Accounting and Valuation Principles

B. Accounting and Valuation Principles

6. General information

As a rule, the annual financial statements of the companies included are prepared using uniform accounting and valuation methods. The accounting and valuation options in the Consolidated Financial Statements are exercised in the same manner as in the single-entity Financial Statements. The accounting and valuation methods applied are unchanged year-on-year.

7. Recognition of income and expense

Revenues and other operating income are recognized when the service is provided or when risk is transferred to the customer. Operating expenses are recognized in income when the service is taken up or when these are caused. Revenue-related expenses or provisions are taken into account when the corresponding revenues are recognized. Interest income and expense are accrued.

8. Assets

Intangible assets acquired against payment are carried at cost less straight line amortization in line with their useful lives.

Intangible assets carried under IFRS 3 are amortized taking into account the reworked IAS 38.

Internally generated intangible assets from which future economic benefits will flow to the
group and which can be reliably valued (IAS 38) are capitalized at their production cost. These mostly relate to sales and production-specific software systems which can be used throughout the group. These systems are regularly modified in line with the changing technical requirements, with the useful life being re-determined on a regular basis. Production costs comprise all directly allocable costs as well as reasonable amounts of the production-related overheads. Financing costs are not capitalized (IAS 23). Other development costs are also not capitalized.

The goodwill included in intangible assets is not subject to scheduled amortization. Impairment tests (IAS 36) are conducted for the individual items. If write-downs were required, extraordinary write-downs were performed.

Property, plant and equipment is carried at cost and, if these are wasting assets, less scheduled straight line depreciation. Production costs comprise all directly allocable costs as well as reasonable amounts of the production-related overheads. Financing costs are not capitalized (IAS 23.10 et seq.). The basis for depreciation is less an estimated residual value which the companies can anticipate realizing at the end of the useful life less the costs of disposal (IAS 16.6, 38.7). The residual value on the Balance Sheet date is calculated as if the respective asset already has the age and degree of wasting on the date of the supposed disposal (IAS 16 BC 29). There is no revaluation of assets according to IAS 16.31 and IAS 38.75. Only depreciation resulting from tax regulations is not applied.

Low value assets with an individual acquisition value of up to 410.00 euros are written off in full in the year of their acquisition.

Scheduled amortization/depreciation of non-current assets is mostly calculated based on the following uniform group useful lives:

Standard operating useful lives are determined based on previous experience of using the asset, its current and expected opportunities for use, and specific technical developments.

Extraordinary amortization/depreciation within the meaning of IAS 36 was performed according to IAS 16.63 if there was reason to believe that the recoverable amount of the asset was significantly less than its book value, for example if market values fell more strongly than normal.

Financial assets are measured at cost. No extraordinary amortization was performed as a result of expected permanent impairment. Joint venture companies are consolidated at equity and carried under financial assets at equity. Upon initial consolidation they are carried at cost or, if the participation is via a non-cash contribution, at their present value; in the case of noncash contributions the portions of hidden reserves due to the partner company are taken into account.

Inventories are carried at cost. Cost includes material and production unit costs as well as material and production overheads to a reasonable extent. Administrative costs are taken into account to the extent that these are attributable to production. If the net selling value was lower on the Balance Sheet date, this is applied. There were no long-term production contracts. Purchased items of inventory were measured at their weighted average value using the average value method.

As a rule, receivables and other assets are carried at their face value. If there is doubt surrounding the collection of receivables, these are carried at the lower amount which can be received. In addition to the required individual write-downs, recognizable risks from the general credit risk are taken into account by forming lump-sum individual write-downs. Non-interest bearing receivables and other assets are discounted to the extent that these are noncurrent. The treasury shares held are deducted from equity on the face of the Balance Sheet in a separate item according to IAS 32.33.

Cash in hand, bank balances and checks are carried at amortized cost. Cash in hand and balances in foreign currencies are translated at the exchange rate on the Balance Sheet date (see this page).

According to IAS 12, deferred tax assets and liabilities are formed for all temporary differences for assets and liabilities between the tax base and the IFRS/IAS financial statements, for tax credits and losses carried forward. The national tax rates applicable on the Balance Sheet date or in future are applied respectively. The impact of changes in the tax rate on deferred taxes is recorded when the statutory change comes into effect. Deferred tax assets from losses carried forward are only taken into account to the extent that their realization is sufficiently concrete and probable.

9. Liabilities and shareholders’ equity

Subscribed capital is carried at its nominal amount under equity. The premium from the initial share issue is measured as the share premium at the difference between the nominal amount of the bearer shares issued and the issuing amount generated. The company received compensation for the new shares issued as part of conversion rights being exercised. The amount of this compensation is disclosed in the amount of its nominal value under subscribed capital and in the amount of the premium in excess of this amount under the share premium. Subscribed capital and the share premium relate to CEWE COLOR Holding AG, Oldenburg, and are disclosed as for this company. In line with IAS 32.33, treasury shares are carried in the amount of their full original acquisition costs on the date of their re-purchase in the special item for treasury shares. The revenue reserves and the net retained profits are formed according to statutory provisions and the articles of association, and are carried at their face value. In addition, they include the differences to IFRS/IAS accounting that result in excess of the HGB results. In addition, effects are disclosed that result from the fair value measurement of hedging transactions within the
meaning of IAS 39 and the valuation of Stock Option Plans according to IFRS 2 (see this page). The option premiums received as part of the option rights issued are also carried under revenue reserves.

