The Telenor Group
GENERAL INFORMATION
Telenor ASA (the Company) is a limited company incorporated in Norway. 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. Telenor is a telecommunication company and the principal activities of the Company and its subsidiaries (the Group) are described under segments in note 3.
These consolidated financial statements have been approved for issuance by the Board of Directors on 31 March 2008 and will be subject for authorisation by the General Assembly at 8 May 2008.
STATEMENT OF COMPLIANCE
From 1 January 2005, as required by the European Union’s IAS Regulation and the Norwegian 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.
ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS
In the current year, the Telenor has adopted all of the new and revised Standards and Interpretations issued by the IASB and approved by EU that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2007. The implementation of IFRS 7 Financial Instruments disclosures and the capital disclosures in IAS 1 resulted in additional disclosures. The implementation of IFRIC 8 scope of IFRS 2 had no impact on Telenor.
Telenor has early adopted the following standards and interpretations:
IFRS 8 Operating segment (effective from 1 January 2009). This standard was adopted 1 January 2006. This adoption did not lead to any changes in our definition of segments.
IFRIC 12 Service Concession Arrangement (effective from 1 January 2008). Telenor adopted this interpretation in 2005. There were no changes in accounting policies were required as a consequence of the final interpretation.
IAS 23 Borrowing Costs (effective from 1 January 2009). This revision has not lead to any changes in how Telenor account for borrowing cost.
At the date of authorisation of these financial statements, the following Standards and Interpretations that could affect Telenor were issued but not effective:
IFRS 3R Business Combination – (shall be applied from the year beginning on or after 1 July 2009). The standard introduces a number of changes that will impact the amount of goodwill and reported results after implementation. The revised standard shall be applied prospectively and future business combinations will be affected by this revision.
IAS 27R Consolidated and separate financial statements – amended – (shall be applied from the year beginning on or after 1 July 2009). The standard requires that changes in ownership interest of a subsidiary are accounted for as an equity transaction. The revised standard shall be applied prospectively and future transactions with non-controlling interests will be affected.
IFRIC 11 Group and Treasury Share Transactions – (shall be applied from annual periods beginning on or after 1 March 2007). No changes for Telenor are expected to result from adoptions of this interpretation.
IFRIC 13 Customer loyalty programs (shall be applied from the year beginning at 1 July 2008 or later). This IFRIC gives guidance on how to account for customer loyalty programme. The consequences are under evaluation, but no significant changes are expected.
The management anticipates that these Standards and Interpretations will be adopted at the dates stated above and that the adoption in future periods will have no material impact on the financial statements of the Group.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the historical cost basis, except for financial assets available for sale (primarily shares owned less than 20%), derivative financial instruments, which are carried at fair value and carrying value of pensions. Loans, receivables and other financial obligations are valued at amortised cost. The principal accounting principles adopted are set out below.
The financial statements are presented in Norwegian Kroner (NOK), rounded to the nearest million, unless otherwise stated. Certain minor reclassifications have been made to comparative financial information to ensure consistency in presentation. The income statements are presented based on the nature of expenses.
Basis of consolidation and non-controlling interests
The consolidated financial statements include 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% of the voting power through ownership or agreements, except where non-controlling (minority) rights are such that a non-controlling shareholder is able to prevent Telenor from exercising control. In addition control may exist without having 50% voting power through ownership or agreements, or in the circumstances of other shareholders’ enhanced rights, as a consequence of de facto control. De facto control is control without the legal right to exercise unilateral control, and involves decision-making ability that is not shared with others and the ability to give directions with respect to the operating and financial policies of the entity concerned.
The financial statements of the subsidiaries are prepared for the same reporting periods as the parent company, using consistent accounting policies. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of control is obtained and until the control ceases. Intercompany transactions, balances, revenues and expenses are eliminated on consolidation.
Non-controlling 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. The Group accounts for the transactions with the non-controlling interest using the hybrid entity concept/parent entity method (detailed policy is disclosed under “Business Combinations”).
Foreign currency translation
The consolidated financial statements are presented in NOK, which is Telenor ASA’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate 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 recognised as 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 recorded 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.
The Group has foreign entities with functional currency other than Norwegian Krone. 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 at the balance sheet date and their income statements are translated at the average exchange rates for the year. The translation differences arising from 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 were recognised as a permanent part of equity at the date of transition to IFRS (1 January 2005).
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 Telenor’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, Telenor’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.
