IFRS Consolidated Financial Statements of. Xella International S.A. for 2014

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1 IFRS Consolidated Financial Statements of Xella International S.A. for of 81

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3 Table of contents Consolidated Financial Statements 2014 Consolidated Statement of Financial Position... 6 Consolidated Statement of Income by nature of expense... 7 Consolidated Statement of Comprehensive Income... 8 Consolidated Statement of Changes in Equity... 9 Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 2014 A. Background B. Notes to the Consolidated Statement of Financial Position Property, Plant and Equipment Intangible Assets Investments in Associates (At Equity) Financial Assets Deferred Taxes Inventories Trade and Other Receivables Cash and Cash Equivalents Equity Financial Liabilities Pension Provisions Other Provisions Deferred Income Trade and Other Accounts Payable C. Notes to the Consolidated Statement of Income By Nature of Expense Sales Other Income Staff Expenses Other Expenses Result from Other Investments Finance Costs Other Financial Result Income Taxes D. Other Notes to the Consolidated Financial Statements Financial Risk Management Contingencies of 81

4 25. Corporate Acquisitions and Divestments Consolidated Statement of Cash Flows Segment Reporting Related Parties List of shareholdings Significant Events After the End of the Financial Year of 81

5 Consolidated Statement of Financial Position Assets Note Dec. 31, 2014 Dec. 31, 2013 k k Property, plant & equipment (1) 1,019,296 1,091,485 Intangible assets (2) 580, ,173 Investments in associates (at equity) (3) 18,823 15,961 Financial assets (4) 55,019 77,303 Trade and other receivables 2,206 2,180 Tax assets Deferred tax assets (5) 15,019 7,641 Non-current assets 1,692,018 1,779,610 Inventories (6) 145, ,102 Trade and other receivables (7) 136, ,255 Tax assets 13,751 8,790 Financial assets (4) 18,893 41,430 Cash and cash equivalents (8) 122, ,200 Deferred expenses 2,673 2,942 Current assets 440, ,719 Total assets 2,132,701 2,227,329 Equity and Liabilities Note Dec. 31, 2014 Dec. 31, 2013 k k Shareholders' equity (286,907) (152,983) Non-controlling interests 22,162 19,353 Total equity (9) (264,745) (133,630) Financial liabilities (10) 1,652,745 1,596,198 Deferred tax liabilities (5) 105, ,563 Pension provisions (11) 204, ,132 Other provisions (12) 81,267 94,017 Trade and other accounts payable (non-current) Deferred income (13) 6,387 6,194 Non-current liabilities 2,050,872 1,977,276 Financial liabilities (10) 37,881 43,365 Tax liabilities 8,373 8,651 Other provisions (12) 67,820 83,919 Trade and other accounts payable (14) 232, ,364 Deferred income Current liabilities 346, ,683 Total equity and liabilities 2,132,701 2,227,329 The accompanying notes are an integral part of these Consolidated Financial Statements. 6 of 81

6 Consolidated Statement of Income By Nature of Expense Consolidated Statement of Income Note Jan. 1st - Dec. 31, 2014 Jan. 1st - Dec. 31, 2013 k k Sales (15) 1,272,935 1,254,095 Change in finished goods & work in progress 1,592 (6,615) Own work capitalised 3,970 3,000 Total output 1,278,497 1,250,480 Materials expenses (604,145) (593,168) Gross profit 674, ,312 Other income (16) 16,571 26,608 Total income 690, ,920 Staff expenses (17) (318,356) (309,944) Other expenses (18) (185,794) (180,046) EBITDA 186, ,930 Depreciation & amortisation expenses (127,573) (115,609) Impairment of goodwill (1,065) EBIT 59,200 77,256 Result from associates (at equity) 3,872 2,934 Result from other investments (19) 708 3,513 Finance costs (20) (146,368) (116,445) Other financial result (21) (15,048) (3,308) Financial result (156,836) (113,306) Profit/ loss before tax (97,636) (36,050) Current income taxes (10,579) (14,135) Deferred taxes 6,967 9,703 Income taxes (22) (3,612) (4,432) Net income/ loss (101,248) (40,482) Net income/ loss attributable to shareholders (105,190) (43,707) Net income/ loss attributable to non-controlling interests 3,942 3,225 The accompanying notes are an integral part of these Consolidated Financial Statements. 7 of 81

7 Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Jan 1st - Dec 31, 2014 Jan 1st - Dec 31, 2013 k k Net income / loss (101,248) (40,482) Other comprehensive income with potential subsequent reclassification to the income statement Currency adjustment 2,287 (10,399) Share of other comprehensive income of investments in associates (at equity) 399 (1,578) Remeasurement of available for sale investments * Income taxes on items in other comprehensive income * (36) 23 Other comprehensive income without potential subsequent reclassification to the income statement Remeasurements from defined benefit liability * (44,153) 20,933 Income taxes on items in other comprehensive income 12,793 (5,894) Other comprehensive income (28,606) 3,101 Total comprehensive income (129,854) (37,381) Total comprehensive income attributable to shareholders (133,918) (39,842) Total comprehensive income attributable to non-controlling interests 4,064 2,461 * In 2013 minor reclassifications mainly due to new line items. The accompanying notes are an integral part of these Consolidated Financial Statements. 8 of 81

