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1.1. Accounting principles for the consolidated financial statements

The Group’s parent company, Vaisala Oyj, is a Finnish public limited company established under Finnish law, its domicile is Vantaa and its registered address in Vanha Nurmijärventie 21, FI-01670 Vantaa (P.O. Box 26, FI-00421 Helsinki). The company’s Business ID is 0124416-2. Vaisala has offices and business operations in Finland, North America, France, the UK, Germany, China, Sweden, Malaysia, Japan and Australia.

Vaisala’s consolidated financial statements have been prepared according to the International Financial Reporting Standards (IFRS) and in their preparation all the obligatory IAS and IFRS standards as well as the SIC and IFRIC interpretations in effect on 31 December 2007 have been followed. By international financial statement standards is meant standards approved for application in the EU, and interpretations issued about them, according to the procedure prescribed in Finnish law and provisions enacted thereon in EU Regulation (EC) No. 1606/2002. The notes to the consolidated financial statements are also in accordance with Finnish accounting and corporate law.

Vaisala Oyj is an international technology group which develops and manufactures electronic measuring systems and instruments. The areas of application of these products are meteorology, the environmental sciences, transport and industry. Vaisala’s products create the basis for better quality of life, cost savings, environmental protection, security and efficiency.

Segment reporting

Segment information is presented in accordance with the Group’s business and  geographical segment divisions. The Group’s primary segment reporting format is according to business segments. Business segments are based on the Group’s internal organisational structure and internal financial reporting.

The business segments consist of asset categories and business operations whose product- or service-related risks and profitability differ from other business segments. The products or services of geographical segments are produced in a financial environment whose risks and profitability differ from the risks and profitability of the financial environment of other geographical segments.

Pricing between segments takes place at the fair market price.

The assets and liabilities of segments are business items which the segments use in their business operations or which on sensible grounds are attributable to the segments. Other activity includes the development units of new business operations, unattributed tax and financial items as well as other items common to the whole company. Investments consist of additions to tangible fixed assets and intangible assets, which are used in more than one financial year.

Vaisala’s three business divisions are Vaisala Measurement Systems, Vaisala Solutions and Vaisala Instruments. 

Vaisala Measurement Systems develops, manufactures and markets systems and instruments for observing the weather in the upper atmosphere as well as wind profilers, weather radars, weather radar signal, data processing and display systems and lightning detection systems that make extensive use of remote sensing technology. The division also offers maintenance services for these systems and instruments.

Vaisala Solutions develops, manufactures and markets weather observation instruments, which are used to observe weather conditions on or near the Earth’s surface.  The division also offers maintenance service for these instruments.

Vaisala Instruments develops, manufactures and markets instruments for the measurement of relative humidity, dewpoint, barometric pressure, carbon dioxide, wind, visibility, cloud height and prevailing weather conditions. The division also offers its customers maintenance services for measuring instruments.

Accounting Principles for the Consolidated Financial Statements (IFRS)

During 2005 the Group adopted the international IFRS financial reporting practice. The transition date was 1 January 2004.

Financial statement data are presented in millions of euros and they are based on original acquisition costs if not otherwise stated in the accounting principles outlined below.

The preparation of financial statements in accordance with IFRS standards requires Group management to make certain estimates and to exercise discretion in applying the accounting principles. Information about the discretion exercised by management in applying the accounting principles followed by the Group and that which has most impact on the figures presented in the financial statements has been presented in the item ‘Accounting principles that require management discretion and main uncertainty factors relating to estimates’.

Principles of consolidation

Subsidiaries

The consolidated financial statements include the parent company Vaisala Oyj and all subsidiaries in which it directly or indirectly owns more than 50% of the votes or in which the parent company otherwise exercises control. The existence of potential voting rights has been taken into account when assessing the terms of control when instruments conferring entitlement to potential control are presently exercisable. Subsidiaries acquired or founded during the financial period are consolidated from the date on which the Group has acquired control and are no longer consolidated from the date that control ceases. Subsidiaries acquired before 1 January 2004 are consolidated at original acquisition cost, according to the exception mentioned in IFRS 1. Subsidiaries acquired on or after 1 January 2004 are consolidated according to the IFRS 3 standard Business Combinations.

