B. Summary of accounting policies

The accounting policies applied to the Consolidated Financial Statements are consistent with those of the previous year with the exceptions listed below.

The following new and revised Standards and Interpretations were adopted for the first time in the business year 2018/19:

IFRS 15 Revenue from Contracts with Customers combines all revenue recognition rules and replaces both IAS 18 and IAS 11 as well as the related Interpretations. Under IFRS 15, the focus has shifted from the transfer of material risks and opportunities to the moment in time at which control over the goods and services is transferred, thus making it possible to realize related benefits. The newly introduced five-step model serves to determine both the scope and the timing of revenue recognition.

The voestalpine Group applied the new standard for the first time as of April 1, 2018, using the modified retrospective method. It was applied to all open contracts. The comparative information for 2017/18 was not adjusted; instead, as previously, it is presented in accordance with IAS 18, IAS 11, and the corresponding Interpretations. In addition, the disclosure obligations pursuant to IFRS 15 were not applied to the comparative information.

The revisions regarding customer-specific series production trigger early recognition of revenue in contrast to IAS 11 if the requirements of IFRS 15.35c apply. As regards these customer-specific products for which there are no alternative uses, revenue must be recognized over time, because voestalpine has an enforceable claim to payment against the customer. The resulting effect on equity after taxes is about EUR 7.0 million, mainly from the automotive and aerospace segments.

Another effect on equity after taxes in the amount of approximately EUR –15.0 million stems from the reversal of previously capitalized pre-series losses in the automotive segment. under the rules of IFRS 15, they must now be recognized as income in the period in which they are incurred.

Aside from the initial application effect on equity after taxes of approximately EUR –7.4 million, these changes result in reclassifications of inventories, PoC receivables according to IAS 11, and payments received on contract assets and contract liabilities.

The Group’s remaining segments are not affected by the changes in IFRS 15 at all or only to an immaterial extent.

The table below presents the effects of the initial application of IFRS 15 Revenue from Contracts with Customers on the opening statement of financial position as of April 1, 2018:

The tables below present the effects of the application of IFRS 15 on the respective items in the consolidated statement of financial position as of March 31, 2019, and in the consolidated income statement for the business year 2018/19. There are no material effects on the consolidated statement of cash flows for the business year 2018/19.

See Note 1. Revenue for further information on the recognition of revenue.

Except for the requirements regarding portfolio fair value hedges for interest rate risks, IFRS 9 Financial Instruments results in revisions and changes regarding financial instruments and replaces IAS 39. Henceforth, the classification rules are contingent on the characteristics of the business model as well as on the contractual cash flows from financial assets. As regards financial liabilities, the existent requirements were largely incorporated into IFRS 9. Depending on the characteristics, there are also changes with respect to subsequent measurements of financial assets.

IFRS 9 contains three measurement categories which – with the exception of a few measurement choices – must always be considered mandatory:

• measured at amortized cost (Amortized Cost, AC);
• measured at fair value through other comprehensive income (Fair Value through Other Comprehensive Income, FVOCI);
• measured at fair value through profit or loss (Fair Value through Profit or Loss, FVTPL).

Another fundamental change arises in connection with impairment losses that are based on an expected loss model rather than on incurred losses as has been the case to date. In addition, IFRS 9 contains new general hedge accounting requirements, yet retains the existent provisions of IAS 39 regarding the recognition and derecognition of financial instruments. The new requirements of IFRS 9 expand the options for applying hedge accounting by shifting the focus to the goals and strategies of risk management as the basis of measurement. Accordingly, IFRS 9 applies a largely qualitative and forward-looking approach to the measurement of the effectiveness of hedging relationships.

The voestalpine Group applied the revisions to IFRS 9 for the first time as of April 1, 2018. As regards both classification and measurement, the retrospective application option was applied. Comparative periods were not adjusted. The requirements for hedge accounting must be applied prospectively.

The reclassification and measurement of financial instruments from IAS 39 to IFRS 9 may be presented as follows:

The initial application of IFRS 9 in the voestalpine Group does not have any material effects on the classification of financial assets and liabilities.

A reclassification from the previous measurement categories under IAS 39 to the new measurement categories under IFRS 9 concerns a portfolio of trade receivables that is slated for sale as of the next sales date in the context of factoring programs. While these receivables were measured at cost in the loans and receivables category until now, as of April 1, 2018, they have been measured at FVTPL due to their allocation to the “sale” business model, which has not led to any valuation adjustments, however.

To date, under IAS 39 short-term financial assets were designated voluntarily as FVTPL, because they were managed on a fair value (FV) basis. This group of financial assets is managed pursuant to the documented risk management and investment strategy based on their fair value, and their performance is observed and reported using the fair value. Pursuant to IFRS 9, they must be measured at FVTPL.

As of March 31, 2018, the voestalpine Group held an equity instrument valued at EUR 32.1 million, which had been classified as available for sale at fair value. Under IFRS 9, it is measured at FVTPL as of April 1, 2018. The option to recognize gains/losses in other comprehensive income (OCI) was not elected.

