Annual Report 2016
Menu

Notes

I. GENERAL INFORMATION ON THE GROUP

KSB Aktiengesellschaft, Frankenthal/Pfalz, Germany (hereinafter referred to as KSB AG), is a capital market-oriented public limited company [Aktiengesellschaft] under the law of the Federal Republic of Germany. The company is registered with the Handelsregister [Commercial Register] of the Amtsgericht [Local Court] Ludwigshafen am Rhein, registration No. HRB 21016, and has its registered office in Frankenthal/Pfalz, Germany.

In the previous year, KSB AG and its subsidiaries were included in the consolidated financial statements of Klein Pumpen GmbH, Frankenthal. Klein Pumpen GmbH, Frankenthal, is the parent company which prepares the consolidated financial statements for the largest group of companies. The consolidated financial statements are published in the Bundesanzeiger [German Federal Gazette].

The KSB Group is a global supplier of high-quality pumps, valves and related systems and also provides a wide range of services to users of these products. The Group’s operations are divided into three segments: Pumps, Valves and Service.

Basis of preparation of the consolidated financial statements

The accompanying consolidated financial statements of KSB AG were prepared in accordance with the International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the additional requirements of German commercial law under section 315a(1) of the HGB [Handelsgesetzbuch – German Commercial Code]. We applied the Framework, and all Standards applicable at the reporting date and adopted by the European Commission for use in the EU that are of relevance to the KSB Group, as well as the Interpretations issued by the IFRS Interpretations Committee. For the purposes of this document, the term IFRSs includes applicable International Accounting Standards (IASs). The consolidated financial statements of KSB AG therefore meet the requirements of the IFRSs as applicable in the EU.

The consolidated financial statements were prepared on a going concern basis in accordance with IAS 1.25. They were prepared using the historical cost convention, with the exception of measurement at market value for available-for-sale financial assets and measurement at fair value through profit and loss for financial assets and liabilities (including derivatives). Our investments in joint ventures and associates are measured using the equity method.

The financial year of the companies consolidated is the calendar year.

The income statement as part of the statement of comprehensive income has been prepared using the nature of expense method.

All material items of the balance sheet and the income statement are presented separately and explained in these Notes.

The main accounting policies used to prepare the consolidated financial statements are presented below. The policies described were applied consistently for the reporting periods presented unless stated otherwise.

The consolidated financial statements and the group management report, as well as the annual financial statements and management report of the Group’s parent company, are submitted to and published in the Bundesanzeiger [German Federal Gazette].

The present consolidated financial statements were approved for issue by the Board of Management on 21 March 2017 and are expected to be approved by the Supervisory Board on 22 March 2017.

New accounting principles

a) Accounting principles applied for the first time in the 2016 financial year

The following new and revised Standards issued by the International Accounting Standards Board (IASB) were required to be applied for the first time in financial year 2016:

IFRS announcement Adoption Publication in EU Official Journal First-time application in the EU
IAS 19 Employee Benefits 17 Dec. 2014 9 Jan. 2015 1 Feb. 2015
Improvements to the International Financial Reporting Standards (2010 to 2012) 17 Dec. 2014 9 Jan. 2015 1 Feb. 2015
Improvements to the International Financial Reporting Standards (2012 to 2014) 15 Dec. 2015 16 Dec. 2015 1 Jan. 2016
IAS 1 Presentation of Financial Statements 18 Dec. 2014 19 Dec. 2015 1 Jan. 2016
IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures 22 Sept. 2016 23 Sept. 2016 1 Jan. 2016
IFRS 11 Joint Arrangements 24 Nov. 2015 25 Nov. 2015 1 Jan. 2016
IAS 16 Property, Plant and Equipment, and IAS 38 Intangible Assets 2 Dec. 2015 3 Dec. 2015 1 Jan. 2016
IAS 16 Property, Plant and Equipment, and IAS 41 Agriculture 23 Nov. 2015 24 Nov. 2015 1 Jan. 2016

The adjustments to IAS 19 Employee Benefits introduce a new option into the standard in relation to the accounting method used for defined benefit pension commitments to which employees (or third parties) contribute via compulsory contributions.