The consolidated financial statements have been prepared using the acquisition cost method. Intra-Group transactions, unrealised margins on internal deliveries, internal receivables and liabilities, and the Group’s internal distribution of profit are eliminated. Unrealised losses on intra-Group transactions are also eliminated unless costs are not recoverable or the loss results from an impairment. The consolidated financial statements are prepared applying consistent accounting principles to the same transactions and other events which are implemented under the same conditions. Minority interests have been separated from subsidiaries’ results for the financial year and have been presented as a separate item in the Group’s shareholders’ equity.

Associated companies

The share of profits or losses of associated companies, i.e. companies of which Vaisala owns between 20% and 50% and over which it has significant influence, are included in the consolidated financial statements using the equity method. If Vaisala’s share of an associated company’s losses exceeds the book value of the investment, the investment is entered in the balance sheet at zero value and further losses are not recognised unless the Group has incurred obligations on behalf of the associated company. Unrealised gains on transactions between the Group and its associated companies have been eliminated to the extent of the Group’s interest in the associated companies. The Group’s investment in associated companies includes goodwill on acquisition.

The Group’s share of associated companies’ results is presented in the income statement as a separate item after ‘financial income and expenses’. Investments in associated companies are originally entered into the accounts at their acquisition cost and the book value increased or decreased by the share of post-acquisition profits or losses. Distribution of profit received from an investment reduces the book value of the investment.

Foreign currency items

Transactions in foreign currencies are recognised at the rates of exchange on the date of transaction. Receivables and payables in foreign currency have been valued at the exchange rates quoted by the European Central Bank on the closing date. Exchange rate differences resulting from the settlement of monetary items or from the presentation of items in the financial statements at different exchange rates from which they were originally recognised during the financial period, or presented in the previous financial statements, are recognised as income or expenses in the income statement group ‘financial income and expenses’ in the financial period in which they arise.
 
Items relating to the result and financial position of each entity of the Group are measured using the currency which is the main currency of each entity’s operating environment. Balance sheets of Group companies outside the euro zone have been translated into euros using the official mid-market exchange rates of the European Central Bank on the closing date. In translating income statements, mid-market exchange rates have been used.  Exchange rate differences resulting from the translation of income statement items at mid-market exchange rates and from the translation of balance sheet items at exchange rates on the closing date have been recognised as a separate item in shareholders’ equity. Translation gains and losses which arose in the elimination of the shareholders’ equity of subsidiaries have been recognised as a separate item in shareholders’ equity. When a foreign subsidiary or associated company is sold, the accumulated translation difference is recognised in the income statement as part of the gain or loss on the sale.

Goodwill or fair value adjustments arising on the acquisition of an independent foreign entity are treated as that entity’s foreign currency assets and liabilities and are translated at the closing balance sheet rate.

Tangible fixed assets

The office and factory premises at Vantaa were revalued by a total of EUR 5.7 million in the years 1981-1988. These revaluations have been reversed in connection with the adoption of IFRS and in the valuation of tangible assets the values have been restored in all respects to original acquisition cost.

Fixed assets comprise mainly land and buildings as well as machinery and equipment. The balance sheet values are based on original acquisition cost less accumulated depreciation and amortisation as well as possible impairment losses. The cost of self-constructed assets includes materials and direct work as well as a proportion of overhead costs attributable to construction work. If a fixed asset consists of several parts which have useful lives of different lengths, the parts are treated as separate assets. Expenditures that arise later to an asset or part thereof are capitalised only when they increase the asset’s economic benefit to the company. All other expenditures, such as normal repair and maintenance, are charged to the income statement during the financial period in which they are incurred. Interest expenses are not included in the acquisition cost of fixed assets.

Depreciation is calculated using the straight-line method and is based on the estimated useful life of the asset. Land is not depreciated. Estimated useful lives for various assets are: 

Buildings and structures  5 – 40 years
Machinery and equipment 3 – 10 years
Other tangible assets 5 – 15 years

The residual value, depreciation method and useful life of assets are checked in connection with each financial statement and if necessary adjusted to reflect changes in the expectation of economic benefit. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the operating profit.

Public grants received for fixed asset investments are recognised as a reduction in the carrying amounts of tangible fixed assets. Grants are recognised in the form of smaller depreciations during the useful life of the asset.

Depreciation of a tangible fixed asset is discontinued when the tangible fixed asset is classified as being for sale in accordance with the IFRS 5 standard Non-Current Assets Held for Sale and Discontinued Operations.

