equity instruments, except for investments in associated companies and joint ventures, are classified as assets available-for-sale. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.
Financial liabilities are classified into categories
- At fair value through profit or loss
Derivatives, comprising foreign exchange forward contracts, currency options, power derivatives and interest rate swaps.
- Financial liabilities measured at amortized cost
Short-term borrowings and overdrafts as well as long-term loans and trade and other payables are classified as financial liabilities measured at amortized cost. Loans are included in non-current and current liabilities.
Recognition and de-recognition
All financial instruments are initially recognized at fair value. Transaction costs are included in the carrying value only if the financial instrument is not recorded at fair value through profit or loss in which case transaction costs are expensed in income statement. Usually the fair value equals amount received or paid.
Regular way purchases and sales of financial assets are accounted for at trade date, the date on which the Group commits to purchase or sell the asset, for all categories of financial assets, where entity hold them and which are not derivatives.
Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
Financial liabilities are derecognized when they are extinguished, that is when the obligation is discharged, cancelled or expired.
Subsequent measurement of financial instruments depends on the designation of the instruments.
- Financial assets and liabilities at fair value through profit or loss
The valuation method is described in the footnote of Note 27. Related valuation changes are reported, depending on their nature, in the income statement in the financial income and expenses, in other income from operations and other operating expenses in exchange rate gains and losses (foreign exchange forward contracts) and in other financial income and expenses (currency options). The rest of the valuation changes are shown in interest income and expenses (interest rate swaps) and in other operating expenses (power derivatives), except for when applying hedge accounting where fair value changes are reported in other comprehensive income.
In the balance sheet the fair value of financial assets from this category are reported under trade and other receivables or trade and other payables if asset or liability due in less than 12 months. In case the asset or liability is due in later than 12 months, it is reported under other noncurrent assets and liabilities in the balance sheet.
- Loans and receivables
Loans and receivables are subsequently carried at amortized cost, using the effective interest method.
- Available-for-sale financial assets
Available-for-sale financial assets are measured at fair value if fair value can be measured reliably. Unrealized gains and losses are recognized in shareholders' equity. If fair value is not available, the assets are held at initial value. The available-for-sale assets are reported under other noncurrent assets in the balance sheet. When the investment is sold, the accumulated fair value adjustment is recognized in the income statement.
- Financial liabilities measured at amortized cost
Interest expense and transaction costs are amortized in the income statement over the maturity of the loan using the effective interest method.
Impairment of financial assets
- Assets carried at amortized cost
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a Group of assets is impaired. A financial asset is regarded impaired if one or more of the following events have occurred after the initial recognition of the asset and that event has an impact on the estimated future cash flows of the financial asset:
1. significant financial difficulty of the issuer or obligor
2. a breach of contract such as default in interest or principal payments
3. it becomes probable that the borrower will enter bankruptcy or other financial reorganization
4. the disappearance of an active market for that financial asset because of financial difficulties.
Possible impairment is booked in the income statement.
- Assets classified as available for sale
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a Group of assets is impaired. For debt securities the Group uses the criteria above. In the case of equity investments classified as available for sale, the Group evaluates whether there is any evidence of prolonged decline in the fair value of the security, thus justifying the assets are impaired. If such evidence exists, the impairment is booked in the income statement.
Derivative financial instruments and hedging activities
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The fair values of various derivative instruments used for hedging purposes are disclosed in note 26. Movements on the hedging reserve in other comprehensive income are also attached to the note 26.
The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion of cash flow hedge is recognized immediately in the income statement within the operating income and expenses. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (e.g. when the forecast sale that is hedged takes place).
Trade and other receivables
Trade and other receivables are carried at their nominal value or original amount due from customers, which is considered to be fair value, less a provision for doubtful receivables. The provision for doubtful accounts is recorded in the income statement and measured based on the principles defined in the Corporate credit policy. The provision is an accounting estimate of the amount of receivables with a high probability to be written off as uncollectable. The accounting estimate is based on the amount of receivables overdue for a period of time defined in the credit policy. The final write off decision is made based on individual assessment of the potential collectability risk involved.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with banks and other liquid investments that are readily convertible to known amount of cash within 3 months’ period and which are subject to an insignificant risk of changes in value. Bank overdrafts are included in short-term borrowings under current liabilities.
A provision is a liability of uncertain timing or amount, which should be recognized when the entity has a present legal or constructive obligation as a result of a past event and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.
The Group operates a number of different pension plans in accordance with national requirements and practices. The majority of the plans are classified as defined contribution plans. Payments to defined contribution plans are recognized as employee benefit expenses when the contributions are due. The Group has no further payment obligations once the contributions have been paid.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
For defined benefit pension plans the liability equals the present value of the defined benefit obligation less the fair value of the plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension obligation.
The net interest of the net defined benefit liability or asset is presented among financial items.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.
Tieto uses in its incentive programmes share options classified as being paid equity as well as rewards, which can either be paid in the form of shares, in the form of a cash payment or as a combination thereof. The fair value of the employee services received in exchange for the grant of the stock options and shares is recognized as an expense during the vesting period. The cost of such services is measured by reference to the fair value of the options at the grant date. Terms and conditions which are not on market terms (e.g. targets related to the financial results and the duration of the employment relationship) are taken into account in the number of the share options, which the employees are expected to become entitled to. The amount to be booked as an expense will be allocated to the period of time, during which all the criteria for the generation of the right are to be fulfilled. An estimate of the number of share options to which a right is expected to be generated based on the terms and conditions not being on market terms, is checked on each financial statement date. The possible effect of the readjustments made to the original estimates is recorded in the income statement and a corresponding adjustment is made to the equity.
The rewards granted in the form of shares are booked as an employee benefit expense and as an increase in the equity. Share-based compensation is recognized as an expense in the income statement over the service period. The fair value of the amount payable to the employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities over the period in which the employees become unconditionally entitled to the payment. The liability is measured at each reporting date and at the settlement day. Any changes in the fair value of the liability are recognized as employee benefit expenses in the income statement.
The level of the realization of the set financial targets influences the amount in which rewards are to be booked and paid.
Equity, dividends and own shares
Dividends proposed by the Board of Directors are not deducted from distributable equity until approved by the shareholders at the Annual General Meeting.
When Tieto Corporation's own shares are repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction in equity.
Earnings per share
Earnings per share (EPS) is calculated by dividing the net profit attributable to the shareholders of the company by the weighted average number of shares in issue during the year, excluding shares purchased by Tieto Corporation.
Diluted earnings per share is calculated as if the warrants and options were exercised at the beginning of the period. In addition to the weighted average number of shares outstanding, the denominator includes the incremental shares obtained through the assumed exercise of the warrants and options. The assumption of exercise is not reflected in earnings per share when the exercise price of the warrants and options exceeds the average market price of the shares during the period. The warrants and options have a diluting effect only when the average market price of the share during the period exceeds the exercise price of the warrants and options.
In accordance with the new guidelines on alternative performance measures issued by the European Securities and Markets Authority (ESMA) Tieto has revised the terminology used in its financial reporting. The term "adjusted items” has replaced the term "one-off items". Adjusted items include restructuring costs, capital gains/losses, goodwill impairment charges and other items.
Tieto uses alternative performance measures to better reflect its operational business performance and to enhance comparability between financial periods. They are reported in addition to, but not as a substitute for, the performance measures reported in accordance to IFRS.
Critical accounting estimates and assumptions
The preparation of the financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results may differ from the estimates.
Critical accounting estimates and assumptions are presented in the following disclosures:
|Impairment of goodwill||31|
|Deferred income taxes||13|
|Fair value of derivatives and other financial instruments||26–27|