[7] Accounting policies

The Group financial statements have been prepared under the historical cost convention, with the exception of derivative financial instruments, available-for-sale financial assets, and plan assets relating to externally funded defined benefit pension obligations, which are stated at their fair values.

The financial statements of companies included in the consolidated financial statements of The Linde Group have been prepared using uniform accounting policies in accordance with IFRS 10 Consolidated Financial Statements.

Recently issued accounting standards which have not yet been applied

The following standards have been issued by the IASB, but have not been applied in the consolidated financial statements of The Linde Group for the year ended 31 December 2013, as they are either not yet effective or have not yet been adopted by the European Union:

  • IFRS 9 Financial Instruments (first-time application date undecided by IASB)
  • IFRS 9 Financial Instruments: Hedge Accounting and Amendments to IFRS 9, IFRS 7 and IAS 39 (first-time application date undecided by IASB)
  • Amendments to IFRS 9/IFRS 7: Mandatory Effective Date and Transition Disclosures (first-time application date undecided by IASB)
  • Amendments to IAS 39: Novation of Derivatives and Continuation of Hedge Accounting (first-time application according to IASB in financial years beginning on or after 1 January 2014)
  • Amendments to IAS 19: Defined Benefit Plans: Employee Contributions (first-time application according to IASB in financial years beginning on or after 1 July 2014)
  • Improvements to IFRSs (2010 – 2012) (first-time application according to IASB in financial years beginning on or after 1 July 2014)
  • Improvements to IFRSs (2011 – 2013) (first-time application according to IASB in financial years beginning on or after 1 July 2014)
  • Amendments to IAS 32: Offsetting Financial Assets and Financial Liabilities (first-time application according to IASB in financial years beginning on or after 1 January 2014).

IFRS 9

According to the rules of the IASB, the application date for IFRS 9 remains undecided.

The rules for the recognition and measurement of financial instruments set out in IAS 39 will be replaced by those set out in IFRS 9. In future, financial assets will be divided into only two classifications: those measured at amortised cost and those measured at fair value. The group of assets measured at amortised cost will comprise those financial assets for which the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding and in respect of which the objective of the entity’s business model is to hold the financial asset to collect the contractual cash flows. All other financial assets are included in a group which is measured at fair value. IFRS 9 contains an option, as before, to designate a financial asset in the first category as measured at fair value through profit or loss if certain conditions apply (fair value option).

Value changes for financial assets measured at fair value are recognised in profit or loss, except for those equity instruments for which the entity has elected to report value changes in other comprehensive income. However, dividend income relating to these financial assets is recognised in profit or loss.

The rules which apply to financial liabilities are mostly the same as those set out in IAS 39. The most significant difference concerns the recognition of gains and losses on financial liabilities designated as at fair value through profit or loss. In future, such gains and losses will be split into the amount of the change in fair value of the liability that is attributable to changes in the credit risk of the liability, which shall be presented in other comprehensive income, and the remaining amount of change in the fair value of the liability, which shall be presented in the statement of profit or loss.

IFRS 9 may result in changes in the classification and measurement of financial assets in the consolidated financial statements of The Linde Group.

The remaining standards have no significant impact on the net assets, financial position and results of operations of The Linde Group.

Recently issued accounting standards which have been early adopted

The following standards have all been adopted already by the European Union. They have been early adopted as it is permitted for them to be early adopted either according to the rules of the IASB or the rules of the EU:

  • IFRS 10 Consolidated Financial Statements
  • IFRS 11 Joint Arrangements
  • IFRS 12 Disclosures of Interests in Other Entities
  • Amendments to IFRS 10, IFRS 11 and IFRS 12 Transition Guidance
  • Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities
  • IAS 28 Investments in Associates and Joint Ventures
  • Amendments to IAS 36: Recoverable Amount Disclosures for Non-Financial Assets.

IFRS 10, 11 and 12

IFRS 10, IFRS 11 and IFRS 12 will become effective in the European Union from the 2014 financial year. However, early adoption is permitted. The Linde Group has early adopted IFRS 10, IFRS 11 and IFRS 12 from 1 January 2013 in accordance with the rules on application set out by the IASB. The new standards are to be applied retrospectively.

In IFRS 10, the term “control” is redefined. If one entity controls another entity, the parent company shall include the subsidiary in full in its consolidated financial statements. Under the new definition, control is established if the potential parent entity has power over the potential subsidiary (investee) as a result of voting rights or other rights and actual circumstances, is exposed or has rights to positive or negative variable returns from its involvement with the investee, and above all has the ability to use its power over the investee to affect significantly the amount of its returns.

IFRS 11 sets out new rules for accounting for joint arrangements. Under these new rules, a distinction is made between joint operations and joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (the joint operators) have rights to the assets and obligations for the liabilities relating to the arrangement. The rights to the assets and the obligations for the liabilities are recognised in the consolidated financial statements. In a joint venture, on the other hand, the parties that have joint control of the arrangement (the joint venturers) have a right to the net assets of the arrangement. This right is accounted for in the consolidated financial statements using the equity method. The option of proportionate consolidation in the consolidated financial statements, hitherto permitted by IAS 31, is no longer available.

IFRS 12 sets out the disclosure requirements for interests in other entities. This standard requires a much wider range of disclosures than previously required by the rules set out in IAS 27, IAS 28 and IAS 31.

As a result of applying IFRS 10, The Linde Group has adjusted its accounting policies to reflect the revised definition of “control”.

Eight companies in Mexico and China, the principal object of which is the construction and operation of gas production plants and which have until now been included as joint ventures, have been fully consolidated for the first time as a result of the advantage held by Linde in terms of know-how. In these cases, the key issue is that the co-shareholders are also often the main customers for the gases produced. Given its advantage in terms of know-how, The Linde Group has assumed responsibility for the operation of the companies’ plants. These companies are therefore dependent on Linde technology. This is reflected in the licensing agreements in force and the integration of production into the processes of The Linde Group and/or the interrelationships between the various decision-makers. The operation of the plants is the principal driver of variable returns from the companies and therefore Linde exercises control (as defined by IFRS 10) over these companies.

In addition, two other companies in the United States and in India, which have until now been included as joint ventures, have been fully consolidated for the first time, because Linde exerts increased management authority in those companies. Here, Linde is able to exercise, on the basis of individual contracts, the most extensive decision-making powers over major portions of the operating activities of the entities. On this basis, The Linde Group has the opportunity to determine those activities of the entities which significantly affect the variable returns of the companies and therefore to exercise control (as defined by IFRS 10) over the companies.