8 Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity for the period Jan 1st - Dec 31, 2014 Subscribed capital Capital reserves Other comprehensive income Revaluation reserves Retained earnings Shareholders' equity Noncontrolling interests Total equity Available for sale investments and investments in associates Hedge of net investment in foreign operations Remeasurement defined benefit liability Translation reserves k k k k k k k k k k k As at Jan 1st, ,382 (1,546) 2,688 (24,772) (920) (24,550) (226,846) (152,983) 19,353 (133,630) Dividends (2,132) (2,132) Subsequent Acquisition with existing control (6) (6) 2 (4) Capital increase/ decrease Currency adjustment 399 1,876 2,275 2, ,686 Addition to/ release of OCI (not affecting consolidated income statement) 58 (31,061) (31,003) (31,003) (289) (31,292) Net income/ loss (105,190) (105,190) 3,942 (101,248) Total comprehensive income 457 (31,061) 1,876 (28,728) (105,190) (133,918) 4,064 (129,854) Book value as at Dec 31, ,382 (1,089) 2,688 (55,833) 956 (53,278) (332,042) (286,907) 22,162 (264,745) The accompanying notes are an integral part of these Consolidated Financial Statements. Please refer to note 25 for information about corporate acquisitions and divestments in the year under review. 9 of 81

9 Consolidated Statement of Changes in Equity for the period Jan 1st - Dec 31, 2013 Subscribed capital Capital reserves Other comprehensive income Revaluation reserves Retained earnings Shareholders' equity Noncontrolling interests Total equity Available for sale investments and investments in associates Hedge of net investment in foreign operations Remeasurement defined benefit liability Translation reserves k k k k k k k k k k k As at Jan 1st, ,382 (5) 2,688 (39,642) 8,544 (28,415) (180,439) (110,441) 30,330 (80,111) Dividends (2,300) (2,300) Subsequent Acquisition with existing control (2,700) (2,700) (11,763) (14,463) Capital increase/ decrease Currency adjustment (1,578) (9,464) (11,042) (11,042) (935) (11,977) Addition to/ release of OCI * (not affecting consolidated income statement) 37 14,870 14,907 14, ,078 Net income/ loss (43,707) (43,707) 3,225 (40,482) Total comprehensive income* (1,541) 14,870 (9,464) 3,865 (43,707) (39,842) 2,461 (37,381) Book value as at Dec 31, 2013 * 31 98,382 (1,546) 2,688 (24,772) (920) (24,550) (226,846) (152,983) 19,353 (133,630) * Minor reclassifications, see footnote to Consolidated Statement of Comprehensive Income. The accompanying notes are an integral part of these Consolidated Financial Statements. Please refer to note 25 for information about corporate acquisitions and divestments in the year under review. 10 of 81

10 Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Jan 1st - Dec 31, 2014 Jan 1st - Dec 31, 2013 k k Net loss for the period including non-controlling interests (101,248) (40,482) Depreciation, amortization and impairment of property, plant and equipment as well as of intangible assets 127, ,674 Income and expenses from changes in deferred taxes (6,967) (9,703) Income and expenses from income taxes 10,579 14,135 Financial result 156, ,306 EBITDA 186, ,930 Changes in inventories (3,591) 3,464 Changes in trade receivables 3,302 (11,142) Changes in trade payables (536) 7,842 Change of trade working capital (825) 164 Changes in pension provisions (8,380) (7,081) Changes in other non-current provisions and liabilities 2,010 (9,117) Changes in other current assets 865 1,269 Changes in current provisions (2,238) (3,183) Changes in other current liabilities (14,573) 2,865 Change in other working capital (22,316) (15,247) Income taxes (15,669) (18,198) Other non-cash income and expenses 4, Income and expenses from the disposal of non-current assets (778) (1,178) Cash flow from operating activities 151, ,778 Cash paid for investments in property, plant and equipment and intangible assets (68,725) (78,450) Cash received from the disposal of property, plant and equipment and intangible assets 1,810 1,916 Cash paid for the acquisition of consolidated entities and other business units (80) Cash paid for / received from the disposal of consolidated entities and other business units 1,506 (10) Cash paid for additions to investments in associated entities at equity and other financial assets (824) (591) Cash received from disposals of investments in associated entities at equity and other financial assets 9,552 6,485 Cash received from interest and investment income 2,326 2,051 Cash flow from investing activities (54,355) (68,679) Cash received from equity contributions 105 Payments made to non-controlling interests (2,132) (2,300) Payments made for the acquisition of shares in subsidiaries without change of control (3) (7,930) Cash received from the issue of non-current financial liabilities 325, Cash received from the issue of current financial liabilities Cash paid for the scheduled repayment of financial liabilities (1,598) (2,483) Cash paid for interest expenses and fees (40,860) (46,943) Cash paid for the unscheduled repayment of financial liabilities including prepayment costs (360,140) (47,748) Cash received from derivative financial instruments 28 Cash flow from financing activities (79,590) (107,133) Cash and cash equivalents at the beginning of the period 107, ,512 Net change in cash and cash equivalents 17,794 (16,034) Net foreign exchange difference (2,229) (1,278) Cash and cash equivalents at the end of the period 122, ,200 The accompanying notes are an integral part of these Consolidated Financial Statements. Please see note 26 for more information on the Statement of Cash Flows. 11 of 81