Until now, other equity investments in affiliated companies and other investments not included in the Consolidated Financial Statements on account of their secondary significance to the Group were recognized as available for sale at cost. Since April 1, 2018, however, they have been presented in “Other shares in companies.” They were reclassified at the carrying amount of EUR 11.4 million.

The label of the item “Other financial assets” shown in the non-current assets was changed for clarification purposes to “Other financial assets and other shares in companies” in connection with the first-time adoption of IFRS 9 as of April 1, 2018, in order to reflect that the item comprises both financial assets and other shares in companies.

The classification of financial liabilities remains unchanged; here, solely the measurement categories were updated to reflect the wording of IFRS 9.

A measurement model was set up in the voestalpine Group to take into account the requirements of IFRS 9 with respect to the impairment model. Historical data derived from actual historical credit losses in the past five years were used as the basis for the estimated expected credit losses. Given the existent credit insurances and a diversified customer portfolio dominated by very good to good credit ratings, there is no significant concentration of default risks. Because both historical and expected credit losses are low, the application of the new impairment method does not result in any adjustments of the allowances for trade receivables. Note 23. Financial Instruments contains additional information on impairment.

With respect to hedge accounting, there are additional options particularly for raw materials hedges which expand the hedging relationships that qualify for hedge accounting. The hedges existent as of the transition date meet the requirements of IFRS 9 and agree with the risk management strategies and goals of the voestalpine Group; as a result, the initial application did not require any adjustments.

Under IAS 39, the amounts used to hedge cash flows shown in the reserve for cash flow hedges (hedging reserve) were reclassified to profit or loss as reclassification adjustments in the period in which the expected, hedged cash flows affected profit or loss. Under IFRS 9, amounts recognized in the hedging reserve (for cash flow hedges in connection with the foreign currency risks related to expected purchases of inventories) are included directly in the acquisition cost of the inventories at the time of recognition.

Given the aforementioned disclosures, the initial application of IFRS 9 did not have any material effects on the voestalpine Group.

See B. Summary of Accounting Policies (section entitled Financial Instruments) for additional information on the accounting for financial instruments.

Improvements to IAS 12Income Taxes were issued as part of the Annual Improvements to IFRS Standards, 2015–2017 Cycle. All income tax effects of dividend payments must be recognized in the same way as the income on which the dividends are based. As a result, they must be recognized in profit or loss unless the dividends are derived from income recognized directly in other comprehensive income or in equity.

These changes must be applied to business years starting on or after January 1, 2019. The voestalpine Group has opted for early application of these changes. The first-time adoption of the standard concerns all income tax effects of dividend payments that were recognized as of or after the start of the earliest comparative period.

The positive income tax effect on hybrid capital interest of EUR 7.5 million in the business year 2017/18 was recognized retroactively in the item, tax expense, of the statement of comprehensive income instead of directly in equity.

The tables below present the effects of the application of IAS 12on the respective items in the consolidated statement of cash flows and the consolidated income statement for the business year 2017/18. There are no material effects on the consolidated statement of financial position as of March 31, 2018.

The application of the other aforementioned revisions did not have any material effects on the Consolidated Financial Statements.

The following new and revised Standards and Interpretations had already been published as of the reporting date, but their application was not yet mandatory for the business year 2018/19 or they have not yet been adopted by the European Union:

These Standards—to the extent they have been adopted by the European Union—will not be adopted early by the Group. From today’s perspective, the new and revised Standards and Interpretations (except for IFRS 16) are not expected to have any material effects on the voestalpine Group’s net assets, financial position, and results of operations. The following effects are expected from the new IFRS 16:

IFRS 16 Leases governs the accounting for leases and will replace IAS 17 as well as previous Interpretations. The new rules eliminate the prior distinction on the part of the lessee between finance and operating leases. In the future, operating leases must generally be treated in the same way as finance leases.

The voestalpine Group plans to apply the new Standard using the modified retrospective method for the first time as of April 1, 2019. Accordingly, the resulting cumulative initial application effect will be recognized in retained earnings as of April 1, 2019, but no adjustment of the comparative data is made at the same time. As voestalpine Group companies currently are lessees under operating leases, the application of IFRS 16 is expected to have an impact on the Group’s net assets, financial position, and results of operations.

The voestalpine Group identified the future capitalization of right-of-use assets and the corresponding liabilities as the most significant effect. As a result, instead of recognizing lease expenses on a straight-line basis as in the past, depreciation expenses for right-of-use assets and interest on lease liabilities are recognized. This will lead to an improvement in EBITDA and EBIT as well as to a shift between cash flows from operating activities and financing activities.