Intangible assets

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary/associated company at the date of acquisition. Goodwill is calculated in the currency of the operating environment of the acquired entity. If the acquisition cost is lower than the value of the acquired subsidiary’s net asset value the difference is entered directly into the income statement. According to the relief permitted by the IFRS standard, company acquisitions before the IFRS transition date have not been adjusted according to IFRS principles; they have been left at the values according to Finnish accounting practice. In acquisitions that took place before the IFRS transition date, the acquisition cost has been attributed where applicable to the fixed assets of the acquired subsidiary and amortised according to plan over an estimated useful life of 5 years.

Goodwill is not amortised, rather it is tested annually for any impairment.  For this purpose goodwill has been attributed to cash generating units. Goodwill is valued at the original acquisition cost and in terms of subsidiaries acquired before 1 January 2004 at assumed acquisition cost less impairments.

Other intangible assets

Other intangible assets are e.g. patents and trademarks as well as software licences. They are valued at their original acquisition cost and amortised using the straight-line method over their useful life. Intangible assets that have an indefinite useful life are not amortised, rather they are tested for impairment annually. Intangible assets of the acquired subsidiaries are valued at their fair values at the date of acquisition.

Estimated useful lives for intangible assets are:
Intangible rights  at most 5 years
Other tangible assets  at most 10 years
Software 3-5 years

Research and development expenditure

Research and development expenditures have been recognised as expenses in the financial period in which they were incurred, except for machinery and equipment acquired for research and development use, which are amortised according to plan over 5 years.  Costs relating to the development of new products and processes are not capitalised because the future earnings obtained from them are only assured when the products come to market. According to IAS 38 an intangible asset is entered in the balance sheet only when it is probable that the company will derive financial benefit from the asset.  Moreover, it is typical of the industry that it not possible to distinguish the research stage of an internal project that aims to create an asset from its development stage.

Borrowing costs

Borrowing costs are recognised as an expense for the period during which they arise.

Inventories

Inventories are presented at the lower of acquisition cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.  The cost of finished goods and work in progress comprises raw materials, direct labour costs, other direct costs and an appropriate proportion of variable and fixed production overheads based on normal operating capacity. In determining the acquisition cost, standard cost accounting is applied and standard costs are adjusted regularly and changed if necessary according to the situation at the time in question. Acquisition cost is determined using the weighted average method, whereby the cost is determined as the weighted average of similar inventory items which were held at the beginning of the financial period and those bought or produced during the financial period.

Lease agreements

The Group is the lessee

Lease agreements of tangible assets where the Group has a substantial part of the risks and rewards of ownership are classified as finance leases. Finance leases are entered into the balance sheet’s tangible fixed assets at the start of the lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments. The asset acquired under a finance lease is depreciated over the shorter of the asset’s useful life and the lease term. Lease payments are allocated between the liability and finance charges so as to achieve a constant interest rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in interest-bearing liabilities. 
 
Lease agreements where the lessor retains a significant portion of the risks and rewards of ownership are treated as other leases. Payments made under other leases are charged to the income statement on a straight-line basis over the period of the lease.

The Group is the lessor

Leases of Group assets where a significant portion of the risks and rewards of ownership are transferred to the lessee are classified as finance leases and the present value of the lease payments is recognised in the balance sheet as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Finance income from a finance lease is determined so that the remaining net investment produces a constant periodic rate of return over the term of the lease.

Assets leased out under leases other than finance leases are included in tangible fixed assets in the balance sheet. They are depreciated over their useful lives on a basis consistent with similar owned tangible fixed assets. Rental income is recognised in the balance sheet on a straight-line basis over the lease term.

Impairment

On every closing date the Group reviews asset items for any indication of impairment losses. If there are such indications, the amount recoverable from the said asset item is assessed. The recoverable amount is also assessed annually for the following asset items irrespective of whether there are indications of impairment:  goodwill, intangible assets which have an indefinite useful life as well as incomplete intangible assets.
 
The recoverable amount is the higher of the asset item’s fair value less the cost arising from disposal and its value in use. When determining value in use, the expected future cash flows are discounted based on their present values at discount interest rates which reflect the average capital cost before taxes of the country and business sector in question (WACC = weighted average cost of capital). The special risks of the assets in question are also taken into account in the discount interest rates. The recoverable amount of financial assets is either the fair value or the present value of expected future cash flows discounted at the original effective interest rate. Short-term receivables are not discounted. In terms of individual asset items which do not independently generate future cash flows, the recoverable amount is determined for the cash generating unit to which the said asset item belongs.

