II. Group

The Consolidated Financial Statements include technotrans AG and its 21 subsidiaries, over which it exercises control. Control is routinely deemed to exist where a majority of voting rights is held. technotrans AG directly or indirectly holds a majority of voting rights in 20 subsidiaries. The group does not hold a majority of voting rights in SHT Immobilienbesitz GmbH & Co. Vermietungs KG, which exclusively holds and manages the factory premises in Bad Doberan that are let out to KLH Kältetechnik GmbH. However, based on the terms of the lease agreement the group essentially receives the entire income from this activity. The Board of Management consequently comes to the conclusion that SHT Immobilienbesitz GmbH & Co. Vermietungs KG is a subsidiary and is therefore to be included in consolidation. Subsidiaries that are of minor significance for the group and for the presentation of a true and fair view of the net worth, financial position and financial performance in view of their suspended or only minor level of business activity are fundamentally not included in the Consolidated Financial Statements. Three subsidiaries that are already in liquidation were not included in the Consolidated Financial Statements for reasons of minor significance.

At the meeting of shareholders on August 31, 2017 it was resolved to further consolidate Asia business at the Taicang location and therefore to terminate the business of KLH Cooling International Pte. Ltd., Singapore, to distribute the remaining equity to technotrans AG and then to wind up the company. The company still in liquidation was deconsolidated with effect from December 31, 2017. Deconsolidation had no material effect on the consolidated result.

With effect from September 30, 2017 EasyBrowse GmbH, Schwerin, was merged with Ovidius GmbH, Berlin. In addition, two new companies were established in the financial year: technotrans Grundstücksverwaltungs GmbH, Sassenberg, will be erecting the new business premises for Termotek GmbH at its Baden-Baden location in the 2018 financial year. With effect from January 1, 2018 technotrans japan K.K., Kobe, Japan, took over the business operations of the permanent establishment of technotrans Asia Pacific limited, Hong Kong/China, which has previously been situated in Japan.

The Consolidated Financial Statements are based on the group companies’ annual financial statements and interim financial statements (Commercial Balance Sheet II based on IFRS) prepared in accordance with standard recognition and measurement principles at December 31, 2017.

Capital consolidation for the subsidiaries is performed according to the purchase method pursuant to IFRS 3. The costs of acquisition of the business combination in each case correspond to the cash components paid and the liabilities arising and acquired at the time of acquisition. These costs of acquisition are distributed between the identifiable assets, liabilities and contingent liabilities of the acquiree by their recognition at the respective fair values at the time of acquisition. The positive differences remaining after purchase price allocation are recognised as goodwill. The non-controlling interests were measured at acquisition cost (partial goodwill method). Changes in the group’s interest in a subsidiary that do not lead to a loss of control are reported as equity transactions. Goodwill is recognised as an asset and subjected to an impairment test annually. The costs associated with the business combination are recognised as an expense when they arise.

All intra-group receivables and liabilities, revenues, expenses and income as well as balances from intra-group supplies are eliminated on consolidation. Where necessary, deferred taxes are recognised for consolidation processes affecting income.

With the exception of certain financial instruments that are reported at fair value, the Consolidated Financial Statements are prepared based on historical cost.

Estimates and Judgments Made for Financial Reporting Purposes

The preparation of the Consolidated Financial Statements in accordance with IFRS requires the Board of Management to make estimates and assumptions which exercise influence on the amounts reported and the disclosures made on them in the Notes. Key exercises of judgment outside the context of estimates concern the definition of the cash-generating units, the consolidation of companies in which no majority of voting rights is held, and the measurement method for the non-controlling interests.

All estimates and assumptions are made to the best of our knowledge, in the interests of providing a true and fair view of the net worth, financial position and financial performance of the group. Such estimates and assumption-based policies involve uncertainty and may change in the course of time. The actual results may deviate from these assessments. Responsibility for regularly monitoring all key fair value measurements, including the Level 3 fair values, rests with Group Controlling. Changes are reported to the Finance Director. Regular reviews of the key non-observable input factors and of fair value adjustments are carried out.