The voestalpine Group intends to apply the following measurement choices and exemptions:

• Right-of-use assets and lease liabilities are not recognized separately in the statement of financial position but instead are presented in the Notes.
• Upon first-time adoption, a given lease liability is recognized at the present value of the remaining lease payments, discounted using the incremental borrowing rate at the time of initial application; the right-of-use asset is recognized in the same amount.
• The Group has elected the option not to determine a right-of-use asset or lease liability for leases with terms up to 12 months (short-term leases) and for leases where the underlying asset is of low value. In the voestalpine Group, low-value assets concern leased assets whose cost does not exceed EUR 5,000. At the transition date, leases with a residual term of up to 12 months are classified as short-term leases.
• No separation is made with respect to contracts containing both non-lease components and lease components; this does not apply to land and buildings.
• IFRS 16 is not applied to intangible asset leases.

Based on the currently available information, the voestalpine Group estimates that additional lease liabilities of about EUR 437 million and the corresponding right-of-use assets in the same amount will be recognized as of April 1, 2019.

No significant effects are expected for existent finance leases.

The annual financial statements of all fully consolidated entities are prepared based on uniform accounting policies. For entities included using the equity method (associates and joint ventures), local accounting policies and different reporting dates (see “Investments” appendix to the Notes) were maintained due to cost/benefit considerations if the relevant amounts were immaterial.

Upon initial consolidation, assets, liabilities, and contingent liabilities are measured at their fair value as of the acquisition date. Any excess of the cost over the net of the assets acquired and liabilities assumed is recognized as goodwill. If the net of the assets acquired and liabilities assumed exceeds the cost, the difference is recognized in profit or loss in the acquisition period. The hidden reserves and/or hidden losses attributed to the non-controlling interests are also accounted for.

All intra-Group profits, receivables and payables as well as income and expenses are eliminated.

In accordance with IAS 21, annual financial statements prepared in foreign currencies that are included in the Consolidated Financial Statements are translated into euros using the functional currency method. The relevant national currency is the functional currency in all cases because – in financial, economic, and organizational terms – these entities all run their businesses independently. Assets and liabilities are translated using the exchange rate on the reporting date. Income and expenses are translated using the average exchange rate for the business year.

Equity is translated using the historical exchange rate. Currency translation differences are recognized directly in equity in the currency translation reserve.

In the individual financial statements of consolidated entities, foreign currency transactions are translated into the functional currency of the given entity using the exchange rate on the transaction date. Foreign exchange gains and losses resulting from translation as of the transaction date and reporting date are recognized in the consolidated income statement.

Currency exchange rates (ECB fixing) of key currencies have changed as follows:

The preparation of the Consolidated Financial Statements in conformity with IFRS requires the management to make accounting estimates and assumptions that may significantly affect the recognition and measurement of assets and liabilities, the recognition of other obligations as of the reporting date, and the recognition of income and expenses during the business year.

The following assumptions bear significant risks of triggering material adjustments of assets and liabilities in future periods:

• Recoverability of assets

  The assessment of the recoverability of intangible assets, goodwill as well as property, plant and equipment is based on assumptions concerning the future. The determination of the recoverable amount in the course of an impairment test is based on several assumptions such as future net cash flows and discount rates. The net cash flows correspond to the figures in the most current business plan at the time the Consolidated Financial Statements are prepared. See B. Summary of Accounting Policies (section entitled “Impairment testing of goodwill, other intangible assets, and property, plant and equipment”); as well as Note 9. Property, plant and equipment; Note 10. Goodwill; and Note 11. Other intangible assets.

• Recoverability of financial instruments

  Alternative actuarial models are used to measure the recoverability of financial instruments for which there is no active market. The parameters used to determine the fair values are based partially on assumptions concerning the future. See B. Summary of Accounting Policies (section entitled “Financial instruments”) as well as Note 23. Financial instruments.

• Pensions and other employee obligations

  The measurement of existent severance payment and pension obligations is based on assumptions regarding interest rates, the retirement age, life expectancy, and future salary/wage increases. See B. Summary of Accounting Policies (section entitled “Pensions and other employee obligations”) as well as Note 18. Pensions and other employee obligations.

• Assets and liabilities associated with acquisitions

  Acquisitions require making estimates in connection with the determination of the fair value of identified assets, liabilities, and contingent consideration. All available information on the circumstances as of the acquisition date is applied. The fair values of buildings and land are typically determined by external experts or intra-Group experts. Intangible assets are measured using appropriate valuation methods depending on the type of asset and the availability of information. These measurements are closely connected to assumptions about the future development of the estimated cash flows as well as the applied discount rates.

  Information on acquisitions made during the reporting period is reported under D. Acquisitions and other additions to the scope of the consolidation.

• Other provisions

  Other provisions for present obligations arising from past events, which lead to an outflow of resources embodying economic benefits, are stated at the amount that reflects the most probable value based on reliable estimates. Provisions are discounted if the effect is material. Details concerning provisions follow from B. Summary of Accounting Policies (section entitled “Other provisions”) as well as Note 19. Provisions.

• Income taxes

  Income tax expense represents the total of current tax expenses and deferred taxes. The current tax expense is determined based on the taxable income using the currently applicable tax rates. Deferred taxes are determined based on the respective local income tax rates. Future fixed tax rates are also considered in the deferral. The recognition and measurement of actual and deferred taxes is subject to numerous uncertainties.

