| Print | Close window |
|
|
Telenor Group
General information
Telenor ASA (the Company) is a limited company incorporated in Norway on 21 July 2000. The Company is subject to the provisions of the Norwegian Act relating to Public Limited Liability Companies. The Company’s principal offices are located at Snarøyveien 30, N-1331 Fornebu, Norway. Telephone number: +47 810 77 000. The principal activities of the Company and its subsidiaries (the Group) are described under segments below.
From 1 January 2005, as required by the European Union's IAS Regulation and the Accounting Act, the Company has prepared its consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). IFRS as adopted by the EU differ in certain respects from IFRS as issued by the International Accounting Standards Board ("IASB"). However, the consolidated financial statements for the periods presented would be no different had the Company applied IFRS as issued by the IASB. References to "IFRS" hereafter should be construed as references to IFRS as adopted by the EU. The financial statements have been prepared on the historical cost basis, except for financial assets available for sale (primarily shares owned less than 20%) and derivative financial instruments, which are carried at fair value. The Group has not elected to revalue Property, Plant and Equipment and Intangible assets. The principal accounting principles adopted are set out below.
According to the Stock Exchange Regulations the Group’s income statement, balance sheet and Cash Flow statements for 2004 and 2003 according to Norwegian Generally Accepted Accounting Principles (N GAAP) are included as separate statements. The Financial Statements for 2003 are not reconciled to IFRS.
The Group's accounting principles differ, in certain respects, from United States Generally Accepted Accounting Principles (US GAAP). The differences are set forth in note 38.
Adoption of International Financial Reporting Standards
Regulations of the European Union (EU) require that publicly listed companies within the EU prepare their consolidated financial statements in accordance with “International Financial Reporting Standards” (IFRS) for accounting periods commencing on or after 1 January 2005. Due to the European Economic Area (EEA) agreement, Norwegian listed companies are also required to follow IFRS. Telenor’s first IFRS financial statements are for the year ending 31 December 2005 and include the comparative period for 2004.
The main changes in accounting principles when preparing Telenor’s financial statements according to IFRS compared to N GAAP are found in note 37.
Summary of significant accounting policies
At the date of authorisation of these financial statements, the following Standards and Interpretations that could affect Telenor were issued but not effective:
The management anticipate to adopt these Standards and Interpretations at the dates stated above and anticipate that the adoption in future periods will have no material impact on the financial statements of the Group.
Telenor has implemented IFRIC 4 – Determining whether an Arrangement contains a Lease (shall be applied from the year beginning on 1 January 2006).
Basis of consolidation and non-controlling interests
The consolidated financial statements incorporate the financial statements of Telenor ASA and entities controlled by Telenor ASA (subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control normally exists when Telenor has more than 50% voting power through ownership or agreements.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Intercompany transactions, balances, revenues and expenses are eliminated on consolidation.
Non-controlling (minority) interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the business combination (see below) and the non-controlling interests’ share of changes in equity since the date of the combination.
Business combinations
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, in exchange for control of the acquiree, plus any costs directly attributable to the business combination. If parts or whole of the purchase price has been hedged, and cash flow hedge accounting is applicable according to IAS 39, the gain or loss on the hedge instrument is included in the purchase price.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair values at the acquisition date, except for non-current assets that are classified as held for sale. Goodwill arising on acquisition is recognised as an asset at the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceed the cost of the business combination, the excess is recognised immediately in profit or loss.
The interest of non-controlling shareholders in the acquiree is initially measured at the non-controlling shareholders’ proportion of the net fair value of the assets (excluding goodwill), liabilities and contingent liabilities recognised.
The increase in value of identifiable assets and liabilities between the time of consolidation and subsequent share purchase is recorded against the shareholders’ equity. The increase of goodwill is capitalized for every acquisition.
Increases in non-controlling interests from a subsidiary's equity transactions and sale of shares in a subsidiary are recorded at fair value as non-controlling interests. The difference between the non-controlling interests measured at fair value and the recorded equity in the subsidiary is amortized or written-down through allocating results to the non-controlling interests.