11 Notes to the 2014 Consolidated Financial Statements A. Background The registered office of Xella International S.A. is Allée Scheffer L-2520 Luxembourg. Xella International S.A. holds Xella Group which is a leading player in the European market for building materials. The Group manufactures and markets building materials and supplies lime under the umbrella of Xella (Ytong, Silka, Hebel, Multipor, Fermacell and Fels trademarks). The company is in turn a subsidiary of Xella International Holdings S.à r.l., which is jointly managed by representatives from Goldman Sachs Capital Partners and PAI Partners. Besides, selected managers of Xella International S.A., Luxembourg, and other employees and their close family members have acquired shares in Xella International S.A., Luxembourg, via XI Management Beteiligungs GmbH & Co KG, Duisburg / Germany within the framework of the management participation program. The financial year of the Xella Group commenced on January 1, 2014 and ended on December 31, These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and in accordance with the Luxembourg legal and regulatory requirements. The Consolidated Financial Statements have been prepared in euro ( ) and the figures are generally stated in thousand Euros (k ). For calculatory reasons, some of the tables may include rounding differences of up to one unit. For additional clarity, a number of items have been summarized both in the Consolidated Statement of Financial Position and in the Consolidated Statement of Income. These are discussed in detail in the Notes to the Consolidated Financial Statements. The items in the Consolidated Statement of Financial Position have been classified as current or non-current items in line with IAS 1. The Consolidated Statement of Income has been prepared using the nature of expense method. The Consolidated Financial Statements were authorized for issue by the board of directors at March 26, 2015 and were signed on its behalf. Consolidation Principles Subsidiaries over which Xella International S.A., Luxembourg, has either direct or indirect control as defined by IFRS 10 have been fully consolidated in the Consolidated Financial Statements. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns 12 of 81

12 through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. Associates are valued using the equity method pursuant to IAS 28. Other equity investments are recognized at fair value in accordance with IAS 39 or, if no market value is available and fair value cannot be reliably determined, at acquisition cost. All consolidated companies have the same reporting date as the balance sheet reporting date of the Consolidated Financial Statements of December 31, The Financial Statements of Luxembourgish, German and other foreign subsidiaries included in the Consolidated Financial Statements have all been prepared using uniform accounting policies. Business combinations are recognized using the purchase method and measured at their acquisition-date with fair values (IFRS 3). That portion of the purchase price which is made in anticipation of expected future economic benefits from the acquisition and cannot be allocated to defined or identifiable assets in the course of purchase price allocation is reported as goodwill under intangible assets. Two immaterial subsidiaries were not consolidated (PY: two). Pursuant to IFRS 3, goodwill is not amortized. Rather, the cash-generating unit (CGU) to which goodwill has been allocated is tested for impairment annually or during the year if there is indication of an impairment. If impaired book value of goodwill is written down to recoverable amount which corresponds to the higher of value in use or fair value less cost of disposal. In principle, any impairments of goodwill are posted through profit or loss. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. IFRS 3 and IFRS 10 prescribe the mandatory application of the economic entity approach for accounting for transactions involving acquisitions and disposals of shares resulting in a controlling interest being obtained or retained. Non-controlling transactions are viewed as transactions with shareholders and recognized in equity. Disposals of shares which result in the loss of a controlling interest are reported as a gain or loss on disposal in the Consolidated Statement of Income. If an interest is still held after the disposal of the controlling interest, the remaining investment is measured at fair value. The difference between the former carrying amount of the remaining investment and its fair value is recognized in income as a gain or loss on disposal and presented separately with the fair value of the remaining investment. Parents acquiring an additional stake in a subsidiary resulting in control being obtained ( step acquisition ) must remeasure the initially held interest at fair value with differences to book value recognized in the Consolidated Statement of Income. 13 of 81