The interest of non-controlling shareholders in the subsidiary is initially measured at the non-controlling shareholders’ proportion of the net fair value of the identifiable assets, liabilities and contingent liabilities recognised.
Where the Group increases its stake in a subsidiary through a share purchase from non-controlling shareholders, goodwill is determined as the difference between the consideration given and the acquired additional interest in the subsidiary’s net assets and contingent liabilities at fair value as the date of the additional purchase. The increase or decrease in the fair value for the portion of identifiable assets, liabilities and contingent liabilities acquired in the period between the date of consolidation and subsequent share purchase is recorded against the shareholders’ equity.
Increases in non-controlling interests in a subsidiary’s equity as a result of transactions in the subsidiary and sale of shares in a subsidiary to non-controlling interests are accounted for as transactions between shareholders. Gains or losses on disposals to shareholders after a proportionate reduction of goodwill are recorded against equity.
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. Significant influence may also exist when Telenor have more than 50% interests, but where other shareholders have participating rights which prevent Telenor from exercising control.
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 (ie 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 these associated companies.
Any goodwill is included in 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 amortisation, impairment losses, reversal of impairment losses 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, financial statements as of the balance sheet date are not available before the Company issues its consolidated financial statements. 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.
Interests in joint ventures
A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control. That is when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control.
Joint venture arrangements that involve a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities using proportionate consolidation. The Group’s share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line-by-line basis.
Any goodwill arising on the acquisition of the Group’s interest in a jointly controlled entity is accounted for in accordance with the Group’s accounting policy for goodwill arising on the acquisition of a subsidiary (see above). Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s interest in the joint venture.
Goodwill and cash generating units
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 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 management 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 cash generating unit 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 cash generating units expected to benefit from the synergies of the combination that gave rise to the goodwill. Cash generating units to which goodwill have 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 cash generating unit is less than the carrying amount of the cash generating unit, the impairment losses first reduces the carrying amount of any goodwill and then reduces the carrying amount of the other assets of the unit pro-rata on the basis of the carrying amount of the individual assets. The carrying amount of any individual asset is not reduced below its individual recoverable amount or zero. An impairment losses recognised for goodwill cannot be reversed in a subsequent period if the fair value of the cash generating unit recovers. Any impairment is presented as impairment losses 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 in accordance with 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. Appropriate level of management (the Board of Directors or Group Executive Management depending on the transaction) 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 and no longer depreciated (or amortised).
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.
Profit after tax from discontinued operations are excluded from continuing operations and reported separately as Profit (loss) from discontinued operations. Prior period’s Profit (loss) from discontinued operations are reclassified to be comparable. Assets and liabilities classified as held for sale are presented on separate line items in the balance sheet as current assets and current liabilities.
Revenue recognition and measurement
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenues are measured at the fair value of the consideration received or receivable, net of discounts and sales related taxes. These taxes are regarded as collected on behalf on the authorities.
Revenues primarily comprise sale of
• Services: traffic fees, subscription and connection fees, interconnection fees, fees for leased lines and leased networks, fees for data network services, fees for TV distribution and satellite services, IT-operations,
• Customer equipment: Telephony handsets, PCs, terminals, set-top boxes etc.
Revenues from subscription fees are recognised over the subscription period while deliveries of other services are normally recognised based on actual use.
Revenues from sale of customer equipment are normally recognised when the related significant risk and rewards are transferred to the buyer.
When the Group delivers services and equipment as part of one contract the consideration is allocated to separate identifiable components 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. 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, and this is therefore most often the amount received in cash at the time of sale. In most instances the delivered element is equipment, and consequently the equipment is recorded with low revenue due to the discounts provided in the transaction. The subsequent services are recorded at the normal selling price or at a discounted value, depending on the facts and circumstances.
Connection fees
Revenues from connection that are linked to other elements in a way that the commercial effect cannot be understood without reference to the other transactions are deferred and recognised 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 in the Group companies.
When connection fees are charged in the same transaction as other elements and where discounts are provided on other identifiable components in the transaction (including multiple element transactions), connection fees are allocated to sale of the discounted equipment or services, limited to the amount of the discount, and recognised as revenues at the same time the equipment or services are recognised as revenue.
Sale of software
Revenues from sale of software licenses and software upgrades are deferred and recognised as revenue over the remaining software maintenance period as long as the customer has the right to use the software with 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 recognised 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 programmes etc) where Telenor has past history so that reliable estimates can be made, the accrued discount is limited to the estimated discount that will actually be earned by the customer. The exact amount and earnings period of the discount often must be based on estimation techniques, with any changes in estimates being recorded in the period the estimate changes or the final outcome is known.
