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1 Accounting policies for the consolidated financial statements
The notes to the consolidated financial statements have been grouped into sections based on their nature. The basis of preparation is described as part of this note (Accounting policies for the consolidated financial statements), while the accounting policies directly related to a specific note are presented as part of the note in question. The notes contain the relevant financial information as well as a description of the accounting policies and key estimates and judgements applied for the topics of the individual note.
1.1 Basic information about the Company
Kesko is a Finnish listed trading sector company. Kesko has approximately 1,800 stores engaged in chain operations in the Nordic and Baltic countries, Poland, Russia and Belarus.
Kesko Group's reportable segments consist of its business divisions, namely the grocery trade, the building and technical trade, and the car 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 PO Box 1, FI-00016 KESKO. Copies of Kesko Corporation's financial statements and the consolidated financial statements are available from Kesko Corporation, PO Box 1, Helsinki, FI-00016 KESKO, visiting address Sörnäistenkatu 2, Helsinki, and from the internet at www.kesko.fi.
Kesko's Board of Directors has approved these financial statements for disclosure on 31 January 2018.
1.2 Basis of preparation
Kesko's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) approved for adoption by the European Union, and they comply with the IAS and IFRS standards and respective SIC and IFRIC Interpretations effective on 31 December 2017. The International Reporting Standards refer to standards and their interpretations approved for adoption within the EU in accordance with the procedure enacted in EU regulation (EC) 1606/2002, included in the Finnish Accounting Act and regulations based on it. Accounting standards not yet effective have not been adopted voluntarily for the consolidated financial statements. The notes to the consolidated financial statements also include compliance with Finnish accounting and corporate legislation.
New standards were not adopted during the financial year 2017.
All amounts in the consolidated financial statements are in millions of euros and based on original cost, with the exception of items specified below, which have been measured at fair value in compliance with the standards.
1.3 Critical accounting estimates and assumptions
The preparation of consolidated financial statements in conformity with international accounting standards 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. The most significant circumstances for which estimates have been required are described below.
The estimates and judgements made are continuously evaluated, and they are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Measurement of assets acquired and liabilities assumed
Assets acquired and liabilities assumed in business combinations are measured at their fair values at the date of acquisition. The fair values on which the allocation of costs and liabilities 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 recoverable amounts of cash generating units have been determined using calculations based on value in use. In the calculations, forecast cash flows are based on financial plans approved by management, covering a period of three years. (Note 3.4)
Employee benefits
The Group operates both defined contribution pension plans and defined benefit pension plans. Items relating to employee benefits are calculated using several factors that require the application of judgement. Pension calculations under defined benefit plans in compliance with IAS 19 are based on, among others, the following factors that rely on management estimates (note 3.8):
- discount rate used in calculating pension expenses and obligations and net finance cost for the period
- future salary level trend
- employee service life.
Changes in these assumptions can significantly impact the amounts of pension obligation and future pension expenses. In addition, a significant part of the pension plan assets is invested in real estate and shares, whose value adjustments impact the recognised amount of pension assets.
Measurement of inventories
The Group regularly reviews inventories for obsolescence and turnover, and for possible reduction of net realisable value below cost, and records an impairment as necessary. Such reviews require assessments of future demand for products. Possible changes in these estimates may cause changes in inventory measurement in future periods.
Trade receivables
The Group companies apply a uniform practice to measuring receivables past due. Possible changes in customers' solvency may cause changes in the measurement of trade receivables in future periods.
Provisions
The existence of criteria for recognising provisions and the amounts of provisions are determined based on estimates of the existence and amount of the obligation. Estimates may differ from the actual future amount of the obligation and with respect to the existence of the obligation.
1.4 Critical judgements in applying accounting policies
The Group's management uses its judgement in the adoption and application of accounting policies in the financial statements. Management has exercised its judgement in the application of accounting policies when, for example, measuring receivables, determining provisions for restructuring and classifying leases.
1.5 Consolidation principles
Subsidiaries
The consolidated financial statements combine the financial statements of Kesko Corporation and subsidiaries controlled by the Group. Control exists when the Group has more than half of the voting rights of a subsidiary or otherwise exerts control. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Acquired subsidiaries are consolidated from the date on which the Group gains control until the date on which control ceases. The existence of potential voting rights has been considered when assessing the existence of control in the case that the instruments entitling to potential control are currently exercisable. Subsidiaries are listed in note 5.2.
Mutual shareholding is eliminated by using the acquisition cost method. The cost of assets acquired is determined on the basis of the fair value of the acquired assets as at the acquisition date, the issued equity instruments and liabilities resulting from or assumed on the date of the exchange transaction. The identifiable assets, liabilities and contingent liabilities acquired are measured at the fair value at the acquisition date, gross of non-controlling interest.
