Corrections to the IFRS attachment in Fortum's Financial Statements
2004
The IFRS attachment to Fortum's Financial Statements 2004 distributed
earlier today contained minor inaccuracies. Below is the corrected
attachment.
Attachment
Transition to International Financial Reporting Standards (IFRS) in
2005
Introduction
Fortum will adopt the International Financial Reporting Standards
(IFRS) starting January 1, 2005. The date of transition from Finnish
GAAP (FAS) to IFRS is January 1, 2004. The first interim report under
IFRS will be published May 3, 2005.
The purpose of this IFRS summary is to give an overview of the impact
of the transition and to describe the effects of those IFRS accounting
principles and rules that will have a material impact on the
consolidated income statement and certain key ratios. The IFRS
financial information presented in this summary may require adjustments
before its inclusion as comparative information in the Fortum's first
set of IFRS financial statements for the year ended December 31, 2005
due to the ongoing changes in IFRS which might have an effect on the
accounts of the companies applying IFRS from 2005.
In March 2005 Fortum will provide a separate detailed disclosure on the
transition to IFRS including the adjusted 2004 quarterly income
statement, balance sheet, cash flow, key ratios and segment information
as well as reconciliations of equity and net profit.
Fortum's IFRS project
In order to evaluate the impact of the transition to IFRS, Fortum
established a project in the autumn 2002. The IFRS project organisation
included participants from corporate center as well as from all
business units. The IFRS project worked under the leadership of a
steering committee, the Chief Financial Officer acting as a chairman.
The auditors of Fortum have assisted the different sub-project groups
as well as taken part in the work of steering committee. The results of
the project have been communicated to the Corporate Executive Committee
and the Audit Committee on a continuous basis.
The main impacts will result from the changes in the recognition and
measurement principles of financial instruments, the recognition of
assets and provisions in relation to asset retirement obligations and
disposal of spent fuel regarding the nuclear power plants, differences
in the classification of leasing arrangements compared to FAS and from
the changes in the accounting for pension obligations.
In the IFRS transition Fortum has elected to apply exemptions allowed
in the First-Time Adoption standard (IFRS 1). The most important
exemption elected is concerning business combinations that have taken
place before the date of transition to IFRS. Fortum will keep the same
classification and recognition of assets and liabilities as in its FAS
financial statements. This means that acquisitions made before January
1, 2004 are not restated. Impairment tests have been performed
continuously and no impairment charges have been recognised in the IFRS
opening balance sheet.
Fortum has chosen to apply IAS 32 and 39 standards regarding financial
instruments also for the comparison year 2004.
Assets and liabilities related to decommissioning of nuclear power
plants and the disposal of spent fuel
Fortum owns Loviisa nuclear power plant in Finland. The nuclear
liability and Fortum's share in the Nuclear Waste Fund related to the
Loviisa power plant are under FAS presented in the note Contingent
liabilities in the financial statements. The nuclear liability is
calculated according to the Nuclear Energy Act in Finland. That
calculation does not take into account the effect of discounting the
future liability. The paid annual fee to the Nuclear Waste Fund (due to
the change in the nuclear liability, the share of profit of the Nuclear
Waste Fund and incurred costs of taken actions) is recorded in the
income statement. The nuclear liability related to Loviisa nuclear
power plant is fully covered in the Nuclear Waste Fund.
Under IFRS, Fortum's part of the Nuclear Waste Fund and the related
nuclear liability are presented gross as non current interest-bearing
assets and provisions. Fortum's share in the Nuclear Waste Fund has
been accounted for according to IFRIC Draft Interpretation D4 which
states that the fund assets are measured at the lower of fair value or
the value of the related liabilities since Fortum does not have control
or joint control over the Nuclear Waste Fund. Both Fortum's share of
Nuclear Fund in assets and the total provisions amount to EUR 354
million in the opening balance January 1, 2004 and to EUR 401 million
in the closing balance December 31, 2004. The asset and provisions are
both included in the capital employed and the resulting net amount is
then equal to zero (see below for 'Impact on key ratios').
The fair value of the provisions in IFRS is calculated by discounting
the future cash flows, which are based on estimated future costs and
actions already taken. The initial net present value of the provision
for decommissioning (at the time of commissioning the nuclear power
plant) has been included in the investment cost and depreciated over
the estimated operating time of the nuclear station. The provision for
spent fuel covers the future disposal costs of fuel used until the end
of the accounting period. Costs for disposal of spent fuel are expensed
during the operating time based on fuel usage.
