Accounting principles requiring management discretion and uncertainty factors relating to estimates
Preparing consolidated financial statements in accordance with IFRS requires the company’s management to exercise discretion, use estimates and make assumptions that affect the application of the accounting principles, the reporting of assets and liabilities, and the amounts of income and expenses. These estimates are based on the management’s best insight at the present time, but it is possible that actual results may ultimately deviate from the estimates made.
The Group regularly monitors the realization of estimates and assumptions, as well as the changes occurring in the background. Changes in the estimates and assumptions are entered into the accounts in the financial period during which the changes occur as well as in all subsequent periods.
The most common and significant circumstances where the management is called upon to exercise discretion and make estimates are related to the following decisions:
- Estimates of future business development and the assumptions used for impairment testing on development projects
- The depreciation periods for tangible and intangible assets
- Estimates of the amount of warranty provisions
- Recognition of deferred tax assets for losses
Consolidation principles behind the consolidated financial statements
Subsidiaries
The consolidated financial statements include the parent company and all of the subsidiaries under the control of the Group’s parent company. Control arises when the Group’s participation in the entity exposes the Group to the entity’s variable income or entitles it to variable income and the Group is able to influence this income by exercising its control over the entity. The Group’s control over an entity is based on voting rights. All of the subsidiaries included in the consolidated financial statements are wholly owned.
Subsidiaries are consolidated from the date of acquisition until the date when the parent company no longer has control over the subsidiary.
Intra-Group transactions, receivables, liabilities, unrealized profits and internal distribution of profit are eliminated in the consolidated financial statements.
During consolidation, the accounting principles applied to the subsidiaries are altered if necessary to correspond to the accounting principles used for the consolidated financial statements.
Conversion of items denominated in foreign currencies
The figures for the income and financial position of the Group’s units are given in the currency primarily used in the company’s operating environment (the “operating currency”). The consolidated financial statements are presented in euros, which is the functional and presentation currency of the Group’s parent company. The figures presented in the financial statements are rounded to the nearest thousand euros unless otherwise stated. For this reason, the sums of individual figures may differ from the totals stated.
Foreign-currency denominated transactions
Transactions in foreign currencies are recognized in the Group companies’ operating currencies at the exchange rates prevailing on the transaction date. Monetary assets and liabilities in foreign currencies are converted to the operating currency at the exchange rates prevailing on the balance sheet date.
Non-monetary assets and liabilities denominated in foreign currencies and measured at fair value are converted to the operating currency at the exchange rates prevailing on the measurement date. Non-financial items denominated in foreign currencies and valued at original acquisition cost are translated using the exchange rates prevailing on the date of transaction.
The gains and losses arising from translations of transactions and monetary items denominated in foreign currencies are recognized through profit or loss.
Financial statements of foreign subsidiaries
The assets and liabilities of foreign subsidiaries are converted to euros at the exchange rates prevailing on the final day of the reporting period. Exchange rate gains or losses from the conversion of assets and liabilities denominated in foreign currencies are recognized on the consolidated statement of income as items affecting operating profit for items related to business operations, while financial items are recognized on the statement of income under financial income and expenses.
The income and expense items on the statements of income of the Group subsidiaries that operate in currencies other than the euro are converted into euros at the average exchange rate during the reporting period.
Converting the income for the financial period and the comprehensive income at different exchange rates on the balance sheet gives rise to a translation difference recognized under equity, and changes to the translation difference are recognized under other items of comprehensive income.
Principles of revenue recognition
Sales revenues are recognized in the amount that the Group expects to be entitled to receive on the basis of contracts with customers. The Group’s sales revenues accrue from digital locking and access management systems and they are recognized when control over the goods or services is transferred to the customer.
The Group’s customers are retailers. Customer contracts typically consist of a partnership agreement and each confirmed product order.
The contracts identify the separate performance obligations, which consist of supplied locks, as well as lock operation and maintenance services. The warranties related to the locks are identified as ordinary warranties that do not constitute a separate performance obligation. Instead, a warranty provision is made for them in accordance with the IAS 37 standard.
For locks, the transaction price consists of the price as per the price list, less estimated variable charges, which are any applicable annual discounts. The operation and maintenance agreement specifies the maintenance fees for the locking service. The total price of the service depends on the number of locks and the services selected by the customer. The agreements do not include significant financing components.
The capitalization of lock deliveries does not meet the criteria for capitalization over time, so they are capitalized when control is transferred on the basis of the delivery, when the risks and benefits have been transferred to retailers. Operation and maintenance agreements are capitalized over time as sales of services because the end customer receives the benefit of the service when it has been provided.