An impairment loss is recognised in the income statement when the carrying amount is greater than the recoverable amount. The impairment loss is reversed if a change in conditions has occurred and the recoverable amount of the asset has changed since the date when the impairment loss was recognised. The impairment loss is not reversed, however, by more than that which the carrying amount of the asset (less depreciation) would be without the recognition of the impairment loss.  Impairment losses recognised for goodwill are not reversed under any circumstances.

Trade and other receivables

Trade and other receivables are recognised at their anticipated realisable value, which is the original invoicing value less the estimated impairment provision of these receivables. An impairment provision for trade receivables is made when there are good grounds to expect that the Group will not receive all its receivables on original terms.

Financial assets and financial liabilities

The IAS 32 and IAS 39 standards relating to financial instruments have been applied as of 1 January 2005.

IAS 39 classifies a group’s financial assets into the following categories: financial assets measured at fair value through profit and loss, held-to-maturity investments, loans and receivables, and available-for-sale financial assets. Categorisation is made on the basis of the purpose for which the financial assets were acquired and they are categorised in connection with the original acquisition. Transaction costs have been included in the original carrying amount of the financial assets when the item in question is not valued at fair value through profit and loss. All purchases and sales of financial assets are recognised on the trade date.

Derecognition of financial assets takes place when the Group has lost a contractual right to receive the cash flows or when it has transferred substantially the risks and rewards outside the Group. On every closing date the Group assesses whether there is objective evidence that the value of a financial asset item or group of items asset items has been impaired. If such evidence exists, the impairment is recognised in the income statement item financial expenses.
  
Financial assets held for trading purposes such as derivative instruments to which the Group does not apply hedge accounting under IAS 39 as well as income fund investments consisting of the short-term investment of liquid assets have been categorised as financial assets recognised at fair value through profit and loss. The fair value of income fund investments has been determined based on price quotations published in an active market, namely the bid quotations on the closing date. Realised and unrealised gains and losses arising from changes in fair value are recognised in the income statement in the period in which they arise. Financial assets held for trading as well as those maturing within 12 months are included in current assets.

Held-to-maturity investments are financial assets not belonging to derivative assets whose payments are fixed and quantifiable and which mature on a specified date and which the Group has the firm intent and ability to hold to maturity. They are valued at amortised cost and they include either short-term or long-term assets.

Loans and other receivables are assets not belonging to derivative assets whose payments are fixed and quantifiable and which are not quoted on an active market and which the company does not hold for trading purposes. This category includes Group financial assets which have arisen through the transfer of money, goods or services to debtors. They are valued at amortised cost and they include short- and long-term financial assets, the latter if they mature after more than 12 months. If there are indications of value impairment, the carrying amount is estimated and reduced immediately to correspond with the recoverable amount.

Available-for-sale financial assets are assets not belonging to derivative assets which are expressly allocated to this category or which do not fall into one of the other categories. These include long-term assets except if the intent is to keep them for less than 12 months from the closing date, in which case they are included in current assets. The company does not, however, have any such items at present.

Cash and cash equivalents are carried in the balance sheet at original cost. Cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term, highly liquid investments with original maturities of three months or less and which consist mainly of the short-term investment of cash assets. Bank overdrafts are included within current interest-bearing liabilities. Owing to their short-term nature, the fair values of cash funds and short-term investments have been estimated to be the same as their acquisition cost.

Financial liabilities are recognised at fair value on the basis of the original consideration received. Transactions costs have been included in the original carrying amount of the financial liabilities. Later, all financial liabilities are valued at amortised cost using the effective yield method.  Financial liabilities include long- and short-term liabilities and they can be interest-bearing or non-interest-bearing.

Derivative contracts and hedging activities
All derivatives contracts are initially recognised at cost and subsequently remeasured at their fair value. Forward foreign exchange contracts are valued at their fair value using the market prices of forward contracts at the closing date.
 
The Group has sales in a number of foreign currencies, of which the most significant are the US dollar, the Japanese yen and the British pound.  The Group does not apply hedge accounting under IAS 39 to forward foreign exchange contracts that hedge sales in foreign currencies. The Group has a number of investments in foreign subsidiaries whose net assets are exposed to foreign currency risk. The Group does not hedge the foreign exchange risk of subsidiaries’ net assets.

Unrealised and realised gains and losses arising from changes in fair value are recognised in the income statement in ‘financial income and expenses” in the period during which they arise.