Investments in associated companies
An associate is an entity over which the Group has significant influence and that is not a subsidiary. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies. Significant influence normally exists when Telenor has 20% to 50% voting power through ownership or agreements.
The results and assets and liabilities of associated companies are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associated companies are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associated companies (i.e. profit or loss and equity adjustments), less any impairment in the value of individual investments. Losses of associated companies in excess of the Group’s interest in such companies, including any non-current interests that, in substance, form part of the Group’s net investment in the associated companies are not recognised unless the Group has incurred legal or constructive obligations or made payments on behalf of the associated companies.
Any goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Where a Group entity transacts with an associate of the Group, profits or losses are eliminated to the extent of the Group’s interest in the relevant associated company.
The net result of associated companies, including amortization and write-downs and gains and losses on disposals, are included as a separate line item in the income statement between operating profit (loss) and financial items. For some associated companies, especially those that are listed (see note 18), financial statements as of the Group’s balance sheet date are not available. In such instances, the most recent financial statements (as of a date not more than three months prior to the Group’s balance sheet date) are used, and estimates for the last period are made based on publicly available information.
Goodwill and cash generating units
IFRS 3 has been adopted for business combinations for which the agreement date is on or after 1 January 2004.
Goodwill (see business combinations) is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.
A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. In identifying whether cash inflows from an asset (or group of assets) are largely independent of the cash inflows from other assets (or groups of assets), the Group considers various factors including how management monitors the entity’s operations (such as by product or service lines, businesses, geographical areas). The Group has identified that a CGU often will be the separate networks in the separate geographical areas (countries), distinguishing between different technologies (mobile, fixed and broadcast).
Goodwill does not generate cash flows independently of other assets or groups of assets and is allocated to the CGUs expected to benefit from the synergies of the combination that gave rise to the goodwill. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount (the higher of fair value less cost to sell and value in use) of the CGU is less than the carrying amount of the unit, the impairment loss does first reduce the carrying amount of any goodwill and then reduce the carrying amount of the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill cannot be reversed in a subsequent period if the fair value of the CGU recovers. Any impairment is included in write-downs in the income statement.
On disposal of businesses, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Non-current assets held for sale and discontinued
operations
Non-current assets and disposal groups are classified as held for sale according to IFRS 5 if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell.
A discontinued operation is a component of the Group that either has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale.
Revenue recognition and measurement
Revenues are measured at the fair value of the consideration received or receivable, net of discounts and sales related taxes. Revenues are reported gross with a separate recording of expenses to vendors of products or services. However, when Telenor only acts as an agent or broker on behalf of suppliers of products or services, revenues are reported on a net basis.
Revenues primarily comprise sale of
Revenues from subscription fees are recognized over the subscription period while delivery of other services is normally recognized based on actual usage. Revenues from operating services are recognized on the basis of actual use for volume-based contracts, and on a linear basis over the contract period for term-based contracts.
Revenues from sale of customer equipment are normally recognized when products are delivered to customers.
Connection fees
Revenues from connection that do not represent a separate earnings process are deferred and recognized over the periods that the fees are earned which is the expected period of the customer relationship. The expected period of the customer relationship is based on past history of churn, and expected development based on recent development or experience from other Group companies.
When connection fees are charged in arrangements where discounts is provided on other elements in the transaction (including multiple element transactions) connection fee has been allocated to sale of the rebated equipment or services, limited to the amount of the discount, and therefore recognized as revenue at the same time the equipment or services is recognized as revenue.
Multiple element arrangements
Revenue arrangements with multiple deliverables are divided into separate units of accounting if the delivered item has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of undelivered items. Arrangement consideration is allocated based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or other specified performance criteria, which most often is the amount received in cash at the time of sale. In most instances the delivered element is equipment, and the equipment is recorded with low revenue, potentially including connection fee, due to discounts provided. The subsequent services are recorded at the normal selling price or at a discounted value, depending on the facts and circumstances.