The aim of the amendment to IAS 1 Presentation of Financial Statements is to remove immaterial information from the IFRS financial statements, thereby emphasising the concept of materiality. This standard also deals with the presentation of additional subtotals in the balance sheet and statement of comprehensive income, and with the presentation of other comprehensive income attributable to associates and joint ventures accounted for using the equity method. Additionally, the structure of disclosures in the Notes and the presentation of the significant accounting methods are covered by the standard.

The Investment Entities – Applying the Consolidation Exception standard amending IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Interests in Associates and Joint Ventures clarifies the fact that exemption from the obligation to prepare consolidated financial statements also applies to parent companies that are themselves a subsidiary of an investment entity.

The amendment to IFRS 11 Joint Arrangements clarifies that the acquisition of interests and of additional interests in joint operations that represent a business as defined in IFRS 3 are to be accounted for in accordance with the principles for the reporting of business combinations in accordance with IFRS 3 and other applicable IFRSs, provided that this does not contradict the provisions of IFRS 11.

The aim of the amendments to IAS 16 Property, Plant and Equipment and to IAS 38 Intangible Assets is to provide further guidelines for defining an acceptable method for the depreciation of property, plant and equipment. Under the Standards, revenue-based depreciation methods are not permitted for property, plant and equipment at all and for intangible assets only in certain exceptional cases.

The amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture mean that bearer plants that no longer undergo significant biological transformation are recognised in the same way as property, plant and equipment.

The changes had no material impact on the consolidated financial statements.

b) Accounting principles that have been published but that are not yet mandatory

The following Standards and revised Standards, as well as the new Interpretation issued by the IFRS Interpretations Committee (IFRIC), were not yet mandatory and were not applied in the 2016 financial year:

IFRS announcement Adoption / Publication Publication in EU Official Journal First-time application in the EU
IAS 28 Investments in Associates and Joint Ventures and IFRS 10 Consolidated Financial Statements 11 Sept. 2014 Open Open
IAS 12 Income Taxes 19 Jan. 2016 Exp. in Q2/2017 1 Jan. 2017
IAS 7 Statement of Cash Flows 29 Jan. 2016 Exp. in Q2/2017 1 Jan. 2017
Improvements to the International Financial Reporting Standards (2014 to 2016) 8 Dec. 2016 Exp. in Q3/2017 1 Jan. 2017 1 Jan. 2018
IFRS 15 Revenue from Contracts with Customers 11 Sept. 2015 29 Oct. 2016 1 Jan. 2018
Clarifications of IFRS 15 Revenue from Contracts with Customers 12 Apr. 2016 Exp. in Q1/2017 1 Jan. 2018
IFRS 9 Financial Instruments 24 July 2014 29 Nov. 2016 1 Jan. 2018
IFRS 2 Share-based Payment 20 June 2016 Exp. in Q3/2017 1 Jan. 2018
IFRS 4 Insurance Contracts 12 Sept. 2016 Exp. in Q3/2017 1 Jan. 2018
IFRIC 22 Foreign Currency Transactions and Advance Consideration 8 Dec. 2016 Exp. in Q3/2017 1 Jan. 2018
IAS 40 Investment Property 8 Dec. 2016 Exp. in Q3/2017 1 Jan. 2018
IFRS 16 Leases 13 Jan. 2016 Exp. in Q4/2017 1 Jan. 2019

The amendments to IAS 28 Investments in Associates and Joint Ventures and IFRS 10 Consolidated Financial Statements remove an inconsistency between the rules laid down in the Standards for dealing with assets being sold to an associate or joint venture and/or the contribution of assets in an associate or joint venture. In future, any gain or loss arising from the loss of control over a subsidiary that is being incorporated into a joint venture or associate must be recognised in the full amount by the investor if the transaction relates to a business as defined in IFRS 3 Business Combinations. If, in contrast, the assets do not form a business, the gain / loss may only be recognised pro rata.

