Notes to the presentation of the financial statements
A Accounting principles
A1 Basic information of the Group
The Group’s parent company is Finnvera plc (hereinafter Finnvera) and its subsidiaries are Veraventure Ltd, ERDF-Seed Fund Ltd and Finnish Export Credit Ltd. Finnvera provides financing for the business of small and medium-sized enterprises (SMEs), for exports and internationalisation, and helps implement the government’s regional policy objectives. Veraventure Ltd and ERDF-Seed Fund Ltd engage in venture capital investment, whereas Finnish Export Credit Ltd focuses on the financing of export credits. Through a partial division, Seed Fund Vera Ltd, a former subsidiary of the Group, was split into Seed Fund Vera Ltd and ERDF-Seed Fund Ltd on 15 July 2016. Finnvera sold the majority holding in Seed Fund Vera Ltd to a buyer outside the Group on 16 December 2016. Therefore, the company is no longer included in the consolidated financial statements at the end of 2016. Finnvera had a holding of 19.99 per cent in Seed Fund Vera Ltd at the end of 2016, and Finnvera no longer has a controlling interest in the company. Seed Fund Vera Ltd and ERDF-Seed Fund Ltd are classified as long-term assets available for sale and they are presented in more detail under “E23 Long-term assets available for sale”.
The Group’s parent company is a Finnish limited liability company established in accordance with Finnish law. Its business ID is 1484332-4 and it is domiciled in Kuopio. The parent company’s registered address is P.O. Box 1127, Kallanranta 11, 70111 Kuopio. The Board of Directors approved the financial statements on 28 February 2017.
Copies of the consolidated financial statements and the parent company’s financial statements are available on the Internet, at www.finnvera.fi, or in the Group’s head offices at Kallanranta 11, 70110 Kuopio and Porkkalankatu 1, 00180 Helsinki.
A2 Principles for drawing up the financial statements
The financial statements include both the consolidated and the parent company’s financial statements. The financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) complying with the IFRSs effective on 31 December 2016 that refer to the standards and their SIC and IFRIC interpretations adopted in accordance with the procedures laid down in IAS Regulation No 1606/2002 of the European Union. The notes to the financial statements also comply with the currently valid requirements of the Finnish Accounting and Limited Liability Companies Acts.
The financial statements have been prepared on the basis of historical costs, except for financial assets available for sale and financial assets and liabilities carried at fair value through profit or loss. Drawing up financial statements in keeping with the IFRS Standards requires the making of certain accounting estimates and judgment exercised by the management. In its judgments, the management uses estimates and assumptions that are based on earlier experience and the management’s best understanding or other knowledge. Use of the management’s judgment is described in more detail in section “A12 Accounting principles requiring the management’s judgment and the key sources of estimation uncertainty”.
The financial statements are presented in thousands of euros. The sums calculated from individual figures may therefore differ from the total sums presented on their own lines.
New and revised standards and interpretations applied
In 2016 Finnvera adopted the following new or revised IFRSs and interpretations:
- Annual Improvements to IFRSs, 2012–2014 cycle (applied to financial periods starting on 1 January 2016 or thereafter): Through the Annual Improvements process, small and less urgent changes to standards are collected in a single document and implemented once a year. The amendments apply to four standards. The impacts of the amendments vary depending on the standard, but they are not significant.
- Amendments to IAS 1 Presentation of Financial Statements – A project concerning information presented in the financial statements (applied to financial periods starting on 1 January 2016 or thereafter). The amendments clarify the guidelines of IAS 1 concerning materiality, the aggregation of items in the income statement and on the balance sheet, the presentation of subheadings, the structure of financial statements and the principles for drawing them up. Minor amendments have been made to Finnvera’s consolidated financial statements as concerns their presentation.
New and revised standards and interpretations applied later
The IASB has issued the following new or revised standards and interpretations. The Group applies them as of the effective date of each standard and interpretation. If the effective date is not the first day of a financial period, they are applied as of the beginning of the next financial period following the effective date.