Employee benefits 

Pension obligations

The Group has a number of pension schemes in different parts of the world which are based on local conditions and practices. These pension schemes are classified as either defined-contribution or defined-benefit schemes. Under defined-contribution plans, expenses are recognised in the balance sheet in the financial period in which the contribution is payable.

In defined-benefit plans, the Group can be left with the arrangement of obligations or assets after the financial period in which the contribution is payable. A pension liability describes the present value of future cash flows resulting from payable benefits. The present value of the defined-benefit pension plans has been determined using the projected unit credit method and assets belonging to the plans have been valued at fair value on the closing date. The obligations of the Group’s defined-benefit pension plans have been calculated for each plan separately. On the basis of calculations made by authorised actuaries, the calculated actuarial gains and losses are recognised in the income statement during the average remaining period of service of employees participating in the plan to the extent that they exceed the greater of 10% of the present value of the plan’s defined-benefit pension obligations and the fair value of assets included in the plan.

On the transition date to IFRS standards on 1 January 2004, all actuarial gains and losses have been recognised in the balance sheet’s opening shareholders’ equity in the manner allowed by the IFRS 1 standard.

Share-based payments

The Group currently has no stock option schemes. The company’s option scheme 2000 ended for all options on 31 January 2006.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as the result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. If it is possible that the Group will be reimbursed for part of the obligation by some third party, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The amount of provisions is estimated at each closing date and the amount is changed to correspond to the best estimate at the given time. A provision is cancelled when the probability of financial settlement has been removed. A change in provisions is recognised in the same item of the income statement in which the provision was originally recognised.

Provisions relate to the restructuring of operations, loss-making agreements and repairs under guarantee. Restructuring provisions are recognised when a detailed and appropriate plan relating to them has been prepared and the company has begun to implement the plan or has announced it will do so. Restructuring provisions generally comprise lease termination penalties and employee termination payments.

A provision for a loss-making agreement is recognised when unavoidable expenditure required to fulfil obligations exceeds the benefits obtainable from the agreement.

Income tax

The tax item in the income statement comprises tax based on taxable income for the financial year, adjustments to tax accruals related to previous years and the change in deferred taxes. Tax based on taxable income for the financial year is calculated for taxable income on the basis of each country’s current tax rate.

Deferred taxes are calculated for all temporary differences between the carrying amount of an asset or liability and its tax base. The largest temporary differences arise from amortisation of fixed assets, defined-benefit pension schemes and unused tax losses. In taxation deferred tax is not recognised for non-deductible goodwill impairment and deferred tax is not recognised for distributable earnings of subsidiaries where it is probable that the difference will not reverse in the foreseeable future. The Group’s deferred tax assets and liabilities relating to the same tax recipient are stated net.

Deferred taxes have been calculated using tax rates prescribed by the closing date.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit, against which the temporary differences can be utilised, will be available.

Shareholders’ equity, dividends and treasury shares

The Board of Directors’ proposal for dividend distribution has not been recognised in the financial statements; the dividends are recognised only on the basis of the Annual General Meeting’s approval.

If a company buys its own shares (treasury shares), the consideration paid for them including direct costs is deducted from shareholders’ equity.

Principles of revenue recognition

Sales of goods and services rendered

Revenue from the sale of goods is recognised when significant risks and rewards of owning the goods are transferred to the buyer. Revenue recognition generally takes places when the transfer has taken place. Revenue for rendering of services is recognised when the service has been performed. When recognising turnover, indirect taxes and discounts, for example, have been deducted from sales revenue. Possible exchange rate differences are recognised in the financial income and expenses.

Long-term projects

Revenues from long-term projects are recognised using the percentage of completion method, when the outcome of the project can be estimated reliably. The stage of completion is determined for each project by reference to the relationship between the costs incurred for work performed to date and the estimated total costs of the project or the relationship between the working hours performed to date and the estimated total working hours.

When the outcome of a long-term project cannot be estimated reliably, project costs are recognised as expenses in the same period when they arise and project revenues only to the extent of project costs incurred where it is probable that those costs will be recoverable. When it is probable that total costs necessary to complete the project will exceed total project revenue, the expected loss is recognised as an expense immediately.

Other revenue received by the Group

Revenue arising from royalties and rents is recognised on an accrual basis in accordance with the substance of the relevant agreements. Interest income is recognised on a time-proportion basis, taking account of the effective yield of the asset item, and dividend income is recognised when the Group’s right to receive payment is established.