The timing factor will be taken into consideration by accounting for
interest expense related to discounting the nuclear provisions. The
interest on the Nuclear Waste Fund assets is presented as financial
income.
Fortum also has minority shareholdings in the associated nuclear power
production companies Teollisuuden Voima Oy (TVO) in Finland and
directly and indirectly OKG AB and Forsmarks Kraftgrupp AB in Sweden.
Similar kinds of adjustments have been made through accounting of
associates.
Financial Instruments
General principles
Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured at
their fair value. The method of recognising the resulting gain or loss
depends on whether the derivative is designated as a hedging
instrument, and if so, the nature of the item being hedged. The Group
designates certain derivatives as either: (1) hedges of highly probable
forecast transactions (cash flow hedges); (2) hedges of the fair value
of recognised assets or liabilities or a firm commitment (fair value
hedge); or (3) hedges of net investments in foreign operations.
The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash flow hedges are recognised in
equity. The gain or loss relating to the ineffective portion is
recognised immediately in the income statement. Amounts accumulated in
equity are recycled in the income statement in the periods when the
hedged item affects profit or loss, for instance when the forecast sale
that is hedged takes place.
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in the income statement,
together with any changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk. If derivatives do
not qualify for hedge accounting the change of fair value is recognised
immediately in the income statement.
Electricity commodity derivatives
Electricity derivatives are mainly used to hedge future cash flows of
electricity sales (Power Generation and Heat) to Nord Pool and
purchases (Markets and Distribution) from Nord Pool or other sources.
Regarding electricity commodity derivatives, hedge accounting is
applied for most of the cash flow hedges to decrease the volatility in
the income statement however creating volatility in equity. Forecasted
underlying physical electricity deliveries, i.e. sales or purchases are
not recorded until the delivery period.
Total volatility in operating profit caused by electricity derivatives
on the Group level amounted to EUR 12 million in 2004. Some of the
contracts for the years 2004 - 2007 entered into during 2003 and for
which hedge accounting was not applied to caused some volatility, EUR
11 million in 2004, as the changes in the fair values are recognised in
income statement. To a very large extent contracts entered into during
2004 and onwards will have a hedge accounting status.
Oil commodity derivatives
Oil derivatives entered into to hedge price risk are economical hedges
and they do not qualify for hedge accounting under IAS 39. All fair
value changes, EUR 29 million in 2004, are recognised in the operating
profit.
Treasury derivatives (foreign exchange and interest rate derivatives)
Foreign exchange derivatives are used for hedging forecast cash flows
of the sales and purchases, assets and liabilities in the balance sheet
and net investments in foreign operations.
During 2004 hedge accounting was applied to all Oil cash flow hedges
and partly to Power and Heat cash flow hedges (Power Generation and
Heat) to decrease the volatility in operating profit in the income
statement. The volatility from foreign exchange derivatives hedging
future cash flows was EUR - 6 million in operating profit for those
hedges for which hedge accounting was not applied during 2004.
The Group has chosen not to apply hedge accounting for foreign exchange
derivatives hedging balance sheet items. A minor volatility in
financial items is caused by the forward points of these hedges. The
cross currency and interest rate derivatives maturing in 2004-2011
entered into earlier do not qualify for hedge accounting. A major part
of these swaps are maturing during 2005-2006, and are thus expected to
create less volatility in the coming years. However, fair value hedges
of issued bonds in 2003 qualify for hedge accounting. Volatility in
financial items was EUR -10 million during 2004.
Net investments in foreign subsidiaries are hedged according to the
approved Treasury policy. In IFRS, as in FAS, gains and losses on net
investment are recognised in the equity.
Minority preference shares with option agreement
Fortum owns10.1% of the shares in Nybroviken Kraft AB Group (NYKAB)
(which represents 52.9% of the votes). NYKAB is consolidated as a
subsidiary in Fortum's consolidated accounts. NYKAB owns hydroelectric
power generating assets. Fortum manages these power assets by agreement
and utilises all the power produced. Fortum is entitled to buy the
minority preference shares of NYKAB through option agreements.