Presentation
Where the Group’s role in a transaction is a principal, revenue is recognised on a gross basis. The evaluation of whether Telenor is acting as principal or agent is based on an evaluation of the substance of the transaction, the responsibility for providing the goods or services and setting prices and the underlying financial risk and rewards. This requires revenue to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost. Where the Telenor’s role in a transaction is that of an agent, revenue is recognised on a net basis and represents the margin earned.
License fees paid to telecommunication authorities calculated on the basis of revenue share arrangements are treated as license costs and, hence, revenue is reported gross as Telenor is considered to be the primary obligor.
Interest and dividend income
Interest income is accrued on a time basis. Dividend income from investments is recognised when the Telenor’s rights to receive payment have been established (declared by the General Assembly or otherwise).
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 recognised over the estimated average remaining service period when the changes are not immediately vested. 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 are recognised 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.
Gains or losses on the curtailment or settlement of a defined benefit plan are recognised through profit and loss 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.
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 is 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
The Group presents assets it has leased to others as receivables equal to the net investment in the leases. The Group’s financial income is determined such that a constant rate of return is achieved on outstanding receivables during the contract period. Direct costs incurred in connection with establishing the lease are included in the receivable.
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 included in the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Contingent rents are recognised as revenue in the period in which they are earned.
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 liability to the lessor is included in the balance sheet as finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability.
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 incentives to enter into an operating lease are also amortised on a straight-line basis over the lease term. Prepaid lease payments made on entering into operating leases or acquiring leaseholds are amortised over the lease term in accordance with the pattern of benefits provided and included in the line item “depreciation and amortisation” in the income statement.
Financial Instruments
A financial instrument is defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset is typically cash and cash equivalents, trade receivables, held to maturity investments and financial derivatives. A financial liability is typically bank overdraft liability, trade payables, other liability to banks, bonds issued and financial derivatives.
Financial instruments are classified in the following categories: at fair value through profit or loss (FVTPL), held-to-maturity investments (HTM), loans and receivables, available-for-sale (AFS) and other financial liabilities. The classification of the financial instrument is done based on the nature and purpose of the financial instrument and is determined at the initial recognition. Financial liabilities are classified as financial liabilities at fair value through profit or loss and other financial liabilities. Telenor has not used the fair value option that exists in IAS 39, to upon initial recognition designating a financial asset or liability as an instrument at fair value through profit and loss.
The financial instruments are recognised in Telenor’s balance sheet as soon as Telenor become a party to the contractual provisions of the instrument. Financial instruments are recognised without any offsetting respectively as assets when the value is positive and as liabilities when the value is negative, as long as Telenor has no intention or ability to settle the contracts net.
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 to small extent interest rate options, to hedge its risks associated with interest rate and foreign currency fluctuations.
The Group does not use derivative financial instruments for trading purposes.
The derivative financial instruments are initially and subsequently measured at fair value. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are recognised in profit or loss as financial income or expense. For detailed information related to derivative financial instruments and hedging see note 22.
Derivatives embedded in other financial instruments or other non-financial host contracts are treated as separate derivatives when their risk and economical 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 recognised in profit or loss. Currency derivatives embedded in committed purchase or sales contracts are not bifurcated and recognised with fair value if the embedded currency derivative in the contract is either the functional currency of one of the parties to the contract or if it is a commonly used currency for purchase or sales in the relevant economic environment.
Telenor applies hedge accounting in accordance with the regulations in IAS 39. The hedging is entered into for balance sheet items and future cash flows to reduce income statement volatility. Telenor has cash flow hedges, fair value hedges and hedges of net investments in foreign operations.
At the inception of each hedge relationship, the Group formally designates and documents the hedge accounting relationship,
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.
Hedge relationships that meet the requirements in IAS 39 for hedge accounting are accounted for in the Group’s financial statement as follows:
Fair value hedges
The Group uses fair value hedge primarily to hedge interest rate risk of fixed-rate interest-bearing liabilities and currency risk for interest-bearing liabilities.
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 hedged item is adjusted for gains and losses attributable to the risk being hedged. The derivative is also measured at fair value and gains and losses from both the instrument and the item are recognised in profit or loss.