  Given its international activities, the voestalpine Group is subject to different tax regulations in the respective tax jurisdictions. The tax items presented in the Consolidated Financial Statements are determined based on the relevant tax regulations and, because of their complexity, may be subject to different interpretations by taxpayers, for one, and local finance authorities, for another. Because varying interpretations of tax laws may lead to additional tax payments for past years as a result of comprehensive tax audits, they are included in the analysis based on management’s assessment.

  Deferred tax assets are recognized to the extent that it is probable that taxable income will be available against which deductible differences and/or tax losses carried forward but not yet applied may be utilized. This assessment requires making assumptions regarding future taxable income and thus is subject to uncertainties. It is made on the basis of the planning for a five-year period. Changes in future taxable income may result in lower or higher deferred tax assets.

  Further information follows from B. Summary of Accounting Policies (section entitled “Income taxes”) as well as Note 8. Income taxes and Note 13. Deferred taxes.

• Legal risks

  As an internationally active company, the voestalpine Group is exposed to legal risks. The outcome of present or future legal disputes is generally not predictable and may have a material effect on the Group’s net assets, financial position, and results of operations. In order to reliably assess potential obligations, management continually reviews the underlying information and assumptions; both internal and external legal counsel is used for further evaluation. Provisions are recognized to cover probable present obligations, including a reliable estimate of legal costs. The option to record a contingent liability is considered if the future outflow of resources is not probable or if the company has no control over the confirmation of actual events.

  Both the estimates and the underlying assumptions are reviewed on an ongoing basis. The actual figures may differ from these assumptions and estimates if the stated parameters differ from reporting date expectations. Revisions are recognized through profit or loss in the period in which the estimates are revised, and the assumptions are adjusted accordingly.

In the voestalpine Group, revenue is realized when a customer obtains control over goods or services. See the disclosures in Note 2. Operating Segments regarding the type of goods and services offered by the individual business segments.

As a rule, revenue is recognized at the time the goods or services are delivered, taking into account the stipulated terms and conditions. This is generally the time at which risks and opportunities are transferred in accordance with the stipulated Incoterms, typically subject to payment terms of between 30 and 60 days.

The transaction price corresponds to the contractually stipulated consideration, taking into account any variable components. Variable consideration is recognized only if it is highly probable that there will be no material revenue reversals in the future.

Revenue from series products that satisfy the revenue recognition criteria of IFRS 15.35 (c) is recognized over time. This mainly concerns products of the automotive and aerospace segments for which there are no alternative uses, because they are developed and produced specifically for a customer based on the latter’s specific requirements and thus may generally not be used for any other purpose, or where any alternative use would result in significant losses. Furthermore, a legally or contractually enforceable claim to payment of consideration, including a reasonable margin, applies to any components under construction as well as to finished goods, provided the company is not responsible for any termination of the contract.

Where revenue is recognized over time, such recognition must be pro rated based on the ratio of the costs incurred to the estimated total costs. This method is the most reliable way to reflect progress in performance. Expected losses under a contract are recognized immediately. The cash flows are obtained in accordance with the contractual arrangements. The payment terms typically are between 30 and 90 days.

The claims of the voestalpine Group to consideration for completed performance not yet billed as of the reporting date are recognized as contract assets in trade and other receivables. The contract liabilities presented in trade and other payables concern primarily consideration received from customers in advance for performance not yet delivered.

Investment grants are treated as deferred items and recognized as income over the useful life of the asset. Cost subsidies are recognized on an accrual basis, corresponding to the associated expenses. Government grants of EUR 28.6 million (2017/18: EUR 21.4 million) for capital expenditures, research and development, and promotion of job opportunities were recognized as income in the reporting period.

Revenue from deliveries is recognized when all material risks and rewards arising from the delivered good or service have passed to the buyer. Investment grants are treated as deferred items and recognized as income over the useful life of the asset. Cost subsidies are recognized on an accrual basis, corresponding to the associated expenses.

Operating expenses are recognized when goods or services are used or when the expense is incurred. In the business year 2018/19, expenses for research and development were EUR 170.5 million (2017/18: EUR 152.1 million).

Property, plant and equipment are measured at cost less accumulated depreciation and any impairment losses.

The cost of self-constructed property, plant and equipment includes direct costs and appropriate portions of materials and indirect labor costs required for production as well as borrowing costs in case of qualifying assets. The capitalization date is the date from which expenditures for the asset and borrowing costs are incurred and activities necessary to prepare the asset for its intended use or sale are undertaken.

Depreciation is recognized on a straight-line basis over the expected useful life. Land is not subject to depreciation. Depreciation is based on the following rates for each asset category:

Investment property is measured at amortized cost. Both the depreciation method and the useful life are identical to those applicable to property, plant and equipment recognized under IAS 16.

Leased assets are treated as finance leases when they are considered asset purchases subject to long-term financing in economic terms. All other leased assets are classified as operating leases. Lease payments under operating leases are shown as expenses in the consolidated income statement.