Provisions for pensions are taken into account in line with the projected unit credit method prescribed by IAS 19 for performance-related pension commitments. When valuing provisions for pensions and calculating pension costs, the 10 % corridor rule was not applied. That means that all actuarial gains and losses are recognized in income immediately. Actuarial calculations are based on the following assumptions of trends:

Calculations based on: 2005 mortality table from G. Heubeck-Richttafeln GmbH, Cologne, for 2005
Pension age selected: advance take-up according to RRG 1999

Mortality rates are calculated according to the current mortality tables published by Heubeck or comparable foreign mortality tables. There is re-insurance in the event that extraordinary payments are required. There were no fund assets to be offset and which could be used to repay the commitments.

Government grants for assets are carried in the item special tax-allowable reserve for investment grants as a deferred liability. Investment grants and investment subsidies are recognized in income proportionately as these are taken up in line with amortization/depreciation for the subsidized assets.

Deferred tax liabilities are carried under provisions. These are formed based on the standard international liability method (IAS 12) and show the tax impact of valuation differences between the individual companies’ tax bases and the consolidated financial statements. Neither deferred tax assets nor deferred tax liabilities are discounted. The deferrals are calculated using the tax rates which are to be expected when the temporary differences are reversed according to current knowledge. The underlying tax rates total approx. 38.2% in Germany and are between 16.0 % and 33.9 % in the rest of the world.



Other provisions for taxes and other provisions are formed to the extent that there is a commitment resulting from a past event. This is conditional upon it being probable that this commitment will lead to a future outflow of resources and the charges can be reliably estimated (IAS 37). These are carried if the probability is greater than 50% based on the fulfillment amount with the highest probability of occurrence. Provisions for liabilities that will probably not lead to charges in the following year are formed in the amount of the cash value of the anticipated outflow of resources, to the extent that this is material. The discount rates correspond to the standard capital market rates. The carrying amount of the provisions is reviewed on every Balance Sheet date.

Liabilities are carried at amortized cost (IAS 39), items denominated in foreign currency are measured at the mean rate of exchange on the Balance Sheet date.

Contingent liabilities are used to disclose obligations from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events, and for which the threatened outflow of resources is not sufficiently probable or for which the amount of the outflow of resources cannot be reliably estimated (IAS 37). Compensation obligations to the minority shareholder of CEWE COLOR AG & Co. OHG, Oldenburg, are carried at their fair value (IAS 32 in connection with ED IAS 32). This figure is geared to the stock market price of shares of CEWE COLOR Holding AG, Oldenburg, as this company itself does not conduct its own activities and is merely a holding company.

As a rule, contingent liabilities are not carried on the Balance Sheet. The volume of contingent liabilities stated in the notes corresponds to the amount on the Balance Sheet date. The carrying amount of the contingent liabilities is recalculated on every Balance Sheet date.

CEWE COLOR uses derivative financial instruments such as interest rate and foreign currency options, interest rate swaps, combined interest and currency swaps, as well as commodities forwards (silver) to hedge currency, interest rate and commodity price risks. According to the risk management principles, no derivative financial instruments are held for trading purposes.

Derivative financial instruments are initially carried on the Balance Sheet at cost and then at their market values. Gains and losses are recorded depending on the type of item hedged. On the date a hedge transaction is concluded, the derivatives are either classified as hedges for a planned transaction (cash flow hedge), hedges for the fair value of a disclosed asset or liability (fair value hedge) or hedges for a net investment in an economically independent foreign subsidiary.

The change in the market value of derivatives which are used for and are suitable for use as cash flow hedges, and which prove to be fully effective, are carried under equity. If these are not 100% effective, the ineffective changes in value are recognized in income. The gains and losses accumulated in equity are recognized in income in the same period in which the hedged transaction impacts the income statement. In the case of derivative financial instruments which are used to hedge fair value, the results from the derivative and the corresponding gain or loss from the hedged item are recognized in income immediately.

Changes to the market value of derivatives to hedge the market value of a future underlying transaction which are not suitable for hedge accounting within the meaning of IAS 39, are recognized in income immediately.

Hedging for foreign net items is disclosed correspondingly as cash flow hedges. If the hedging instrument is a derivative, the actual currency gains and losses from the derivative or from the translation of the credit are carried under equity.

The relationships between the hedge instruments and the hedged items and the risk management targets for the hedge transaction are documented when the transaction is concluded. This approach links all derivatives classified as hedges with specific planned transactions. In addition, the assumption is documented regarding whether the derivative used as a hedge is highly effectively balanced out in the changes in cash flow for the hedged transaction.

The market values of cross-currency swaps are calculated based on market conditions on the Balance Sheet date. Recognized valuation models are used to determine the market value.

IFRS 2 is taken into account for the accounting treatment of Stock Option Plans as a special type of remuneration via real options, for which the company has to supply treasury shares to the option holders when these are exercised. The fair value of the options on the grant date is identified based on market prices (prices at Deutsche Börse AG, Frankfurt) taking into account the issuing conditions and generally recognized valuation techniques for financial instruments. The following are included in valuation: the strike price, the term, the current market value of the subject of the option (shares of CEWE COLOR), the anticipated volatility of the market price, the anticipated dividends for the shares and the risk-free interest rate for the term of the options. In addition, the following special features are taken into account: the necessary lock-up period and, if required, the earliest possible exercise of the option by the holder. The identified value of the stock options is then distributed as an expense over the term taking into account the assumed length of service or fluctuation in option holders. This is disclosed under personnel expenses and in equity under other revenue reserves.