13 Intercompany profits and losses, sales, income and expenses as well as all receivables and liabilities between consolidated companies are offset against each other. Intercompany profits contained in non-current assets and inventories originated by intercompany transactions are eliminated unless they are immaterial. Consolidated Entities and Changes in the Consolidated Group The changes in the number of consolidated entities were as follows: Consolidated entities and changes in the consolidated group As at January 1st Addition from formation 2 Disposal from sale of shares 1 Disposal from merger and liquidation 2 1 As at December Foreign Currency Translation The presentation currency of Xella International S.A., Luxembourg, is the Euro. Currency translation of subsidiaries reporting in a country with a currency other than Euro is performed in accordance with IAS 21 using the functional currency method. Due to the fact that all subsidiaries operate financially, economically and also organizationally in their primary economic environment, their respective local currency is their functional currency. Transactions in foreign currency in the separate financial statements are translated to the functional currency at the spot rate prevailing on the transaction date. Gains and losses from the settlement of such business transactions and from the translation of monetary assets and liabilities are recognized in the Consolidated Statement of Income. The assets and liabilities reported in the financial statements of companies based in a country which does not have the Euro as currency are translated at the closing rate, whereas the line items in the Consolidated Statement of Income are translated at the annual average exchange rate for the period. Goodwill arising from purchase accounting and any hidden reserves and liabilities uncovered in the course of applying the purchase method are allocated to the acquired entity and translated using the closing rate. Any foreign exchange differences are posted to other comprehensive income (OCI) without affecting earnings. Such differences arise when the assets and liabilities of Group entities whose functional currency is not the Euro are translated to the presentation currency and the exchange rate differs from the one applied in the prior year. They also arise when the Statement of Income and the Statement of Financial Position are translated and the average exchange rate differs from the closing rate. 14 of 81

14 9The relevant exchange rates for non-euro countries (1 = x local currency) are: Country Closing rate Average rate Dec. 31, 2014 Dec. 31, Bosnia 1,9558 1,9558 1,9558 1,9558 Bulgaria 1,9558 1,9558 1,9558 1,9558 China 7,5358 8,3491 8,1707 8,1622 Croatia 7,6580 7,6265 7,6343 7,5783 Czech Republic 27, , , ,9664 Denmark 7,4453 7,4593 7,4548 7,4579 Hungary 315, , , ,8229 Mexico 17, , , ,9372 Norway 9,0420 8,3630 8,3485 7,7932 Poland 4,2732 4,1543 4,1840 4,1968 Romania 4,4828 4,4710 4,4433 4,4185 Russia 72, , , ,2631 Serbia 121, , , ,9815 Sweden 9,3930 8,8591 9,0951 8,6481 Switzerland 1,2024 1,2276 1,2146 1,2310 USA 1,2141 1,3791 1,3264 1,3276 Ukraine 18, , , ,8168 Accounting Policies The Consolidated Financial Statements are prepared in accordance with the historical cost convention with the exception of certain financial assets, financial liabilities and derivative financial instruments, which are measured at fair value. Property, plant and equipment is measured at acquisition or production cost less depreciation and any impairment losses according to IAS et seqq. If the reasons for an impairment no longer apply in future, the assets are written up accordingly. In addition to direct costs, the cost of internally constructed property, plant and equipment includes an appropriate portion of overheads that can be directly allocated to the production of the asset. Borrowing costs that are directly attributable to the construction or production of a qualifying asset are recognized by the Xella Group as part of the cost of that asset. This practice is also applicable for intangible assets. Property, plant and equipment are depreciated over their economic life using the straight-line method. Depreciation is based on the following useful lives: Buildings Plant and machinery Vehicles and equipment 8 to 50 years 4 to 25 years 2 to 15 years 15 of 81

15 Items such as spare parts, stand-by equipment and servicing equipment are recognized in accordance with IAS 16 when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. The quarries acquired are recognized as property, plant and equipment (land for exploitation). The Group applies the depletion method of depreciation based on the exploitation of the lime and of other reserves. The depreciation starts from the time of the first-time extraction of raw materials. The criteria of IAS 17 for classification as finance lease are met where the Group bears the significant risks and rewards incidental to ownership within the framework of a lease transaction, and is therefore deemed to have economic title to the asset. In these cases, the respective property, plant and equipment is recognized at fair value or the lower net present value of the minimum lease payments and depreciated over the economic life of the asset or over the shorter term of the lease respectively, using the straight-line method. A lease liability in the amount of the resulting net present value of future minimum lease payments is recognized under current and non-current financial liabilities respectively. Buildings and plant and machinery acquired under finance leases generally have customary purchase options attached for the end of the lease. The leases are all based on market interest rates at the time the leases were entered into. In addition to the finance leases, the Group entered into rental agreements under which the economic title to the assets remains with the lessor (operating leases). The payments on these leases are posted to profit and loss. Depending on the type of assets, the leases contain the customary rental conditions and right of first refusal. Intangible assets purchased for a consideration are recognized at cost less straight-line amortization and any impairment losses. Intangible assets are amortized over the contractual term or the estimated useful life of the asset. Licenses including software licenses and similar rights are amortized over two to ten years. Customer lists are amortized over five to ten years. Xella is not planning to cease use of the trademarks reported in the Consolidated Statement of Financial Position. Moreover, there is no indication that the useful life of the trademarks is finite. The trademarks reported in the Consolidated Statement of Financial Position therefore have an indefinite useful life. This also applies for certain CO 2 -certificates and goodwill. All other useful lives are finite. Development expenses from which future benefits are likely to flow to the Group and whose cost can be reliably measured are recognized at the cost of production and amortized over two to ten years. The cost of production includes all costs directly allocable to development as well as an appropriate portion of allocable overheads. 16 of 81