Sale of software
Revenue from sale of software licenses and software upgrades is deferred and recognized as revenue over the remaining software maintenance period when the customer does not have the right to use the software without software maintenance from the Group. In addition, in conjunction with these contracts, the Group may develop additional applications that are not essential to the use of the software. These development fees are also deferred and recognized as revenue over
the remaining software maintenance period.
Discounts
Discounts are often provided in the form of cash discount, free products or services delivered by the Group or by external parties. Discounts are recorded on a systematic basis over the period the discount is earned. Cash discounts or free products are recorded as revenue reductions. Free products or services delivered by external parties are recorded as expenses.
For discount schemes (loyalty programs etc), if the Group has past history to be able to make a reliable estimate the accrued discount is limited to the estimated discount that will actually be earned. The exact amount and earnings period of the discount often must be based on estimation techniques, with potentially changes recorded in the period the estimate changes or the final outcome is known.
Interest and dividend income
Interest income is accrued on a time basis. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
Pensions
Defined benefit plans are valued at the present value of accrued future pension benefits at the balance sheet date. Pension plan assets are valued at their fair value. Changes in the pension obligations due to changes in pension plans are recognized over the estimated average remaining service period. Accumulated effects of changes in estimates, changes in assumptions and deviations from actuarial assumptions (actuarial gains or losses) that are less than 10% of the higher of pension benefit obligations and pension plan assets at the beginning of the year is not recorded. When the accumulated effect is above 10% the excess amount is recognized in the income statement over the estimated average remaining service period. The net pension cost for the period is classified as salaries and personnel costs.
Payments to defined contribution plans are expensed as incurred. When sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, the plan is accounted for as if it were a defined contribution plan.
The Group recognized all cumulative actuarial gains and losses on pension obligations at the date of transition to IFRS (1 January 2004).
Gains or losses on the curtailment or settlement of a defined benefit plan are recognized when the curtailment or settlement occurs. A curtailment occurs when the Group either is demonstrably committed to make a material reduction in the number of employees covered by a plan; or amends the terms of a defined benefit plan such that a material element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The evaluation is based on the substance of the transaction. However, situations that individually would normally lead the Group to classify a lease as a finance lease is if the lease term is more than 75% of the estimated economic life or the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset.
According to IFRIC 4 the Group may enter into an arrangement that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments. Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset.
The Group as lessor
Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease is added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term.
The Group as lessee
Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation.
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Prepaid lease payments made on entering into operating leases or acquiring leaseholds are amortized over the lease term in accordance with the pattern of benefits provided and included in the line item “depreciation and amortization” in the income statement.
Foreign currency translation
The consolidated financial statements are presented in Norwegian Krone, which
is the Telenor ASA’s functional and presentation currency. The Group has foreign
entities with functional currency other than Norwegian Krone. Transactions in
foreign currencies are initially recorded in the functional currency rate ruling
at the date of the transaction. Monetary assets and liabilities denominated
in foreign currencies are retranslated at the functional currency rate of exchange
ruling at the balance sheet date. All differences are taken to profit or loss
with the exception of differences on foreign currency borrowings that provide
a hedge against a net investment in a foreign entity, or monetary items that
are regarded as a part of the net investments. These are taken directly to a
separate component of equity until the disposal of the net investment, at which
time they are recognised in profit or loss. Tax charges and credits attributable
to exchange differences on those borrowings are also dealt with in equity. Non-monetary
items that are measured in terms of historical cost in foreign currency are
translated using the exchange rates as at the dates of the initial transactions.
As at the reporting date, the assets and liabilities of foreign entities with
functional currencies other than Norwegian Krone are translated into Norwegian
Krone at the rate of exchange ruling at the balance sheet date and their income
statements are translated at the weighted average exchange rates for the year.
The translation differences arising on the translation are taken directly to
a separate component of equity until the disposal of the net investment, at
which time they are recognised in profit or loss. Cumulative translation differences
are deemed to be zero at the date of transition to IFRS, and are kept permanently
in equity.