Intragroup transactions, receivables and payables, unrealised profits and internal distributions 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. Non-controlling interest in the profit for the period is disclosed in the income statement and the amount of equity attributable to the non-controlling interests is disclosed separately in equity.
The Group accounts for its real estate company acquisitions as acquisitions of assets.
Associates
Associates are companies over which the Group has significant influence but not control. In Kesko Group, significant influence accompanies a shareholding or agreement of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially recognised at cost.
The Group’s share of post-acquisition profits or losses is recognised in the income statement. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. If the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses.
Unrealised gains on transactions between the Group and the associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred. 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.
Joint arrangements
Joint arrangements are arrangements in which the sharing of joint control has been contractually agreed between two or more parties. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method, and on initial recognition, they are recognised at cost.
The Group’s share of post-acquisition profits or losses is recognised in the income statement. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. If the Group’s share of losses in a joint venture equals or exceeds its interest in the joint venture, the Group does not recognise further losses.
Unrealised gains on transactions between the Group and the joint ventures are eliminated to the extent of the Group’s interests in the joint ventures. Unrealised losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred. Dividends received from joint ventures are deducted from the Group's result and the cost of the shares. An investment in a joint venture includes the goodwill generated by the acquisition. Goodwill is not amortised.
Mutual real estate companies
Mutual real estate companies are consolidated as common functions on a line-by-line basis in proportion to ownership. The Group's share of mutual real estate companies' loans and reserves is accounted for separately in the consolidation.
Subsidiaries, equity accounted investments and proportionately consolidated mutual real estate companies are listed in note 5.2.
Foreign currency items
The consolidated financial statements are presented in euros, which is both the functional currency of the environment in which the Group’s parent operates and the presentation currency. On initial recognition, the amounts with respect to the result and financial position of the Group companies located outside the euro zone are recorded in the functional currency of each of their operating environments. Until 31 December 2016, the functional currency of the real estate companies operating in Russia in St. Petersburg and Moscow was the euro, which is why no significant exchange differences realised before 2017 from their balance sheets to the Group. A change has taken place in the Russian real estate market as a result of which an increasing number of leases are rouble denominated. Earlier leases were mainly denominated in the euro. As a result of the change in the lease market, the functional currency of the Russian real estate companies has been the rouble as of 1 January 2017.
Foreign currency transactions are recorded in euros by applying the exchange rate at the date of the transaction. Receivables and liabilities denominated in foreign currency are translated into euros using the closing rate. Exchange rate gains and losses on foreign currency transactions as well as receivables and liabilities denominated in foreign currency are recognised in the income statement, with the exception of monetary items that form a part of a net investment in a foreign operation and loans designated as hedges for foreign net investments and regarded as effective. These exchange differences are recognised in equity and their changes are presented in other comprehensive income. The exchange differences are presented in the income statement on disposal of the foreign operation or settlement of the hedges. The Group has currently no loans designated as hedges for foreign net investments. Foreign exchange gains and losses resulting from operating activities are included in the respective items above operating profit. Foreign exchange gains and losses from foreign exchange forward contracts and options used for hedging financial transactions, and from foreign currency borrowings are included in finance income and costs.
The income statements of the Group companies operating outside the euro zone have been translated into euros at the average rate of the financial year, and their balance sheets at the closing rate. The foreign exchange difference resulting from the use of different rates, the translation differences arising from the elimination of the acquisition cost of subsidiaries outside the euro zone, exchange differences arising from monetary items that form a part of a net investment in a foreign operation and the hedging results of net investments are recognised in equity, and the changes are presented in other comprehensive income. In connection with the disposal of a subsidiary, translation differences are recognised in the income statement as part of the gains or losses on the disposal.
Goodwill arising on the acquisition of foreign operations and the fair value adjustments of assets and liabilities made upon their acquisition are treated as assets and liabilities of these foreign operations and translated into euros at the closing rate.
1.6 New IFRS standards and IFRIC interpretations and amendments to the existing standards and interpretations
In addition to the standards and interpretations presented in the 2017 financial statements, the Group will adopt the following standards, interpretations and amendments to standards and interpretations issued for application in its 2018 or subsequent financial statements.
IFRS 9 Financial instruments
IFRS 9 concerns the classification, measurement and recognition of financial assets and financial liabilities, changes the rules concerning hedge accounting, and provides a new impairment model for financial assets. The effective date of the standard is 1 January 2018. The standard has been endorsed for adoption by the EU.
