2 Critical accounting estimates and judgements
The preparation of IFRS consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities existing at the balance sheet date as well as the reported amounts of revenues and expenses during the reporting period. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results and timing may differ from these estimates.
The table below is listing the areas where management's accounting estimates and judgements are most critical to reported results and financial position. The table is also showing where to find more information about those estimates.
|Critical accounting estimates||Note|
|Assigned values and useful lifes determined for intangible assets and property, plant and equipment acquired in a business combination||18. Intangible assets|
|Assumptions related to impairment testing of property, plant and equipment and intangible assets||19. Property, plant and equipment|
|Judgement used when assessing the nature of Fortum's interest in its investees and when considering the classification of Fortum's joint arrangements||20. Participations in associated companies and joint ventures|
|Assumptions and estimates regarding future tax consequences||29. Deferred income taxes|
|39. Legal actions and official proceedings|
|Assumptions made to determine long‑term cash flow forecasts of estimated costs for provision related to nuclear production||30. Nuclear related assets and liabilities|
|Assumptions used to determine future pension obligations||32. Pension obligations|
2 Critical accounting estimates
2.1 Intangible assets
In an acquisition acquired intangible and tangible assets are fair valued and their remaining useful lives are determined. Management believes that the assigned values and useful lives, as well as the underlying assumptions, are reasonable. Different assumptions and assigned lives could have a significant impact on the reported amounts.
The Group has significant carrying values in property, plant and equipment as well as goodwill which are tested for impairment according to the accounting policies.
2.2 Property, plant and equipment
The Group has significant carrying values in property, plant and equipment as well as goodwill which are tested for impairment according to the accounting policy described in the notes. The recoverable amounts of cash-generating units have been determined based on value in use calculations. These calculations are based on estimated future cash flows from most recent approved business plan. Preparation of these estimates requires management to make assumptions relating to future expectations. Assumptions vary depending on the business the tested assets are in. For power and heat generation business the main assumptions relate to the estimated future operating cash flows and the discount rates used to present value them. The distribution business is regulated and supervised by national authorities. Estimated future cash flows include assumptions relating to the development of the future regulatory framework.
Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets.
2.3 Participations in associated companies and joint ventures
Management is required to make significant judgements when assessing the nature of Fortum's interest in its investees and when considering the classification of Fortum's joint arrangements. In the classification, emphasis has been put on decision-making, legal structure and financing of the arrangements.
2.4 Deferred income taxes
Assumptions and estimates regarding future tax consequences
Fortum has deferred tax assets and liabilities which are expected to be realised through the income statement over the extended periods of time in the future. In calculating the deferred tax items, Fortum is required to make certain assumptions and estimates regarding the future tax consequences attributable to differences between the carrying amounts of assets and liabilities as recorded in the financial statements and their tax basis.
Assumptions made include the expectation that future operating performance for subsidiaries will be consistent with historical levels of operating results, recoverability periods for tax loss carry-forwards will not change, and that existing tax laws and rates will remain unchanged into foreseeable future. Fortum believes that it has prudent assumptions in developing its deferred tax balances.
The Group recognises liabilities for anticipated tax dispute issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
If the actual final outcome (regarding tax disputes) would differ negatively from management's estimates with 10%, the Group would need to increase the income tax liability by EUR 39 million as of 31December 2014.
2.5 Nuclear related assets and liabilities
Assumptions made when estimating provisions related to nuclear production
The provision for future obligations for nuclear waste management including decommissioning of Fortum's nuclear power plant and related spent fuel is based on long-term cash flow forecasts of estimated future costs. The main assumptions are technical plans, timing, cost estimates and discount rate. The technical plans, timing and cost estimates are approved by governmental authorities.
Any changes in the assumed discount rate would affect the provision. If the discount rate used would be lowered, the provision would increase. Fortum has contributed cash to the State Nuclear Waste Management Fund based on a non-discounted legal liability, which leads to that the increase in provision would be offset by an increase in the recorded share of Fortum's part of the State Nuclear Waste Management Fund in the balance sheet. The total effect on the income statement would be positive since the decommissioning part of the provision is treated as an asset retirement obligation. This situation will prevail as long as the legal obligation to contribute cash to the State Nuclear Waste Management Fund is based on a non-discounted liability and IFRS is limiting the carrying value of the assets to the amount of the provision since Fortum does not have control or joint control over the fund.
Based on the Nuclear Energy Act in Finland, Fortum has a legal obligation to fully fund the legal liability decided by the governmental authorities, for decommissioning of the power plant and disposal of spent fuel through the State Nuclear Waste Management Fund.
2.6 Pension obligations
Assumptions used to determine future pension obligations
The present value of the pension obligations is based on actuarial calculations that use several assumptions. Any changes in these assumptions will impact the carrying amount of pension obligations.