According to the option agreements the repurchase may take place in
2007, 2011 or 2015 at a price in accordance with an agreed formula. The
minority interest accounted for in Fortum represents the nominal amount
of the minority preference shares.
According to IAS 32 and 39 the minority interest referring to the
preference shares is classified as an interest-bearing liability and
the difference between the estimated value based on the option formula
and the capital amount of the interest-bearing liability is presented
as accrued interest liability. Changes in the estimated value based on
the option formula are accounted for as interest costs.
Leasing
The classification criteria when considering whether a lease
arrangement is an operating lease or financial lease are different
under IFRS than under FAS.
In Fortum this means that some lease arrangements, where Fortum is the
lessee are reclassified to be financial leases. The liabilities of
these agreements that have previously been reported as contingent
liabilities are under IFRS included in the balance sheet. The resulting
increase in the interest-bearing liabilities at year-end 2004 is EUR
102 million. The main part of this amount relates to Shipping leases.
In some customer contracts in Heat Fortum also acts as a lessor. Fortum
has evaluated customer contracts against the criteria in IFRIC D4
(leasing). A part of these contracts is classified as financial leases.
In the balance sheet the effect will be seen mainly as a
reclassification between interest-bearing receivables and tangible
assets.
Employee benefits
Fortum has various pension plans in accordance with local practices in
the countries where it operates. Under FAS, the Group's pension
obligations have been reported according to local regulations. In IFRS
financial statements, pension obligations are treated in accordance
with IAS 19 Employee Benefit and all accumulated actuarial gains and
losses related to defined benefit plans are recognised in the balance
sheet of the transition date as allowed by IFRS 1. The interest
component is included in the pension costs in the income statement.
Major impact from the transition to IFRS is due to the accounting for
Finnish statutory employment pension scheme (TEL), which is in Fortum
covered partly in insurance companies and partly in pension funds.
In the IFRS transition balance sheet January 1, 2004 the impact of the
Finnish pensions covered by pension funds was some EUR 40 million which
resulted from the fact that the fair value of the assets of the Fortum
pension funds exceeded the obligations caused by different pension
plans. This has been reported as other non-current assets. In addition
an obligation of some EUR 30 million has been recognised in the
provisions for the future disability pension component for the plans
that are provided by insurance companies.
Due to changes approved by Finnish authorities in December 2004 TEL's
disability pension component is accounted for as a defined contribution
plan in the IFRS balance 31.12.2004 instead of defined benefit plan as
in the IFRS transition balance sheet. This change will have a positive
impact of some EUR 20 million before tax on the period's net profit.
The rest of the total change in the income statement (some EUR 30
million) is due to positive development of the fair values of pension
fund assets.
Other IFRS transition impacts
Other IFRS adjustments include for example:
- According to FAS accounting principles costs for major overhauls
(mainly in Oil Refining) are accrued in advance of the shutdown and
accounted for as a provision in the balance sheet. Under IFRS these
costs are treated according to the asset component approach. The costs
are capitalised when they occur and depreciated during the shutdown
cycle.
- Fortum has elected to keep FAS revaluations net of cumulative
depreciations of certain items of property, plant and equipment as
deemed cost of property, plant and equipment. Adjustments are made
retrospectively for depreciations following the underlying asset.
- According to FAS accounting principles connection fees have been
recognised as revenue immediately. In IFRS connection fees regarding
cooling will be deferred and recognised as revenue over the expected
customer relationship period.
- The difference between the acquisition cost of shares in associated
companies and Fortum 's part of the shareholders equity at the time of
acquisition, have been allocated to fixed assets at the time of
acquisition to the extent that their fair value at the time exceeded
the book value. In FAS the depreciation of these fair value adjustments
has been presented in Other expenses. According to IFRS these
depreciations, EUR 20 million, have been reclassified to Share of
profit (loss) of associates and joint ventures.
- The tax expense reported in the income statement has been affected by
a positive one-time adjustment of EUR 6 million concerning the change
in the corporate tax rate in Finland from 29% to 26% from 2005 onwards.
Impact on certain key ratios
Capital employed
The IFRS adjustments increase the capital employed in Fortum. The
changes in accounting for certain lease agreements are the main reason
to the change in the capital employed being an increase of EUR 111
million in the opening balance and an increase of EUR 193 million in
the closing balance 2004. The provisions for decommissioning and the
provision for spent fuel regarding nuclear power assets have been
included in the capital employed. The financial costs associated with
these provisions have also been included when calculating return on the
capital employed.