Derivative financial instruments and hedging
The group uses derivative financial instruments such as forward currency contracts, interest rate swaps, cross currency interest rate swaps and interest rate options to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative, as long as Telenor has no intention or ability to settle the contracts net. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken to profit or loss.
Derivatives embedded in other financial instruments or other non-financial host contracts are treated as separate derivatives when their risk and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with unrealised gains or losses reported in profit or loss. Currency derivatives embedded in committed purchase or sales contracts are not separated and fair valued if the currency in the contract is either the functional currency of one of the parties to the contract or is a commonly used currency for purchase or sales in the relevant country.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to change in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Hedges that meet the strict criteria for hedge accounting are accounted for as follows:
Fair value hedges
Fair value hedges are hedges of the Group’s exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such, that is attributable to a particular risk and could affect profit or loss. For fair value hedges, the carrying amount of the hedge item is adjusted for gains and losses attributable to the risk being hedged, the derivative is remeasured at fair value and gains and losses from both are taken to profit or loss.
For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through profit or loss over the remaining term to maturity.
The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation.
The Group use fair value hedge primarily to hedge interest rate risk of fixed-rate interest-bearing liabilities and currency risk for interest-bearing liabilities.
Cash flow hedges
A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss.
Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when hedged financial income or financial expense is recognised or when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability.
If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to profit or loss.
The Group uses cash flow hedges primarily to hedge interest rate risk of variable-rate interest-bearing liabilities and highly probable transactions such as purchase of a foreign entity and significant investments in foreign currency.
Hedges of a net investment
Hedge of a net investment in a foreign entity is accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign entity, the cumulative value of any such gains or losses recognised directly in equity is transferred to profit or loss.
Income taxes
Current tax assets and liabilities are measured at the amount expected to be recovered or paid to the tax authorities. Deferred tax assets and liabilities are calculated using the liability method with full allocation for all temporary differences between the carrying amount of assets and liabilities in the financial statements and for tax purposes, including tax losses carried forward. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill.
Telenor includes deductions for uncertain tax positions when it is probable that the tax position will be sustained in a tax review. Telenor make provisions to cover in full all changes in Telenor’s tax assessments, pending the final outcome of Telenor’s appeal against the disallowed deductions. Legal disputes concerning tax positions that are not finally settled in the Group’s favour is also fully provided for. Deferred tax assets are recorded in the balance sheet to the extent it is more likely than not that the tax assets will be utilized. The enacted tax rates at the balance sheet date and undiscounted amounts are used.
Deferred tax assets that will be realized upon sale or liquidation of subsidiaries or associated companies are not recorded until a sales agreement has been entered into or liquidation is decided. Deferred taxes are calculated on undistributed earnings in foreign subsidiaries and associated companies based on the estimated taxation on transfer of funds to the parent company, based on the enacted tax rates and regulation as of the date of the balance sheet. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and the Group intends to settle its current tax assets and liabilities on a net basis.
Current/non-current
An asset/liability is classified as current when it is expected to be realised/settled
or is intended for sale or consumption in the Group’s normal operating
cycle, or it is expected/due to be realised or settled within twelve months
after the balance sheet date. Connection revenues and related costs for connection
limited to the deferred connection revenues are deferred over the estimated
customer relationship. Deferred revenues and costs for connection are classified
as current as they relate to the Group’s normal operating cycle. Other
assets/liabilities are classified as non-current.
Trade receivables
Trade receivables are measured on initial recognition at fair value. Appropriate
allowances for estimated irrecoverable amounts taking account of the historic
evidence of the level of bad debt experienced for customer types are recognized
in profit or loss when there is a loss event and objective evidence that the
asset is impaired.
Investments
Investments are initially measured at fair value, plus directly attributable
transaction costs.
Investments, primarily shares owned less than 20%, are classified as available-for-sale and are measured at subsequent reporting dates at fair value. Gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss.
Cash and cash equivalents
Cash and cash equivalents include cash, bank deposits, fixed rate bonds and
commercial paper with original maturity of three months or less.