16 Research costs are expensed as incurred and not capitalized. Development costs are capitalized, if the criteria of IAS 38 are met. Any amortization of intangible assets is included in net income/loss in the consolidated statement of income. Goodwill, trademarks and certain CO 2 -certificates with an indefinite useful life are subject to an impairment test (impairment-only approach). The recoverability of the goodwill recognized in the Consolidated Statement of Financial Position is reviewed once a year on the basis of cashgenerating units pursuant to IAS 36 (or during the year if there is an indication of impairment). Within the framework of the impairment test, the carrying amounts of the individual or groups of cash-generating units are compared to the recoverable amount which is defined as the higher of fair value less costs of disposal and value in use. The fair value reflects the best possible estimate of the amount that an independent third party would pay to acquire the cashgenerating units on the balance sheet date. The costs incurred to make such a sale are deducted from this amount. In most of the CGU of the Xella Group, the recoverable amount is generally based on its value in use. The value in use for the CGUs with goodwill or intangible assets with indefinite useful lives is determined by discounting future estimated pre-tax cash flows based on CGU-specific weighted average cost of capital. The cash flows are derived from a detailed plan and a subsequent terminal value. The detailed plan, approved by management, is based on historical developments as well as on future market estimations and generally covers a period of five years. Management s key assumptions are generally consistent with external information sources. In the detailed plan key assumptions for each CGU include, among others, expected selling and procurement prices, investments and market growth rates. The detailed plan is based on economic assumptions derived from external sources, e.g. external market studies, as well as from internal assumptions. The terminal value considers CGU-specific long-term growth rates which are estimated by Xella to be consistent with publicly available information about the long-term average growth rates for the markets in which the CGU operates. Key assumptions of significant CGUs in 2014 (in %) Weighted average cost of capital Long-term growth rate Building Materials Business Unit CGU North West Europe CGU Middle West Europe/Scandinavia CGU South West Europe CGU Central East Europe CGU North East Europe CGU Dry Lining CGU Lime of 81

17 In 2013 the weighted average cost of capital before tax in the individual CGUs ranged between 9.4% and 10.2% and the terminal value considered an average long-term growth rate of 2%. If the recoverable amount of the cash-generating unit or group of cash-generating units is less than the carrying amount an impairment loss is recognized on goodwill and, if necessary, of the remaining assets as well. In 2014 the recoverable amount exceeded the carrying amount in each CGU. A sensitivity analysis was performed simulating a variation of the following significant assumptions: an increase of the weighted average cost of capital before taxes by one percent, a reduction of the long-term growth rates by one percent and a reduction of EBITDA by five percent. A modification of each of these assumptions would not lead to any impairment loss. At balance sheet date the following goodwill and trademarks existed for the CGUs with significant amount of goodwill or intangible assets with indefinite useful lives: Selected intangible assets of significant CGUs Goodwill Trademarks Dec 31, 2014 Dec 31, 2013 Dec 31, 2014 Dec 31, 2013 k k k k Building Materials Business Unit CGU North West Europe 91,500 91,500 39,000 39,000 CGU Middle West Europe/Scandinavia 42,804 42,774 61,105 61,100 CGU South West Europe 19,399 19,399 20,700 20,700 CGU Central East Europe 67,527 68,068 29,471 29,752 CGU North East Europe 5,216 5,323 25,093 25,811 CGU Dry Lining 40,670 40,670 12,700 12,700 CGU Lime 65,752 65,870 Others ** ,174 37,444 Total 333, , , ,507 * 2013 adjusted for Scandinavia ** All in Building Materials business unit adjusted for Scandinavia Associates are valued using the equity method pursuant to IAS 28. Beginning with the historical cost at the time of acquisition of the shares, the respective carrying amount of the investment is increased or decreased by any changes in the attributable equity of the investment, regardless of their impact on profit or loss. The goodwill included in the carrying amounts of the investments, determined in accordance with the policies applying to fully consolidated subsidiaries, is not subject to amortization. An impairment test is carried out if there is any indication that the total carrying amount of the investment may be impaired. In addition to loans, financial assets consist of investments and securities. Non-current and current financial assets include claims against Xella s former shareholder Haniel which were agreed on by the buyer and seller during the acquisition of the Xella Group in These claims against Haniel relate to hold-harmless agreements. Therefore Xella can expect that expenditures required to settle the respective provisions will be settled by the former 18 of 81