Other operating income and expenses

Gains on the disposal of assets as well as income other than that relating to actual performance-based sales, such as rental income, are recognised as other operating income.

Losses on the disposal of assets and expenses other than those relating to actual performance-based sales are included in other operating expenses.

Grants

Grants received from the state or another party are recognised in the income statement at the same time as expenses are recognised as a deduction of the related expense group. Grants relating to asset acquisition are presented as an adjustment to the acquisition cost of the asset and they are recognised in the form of smaller depreciations over the useful life of the asset.

Held-for-sale assets and discontinued operations

Held-for-sale assets and assets relating to discontinued operations, which have been classified as held for sale, are valued at the lower of the following: the carrying amount and the fair value less costs arising from the sale. Depreciation of these assets is discontinued at the moment of classification.

Accounting principles requiring management discretion and the main uncertainty factors relating to estimates

The preparation of financial statements requires the use of estimates and assumptions relating to the future and the actual outcomes may differ from the estimates and assumptions made. In addition, discretion has to be exercised in applying the accounting principles of the financial statements. Estimates made and discretion exercised are based on previous experience and other factors, such as assumptions about future events. Estimates made and discretion exercised are examined regularly. The key areas in which estimates have been made and discretion has been exercised are outlined below. Other estimates are connected mainly with environmental, litigation and tax risks, the determination of pension obligations as well as the utilisation of deferred tax assets against future taxable income.

Allocation of acquisition cost

IFRS 3 requires the acquirer to recognise an intangible asset separately from goodwill, if the recognition criteria are fulfilled. Recognition of an intangible asset at fair value requires management estimates of future cash flows. Where possible, management has used available market values as the basis of acquisition cost recognition in determining fair values. When this is not possible, which is typical particularly with intangible assets, valuation is based principally on the historic cost of the asset item and its intended use in business operations. Valuations are based on discounted cash flows as well as estimated disposal and repurchase prices and require management estimates and assumptions about the future use of asset items and the effect on the company’s financial position. Changes in the emphasis and direction of company operations can in future result in changes to the original valuation.

Revenue recognition

The Group uses the percentage of completion method in recognising revenue for long-term projects. Revenue recognition according to percentage of completion is based on estimates of expected revenue and costs as well as on a determination of the progress of the percentage of completion. Changes can arise to recognised revenue and profit if estimates of a project’s total costs and total income are adjusted. The cumulative effect of adjusted estimates is recognised in the period in which the change becomes probable and it can be estimated reliably.

Impairment testing

The Group tests goodwill annually for possible impairment and reviews whether there are indications of impairment according to the accounting principle presented above. The recoverable amounts of cash generating units have been determined in calculations based on value in use. Although assumptions used according to the view of the company’s management are appropriate, the estimated recoverable amounts might differ substantially from those realised in future.

Valuation of inventories

A management principle is to recognise an impairment for slowly moving and outdated inventories based on the management’s best possible estimate of possibly unusable inventories in the Group’s possession at the closing date. Management bases its estimates on systematic and continuous monitoring and evaluations.

Application of new or amended IFRS standards and IFRIC interpretations

New and updated standards and interpretations that the Group has applied in 2007:

Standard IFRS 7, Financial instruments: Information to be Presented in Financial Statements and amendment of Standard IAS 1, Presentation of Financial Statements. The introduction of this standard and amendment increases disclosures relating to financial instruments. The standard requires the presentation of qualitative and quantitative information on the company’s vulnerability to risks arising from financial instruments and it contains minimum requirements for disclosures relating to credit, liquidity and market risks, including a sensitivity analysis of market risk. The amendment to Standard IAS 1 requires the presentation of information on the company’s capital levels and the management thereof.

IFRIC 8, Scope of IFRS 2. The interpretation applies to arrangements where the company grants equity instruments and the identifiable consideration given appears to be less than the fair value of the equity instruments granted. In such situations an assessment must be made as to whether the arrangement belongs within the scope of IFRS 2. [This interpretation has no impact on the Group’s financial statements.]

IFRIC 10, Interim Reports and Impairment. The interpretation prohibits an entity from reversing, at a later closing date, an impairment loss recognised in a previous interim period in respect of goodwill , equity instruments classified as available-for-sale  and unquoted equity instruments carried at cost. [This interpretation has no impact on the Group’s financial statements.]

New and revised  standards and interpretations that entered into effect in 2007 but which have no substantial impact on the Group’s financial statements 

IFRIC 7, Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.