For fair value hedges relating to items earlier carried at amortised cost, the adjustment from carrying amount to fair value is amortised through profit or loss over the remaining time 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 carrying amount at de-designation will be amortised to face value over the remaining time to maturity.
Cash flow hedges
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.
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 recognised directly 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 recognised 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 forecasted transaction is not expected to occur, the amount is immediately recognised in profit or loss.
Hedges of a net investment
A hedge of a net investment in a foreign operation is accounted for in a similar way as a cash flow hedge. Foreign exchange gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any foreign exchange gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign entity, the cumulative value of foreign exchange 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 tax base and the carrying amount of assets and liabilities in the financial statements, including tax losses carried forward. Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or in respect of temporary differences associated with investments in subsidiaries, associates or joint ventures where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Telenor has recognised a deferred tax liability (primarily withholding tax) for undistributed earnings in subsidiaries and associated companies. For undistributed earnings in subsidiaries a provision for deferred tax is made to the extent it is expected that dividends will be distributed in the foreseeable future. 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 balance sheet date.
Deferred tax assets that will be realised upon sale or liquidation of subsidiaries or associated companies are not recorded until a sales agreement has been entered into or liquidation is decided.
Telenor includes deductions for uncertain tax positions when it is probable that the tax position will be sustained in a tax review. Telenor records provisions relating to uncertain or disputed tax positions at the amount expected to be paid. The provision is reversed if the disputed tax position is settled in favour of Telenor and can no longer be appealed.
Deferred tax assets are recorded in the balance sheet to the extent it is more likely than not that the tax assets will be utilised. The enacted tax rates at the balance sheet date and undiscounted amounts are used.
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 is able to and 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, it is held primarily for the purpose of being traded, or it is expected/due to be realised or settled within twelve months after the balance sheet date. Other assets/liabilities are classified as non-current. Financial instruments are classified based on expected life, except for the trading instruments, and consistent with the underlying hedged item. Deferred revenues and costs for connection are classified as current as they relate to the Group’s normal operating cycle.
Trade and other receivables
Trade and other receivables are measured on initial recognition at fair value and subsequently measured at amortised cost using the effective interest rate method adjusted for provision for any impairment. Impairment for estimated irrecoverable amounts is recognised in profit or loss when a loss event and objective evidence that the asset is impaired, exists. The impairment is calculated by taking into account the historic evidence of the level of bad debt experienced for customer types and the aging of the receivable balance. Individual trade receivables are impaired when management assess them not to be collectible.
Investments
Financial investments are initially measured at fair value, plus directly attributable transaction costs. The financial investments, primarily investments in shares with ownership less than 20%, are classified as available-for-sale as non-current or current financial assets in the balance sheet and are measured at subsequent reporting dates at fair value.
The main criteria for the classification of the financial investments are the intention of the investments. Currently none of Telenor’s investments are held for the purpose of trading, nor do they meet the criteria to be within the loan and receivable or the held to maturity category as defined in IAS 39; they are therefore classified in the available-for-sale category.
Gains and losses arising from changes in fair value are recognised directly in equity, until the investment 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. Dividends on any of the investments are recognised in profit or loss when the right to receive the dividend is established (typically when declared by the General Assembly).
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. Cash and cash equivalents are initially measured at fair value.
Other financial assets – current and non-current
Bonds and commercial papers with original maturity beyond three months, financial derivatives including those used in a fair value hedging relationships, available for sale investments and other prepayments to suppliers. Other financial assets are measured at fair value on initial recognition and subsequently measured either at amortised cost or at fair value. All financial derivatives are subsequently measured at fair value.
Trade and other payables
Trade and other payables include accounts payable, government taxes, accrued expenses and prepaid revenue. Trade and other payables are not interest-bearing and are initially recognised in the balance sheet at fair value and subsequently measured at amortised cost using the effective interest rate method.
Non-interest-bearing financial liabilities
Non-interest-bearing financial liabilities includes financial derivatives and other non-interest-bearing liabilities. On initial recognition the non-interest-bearing financial liabilities are measured at fair value. Subsequently they are measured either at fair value or at amortised cost using the effective interest rate method.
Interest-bearing financial liabilities
Interest-bearing bonds and commercial papers, 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 liabilities are 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 and the consideration paid is recognised in profit or loss.
Inventories
Inventories are valued at the lower of cost or market price for products that will be sold as a separate product. Inventories that will be sold as part of a transaction with several components, which we expect to earn net income from, are valued to cost even if the selling price of the inventory is below cost price. Cost is determined using the FIFO or weighted average method.
