Notes to the Consolidated Financial Statements
Posti Group provides postal and logistics services, e-commerce services and financial management outsourcing services and operates in 9 countries. The Group’s parent company, Posti Group Corporation, is domiciled in Helsinki, and its registered address is Postintaival 7 A, FI-00230 Helsinki.
Posti Group Corporation has prepared its consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS), as adopted by the European Union, while adhering to the related IFRS/IAS standards, effective on December 31, 2015, and their SIC and IFRIC interpretations. The notes to the consolidated financial statements are also in compliance with Finnish accounting and company legislation.
The consolidated financial statements are prepared at historical cost, with the exception of financial assets and liabilities measured at fair value through profit or loss and non-current assets held for sale and available-for-sale financial assets. The consolidated financial statements are presented in millions of euros. The figures are rounded and thus the sum total of individual figures may be different than the total presented.
The consolidated financial statements include the accounts of the parent company, Posti Group Corporation, and those of all of its subsidiaries. Subsidiaries refer to companies over which the Parent company exercises control, directly or indirectly, arising from the Group being exposed to or having right to variable returns from the subsidiary and having the ability to affect those returns through its power over the subsidiary.
Subsidiaries are consolidated from the date on which control is obtained until the control ceases. Intra-group shareholdings are eliminated using the purchase method and the resulting residual is allocated to the acquiree’s assets and liabilities measured at fair value. Any excess of the cost of acquisition over the Group’s interest in the fair values of the acquiree’s identifiable net assets, liabilities and contingent liabilities are recognized as goodwill.
Intra-group transactions, receivables, liabilities and distribution of profits are eliminated in the consolidated financial statements.
An associated company refers to an entity in which the Group holds more than 20 per cent of its shares and votes or, in other respects, over which the Group exercises significant influence, but not control. Holdings in associated companies are consolidated using the equity method. Investments in associated companies are recognized at cost as adjusted by post-acquisition changes in the Group’s share of the associated company’s net assets. The Group’s share of associates company’s results, based on the Group’s interest in the associated company, is shown as a separate item before operating profit in the consolidated income statement.
Mutual property companies
Posti Group has holdings in property companies which are measured at the lower of cost or fair value. The holdings are presented in accordance with the assets and liabilities of the property companies, mainly in buildings and land areas in the statement of financial position. This presentation best reflects the nature of these assets and liabilities.
Foreign currency translation
The consolidated financial statements are presented in euros, which is the functional currency of the Group’s parent company.
Transactions denominated in foreign currencies are translated into euros at the exchange rate quoted on the transaction date. While monetary items in the balance sheet are translated into euros using the exchange rate quoted on the balance sheet date, non-monetary items are translated using the exchange rate quoted on the transaction date, excluding items carried at fair value translated using the exchange rate quoted on the date when the fair value was determined. Any exchange gains or losses arising from business operations are recorded in the statement of comprehensive income under the respective items above operating profit and those arising from financial instruments are included in financial income and expenses.
If the subsidiaries’ functional currency differs from the Group’s presentation currency, their income statements and cash flows are converted into euros using the average exchange rate quoted for the financial year, and their statements of financial position into the exchange rate on the balance sheet date. The translation difference arising from this is recognized in other items of comprehensive income. Translation differences arising from the elimination of the acquisition cost and post-acquisition equity changes are also recognized in other comprehensive income. When the subsidiary is disposed of, any accumulated translation differences are recognized through profit or loss as part of gain or loss on disposal.
Goodwill resulting from the acquisition of foreign entities and the fair value adjustments of the carrying amounts of these entities’ assets and liabilities made at the acquisition have been treated as the entity’s assets and liabilities and translated into euros quoted on the balance sheet date. The goodwill resulting from acquisitions carried out before January 1, 2006, and fair value adjustments are recognized in euros.
Translation differences from net investments in foreign units are recorded under other items of comprehensive income. Net investments include also long-term loans granted by the Group to foreign units with unscheduled repayment and with unlikely repayment in the foreseeable future. As of October 1, 2009, intra-Group loan receivables from the Russian companies have been classified as net investments.