IFRIC 9, Reassessment of Embedded Derivatives.

The IASB has published standards and interpretations, listed below, which are not yet in effect and which the Group has not yet applied. The Group will introduce them from the effective date of each standard and interpretation or, if the effective date is other than the first day of the financial period, from the beginning of the financial period following the effective date.

IFRIC 11, IFRS2 - Group and Treasury Share Transactions (effective for financial periods beginning on or after 1 March 2007). The new interpretation clarifies the scope of equity-based transactions according to the IFRS 2 standard and requires the reassessment of such transactions in subsidiaries. [The new interpretation will have no impact on the Group’s future financial statements.*]

IFRIC 12, Service Concession Arrangements (effective for financial periods beginning on or after 1 January 2008). The interpretation addresses arrangements in which a private body participates in the development, financing or realisation of public services or in the maintenance of infrastructure.<0} The Group has no arrangements with the public sector referred to in the interpretation, so the interpretation will have no impact on the Group’s future financial statements.*

IFRIC 13 Customer Loyalty Programmes (effective for financial periods beginning  on or after 1 July 2008). The interpretation defines transactions in which goods or services are sold in a way that encourages customer loyalty as sales contracts that have separable components. The consideration received from the customer is allocated to different components of the sales contract based on their fair value. The Group has no customer loyalty programmes referred to in the interpretation, so the interpretation will have no impact on the Group’s future financial statements.*

IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for financial periods beginning on or after 1 January 2008).  The interpretation addresses post-retirement defined-benefit arrangements according to the IAS 19 standard and other long-term defined-benefit employee benefits when the arrangement includes a minimum funding requirement. The interpretation also addresses balance sheet recognition conditions for significant asset items via future refunds or future reductions of contributions made into the arrangement. The Group has in Finland a defined-benefit pension arrangement referred to in the interpretation. According to a preliminary assessment, the new interpretation will have no substantial impact on the Group’s future financial statements. *

IFRIC 8 Operating Segments (effective for financial periods beginning on or after 1 January 2009). IFRS 8 replaces the IAS 14 Segment Reporting standard. Under the new standard, segment reporting is based on management’s internal reporting and on the accounting principles followed therein. IFRS 8 requires the presentation of information on a Group’s products, services, geographical areas and significant customers. An entity is also required to give information on the basis of specification of reportable segments  as well as the accounting principles to be applied in segment reporting. In addition, the standard requires the presentation in segment reporting of a reconciliation statement for certain income statement and balance sheet items. The Group considers that the new standard will not substantially change the present segment reporting, because the business segments specified according to internal reporting are nowadays the Group’s primary form of reporting. The Group expects that the introduction of IFRS 8 will mainly influence the way in which segment information is presented in the notes to future financial statements. *

IAS 23 Borrowing Costs, amendment (effective for financial periods beginning on or after 1 January 2009). The amended standard requires that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, such as a production plant, are included in the acquisition cost. In the manner permitted earlier, the Group has recognised borrowing costs as an expense in the financial period during which they arose. The Group considers that the introduction of the new standard will not, however, have a substantial impact on future financial statements.*

IAS 1 Presentation of Financial Statements, amendment (effective for financial periods beginning on or after 1 January 2009). The revised standard changes the way in which financial statements are presented. The Group considers that the change will mainly affect the presentation of the income statement and the statement of changes in shareholders’ equity. The accounting principle behind the calculation of the key figure earnings per share will not change.*

IFRS 3 (Revised), Business Combinations (effective for financial periods beginning on or after 1 January 2010). The revised standard further requires the use of the purchase method in the handling of business combinations, however with certain significant changes. For example, all payments relating to the acquisition of companies must be recognised at fair value  at the date of acquisition and certain contingent considerations are valued after the acquisition at fair value through profit and loss. Goodwill can be calculated based on the parent company’s portion of net assets or it can include the goodwill attributed to the minority interest. All transaction costs are recognised as an expense.*

IAS 27 (Revised), Consolidated and Separate Financial Statements. The revised standard requires the recognition of all minority transactions in shareholders’ equity, if control is not transferred. Thus minority transactions no longer result in the recognition of goodwill nor in the recognition of profit or loss. The standard also specifies the handling of transactions when control is transferred. Any residual value in the acquired entity is valued at fair value and any profit or loss arising is recognised through profit and loss.*

* The said standard/interpretation has not yet been approved for application in the EU