- IFRS 9 Financial Instruments and its amendments (applied to financial periods starting on 1 January 2018 or thereafter): The new standard replaces the current IAS 39 Financial Instruments – Recognition and Measurement. IFRS 9 changes the classification and measurement of financial assets and includes a new calculation model, based on expected loss impairment, for assessing the impairment of financial assets. The classification and measurement of financial liabilities are largely the same as in the current IAS 39 requirements. The standard revision is important from the perspective of Finnvera’s financial information. The standard has an essential impact on the current calculation and recognition practices concerning impairment losses and provisions and on the reporting of financial information. In addition, it requires considerable system changes. Owing to the changes required by the standard, Finnvera launched a system development and revision project in autumn 2016. Finnvera has estimated that the most important changes concern impairment losses on loans and provisions for losses on domestic guarantees and export credit guarantees. Late in 2017, Finnvera will report more detailed numerical information on the impact of IFRS 9 on impairment losses on receivables, on provisions for commitments for guarantees, and on the impact of the change on the company’s financial standing. According to the management’s current view, no major changes are expected in the classification of financial assets and liabilities and in hedge accounting.
- IFRS 15 Revenue from Contracts with Customers (applied to financial periods starting on 1 January 2018 or thereafter): The new standard replaces the current IAS 18 and IAS 11 standards and the related interpretations. IFRS 15 includes a five-step model for recognising revenue: how and when is revenue recognised. The number of notes presented is also increased. In general, Finnvera recognises the revenue collected on loans and guarantees on the basis of time elapsed. Finnvera deems that the amendments may possibly concern individual premiums collected on export credit guarantees and their recognition. Any amendments that the standard may require will be made in the consolidated financial statements during 2017.
- IFRS 16 Leases (applied to financial periods starting on 1 January 2019 or thereafter): Replaces the current standard IAS 17 on leases and the related interpretations. IFRS 16 includes major changes to the lessee’s accounting because a substantial percentage of leases is transferred to the lessee’s balance sheet as an item under fixed assets and as a lease liability. In addition, lessees will no longer classify leases as finance leases and operating leases. In consequence, lessees will have only one accounting model for presenting leases.
A3 Consolidation principles for the financial statements
Subsidiaries are entities controlled by the Group. Control exists when the Group, by being party to a corporation, is exposed to its variable income or is entitled to its variable income and can influence it by using its power over the corporation. The consolidated financial statements include the subsidiaries in which the parent company holds more than 50 per cent of the votes, or in which the company otherwise has control.
In the parent company’s financial statements, holdings in subsidiaries have been entered at acquisition cost. The value of the subsidiaries’ shares is tested when the books are closed and, whenever necessary, an impairment loss is recognised.
The consolidated financial statements include the financial statements of the parent company and its subsidiaries. Intra-group shareholding has been eliminated using the acquisition method. When subsidiaries are acquired, they are consolidated from the date of acquisition up to the date when the control ceases.
In accordance with the exemption granted under IFRS 1, the acquisition costs arising from business combinations prior to the IFRS transition date 1 January 2006 have been treated according to the Finnish accounting practice. The Group has not made company acquisitions after the date of transition.
Associated companies are entities in which the Group has significant influence but not control over the financial and operational policies of the entity. Significant influence exists when the Group has 20 to 50 per cent of the voting shares of the entity. Associated companies are consolidated using the equity method of accounting. At the end of 2016, Finnvera had no associated companies consolidated using the equity method of accounting.
Equity investments made by Finnvera through its subsidiaries engaged in venture capital investment – Veraventure Ltd and ERDF-Seed Fund Ltd– are treated in the consolidated financial statements in the alternative manner allowed by IAS 28 Investments in Associates at fair value, as investments recognised through profit or loss. The consequent changes in fair value are recognised in the income statement of the consolidated financial statements, under the item Gains/losses from items carried at fair value.
Elimination of intra-group items in the consolidated financial statements
Intra-group transactions, internal receivables and liabilities, unrealised profits on internal transactions, and intra-group profit distributions are eliminated in the consolidation.
Non-controlling interest in the equity and in the comprehensive income for the period is reported as a separate item in the comprehensive income statement and on the balance sheet as part of equity.