A significant portion of the Group’s revenue is generated by the production of short-term services. Various delivery solutions form a significant portion of the Group’s range of services. Revenue from services is recognized when the service in question has been performed in accordance with the agreement. Revenue from the sale of goods is recognized when the goods have been delivered to the customer, and the significant risks and benefits associated with the ownership of the goods have transferred to the buyer.
Net sales comprise the revenue generated by the sale of goods and services minus indirect taxes related to sales, discounts and foreign exchange differences.
Postal Services provides delivery services for letters, advertisements and publications and marketing services.
Revenue on stamps (includes transport and delivery service) is recognized when they are sold. Net sales derived from the delivery of letters, publications, and direct marketing are recognized monthly on accrual basis. Services charged on an annual basis, such as post office boxes, net sales are recognized monthly in accordance with use. Revenue on sale of goods is recognized when goods are transferred to the customer.
Parcel and Logistics Services
Parcel and Logistics Services offers comprehensive supply chain solutions, parcel and e-commerce services, freight and transportation services and warehousing services.
The net sales of online shopping and parcel services are recognized per calendar month, based on the date of observation. The date of observation reflects the moment at which the first registration concerning a parcel was entered into the production system.
Revenue on freight and transportation services is recognized when the service has been performed. Revenue on warehousing services includes two components: processing and the rent for premises. Processing means collection done on behalf of a customer that is recognized on the basis of the number of occurrences. The rent for premises is recognized as income according to the space a customer’s goods require (pallet meters per day) on accrual basis.
The business group’s net sales consist primarily of the volume-based invoicing of outbound services, electronic solutions, and financial management services. Sales are recognized on accrual basis during the month of production. Annual licenses related to electronic services are recognized during the period of license validity.
Government grants mainly refer to product and business development grants and low-wage support, which are recognized in other operating income.
Other operating income
Other operating income includes capital gains on sale of assets and income other than that based on the sale of goods and services, such as rental income.
The majority of the Group’s pension plans are classified as defined contribution plans. Contributions under defined contribution pension plans are recognized through profit or loss in the period to which they relate. After the contributions have been paid, no pension obligations remain for the Group.
For defined benefit plans, the pension liability recognized in the balance sheet equals the present value of the defined benefit obligation reduced by the fair value of plan assets on the balance sheet date.
Expenses under both the defined contribution and defined benefit plans are included in employee benefit expenses in the statement of comprehensive income. Actuarial gains and losses on defined benefit pension plans are included in other items of comprehensive income.
Other operating expenses
Other operating expenses include lease expenses, voluntary personnel expenses, maintenance expenses related to premises and vehicles, expenses related to fuels and lubricants, as well as other production expenses. In addition, sales commissions paid to non-employees and other sales costs and marketing, entertainment, administration and IT expenses are included in other operating expenses.
The Group applies the following definition for operating profit: an operating profit is a net amount derived from net sales plus other operating income, less purchase expenses from which change in finished goods inventory and work in progress is subtracted, adjusted for expenses from production for own use, less employee benefit expenses, depreciation, amortization and any impairment losses, other operating expenses and the share of associated companies' results. All other items in the income statement are shown below the operating profit. Exchange rate differences are included in the operating profit if they arise from items related to operations. Otherwise they are recognized in financial items.
Extraordinary events outside regular operations are regarded as non-recurring items which are allocated to segments. The Group's non-recurring items include reorganization costs, impairment on goodwill and impairment on purchase price allocations generated in business combinations. Also significant sales gains or losses on sale of shares, properties or business operations, and changes in purchase consideration for business combinations after the date of acquisition recognized in income statement are defined as non-recurring items. Non-recurring items related to personnel restructuring are included in employee benefits expense.
Borrowing costs are expensed as incurred. Direct borrowing costs incurred by the acquisition, construction or manufacture of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalized as part of the asset’s acquisition cost. Loan-related transaction expenses clearly associated with a specific loan are included in the loan’s original amortized cost and recognized as interest expenses using the effective interest method.