The assessments and underlying assumptions are examined on a regular basis. If a reassessment results in a difference, that difference is reported in the accounting period in which the reassessment was made if it relates to that period only. It is recorded in the accounting period in which the reassessment was made, as well as in subsequent periods if it also influences the subsequent periods.

Assessments made by the Board of Management that are subject to a significant degree of uncertainty and bring with them the risk of significant adjustments in future financial years concern the following matters in particular:

Goodwill is reported in the Consolidated Balance Sheet as a result of acquisitions. Upon initial consolidation of an acquisition, all identifiable assets, liabilities and potential liabilities are stated at their fair value at the date of acquisition. Assets such as land, buildings, and plant and equipment are normally measured on the basis of independent appraisals, while the fair value of an intangible asset is determined internally according to its nature and the complexity of its measurement, applying an appropriate measurement technique. The assumptions made here are regularly subject to forecasting uncertainty. Goodwill exists from corporate acquisitions in previous years. Goodwill is tested for impairment once a year or whenever any basis for impairment is identified. With regard to “key exercises of judgment in the context of financial reporting for 2017”, see Note 2 “Goodwill” and Note 3 “Intangible Assets”.

At each balance sheet date the Board of Management is to assess whether there is any indication that the carrying amount of an item of property, plant and equipment or an intangible asset might be impaired. In that case, the recoverable amount of the asset in question is estimated. The recoverable amount corresponds to the higher of the fair value less the costs of disposal, or the value in use. In order to determine the value in use, the discounted future cash flows of the asset in question need to be determined. This estimate involves key assumptions about the underlying economic situation and future cash flows. Changes to these assumptions or circumstances could result in additional reductions for impairment in the future, or in reversals. With regard to “key exercises of judgment in the context of financial reporting for 2017”, see the Notes section, Note 1 “Property, Plant and Equipment”, Note 2 “Goodwill” and Note 3 “Intangible Assets”.

For the recognition and measurement of other provisions, the level and likelihood of the call are estimated. The level of the actual call may differ from the estimates. The assumptions and estimates are in each case based on current knowledge and the available data. With regard to “key exercises of judgment in the context of financial reporting for 2017”, see Note 15 “Provisions”.

Because the group has operations and generates income in many different countries, it is subject to widely varying tax laws in a large number of tax regimes. Although the management believes it has made a reasonable estimate of fiscal imponderables, there can be no assurance that the outcome of such fiscal imponderables will correspond to the original estimate. Any differences could have an impact on the tax liabilities and the deferred taxes. At every balance sheet date, the Board of Management assesses whether the realisability of future tax benefits is sufficiently probable for the reporting of deferred tax assets. This requires the management among other things to assess the tax benefits that arise from the available tax planning strategies and future taxable income. The deferred tax assets reported could decrease if the estimates of planned taxable income are reduced or if changes to current tax laws restrict the realisability of future tax benefits.

The application of a specific IFRS is indicated in the notes to the individual items of the financial statements. The following methods of recognition and measurement were fundamentally applied:

Property, plant and equipment are reported at historical cost less depreciation and accumulated impairment losses. Retrospective costs of acquisition are capitalised where they increase the value of the property, plant and equipment. In the case of self-constructed assets, the cost of conversion is calculated on the basis of prime costs as well as the systematically allocable fixed and variable production overheads, including depreciation. Regular maintenance and repair costs are recorded as an expense after they have occurred.

Apart from land, items of property, plant and equipment are depreciated according to the straight-line method, on the basis of their useful life. The useful life and method of depreciation are reassessed annually. Components of property, plant and equipment with a significant purchase value in relation to the total value are depreciated separately as appropriate. Upon sale or retirement, the costs and the corresponding accumulated depreciation for the assets are derecognised from the Balance Sheet; any gains or losses arising are recognised in the Income Statement.

