2. Accounting policies

Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).

Due to rounding, numbers presented throughout this report may not add up precisely to the totals provided. All ratios and variances are calculated using the underlying amount rather than the presented rounded amount.

Adoption of revised and new International Financial Reporting Standards and interpretations

In 2015, LafargeHolcim adopted the following amendments relevant to the Group.

IAS 19 (amended)

Employee Benefits

Improvements to IFRSs

Clarifications of existing IFRSs (issued in December 2013)

The amendment to IAS 19 relating to defined benefit plans clarifies how employee contributions which are linked to service should be attributed to the periods of service. For contributions that are independent of the number of years of service, the amendment permits a company to reduce service cost either (a) by attributing them to periods of service or (b) by reducing service costs in the period in which the related service is rendered. Since the Group already applied the option (a) above, the amendment to IAS 19 had no impact on the consolidated financial statements.

The adoption of the improvements to IFRSs did not materially impact the Group’s financial statements.

In 2016, LafargeHolcim will adopt the following amended standards relevant to the Group:

Amendments to IAS 1

Disclosure Initiative

Amendments to IFRS 11

Accounting for Acquisitions of Interests in Joint Operations

Amendments to IAS 16 and IAS 38

Clarification of Acceptable Methods of Depreciation and Amortization

Improvements to IFRSs

Clarifications of existing IFRSs (issued in September 2014)

The amendments to IAS 1 Presentation of Financial Statements largely clarify a number of presentation issues and highlight that preparers are permitted to tailor the format and presentation of the financial statements to their circumstances. The adoption of this amendment will not materially impact the presentation of the Group’s financial statements.

The amendments to IFRS 11 Joint Arrangements require business combination accounting according to IFRS 3 Business Combinations to be applied to an acquisition of an interest in a joint operation that constitutes a business. The adoption of this amendment will not materially impact the Group’s financial statements.

The amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets clarify that revenue-based amortization is generally inappropriate. The adoption of this amendment will not impact the Group’s financial statements.

The improvements to IFRSs relate largely to clarification issues. Therefore, the adoption of these amendments will not materially impact the Group’s financial statements.

In 2017, LafargeHolcim will adopt the following amended standards relevant to the Group:

Amendments to IAS 12

Income Taxes

Amendment to IAS 7

Disclosure Initiative

The amendments to IAS 12 clarify the requirements for recognizing deferred tax assets on unrealized losses. The amendments also clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. The adoption of this amendment will not materially impact the Group’s financial statements.

The amendment to IAS 7 introduces the disclosure of the reconciliation of liabilities arising from financing activities. The adoption of this amendment is disclosure related only and therefore will not materially impact the Group’s financial statements.

In 2018, LafargeHolcim will adopt the following new standards relevant to the Group:

IFRS 15

Revenue from Contracts with Customers

IFRS 9

Financial Instruments

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations. Except for the disclosure requirements, the new standard will not materially impact the Group financial statements.

In July 2014, the IASB issued IFRS 9 Financial Instruments which replaces IAS 39 Financial Instruments: Recognition and Measurement and that will change the classification and measurement requirements of financial assets and financial liabilities and the general hedge accounting rules. The Group is in the process of evaluating the impact IFRS 9 may have on its consolidated financial statements.

In 2019, LafargeHolcim will adopt the following new standard relevant to the Group:

IFRS 16

Leases

In January 2016, the IASB issued IFRS 16 Leases, which replaces IAS 17 Leases and related interpretations. The new standard will require lessees to recognize a lease liability reflecting future lease payments and a right-of-use asset for virtually all lease contracts. The Group is in the process of evaluating the impact IFRS 16 may have on its consolidated financial statements.

Change in accounting policies

During the first quarter 2015, the Group decided to change its accounting policy for recognizing net interest expense relating to retirement benefit plans. More relevant information is provided if total net interest costs are presented as part of financial expenses and not in the operating profit. This presentation better reflects the nature of net interest since it corresponds to the unwinding effect of the long-term defined benefit obligation. As the comparative amount for 2014 is immaterial, it has not been restated.

On April 9, 2015, the IFRIC published an agenda decision concerning the classification of joint arrangements under IFRS 11 Joint Arrangements. As a result of the clarifications regarding rights to the assets of a joint arrangement through other facts and circumstances, the Group was unable to continue to account for Cement Australia as a joint operation, since LafargeHolcim does not have an obligation to acquire substantially all of the economic benefits (i.e. output) from Cement Australia. As a result, LafargeHolcim changed its accounting policy for Cement Australia in the second quarter 2015 and reclassified its investment in Cement Australia as a joint venture and applied the equity accounting method. This accounting policy change has been applied retrospectively and its effect on the comparative information (restated amounts) presented for each financial statement line item is set out in the following tables.

Changes to consolidated statement of income of LafargeHolcim Group

Million CHF

2014
Reported

Impact from changes in accounting policies IFRS 11

2014
Restated

1

Restated due to the distribution of a scrip dividend, see note 14.

