Investor Presentaiton

109 A.P. Moller-Maersk Annual Report 2020 Financials Consolidated financial statements Notes index Amounts in USD million = Note 23 Significant accounting policies - continued the effect of minimum funding and asset ceiling require- ments. Plans with a funding surplus are presented as net assets on the balance sheet. The defined benefit obliga- tions are measured at the present value of expected fu- ture payments to be made in respect of services provided by employees up to the balance sheet date. Plan assets are measured at fair value. The pension cost charged to the income statement consists of calculated amounts for vested benefits and interest in addition to settlement of gains or losses, etc. Interest on plan assets is calculated with the same rates as used for discounting the obliga- tions. Actuarial gains/losses are recognised in other com- prehensive income. Pension plans where A.P. Moller - Maersk, as part of col- lective bargaining agreements, participates together with other enterprises - so called multi-employer plans - are treated as other pension plans in the financial state- ments. Defined benefit multi-employer plans, where suf- ficient information to apply defined benefit accounting is not available, are treated as defined contribution plans. Deferred tax is calculated on temporary differences be- tween the carrying amounts and tax bases of assets and liabilities. Deferred tax is not recognised for differences on the initial recognition of assets or liabilities, where at the time of the transaction neither accounting nor taxable profit/loss is affected, unless the differences arise in a business combination. In addition, no deferred tax is rec- ognised for undistributed earnings in subsidiaries, when A.P. Moller-Maersk controls the timing of dividends, and no taxable dividends are currently expected. A deferred tax asset is recognised to the extent that it is probable that it can be utilised within a foreseeable future. Financial liabilities are initially recognised at fair value less transaction costs. Subsequently, the financial liabilities are measured at amortised cost using the effective inter- est method, whereby transaction costs and any premium or discount are recognised as financial expenses over the term of the liabilities. Fixed interest loans subject to fair value hedge accounting are measured at amortised cost with an adjustment for the fair value of the hedged inter- est component. Liabilities in respect of leases are meas- ured at the interest rate implicit in the lease, if practicable to determine, or else at A.P. Moller - Maersk's incremental borrowing rate. Lease liabilities are initially measured at the present value of the lease payments over the lease term, discounted using the incremental borrowing rate. The following lease payments are included in the net present value: fixed payments (including in-substance fixed payments), less any lease incentives receivable variable lease payments that are based on an index or a rate amounts expected to be payable by the lessee under residual value guarantees the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and pay- ments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit/loss. Extension and termination options in lease contracts are included in contracts, where A.P. Moller-Maersk will probably exercise the options. These terms are used to maximise operational flexibility in terms of managing contracts. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended or not terminated. Most of the extension and termination options held are exercisable only by A.P. Moller-Maersk and not by the respective lessor. This assessment is reviewed if a significant event or a signif- icant change in circumstances occurs which affects this assessment, and which is within the control of the les- see. Where A.P. Moller - Maersk will probably exercise spe- cific purchase options, those options are included in the measurement of the lease liability with corresponding right-of-use asset depreciated over the asset's useful life rather than lease term. Lease payments are discounted at the implicit interest rate, to the extent this can be determined, otherwise discounted using incremental borrowing rates (IBRS). A.P. Moller-Maersk's IBR reflects the Group's credit risk, leased amount and contract duration, as well as the nature and quality of the asset's security and economic environment in which the leased assets operate. To de- termine the IBR, where possible, A.P. Moller-Maersk uses recent third-party financing received by the individual lessee as a starting point, with adjustments to reflect changes in financing conditions since that financing was received. Where such financing is not available, A.P. Moller-Maersk uses a build-up approach that starts with a risk-free interest rate adjusted by credit risk and specific risks faced by the lessee such as asset type, geo- graphical risks, etc. Subsequently, the lease liability is measured at amor- tised cost with each lease payment allocated between the repayment of the liability and financing cost. The finance cost is charged to the income statement over the lease period using the IBR that was used to discount the lease payments. Derivative financial instruments Derivative financial instruments are recognised on the trading date and measured at fair value using generally acknowledged valuation techniques based on relevant observable swap curves and exchange rates. The effective portion of changes in the value of derivative financial instruments designated to hedge highly proba- ble future transactions is recognised in other comprehen- sive income until the hedged transactions are realised. At that time, the accumulated gains/losses are transferred to the items under which the hedged transactions are rec- ognised. The effective portion of changes in the value of derivative financial instruments used to hedge the value of recognised financial assets and liabilities is recognised in the income statement together with changes in the fair value of the hedged assets or liabilities that can be attrib- uted to the hedging relationship. Currency basis spread and forward points are considered a cost of hedging and deferred in equity. The ineffective portion of hedge transactions and changes in the fair values of derivative financial instru- ments, which do not qualify for hedge accounting, are recognised in the income statement as financial income or expenses for interest and currency-based instruments, and as other income/costs for oil price hedges and for- ward freight agreements. Cash flow statement Cash flow from operating activities includes all cash transactions other than cash flows arising from invest- ments and divestments, received dividends, principal payments of loans, instalments on lease liabilities, paid and received financial items and equity transactions. Capitalisation of borrowing costs is considered as a non- cash item, and the actual payments of these borrowing costs are included in cash flow from financing. Cash and cash equivalents comprise cash and bank bal- ances net of bank overdrafts where overdraft facilities form an integral part of A.P. Moller-Maersk's cash man- agement. Business combinations and disposal of subsidiaries Upon acquisition of new entities, the acquired assets, liabilities and contingent liabilities are measured at fair value at the date when control was achieved using the acquisition method. Identifiable intangible assets are recognised if they arise from a contractual right or can otherwise be separately identified. The difference be- tween the fair value of the acquisition cost and the fair value of acquired identifiable net assets is recognised as goodwill. Contingent consideration is measured at fair value and any subsequent changes to contingent consid- eration are recognised as other income or other costs in the income statement. Transaction costs are recognised as operating costs as they are incurred. When A.P. Moller - Maersk ceases to have control of a subsidiary, the value of any retained investment is re-measured at fair value, and the value adjustment is recognised in the income statement as a gain/loss on the sale of non-current assets. The difference between sales proceeds and the carrying amount of the subsidiary is recognised in the income statement including fair value of