18 shareholder. According to IFRS 3 / IAS 37 the potential reimbursements are treated as separate assets. Upon initial recognition, loans are recognized at fair value plus the incidental costs of the transaction and subsequently at amortized cost by applying the effective interest rate method. Pursuant to IAS 39, investments and securities are categorized as those that are available for sale, those that are valued at fair value through profit or loss and those that are held to maturity. The relevant category is determined upon acquisition and reviewed on each balance sheet date. Purchases and sales of investments and securities in all categories of financial assets are recognized on their settlement date. Financial assets in the category available for sale are initially measured at fair value plus transaction costs and subsequently at their respective fair value on balance sheet date. The resulting unrealized gains and losses are recorded directly in equity taking deferred taxes into account. If there is no listed market price and fair value cannot be reliably determined, the assets are recognized at cost. If there are indications of an impairment, they are written down through profit or loss. If the reasons for an impairment no longer exist, the asset is written up to fair value. For equity instruments, the adjustment is posted to other comprehensive income without affecting earnings. For debt instruments, the adjustment is posted to profit or loss, provided the criteria in IAS 39 are met. When the asset is sold, the adjustments previously recorded in equity are released to profit or loss. Financial assets in the category of fair value through profit or loss are valued using the mark-tomarket method on balance sheet date. Any transaction costs are charged to profit and loss when posted. Fluctuations in fair value are recognized directly in the Consolidated Statement of Income. Financial assets in the held to maturity category are initially measured at fair value plus transaction costs and subsequently at amortized costs on balance sheet date using the effective interest rate method. If there are objective indications of an impairment, the assets may be written down to their lower present value on the basis of the original effective interest rate. The following cash and cash equivalents are recorded in the Consolidated Statement of Financial Position: cash on hand, checks, bank deposits and funds in transit. Inventories are recognized at cost. In addition to materials and direct production costs, production-related portions of the necessary materials and production overheads as well as the depreciation expense attributable to property, plant and equipment is included. If historical cost is higher on closing date than net realizable value, inventories are written down to the latter. Depending on the circumstances of the industry, different cost methods are applied to measure 19 of 81

19 the consumption of inventories. The weighted average method is most commonly used by the Xella Group. CO 2 emission certificates which are purchased as well as allowances allocated free of charge are stated at lower of cost or fair value. A provision is recognized to cover the obligation to deliver CO 2 emission allowances to the respective authorities; this provision is measured at the carrying amount of the CO 2 allowances capitalized for this purpose. If a portion of the obligation is not covered with the available allowances, the provision for this portion is measured using the market price of the emission allowances on the balance sheet date. Trade receivables, receivables from investments and other assets that qualify as loans and receivables are measured at fair value upon initial recognition and thereafter measured at amortized cost. Appropriate allowances are established for any existing risks. Long-term construction contracts are measured in accordance with the percentage-ofcompletion method. This involves recognizing sales and expenses associated with long-term construction contracts on the basis of the degree to which the contract has been completed. The degree of completion is measured as the ratio of the costs already incurred by the balance sheet date in proportion to the total estimated costs of the contract ( cost to cost method ). If the result of a long-term construction contract cannot be determined reliably, sales are only recognized at the amount of the contract costs incurred ( zero profit method ). Losses on customer-specific long-term construction contracts are posted immediately in the period in which the loss becomes apparent regardless of the percentage of completion. Borrowing costs that are directly attributable to the production of a qualifying asset are recognized as part of the cost of that asset by the Xella Group. Tax receivables and tax liabilities are measured at the amount expected to be received or paid to the tax authorities. Long-term tax receivables are recognized at net present value. Derivative financial instruments such as forward contracts, options and swaps are used solely to hedge foreign currency exposure and interest exposure. Financial instruments are accounted for as of the settlement date for both sales and purchases. Pursuant to IAS 39, all derivative financial instruments are accounted for at fair value irrespective of the purpose or intention for which they were concluded. Changes in the fair value of the derivative financial instruments for which hedge accounting is used are either disclosed in net interest (fair value hedge) or, in the case of a cash flow hedge or net investment hedge, in equity under other comprehensive income, taking deferred taxes into account. Derivatives are currently solely used in order to hedge against future cash flow risks originating from existing underlying or planned transactions. None of the existing derivative transactions 20 of 81