Finance leases are initially recognized as Group assets at fair value or the lower present value of the minimum lease payments upon inception of the lease. The corresponding liabilities to the lessors are recognized in financial liabilities in the consolidated statement of financial position.

Assets from finance leases are depreciated over their expected useful life on the same basis as own assets or over the term of the relevant lease, whichever is shorter. The Group does not act as a lessor.

All acquisitions are accounted for using the purchase method. Goodwill arises from the acquisition of subsidiaries and investments in associates and joint ventures.

Goodwill is allocated to cash generating units (CGUs) or groups of cash generating units and, in accordance with IFRS 3, is not amortized, but tested for impairment at least annually as well as additionally if circumstances indicate possible impairment. The carrying amount of investments in associates and joint ventures also includes the carrying amount of goodwill.

Negative goodwill arising from an acquisition is immediately recognized as income.

On disposal of a subsidiary, the goodwill associated with the subsidiary is included in the determination of the profit or loss on disposal based on the relative value in accordance with IAS 36.86.

Expenses for research activities that are undertaken with the prospect of gaining new scientific or technical insights are immediately recognized as an expense. In accordance with IAS 38.57, development expenditure is capitalized from the date on which the relevant criteria are satisfied. This means that the expenses incurred are not capitalized subsequently if all of the above conditions are met only at a later date. Expenditures for internally generated goodwill and brands are immediately recognized as an expense.

Other intangible assets are stated at cost less accumulated amortization and impairment losses. In the case of a business combination, the fair value as of the acquisition date is the acquisition cost. Amortization is recognized on a straight-line basis over the expected useful life of the asset. The maximum expected useful lives are as follows:

CGUs or groups of CGUs to which goodwill has been allocated and other intangible assets with an indefinite useful life are tested for impairment at least annually as well as additionally if circumstances indicate possible impairment. All other assets and CGUs are tested for impairment if there are any indications of impairment. Impairment testing is based on the value in use approach; accordingly, the recoverable amount is determined based on the value in use.

For the purpose of impairment testing, assets are grouped at the lowest levels at which cash flows are independently generated (CGUs). Goodwill is allocated to those CGUs or groups of CGUs that are expected to benefit from synergies of the related acquisition, and this must be on the lowest level at which the goodwill in question is monitored for internal management purposes.

An impairment loss is recognized at the amount by which the carrying amount of the asset or cash generating unit (CGU) exceeds the recoverable amount. The recoverable amount is the higher of the fair value less cost to sell and the value in use. Impairment losses recognized for CGUs or groups of CGUs to which goodwill has been allocated are applied first against the carrying amount of the goodwill. Any remaining impairment loss reduces the carrying amounts of the assets of the CGU on a pro rata basis. If the goodwill impairment test is carried out for a group of CGUs and if this results in an impairment, the individual CGUs included in this group are also tested for impairment and any resulting impairment of assets is recognized at this level first. Subsequently, this is followed by another impairment test for the CGUs at the Group level.

If there is any indication that an impairment loss recognized for an asset, a CGU, or a group of CGUs (excluding goodwill) in earlier periods no longer exists or may have declined, the recoverable amount must be estimated and then recognized (reversal of impairment).

IFRS 9 contains three measurement categories which—with the exception of a few measurement choices—must always be considered mandatory:

• measured at amortized cost (Amortized Cost, AC);
• measured at fair value through other comprehensive income (Fair Value through Other Comprehensive Income, FVOCI); and
• measured at fair value through profit or loss (Fair Value through Profit or Loss, FVTPL).

At this time, measurement at FVOCI is not applied in the voestalpine Group.

Other financial assets

The other financial assets include non-current receivables and loans that are measured at amortized cost. Equity instruments held (especially equity interests) are measured at FVTPL, because the option to elect measurement at FVOCI was not utilized.

All other current and non-current financial assets (particularly stock) must be measured at FVTPL, because they are either allocated to a business model oriented toward active purchases and sales or do not satisfy the cash flow requirement (cash flows at specified dates comprising solely payments of interest and principal).

Trade and other receivables

Trade and other receivables are always recognized at amortized cost. Identifiable risks are mainly covered by buying credit insurance. Interest-free or low-interest receivables with a remaining term of more than one year are recognized at their discounted present value. Sold receivables are derecognized in accordance with the provisions of IFRS 9 (see Note 28. Disclosures of transactions not recognized in the statement of financial position).

Trade receivables held for sale under an existent factoring agreement are measured at FVTPL, because they are allocated to the “sale” business model.

Accruals and deferrals, respectively, are reported under other receivables and other liabilities.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash at banks, and checks and are carried at amortized cost.

Loss allowance

The voestalpine Group recognizes loss allowances for expected credit losses on financial assets measured at amortized cost and on contract assets (portfolio loss allowance, stage 1 and stage 2). The Group applies the simplified approach to trade receivables and contract assets, pursuant to which any impairment determined with respect to such financial assets must, under certain conditions, equal the lifetime expected credit losses.

