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Accounting policies in the Novozymes Group

The consolidated financial statements of the Novozymes Group have been prepared in accordance with the International Financial Reporting Standards (IFRS), as adopted in the EU, and additional Danish requirements on the presentation of accounts. Novozymes has prepared its consolidated financial statements in accordance with all the relevant IFRS standards. The consolidated financial statements have been prepared under the historical cost convention, with the exception of specific items as described below:

  • Available-for-sale financial assets
  • Derivative financial instruments measured at fair value
  • Some of the information required pursuant to IFRS is contained in the Report. The rest will be found in the following sections.

    Novozymes changed its accounting policies with effect from January 1, 2005 in accordance with the requirements of IFRS. The move to IFRS has involved changes in the following areas:

  • Share-based payment
  • Financial instruments
  • Capitalised borrowing costs
  • Provisions for employee benefits
  • Business combinations
  • See Note 36 for a detailed review of the changes and the impact of the transition to IFRS.

    Implementation of standards which have been approved but have not yet entered into force as at December 31, 2005 involves changes to IAS 21 and IFRS 7, which are not expected to give rise to significant changes to the figures in the consolidated financial statements. 

    Environmental, social and knowledge data has been selected on the basis of an assessment of which data is of particular significance for Novozymes’ long-term earnings capacity. We also believe this data to be of greatest relevance to our key stakeholders. Information on Novozymes’ use of the GRI indicators will be found under Other information.

    Environmental, social and knowledge data is an integrated part of the Annual Report and is covered by the statutory audit performed by the auditor elected by the Annual Meeting of Shareholders.

    Accounting policies for financial information

    Consolidation
    The consolidated financial statements comprise the financial statements of Novozymes A/S (the parent company) and all the companies in which the Group owns more than 50% of the voting rights or otherwise has a controlling influence (subsidiaries), as well as joint ventures.

    The consolidated financial statements are based on the financial statements for the parent company and for the subsidiaries, and are prepared by combining items of a uniform nature and subsequently eliminating intercompany transactions, internal shareholdings, balances and unrealised intercompany profits and losses. All the financial statements used for consolidation are prepared in accordance with the Group’s accounting policies.

    The Group’s holdings in joint ventures regarded as jointly controlled entities are consolidated using the proportionate consolidation method by including its proportional share of their assets, liabilities, revenues and costs line by line.

    Business combinations
    On acquisition of new activities/companies, the assets, liabilities and contingent liabilities of each new activity/company are recognised at fair value at the time of acquisition. Goodwill is adjusted for changes in the purchase price after acquisition and changes in the fair value of the identifiable assets, liabilities and contingent liabilities acquired since the acquisition date until 12 months afterwards. Newly acquired activities/companies are recognised as from the date of acquisition, and no adjustment is made to comparative figures.

    Translation of foreign currencies
    The consolidated financial statements are presented in Danish kroner (DKK).

    Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction date. Monetary items denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Financial statements of foreign subsidiaries are translated into Danish kroner at the exchange rates prevailing at the balance sheet date for assets and liabilities, and at average exchange rates for income statement items.

    Goodwill arising on the acquisition of new activities and companies is treated as an asset belonging to the foreign subsidiaries and translated into Danish kroner at the exchange rates prevailing at the balance sheet date.

    Realised and unrealised foreign exchange gains and losses are recognised in the income statement under financial items, with the exception of unrealised gains and losses relating to hedging of future cash flows, which are recognised in Shareholders’ equity under Cash flow hedges. The following exchange rate differences are also recognised directly in Shareholders’ equity under Currency translations, translated at the exchange rates prevailing at the balance sheet date:

    • Translation of foreign subsidiaries’ net assets at beginning of year
    • Translation of foreign subsidiaries’ income statements from average exchange rates to the exchange rates prevailing at the balance sheet date
    • Translation of long-term intercompany receivables, which are considered to be an addition to net assets in subsidiaries
    • Fair value adjustment of currency swaps that qualify for hedging of net assets in subsidiaries

    Derivative financial instruments
    Derivative financial instruments used to hedge receivables and liabilities are measured at fair value on the balance sheet date, and value adjustments are recognised in the income statement under financial items.

