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Accounting policies for Novozymes A/S

The financial statement for 2005 of Novozymes A/S has been prepared in accordance with the Danish Financial Statements Act (accounting class D) and the regulations of the Copenhagen Stock Exchange on the presentation of accounts by listed companies. The accounting policies have changed from last year in the following areas:

  • Share-based payment with treasury shares
  • Capitalised borrowing costs

See Note 16 for details of the impact of the specified changes in accounting policies. The comparative figures for 2004 have been restated to reflect the new accounting policies.

Recognition and measurement in general
Revenue is recognised in the income statement as it is earned. Value adjustments of financial assets and liabilities measured at fair value or amortised cost are also recognised in the income statement. All costs incurred in generating the year’s revenue are also recognised in the income statement, including depreciation, amortisation and impairment losses.

Assets are recognised in the balance sheet when it is considered probable that future economic benefits will accrue to the company, and the value of the asset can be measured on a reliable basis. Liabilities are recognised in the balance sheet when they are considered probable and can be measured on a reliable basis. When first recognised, assets and liabilities are measured at cost. Thereafter assets and liabilities are measured as described below for each item of the accounts.

The recognition and measurement principles take due account of predictable losses and risks occurring prior to the presentation of the financial statements that confirm or refute the conditions prevailing on the balance sheet date.

Business combinations
Acquisition of new activities/companies is treated by use of the purchase method, and the assets and liabilities of each new activity/company are thus restated at fair value at the time of acquisition. Goodwill is recognised as an asset in the balance sheet and amortised over the expected useful life. Goodwill from acquisitions is adjusted for changes in recognition and measurement of net assets until one full financial year after the date of acquisition. Amortisation of goodwill is allocated in the financial statements to the functions to which it relates. Newly acquired activities/companies are recognised as from the date of acquisition and no adjustment is made to comparative figures.

Translation of foreign currencies
Transactions in foreign currencies are translated into Danish kroner at the rates of exchange on the transaction date. Monetary items denominated in foreign currencies are translated into Danish kroner using the exchange rates on 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 the following exchange rate differences recognised directly in Retained earnings under Shareholders’ equity:

  • Translation of long-term intercompany loans, which are considered to be an addition to net assets in subsidiaries, at the exchange rates on the balance sheet date.
  • Adjustment of currency swaps contracted to hedge net assets in subsidiaries at the exchange rates on the balance sheet date.

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 in foreign currency are measured at fair value on the balance sheet date, and value adjustments are recognised directly in Shareholders’ equity.

Currency swaps used to hedge net investments in subsidiaries 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 hedges that are recognised in Shareholders’ equity are transferred from Shareholders’ equity on realisation of the hedged item and are recognised under financial items.

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

All derivative financial instruments are recognised on the settlement date, while all other financial instruments are recognised on the transaction date.

Share-based payment with treasury shares
Most of the company’s employees are covered by share option programmes and there is also a share-based incentive programme for Executive Management. The plans are equity-settled.

The fair value of the employee services received in exchange for the grant of share options is computed using the value of the issued share options. The fair value of the issued 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 vesting 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 share options, and this estimate is adjusted at the end of the period such that only the number of options to which employees are entitled are recognised. The value of equity programmes is offset against Shareholders’ equity.

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.

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 2005, although certain key figures have been adapted to Novozymes A/S.

Income statement

Turnover
Net turnover covers sales of goods and services invoiced for the year less provision for goods returned, and volume and cash discounts. Sales are recognised in the income statement 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 company has entered into few agreements where the other contracting party undertakes sales to third parties and the profit is distributed between the company and the other contracting party on the basis of a predetermined formula. Sales are recognised on an ongoing basis 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 company 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.

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 comprise licence fees, grants from public authorities to research projects and investments, and income, net, of a secondary nature in relation to the main activities in the company. 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 the net profit, and directly in Shareholders’ equity at the amount attributable to items recognised directly in Shareholders’ equity. Tax payable for the year is recognised under Receivables or Current liabilities, and deferred tax is recognised under Receivables or Provisions.

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 withdrawal from the Danish joint taxation scheme.

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 adjustments are recognised in the income statement to the extent that they can be attributed to net profit, and directly in equity to the extent that they can be attributed to items under 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 for the development of software for internal use are incurred with a view to developing new and improved systems, these are capitalised as Completed IT development projects.

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, not exceeding 5 years.
  • Acquired patents, licences and know-how are amortised over their useful lives, not exceeding 20 years. Patents are amortised over their useful lives, which is normally identical to the patent period, and licences are amortised over the agreement period.
  • Goodwill is amortised over the useful life, not exceeding 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
  • Production equipment and machinery, 5-16 years
  • Other equipment, 3-16 years

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. Intangible assets with indefinite useful life are also subject to annual impairment testing.

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.

Financial fixed assets
Participating interests in subsidiaries are recognised using the equity method, i.e. at the respective proportion of the shareholders’ equity of subsidiaries with addition of goodwill.

The company’s share of the net profits of subsidiaries less unrealised intercompany profits on inventories is recognised in the income statement of the parent company. If the shareholders’ equity of subsidiaries is negative, receivables from the subsidiaries will be offset against the parent company’s share of the negative equity on the basis of a concrete assessment. If the parent company has a legal or constructive obligation to cover the company’s negative equity, a provision is recognised.

To the extent that it exceeds dividends received from such subsidiaries, net revaluation of participating interests in subsidiaries is recognised under the net revaluation reserve under Shareholders’ equity.

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.

Securities
From the time of the Demerger, shares in Novo Nordisk A/S are recognised in the balance sheet as Securities under Current assets. Shares in Novo Nordisk A/S are used to hedge share option commitments for which Novozymes A/S is liable, and are recognised at the option prices.

Dividend
The dividend proposed for the financial year is shown as a separate item under 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 holdings of treasury shares are used to hedge employees’ exercise of issued 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
Fixed-interest loans expected to be held to maturity are initially recognised as the proceeds received less transaction costs incurred. The loans are subsequently measured at amortised cost, corresponding to their capitalised value using the effective rate of interest, whereby the difference between proceeds and nominal value is recognised in the income statement over the term of the loan.

Other liabilities are measured at amortised cost, which essentially corresponds to their nominal value.

Pension obligations
Costs relating to defined contribution plans are recognised in the income statement, and any amounts payable are recognised in the balance sheet under Other payables. The company has no obligations other than the current fixed contributions.

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