Historical data derived from actual historical credit losses in the past five years are used as the basis for the estimated expected credit losses. There is no significant concentration of default risks, given the existent credit insurances and a diversified customer portfolio that is dominated by very good to good credit ratings. Loss allowances on an individual basis are recognized for receivables with impaired credit ratings (stage 3). Note 23. Financial instruments contains additional information on impairment.

Derivative financial instruments

voestalpine Group uses derivative financial instruments exclusively for the purpose of hedging the interest rate, foreign currency, and raw materials price risks. Derivative financial instruments are carried at fair value through profit or loss. Hedge accounting as defined in IFRS 9 is used for some of the Group’s derivative financial instruments. Consequently, gains or losses resulting from changes in the value of derivative financial instruments are recognized either in profit or loss or in other comprehensive income (for the effective portion of a cash flow hedge). Positive fair values from derivative financial instruments are shown in trade and other receivables. Negative fair values from derivative financial instruments are shown in trade and other payables.

The derivative transactions are marked to market daily by determining the value that would be realized if the hedging position were closed out (liquidation method). Observable currency exchange rates and raw materials prices as well as interest rates are the inputs for determining the market values. The market values are calculated based on the inputs using generally accepted actuarial formulas.

Unrealized profits or losses from hedged transactions are treated as follows:

• If the hedged asset or liability has already been recognized in the statement of financial position or if an obligation not recognized in the statement of financial position is hedged, the unrealized profits and losses from the hedged transaction are recognized through profit or loss. At the same time, the hedged item is also measured at fair value, regardless of the initial valuation method used. Any resulting unrealized profits and losses are offset against the unrealized results of the hedged transaction in the income statement so that, in sum, only the ineffective portion of the hedged transaction is recognized in profit or loss for the period (fair value hedges).
• If a future transaction is hedged, the effective portion of the unrealized profits and losses accumulated up to the reporting date is recognized in other comprehensive income. Ineffective portions are recognized through profit or loss. If the transaction results in the recognition of a non-financial asset or a liability in the statement of financial position, the amount recognized in other comprehensive income is considered in the determination of the carrying amount of this item. Otherwise, the amount reported in other comprehensive income is recognized through profit or loss in accordance with the income effectiveness of the future transaction or the existing obligation (cash flow hedges).

Liabilities

Liabilities (except liabilities from derivative financial instruments) are recognized at amortized cost.

Subsidiaries, joint ventures, and associates that are not included in these Consolidated Financial Statements by way of full consolidation or the equity method are recognized in other financial assets and other shares in companies. These other assets are measured at amortized cost.

Loans and receivables are carried at amortized cost. As the Group’s securities meet the criteria of IAS 39.9 for application of the fair value option, securities are recognized at fair value through profit or loss. The fair value designation was selected to convey more useful information, because this group of financial assets is managed based on their fair value as documented in the risk management and investment strategy, and their performance is observed and reported based on the fair value. There are no held-to-maturity financial instruments.

Derivative financial instruments

voestalpine Group uses derivative financial instruments exclusively for the purpose of hedging foreign currency, interest rate, and raw materials price risks. Derivative financial instruments are generally carried at fair value and recognized through profit or loss; hedge accounting as defined in IAS 39 is applied to some of them. Consequently, gains or losses resulting from changes in the value of derivative financial instruments are recognized either in profit or loss or in other comprehensive income, depending on whether a fair value hedge or the effective portion of a cash flow hedge is involved.

The derivative transactions are marked to market daily by determining the value that would be realized if the hedging position were closed out (liquidation method). Observable currency exchange rates and raw materials prices as well as interest rates are the inputs for determining the market values. The market values are calculated based on the inputs using generally accepted actuarial formulas.

Unrealized profits or losses from hedged transactions are treated as follows:

• If the hedged asset or liability has already been recognized in the statement of financial position or if an obligation not recognized in the statement of financial position is hedged, the unrealized profits and losses from the hedged transaction are recognized through profit or loss. At the same time, the hedged item is also measured at fair value, regardless of the initial valuation method. Any resulting unrealized profits and losses are offset against the unrealized results of the hedged transaction in the income statement so that, in sum, only the ineffective portion of the hedged transaction is recognized in profit or loss for the period (fair value hedges).
• If a future transaction is hedged, the effective portion of the unrealized profits and losses accumulated up to the reporting date is recognized in other comprehensive income. Ineffective portions are recognized through profit or loss. If the transaction results in the recognition of a non-financial asset or a liability in the statement of financial position, the amount recognized in other comprehensive income is considered in the determination of the carrying amount of this item. Otherwise, the amount reported in other comprehensive income is recognized through profit or loss in accordance with the income effectiveness of the future transaction or the existent obligation (cash flow hedges).

Other investments

Subsidiaries, joint ventures, and associates that are not included in these Consolidated Financial Statements by way of full consolidation or the equity method are recognized in other investments. They are held as “available for sale at cost” and measured at cost, because no price is quoted for these investments in an active market and their fair value cannot be reliably determined. Only the non-consolidated investment in Energie AG Oberösterreich is measured at fair value as “available for sale at fair value,” because the fair value of this entity can be reliably determined based on the valuation report prepared once a year for Energie AG Oberösterreich as a whole.