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 the revenues and is expensed.
Advertising costs, marketing and sales commissions
Advertising costs, marketing and sales commissions are expensed as in curred, unless they form part of the costs that are deferred in relation to deferral of connection fees as describe above.
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 are 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 “other (income) expense” in the income statement and is 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 does not expect to use for the assets’ whole economic life.
Repair and maintenance is expensed as incurred. If new parts are capitalised, replaced parts are derecognised and any remaining net book value is recorded to operating profit (loss) as loss on disposal.
Intangible assets
Intangible assets acquired separately are measured initially at cost. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.
Intangible asset with finite lives are amortised over the useful economic lives. Useful lives and amortisation method for intangible assets with finite useful life is reviewed at least annually. The straight-line depreciation method is used for most intangible assets as this best reflects the consumption of the assets.
Gains and losses arising from derecognition of an intangible asset are measured at the difference between the net disposal proceeds and the carrying amount of the asset and are recognised as “other (income) expense” in the income statement as part of operating profit.
Research and development costs
Research costs and development costs that do not meet the criteria of capitalisation, are expensed as incurred.
Development costs that meet the criteria for recognition of an asset in IAS 38 Intangible Assets are capitalised. The assets are amortised over their expected useful life once the asset is available for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred.
Impairment of property, plant and equipment and intangible assets excluding goodwill and other assets with indefinite useful life
At each reporting date the Group evaluates if there are identified indications that property, plant and equipment or intangible assets may be impaired. If there are such indications, 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.
An asset’s 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. The impairment losses is recognised in the profit or loss. Where an impairment losses is subsequently reversed, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount so that the increased carrying amount does not exceed the carrying amount that would have been recorded had no impairment losses 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 remove an asset and restore the site. Where Telenor is required to settle an asset retirement obligation, Telenor has estimated and capitalised the net present value of the obligations and increased the carrying value of the related asset, with an amount equal to the depreciated value of the asset retirement obligation. The cash flows are discounted at an estimated long term pre tax rate that reflects the risks related to the obligation. Subsequent to the initial recognition, an accretion expense is recorded as finance cost relating to the asset retirement obligation, and the capitalised cost is expensed as ordinary depreciation with the related asset. The effects on the net present value of any subsequent changes to the 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 based payments
The Group has issued equity-settled share-based payments to certain employees. Such payments include both the closed share option programme and a grant of a fixed monetary compensation where the participant is required to invest the net amount into Telenor shares. 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, adjusted for the effect of non market-based vesting conditions.
For the share option plans 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. Fair value of the share programme is measured to the consideration given on behalf of the employees.
The Group also has provided employees with the ability to purchase the Group’s ordinary shares at a discount to the current market value and bonus shares. The Board of Directors decides such employee stock ownership grants from time to time. Discounts in the employee stock ownership programme 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 the 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 recognised over the estimated vesting period. The social security tax is calculated with the appropriate tax rate on the difference between marked price and exercise price at the measurement date.
Payments from employees for shares, which are issued by Telenor ASA under the option plan or the employee stock ownership programme, 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 such as asset retirement obligations, workforce reductions, onerous contracts and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. 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 presents 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 non-controlling interests) are included as a part of financial activities. Value Added Tax and other similar taxes are regarded as collection of tax on behalf of authorities, and is reported net.
Treasury shares
Own equity instruments which are reacquired (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments.
CRITICAL ACCOUNTING JUDGMENTS AND
KEY SOURCES OF ESTIMATION UNCERTAINTY
Critical judgments in applying the entity’s accounting policies
The areas were the managements judgements are critical for application of accounting principles described above, are discussed below.
Telenor owns 56.5% of the voting shares of Kyivstar G.S.M (“Kyivstar”), and the company was accounted for as a consolidated subsidiary until 29 December 2006. As further described in note 25, proper corporate governance in Kyivstar is not restored due to Storm’s (the other shareholder in Kyivstar) continued failure to attend shareholder meetings, which is necessary to be able to appoint an operational Board of Directors in Kyivstar. Accordingly, the Company has determined that it currently is not able to demonstrate control over Kyivstar. Based on an assessment of the facts and circumstances, the Company has determined that significant influence exists, and accordingly, Kyivstar is accounted for as an associated company from 29 December 2006.