Under IFRS 9, financial assets are classified into three measurement categories: amortised cost, fair value through other comprehensive income, and fair value through profit and loss. The measurement category is determined on initial recognition. Classification depends on the business model for managing financial assets and the cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income, unless this creates an accounting mismatch.
The measurement and classification of the Group’s financial assets and financial liabilities has been reviewed with regard the new standard. The Group’s management estimates that the new standard will result in only minor changes to the classification of financial assets and that the changes in classification will have only a minor impact on the Group’s result. The standard is not expected to have an impact on the accounting treatment of financial liabilities.
In hedge accounting, IFRS 9 eases the requirements concerning hedge effectiveness by removing pre-determined effectiveness testing thresholds. Under the standard, an economic relationship must exist between the hedging instrument and the hedged item and the hedge ratio designated must be the one actually used by the management for risk management. Documentation requirement will continue to exist, but it will differ from the IAS 39 requirements. The new model links accounting treatment with risk management and enables the hedging of net positions. The Group has concluded that its current hedge ratios fulfil the criteria for continued hedging when implementing IFRS 9. As for the hedging of electricity price risk, the standard will enable having only electricity system price as a hedged item. Management estimates that the new standard will have a minor impact on the accounting treatment of the Group’s hedgings.
According to the new IFRS 9 impairment model, impairments must be recognised on the basis of expected credit losses. Under IAS 39, impairment was only recognised on realised credit losses. Management estimates that the new standard will have only a minor impact on the time of recognition of impairment losses on trade receivables and on the measurement of other financial assets.
IFRS 15 Revenue from Contracts with Customer
The standard replaces IAS 11, ‘Construction contracts’ and IAS 18, ’Revenue and related interpretations’. According to the standard, revenue is recognised when control of goods or services transfers to a customer. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the goods or services. The core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The effective date of the standard is 1 January 2018. The standard has been endorsed for adoption by the EU.
Kesko Group’s income mainly consists of sales of goods and services to business and consumer customers under ordinary trading sector terms and conditions. Management estimates that the adoption of the new standard will not have a material impact on the consolidated financial statements. The standard is not estimated to have any impact on customer agreements or business operations. The adoption of the standard is estimated to have only minor impacts on business support processes or information systems.
IFRS 16 Leases
IFRS 16 concerns the definition, recognition and measurement of lease agreements and notes related to leases. According to the standard, the lessee recognises in its balance sheet right-of-use assets and lease liabilities. The standard includes optional exemptions for leases with a term of less than 12 months and for asset items of low value. The lessor’s reporting remains unchanged, meaning leases are still divided into finance lease agreements and operating leases. The effective date of the standard is 1 January 2019. The standard has been endorsed for adoption by the EU.
Kesko Group leases store sites for use in its business operations in all of its operating countries. The store site network is a strategic competitive factor for the Group. At the end of 2017, Kesko Group had over 1,500 leased properties, the lease liability for which was €2,892 million, in addition to which the Group had other lease liabilities of €21 million.
The Group has initiated an assessment regarding the impact of IFRS 16 on its financial statements. Management estimates that the new lease standard will have a significant impact on the Company’s income statement, balance sheet and performance indicators. Kesko has a significant number of lease agreements that according to the standard currently in force are categorised as operating leases and have been recognised as lease expenditure in the income statement on a time apportionment basis. According to the new standard, assets and liabilities corresponding to the present value of minimum lease payments shall be recognised in the balance sheet at the commencement of the leases, meaning assets and liabilities will increase significantly in the balance sheet. The new standard will increase the Group’s operating profit as the current lease expenditure will be replaced by depreciation of a right-of-use asset. In addition, interest expenses for liability will also be recognised and presented under finance costs in the income statement.
According to IFRS 16, the measurement of the right-of-use assets and the lease liabilities is determined by discounting the minimum future lease payments. The Group intends to adopt the standard using the retrospective method. The discount rate should primarily be the interest rate implicit in the lease, if available. The Group will use the interest rate implicit in the lease for agreements where this rate is available. The interest rate implicit in the lease is not available for all lease agreements, in which case the Group will use the incremental borrowing rate, which comprises reference rate, credit spread for the incremental borrowing, and a potential country and currency risk premium. At the commencement date of each lease agreement, the incremental borrowing rate will be determined and the minimum lease payments will be discounted. The Group has yet to determine the quantitative impacts the application of IFRS 16 will have on its financial statements. The Group will assess the impacts in more detail during the reporting period beginning on 1 January 2018.
Management estimates that the other issued new IFRS standards, IFRIC interpretations and amendments to the existing standards and interpretations will not have a material impact on the consolidated financial statements or their presentation.