Income tax expense shown in the consolidated income statement includes Group companies’ current income tax calculated on their profit for the financial year using the tax rate effective on the balance sheet date based on local tax regulations, as well as any tax adjustments for previous financial years and changes in deferred tax.
Deferred taxes are calculated on temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases. The largest temporary differences arise from depreciation of property, plant and equipment, defined benefit pension plans, unused tax losses and fair value adjustments related to acquisitions.
The tax rate enacted by the balance sheet date or, in practice, confirmed by the closing date of the reporting period, is used to determine deferred tax. A deferred tax asset is recognized to the extent that it appears probable that future taxable profit will be available against which the temporary difference can be utilized.
Goodwill represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree on the date of acquisition.
Instead of amortization, goodwill is annually tested for impairment. For this purpose, goodwill is allocated to cash generating units (CGUs). After initial recognition, goodwill is measured at cost less accumulated impairment losses.
Research and development expenditure
Research and development costs are primarily expensed as incurred. Only development costs arising from new significant or substantially improved products and enterprise resource planning systems are capitalized as intangible assets. Asset is capitalized only if it is technically and commercially feasible and the Group has intention and resources to complete the intangible asset and it is probable that the created asset will generate future economic benefits. Capitalized development costs are recognized as intangible assets and amortized over the assets’ useful lives.
Other intangible assets
A purchased intangible asset is initially recognized at cost. Intangible assets acquired through business combinations, such as intangible assets related to customers, marketing and technology, are carried at fair value on the date of acquisition. Intangible rights mainly comprise software licenses and customer portfolios, trademarks and leases acquired through business combinations. The Group’s other intangible assets have definite economic lives, over which period they are amortized. The expected useful lives are as follows:
|Software licenses||3–5 years|
|Customer portfolios||5–10 years|
Property, plant and equipment
Property, plant and equipment (PPE) are carried at cost less any accumulated depreciation and impairment losses. PPE are depreciated on a straight-line basis over their expected useful lives. Land and water are not subject to depreciation.
The expected useful lives of PPE are as follows:
|Production buildings||8–25 years|
|Office buildings||25–40 years|
|Machinery and equipment||3–13 years|
|Other tangible assets||3–10 years|
If an asset under PPE constitutes several items with differing useful lives, each of them is accounted for as a separate asset. In such a case, the cost of replacing the item is recognized as an asset. Otherwise, subsequent costs, such as modernization and renovation project costs, are capitalized if it is probable that the future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. Regular repair, maintenance and service costs are expensed as incurred. Assets’ useful lives are reassessed on the balance sheet date and, if necessary, adjusted to meet the requirements of changed circumstances.
When an asset’s carrying amount is expected to be recovered principally through a sale rather than through continuing use, it is classified as held for sale. An asset is classified as held for sale if its sale is highly probable and it is available and ready for immediate sale. Furthermore, the company’s management must be committed to a plan to sell the asset within 12 months of classification as held for sale. Assets classified as held for sale are not subject to depreciation.
Investment property refers to land or buildings, or part thereof, held for rental income or capital appreciation. It is measured at cost less accumulated depreciation and impairment losses. Buildings under investment property are depreciated on a straight-line basis over their expected useful lives, 30–40 years. Land included in investment property is not depreciated.
Leases on property, plant and equipment, in which substantially all risks and rewards of ownership transfer to the lessee, are classified as finance leases. Leases in which risks and rewards remain with the lessor are classified as operating leases.
The Group as lessee
Assets under finance leases are recognized as assets at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. Lease obligations are included in interest-bearing liabilities. Leased assets are depreciated over their useful lives or shorter lease term. Finance lease payments are apportioned between interest expenses and reduction of the lease liability.
Operating lease payments are expensed in the statement of comprehensive income on a straight-line basis over the lease term.
The Group as lessor
Finance leases, for which the Group acts as a lessor are recognized as receivables at the present value of investment. Finance lease income is recognized in such a way that the residual net investment generates the same return over the lease term.
Assets leased under operating leases are included in property, plant and equipment and depreciated over their useful lives in the same way as for similar assets in own use. Lease income is recorded on a straight-line basis through profit or loss over the lease term.