As a result of the application of IFRS 11, The Linde Group has revised its accounting policies in respect of the obligation to include certain joint arrangements on a line-by-line basis. Linde accounts on a line-by-line basis in accordance with the rules set out in IFRS 11 for four joint arrangements in the United Arab Emirates and in China where the sole object is to supply one or several shareholders. In the absence of any special rights attaching to individual assets and liabilities, the assets and liabilities are accounted for on the basis of the share of equity held by The Linde Group. The change in the method of accounting for these four companies from the equity method to the line-by-line method resulted in a reduction in revenue reserves at 1 January 2012 of EUR 16 m. The total carrying amount of the investments (EUR 144 m) was eliminated. Assets of EUR 416 m and liabilities of EUR 318 m were subsequently recognised in respect of these companies.

Amendments to IAS 36

According to the rules of the IASB, the amendments to IAS 36 become effective from the 2014 financial year. Early adoption is permitted. The Linde Group has early adopted the amendments to IAS 36 from 1 January 2013.

The amendments include further restriction of the requirement to disclose the recoverable amount of an asset (originally included in the consequential amendments in IAS 36 as a result of the issuing of IFRS 13 Fair Value Measurement). The original requirement was to disclose the recoverable amount of each cash-generating unit (CGU) to which a significant portion of the carrying amount of goodwill had been allocated. As this disclosure requirement was highly controversial, it was restricted by the amendment to IAS 36 issued in May 2013. Disclosure of the recoverable amount of an asset or CGU is now restricted to periods in which an impairment loss has been recognised or is reversed. Information about this is given in the Notes to the consolidated financial statements of The Linde Group.

The remaining standards have no significant impact on the net assets, financial position and results of operations of The Linde Group.

Recently issued accounting standards

The IASB and IFRIC have revised numerous standards and have issued many new ones in the course of their projects to develop IFRS and achieve convergence with US GAAP. Of these, the following standards are mandatory in the consolidated financial statements of The Linde Group for the year ended 31 December 2013:

  • IFRS 13 Fair Value Measurement
  • IAS 19 Employee Benefits (revised 2011)
  • Amendments to IAS 1 Presentation of Items of Other Comprehensive Income
  • Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets
  • Amendment to IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities
  • Improvements to IFRSs 2009 – 2011

IFRS 13

IFRS 13 sets out in a single IFRS a unified framework for measuring fair value in financial statements prepared in accordance with International Financial Reporting Standards. It will apply in future to all other standards that require or permit fair value measurement. Exemptions to IFRS 13 are allowed only in the case of IAS 17 and IFRS 2, with some rules in these two standards continuing to apply. This standard also replaces and expands the disclosure requirements in other standards in respect of measurement at fair value.

Fair value is defined according to IFRS 13 as the exit price: i.e. the price that would be received to sell an asset or paid to transfer a liability. A three-level hierarchy for fair value measurements is being introduced, a system which is familiar from the measurement at fair value of financial assets. The three levels identified in the hierarchy are based on the extent to which observable market prices are available in order to determine fair value. The fair values determined under the new rules may differ from those determined under the old rules.

IFRS 13 is effective from the 2013 financial year. The standard is applied prospectively. The Linde Group has concluded bilateral credit support annexes (CSAs) with most of the banks with which financial instruments recognised at fair value are traded, thus minimising the default risk arising from these instruments. The application of IFRS 13 will not therefore have a significant impact on the consolidated financial statements of The Linde Group.

IAS 19

The main changes in IAS 19 (revised 2011) relate to the abolition of recognition and measurement options in respect of defined benefit pension plans. The changes here which are relevant for The Linde Group are the abolition of the expected return on plan assets and the introduction of a rate of return for the plan assets which is the same as the discount rate applied to the corresponding defined benefit obligation. This leads to a net measurement of the net pension obligation or net pension asset and to the disclosure of a net interest expense or net interest income in respect of defined benefit plans. Other changes in IAS 19 (revised 2011) which are relevant to The Linde Group are the recognition in profit or loss of unvested past service cost when it arises and the requirement to make additional disclosures in the Notes to the Group financial statements.

IAS 19 (revised 2011) is effective from the 2013 financial year. The changes are applied retrospectively and have led to a slight decrease in the interest income on plan assets included in the net interest component of the financial result. The revisions to the standard require the net disclosure of the net interest expense and net interest income from pension plans. The net effect in the financial result was EUR 190 m in 2013 and EUR 212 m in 2012. The impact of the revisions to the standard from the measurement of plan assets at the discount rate applied to the corresponding defined benefit obligation is immaterial to the net assets, financial position and results of operations of the Group in the reporting year as well as at 1 January 2012 and 31 December 2012.

IAS 1

The amendments to IAS 1 concern items of other comprehensive income which will be reclassified subsequently to profit or loss if certain conditions apply, which should be disclosed separately from those items which will never be reclassified. The presentation in the statement of other comprehensive income has been adjusted accordingly.

The remaining standards have no significant impact on the net assets, financial position and results of operations of The Linde Group.

As the retrospective application of IFRS 10, IFRS 11, IFRS 12 and IAS 19 has an impact on virtually all the items in the Group statement of financial position and in the Group statement of profit or loss, the prior-year figures disclosed have been adjusted throughout the Financial Report.

The retrospective application of IFRS 10, IFRS 11, IFRS 12 and IAS 19 (revised 2011) and the reclassification of current income tax provisions and non-current income tax liabilities in current income tax liabilities see Other provisions resulted in the following adjustments being made to the figures for the prior-year periods disclosed:

  (XLS:) Download XLS (25KiB)

Adjusted Group statement of profit or loss 2012

 

 

 

 

 

 

 

in € million

 

2012 as reported

 

Adjustment January to December 2012

 

2012
adjusted

Revenue

 

15,280

 

553

 

15,833

Cost of sales

 

9,755

 

366

 

10,121

Gross profit

 

5,525

 

187

 

5,712

 

 

 

 

 

 

 

Marketing and selling expenses

 

2,303

 

18

 

2,321

Research and development costs

 

101

 

 

101

Administration expenses

 

1,354

 

19

 

1,373

Other operating income

 

288

 

16

 

304

Other operating expenses

 

155

 

24

 

179

 

 

 

 

 

 

 

Share of profit or loss from associates and joint ventures (at equity)

 

92

 

−79

 

13

 

 

 

 

 

 

 

Financial income

 

354

 

−210

 

144

Financial expenses

 

659

 

−194

 

465

 

 

 

 

 

 

 

Profit before tax

 

1,687

 

47

 

1,734

Taxes on income

 

363

 

30

 

393

 

 

 

 

 

 

 

Profit for the year

 