    Derivative financial instruments used to hedge expected future transactions are measured at fair value on the balance sheet date, and value adjustments are recognised directly in Shareholders’ equity.

    Currency swaps are used to hedge net investments in subsidiaries. Currency swaps are measured on the basis of the difference between the swap rate and the rate on the balance sheet date, and the value adjustment is recognised directly in Shareholders’ equity.

    Income and costs relating to cash flow hedges and hedging of net investments in subsidiaries are transferred from Shareholders’ equity on realisation of the hedged asset and are recognised in the income statement.

    Positive and negative fair values of derivative financial instruments are recognised under Other receivables and Other current liabilities respectively.

    The fair value of derivative financial instruments is calculated using rates obtained from stock exchanges or other reliable data sources. All share options are valued using the Black-Scholes model.

    Derivative financial instruments are recognised on the settlement date, while other financial instruments are recognised on the transaction date.

    Share-based payment
    Most of the Group's employees are covered by share option programmes and there is also a share-based incentive programme for Executive Management. The programmes comprise both equity-settled and cash-settled programmes.

    The fair value of the employee services received in exchange for the grant of share options is computed using the value of the granted share options. The fair value of the granted share options is calculated using the Black-Scholes model, and the fair value of the share-based incentive programme is calculated using the share price on the grant date less the expected dividend in the binding period.

    The fair value of share-based payment on the grant date is recognised as an employee cost over the period in which the right to the share options is accrued. In measuring the fair value, account is taken of the number of employees expected to gain entitlement to the options, and this estimate is adjusted at the end of the period such that only the number of options to which employees are entitled is recognised.

    The value of equity-settled programmes is offset against Shareholders’ equity. The value of cash-settled programmes, which are offset against Other current liabilities, is adjusted to fair value at the end of each period, and the subsequent adjustment in fair value is recognised in the income statement under financial items.

    Grants
    Grants received which relate to research and development costs are recognised under Licence fees and Other operating income, net, based on the percentage completion of the projects. Grants received which relate to investments in fixed assets are offset against the cost price of the assets for which the grants are made.

    Segment information
    The consolidated accounts provide information on the Group’s geographical segments, which is the secondary segment. Novozymes' business activities are considered to be integrated, as a result of which most of the production facilities and most research and development activities are common to the Group as a whole. A small number of business segments are not a fully integrated part of the business, but these do not exceed the limits set in IAS 14 concerning disclosure requirements and therefore information is not provided separately.

    Leasing
    Operating lease costs are recognised in the income statement on a straight-line basis over the period of the lease. Liabilities relating to non-cancellable contracts are specified in the notes.

    Key figures
    Key figures are mainly prepared in accordance with the “Recommendations and Key Figures 2005” of the Danish Society of Financial Analysts, although certain key figures are adapted to the Novozymes Group.

    Income statement

    Sales
    Sales covers sales of goods and services for the year less provisions for goods returned, and volume and cash discounts. Sales are recognised at the time of risk transfer relating to the goods sold, provided that the revenue can be measured on a reliable basis and is expected to be received.

    The Group has entered into few agreements where the other contracting party undertakes sales to third parties and the profit is distributed between the Group and the other contracting party on the basis of a predetermined formula. Sales are recognised using information on the other contracting party’s realised sales, and a liability is recognised for the distribution of the profit, which is calculated and settled with final effect once a year.

    The Group has entered into commission agreements where agents undertake sales to third parties in return for commission on realised sales. These sales are recognised when they are realised and the commission is recognised as a liability. Similarly, a liability is recognised where it is permitted for goods to be returned and this is likely.

    Research and development costs
    Research costs are expensed as incurred.

    Development costs pertaining to ongoing optimisation of production processes for existing products, or to development of new products, where lack of approval by the authorities, approval by customers and other factors of uncertainty mean the development costs do not fulfil the criteria for recognition in the balance sheet, are expensed as incurred.