After initial recognition, inventories are measured at the lower of cost or net realizable value. The cost is measured applying the average price method. Net realizable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in selling and distribution.
Financial assets and liabilities
Financial assets are initially recognized at fair value. Their subsequent measurement depends on their classification. The Group’s financial assets are classified as financial assets recognized at fair value through profit or loss, held-to-maturity investments, loans and receivables and financial assets available-for-sale. Classification of a financial asset is determined by the purpose for which the asset is purchased at the time of its original purchase. Transaction costs are included in the financial asset’s original carrying amount, in the case of the financial asset is not carried at fair value through profit of loss. Purchases and sales of financial assets are recognized or derecognized at transaction settlement date.
The Group derecognizes a financial asset when its contractual right to the cash flows from the asset has expired or is forfeited, or it has transferred substantially all risks and rewards outside the Group.
Financial assets recognized through profit or loss include financial assets held-for-trading. Also derivative instruments which are not classified as hedging instruments qualified for hedge accounting are classified as held-for-trading. Investments in bonds and money-market instruments are measured at fair value on the balance sheet date, based on price quotes on the market on the balance sheet date, or valuation models based on observable market information. Financial assets held-for-trading are included in current assets. Any unrealized and realized gains or losses resulting from fair value changes are recognized through profit or loss during the period in which they occur.
Investments held-to-maturity are financial assets with fixed payments and fixed maturity, which the Group intends to hold to maturity. Held-to-maturity investments are measured at amortized cost using the effective interest-rate method.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and not held for trading. Loans and receivables are included in current and non-current assets and measured at amortized cost applying the effective interest-rate method. Trade and other receivables are recognized at cost, corresponding to their fair value and recorded under current assets.
Financial assets available-for-sale are non-derivatives designated in this asset category or not classified in any of the other asset categories. They are measured at fair value on the balance sheet date. Changes in fair value of the available-for-sale financial assets are recognized in other items of the comprehensive income, taking the related tax effect into account, and presented in the fair value reserve in equity. Changes in the fair value are recorded through profit or loss if the investment is sold or its value has decreased in such a way that an impairment loss must be recognized. Financial assets available-for-sale assets include equity fund investments measured at fair value on the balance sheet date as notified by the fund manager or at the latest available fair value.
Non-derivative financial liabilities are initially recognized based on the consideration received. Transaction costs are included in the initial carrying amount of financial liabilities. Subsequently, financial liabilities are measured at amortized cost applying the effective interest-rate method. The initial carrying amount of trade and other current liabilities equal their fair value, since the effect of discounting is not substantial considering the maturity of liabilities. Financial liabilities are included in both non-current and current liabilities.
Derivative contracts and hedge accounting
Derivative contracts are initially recognized at the fair value of the date the derivative contract was concluded. Subsequently, their value is measured at their fair value on the balance sheet date. Profit or loss arising from valuation at fair value is recognized in accordance with the derivative contract’s purpose of use. The income effect of the value changes of derivative contracts, which constitute effective hedging instruments and which are subject to hedge accounting, is shown consistently with the hedged item. The Group recognizes derivative contracts as hedges (fair value hedge) of either assets or fixed liabilities recorded on the balance sheet, or hedges of highly probable future business transactions (cash flow hedge) or as derivative contracts, which do not meet the conditions for applying hedge accounting.
When commencing hedge accounting, the Group documents the relationship between the hedged item and the hedge instruments as well as the objectives of the Group’s risk management and the strategy for carrying out hedging measures. When commencing hedging, and at least in connection with each closing of the books, the Group documents and assesses the effectiveness of the hedging relationship by inspecting the hedge instrument’s ability to offset the fair value of the hedged item.