1,324

 

17

 

1,341

attributable to Linde AG shareholders

 

1,250

 

−18

 

1,232

attributable to non-controlling interests

 

74

 

35

 

109

 

 

 

 

 

 

 

Earnings per share in € – undiluted

 

7.03

 

−0.10

 

6.93

Earnings per share in € – diluted

 

6.97

 

−0.10

 

6.87

  (XLS:) Download XLS (24KiB)

Adjusted Group statement of comprehensive income 2012

 

 

 

 

 

 

 

in € million

 

2012 as reported

 

Adjustment January to December 2012

 

2012
adjusted

Profit for the year

 

1,324

 

17

 

1,341

Other comprehensive income (net of tax)

 

−317

 

6

 

−311

 

 

 

 

 

 

 

Items that will be reclassified subsequently to profit or loss

 

−124

 

1

 

−123

Unrealised gains/losses on available-for-sale financial assets

 

−4

 

 

−4

Unrealised gains/losses on derivative financial instruments

 

82

 

 

82

Currency translation differences

 

−202

 

1

 

−201

 

 

 

 

 

 

 

Items that will not be reclassified subsequently to profit or loss

 

−193

 

5

 

−188

Remeasurement of defined benefit plans

 

−219

 

5

 

−214

Change in effect of the limit on a net defined benefit asset (asset ceiling under IAS 19R.64)

 

26

 

 

26

Total comprehensive income

 

1,007

 

23

 

1,030

attributable to Linde AG shareholders

 

953

 

−10

 

943

attributable to non-controlling interests

 

54

 

33

 

87

  (XLS:) Download XLS (28KiB)

Adjusted Group statement of financial position as at 31.12.2012

 

 

 

 

 

 

 

in € million

 

31.12.2012 as reported

 

Adjustment
31.12.2012

 

31.12.2012 adjusted

Assets

 

 

 

 

 

 

Goodwill

 

10,620

 

206

 

10,826

Other intangible assets

 

3,580

 

63

 

3,643

Tangible assets

 

10,188

 

985

 

11,173

Investments in associates and joint ventures (at equity)

 

816

 

−608

 

208

Other financial assets

 

282

 

−161

 

121

Receivables from finance leases

 

244

 

137

 

381

Other receivables and other assets

 

592

 

13

 

605

Income tax receivables

 

4

 

 

4

Deferred tax assets

 

469

 

10

 

479

Non-current assets

 

26,795

 

645

 

27,440

 

 

 

 

 

 

 

Inventories

 

1,098

 

14

 

1,112

Receivables from finance leases

 

47

 

12

 

59

Trade receivables

 

2,599

 

54

 

2,653

Other receivables and other assets

 

709

 

27

 

736

Income tax receivables

 

181

 

1

 

182

Securities

 

823

 

1

 

824

Cash and cash equivalents

 

1,218

 

66

 

1,284

Non-current assets classified as held for sale and disposal groups

 

7

 

 

7

Current assets

 

6,682

 

175

 

6,857

 

 

 

 

 

 

 

Total assets

 

33,477

 

820

 

34,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity and liabilities

 

 

 

 

 

 

Capital subscribed

 

474

 

 

474

Capital reserve

 

6,698

 

 

6,698

Revenue reserves

 

5,889

 

−183

 

5,706

Cumulative changes in equity not recognised through the statement of profit or loss

 

33

 

 

33

Total equity attributable to Linde AG shareholders

 

13,094

 

−183

 

12,911

Non-controlling interests

 

564

 

183

 

747

Total equity

 

13,658

 

 

13,658

 

 

 

 

 

 

 

Provisions for pensions and similar obligations

 

1,105

 

8

 

1,113

Other non-current provisions

 

471

 

25

 

496

Deferred tax liabilities

 

2,186

 

21

 

2,207

Financial debt

 

8,862

 

373

 

9,235

Liabilities from finance leases

 

56

 

 

56

Trade payables

 

6

 

 

6

Other non-current liabilities

 

237

 

260

 

497

Liabilities from income taxes

 

85

 

−85

 

Non-current liabilities

 

13,008

 

602

 

13,610

 

 

 

 

 

 

 

Other current provisions

 

1,565

 

−561

 

1,004

Financial debt

 

1,262

 

84

 

1,346

Liabilities from finance leases

 

24

 

 

24

Trade payables

 

2,790

 

16

 

2,806

Other current liabilities

 

1,003

 

23

 

1,026

Liabilities from income taxes

 

167

 

656

 

823

Current liabilities

 

6,811

 

218

 

7,029

 

 

 

 

 

 

 

Total equity and liabilities

 

33,477

 

820

 

34,297

  (XLS:) Download XLS (28KiB)

Adjusted Group statement of financial position as at 01.01.2012

 

 

 

 

 

 

 

in € million

 

01.01.2012 as reported

 

Adjustment
01.01.2012

 

01.01.2012
adjusted

Assets

 

 

 

 

 

 

Goodwill

 

7,868

 

209

 

8,077

Other intangible assets

 

3,300

 

75

 

3,375

Tangible assets

 

9,030

 

913

 

9,943

Investments in associates and joint ventures (at equity)

 

754

 

−556

 

198

Other financial assets

 

918

 

−195

 

723

Receivables from finance leases

 

302

 

248

 

550

Other receivables and other assets

 

526

 

12

 

538

Income tax receivables

 

5

 

 

5

Deferred tax assets

 

368

 

8

 

376

Non-current assets

 

23,071

 

714

 

23,785

 

 

 

 

 

 

 

Inventories

 

1,036

 

8

 

1,044

Receivables from finance leases

 

50

 

19

 

69

Trade receivables

 

2,030

 

74

 

2,104

Other receivables and other assets

 

558

 

26

 

584

Income tax receivables

 

97

 

 

97

Securities

 

1,073

 

2

 

1,075

Cash and cash equivalents

 

1,000

 

61

 

1,061

Current assets

 

5,844

 

190

 

6,034

 

 

 

 

 

 

 

Total assets

 

28,915

 

904

 

29,819

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity and liabilities

 

 

 

 

 

 

Capital subscribed

 

438

 

 

438

Capital reserve

 

5,264

 

 

5,264

Revenue reserves

 

5,752

 

−169

 

5,583

Cumulative changes in equity not recognised through the statement of profit or loss

 

150

 

−4

 

146

Total equity attributable to Linde AG shareholders

 

11,604

 

−173

 

11,431

Non-controlling interests

 

540

 

161

 

701

Total equity

 

12,144

 

−12

 

12,132

 

 

 

 

 

 

 

Provisions for pensions and similar obligations

 