A4 Transactions denominated in foreign currencies
The consolidated financial statements are presented in euros, which is the currency that all Group companies use in their operations and presentations.
Transactions denominated in foreign currencies are recognised using the exchange rates prevailing at the dates of the transactions, and assets and liabilities denominated in foreign currencies are converted using the exchange rates on the balance sheet date. Foreign exchange gains and losses arising from conversion are recognised under the income statement item Gains and losses from financial instruments carried at fair value.
A5 Principles for recognising income and expenses
Net interest income
Interest income and interest expenses are recognised in the income statement over the maturity of the contract using the effective interest rate method. All fees received and paid, interest points that are an integral part of the effective interest rate of the contract, as well as transaction costs and any other premiums or discounts are taken into consideration in calculating the effective interest. Interest subsidies received from the State are recognised correspondingly over the maturity of the contract using the effective interest rate method.
The interest on interest rate swaps made for hedging receivables is treated as an adjustment item for interest income, while the interest on interest rate swaps made for hedging liabilities is treated as an adjustment item for interest expenses.
Fees and commission income and expenses, net
Guarantee fees are recognised in the income statement over the maturity of the contract. Other fee and commission income and expenses are normally recognised when the service is rendered.
Gains and losses from financial instruments carried at fair value
Gains and losses (both realised and unrealised) from derivatives, liabilities and venture capital investments measured at fair value as well as exchange rate differences are presented under the comprehensive income statement item Gains and losses from financial instruments carried at fair value.
Net income from investments
Gains and losses from shares, participations and debt securities classified as available for sale, and impairments of these items, are presented under the item Net income from investments.
Dividends are recognised as income in the period in which the right to receive dividends is established.
Finnvera receives interest and commission subsidies from the State as well as compensation for losses on credits and guarantees that Finnvera has granted on certain regional policy grounds agreed with the State. Credit and guarantee loss compensation is paid for credits and guarantees that have been granted without full security.
Interest and commission subsidies are recognised over the maturity of the contract using the effective interest rate method, and compensation received for credit losses is recognised when the contractual right to receive such compensation is established.
In previous years, Finnvera has also received grants to be used as capital for the subsidiary Seed Fund Vera Ltd. More information on government grants is available in Note E12 to the balance sheet.
A6 Intangible and tangible assets
Intangible assets and other capital expenditure include licences and user rights for IT applications and software and their development costs, provided that their cost can be measured reliably and it is probable that the Group will gain economic benefit from the assets. Finnvera has two important IT projects in progress. The goal of the eFinnvera project is to improve productivity and efficiency through possible digitisation of business and support processes. The goal of the Salkku project is to replace the old management system of customer accounts with a new application. eFinnvera will be taken into use in steps over several years, whereas Salkku will be in production use during 2017.
Intangible assets are carried at historical cost less accumulated amortisations and impairment losses, and they are amortised over their estimated economic life, which is five years.
Property, plant and equipment comprise machinery and equipment in the company’s own use. Property, plant and equipment are carried at historical cost less accumulated depreciation and impairment losses. Property, plant and equipment are depreciated over their estimated economic lives.
Impairment of intangible assets and property, plant and equipment
At every balance sheet date, the carrying amounts of intangible assets and property, plant and equipment are reviewed to determine whether there are indications of impairment. If such indications exist, the asset’s recoverable amount is estimated. An impairment loss is entered into the income statement when the carrying amount of an asset exceeds its recoverable amount.
A7 Costs of post-employment benefits
Group pension plans are classified as either defined benefit plans or defined contribution plans. Under a defined contribution plan, the Group pays fixed contributions to a pension insurance company and has no legal or constructive obligation to pay further contributions. Obligations resulting from a defined contribution plan are expensed in the period to which they relate. The cost of providing defined benefit plans is charged to the income statement over the working lives of the employees participating in the plan on the basis of actuarial calculations. The net liability of defined benefit plans is entered on the balance sheet.
