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
Net working capital
2.1 NET WORKING CAPITAL, OTHER RECEIVABLES AND CURRENT LIABILITIES
Our Consolidated Environmental, Social and Governance Data
Accounting policies
Inventory
Inventories are measured at the lower of cost or net
realisable value, calculated on a first-in, first-out basis.
The net realisable value is established taking into
account inventory marketability and an estimate of the
selling price, less completion costs and costs incurred
to execute the sale.
The cost of raw materials, consumables as well as
commercial goods includes the purchase price plus
delivery costs. The prepaid price to Arla's owners is
used as the purchase price for owner milk.
The cost of work in progress and manufactured goods
also includes an appropriate share of production
overheads, including depreciation, based on the normal
operating capacity of the production facilities.
Trade receivables
Trade receivables are recognised at the invoiced
amount less expected losses in accordance with
the simplified approach for amounts considered
irrecoverable (amortised cost). Expected losses are
measured as the difference between the carrying
amount and the present value of anticipated cash flow.
Expected losses are assessed on major individual
receivables or in groups at a portfolio level, based on
the receivables' age and maturity profile as well as
historical records of losses. Calculated expected losses
are adjusted for specific significant negative
developments in geographical areas.
Trade and other payables
Trade payables are measured at amortised cost,
which usually corresponds to the invoiced amounts.
Other receivables and other current liabilities
Other receivables and other current liabilities are
measured at amortized cost usually corresponding
to the nominal amount.
♫ Uncertainties and estimates
Inventory
The group uses monthly standard costs to calculate
inventory and revises all indirect production costs at
least once a year. Standard costs are also revised if they
deviate materially from the actual cost of the individual
product. A key component in the standard cost
calculation is the cost of raw milk from farmers. This is
determined using the average prepaid milk price that
matches the production date of inventory.
Indirect production costs are calculated based on
relevant assumptions with respect to capacity
utilisation, production time and other factors,
characterising the individual product.
The assessment of the net realisable value requires
judgement, particularly in relation to the estimate of
the selling price of certain cheese stock with long
maturities and bulk products to be sold on European
or global commodity markets.
Receivables
Expected losses are based on a calculation, including
several parameters, for example, number of days
overdue adjusted for significant negative developments
in certain geographical areas.
The financial uncertainty associated with provision for
expected losses is usually considered to be limited.
However, if a customer's ability to pay were to
deteriorate in the future, further write-downs may be
necessary.
Customer-specific bonuses are calculated based on
actual agreements with retailers, however, some
uncertainty exists when estimating exact amounts to be
settled and timing of these settlements.
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