938

 

9

 

947

Other non-current provisions

 

445

 

23

 

468

Deferred tax liabilities

 

2,012

 

20

 

2,032

Financial debt

 

6,491

 

393

 

6,884

Liabilities from finance leases

 

33

 

 

33

Trade payables

 

6

 

 

6

Other non-current liabilities

 

194

 

315

 

509

Liabilities from income taxes

 

96

 

−96

 

Non-current liabilities

 

10,215

 

664

 

10,879

 

 

 

 

 

 

 

Other current provisions

 

1,455

 

−580

 

875

Financial debt

 

1,277

 

92

 

1,369

Liabilities from finance leases

 

13

 

 

13

Trade payables

 

2,712

 

28

 

2,740

Other current liabilities

 

996

 

27

 

1,023

Liabilities from income taxes

 

103

 

685

 

788

Current liabilities

 

6,556

 

252

 

6,808

 

 

 

 

 

 

 

Total equity and liabilities

 

28,915

 

904

 

29,819

  (XLS:) Download XLS (23KiB)

Adjusted Group statement of cash flows 2012

 

 

 

 

 

 

 

in € million

 

2012 as reported

 

Adjustment January to December 2012

 

2012
adjusted

Cash flow from operating activities

 

2,522

 

142

 

2,664

Cash flow from investing activities

 

−3,813

 

−72

 

−3,885

Cash flow from financing activities

 

1,516

 

−63

 

1,453

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

225

 

7

 

232

Opening balance of cash and cash equivalents

 

1,000

 

61

 

1,061

Effects of currency translation on cash and cash equivalents

 

−7

 

−2

 

−9

Closing balance of cash and cash equivalents

 

1,218

 

66

 

1,284

Revenue recognition

Revenue comprises sales of products and services as well as lease and rental income, less discounts and rebates.

Revenue from the sale of goods is recognised when the risks of ownership have been transferred to the customer, the consideration can be reliably determined and it is probable that the associated receivables will be collected. If the customer is to take delivery of the goods, the relevant sale will not be recognised until the customer has accepted delivery. In the case of long-term service contracts, revenue is recorded on a straight-line basis over the period of the contract.

Revenue from customer-specific construction contracts is recognised in accordance with IAS 18 Revenue and/or IAS 11 Construction Contracts, based on the stage of completion of the contract (percentage of completion method, or PoC method). Under this method, revenue is only recognised when the outcome of a construction contract can be estimated reliably.

For revenue and earnings recognition relating to lease transactions, see the section below on accounting for leases.

Long-term construction contracts

Long-term construction contracts are measured using the PoC method. The stage of completion of each contract is determined by the ratio of the costs incurred to the expected total cost (cost-to-cost method). When the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent of the contract costs incurred (zero profit method). If the cumulative contract output (costs incurred plus profits disclosed) exceeds payments on account on an individual contract, the construction contract is disclosed under Trade receivables. If there is a negative balance after deducting payments on account, the amount is disclosed under Trade payables. Anticipated losses on contracts are recognised in full, based on an assessment of identifiable risks.

The financial income from long-term construction contracts is disclosed in Other operating income as a result of its clear relationship with the Group’s operating business.

Cost of sales

Cost of sales comprises the cost of goods and services sold and the cost of merchandise sold. It includes not only the cost of direct materials and direct manufacturing expenses, but also overheads including depreciation of production plants, amortisation of certain intangible assets and inventory write-downs.

Research and development costs

Research costs and development costs which cannot be capitalised are recognised immediately in profit or loss.

Financial result

The financial result includes interest expenses on liabilities, dividends received, interest income on receivables and gains and losses on financial instruments recognised in profit or loss. The net interest cost relating to pension provisions and any loss on remeasurement of certain embedded derivatives are also included in financial expenses.

Interest income and interest expenses are recognised in profit or loss on the basis of the effective interest rate method.

Dividends are recognised in profit or loss when they have been declared. Since the beginning of the reporting period, dividend payments made by operating companies which are reported at cost or at fair value in which Linde holds more than 10 percent of the voting rights and which have a clear connection to Linde’s core operating business have been recognised in other operating income. Core businesses are defined as those business areas which make a material contribution to the revenue of a division. A material contribution is deemed to be one of around 20 percent. As no investments of this type met the stated criteria in 2012, the prior-year figures were not adjusted.

Finance income relating to finance leases is calculated using the effective interest rate method. In addition, any gain on remeasurement of certain embedded derivatives is disclosed in financial income.

Intangible assets

Intangible assets comprise goodwill, customer relationships, brand names, that portion of development costs which may be recognised as an asset, patents, software, licences and similar rights.

Purchased and internally generated intangible assets are stated at acquisition cost or manufacturing cost less accumulated amortisation and any impairment losses. An internally generated intangible asset is recognised if it can be identified as an asset, if it is probable that the future economic benefits that are attributable to the asset will flow to Linde, and if the cost of the asset can be measured reliably. Amortisation of intangible assets is recognised under the heading in the statement of profit or loss which corresponds to its functional features. It is important to determine whether the intangible assets have finite or indefinite useful lives. Goodwill, intangible assets with indefinite useful lives and intangible assets not yet ready for use are not amortised, but are subject instead to an impairment test once a year, or more often if there is any indication that an asset may be impaired.

The impairment test in accordance with IAS 36 Impairment of Assets compares the carrying amount of the cash-generating unit or of the asset to be tested with the recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

According to IAS 36 Impairment of Assets, goodwill is allocated to the cash-generating unit (CGU), the lowest level at which goodwill is monitored for internal management purposes, and tested for impairment at least once a year at this level. In the Gases Division, this is the level of the Regional Business Units (RBUs), which are the equivalent of the operating segments before their aggregation into reportable segments. Outside the Gases Division, goodwill is tested for impairment at the level of the reportable segments, which are also the operating segments. The impairment test involves initially comparing the value in use of the cash-generating unit with its carrying amount. If the carrying amount of the cash-generating unit exceeds the value in use, a test is performed to determine whether the fair value of the asset less costs to sell is higher than the carrying amount. Any impairment losses relating to an intangible asset with an indefinite useful life are recognised in the statement of profit or loss and disclosed in functional costs.

To calculate the value in use of the cash-generating units, post-tax future cash inflows and outflows are derived from corporate financial budgets approved by management which cover a detailed planning period of five years. The calculation of the terminal value is based on the future net cash flows from the latest available detailed planning period. The post-tax interest rates used to discount the cash flows take into account industry-specific and country-specific risks relating to the particular cash-generating unit. When the terminal value is discounted, declining growth rates are used, which are lower than the growth rates calculated in the detailed planning period and which serve mainly to compensate for a general inflation rate.