Expenses based on work performed during the term and the net liability interest of defined benefit plans are entered on the income statement and presented under expenses incurred by employment benefits. Items resulting from revaluation of the net liability of defined benefit plans (e.g. actuarial gains and losses as well as earnings from plan assets) are recognised in other comprehensive income for the financial period during which they are incurred.
A8 Income taxes
Income taxes in the statement of comprehensive income consist of income taxes and deferred taxes for the current and previous financial periods. Taxes are recognised in the income statement with the exception of any deferred tax for items charged or credited directly to equity. In that case, the tax is also charged or credited directly to equity.
Deferred taxes are calculated using the differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred taxes are calculated using a corporation tax rate of 20.0 per cent.
An amendment to the Income Tax Act passed by Parliament entered into force through a Government Decree issued on 20 December 2007. The amendment made Finnvera exempt from income taxation as from 1 January 2007. Finnvera’s subsidiaries have no corresponding exemption.
A9 Financial assets and liabilities
Financial assets are classified as financial assets at fair value through profit or loss, loans and other receivables, as well as financial assets available for sale. Financial liabilities are classified as financial liabilities at fair value through profit or loss and other financial liabilities.
Financial assets and liabilities recognised at fair value through profit or loss
Balance sheet items recognised at fair value through profit or loss comprise derivatives and financial liabilities designated at fair value through profit or loss. Finnvera has no financial assets or liabilities held for trading.
Financial items recognised at fair value through profit or loss comprise derivatives and those liabilities designated at fair value through profit or loss for which the interest rate risk or the currency risk has been hedged using derivatives. Finnvera applies the fair value option in accordance with IAS 39 Financial Instruments: Recognition and Measurement to the above mentioned items. Fair value changes in assets recognised at fair value through profit or loss are recognised in the income statement under the item Gains and losses from financial instruments carried at fair value through profit or loss.
Venture capital investments made by the Group are classified as financial assets at fair value through profit or loss upon initial recognition. Investments are carried at fair value and the change in fair value is recognised in the income statement, under the item Gains/losses from items carried at fair value (for determination of the fair value of venture capital investments, see Note A13 Accounting principles requiring the management’s judgment).
Loans and other receivables
Contracts with fixed or determinable payments that are not quoted in an active market are classified as loans and other receivables. Upon initial recognition, loans and other receivables are measured at acquisition cost plus any directly attributable costs. Subsequently these items are measured at amortised cost using the effective interest method.
Other financial liabilities
Other financial liabilities comprise other liabilities to credit institutions and customers, as well as debt securities in issue, that are not designated as financial liabilities at fair value through profit or loss.
State subsidies and grants received for the purpose of acquisition of subsidiaries are also classified as other financial liabilities because of the repayment obligation relating to these items in certain situations.
Other financial liabilities are recorded on the balance sheet at the amount of the consideration received, adjusted for any transaction costs incurred, and are measured at amortised cost using the effective interest method. Finnvera treats the zero-interest subordinated loans granted to the Group by the State as loans granted by the owner. They are recognised at nominal value due to their special nature and the related special clauses. Subordinated loans are presented in more detail in Note E16 to the balance sheet.
Determination of fair value
The fair value of financial instruments is determined on the basis of the following principles:
Level 1: The fair value of quoted shares, fund investments and other financial instruments is determined on the basis of published price quotations on an active market.
Level 2: If a published price quotation on an active market does not exist for a financial instrument in its entirety, but an active market exists for its components, fair value is determined on the basis of relevant market prices for the components using an applicable valuation technique. The valuation techniques used may vary by financial instrument.
Level 3: If the market is not active or the financial instrument is unlisted, the value is determined by using generally applied valuation techniques. If reliable determination of fair value is not possible, the financial instrument is measured at cost less any impairment losses.
The notes on Group financial assets and liabilities describe in greater detail the principles for determining fair value by financial instrument, the valuation techniques used in various situations, and the classification of the fair value of financial instruments according to whether they were obtained by public listing (Level 1), using valuation techniques that use verifiable data (Level 2), or using valuation techniques based on unverifiable data (Level 3).