Trade and other receivables

Trade and other receivables are stated at amortized cost. Identifiable risks are mainly covered by buying credit insurance. Interest-free or low-interest receivables with a remaining term of more than one year are recognized at their discounted present value. Sold receivables are derecognized in accordance with the provisions of IAS 39 (see Note 28. Disclosures of transactions not recognized in the statement of financial position).

When the outcome of a construction contract pursuant to IAS 11 can be estimated reliably, contract revenue and contract costs associated with the given construction contract must be recognized by reference to the stage of completion of the contract activity as of the reporting period (“percentage of completion method”), in each case based on the proportion of the contract costs incurred for the work performed relative to the estimated total contract costs. When the outcome of a construction contract cannot be estimated reliably, contract revenue may be recognized only in an amount that corresponds to the probably recoverable contract costs incurred. Contract costs are recognized as expenses in the period in which they are incurred. When it is probable that the total contract costs will exceed the total contract revenue, the expected loss is immediately recognized as an expense.

Accruals and deferrals, respectively, are reported under other receivables and other liabilities.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash at banks, and checks and are carried at amortized cost.

Liabilities

Liabilities (except liabilities from derivative financial instruments) are stated at amortized cost.

Income tax expense represents the total of current tax expenses and deferred taxes. The current tax expense is determined based on the taxable income using the currently applicable tax rates.

In accordance with IAS 12, all temporary differences between the income tax base and the Consolidated Financial Statements are included in deferred taxes. Deferred tax assets on unused tax loss carryforwards are recognized to the extent that sufficient taxable (deferred) temporary differences between carrying amounts are available or that budgetary accounting will make sufficient taxable income available against which the tax losses may be offset.

In accordance with IAS 12.39 and IAS 12.44, deferred taxes arising on differences resulting from investments in subsidiaries, associates, and joint ventures are generally not recognized.

Deferred tax liabilities are recognized for planned dividend payments subject to withholding tax.

Deferred taxes are determined based on the respective local income tax rates. Future fixed tax rates are also considered in the deferral. Deferred tax assets and deferred tax liabilities are offset when they relate to the same tax authority and when there is a claim to offsetting.

Inventories are measured at the lower of cost and the net realizable value. The net realizable value is the estimated selling price less estimated costs of completion and sale. In exceptional cases, the replacement cost of raw materials and supplies may serve as the basis of measurement in accordance with IAS 2.32.

The cost of inventories of the same type is determined using the weighted average price method or a similar method. The cost includes directly attributable costs and all pro-rated material and production overheads based on normal capacity utilization. Borrowing costs, general administrative expenses, and distribution costs are not capitalized.

Free certificates are measured at zero cost over the entire holding period, as the rights have been allocated free of charge. Purchased emission certificates are recognized in current assets at their actual cost and measured at fair value as of the reporting date (limited by the actual cost).

In case of any under-allocation, amounts for CO₂ emission certificates are included in other provisions. The measurement is based on the rate prevailing on the reporting date (or the carrying amount) of the relevant certificates.

Pensions and other employee obligations include provisions for severance payments, pensions, and long-service bonuses and are recognized in accordance with IAS 19 using the projected unit credit method.

Actuarial gains and losses from severance and pension provisions are recognized directly in other comprehensive income in the year in which they are incurred. Actuarial gains and losses from provisions for long-service bonuses are recognized immediately in profit or loss.

Severance obligations

Employees of Austrian entities whose employment started before January 1, 2003, are entitled to severance payment if their employment contract is terminated by the employer or if they retire. The amount to be paid depends on the number of years of service and the employee’s salary or wage at the time employment ends. A contribution-based system is provided for employees whose employment started after December 31, 2002. The contributions to external employee pension funds are recognized as expenses.

Defined contribution plans

Defined contribution plans do not entail further obligations on the company’s part once the premiums have been paid to the managing pension fund or insurance company.

Defined benefit plans

Under defined benefit plans, the company promises a given employee that they will be paid a pension in a specified amount. The pension payments begin upon retirement (or disability or death) and end upon the death of the former employee (or that of their survivors). Widow’s and widower’s pensions (equivalent to between 50% and 75% of the old age pension) are paid to the surviving spouse until their death or remarriage. Orphan’s pensions (equivalent to between 10% and 20% of the old age pension) are paid to dependent children until the completion of their education, but at most up to the age of 27.

Longevity thus is the central risk to the Group under the defined benefit pension plans. All measurements are based on the most recent mortality tables. Given a relative decrease or increase of 10% in mortality, the defined benefit obligation (DBO) of pensions changes by +3.9% or –3.5% as of the reporting date. Other risks such as the risk of rising medical costs do not materially affect the scope of the obligation.

Almost all of the Group’s pension obligations concern claims that have already vested.

Austria

The amount of the pension is based either on a certain percentage of the final salary depending on the years of service or on a fixed, valorized amount per year of service. The majority of the obligations under defined benefit plans is transferred to a pension fund, but the liability for any shortfalls rests with the company.