20 are accounted for under IFRS hedge accounting. All changes in the market value of derivative financial instruments are posted immediately in full to profit or loss. Non-current assets and groups of assets are categorized as held for sale when the carrying amount of an operation will be recovered principally through a sales transaction and not through continuing use. This condition is deemed to have been fulfilled if sale is highly probable, the asset or disposal group is available for immediate sale and it is expected that sale will occur within one year of allocation to the category. Assets and disposal groups which are classified as held for sale are no longer written off systematically but are carried at the lower of carrying amount and fair value less the costs to sell. The assets and disposal groups categorized as held for sale and their related liabilities (disposal groups) are reported in the Consolidated Statement of Financial Position separately from other assets and liabilities, each in a separate item under current items. If the disposal group is a significant operation, the result of the discontinued operation is reported separately in the Statement of Income. The result of such discontinued operations consists of the result of the valuation mentioned above, the current result of the operation and the gain or loss upon sale. The Statement of Income from the prior year is adjusted accordingly. The main groups of assets and liabilities that are classified as held for sale and the result from discontinued operations are explained separately in the notes if the criteria are met. Deferred tax assets and deferred tax liabilities are recognized for all temporary differences between the tax base of the individual entities in the Group and the IFRS Consolidated Statement of Financial Position with the exception of goodwill that cannot be recognized for tax purposes and for tax losses carried forward. Deferred tax assets were only recognized for the unused tax losses to the extent that their utilization is sufficiently certain. Deferred taxes are determined on the basis of the tax rates which, under the current legislation, will apply in future. Deferred taxes are netted in accordance with IAS 12. Provisions for pensions and similar obligations are determined using the actuarial projected unit credit method in accordance with IAS 19 revised. This method involves considering the biometric parameters and the respective long-term interest rates on the capital markets as well as the latest assumptions on future salary and pension increases. Plan assets established to cover the pension obligations are deducted from pension provisions. Remeasurements are posted to other comprehensive income. Past service costs including curtailments are to be recognized immediately within staff expenses as they occur. Service costs are also shown within staff expenses. A uniform, market-based discount rate is applied to both the defined benefit liability as well as any corresponding plan asset ( net interest approach ). The net interest expenses are reported within the financial result. 21 of 81

21 In accordance with IAS the discount rate should be determined with reference to the market yield on high quality corporate bonds. As at December 31, 2013, Xella used the Mercer Yield Curve as a reference. As at December 31, 2014 Xella used the Mercer Yield Curve enlarged by AA collateralized bonds as a more reliable point of reference for the market yield on high quality corporate bonds for the Euro area. This change of accounting estimate is also considered appropriate in order to fulfil the requirement of a deep market in accordance with IAS Therefore, the Mercer Yield Curve applied as at December 31, 2013 enlarged by AA collateralized bonds as at December 31, 2014 is used. For the relevant durations the discount rate increased by approx. 0.1% on average due to the application of the new approach. This results in a defined benefit liability as at December 31, 2014 which is 5,686 k lower compared to the previous approach. We do not expect significant effects on the service cost and net interest cost. With the exception of the other employee-related provisions calculated in accordance with IAS 19, all other provisions are recognized in accordance with IAS 37 where there is a legal or constructive obligation to a third party based on a past event. The flow of economic benefits required to settle the obligation must be probable and reliably measurable. Significant provisions with a residual term of more than one year are discounted at market interest rates which reflect the risk and period until the obligation is met. With the exception of derivative financial instruments, liabilities are initially recognized at fair value less transaction costs and subsequently measured at amortized cost using the effective interest rate method. Changes in contractual stipulations regarding repayments, considerations, and interest rates lead to a recalculation of the carrying amount. The restated carrying amount is equal to the present value computed at the original effective interest rate. The respective present value changes are recognized in profit or loss as income or expense. There are no liabilities held for trading according to IAS 39 except for the market value of derivative financial instruments. Liabilities from finance leases are measured at the net present value of the future minimum lease payments using the interest rate implicit in the lease and taking account of any repayments made in the meantime. Foreign currency liabilities are translated using the closing rate. Sales comprise the proceeds from the sale of goods and services, less discounts and rebates. Sales are recognized upon the transfer of risk to the customer unless they are recognized using the percentage of completion method or zero-profit method under IAS 11. Service sales mainly include the construction business of the Dutch entities in the Building Materials Business Unit. Other income is recorded if it is likely that there will be a flow of economic resources to the entity and this amount can be reliably determined. 22 of 81