Recognition and derecognition of financial assets and liabilities
Loans and other receivables are recognised on the balance sheet when a customer takes out a loan; available-for-sale financial assets and derivatives are entered using trade date accounting, and financial liabilities recognised at fair value through profit or loss are entered when the consideration is received.
Financial assets are derecognised from the balance sheet when the contractual right to the asset expires or when a significant share of the risks and income are transferred to another party. Financial liabilities are derecognised when the related obligations are fulfilled.
Impairment losses on financial assets
An impairment loss is recorded on loans and other receivables when there is objective evidence of impairment as a result of one or more loss events and this has an impact on future cash flows to be received from the receivables.
Objective evidence of a customer’s capability to fulfil obligations is based on the risk classification of customers, past experience and estimates made by the management about the effect of delayed payments on the accruing of receivables.
Impairment is assessed individually and collectively. Receivables where the customer’s total risk exposure is significant are assessed individually. For the purposes of assessing receivables collectively, the receivables are divided into subgroups that are similar in terms of credit risk.
An impairment loss is recognised if the present value of the future cash flows discounted at the receivable’s original effective interest rate is lower than the carrying amount of the receivable. The amount recovered at the realisation of the collateral, as well as the credit loss compensation received from the State, are taken into account in the assessment.
An impairment loss is recognised as a realised loss when the customer has been found insolvent in liquidation proceedings, has ceased operations, or the receivables have been written off in either a voluntary or statutory debt adjustment. In SME financing, as from the financial statements of 2015, Finnvera has applied the definition of doubtful receivables harmonised at the EU level. The following are reported as doubtful receivables: receivables that are more than 90 days overdue; receivables subject to impairment losses, receivables from clients that have applied for restructuring or are in the process of restructuring, guarantee receivables and bankruptcy receivables.
Available-for-sale financial assets
Non-derivative financial assets that are designated as available for sale or that do not belong to any other category of financial assets are classified as available-for-sale financial assets.
In Finnvera, debt securities as well as shares and holdings other than those held for venture capital investments are classified as available-for-sale financial assets. Upon initial recognition these assets are measured at fair value plus any transaction costs directly attributable to the acquisition. Subsequently, available-for-sale financial assets are measured at fair value and the change in fair value is recognised in other components of comprehensive income and in equity in the fair value reserve, excluding short-term investments, which include municipal notes, commercial papers and certificates of deposit that are measured at amortised cost.
If the value of an asset classified as available for sale has declined markedly or for an extended period, the accumulated loss recognised in equity is entered in the income statement. The criteria for impairment loss are as follows: the company has been declared bankrupt or insolvent or has entered into a restructuring agreement, or has sought protection against its creditors, or extensive restructuring having an effect on the creditors is in progress.
For bonds issued as from the beginning of 2016, Finnvera has adopted hedge accounting with regard to fair value hedges when the criteria for hedge accounting are met. The purpose of hedge accounting is to hedge against the impact of fair value changes caused by changes in market interest rates. Financial liabilities encompassed by hedge accounting and their result are presented in Note E20.
Impact of negative interest rates
As of the second quarter of 2016, the income received by the Group on some euro-denominated accounts and other investments has been negative. This has reduced the Group’s interest income.
In accordance with credit agreements, Finnvera compensates its clients for the impact of a negative reference rate.
Provisions for export credit guarantee losses
A provision is recognised on outstanding export credit guarantees and special guarantees when there is objective evidence that the obligation to pay an indemnity is likely to arise and it is estimated that the present value of the cash flows arising from the indemnity and discounted at the effective interest rate exceeds the correspondingly discounted cash flow from the recovery receivables arisen on the basis of the indemnity paid.
Objective evidence of a customer’s capability to fulfill obligations is based on the risk classification of customers, past experience and estimates made by management about the customer’s ability to repay the credit covered by the guarantee.
The need for provisions is assessed individually and collectively. Individual assessment is applied to commitments where the amount of commitments is substantial, i.e. the total commitment as per the guarantee cover is at least EUR 500,000. For smaller commitments, the need for provisions is assessed collectively.
Provisions for domestic guarantee losses
Provisions for domestic guarantee losses are recognised according to the same principles as the impairment losses recognised on loans and other receivables individually or collectively.