Employee benefits
Pension obligations
Pension schemes are classed as defined-benefit or defined-contribution schemes. Under defined-contribution schemes, the Group pays fixed fees to a separate unit and the Group has no legal or actual obligations to make further payments. The contributions paid into defined-contribution schemes are recognized through profit or loss as charges arising from employee benefits in the period to which the contribution applies. The Group’s pension schemes are classed as defined-contribution pension schemes.
Share-based payments
Options are measured at fair value on the date of issue and recognized as expenses in the statement of income in equal installments over the vesting period. A corresponding amount is recognized directly as an addition to equity. The expense determined at issue is based on the Group’s estimate of the number of options that are expected to vest at the end of the vesting period.
When options are exercised, the monetary payments received on the basis of share subscriptions (adjusted for any transaction costs) are recognized in the invested unrestricted equity fund. The vesting period for the Group’s 2013 option scheme ended at the end of 2014, and the subscription period was from 2015 to 2017.
Operating profit
Operating profit consists of revenues and other operating income less the costs of materials and services, the costs of employee benefits and other operating costs, as well as depreciation and impairment losses.
Recognition of income taxes and deferred taxes
Income taxes consist of taxes based on the taxable income for the financial period, adjustments related to prior financial periods, and deferred taxes. The taxes based on taxable income for the period are calculated from the taxable income at the applicable tax rate in each country or at the tax rate that was approved in practice by the reporting date. The Group offsets the tax assets and liabilities based on the taxable income for the period against each other only when the Group has a legally enforceable entitlement to offset the tax assets and liabilities based on the taxable income for the period against each other and it intends either to make the payment on a net basis or realize an asset item and settle the liabilities simultaneously.
Deferred taxes are calculated from the temporary differences between the carrying value and the taxable value using the tax rates enacted or approved in practice by the reporting date.
Deferred tax liabilities are recognized for all temporary differences between the carrying value and the taxable value. Deferred tax assets are recognized for all deductible temporary differences and for losses that can be deducted in tax up to the probable amount of taxable income in the future against which the temporary difference can be utilized. The criteria for recognizing deferred tax assets are estimated on the final day of each reporting period.
The Group offsets deferred tax assets and liabilities against each other only when the Group has a legally enforceable right to offset the tax assets and liabilities based on the taxable income for the period and when the deferred tax assets and liabilities relate to the income tax levied by the same tax authority on the same entity or different entities that intend to realize the asset and settle the liability on a net basis.
Intangible assets
Intangible assets are recognized on the balance sheet only if the acquisition cost can be reliably determined and it is likely that the financial benefit derived from the asset will accrue to the Group.
Research and development expenditure
Research and development expenditure is recognized as a cost in the period during which it arises.
Research and development expenditure is only recognized on the balance sheet if an asset in progress meets the requirements of IAS 38 concerning the capitalization of development expenditure. Research and development expenditure is depreciated over the useful economic life. Depreciation is recognized on the asset once the research and development project has been concluded and the asset created by the development is ready for use or sale. Other research and development expenditure is recognized as a cost. Research and development expenditure that has previously been recognized as a cost cannot be capitalized in later periods.
Research and development expenditure recognized as a cost is included in the consolidated statement of income under other operating costs.
Other intangible assets
Other intangible assets are recognized on the balance sheet at acquisition cost. In subsequent periods, other intangible assets are measured at acquisition cost less recognized depreciation. The original acquisition cost includes the immediate expenses due to the acquisition of the asset.
Other tangible assets with a finite service life are depreciated on a straight-line basis over the estimated service life of the asset. Changes to the service life of an asset, the method of depreciation, and the residual value are treated as changes in an actuarial estimate.
The estimated service lives of assets are as follows:
- Intangible rights: 5–10 years
- Other intangible assets: 5–10 years
The service lives of assets and methods of depreciation are evaluated at the end of each reporting period and adjusted if necessary.
Gains on disposals of intangible assets are recognized on the statement of income under other operating income and losses are recognized under other operating costs.
Tangible fixed assets
Tangible fixed assets are recognized on the balance sheet only when it is likely that the Group will enjoy future financial benefits derived from the asset and the acquisition cost can be reliably determined.
Tangible fixed assets are measured at acquisition cost less depreciation and impairment. Acquisition cost includes the costs directly incurred in acquiring the tangible fixed asset.
Tangible fixed assets are depreciated on a straight-line basis over the estimated service life of each asset.
The methods of depreciation used and the estimated service lives of assets are as follows:
- Machinery and equipment: 5 years
- Furnishings and other moveable property: 5 years
The service life and method of depreciation are evaluated at the end of each reporting period and adjusted if necessary to reflect changes in the expected economic benefit.