Where there is a basis for impairment, property, plant and equipment are examined for impairment pursuant to IAS 36. Insofar as necessary, the carrying amount for property, plant and equipment is adjusted to the recoverable amount. If the circumstances which led to this measure subsequently cease to apply, this impairment is reversed at most by the net carrying amount that would have applied if no such reductions for impairment had been made.

The reported goodwill constitutes the difference between the purchase price and the fair value of the net assets acquired through business combinations. Pursuant to IAS 36, goodwill is to be tested for impairment once a year or if any basis for a reduction for impairment is established. For the impairment test, from the acquisition date any goodwill acquired through a business combination is allocated to the group’s cash-generating units which benefit from the synergy effects from the business combination. Insofar as necessary, the carrying amount is reduced to the "recoverable amount". Pursuant to IAS 36.124, such impairment is not reversed where the circumstances which led to it subsequently cease to apply.

Intangible assets, namely concessions, industrial and similar values acquired for consideration, and the customer base are carried at cost. They are amortised by the straight-line method, according to their useful life. The residual value, useful life and method of depreciation are reassessed annually.

Self-constructed intangible assets are recognised at cost. Development expenditure on the fundamental reengineering of a product is capitalised if the product is technically and economically realisable, the development is saleable, the expenditure can reliably be measured and the group possesses adequate resources to complete the development project. Pursuant to IAS 38.65 ff, it comprises the directly allocable prime costs as well as the production overheads that can be allocated directly to the creation, manufacture and preparation of the asset, where they arise between the start of the development phase and its conclusion. The conditions for capitalisation as laid down in IAS 38.21, 38.22 and 38.57 are met. Amortisation of development expenditure recognised as an intangible asset commences as soon as the asset is available for use. This usually coincides with the start of its commercial use.

All self-constructed intangible assets acquired for consideration have a finite useful life. The notes on property, plant and equipment apply analogously to any necessary impairment of intangible assets to the “recoverable amount”.

The taxes for the period comprise current and deferred taxes. Taxes are recognised in the Income Statement unless they refer to items that are recognised directly in profit or loss or in other comprehensive income. In such cases, the corresponding taxes are likewise recognised in profit or loss or in other comprehensive income. In accordance with IAS 12, deferred taxes are accounted for using the balance sheet liability method in respect of temporary differences between the carrying amounts in the Commercial Balance Sheet and the Tax Balance Sheet (liability method) and in respect of tax loss carryforwards for creditable tax. Deferred tax assets for temporary differences as well as tax loss carryforwards are only reported to the extent that it is probable that sufficient taxable income will be available in the future to make use of these. The deferred taxes are measured using the locally applicable tax rates that apply or have been announced at the balance sheet date.

Deferred tax assets and liabilities are also recognised on temporary differences arising from business combinations, except for temporary differences on goodwill where the latter are fiscally disregarded. Deferred tax assets and liabilities are offset if a right to perform offsetting exists and the items relate to income taxes levied by the same taxation authorities and for the same company.

The inventories recognised are always measured at cost of acquisition or cost of conversion, using the weighted average cost method, or at the net realisable value if lower. In accordance with IAS 2, cost of conversion includes the direct costs of material and direct costs of labour, as well as allocable fixed and variable production overheads arising in the manufacturing process, by way of target costing.

The net realisable value is the anticipated sales proceeds less the estimated costs of completion and the costs necessary to make the sale. If the reasons which have led to downward valuation cease to apply, a reversal is made.

Trade receivables and other current receivables are fundamentally reported at amortised cost, using the effective interest rate method. Reductions for impairment that are applied in the form of individual and group portfolio-based valuation allowances take adequate account of the credit risk. Objective failures result in the derecognition of the receivable in question. Non-current, non-interest-bearing receivables are discounted.

