6. Critical accounting estimates and judgments
Estimates and judgments are continually evaluated and are based on historical experience, and expectations regarding future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the respective actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are addressed below.
Estimates and discretionary decisions related to climate change
According to scientific findings, global climate change will impact in many ways. Business models and competitive advantages can be sustainably influenced by climate change. Due to increasingly tightly interconnected global supply and value chains, the industry is particularly affected by potential risks and damage.
In the context of the resulting economic consequences, NORMA Group analyses potential opportunities and risks for the corporate structure and future sales markets as well as takes these assumptions into account when preparing the Consolidated Financial Statements.
Risks and uncertainties arising from climate change could affect the following areas of the Consolidated Financial Statements in particular:
•Impairment of non-financial assets: The uncertainties related to climate change could result in changes in cash flow projections or the level of risk associated with achieving those cash flows.
•Useful lives of assets: Climate-change-related factors could result in assets becoming physically unusable or commercially obsolete sooner than anticipated.
•Realization of deferred tax assets: The uncertainties related to climate change could lead to changes in projected future taxable profits.
The actual amounts may differ from the estimates and discretionary decisions; NORMA Group assumes that the assumptions made adequately reflect the situation at the time the Consolidated Financial Statements were prepared.
Estimates and discretionary decisions in connection with macroeconomic risks and the war in Ukraine
The impact of the war in Ukraine and the other macroeconomic risks (e.g., from inflation, the economy, interest rate policy, supply chain problems) on NORMA Group is complex and results mainly from the increase in energy and raw material prices as well as supply bottlenecks. The escalation of the conflict would further increase the risk of a global economic downturn, which in combination with growing inflation and rising interest rates could lead to a significant decline in consumption.
In order to take account of the resulting economic uncertainties and volatilities, NORMA Group conducts an analysis of potential opportunities and risks for its company structure and future sales markets and takes these considerations into account when preparing the Consolidated Financial Statements.
The risks and uncertainties arising from the war in Ukraine and the other macroeconomic risks could have the following consequences:
• Volatility on the raw material markets
•Margin reductions to the extent that price increases cannot be passed on immediately to customers
•Changes in interest rates in various countries
•Growing volatility of foreign currency exchange rates
•Declining and volatile share prices
•Deteriorating creditworthiness, payment defaults or late payments
These factors have in part had an impact on the fair value and carrying amount of assets and liabilities as well as cash flows, in particular on the measurement of pension provisions, the discount rate for goodwill impairment testing purposes and the recoverability of deferred tax assets. The actual amounts that result can differ from the estimates and discretionary decisions. NORMA Group believes that the underlying assumptions appropriately reflect the situation at the time of preparing the Consolidated Financial Statements.
Estimated impairment of goodwill
NORMA Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in NOTE 3. ‘SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – IMPAIRMENT OF NON-FINANCIAL ASSETS’ The recoverable amounts of cash-generating units have been determined based on fair value less costs to sell calculations. These calculations are based on discounted cash flow models, which require the use of estimates. NOTE 18. ‘GOODWILL AND OTHER INTANGIBLE ASSETS’
In fiscal years 2022 and 2021, no impairment of goodwill, which amounted to EUR 402,270 thousand on December 31, 2022 (Dec 31, 2021: EUR 392,745 thousand), was necessary.
The Group is subject to income taxes in numerous jurisdictions. Significant judgments are required in determining the worldwide liabilities for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters differs from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. On December 31, 2022, income tax liabilities were EUR 6,992 thousand (Dec 31, 2021: EUR 5,269 thousand) and deferred tax liabilities were EUR 52,851 thousand (Dec 31, 2021: EUR 57,590 thousand). Deferred tax assets are recognized if sufficient taxable income is available in the future. Among other factors, the planned results from operating activities, the effects on earnings from the reversal of taxable temporary differences and possible tax strategies that NORMA Group would pursue are taken into account. Based on the taxable income generated in past periods and the planned future taxable income, NORMA Group assesses the recoverability of deferred tax assets at each balance sheet date. Since future business developments are uncertain and partly beyond NORMA Group’s control, assumptions are required to estimate future taxable income and the timing of the realization of deferred tax assets. Estimates are adjusted in the period in which there are sufficient indications for an adjustment.
The present value of the pension obligations depends on a number of factors determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.
The present value of the defined benefit obligation is calculated by discounting the estimated future cash outflows using the interest rates of high-quality corporate bonds.
The Group determines the appropriate discount rate on the balance sheet date. In determining the appropriate discount rate, the Group considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability.
Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in NOTE 3. ‘SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – EMPLOYEE BENEFITS’.
The carrying amount of pension obligations as of December 31, 2022, was EUR 9,174 thousand (Dec 31, 2021: EUR 15,913 thousand).
Useful lives of property, plant and equipment and intangible assets
The Group’s management determines the estimated useful lives and related depreciation / amortization charges for its property, plant and equipment and intangible assets. This estimate is based on projected lifecycles. These could change as a result of technical innovations or competitor actions in response to severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated useful lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.
Accounting for leases
In connection with the accounting for leases, estimation uncertainties and discretionary decisions arise, which are described in NOTE 3. ‘SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – LEASING ACTIVITIES OF THE GROUP AND THEIR ACCOUNTING TREATMENT.
In our accounting for business combinations, judgment is required in determining whether an intangible asset is identifiable, and should be recorded separately from goodwill. Additionally, estimating the acquisition-date fair values of the identifiable assets acquired and liabilities assumed involves considerable judgment. The necessary measurements are based on information available on the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management. These judgments, estimates and assumptions can materially affect our financial position and profit for several reasons, including the following:
•Fair values assigned to assets subject to depreciation and amortization affect the amounts of depreciation and amortization to be recorded in operating profit in the periods following the acquisition.
•Subsequent negative changes in the estimated fair values of assets may result in additional expense from impairment charges.
•Subsequent changes in the estimated fair values of liabilities and provisions may result in additional expense (if increasing the estimated fair value) or additional income (if decreasing the estimated value).
These contents are part of the Non-financial Group Report and were subject to a separate limited assurance examination.