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 management 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 Group’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. Management evaluates such estimates on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods management consider reasonable in the particular circumstances, as well as the 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. The Group has many subscribers and offers a number of different services with different price plans. The Group provides discounts of various types, often in connection with different campaigns. The Group also sells wholesale products to other operators and vendors within the different countries and across borders. Management has to make a number of estimates related to recognising revenues. To some extent, management has to rely on information from other operators on amounts of services delivered. For some services, the other parties may dispute the prices charged. Management makes then estimates of the final outcome. Some revenues are recorded in the balance sheet as deferred revenue, e.g. some connection fee which means that we have to estimate the average customer relationship (deferral period).
Business combinations, see also note 1
Management is required to allocate the purchase price of acquired companies to the assets acquired and liabilities assumed based on their estimated fair values. For the larger acquisitions, third-party valuation experts are engaged to assist in determining the fair values of the assets acquired and liabilities assumed. Such valuations require management to make significant judgements in selecting valuation methods, estimates and assumptions. The significant purchased intangible assets recorded by Telenor include customer bases, customer contracts, brands, licenses, service concession rights, roaming agreements and software.
Critical estimates in the evaluations of useful lives for such intangible assets 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 and 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 values may differ from estimates.
Pension costs, pension obligations and pension plan assets, see also note 7
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 the fair value of net pension liabilities. Changes in the discount rate has individually most significant impact, see note 7 where a sensitivity analysis for changes in certain actuarial assumptions and how they effect the pension obligations and the pension costs is included. The basis for the assumptions is also described in this note.
Deferred tax assets, see also note 13
Deferred tax assets are recognised as the amount that are more likely than not to be realised. Significant judgement is required to determine the amount that can be recognised and depends foremost on the expected timing, level of taxable profits and tax planning strategies. The judgements relates primarily to losses carried forward in some of our foreign operations. If realisation of the deferred tax assets earlier not recognised becomes probable, a tax income will be reported in the period in which the probability level for realisation changes. When new rules are introduced there may be disagreements on the interpretation of the new rules and the transitional rules. Please refer to note 13 for additional information on the Groups uncertain tax positions.
Depreciation and amortisation, see also note 14 and 15
Depreciation and amortisation 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 amortisation 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 the assets and technologies, in which the Group invested several years ago, are still in use and provide the basis for the new technologies. For example, the copper cables and infrastructure in the fixed networks are used as the basis for the rollout of our ADSL technology and lines. In the mobile business, the development and launch of UMTS technology and services have been slower than the telecommunications industry anticipated a few years ago. The useful lives of property, plant and equipment and intangible assets are reviewed at least annually taking into consideration the factors mentioned above and all other important factors. Estimated useful lives for similar types 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 and quality of components used. In case of significant changes in our estimated useful lives, depreciation and amortisation charges are adjusted prospectively.
Impairment, see also note 15 and 16
Telenor has made significant investments in property, plant and equipment, intangible assets, goodwill, associated companies and other investments. These assets and investments are tested, as described, for impairment annually or when circumstances indicate there may be a potential impairment. Factors considered important which could trigger an impairment evaluation 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; significant regulatory decisions and significant cost overruns in the development of assets.
Estimating recoverable amounts of assets and companies must in part be based on management’s evaluations, including determining appropriate cash generating units, 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.
Associated companies, see note 17
If financial statements for associated companies are not available as of the Group’s balance sheet date, Telenor’s share of profits from the associated company is estimated based on the latest available quarterly financial statements. The estimate for the latest quarter is based on available information from different external sources. For listed associated companies, the information includes estimates from financial analysts. Subsequently Board approved financial statements from the associated company may differ from the estimated figures, and the estimates are adjusted when the information is available.
From 29 December 2006, Kyivstar is reported as an associated company. As further described in note 25, Kyivstar has not been able to issue board and shareholder approved financial statements due to Storm’s (the other shareholder in Kyivstar) continued failure to attend shareholder meetings in Kyivstar. However, after the termination of the last of in all three barring injunctions by a Ukrainian court on 23 November 2007, Kyivstar management is now providing Telenor with monthly, quarterly and annual financial information. Telenor is actively involved in the operations of Kyivstar, and internal controls over financial reporting are implemented, evaluated and tested within Kyivstar with oversight by Telenor. Board and shareholder approved financial reporting from Kyivstar may differ from the management reporting when they are issued.
Legal proceedings, claims and regulatory discussions,
see also note 25
Telenor is subject to various legal proceedings and claims including regulatory discussions, the outcomes of which are subject to significant uncertainty. Management evaluates, 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 to be 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.