Cash and cash equivalents are reported at face value and converted into euros at the closing rates. They comprise cash on hand and demand deposits, as well as financial assets that can be converted into cash at any time.

Issued capital (no par value shares) is reported at the nominal amount.

If the company acquires treasury shares, these are offset against equity. The purchase and sale, issuance and retirement of treasury shares are not recognised within income, but as an addition to or disposal from equity. Differences between the cost of the issued shares and their fair value upon their sale or issuance are offset against retained earnings or capital reserves.

Liabilities are fundamentally recognised at amortised cost. Liabilities in foreign currency are translated in accordance with IAS 21.21 and 23 (a). With the exception of the conditional purchase price payments from corporate transactions, financial liabilities are not measured at fair value through profit or loss. When initially recognised, they are measured at fair value including the transaction costs and subsequently at amortised cost, using the effective interest method. Conditional purchase price payments are measured at fair value. Changes in the fair value are recognised through profit or loss.

Provisions are created to cover obligations to third parties if obligations existing at the reporting date are likely to result in a future outflow of resources and the latter amount can reliably be estimated. They are measured at the likely amount at which settlement will take place. Long-term provisions are discounted.

Provisions for warranties are created at the time of sale of the goods in question. Their level is based on past developments in warranties and on a consideration of all possible future warranty claims, weighted according to probability.

Provisions for litigation settlements are created in the amount of the expected call, alongside the costs of the proceedings.

Provisions for pensions and provisions for similar obligations are measured according to the projected unit credit method. Gains and losses resulting from changes in expectations regarding life expectancy, pension and pay increases expected in the future and the discount rate compared with the actual development during the period are recognised income-neutrally directly in other comprehensive income on the Statement of Comprehensive Income.

Derivative financial instruments are recognised at market value. At technotrans, derivative financial instruments were used exclusively for hedging interest rate risks at December 31, 2017. Where they qualify as cash flow hedges, the correspondingly effective adjustments to the market price are recognised within equity, with no effect on income. Financial instruments are reported if technotrans is a party to the contractual provisions of the financial instrument. Financial assets are reported at the settlement date except in the case of derivative financial instruments, which are reported at the trade date.

Revenues from the sale of goods are recognised in accordance with IAS 18.14 as soon as the significant risks and rewards associated with ownership of the products sold have been transferred to the buyer. Revenues from services are recognised as soon as the service has been performed. Revenue is reported less reductions in proceeds such as bonuses, rebates and trade discounts.

Financial income and charges are reported on an accrual basis in line with the effective interest method. Borrowing costs that are directly attributable to the acquisition, construction or manufacture of a qualifying asset are capitalised as part of the cost of that asset pursuant to IAS 23. No financing costs were capitalised in the 2017 financial year.

Currency translation: The financial statements of all foreign group companies prepared in foreign currency are translated according to the concept of the functional currency (IAS 21). The local currency of the country in which they are based is recognised as the functional currency of the companies included in the Consolidated Financial Statements.

Business transactions conducted by a group company in a currency other than its functional currency are translated into and reported in the functional currency for the first time at the spot exchange rate on date of the business transaction. At each subsequent balance sheet date, monetary items (cash, receivables and liabilities) that were originally in a currency other than the functional currency are translated at the closing rate; the resulting exchange rate differences are recognised in the Income Statement. Non-monetary items are translated at the historical rate.

The assets and liabilities of foreign subsidiaries are translated at the mean rate at the balance sheet date (closing rate), and included in the Consolidated Financial Statements. Expenses and income are translated at the current rate, approximating to the mean rate for the year; the resulting differences are netted against equity, with no effect on income. Exchange differences compared with prior-year translation are likewise netted within equity, with no effect on income.

Exchange rate differences from the net investment in a foreign business (group company) are reported within equity with no effect on income; they are only recognised in the Income Statement upon disposal of the net investment.