Tangible fixed assets are derecognized from the balance sheet when they are disposed of or when no future financial benefits can be expected from the use or disposal of the asset. Gains and losses on disposals of tangible fixed assets are recognized through profit or loss and presented under other operating income or costs.
Leases – the Group as the lessee
Finance leasing
If a substantial proportion of the risks and rewards of ownership are transferred to the Group under a lease, it is classified as a finance lease. Leases other than those classified as finance leases are other leases and the leased asset is not recognized on the balance sheet.
The consolidated financial statements for the 2018 and 2017 financial periods do not include leases classified as finance leases.
Other lease agreements
If the risks and rewards characteristic of ownership are retained in substantial part by the lessor under a lease, it is treated as an “other lease” and the payments made on the basis of the lease are recognized as costs throughout the term of the lease.
Inventories
Inventories are measured in accordance with the average price principle at either the determined acquisition cost or the net realization value, whichever is lower. The net realization value is the estimated sale price that could be received under normal business operations.
The acquisition cost includes the direct costs of acquiring the asset incurred by transferring the inventory to the location and state that it was in when reviewed.
Financial assets and liabilities
Recognition and classification of financial assets and liabilities
Financial assets
Pursuant to IFRS 9, the Group’s financial assets are classified into the following categories:
- Deferred acquisition cost,
- Assets measured at fair value through other comprehensive income and
- Assets measured at fair value through profit or loss.
Classification is performed on the basis of the goal of the business model and the contractual cash flows of investments or by applying the fair value alternative in conjunction with the original acquisition. On the reporting date, the Group had no items measured at fair value through other comprehensive income.
Transaction costs are included in the original carrying value of financial assets for items that are not measured at fair value through profit or loss. All purchases and sales of financial assets are recognized on the transaction date.
The Financial assets recognized at deferred acquisition cost group is for trade receivables, loan receivables, and other receivables that are not included in derivative assets. The assets classified in this group are measured at deferred acquisition cost using the effective interest method. The carrying value of trade and other current receivables is assumed to be the same as the fair value. For expected credit losses, the Group recognizes a deduction item from the asset item belonging to financial assets, and this is measured at deferred acquisition cost.
For trade receivables, the Group estimates its expected credit losses using the simplified approach permitted by IFRS 9, whereby credit losses are recognized in an amount corresponding to the expected credit losses throughout the entire period of validity. The credit losses that are recognized are based on historical information about the failure to pay receivables. No expected credit losses were recognized in the consolidated financial statements for the 2018 and 2017 periods because the Group’s realized trade credit losses have historically been very small.
The category of financial assets recognized at fair value through profit or loss includes financial asset items that were acquired to be held for trading or that are classified as assets recognized at fair value through profit or loss when they were originally recognized. Financial assets held for trading were primarily acquired with a view to profiting over the short or long term, and they are presented under either current or non-current financial assets.
Financial liabilities
Pursuant to IFRS 9, the Group’s financial liabilities are classified into the following categories:
- Deferred acquisition cost
- Assets measured at fair value through profit or loss
At the end of the reporting period, the Group had no financial liabilities measured at fair value through profit or loss.
Financial liabilities measured at deferred acquisition cost are initially recognized at fair value. Transaction costs are included in the original carrying value of the financial liabilities. Subsequently, all financial liabilities, with the exception of derivative liabilities, are measured at deferred acquisition cost using the effective interest method. Items measured at deferred acquisition cost can include current and non-current liabilities, accounts payable, and other liabilities. Loans maturing in under 12 months are presented under current liabilities.
Derivative instruments
The Group uses derivatives such as foreign currency forward contracts to hedge against the risks of exchange rate fluctuations. Derivatives are classified as financial assets or liabilities to be recognized at fair value through profit or loss. These financial instruments are originally entered into the accounts at fair value on the date when the Group becomes a party to the contract, and they are subsequently measured at fair value.
Changes in fair value are recognized through profit or loss. Derivatives are presented on the balance sheet under assets if the fair value is positive on the reporting date and under liabilities if the fair value is negative.
Changes in the fair values of foreign currency derivatives are recognized under other operating costs.
The Group uses derivatives for hedging purposes but it does not apply hedge accounting in accordance with IFRS 9.
Impairments and impairment testing
Financial assets
On the last day of each reporting period, the Group evaluates whether there is objective evidence that the value of an item belonging to financial assets has decreased. The value of an item belonging to financial assets is impaired if there is objective evidence that the value has decreased due to one or more events that have occurred since the financial asset was recognized. If an item belonging to financial assets is impaired, the Group recognizes a realized credit loss.