    Licence fees and Other operating income, net
    Licence fees and Other operating income, net, primarily comprises licence fees, grants from public authorities to research projects, and income, net, of a secondary nature in relation to the main activities in the Group. The item also includes one-off income items, net, in respect of outlicensing, etc.

    Tax
    Corporation tax, comprising the current tax liability, change in deferred tax for the year and any adjustments relating to previous years, is recognised in the income statement at the amount attributable to net profit, and directly in Shareholders’ equity at the amount attributable to items recognised in Shareholders’ equity.

    Deferred tax is measured using the liability method, and comprises all temporary differences between the accounting and tax values of assets and liabilities. No deferred tax is recognised for goodwill, unless amortisation of goodwill for tax purposes is allowed. Deferred tax is measured and recognised to cover retaxation of losses in jointly taxed foreign subsidiaries if this is expected to be realised on the sale of shares or when recapture of tax losses becomes applicable.

    The tax value of tax-loss carry-forwards is included in the calculation of deferred tax to the extent that the tax losses can be expected to be utilised in the future.

    Deferred tax is measured according to current tax rules and at the tax rate expected to be in force on elimination of the temporary differences. Changes in deferred tax due to tax rate changes are recognised in the income statement where they can be attributed to net profit, and directly in Shareholders’ equity where they can be attributed to items recognised in Shareholders’ equity.

    Novozymes A/S is jointly taxed with the Danish companies in the Novo and Novo Nordisk Groups. The tax for the individual companies is allocated in full on the basis of the expected taxable income.

    Balance sheet

    Intangible fixed assets
    Intangible fixed assets are measured at cost less accumulated amortisation and impairment losses.

    Where costs associated with large IT projects on the development of software for internal use are incurred with a view to developing new and improved systems, these are capitalised.

    Amortisation is based on the straight-line method over the expected useful lives of the assets, as follows:

    • Completed IT development projects are amortised over the useful life. Booked IT development assets are amortised over 3-5 years.
    • Acquired patents, licences and know-how are amortised over their useful lives. Patents are amortised over their useful lives, normally identical to the patent period, and licences are amortised over the agreement period. Booked patents, licences and know-how are amortised over 7-20 years.

    Property, plant and equipment
    Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Borrowing costs in respect of construction of major assets are expensed in the financial year in which they are incurred.

    Depreciation is based on the straight-line method over the expected useful lives of the assets, as follows:

    • Buildings: 12-50 years
    • Plant: 5-16 years
    • Other equipment: 3-16 years

    The assets’ residual values and useful lives are reviewed on an annual basis, and adjusted if necessary at each balance sheet date.

    Gains and losses on the sale or disposal of assets are recognised in the income statement under the same items as the associated depreciation charges.

    Impairment of assets
    Property, plant and equipment and intangible assets are reviewed for impairment losses when there is an indication that the assets have diminished in value beyond the level of normal depreciation. Goodwill and other intangible assets with indefinite useful life are also subject to impairment testing each year, and when there is an indication that the assets have become impaired.

    An impairment loss resulting from an asset having diminished in value beyond the level of normal depreciation is recognised at the amount by which the book value exceeds its recoverable amount.

    Inventories
    Inventories are measured at cost determined on a first-in first-out basis or net realisable value where this is lower.

    The cost of Work in progress and Finished goods comprises direct production costs such as raw materials and consumables, energy and labour directly attributable to production, and indirect production costs such as employee costs and maintenance and depreciation of plant, etc.

    If the expected sale price less any completion costs and costs to execute sales (net realisable value) of inventories is lower than the carrying amount, the inventories are written down to net realisable value.

    Receivables
    Trade receivables are measured at amortised cost or at net realisable value, if lower, equivalent to nominal value less allowances for doubtful trade receivables.

    Financial assets
    Securities recognised under current assets are measured at fair value at the balance sheet date. Unrealised fair value adjustments are recognised directly in Shareholders’ equity. Value adjustments are transferred from Shareholders’ equity to the income statement when the securities are realised or written down, and recognised under financial items.