22 Pursuant to IAS 20, government grants are only recognized at their fair value if there is reasonable assurance that the conditions attached to them will be met and they will be collected. Grants to cover expenses are posted through profit or loss and offset in the period in which the expenses are incurred for which the grants were made. Investment grants relating to property, plant and equipment are deducted from the acquisition cost of the corresponding assets. Government tax grants are shown as non-current deferred income and are credited to the Statement of Income on a straight-line basis over the expected useful lives of the related assets. The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales, income and expenses during the relevant period. Although these estimates and assumptions are based on management s best knowledge of current events and circumstances, the actual results ultimately may differ from those estimates and assumptions. We evaluate such estimates and assumptions on an ongoing basis based upon historical results and experience, in consultation with experts and using other methods we consider reasonable in the particular circumstances, as well as our forecasts regarding future changes. Estimates and assumptions are particularly necessary for the measurement of property, plant and equipment, lime quarries and intangible assets, such as trademarks and goodwill as well as for the measurement of deferred taxes and warranty provisions. The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognizes liabilities for anticipated tax audit 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 originally recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Contingencies in respect of legal matters are subject to many uncertainties and the outcome of individual matters is not predictable with assurance. Significant judgment is required in assessing probability and making estimates in respect of contingencies, and the Group s final liability may ultimately be materially different. The Group s total liability in respect of litigation is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the nature of the claim and its underlying facts, the progress of each case, the Group s experience and the experience of others in similar cases, and the opinions and views of legal counsel. Predicting the outcome of the Group s litigation matters is inherently difficult. 23 of 81

23 Purchase price allocations are an integral part for the accounting of business combinations in accordance with IFRS which require significant management judgment and the use of estimates. Beyond the determination of fair values and useful lives for property, plant and equipment, the measurement of provisions for pensions, other provisions and an indemnification receivable against the former shareholder, particularly the measurement of intangible assets and deferred taxes require a substantial degree of management estimates and assumptions. Upon the acquisition of the Xella Group in 2008, certain brands were identified with indefinite lives and the difference between the purchase price and net assets acquired measured at fair value was recorded as goodwill. In subsequent periods, brands and goodwill are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that brands or goodwill might be impaired. An impairment charge is recognized if the carrying amounts of brands or goodwill exceed the recoverable amounts. The future cash flows used to determine the recoverable amounts of brand and goodwill are based on current business expectations. Changes in future projected cash flows and discount rates applied may lead to impairment charges in future periods. Deferred tax assets and liabilities under IFRS are recognized for temporary differences between the carrying amounts in the consolidated balance sheet and the tax base of respective assets and liabilities as well as on tax losses carried forward. Significant assumptions may include the probability of sufficient future taxable income being available to realize deferred tax assets recognized. If actual tax laws that would impose restrictions on the realization of the deferred tax assets should occur or there would not be sufficient taxable income available in the future, an adjustment to the recorded amount of deferred tax assets would affect the Consolidated Statement of Income. Shares in assets and liabilities whose residual terms are less than one year are reported under current assets on principle. New International Financial Reporting Standards and Interpretations Application of issued and effective IAS/IFRS and IFRIC in financial year 2014 These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accompanying interpretations issued by the IFRS Interpretations Committee (IFRS- IC) as adopted by the EU. The following standards have been adopted by the group for the first time for the financial year beginning on 1 January 2014 and have a material impact on the group: 24 of 81

24 IFRS 10, Consolidated Financial Statements, establishes a new definition of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess, inter alia by providing detailed prescriptive guidance on substantial rights. IFRS 10 supersedes the existing IAS 27 and SIC-12 requirements for consolidation, though without significantly changing the overall rationale. IFRS 11, Joint Arrangements, sets out requirements for the classification and accounting of joint ventures and joint operations by introducing new criteria. IFRS 11 supersedes IAS 31 based on which application of the proportionate consolidation of legal entity joint ventures will no longer be permitted. However, classification of certain arrangements as joint operations may lead to the recognition of rights and obligations and corresponding income and expenses in the consolidated financial statements of the venture. IFRS 12, Disclosures of Interests in other Entities, includes disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose entities and other off balance sheet vehicles. IFRS 10, 11 and 12 were amended subsequently (Transition Guidance). In connection with the new IFRS 10, 11 and 12 IAS 28, Associates and Joint Ventures was revised. Amendment to IAS 19, Defined benefit plans: Employee contributions, clarifying how an entity should account for contributions made by employees or third parties that are linked to services to defined benefit plans, based on whether these contributions are dependent on the number of years of service provided by the employee. The amendment did not have a significant effect on the group financial statements. Amendment to IAS 32, Financial instruments: Presentation, on offsetting financial assets and financial liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment did not have a significant effect on the group financial statements. Amendment to IAS 36, Impairment of assets, on the recoverable amount disclosures for nonfinancial assets. This amendment removed certain disclosures of the recoverable amount of CGUs which had been included in IAS 36 by the issue of IFRS 13. Amendment to IAS 39, Financial instruments: Recognition and measurement on the novation of derivatives and the continuation of hedge accounting. This amendment considers legislative changes to over-the-counter derivatives and the establishment of central counterparties. Under IAS 39 novation of derivatives to central counterparties would result in discontinuance of hedge 25 of 81