Changes in the fair value of derivatives that meet the conditions for and determined as fair-value hedges as well as changes in the fair value of the hedged asset or liability attributable to the hedged risk are recognized in the income statement. If the conditions for hedge accounting are no longer met, the amount related to the hedged risk and recognized against the hedged asset or liability is recognized to income statement during maturity of the derivative. The Group has applied fair-value hedge accounting for hedging against fixed-rate loans. Changes in the fair value of a derivatives contract hedging against a fixed-rate loan and changes in fair value attributable to the interest rate risk of a hedged fixed-rate loan until hedge accounting is ceased are presented in financial items. Hedge accounting for interest rate swaps ceased to meet hedge effectiveness criteria and hedge accounting was discontinued as of 1 July, 2015. Since that date the amount recognized against the hedged liability is accrued to financial items.
Changes in the fair value of derivatives that meet the conditions for and determined as cash-flow hedges are recognized in other items of comprehensive income. The fair value changes of the hedging instruments are reclassified into profit or loss when the hedged item is recognized through profit or loss. The Group applies cash flow hedging for hedging against foreign exchange risk on commitments in foreign currencies. The gains or losses on hedging instruments are netted against the cost as the hedged item realizes. If a derivative contract classified as a cash flow hedging instrument expires or it is sold, or it no longer meets the conditions for hedge accounting, the accrued fair value gain or loss is carried in the equity until the projected business transaction occurs. However, if the projected business transaction is no longer expected to occur, the accrued fair value gain or loss is recognized trough profit or loss immediately.
The Group has for hedging purposes entered into certain derivative contracts for which hedge accounting is not applied. The Group does not apply hedge accounting as defined in IAS 39 for currency derivatives hedging against foreign exchange risk of currency denominated receivables and liabilities, or for electricity derivatives which are used for hedging against electricity price risk of future electricity purchases. In addition, hedge accounting for interest rate swaps was discontinued as of 1 July, 2015. These contracts have been classified as held for trading and changes in their fair value are recognized through profit or loss, and presented in financial items or other operating income or expenses, depending on the purpose of hedging.
The fair values of derivatives are determined on the basis of the market values of similar derivatives or standard valuation models. The fair value of currency forward contracts is the market quotation on the balance sheet date and the fair value of interest-rate swaps is the present value of future interest cash flows. The fair values of electricity derivatives are based on the quoted market price on the reporting date.
Cash and cash equivalents
Cash and cash equivalents consist of cash, callable bank deposits and other short-term, highly liquid investments that can be easily exchanged for a pre-determined amount of cash and that involve a very small risk of changes in value. The money-market investments classified as the Group’s cash and cash equivalents have a maximum maturity of three months.
Provisions and contingent liabilities
A provision is recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions for restructuring are recognized when the related, detailed and official plan has been approved and disclosed.
A contingent liability is a potential liability based on previous events. It depends on the realization of an uncertain future event beyond the Group’s control. Contingent liabilities also include obligations that will most likely not require the fulfillment of a payment obligation or the amount of which cannot be reliably determined. Contingent liabilities are disclosed in the notes to the consolidated financial statements.
Fair Value Measurement
The Group measures financial assets and liabilities held for trading purposes, financial assets available-for-sale, derivatives, as well as assets and liabilities acquired through a business combination at fair value. Also assets held-for-sale are carried at fair value if the fair value is lower than book value.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy as follows:
Level 1: Fair values are based on the quoted prices of identical asset or liabilities in active markets.
Level 2: Fair values are, to a significant degree, based on data other than quoted prices included in level 1, but on data that are either directly or indirectly observable for the asset or liability in question. To determine the fair value of these instruments, the Group uses generally accepted valuation models that are, to a significant degree, based on observable market data.
Level 3: Fair values are based on data regarding the asset group or liability that is not based on observable market data.
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
An impairment test is performed on non-current asset which is depreciated during its economic lifetime if there is any indication that its carrying value exceeds the recoverable amount. However, goodwill is subject at a minimum to an annual impairment test and factors having an impact on testing are reviewed during the financial period. For this purpose, goodwill is allocated to cash generating units, i.e. to the lowest level for which there are cash flows that are largely independent of the cash flows from other assets or groups of assets. Group’s cash generating units are presented in the Notes.