Interest-bearing net debt
Net debt increases under IFRS with EUR 246 million in the opening
balance and with EUR 199 million in the closing balance 2004. The
increase is mainly due to the financial leases (oil tankers) which are
now included in the balance sheet and to the reclassification of the
minority shareholding in NYKAB to interest-bearing liability.
According to IFRS the nuclear liabilities and Fortum 's part of the
nuclear waste fund are presented gross in the balance sheet. The fund
is fully covered and the net of Fortum's share of fund assets recorded
in the balance sheet and the related provisions amount to zero so the
indebtedness of Fortum is not effected. Neither the interest-bearing
provisions related to the nuclear obligations nor the interest-bearing
non current asset are taken into account when calculating net debt.
Total equity including minority interest
The net effect of the IFRS adjustments to total equity is is EUR -5
million at year-end 2004. In the opening balance this effect amounts to
EUR -129 million. The change is mainly due to the changes in fair value
of financial instruments which qualify for hedge accounting.
Key ratios
Return on capital employed and return on equity are slightly improving
when including the 2004 IFRS adjustments to the underlying profit and
balance sheet items. Gearing is increasing from 64% to 67%.
FORTUM GROUP
JANUARY-DECEMBER 2004
Audited
The preliminary impact of the transition to IFRS on the Fortum Group´s Income
Statement and key ratios
CONSOLIDATED INCOME STATEMENT
Dec 31 2004 1) 2) 3) 4) 5) 6)IFRS 2004
Net sales 11 665 -6 -6 11 659
Other operating income 121 29 6 1 36 157
Materials and services -7 861 0 -7 861
Employee benefit costs -684 23 -12 11 -673
Depreciation, amortisation
and impairmen -511 2 -3 -15 -16 -527
Other operating expenses -886 5 9 33 47 -839
Operating profit 1 844 7 29 6 24 6 72 1 916
Share of profits of
associated companies 70 -2 -20 -22 48
Finance costs - net -259 -8 -10 7 4 2 -5 -264
Profit before taxes 1 655 -3 19 13 28 -12 45 1 700
Income taxes -397 -11 -408
Profit for the year 1 258 34 1 292
Attributable to:
Equity holders of the Company 1 227 32 1 259
Minority interest 31 2 33
1 258 34 1 292
*) Share of profits of associated companies and joint ventures is included in
operating profit in FAS
Earnings per share for profit attributable to the equity holders of the company
during the year (in per share)
Basic 1,44 1,48
Diluted 1,42 1,46
Average number of shares,
1,000 shares 852 625
Diluted adjusted average number
of shares 861 772
KEY RATIOS
Dec 31 2003 1) 2) 3) 4) 5) 6) IFRS 2003
Capital employed, MEUR 12 704 39 -55 155 7 -35 111 12 815
Interest-bearing net debt, MEUR 5 626 98 149 -1 246 5 872
Total equity including
minority interest 6 638 39 -153 6 7 -28 -129 6 509
of which Minority interest, MEUR 232 1 -101 -12 -112 120
KEY RATIOS
Dec 31 2004 1) 2) 3) 4) 5) 6) IFRS 2004
Capital employed, MEUR 12 697 38 35 118 28 -26 193 12 890
Interest-bearing net debt, MEUR 4 896 96 102 1 199 5 095
Total equity including minority
interest 7 655 38 -61 16 28 -26 -5 7 650
of which Minority interest, MEUR 261 1 -100 -12 -111 150
Return on capital employed, % 15,6 15,8
Return on shareholders' equity, % 17,6 18,2
Gearing, % 64 67
1) Nuclear related assets and provisions
2) Financial Instruments
3) Leasing
4) Employee Benefits
5) Other IFRS impacts
6) Total IFRS impact
Fortum Corporation
Carola Teir-Lehtinen
Senior Vice President, Corporate Communications
Further information:
Mikael Lilius, President and CEO, tel. +358 10 452 9100
Juha Laaksonen, CFO, tel. +358 10 452 4519
Distribution:
Helsinki Stock Exchange
Key media
Stock exchange release
Corrections to the IFRS attachment in Fortum's Financial Statements
03 February 2005, 10:09 EET
Fortum Corporation STOCK EXCHANGE RELEASE 3.2.2005