    Dividend
    The dividend proposed for the financial year is shown under Retained earnings in the Statement of shareholders’ equity.

    Treasury shares
    The cost price and proceeds from the sale of treasury shares are recognised directly in Shareholders’ equity. Among other things, the company’s holding of treasury shares is used to hedge employees’ exercise of granted share options.

    Provisions
    Provisions are recognised where a legal or constructive obligation has been incurred, as a result of past events, and it is probable it will lead to an outflow of financial resources. Provisions are measured at the present value of the expected expenditure required to settle the obligation.

    Liabilities
    Liabilities are recognised at cost and subsequently adjusted to amortised cost, unless specified otherwise.

    Pension obligations and other long-term employee benefits
    Costs relating to defined contribution plans are recognised in the income statement in the financial year to which they relate.

    Costs and liabilities relating to defined benefit plans are stated using the projected unit credit method. Liabilities for the major plans are calculated annually by an external actuary. Actuarial gains and losses are recognised in the income statement over the employees’ expected average remaining working life if these differences exceed 10% of either the present value of the liability or the fair value of the plan assets in the previous year, whichever is the higher.

    Pension assets can only be recognised to the extent that the Group is able to achieve future financial benefits in the form of refunds from the pension plan or a reduction in future benefits.

    Costs relating to other long-term employee benefits are accrued over the employees’ expected average remaining working life.

    Statement of cash flows and financial resources
    The Statement of cash flows and financial resources for the Group, which is compiled using the indirect method, shows cash flows from operating, investing and financing activities, and the Group’s cash and cash equivalents at the beginning and end of the year.

    Cash flow from operating activities comprises net profit adjusted for non-cash expenses, paid financial items, corporation tax paid and change in working capital.

    Cash flow from investing activities comprises payments relating to the acquisition and sale of activities, companies and minority shares, intangible fixed assets and property, plant and equipment.

    Cash flow from financing activities comprises proceeds from borrowings, repayment of principal on interest-bearing borrowings, payment of dividends, proceeds from share issues, and the purchase and sale of treasury shares and other securities.

    Cash and cash equivalents comprises cash at bank and in hand less current bank loans due on demand. Financial resources comprises cash and cash equivalents plus undrawn committed credit facilities expiring in more than 1 year.

    Accounting policies for environmental, social and knowledge data

    The accounting policies for environmental, social and knowledge data are unchanged from last year.

    Consolidation
    The environmental, social and knowledge data in the Annual Report is based on data for the parent company and for all subsidiaries, combining items of a uniform nature compiled using the same methods, unless specifically stated otherwise below.

    Environment

    The environmental data covers those activities which, based on an overall environmental assessment, could have a significant impact on the environment, cf. the overview of companies in the Novozymes Group.

    Water
    Water includes drinking water, industrial water and steam, and is stated on the basis of the metered intake of water to Novozymes.

    Internally generated energy and associated emissions
    Internally generated energy is measured as fuel consumption converted to energy on the basis of lowest combustion value and weight by volume. Emissions of CO2, SO2 and NOx are calculated on the basis of the amount of fuel consumed using annually determined conversion factors from Danish authorities and suppliers.

    Externally generated energy and associated emissions
    Externally generated energy is the input to Novozymes of externally generated electricity, heat and steam. Emissions of CO2, SO2 and NOx are calculated using annually determined conversion factors from power plants or their organisations.

    Raw materials and packaging
    Raw materials and packaging comprises materials for fermentation, recovery, granulation, wastewater and sludge treatment, and packaging of products. Consumption of raw materials and packaging is converted into kilograms.

    Wastewater
    Wastewater is measured as the volume discharged by Novozymes. COD, dry matter, BOD5, nitrogen and phosphorus in the wastewater are measured as proportional flow, based on samples taken at point of discharge.