The following rates were applied in currency translation:

During the 2017 financial year the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) published further standards and interpretations as well as amendments to existing standards, the application of which was not yet mandatory in the 2017 financial year. The technotrans Group does not plan the early adoption of the following new or amended standards and interpretations, the adoption of which is only mandatory in later financial years.

The expected effects of the changes to IFRS 9 on the Consolidated Financial Statements:
IFRS 9 contains revised guidelines for the classification and measurement of financial instruments, including a new model for expected credit losses for calculating the impairment of financial assets, as well as the new general hedge accounting requirements. It also adopts the guidelines on the recording and derecognition of financial instruments from IAS 39. The requirements on classification and measurement in IFRS 9 are to be applied retrospectively. No adjustment to prior-year periods is necessary. The hedge accounting requirements are to be applied prospectively.

IFRS 9 contains three principal classification categories for financial assets: “measured at amortised cost”, “fair value through other comprehensive income” and “fair value through profit or loss”. These new classification categories replace the IAS 39 legacy categories: “held to maturity”, “loans and receivables” as well as “available for sale”. The Board of Management does not expect adoption of the new classification requirements to have any material effects on accounting for financial assets.

IFRS 9 in addition has effects on the accounting and measurement of trade receivables. Unlike IAS 39, where impairment losses are only recognised for impairment already occurred but not yet known (“incurred loss model”), with IFRS 9 the future expected credit losses are decisive for the level of impairment (“expected loss model”). For these, the expected credit losses are determined based on the expected credit losses up to maturity. To determine the expected credit losses, customers are arranged in groups of similar credit risks. As well as a collective assessment, an individual assessment of the credit risks is made if the credit risk has increased significantly at the reporting date. Effects from the new adoption of IFRS 9 with effect from the time of first adoption at January 1, 2018 are to be recorded income-neutrally within equity. The group considers that the impairment for trade receivables within the scope of the impairment model of IFRS 9 has not changed materially.

The determination of the need for impairment losses for cash and cash equivalents is equally dealt with in IFRS 9. These are essentially deposited with banks or financial institutions selected based on long-standing positive experience and on bank ratings. The group assumes that its cash and cash equivalents exhibit a low credit risk on the basis of the external ratings of the banks and financial institutions.

Under IFRS 9, the group must ensure that hedge accounting is consistent with the goals and strategy of group risk management. The requirements of IFRS 9 are met for all types of hedge accounting that technotrans currently employs.

Currently exclusively interest rate swaps are used in the technotrans Group for hedging future interest payment streams. Under IAS 39, the interest rate swaps were accounted for at market price. Measurement gains and losses from market price changes were recognised income-neutrally within equity, under the hedging reserve. The amounts recognised within equity were recognised through profit or loss in the period in which the completed transaction influences the net income for the period. With IFRS 9, these amounts continue to influence the net income for the period at the time the hedged transaction influences the net income for the period.

Upon first-time adoption of IFRS 9, the group has the option of continuing to apply the accounting rules of IAS 39 for hedges instead of the requirements of IFRS 39. The group has decided to adopt the new requirements of IFRS 9.

IFRS 9 in addition requires extensive new disclosures, in particular on the credit risk and on expected credit losses as well as on hedge accounting.

Adoption of the new standard is mandatory for financial years beginning on or after January 1, 2018. The group intends to adopt the fully retrospective method for the transition.

The expected effects of the changes to IFRS 15 on the Consolidated Financial Statements:
Under IFRS 15, revenue realisation is to be assessed using a five-step model framework. This involves first identifying the customer contract and the separate performance obligations contained in it. Then the transaction price of the customer contract is to be determined and broken down according to the agreed separate performance obligations. Revenue realisation occurs in the amount of the pro rata transaction price upon fulfilment of the individual performance obligation. The standard is to be adopted for the first time for financial years beginning on or after January 1, 2018. The group does not use the option of early first-time adoption of IFRS 15.