Leases are classified as finance leases and operating leases. The classification is based on whether the substantial risks and rewards incidental to ownership are transferred to the lessee. At the end of 2016, Finnvera had no leases classified as finance leases.
Finnvera enters into operating leases both as a lessee and as a lessor. Lease payments payable and receivable under operating leases are recognised as income or expense on a straight-line basis over the lease term. Operating leases are mostly contracts relating to premises.
A12 Accounting principles requiring the management’s judgment and the key sources of estimation uncertainty
Financial statements drawn up according to the International Financial Reporting Standards (IFRS) require the management’s estimates and assumptions that affect the items reported in the consolidated financial statements and in the notes to the accounts. In addition, judgment is needed when the principles of drawing up financial statements are applied. The management’s estimates and assumptions are based on experience of historical data realised and on future forecasts. Changes in estimates and assumptions are entered into the accounts for the periods when the estimates or assumptions have undergone changes and for all subsequent periods. The final figures realised may differ from these estimates.
In Finnvera, the essential judgments concern the assessment of impairment losses on customers’ loans and other receivables, the provisions to be made for domestic guarantee and export credit guarantee commitments, and the determination of the fair value of financial instruments and venture capital investments made through Finnvera’s subsidiaries engaged in venture capital investment, i.e. Veraventure Ltd and ERDF-Seed Fund Ltd.
Impairment losses on receivables from clients
The impairment testing of receivables from credits, domestic guarantees and export guarantees included in SME financing is done individually for the largest sums and by risk category for other sums. The impairment testing is based on estimates of future cash flows to be received. The value of the receivables has impaired if the estimated value of the cash flow discounted on the balance sheet date, including collateral, is less than the book value of the receivables. In export financing, the impairment testing of loans and recovery receivables is done separately for individual receivables.
The principles for recognising impairment losses are described in more detail under the section Impairment losses on financial assets. During the financial year, impairment losses were only recorded on the balance sheet item Loans and receivables from customers. Note E2 to the balance sheet shows the amount of impairment losses.
A provision is recognised on outstanding domestic guarantees and export credit guarantees in SME financing and export financing when there is objective evidence that the obligation to pay an indemnity is likely to arise and it is estimated that the value of the cash flows arising from the indemnity and discounted on the balance sheet date exceeds the correspondingly discounted cash flow from the recovery receivables arisen on the basis of the indemnity paid.
The principles for recognising provisions are described in more detail under section A10 of the accounting principles. The provisions have been made on the commitments presented in the note Contingencies.
Determination of the fair value of venture capital investments
In accordance with the government’s policy outlines, Finnvera is giving up its venture capital investments. Finnvera has already initiated measures to this end. During 2016, Finnvera sold 78.9 per cent of its holding in Seed Fund Vera Ltd.
The fair value of venture capital investments made by the subsidiaries engaged in venture capital investment, Veraventure Ltd and ERDF-Seed Fund Ltd, is determined using a valuation method approved by the Board of Directors that complies with the International Private Equity and Venture Capital (IPEV) Valuation Guidelines for early-stage ventures. In this method, the determination of fair value is based on the valuation and investments made by outside investors as well as on the portfolio company valuation approved by the fund’s board of directors.
The starting point of the valuation is the value determined on the basis of the previous round of investments. If necessary, this value can be adjusted in accordance with change factors in the portfolio company, its performance and its operating environment. When the value of the holding is determined, the effect of any options and conversion options on the value of the ownership is also taken into consideration. Initial investments made within the past year are recognised at book value. Fund investments are also valued using the IPEV Valuation Guidelines.
Determination of the fair value of liabilities and derivatives
The fair value of derivatives and financial liabilities recognised at fair value through profit or loss is determined using a method based on the current value of cash flow, in which calculations are based on market interest rates and other accounting information on the end date of the financial period. The fair values of derivatives are equivalent to the average market price in situations where the Group would transfer or sell derivatives in normal business operations under market conditions on the end date of the financial period. The credit risk associated with derivatives is reduced by means of collateral arrangements.