Interest-bearing liabilities
Interest-bearing bonds and commercial paper, bank loans and overdrafts are initially
measured at fair value net of transaction costs, and are subsequently measured
at amortised cost, using the effective interest-rate method. In addition, where
fair value hedge accounting is applied the hedged liability is also adjusted
for gains and losses attributable to the risk being hedged. On extinguishment
of debt in whole or in part the difference between the carrying amount of the
liability extinguished and the consideration paid is recognized in profit or
loss.
Costs related to connection fees
Initial direct costs incurred in earning connection fees are deferred over the
same period as the revenue, limited to the amount of the deferred revenue. Costs
incurred consist primarily of the first payment of distributor commission, costs
for credit check, cost of the SIM card, the cost of the printed new customer
information package, costs of installation work and expenses for order handling.
In most instances costs associated with connection fees exceed such revenues.
Inventories
Inventories are valued at the lower of cost or market price. Cost is determined
using the FIFO or weighted average method.
Advertising costs, marketing and sales commissions
Advertising costs, marketing and sales commissions are expensed as incurred,
unless they form part of the costs that are deferred in relation to deferral
of connection fees.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and any accumulated impairment losses. Depreciation is calculated to reduce
the cost of assets, other than land, to their estimated residual value, if any,
over their estimated useful lives. Cost includes professional fees and, for
qualifying assets, borrowing costs capitalised. Depreciation commences when
the assets are ready for their intended use.
Assets held under finance leases and leasehold improvements are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the other (income) expense line as part of operating profit or loss.
Estimated useful life, depreciation method and residual value are evaluated at least annually. The straight-line depreciation method is used for most assets as this best reflects the consumption of the assets, which often is the passage of time. Residual value is estimated to be zero for most assets, except for commercial buildings and vehicles that the Group do not expected to use for the remaining economic life.
Repair and maintenance is expensed as incurred. If new parts are capitalized, replaced parts are derecognized and any remaining net book value is charged to operating profit (loss) as loss on disposal.
Research and development costs
Development costs associated with internal-use software are capitalized and
amortized over their expected useful life to the extent that they satisfy the
criteria for recognition as assets. Costs incurred during the preliminary project
stage, as well as maintenance and training costs are expensed as incurred.
Other research and development costs are expensed as incurred.
Impairment of property, plant and equipment and intangible
assets excluding goodwill
If there are identified indications that property, plant and equipment or intangible
assets have suffered an impairment loss, the recoverable amount of the assets
is estimated in order to determine the extent of the impairment loss (if any).
Intangible assets not yet brought into use (assets under construction) are assessed
annually. Where it is not possible to estimate the recoverable amount of an
individual asset, the Group determines the recoverable amount of the cash-generating
unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years.
Assets retirement obligations
An asset retirement obligation exists where Telenor has a legal or constructive
obligation to settle an asset retirement obligation. Where Telenor is required
to settle an asset retirement obligation, Telenor has estimated and capitalized
the net present value of the obligations and increased the carrying value of
the related long-lived asset, with an amount equal to the depreciated value
of the asset retirement obligation. Subsequent to the initial recognition, an
accretion expense is recorded relating to the asset retirement obligation, and
the capitalized cost is expensed as ordinary depreciation in accordance with
the related asset. The effect on net present value of any subsequent changes
to gross removal costs or discount rates adjust the carrying value of assets
and liabilities, and are expensed over the remaining estimated useful life of
the related assets.
Share options and employee stock ownership program
The Group issues equity-settled share-based payments to certain employees. Equity-settled
share-based payments are measured at fair value (excluding the effect of non
market-based vesting conditions) at the date of grant. The fair value determined
at the grant date of the equity-settled share-based payments is expensed over
the vesting period, based on the Group’s estimate of the shares that will
eventually vest and adjusted for the effect of non market-based vesting conditions.
Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Group also has provided employees with the ability to purchase the Group’s ordinary shares at a discount to the current market value. The Board of Directors decides such employee stock ownership grants from time to time. Discounts in the employee stock ownership program are recorded as salaries and personnel costs when the discount is given to the extent that the discount is vested. Non-vested discounts, including bonus shares, are recorded as an expense based on its estimate of the discount related to shares expected to vest, on a straight-line basis over the vesting period.
Social security tax on options and other share-based payments is recorded as a liability and is recognized over the estimated option period.
Payments from employees for shares, which are issued by Telenor ASA under the option plan or the employee stock ownership program, are recorded as an increase in shareholders equity. Payments from employees for shares, which are issued under the non-wholly owned subsidiaries’ option plans (EDB Business Partner ASA), are recorded as an increase in non-controlling interests.
Provisions
Provisions are recognised when the Group has a present obligation as a result
of a past event, and it is probable that the Group will be required to settle
that obligation. Provisions are measured at the management’s best estimate
of the expenditure required to settle the obligation at the balance sheet date,
and are discounted to present value where the effect is material.
Cash Flow Statement
The Group present Cash Flow Statement using the Direct method. Cash inflows
and outflows are shown separately. Interest received and paid and dividends
received are reported as a part of operating activities. Dividends distributed
(both by Telenor ASA and by subsidiaries with minority interests) are included
as a part of financial activities. Value Added Tax is regarded as collection
of tax on behalf of authorities, and is reported net.
Non-monetary transactions
For transactions subsequent to 1 January 2005, the cost of items of property,
plant and equipment acquired in exchange for a non-monetary asset is measured
at fair value unless (a) the exchange transaction lacks commercial substance
or (b) the fair value of neither the asset received nor the asset given up is
reliably measurable. If the acquired item is not measured at fair value, its
cost is measured at the carrying amount of the asset given up.
Acquisition of licenses is regarded as intangible assets that should be capitalized and recorded in the balance sheet. The payment plan is a financing arrangement and the fair value of the asset acquired is the discounted value of the cash consideration. The net present value of the installments to be paid subsequent years is recorded in the balance sheet as a liability.
Critical accounting judgments and key sources of estimation uncertainty
Critical judgments in applying the entity’s
accounting policies
In the process of applying the entity’s accounting policies, which are
described above, judgments made by the management that have the most significant
effect on the amounts recognized in the financial statements are discussed in
the relevant notes below.
Key sources of estimation uncertainty – critical
accounting estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, as well as the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Certain amounts included in or affecting our financial statements and related disclosure must be estimated, requiring us to make assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared. A ‘‘critical accounting estimate’’ is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We evaluate such estimates on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods we consider reasonable in the particular circumstances, as well as our forecasts as to how these might change in the future
Revenue recognition
The main part of our revenues is based on usage, such as traffic or periodic
subscriptions. We have many subscribers and offer a number of different services
with different price plans.
We provide discounts of various types, often in connection with different campaigns. We also sell wholesale products to other operators and vendors within the different countries and across borders. We have to make a number of estimates related to recognizing revenues. To some extent, we have to rely on information from other operators on amounts of services delivered. For some services, the other parties may dispute the prices we charge. We then make estimates of the final outcome. Some revenue is recorded in the balance sheet as deferred revenue, eg some connection fee. We have to estimate the average customer relationship as the deferral period.
Impairment
We have made significant investments in property, plant and equipment, intangible
assets and goodwill, associated companies and other investments. These assets
and investments are tested for impairment when circumstances indicate there
may be a potential impairment. Factors we consider important which could trigger
an impairment review include the following, significant fall in market values;
significant underperformance relative to historical or projected future operating
results; significant changes in the use of our assets or the strategy for our
overall business, including assets that are decided to be phased out or replaced
and assets that are damaged or taken out of use, significant negative industry
or economic trends; and significant cost overruns in the development of assets.
Estimating recoverable amounts of assets and companies must in part be based on management evaluations, including estimates of future performance, revenue generating capacity of the assets, assumptions of the future market conditions and the success in marketing of new products and services. Changes in circumstances and in management’s evaluations and assumptions may give rise to impairment losses in the relevant periods.