Intangible assets with finite useful lives are amortised over the estimated useful life of the assets, and the amortisation expense is disclosed under the heading in the statement of profit or loss which corresponds to the functional features of the underlying asset. Customer relationships are stated at acquisition cost and amortised on a straight-line basis over their estimated useful life of between five and 40 years. The estimated useful life of customer relationships purchased is calculated on the basis of the term of the contractual relationship underlying the customer relationship, or on the basis of expected customer behaviour. If there are any indications of impairment in the intangible assets, an impairment test is performed.

If the reason for an impairment loss recognised in prior years no longer exists, the carrying amount of the intangible asset is increased to a maximum figure of the carrying amount that would have been determined had no impairment loss been recognised. This does not apply to goodwill.

Costs incurred in connection with the purchase for consideration and in-house development of software used internally, including the costs of bringing this software to an operational state, are capitalised and amortised on a straight-line basis over an estimated useful life of three to eight years.

Tangible assets

Tangible assets are reported at acquisition cost or manufacturing cost less accumulated depreciation based on the estimated useful life of the asset and any impairment losses. The manufacturing cost of internally-generated plants comprises all costs which are directly attributable to the manufacturing process and an appropriate portion of production overheads. The latter include production-related depreciation, a proportion of administration expenses and a proportion of social costs. The acquisition cost or manufacturing cost is reduced by government grants. For qualifying tangible assets, where the purchase or manufacture takes more than one year, the borrowing costs during the construction period are also capitalised. Recognition at manufacturing cost is based on the assumption of normal output. Tangible assets are depreciated using the straight-line method and the depreciation expense is disclosed in the statement of profit or loss under the heading which corresponds to the functional features of the underlying asset. If a tangible asset comprises several significant components with different useful lives, the depreciation is calculated separately for the various components. Existing legal or de facto site restoration obligations are included in the cost of the components based on the discounted expected settlement. The depreciation method and the estimated useful lives of the assets are reviewed on an annual basis and adapted to prevailing conditions.

The following useful lives apply to the different types of tangible assets:

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Useful lives for tangible assets

 

 

 

Buildings

 

10 – 40 years

Technical equipment

 

6 – 15 years

Fixtures, furniture and equipment

 

3 – 20 years

If significant events or market developments include an impairment in the value of the tangible asset, Linde reviews the recoverability of the carrying amount of the asset by testing for impairment. The carrying amount of the asset is compared with the recoverable amount, which is defined as the higher of the asset’s fair value less costs to sell and its value in use. To determine the recoverable amount on the basis of value in use, estimated future cash flows are discounted at a rate which reflects the risk specific to the asset. If the net book value exceeds the recoverable amount, an impairment loss is recognised. When estimating future cash flows, current and expected future inflows as well as segment-specific, technological, economic and general developments are taken into account. If an impairment test is carried out on tangible assets at the level of a cash-generating unit which also includes a portion of allocated goodwill, and an impairment loss is recognised, then impairment losses will be recognised first in respect of the goodwill and then in respect of the other assets based on their relative carrying amounts, taking into account the fair value of the assets. If the reason for an impairment loss recognised in prior years no longer exists, the carrying amount of the tangible asset is increased to a maximum figure of the carrying amount that would have been determined had no impairment loss been recognised.

For the accounting treatment of assets held under leases, see the section below on accounting for leases.

Associates and joint ventures

Associates and joint ventures are accounted for under the equity method at cost at the date of acquisition. In subsequent periods, the carrying amount is adjusted up or down to reflect Linde’s share of the comprehensive income of the investee. Any distributions received from the investee and other changes in the investee’s equity reduce or increase the carrying amount of the investment. If the losses of an associate or joint venture attributable to The Linde Group equal or exceed the value of the interest held in this associate or joint venture, no further losses are recognised unless the Group incurs an obligation or makes payments on behalf of the associate or joint venture. If there are any indications of impairment in the investments in associates or joint ventures, the carrying amount of the relevant investment is subject to an impairment test. If the reason for an impairment loss recognised in prior years no longer exists, the carrying amount of the investment is increased to a maximum figure of the share of net assets in the associate or joint venture.

Inventories

Inventories are reported at the lower of acquisition or manufacturing cost and net realisable value. Net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. Manufacturing cost includes both direct costs and appropriate indirect material and production costs, as well as production-related depreciation charges. Administration expenses and social costs are included if they can be allocated to production. In addition, for inventories where the purchase or manufacture takes more than one year, the borrowing costs are capitalised. Recognition at manufacturing cost is based on the assumption of normal output. Inventories are generally measured on a moving average basis or using the FIFO (first in, first out) method.

Financial instruments

Financial assets and liabilities are only recognised in the Group statement of financial position when Linde becomes bound by the contractual provisions of the financial instrument. In the normal course of events, purchases and sales of financial assets are accounted for on settlement day. The same does not apply to derivatives, which are accounted for on the trading day.

According to IAS 39 Financial Instruments: Recognition and Measurement, financial instruments must be categorised as financial instruments held for trading or at fair value through profit or loss, available-for-sale financial assets, held-to-maturity financial investments, or loans and receivables. No financial instruments were reclassified in the 2013 financial year. The Linde Group does not avail itself of the fair value option, whereby financial assets or financial liabilities are classified as at fair value through profit or loss when they are first recognised.

Available-for-sale financial assets include equity instruments and debt instruments. If equity instruments are not held for trading or measured at fair value through profit or loss, they are classified as available-for-sale financial assets. Debt instruments are included in this category if they are held for an unspecified period and can be sold depending on the market situation.

Financial instruments are initially recognised at fair value. Transaction expenses which are directly attributable to the acquisition or issue of financial instruments are only included in the determination of the carrying amount if the financial instruments are not recognised at fair value through profit or loss.

The subsequent measurement of available-for-sale financial assets is based on the separate recognition in equity as other comprehensive income of unrealised gains and losses, inclusive of deferred tax, until they are realised. Equity instruments for which no price is quoted in an active market and for which the fair value cannot be reliably determined are reported at cost. If the fair value of available-for-sale financial assets falls below cost and if there is objective evidence that the asset is impaired, the cumulative loss recognised directly in equity is transferred to profit or loss. Impairment reversals are recognised in equity for equity instruments and in profit or loss for debt instruments.

Loans and receivables and held-to-maturity financial investments are measured at amortised cost using the effective interest rate method. Where there is objective evidence that the asset is impaired, it is recognised at the present value of expected future cash flows if this is lower than amortised cost. The present value of expected future cash flows is calculated using the original effective interest rate of the financial asset.