The technotrans group has conducted a detailed assessment of the effects of adopting IFRS 15. The material transactions and the related contracts with customers were investigated. As part of the investigation, the business transactions were appraised using the five-step model framework and the differences in quality from the accounting rules previously applicable and applied were assessed.

When goods are sold, revenue is currently recognised upon delivery and supply of the goods, and therefore at the point at which the customer accepts the goods as well as the accompanying risks and rewards incidental to the passage of ownership. Revenue is recognised at that point, provided the revenue and costs can be reliably measured, receipt of the fee is probable and there is no remaining right of disposal with regard to the goods. Under IFRS 15, revenue is recognised as soon as a customer acquires control over the goods. In the assessment of the group, currently the point of revenue realisation corresponds to the point of realisation under IFRS 15. We therefore expect no material changes compared with the previous practice under IAS 18.

Services are provided e.g. on the basis of a single agreement in various reporting periods. The entire fee for service contracts is broken down for the services based on the relative fair values. According to IFRS 15 the entire fee for the service contracts is spread over all services, based on their standalone selling prices. The standalone selling prices are determined on the basis of the list prices at which the group offers the services in separate transactions. Based on the group’s assessment, the fair values and standalone selling prices of the services are broadly comparable. For that reason, we do not expect any material differences with regard to the point at which revenues for these services are recorded.

The group has completed its implementation projects on accounting for revenue from contracts with customers and does not expect any material changes compared with the previous practice under IAS 18. Additional quantitative and qualitative disclosures will be necessary compared to the current IAS 18 rules.

The group intends to apply the modified retrospective method, with recognition of cumulative adjustment amounts at January 1, 2018, in its Consolidated Financial Statements for the transition to IFRS 15. This means that the group will not apply the requirements of IFRS 15 for every comparative period shown.

The expected effects of the changes to IFRS 16 on the Consolidated Financial Statements: The group has completed an initial assessment of the possible effects on its Consolidated Financial Statements, but a detailed assessment has not yet been completed. The actual effects of the adoption of IFRS 16 on the Consolidated Financial Statements at the time of first adoption will depend on the future economic conditions, such as the interest rate for the group at January 1, 2019, the composition of the leases portfolio at that point, the group’s assessment of the exercising of extension options and the extent to which the group uses practical expedients and recognition exemptions.

The standard has material effects on the presentation of the net worth, financial position and financial performance. Whereas payment obligations for operating leases were previously disclosed in the Notes, in future the resulting rights and obligations are to be recognised as right-of-use assets and lease liabilities. technotrans AG expects a significant increase in the balance sheet total at the time of first adoption in view of the rise in lease liabilities, as well as a similarly steep rise in fixed assets from the right-of-use assets to be capitalised. At December 31, 2017 the future minimum lease payments under non-cancellable operating leases for the business premises and for completed motor vehicle lease agreements amount to € 4,429 thousand. The increase in the lease liabilities additionally results in a corresponding rise in net borrowings. In addition, the nature of expenses related to those leases will now change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. This will lead to an improvement in EBIT and to a rise in the operating cash flow in the Cash Flow Statement.

No significant impact is expected for the group’s finance leases.

The group does not expect the adoption of IFRS 16 to have any material impact on compliance with the group’s capital management targets or on the obligation to adhere to financial indicators (financial covenants) (cf. Note 10 “Equity”).

The standard is to be adopted for the first time for financial years beginning on or after January 1, 2019. The group does not use the option of early first-time adoption of IFRS 16. The overall effects will be investigated in a group-wide project on the implementation of IFRS 16, but no reliable estimate of the quantitative effects will be possible until that project has been completed. No decision has yet been taken on which transitional method is to be used.

In addition, the IASB published standards and interpretations that have not yet been adopted by the European Union. Of these, the following standards are of relevance for the group. The effects on the Consolidated Financial Statements are currently being examined.