Depreciation and amortization
Depreciation and amortization is based on management estimates of the future
useful life of property, plant and equipment and intangible assets. Estimates
may change due to technological developments, competition, changes in market
conditions and other factors and may result in changes in the estimated useful
life and in the amortization or depreciation charges. Technological developments
are difficult to predict and our views on the trends and pace of development
may change over time. Some of our assets and technologies, in which we invested
several years ago, are still in use and provide the basis for our new technologies.
For example, our copper cables and infrastructure in our fixed networks are
used as the basis for the rollout of our ADSL technology and lines. In our mobile
business, the development and launch of UMTS technology and services have been
slower than the telecommunications industry anticipated a few years ago. We
review the future useful life of property, plant and equipment and intangible
assets periodically taking into consideration the factors mentioned above and
all other important factors. Estimated useful life for similar type of assets
may vary between different entities in the Group due to local factors as growth
rate, maturity of the market, history and expectations for replacements or transfer
of assets, climate, quality of components used etc. In case of significant changes
in our estimated useful lives, depreciation and amortization charges are adjusted
prospectively. As of 1 January 2005 we made some changes in our estimated useful
lives for some of our assets especially for some components in our networks,
as discussed in note 15.
Business combinations
We are required to allocate the purchase price of acquired companies to the
assets acquired and liabilities assumed based on their estimated fair values.
For our larger acquisitions, we have engaged independent third-party appraisal
firms to assist us in determining the fair values of the assets acquired and
liabilities assumed. Such valuations require management to make significant
estimates and assumptions. The significant purchased intangible assets recorded
by Telenor include customer contracts, brands, licenses, service concession
rights, roaming agreements and software. Critical estimates in the evaluations
of useful lives for such intangible include, but are not limited to, estimated
average customer relationship based on churn, remaining license or concession
period, expected developments in technology and markets. The significant tangible
assets include primarily networks. Critical estimates in valuing certain assets
include, but are not limited to, future expected cash flows for customer contracts,
licenses and roaming agreements replacement cost for brands and property, plant
and equipment. Management’s estimates of fair value and useful lives are
based upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable and, as a result, actual results may differ from estimates.
Income taxes
We write down deferred tax assets to an amount that is more likely than not
to be realized. Our write-downs related primarily to losses carried forward
in some of our foreign operations. While we have considered future taxable income
and feasible tax planning strategies in determining the write-downs, any difference
in the amount that we ultimately may realize would be included as income in
the period in which such a determination is made.
In previous years we have realized significant tax losses on shareholdings, both through liquidation and sale of shares to third parties and between companies in our group. Even though we believe that these tax losses are tax deductible, the tax authorities have challenged our evaluations in connection with some of our transactions. Generally, when new rules are introduced there may be disagreements on the interpretation of the new rules and the transitional rules. You should read note 13 for additional information on the Groups uncertain tax positions.
Pension costs, pension obligations and pension plan
assets
Calculation of pension costs and net pension obligations (the difference between
pension obligations and pension plan assets) are made based on a number of estimates
and assumptions. Changes in, and deviations from, estimates and assumptions
(actuarial gains and losses) affect fair value of net pension liabilities, but
are not recorded in our financial statements unless the accumulated effect of
such changes and deviations exceed 10% of the higher of our pension benefit
obligations and our pension plan assets at the beginning of the year. When implementing
IFRS as at 1 January 2004 we recognized all actuarial gains and losses. In note
7 we have included a sensitivity analysis for changes in certain actuarial assumptions.
Legal proceedings, claims and regulatory discussions
We are subject to various legal proceedings, claims and regulatory discussions,
the outcomes of which are subject to significant uncertainty. We evaluate, among
other factors, the degree of probability of an unfavourable outcome and the
ability to make a reasonable estimate of the amount of loss. Unanticipated events
or changes in these factors may require us to increase or decrease the amount
we have accrued for any matter or accrue for a matter that has not been previously
accrued because it was not considered probable or a reasonable estimate could
not be made.
|