The amendment to IAS 12 Income taxes clarifies that write-downs to a lower market value of debt instruments measured at fair value arising from a change in market interest rates can give rise to deductible temporary differences. For clarification, rules and examples were expanded, for example, to indicate how future taxable income needs to be calculated in order to capitalise deferred tax assets.

The amendment to IAS 7 Statement of Cash Flows aims to add information that will help users of financial statements to assess changes in the entity’s liabilities from financing activities.

IFRS 15 Revenue from Contracts with Customers defines principles that an entity should apply to report on the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. Revenue is no longer realised upon the transfer of the material opportunities and risks but, in future, is realised once the customer has acquired control over the agreed goods and services and can derive benefits from these. The rules and definitions of IFRS 15 will in future replace the content of IAS 18 Revenue and of IAS 11 Construction Contracts. The transitional provisions of IFRS 15 allow both fully retrospective and modified retrospective first-time application. In 2016 KSB launched a Group-wide project to introduce IFRS 15. Based on the three business models of Plant Engineering, Series Production and Service, this includes taking stock of the relevant contracts in the individual Group companies. Using the results from this analysis of contracts, we will be developing a specialist concept for bringing the recognition of sales revenue into line with the new IFRS 15 provisions. The IT processes and systems in place will also be analysed to determine the need for action, necessary adjustments will be implemented, and the Group companies will be given training in the new IFRS 15 rules.

Based on our current information, KSB will be applying the standard for the first time for the 2018 financial year using the modified retrospective approach, i.e. the comparative period will include the amounts reported in accordance with the earlier standards. The cumulative impact of applying IFRS 15 will be reported as an adjustment to the opening equity balance at the time of first-time application. We currently expect only very limited changes to the total amount of sales revenue recorded from contracts with customers. Additionally, the timing of the sales revenue will change for certain types of contract. For example, some sales revenue might be recognised at an earlier stage if there are variable remuneration components or if the transaction price is allocated to different performance obligations. Based on the analysis conducted to date, we expect the vast majority of construction contracts that are currently recognised using the percentage-of-completion method to continue to fulfil the requirements for sales revenue recognition over time. At the same time, the company expects additional quantitative and qualitative disclosures in the Notes. Based on current knowledge, we do not expect any material impact on the consolidated financial statements, which include sales revenue recognised by PoC of € 407 million and receivables recognised by PoC of € 76 million for 2016.

IFRS 9 Financial Instruments contains revised guidelines on classifying and measuring financial instruments, and will replace IAS 39 in future. Depending on their contractual cash flows and the business model used to manage them, financial assets are measured either at amortised cost, or at fair value directly in equity or at fair value through profit or loss. When recognising impairments, IFRS 9 considers expected losses, and not, as under the previous rules, incurred losses, in order to ensure adequate risk provisioning. There are also new rules on the presentation of capitalised hedges to improve the depiction of an entity’s risk management activities. The Group cannot yet definitively assess the impact of applying the standard for the first time. We do not currently expect the effects on the company’s results of operations, financial position and net assets to be material. The disclosures will, however, be extended. The new classification rules will only result in financial asset items being reallocated. The current view is that the transition from the incurred loss model to the expected loss model for the calculation of impairment of financial assets will not result in material changes. The Group already monitors all receivables very closely, demanding advances wherever possible to minimise risk and applying strict rules in the event of any payment default. Consequently, significant effects would only occur if our current customers were to face unprecedented serious payment difficulties. There are currently no indications of any such difficulties. Similarly, no significant adjustments are expected from the change in how financial liabilities are measured, given that these are currently measured in full at amortised cost. In the current year, we will be reviewing the extent to which we apply the new standards on hedge accounting, including from a cost / benefit perspective.