    Biomass
    Biomass is measured as the volume produced and transported from Novozymes as liquid fertiliser (NovoGro®) or converted to a fertiliser product with a higher dry matter content (NovoGro® 30 or compost). The nitrogen and phosphorus contents in the product are measured.

    Waste
    Waste is the registered volume of waste broken down into hazardous and non-hazardous waste, and by disposal method.

    Emissions to air of ozone-depleting substances
    Emissions to air of ozone-depleting substances are measured as consumption of CFCs, HCFCs and halons.

    Environmental impact potentials
    The environmental impact potentials for global warming, ozone layer depletion and acidification are calculated on the basis of “Udvikling af Miljøvenlige Industriprodukter” (UMIP), published by the Institute for Product Development at the Technical University of Denmark.

    Environmental compliance
    Breaches of regulatory limits are measured as the number of incidents reported to the authorities. Unintended releases of GMOs are measured as the number of discharges of GMOs not subject to the general regulatory limits for GMOs and which we and the authorities view as significant. Significant spills is measured as the number of spills of chemicals, oil, etc. into water, air or soil. Significance is assessed both on the basis of extent of the spill and impact on the environment. Neighbour complaints is the number of registered environmental complaints.

    Animals for testing
    This item covers the number of animals used for all commenced internal and external testing undertaken for Novozymes.

    Eco-productivity indices
    The eco-productivity index for water and energy are calculated as a ratio of total relative production output to the consumption of water and energy respectively, compared with last year’s figures. The calculation of EPIs includes all enzyme production facilities.

    Social responsibility

    Number of employees
    The number of employees is calculated as the actual number of employees at year-end, excluding employees on unpaid or parental leave, as well as temporary hires, student interns and PhD students.

    In calculating the number of full-time employees, employees with a working time ratio of 95% or over are stated as full-time employees.

    Job categories
    Senior management comprises the CEO, executive vice presidents, vice presidents and directors. Management comprises middle managers and specialists. Professional staff comprises employees with academic backgrounds, as well as team leaders. Administrative staff comprises administrative personnel. Skilled workers, laboratory technicians and other technicians comprises skilled workers, laboratory technicians and other technicians. Process operators comprises operators and unskilled workers.

    Employee turnover
    Employee turnover is measured as the number of permanent employees who left the Group during the financial year, compared with the average number of permanent employees in the financial year. The average number of permanent employees is calculated as the average number of permanent employees at the end of each quarter.

    Growth in number of employees, organic
    The organic growth in the number of employees is measured as the number of employees at year-end less the number of employees gained via acquisitions and the number of employees at the beginning of the year.

    Growth in number of employees, acquisitions
    The growth in the number of employees via acquisitions is measured as the number of employees gained via acquisition of new activities.

    Age and seniority
    Age and seniority are calculated as the average age and seniority in whole years per employee.

    Absence
    Absence is stated as time lost due to the employee’s own illness, including pregnancy-related sick leave and occupational accidents. The rate of absence is calculated as the number of registered days of absence as a percentage of the total number of normal working days in one year, less holidays and public holidays.

    Training costs
    Training costs is the costs of seminars and internal and external training courses, translated into Danish kroner at the average rates of exchange. Training costs are also shown as a percentage of total employee costs.

    Occupational health and safety

    Occupational accidents and diseases
    Occupational accidents is defined as the number of reported work-related accidents involving at least one day’s absence after the day on which the accident occurred. Occupational diseases is the number of new reported cases of work-related diseases. The consequences of occupational accidents and occupational diseases are measured by recording the work situation once the result of the incident has stabilised, e.g. whether the employee has returned to his/her original job. The frequency of occupational accidents and diseases is calculated per million working hours.

     

    Knowledge

    Number of new products
    The number of new products with new or improved characteristics launched during the year.

    Number of active patent families
    The number of inventions for which there are one or more active patent applications/active patents at year-end.

    Users of the CRM system
    The number of users of the CRM system at year-end.

    Users retrieving documents from LUNA
    The number of users searching for or retrieving documents from Novozymes’ global electronic archives (LUNA)

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