Arla Foods Annual Report 2020

Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data Capital employed 3.3 ASSOCIATES AND JOINT VENTURES Ill Accounting policies Investments where Arla exercises significant influence, but not control, are classified as associates. Investments in which Arla has joint control are classified as joint ventures. The proportionate share of results of associates and joint ventures after tax is recognised in the consolidated income statement, after elimination of the proportionate share of unrealised intra-group profit or loss. Investments in associates and joint ventures are recognised according to the equity method and measured at the proportionate share of the entities' net asset values, calculated in accordance with Arla's accounting policies. The proportionate share of unrealised intra-group profits and the carrying amount of goodwill are added, whereas the proportionate share of unrealised intra-group losses is deducted. Dividends received from associates and joint ventures reduce the value of the investment. For investments held in listed companies, computation of Arla's share of profit and equity is based on the latest published financial information of the company, other publicly available information on the company's financial development, and the effect of reassessed net assets. Investments in associates and joint ventures with negative net asset values are measured at zero. If Arla has a legal or constructive obligation to cover a deficit in the associate or joint venture, the deficit is recognised under provisions. Any amounts owed by associates and joint ventures are written down to the extent that the amount owed is deemed irrecoverable. An impairment test is performed when there is impairment indicators, such as significant adverse changes in the environment in which the equity- accounted investee operates, or a significant or prolonged decline in the fair value of the investment below its carrying value. Where the equity-accounted investment is considered to be an integral part of a cash generating unit (CGU), the impairment test is performed at the CGU level, using expected future net cash flow of the CGU. An impairment loss is recognised when the recoverable amount of the equity-accounted investment (or CGU) becomes lower than the carrying amount. The recoverable amount is defined as the higher of value in use, and fair value less costs to sell, of the equity-ac- counted investment (or CGU). A Uncertainties and estimates Significant influence is defined as the power to participate in financial and operating policy decisions of the investee but does not constitute control or joint control over those policies. Judgement is necessary in determining when significant influence exists. When determining significant influence, factors such as representation on the Board of Directors, participation in policy-making, material transactions between the entities and interchange of managerial personnel are considered. CDH and Mengniu The group has a 30 per cent investment in CDH, which is considered an associated company based on a cooperation agreement extending significant influence including the right of Board representation. The cooperation agreement with CDH also entitles Arla to representation on the Board of Mengniu, a Hong Kong listed dairy company in which CDH is a significant shareholder. It was agreed that Arla and Mengniu cooperate in relation to the exchange of technical dairy knowledge and expertise, and that Arla grants intellectual rights to Mengniu. Based on these underlying agreements, it is our assessment that Arla has significant influence in Mengniu. Lantbrukarnas Riksforbund, Sweden (LRF) Arla has an ownership interest of 24 per cent in LRF, which is a politically independent professional organisation for Swedish entrepreneurs involved in agriculture, forestry and horticulture. Capital employed 3.4 PROVISIONS Provisions Provisions amounted to EUR 46 million in 2020, compared to EUR 32 million last year. Provisions primarily relate to insurance provisions for insurance incidents that occurred but have not been settled. Insurance provisions primarily relate to occupational injuries. No major occupational incidents occurred during the year. The general provision for occupational injuries of EUR 9 million is recorded as a long-term provision. Based on a detailed analysis of the LRF arrangement, Arla's active ownership interest constitutes significant influence over LRF. This includes, but is not limited to, owner representation on the Board of Directors. Furthermore, owners of Arla have represented the Swedish dairy industry at the Board of Directors in LRF and both Arla and our Swedish owners are individual members of LRF. ♫ Uncertainties and estimates Provisions are particularly associated with estimates on insurance provisions. Insurance provisions are assessed based on historical records of, amongst other things, the number of insurance events and related costs considered. The scope and size of onerous contracts are also estimated. 90 ARLA FOODS ANNUAL REPORT 2020

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