Germany

There are different pension schemes in Germany, whose benefits rules may be described as follows:

• A certain percentage of the final salary depending on the years of service;
• A rising percentage of a fixed target pension depending on the years of service;
• A stipulated, fixed pension amount;
• A fixed, valorized amount per year of service that is linked to the average salary in the company; and
• A fixed, valorized amount per year of service.

A small portion of the pensions are financed by insurance companies, but liability for the obligations themselves rests with the given companies.

In all countries with significant defined benefit plan obligations, the employee benefits are determined based on the following parameters:

In August 2018, the Austrian Association of Actuaries (AVÖ) published the new mortality tables, “AVÖ 2018-P – Calculations for Pensions,” which reflect particularly the increases in life expectancy in recent years. The resulting changes are reflected in the actuarial gains and losses arising from the change in demographic assumptions related to provisions for severance pay, pensions, and long-service bonuses.

Net interest expenses resulting from employee benefits are recognized in finance costs in the consolidated income statement.

Long-service bonus obligations

In most of the Group’s Austrian companies, employees are entitled to payment of a long-service bonus, which is based either on a collective agreement or a provision in a works agreement. This is a one-time payment that is made when the respective service anniversary has been reached; depending on the length of service, the bonus generally amounts to between one and three monthly salaries.

Other provisions related to present obligations arising from past events, which lead to an outflow of resources embodying economic benefits, are stated at the amount that reflects the most probable value based on a reliable estimate. Provisions are discounted where the effect is material.

The assumptions underlying the provisions are reviewed on an ongoing basis. The actual figures may deviate from the assumptions if the underlying parameters as of the reporting date have not developed as expected. As soon as better information is available, changes are recognized through profit or loss and the assumptions are adjusted accordingly.

Note that we are invoking the safeguard clause under IAS 37.92, according to which information on provisions is not disclosed if doing so could seriously and adversely impact the company’s interests.

Contingent liabilities are present obligations arising from past events (where it is not probable that an outflow of resources will be required to settle the obligation) or possible obligations arising from past events (whose existence or non-existence depends on less certain future events that the company cannot control in full). A contingent liability must also be stated if, in extremely rare cases, an existent liability cannot be recognized in the statement of financial position as a provision, because the liability cannot be reliably estimated.

As regards possible obligations, note that in accordance with IAS 37.92 information on contingent liabilities is not disclosed if doing so could seriously and adversely impact the company’s interests.

The employee shareholding scheme of the Group’s Austrian companies is based on the appropriation of a portion of employees’ salary and wage increases under collective bargaining agreements over several business years. The business year 2000/01 was the first time employees were granted voestalpine AG shares in return for a reduction by 1% of their salary or wage increase.

In each of the business years 2002/03, 2003/04, 2005/06, 2007/08, 2008/09, 2014/15, and 2018/19, between 0.3 percentage points and 0.5 percentage points of the increases under collective agreements were used to provide voestalpine AG shares to employees. The actual amount follows from the monthly contributions as of November 1 in each of 2002, 2003, 2005, 2007, 2008, 2014, and 2018, applying an annual increase of 3.5%. In the business years 2012/13, 2013/14, 2016/17, and 2017/18, additional contributions of between 0.27 percentage points and 0.43 percentage points of the pay increases for 2012, 2013, 2016, and 2017, respectively, under collective agreements were used for the shareholding scheme for those Austrian Group companies that did not participate in the employee shareholding scheme until a later date.

The Works Council and each company enter into an agreement to implement the Austrian employee shareholding scheme. Shares are acquired by voestalpine Mitarbeiterbeteiligung Privatstiftung (a private foundation that manages the company’s employee shareholding scheme), which transfers the shares to employees according to the wages and salaries they have waived. The value of the consideration provided is independent of share price fluctuations. Therefore, IFRS 2 does not apply to the allocation of shares based on collective bargaining agreements that stipulate lower salary or wage increases.

An international participation model that was developed for Group companies outside Austria was initially implemented in the business year 2009/10 in several companies in Great Britain and Germany. Due to the highly positive experience gained in these pilot projects, the model was expanded in these two countries and introduced step by step in the Netherlands, in Poland, in Belgium, in the Czech Republic, in Italy, in Switzerland, in Romania, in Sweden, and in Spain in the subsequent business years. In the business year 2018/19, a total of 97 companies in these 11 countries participated in the international employee shareholding scheme.

As of March 31, 2019, the voestalpine Mitarbeiterbeteiligung Privatstiftung held approximately 13.4% (March 31, 2018: 12.9%) of voestalpine AG’s shares for employees. In addition, active and former employees of voestalpine hold approx. 1.4% (March 31, 2018: 1.1%) of the shares of voestalpine AG, the voting rights of which are exercised by the foundation. On the whole, therefore, as of March 31, 2019, the voting rights of 14.8% (March 31, 2018: 14.0%) of the share capital of voestalpine AG are bundled in the foundation.