All realized credit losses are recognized through profit or loss. Credit losses may be reversed in subsequent periods if the reversal can be objectively considered to relate to an event that occurs after the credit loss was recognized. Reversals of credit losses on financial assets measured at deferred acquisition cost are recognized through profit or loss.
Assets not belonging to financial assets
On the final day of each reporting period, the Group assesses whether there is any indication that the value of an asset item not belonging to financial assets has decreased. If such an indication is found, the recoverable amount of cash for the asset in question is estimated.
Annual impairment testing is conducted on research and development projects in progress. In addition, the company monitors internal and external indications of asset impairment. If any internal or external indications are found, the company conducts an impairment test by estimating the recoverable amount of an asset item or a cash-generating unit.
The recoverable amount of a non-current asset is the asset’s fair value less sales costs or its value in use, whichever is greater. The value in use is determined by discounting the estimated future cash flows generated by the asset.
An impairment loss is recognized through profit or loss when the carrying amount of an asset exceeds its recoverable amount. Impairment losses are reversed if the estimates used to determine the recoverable amount from the asset have changed. However, impairment losses are not reversed by more than the carrying value that the asset would have had without the recognition of the impairment loss.
Provisions and contingent liabilities
Provisions are recognized when the Group has, due to a past event, a legal or constructive obligation and it is probable that resources providing a financial benefit will need to be transferred out of the company in the future to settle the obligation and when the amount of the obligation can be reliably estimated.
If the time value of money has a substantial effect, the amount of the provision is the present value of the expenses that are expected to be required to fulfill the obligation.
A provision is recognized for future warranty obligations based on the warranty costs that have previously been realized.
The amount of provisions is evaluated on every balance sheet date and the amount is adjusted to represent the best estimate at the time of review. Changes in provisions are entered into the statement of income under other operating expenses.
Contingent liabilities are potential obligations arising due to prior events, and the existence of these obligations can only be confirmed upon the realization of an uncertain event that is beyond the control of the Group. Contingent obligations also include existing obligations that are not likely to require the fulfillment of a payment obligation or that are of a magnitude that cannot be reliably determined. Contingent liabilities are presented in the notes to the financial statements.
Public grants
Public grants are recognized when it is reasonably certain that they will be received and that the Group meets the conditions for receiving a grant.
Public grants related to costs are recognized systematically through profit or loss in the periods when the entity recognizes a cost item for expenditure that is covered by the intended purpose of the grant.
Public grants related to acquisitions of tangible fixed assets are recognized as deductions in the asset’s acquisition cost and they are capitalized in the form of lower depreciation charges over the asset’s service life.
Equity
The Group classifies financial instruments under equity when the instruments are issued by the Group and do not include a contractual obligation to transfer cash or cash equivalents to another entity or to exchange financial assets or liabilities with another entity in the event of circumstances that are unfavorable to the issuer and when the instruments indicate an entitlement to a share of the Group’s assets after all of its liabilities have been deducted. The share capital consists of common stock. If the Group buys back its equity instruments, the acquisition cost is deducted from equity.
New and updated standards and interpretations for application at a later date
The Group will adopt the new and updated standards and interpretations published by IASB as of the effective date of each standard and interpretation or, if the effective date is other than the first day of the financial period, as of the beginning of the financial period following the effective date.
IFRS 16 Leases is effective for financial periods beginning on or after 1 January 2019. The new standard replaces IAS 17 and the related interpretations. IFRS 16 requires lessees to enter leases on the balance sheet as lease payment obligations with a related asset item. The entry on the balance sheet is very similar to the treatment of finance leases under IAS 17. There are two forms of relief for entry onto the balance sheet for short-term leases no longer than 12 months and for assets worth no more than approximately USD 5,000. The treatment by lessors will continue to follow the present IAS 17 standard in large part. According to preliminary estimates, iLOQ will need to recognize its present leasing and office space rents on its consolidated balance sheet. On December 31, 2018, other leases presented as off-balance-sheet liabilities amounted to EUR 1,484 thousand. However, the treatment of leases as liabilities differs from the treatment of leases under IFRS 16, so the amount to be recognized on the balance sheet may differ from the amount of liabilities due to factors such as the applicable forms of relief. The most significant contracts that the Group must recognize on its balance sheet are the fixed-term office rental agreement and vehicle leasing agreements. According to preliminary estimates, the forms of relief for short-term or low-value leases can be applied to several other office rental and leasing agreements, so these do not need to be recognized on the balance sheet. The change will affect the consolidated financial statements and the key indicators based on the balance sheet, such as the debt-to-equity ratio. In the forthcoming financial period, the Group will continue to assess the impact of IFRS 16 and determine the amounts that need to be recognized.
The other new or amended standards published by the IASB are not expected to affect the consolidated financial statements.