The Linde Group conducts regular impairment reviews of the following categories of financial assets: loans and receivables, available-for-sale financial assets and held-to-maturity financial investments. The following criteria are applied:

[a] significant financial difficulty of the issuer or obligor,

[b] breach of contract, such as a default or delinquency in payments of interest or principal,

[c] the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that would not otherwise be considered,

[d] it becoming probable that the borrower will enter bankruptcy or other financial reorganisation,

[e] the disappearance of an active market for that asset because of financial difficulties,

[f] a recommendation based on observable data from the capital market,

[g] information about significant changes with an adverse effect that have taken place in the technological, economic or legal environment of a contracting party,

[h] a significant or prolonged decline in the fair value of the financial instrument.

A financial asset is eliminated if Linde loses its contractual entitlement to cash flows from such an asset or if it transfers virtually all the risks and opportunities associated with that financial asset. In the 2013 financial year, no financial assets that would qualify for elimination were transferred by Linde.

Under IAS 39 Financial Instruments: Recognition and Measurement, all derivative financial instruments are reported at fair value, irrespective of their purpose or the reason for which they were acquired.

In the case of a fair value hedge, derivatives are used to hedge the exposure to changes in the fair value of assets or liabilities. The gain or loss from the change in fair value of the derivative is recognised immediately in profit or loss. At the same time, the carrying amount of the hedged item is adjusted for the corresponding gain or loss with respect to the hedged risk, which is also recognised immediately in profit or loss.

In the case of a cash flow hedge, derivatives are used to hedge the exposure to variability in cash flows associated with an asset or liability which has been recognised or with forecast transactions. The hedge-effective portion of the gains or losses arising from the remeasurement at fair value of these derivative financial instruments is initially disclosed as other comprehensive income in “Cumulative changes in equity not recognised through the statement of profit or loss”. A transfer is made to the statement of profit or loss when the hedged underlying transaction is realised. The hedge-ineffective portion of the changes in fair value is recognised immediately in profit or loss.

In the case of hedges of a net investment in a foreign operation, hedging instruments are used to hedge the exposure to translation risks arising from investments in a foreign functional currency. Gains and losses arising from these hedging instruments are accounted for in equity as other comprehensive income as part of “Cumulative changes in equity not recognised through the statement of profit or loss” until the company is disposed of or sold.

If the requirements for hedge accounting are not met, the gain or loss on the remeasurement of derivative financial instruments at fair value is recognised in profit or loss.

In accordance with IAS 39 Financial Instruments: Recognition and Measurement, embedded derivatives (i.e. derivatives which are included in host contracts) are separated from the host contract and accounted for as derivative financial instruments, if certain requirements are met.

For more information about risk management and the impact on the balance sheet of derivative financial instruments Note [29].

Receivables and liabilities from finance leases, trade receivables and trade payables, financial debt, as well as other receivables, other assets and other liabilities, are reported at amortised cost as long as they are not derivative financial instruments. Differences between historic cost and the repayment amount are accounted for using the effective interest rate method. Appropriate impairment losses are recognised if specific risks are identified. The carrying amount of the financial debt which comprises the hedged item in a fair value hedge is adjusted for the corresponding gain or loss with respect to the hedged risk.

Financial instruments which contain both an equity portion and a liability portion are classified in accordance with IAS 32 Financial Instruments: Presentation. The financial instruments issued by The Linde Group are classified entirely as financial liabilities and reported at amortised cost. No part thereof is classified separately as an equity instrument.

Deferred taxes

Deferred tax assets and liabilities are accounted for in accordance with IAS 12 Income Taxes under the liability method in respect of all temporary differences between the carrying amounts of the assets and liabilities under IFRS and the corresponding tax base used in the computation of taxable profit, and in respect of all consolidation adjustments affecting net income and unused tax loss carryforwards.

Deferred tax assets are only recognised for unused tax losses to the extent that it is probable that taxable profits will be available in future years against which the tax losses can be utilised. Deferred taxes are calculated at the tax rates that apply to the period when the asset is realised or the liability is settled, using tax rates set out in laws that have been enacted or substantively enacted in the individual countries by the balance sheet date.

Tax credits which relate to capital expenditure are recognised in accordance with the provisions of IAS 12 Income Taxes. They are not offset against the relevant capital expenditure.

Provisions for pensions and similar obligations

The actuarial valuation of pension provisions is based on the projected unit credit method set out in IAS 19 Employee Benefits for defined benefit obligations. This method takes into account not only vested future benefits and known pensions at the balance sheet date, but also expected future increases in salaries and pensions. The calculation of the provisions is determined using actuarial reports based on biometric assumptions.

The fair value of the plan assets (adjusted if necessary to comply with the rules relating to the asset ceiling set out in IAS 19.64) is deducted from the present value of the pension obligations (gross pension obligation) to give the net pension obligation or net pension asset in respect of defined benefit pension plans. According to IAS 19.64, a net pension asset may only be disclosed if The Linde Group, under its obligation as an employer, has the right to receive a refund of the surplus or to reduce future contributions.

The net interest expense for the financial year is calculated by multiplying the net pension obligation or net pension asset at the beginning of the period by the interest rate underlying the discounting of the gross defined benefit obligation at the beginning of the period.

The discount rate is calculated on the basis of the returns achieved on the relevant call date for high quality fixed-interest corporate bonds in the market. The currency and period to maturity of the underlying bonds correspond to the currency and probable period to maturity of the post-employment benefit obligations.

Remeasurements comprise on the one hand the actuarial gains and losses on the remeasurement of the gross defined benefit obligation and on the other hand the difference between the return on plan assets actually realised and the return assumed at the beginning of the period, which is based on the discount rate of the corresponding gross defined benefit obligation. If a pension plan is overfunded and the asset ceiling applies, remeasurements also comprise the change in the net asset from the application of the asset ceiling rules to the extent that this has not been accounted for in net interest.

Actuarial gains and losses arise from changes in actuarial assumptions or from variations between earlier actuarial assumptions and actual events.

All remeasurements (i.e. actuarial gains and losses, the cumulative effect of an asset ceiling and the effects of an increase in the pension obligation in accordance with IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction) are offset immediately in other comprehensive income.

The expense arising from additions to the pension provisions is allocated to functional costs. The net interest expense or net interest income from defined benefit plans is disclosed in the financial result. For each pension plan, it is established whether the net figure is a net interest expense or net interest income and the amounts are disclosed accordingly in the financial result.