The recoverable amount is the fair value of the asset less costs to be incurred in selling or a higher cash flow-based value in use. Value in use refers to estimated future net cash flows from an asset or a cash generating unit, discounted to their present value. If the asset’s carrying amount exceeds its estimated recoverable amount, an impairment loss is recognized through profit or loss. The impairment loss on a cash generating unit is first allocated to reduce the carrying amount of any goodwill allocated to the unit and then to reduce the carrying amounts of the unit’s other assets on a pro rata basis.
Impairment losses of tangible assets previously charged to expenses are reversed only if circumstances have changed and the asset’s recoverable amount has changed from the date of impairment loss recognition. An impairment loss is reversed only to the extent that the reversal does not increase the asset’s carrying amount above the asset’s carrying amount if no impairment loss had been recognized. Impairment losses on goodwill are not reversed.
Critical accounting estimates and judgments in applying accounting policies
Preparing the consolidated financial statements in compliance with IFRS requires that Group management make certain estimates and judgments in applying the accounting policies. These estimates and assumptions are based on the management’s best knowledge of current events and actions, but the actuals may differ from the estimates and assumptions stated in the financial statements. The most significant matter, in which the management uses estimates described above, is impairment testing of goodwill.
Goodwill is annually tested for any impairment in accordance with the accounting policy stated above. The recoverable amounts of cash-generating units (CGUs) are based on calculations of value in use, whose preparation requires estimates and assumptions regarding aspects such as discount rate, long-term market growth and business profitability. Sensitivity analysis is prepared in order to assess the changing component’s impact to the results. During the year, the management also assesses whether there is an indication of an impaired asset.
In connection with business combinations, the acquired entity’s assets are measured at fair value. In significant business combinations, the Group has consulted external specialists in evaluating the fair values of the tangible and intangible assets. Allocating the total purchase consideration to intangible assets and goodwill is partly based on an estimate. Determining assets’ depreciation/amortization periods is based on the estimated useful lives of the assets. Any contingent purchase consideration for a business combination is recognized as part of acquisition cost based on management’s estimate.
The carrying amounts of property, plant and equipment are based on the cost of acquisition and the related asset depreciation according to the asset’s useful life. The assets’ useful lives and their adjustment to meet the requirements of changed circumstances are based on estimates and assumptions. The carrying amounts of the tangible and intangible assets will be annually evaluated in the connection of fixed assets physical inventory.
Group’s revenue recognition is not considered to involve material discretionary items.
Application of new or amended IFRS standards
The amendments to IFRS standards effective as of 1 January 2015 had no impact on Group’s financial statements.
The Group will apply the following new or amended standards as they become effective:
IFRS 15 Revenue from contracts with customers. The new standard defines how and when revenue from contracts with customers is recognized. The standard also entails increased disclosures on revenue from customer contracts. The Group estimates that the new standard may change the revenue recognition principles of certain services. The new standard will be applicable to financial periods beginning on or after 1 January 2018. The standard has not yet been endorsed to be applied within the EU.
IFRS 9 Financial Instruments. The new standard will change the classification and measurement of financial assets and liabilities, hedge accounting and impairment of financial assets. The Group estimates that the new standard will have an impact of classification and measurement of financial instruments and hedge accounting. The new standard will be applicable to financial periods beginning on or after 1 January 2018. The standard has not yet been endorsed to be applied within the EU.
IFRS 11 Joint arrangements (amendment). The amendment specifies the treatment of acquisitions of an interest in a joint operation in which the activity constitutes a business. The amendment will be applicable to financial periods beginning on or after 1 January 2016 and it is not applied prospectively.
IAS 1 Presentation of financial statements (amendment). The amendment clarify a number of issues on disclosures. The amendment will be applicable to financial periods beginning on or after 1 January 2016.
Annual Improvements 2012-2014. Amendments to two standards are applicable to Group. Amendments on IFRS 7 Financial Instruments: Disclosures specify guidance on derecognition of financial assets and related disclosures. Amendment on IAS 34 Interim financial reporting adds a requirement to cross-reference information located outside the interim report. The amendments will be applicable to financial periods beginning on or after 1 January 2016.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.