Accounting estimates and judgments


Audited by PwC

In accordance with generally accepted accounting principles, calculation of the carrying amount of certain assets and liabilities requires estimates and judgments to be made concerning future events. Estimates and judgments are based on historical experiences and other factors that Management considers reasonable and relevant. These assumptions may be incomplete or inaccurate, and unexpected events may occur, as a result of which the estimates and judgments made are subject to a certain degree of intrinsic uncertainty.

Impairment testing

Annual impairment testing of goodwill is based on the value in use of the individual cash-generating unit, using the discounted cash flow method. The calculation is based on budgets approved by Management. Cash flows after the budget period are extrapolated using individual growth rates. The discount rate used for the calculation does not contain possible impacts of future risks, as these are included in future cash flows. The cash flows and growth rates take account of previous experiences, and represent Management's best estimate of future developments. In combination with the discount rate, however, these judgments may have a significant impact on the calculated values. This year's impairment testing has not given rise to any write-downs. Further information can be found in Note 12. The total carrying amount of goodwill at the end of 2010 was DKK 513 million (2009: DKK 443 million).

Inventories

Inventories are measured at cost including indirect production costs. The costs are assessed on an ongoing basis to ensure optimal measurement of expected raw material consumption, payroll costs, capacity utilization, and other relevant factors. Changes in the parameters may have an impact on the value of inventories. If the net realizable value of the inventories is lower than cost, the inventories are written down to net realizable value. Inventories are continuously assessed for indications of impairment on the basis of an individual valuation of the product or product group and the products’ expected sales. The carrying amount of inventories was DKK 1,640 million at the end of 2010 (2009: DKK 1,535 million).

Deferred tax assets and liabilities

Deferred tax assets and liabilities are recognized in the financial statements. Determining the value of these assets and liabilities also requires a judgment by Management. The value of deferred tax assets takes account of Management’s expectations of future taxable income and whether this is sufficient to utilize the temporary differences and cover unused tax losses. The carrying amount of deferred tax assets and liabilities was DKK 71 million and DKK 493 million respectively at the end of 2010 (2009: DKK 62 million and DKK 694 million).

Allowances for doubtful trade receivables

Allowances for doubtful trade receivables are based on a country-specific credit rating by external rating agencies. However, the allowances also reflect Management's judgment and review of the individual receivables based on individual customer creditworthiness and current economic trends. If customers’ financial situations change in the future, this may give rise to additional indications of impairment in future accounting periods. The carrying amount of allowances for doubtful trade receivables was DKK 133 million at the end of 2010 (2009: DKK 125 million).

Provisions and contingent liabilities

Management assesses the need for provisions and contingent liabilities on an ongoing basis. This assessment takes account of the likelihood of Novozymes being obliged to expend financial resources and the amount at which the liabilities are expected to be settled. As these assessments are based on estimates of the future, they are subject to a high level of uncertainty and may give rise to changes in amounts in future accounting periods. Further information can be found in Note 23. The carrying amount of provisions was DKK 219 million at the end of 2010 (2009: DKK 155 million).

Stock options

Calculation of cash-settled stock option programs is based on the Black–Scholes model. The input variables for this model include assumptions about the stock option's expected volatility and term to maturity. These input variables are based on estimates and impact the recognized employee costs and employee liabilities. The calculation is performed once and is not adjusted in future accounting periods. An estimate of the number of employees expected to utilize the stock options in the future is taken into account in calculating the cost. The estimate is based on expected rate of employee turnover and is updated every year. Further information on stock options can be found in Note 26.

See also Note 37 on Financial risk factors.             

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