Arla Foods Consolidated Annual Report 2021

73 Arla Foods Consolidated Annual Report 2021 / Consolidated Financial Statements / Notes INTRODUCTION TO NOTES The following sections provide additional disclosures supplementing the primary financial statements. Contents III NOTE 1 REVENUE AND COSTS Details on the group's performance and profitability are disclosed in Note 1. NOTE 2 NET WORKING CAPITAL Details on the development and composition of inventory and trade balances against customers and vendors are disclosed in Note 2. NOTE 3 CAPITAL EMPLOYED Details on the production capacity, intangible assets and financial investments held by the group are disclosed in Note 3. NOTE 4 FUNDING Details on funding of the group's activities and the associated financial risks are disclosed in Note 4. NOTE 5 OTHER AREAS The general accounting policies, the group structure and other IFRS requirements are disclosed in Note 5. Basis for preparation The consolidated financial statements are based on the group's monthly reporting procedures. Group entities are required to report using standard accounting principles in accordance with the International Financial Reporting Standards as adopted by the EU (IFRS). In response to the Guidelines on Alternative Performance Measures (APMs) issued by the European Securities and Markets Authority (ESMA), we have provided additional information on the APMS used by the group. These APMs are deemed critical to understanding the financial performance and financial position of the group, in particular the performance price. As they are not defined by IFRS, they may not be directly comparable with other companies that use similar measures. Definitions are provided in the Glossary and Note 1.4. The group's general accounting principles are disclosed in Note 5.7, while accounting policies for the respective areas are explained in relation to the individual notes. Currency exposure The group's financial position is significantly exposed to currencies, both due to transactions conducted in currencies other than the EUR and due to the translation of financial reporting from entities not part of the Eurozone. The most significant exposure relates to financial reporting from entities operating in GBP and SEK, and to transactions relating to sales in USD or USD-related currencies. Refer to Note 4.1.2 for more details on how the exposure is managed. Applying materiality Our focus is to present information that is considered of material importance to our stakeholders in a simple and structured way. Disclosures that are required by IFRS are included in the annual report, unless the information is considered of immaterial importance to the readers of the annual report. Significant accounting estimates and assessments Preparing the group's consolidated financial statements requires management to apply accounting estimates and judgements that affect the recognition and measurement of the group's assets, liabilities, income and expenses. The estimates and judgements are based on historical experience and other factors. By nature, these are associated with uncertainty and unpredictability which can have a significant effect on the amounts recognised in the consolidated financial statements. The most significant accounting estimates are addressed below. Measurement of revenue and rebates Revenue, net of rebates, is recognised when goods are transferred to customers. Estimates are applied when measuring the accruals for rebates and other sales incentives. The majority of rebates are calculated using terms agreed with the customer. For some customer relationships, the final settlement of the rebate depends on future volumes, prices and other incentives. Therefore there is an element of estimation and judgement in determining whether performance obligations are achieved. Estimates are based on historical experience and forecasted future sales. Refer to Note 1.1 for more details. Valuation of goodwill Estimates are applied in assessing the value in use of goodwill. Goodwill is not subject to amortisation but is tested annually for impairment. Assessing expected future cash flows and setting discount rates involves a level of estimation based on approved forecasts, strategic ambitions and market data. The majority of goodwill is allocated to activities in the UK. Refer to Note 3.1.1 for more details. Influence assessment and classification of investments The group holds an investment in COFCO Dairy Holdings Limited/Mengniu Dairy Company Limited, which is classified as an associate. The classification is based on an assessment of the level of influence through board representation. Refer to Note 3.3 for more details. Valuation of inventory Arla uses a standard cost model and estimates are applied when assessing the historical cost price of milk, utilities and other production-related costs. Furthermore, estimates are applied in assessing net realisable inventory values. Most significantly, this includes the assessment of expected future market prices and the quality of certain products within the cheese category, some of which need to mature for up to two years. Refer to Note 2.1 for more details. Measurement of trade receivables Allowance for doubtful trade receivable positions requires estimates. Losses on trade receivables recognised in the group are historically insignificant, which is also the case this year. Valuation of pension plans Judgements are applied when setting actuarial assumptions such as the discount rate, expected future salary increases, inflation and mortality. The actuarial assumptions vary from country to country, based on national economic and social conditions. They are set using available market data and compared to benchmarks to ensure consistency on an annual basis and in compliance with best practice. For the UK the underlying pension liabilities are projected values for individuals covered by the schemes. The underlying values are updated on a triennial basis, most recently performed in 2019, reflecting changes in members' demographic data. Refer to Note 4.7 for more details.

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