Other provisions

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, other provisions are recognised when a present obligation to a third party exists as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Provisions are recognised for all identifiable risks and liabilities of uncertain timing or amount. The amounts provided are the best estimate of the probable expenditure required to settle the obligation and are not offset against recourse claims. The estimate of the obligation includes any cost increases which need to be taken into account at the balance sheet date. Provisions which relate to periods of more than twelve months are discounted.

Provisions for warranty claims are recognised taking current or estimated future claims experience into account.

Site restoration obligations are capitalised when they arise, at the discounted value of the obligation, and a provision for the same amount is established at the same time. The depreciation charged on the asset and the unwinding of interest applied to the provision are both allocated as an expense to the periods of use of the asset.

Provisions for restructuring are recognised if a formal, detailed restructuring plan has been drawn up and communicated to the relevant parties.

Cost of sales also includes additions to the provisions for warranties and provisions for onerous contracts. Warranty provisions are established for the estimated cost at the date of sale of that particular product. Provisions for onerous contracts are made in full in the reporting period in which the estimated cost of the particular contract exceeds the expected revenue.

For general and business risks, insurance contracts are entered into with an insurer outside the Group. The costs arising from these insurance contracts are recognised as functional costs.

In previous years, companies in The Linde Group acted as reinsurers in respect of some of the above-mentioned insurance contracts. The provisions of this type which still exist fall within the scope of IFRS 4 Insurance Contracts. Insurance risks are recognised in the Group financial statements in the form of a provision for unsettled claims. The provision for payment obligations comprises insurance claims which have arisen by the balance sheet date but which have not yet been settled. Provisions for claims which have been notified by the balance sheet date are based on estimates of the future costs of the claims including loss adjustment expenses. These are set up on the basis of individual obligations. Provisions for claims incurred but not reported (IBNR) at the balance sheet date are set up to take account of the estimated cost of claims. Due to the fact that no information is available about the extent of these claims, estimates are made based on industry experience. The provision is calculated using actuarial and statistical methods.

Since the beginning of the financial year, income tax provisions have no longer been disclosed in provisions but in income tax liabilities. In addition, those income tax payables which have hitherto been disclosed as non-current income tax payables have been reclassified as current income tax payables. The reason for this change is to provide a more appropriate presentation and better comparability of The Linde Group with other companies in the capital market who prepare consolidated financial statements in accordance with IFRS. The change is merely a reclassification on the equity and liabilities side of the balance sheet. The amount reclassified at the balance sheet date from provisions to current income tax payables was EUR 424 m. The prior-year figures have been adjusted accordingly (EUR 567 m).

Accounting for leases

Lease agreements are classified as finance leases in accordance with IAS 17 Leases if they transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are operating leases. Linde Group companies enter into lease agreements both as lessor and as lessee. When Linde enters into an agreement as the lessor of assets held under a finance lease, the future minimum lease payments due from the customer, equivalent to the net investment in the lease, are disclosed under Receivables from finance leases. Finance income is spread over the reporting periods using the effective interest rate method.

When Linde is the lessee under a finance lease agreement, the assets are disclosed at the beginning of the lease under tangible assets at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments, while the corresponding liabilities to the lessor are recognised in the balance sheet as Liabilities from finance leases. When the present value is calculated, the interest rate underlying the lease agreement is used or, if that is not available, the incremental borrowing rate. Depreciation charged on this tangible asset and the reduction of the lease liability are recorded over the lease term. If the useful life of the asset is shorter than the lease term, this should be used to determine the depreciation period instead. Whereas the leased property is depreciated on a straight-line basis over the lease term, the related lease liability is amortised using the effective interest rate method. Over the course of the lease term, this results in a difference between the lease obligation and the carrying amount of the leased property.

Rental and lease payments made by Linde under operating leases are recognised in functional costs in the statement of profit or loss on a straight-line basis over the lease term.

According to IFRIC 4 Determining whether an Arrangement contains a Lease, if specific criteria are met, certain arrangements should be accounted for as leases that do not take the legal form of a lease. In particular, in the Gases Division, certain gas supply contracts are classified as embedded leases if fulfilment of the arrangement depends upon a specific asset and if the gas customer obtains substantially all the production capacity of the asset. If an embedded financial lease exists, the criteria set out in IAS 17 Leases are used to examine in each individual case whether, under the gas supply contract, substantially all the risks and rewards incidental to ownership of the plant have been transferred to the gas customer. The first step in the review process is to separate that portion of the gas supply contract which relates to the embedded lease from the rest of the contract. Then it is established whether the minimum lease payments thus identified amount to substantially all the fair value of the plant and whether the minimum lease term is for the major part of the plant’s economic life. Any other clauses in the agreement, especially those relating to the transfer of ownership, the acquisition or the extension of the lease term are also examined for their impact on the transfer of risks and rewards incidental to ownership of the plant. If these review procedures establish that a gas supply contract contains a finance lease component, the investment in the plant is recognised in revenue not affecting profit or loss and the resulting receivable is disclosed under Receivables from finance leases.

In the case of operating leases or embedded operating leases, if the economic ownership of the leased asset is not transferred to the customer as lessee, but remains with Linde as lessor, the lease income from the operating lease is recognised in revenue on a straight-line basis over the lease term.

Non-current assets held for sale and disposal groups and discontinued operations

Non-current assets and disposal groups are classified separately in the balance sheet as held for sale, if they are available for sale in their present condition and the sale is highly probable. Assets that are classified as held for sale are measured at the lower of their carrying amount and their fair value less costs to sell. Liabilities classified as directly related to non-current assets held for sale are disclosed separately as held for sale in the liabilities section of the balance sheet. For discontinued operations, additional disclosures are required in the Notes, as long as the requirements for classification as discontinued operations are met.

Discretionary decisions and estimates

The preparation of the Group financial statements in accordance with IFRS requires discretionary decisions and estimates for some items, which might have an effect on their recognition and measurement in the statement of financial position and statement of profit or loss. The actual amounts realised may differ from these estimates. Estimates are required in particular for:

  • the assessment of the need to recognise and the measurement of impairment losses relating to intangible assets, tangible assets and inventories Notes [14], [15] and [17],
  • the determination of the estimated useful lives of tangible assets and the assessment as to which components of cost may be capitalised Note [15],
  • the assessment of the need to recognise provisions for bad debts Note [18],
  • the recognition and measurement of pension obligations Note [23],
  • the recognition and measurement of other provisions Note [24],
  • the assessment of the stage of completion of long-term construction contracts Notes [18] and [27],
  • the assessment of lease transactions,
  • the assessment of assets acquired and liabilities assumed on the formation of business combinations Note [3],
  • the assessment as to whether Linde exercises control, joint control or significant influence over companies in which it holds less than 100 percent of the voting rights Notes [4] and [7].