The amendments to IFRS 2 Share-based Payment relate to the accounting treatment of cash-settled share-based payment transactions. Some of the new provisions concern the calculation of the fair value of obligations resulting from share-based payments.

The changes to IFRS 4 Insurance Contracts aim to reduce the impact of the differing start dates for IFRS 9 Financial Instruments and the successor standard to IFRS 4, above all for entities with comprehensive insurance activities.

IFRIC 22 Foreign Currency Transactions and Advance Consideration clarifies the exchange rate to be used on initial recognition for the conversion of foreign currency transactions that include the receipt or payment of advance consideration.

IAS 40 Investment Property has been amended in order to clarify that an entity may only transfer a property to or out of its investment property portfolio if there is evidence of a change of use.

IFRS 16 Leases specifies the new rules on recognising, measuring, presenting and disclosing leases. The classification into operating and finance leases shall no longer apply to lessees in future. Pursuant to IFRS 16, all leases shall as a general rule be accounted for in the form of a right of use with corresponding lease obligation. These are to be reported in separate balance sheet items under fixed assets or liabilities, or may be described in the Notes.

As far as lessees are concerned, the new standard offers various accounting options. Leases with a term of less than 12 months and low-value assets may be capitalised. If this option is used, the lease will be accounted for in a comparable way to that stipulated to date under IAS 17 or operating leases. A further simplification is provided by the option of applying the new rules to a lease portfolio, provided that the resulting effect does not involve any significant change compared with an individual approach.

Comprehensive qualitative and quantitative disclosures will be required in the Notes in future.

Based on current knowledge, IFRS 16 will be applied for the first time on a modified, retrospective basis within the KSB Group by recording the cumulative effect from the first-time application in equity. On this basis, only those existing contracts that are already classified as leases under IAS 17 will be covered by the scope of IFRS 16. Other existing contracts need not be reviewed to determine whether they would be covered by the new standard based on the amended definitions in IFRS 16. For the Group, this means that the assets and liabilities for operating leases already in place must be reported. The discounted residual lease payments are to be recognised as a lease liability. The right of use can either be recognised at the amount that would have resulted from application of the standard at the start of the lease or, more simply, at the amount of the liability (adjusted to take account of any payments before the lease began).

Information on the current leases applicable within the Group are included in Section „IX. Other Disclosures“ of the present Notes. Based on current information, we will be exercising the options applicable to leases with a term of less than 12 months and low-value assets in such a way that we account for these leases in a comparable way to that stipulated to date under IAS 17 for operating leases. Consequently, we expect a balance sheet extension. This will not, however, correspond to the full scope of the operating lease volume (€ 52.9 million) presented in Section IX. Other Disclosures. There will also be a change in the income statement, given that lease payments for operating leases currently reported under other expenses will in future be partially replaced with a depreciation expense for rights of use and interest expenses for liabilities from leases. Accounting for finance leases in place will not be affected by the new standard.

In order to examine the impact of these changes on the KSB Group more accurately, we have already prepared an appropriate project plan. We will be carrying out a detailed impact analysis during the first half of 2017 on the basis of the relevant contracts for the parent company KSB AG, reviewing the need for any process adjustments or IT system adjustments. On the basis of these findings, we will then extend the scope of the impact analysis, preparing a questionnaire on IFRS 16 to be completed by each Group company. Once the returned questionnaires have been analysed, any necessary system adjustments will be initiated, with the corresponding changes being made to the reporting package and accounting instructions. These stages have been scheduled for completion by the end of 2017. Only then will it be possible to make an in-depth conclusive assessment of the impact of applying IFRS 16 for the first time.

As a matter of principle, we have not voluntarily applied the above-mentioned new or revised Standards or the Interpretation prior to their effective dates. We do not anticipate any, or any material, impact on our net assets, financial position or results of operations. With regard to IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases, please refer to the comments in the previous sections.

To top