Any change in the key factors which are applied in impairment reviews of goodwill, other intangible assets, tangible assets or inventories may possibly result in higher or lower impairment losses or no impairment losses at all being recognised. See Note [14] for sensitivity information.

Other significant estimates include the determination of estimated useful lives for intangible assets and tangible assets. Uniform Group guidelines based on past experience apply to estimated useful lives in the main asset classes. Assumptions also need to be made when Linde assesses whether an asset may be capitalised and which components of the cost of the asset may be capitalised. Estimates need to be made here, for example, of the expected future economic benefits of an asset or the expected future costs of the dismantling of plants. In addition, the capitalisation of costs which are incurred during the operating phase of an asset, such as the costs of upgrades to plants or their complete overhaul, depends on whether these costs will lead to better or higher output or whether they extend the estimated useful life of the asset.

Establishing provisions for bad debts is based on making estimates and assessments about individual amounts receivable. These estimates and assessments are founded on the creditworthiness of that particular customer, prevailing economic trends and an analysis of historic bad debts on a portfolio basis. Individual provisions for bad debts take account of both customer-specific and country-specific risks.

The obligation arising from defined benefit pension commitments is determined on the basis of actuarial assumptions. Key actuarial assumptions include the discount rate, trends in pensions and vested future benefits, and life expectancy. The discount rate is determined on the basis of returns achieved on the relevant call date for high-quality fixed-interest corporate bonds in the market. The currency and period to maturity of the underlying bonds correspond to the currency and probable period to maturity of the post-employment benefit obligations. If such returns are not available, the discount rates are based on market returns for government bonds.

Sensitivity analyses of significant actuarial assumptions made are provided in Note [23].

The recognition and measurement of other provisions are based on the assessment of the probability of an outflow of resources, and on past experience and circumstances known at the balance sheet date. The actual outflow of resources may therefore vary from the figure included in Other provisions. Different discretionary decisions and estimates are required for different types of provision. The main estimates used for each type of provision are set out below.

In the case of provisions for site restoration obligations, an estimate is made, based on past experience, of future costs expected to be incurred to dismantle plants and restore the land on which the plant was built to its original condition. The expected costs are reassessed on an annual basis and the amount of the provision is adjusted if required.

Provisions for warranties and onerous contracts include provisions for warranties and provisions for litigation. Assumptions are made here about the probability of occurrence of the risk and the expected future outflow of resources. The uncertainty associated with the measurement of warranty provisions is relatively moderate, as Linde has recourse to historic warranty cost ratios when determining the amounts to be set aside.

Litigation is associated with great uncertainty. A significant amount of discretion is required to assess whether a present obligation to a third party exists at the balance sheet date as a result of a past event, whether it is probable that an outflow of resources will be required in future to settle the obligation and whether a reliable estimate can be made of the amount of the obligation. The current status of outstanding litigation is regularly reviewed and updated by the Group’s legal department and lawyers appointed by the Group. Changes to this status as a result of new information may result in adjustments being made to the provision.

Provisions for other obligations include provisions for costs which are expected to arise on the completion of major projects. There is an increased level of uncertainty associated with the measurement of these provisions.

Provisions for obligations relating to personnel primarily include provisions for holiday pay and provisions for wages and salaries. The uncertainty associated with the measurement of these provisions is very low, as the expected costs can be relatively reliably determined.

The assessment of the stage of completion of long-term construction contracts is based on the percentage of completion (PoC) method, subject to certain conditions being met. When applying this method, it is necessary to evaluate the stage of completion of the contract. Moreover, it is also necessary to provide estimates of total contract costs and total contract revenue and make an assessment of the risks attached to the contract, including technical, political and regulatory risks. According to the PoC method, the stage of completion of the contract is determined on the basis of the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. For major projects, the calculation and analysis of the stage of completion of the project takes into account in particular contract costs incurred by subcontractors. External experts are sometimes used to assist with the calculation of these costs.

When the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent of the contract costs incurred which can probably be covered, and the contract costs in the period in which they are incurred are recognised as an expense (zero profit method).

Changes in estimates may lead to an increase or decrease in revenue.

Discretionary decisions are required to be made, for example, in assessing whether substantially all the risks and rewards incidental to ownership of a leased asset have been transferred to the lessee. Linde enters into lease agreements principally as lessee (procurement leases). Under IFRIC 4, gas supply agreements may though be classified as embedded lease agreements if certain conditions apply. In these cases, Linde acts as the lessor. To establish whether an embedded finance lease exists in respect of Linde’s on-site plants, assumptions need to be made about the allocation of the consideration received from the customer. Consideration, in the form of payments from the customer, is used on the one hand to finance the plants and on the other to provide the customer with maintenance services. Whether lease agreements are classified as operating leases or finance leases will depend on the exercise of discretion.

When classifying procurement lease agreements, Linde must also make assumptions: e.g. to determine the appropriate interest rate or the residual value or estimated useful lives of the underlying assets.

Business combinations require estimates to be made when determining fair values for assets, liabilities and contingent liabilities acquired, as well as for contingent components of the purchase price. The nature of the estimate depends on the measurement methods applied. When discounted cash flow methods are used, primarily to measure intangible assets (but which are also used to calculate contingent consideration), discretionary aspects include in particular the time period and amount of the cash flow and the determination of an appropriate discount rate. If cost-based methods are used, the main discretionary element is the assessment of the comparability of the reference objects with the objects to be measured. When making discretionary decisions about purchase price allocations in the case of business combinations where the total assets acquired including goodwill exceed EUR 100 m, Linde takes advice from experts in the field, who assist in arriving at the decisions and provide reports backing their opinions.

When assessing whether Linde exercises control, joint control or significant influence over companies in which it holds less than 100 percent of the voting rights, discretionary decisions may have to be made. Above all in cases where Linde holds 50 percent of the voting rights, a decision has to be taken as to whether there are other contractual rights or particularly relevant facts or circumstances which might mean that Linde has power over the potential subsidiary or that joint control exists. If joint control exists, Linde needs to distinguish whether the investment is a joint operation or a joint venture. This distinction is dependent on whether Linde has rights to the assets and obligations for the liabilities of the arrangement or whether it has rights to the net assets of the arrangement. To make the distinction, Linde must consider the structure and legal form of the company, any contractual agreements which might apply and any other relevant circumstances.

Changes to contractual agreements or facts or circumstances are monitored and are evaluated to determine whether they have a potential impact on the assessment as to whether Linde is exercising control or joint control over its investment.