Net sales

19,110

(285)

18,825

Production cost of goods sold

(10,548)

88

(10,460)

Gross profit

8,562

(197)

8,365

Distribution and selling expenses

(4,924)

111

(4,813)

Administration expenses

(1,321)

13

(1,308)

Operating profit

2,317

(73)

2,244

Other income

185

0

185

Other expenses

(6)

1

(5)

Share of profit of associates and joint ventures

140

55

195

Financial income

183

2

185

Financial expenses

(611)

7

(604)

Net income before taxes

2,207

(6)

2,201

Income taxes

(588)

7

(581)

Net income

1,619

0

1,619

 

 

 

 

Net income attributable to:

 

 

 

Shareholders of LafargeHolcim Ltd

1,287

0

1,287

Non-controlling interest

332

0

332

 

 

 

 

Earnings per share in CHF

 

 

 

Earnings per share1

3.63

0.00

3.63

Fully diluted earnings per share1

3.63

0.00

3.63

Changes to consolidated statement of financial position of LafargeHolcim Group as of December 31, 2014

Million CHF

31.12.2014
Reported

Impact from changes in accounting policies IFRS 11

31.12.2014
Restated

1

Previously included in intangible assets.

2

The change in accounting policy did not result in any change in equity. As a result, the restated statement of changes in equity is not presented.

Cash and cash equivalents

2,149

(1)

2,148

Accounts receivable

2,695

(47)

2,648

Inventories

1,863

(35)

1,828

Prepaid expenses and other current assets

317

6

323

Assets classified as held for sale

283

0

283

Total current assets

7,307

(76)

7,231

 

 

 

 

Long-term financial assets

491

37

528

Investments in associates and joint ventures

1,758

217

1,975

Property, plant and equipment

21,410

(324)

21,086

Goodwill1

7,176

(46)

7,130

Intangible assets

603

(2)

601

Deferred tax assets

527

0

527

Other long-term assets

412

0

412

Total long-term assets

32,378

(119)

32,259

 

 

 

 

Total assets

39,684

(194)

39,490

 

 

 

 

Trade accounts payable

2,101

23

2,124

Current financial liabilities

2,502

(30)

2,472

Current income tax liabilities

419

(4)

415

Other current liabilities

1,634

(65)

1,569

Short-term provisions

234

0

234

Liabilities directly associated with assets classified as held for sale

33

0

33

Total current liabilities

6,923

(76)

6,847

 

 

 

 

Long-term financial liabilities

9,291

(94)

9,197

Defined benefit obligations

863

0

863

Deferred tax liabilities

1,415

(19)

1,396

Long-term provisions

1,080

(4)

1,076

Total long-term liabilities

12,649

(118)

12,531

 

 

 

 

Total liabilities

19,572

(194)

19,378

 

 

 

 

Share capital

654

0

654

Capital surplus

7,776

0

7,776

Treasury shares

(82)

0

(82)

Reserves

9,082

0

9,082

Total equity attributable to shareholders of LafargeHolcim Ltd

17,430

0

17,430

Non-controlling interest

2,682

0

2,682

Total shareholders’ equity2

20,112

0

20,112

 

 

 

 

Total liabilities and shareholders’ equity

39,684

(194)

39,490

Changes to consolidated statement of financial position of LafargeHolcim Group as of January 1, 2014

Million CHF

1.1.2014
Reported

Impact from changes in accounting policies IFRS 11

1.1.2014
Restated

1

Previously included in intangible assets.

2

The change in accounting policy did not result in any change in equity. As a result, the restated statement of changes in equity is not presented.

Cash and cash equivalents

2,244

(1)

2,243

Accounts receivable

2,521

(46)

2,475

Inventories

1,704

(30)

1,674

Prepaid expenses and other current assets

365

4

369

Assets classified as held for sale

756

0

756

Total current assets

7,590

(72)

7,518

 

 

 

 

Long-term financial assets

536

34

570

Investments in associates and joint ventures

1,562

208

1,770

Property, plant and equipment

20,029

(322)

19,707

Goodwill1

6,881

(45)

6,836

Intangible assets

605

(2)

603

Deferred tax assets

391

0

391

Other long-term assets

351

0

351

Total long-term assets

30,355

(128)

30,227

 

 

 

 

Total assets

37,944

(198)

37,746

 

 

 

 

Trade accounts payable

1,934

18

1,952

Current financial liabilities

2,920

(18)

2,902

Current income tax liabilities

462

(7)

455

Other current liabilities

1,708

(69)

1,639

Short-term provisions

224

0

224

Liabilities directly associated with assets classified as held for sale

213

0

213

Total current liabilities

7,461

(76)

7,385

 

 

 

 

Long-term financial liabilities

8,785

(96)

8,689

Defined benefit obligations

655

0

655

Deferred tax liabilities

1,290

(18)

1,272

Long-term provisions

1,077

(8)

1,069

Total long-term liabilities

11,807

(123)

11,684

 

 

 

 

Total liabilities

19,267

(198)

19,069

 

 

 

 

Share capital

654

0

654

Capital surplus

8,200

0

8,200

Treasury shares

(102)

0

(102)

Reserves

7,453

0

7,453

Total equity attributable to shareholders of LafargeHolcim Ltd

16,205

0

16,205

Non-controlling interest

2,471

0

2,471

Total shareholders’ equity2

18,677

0

18,677

 

 

 

 

Total liabilities and shareholders’ equity

37,944

(198)

37,746

Changes to consolidated statement of cash flows of LafargeHolcim Group

Million CHF

2014
Reported

Impact from changes in accounting policies IFRS 11

2014
Restated

1

The starting point of the consolidated statement of cash flows has been changed from net income before taxes to net income and the comparative figures have been adjusted accordingly.

2

Reported on a net basis as the current financial liabilities have a maturity period of three months or less.

Net income1

1,619

0

1,619

Income taxes1

588

(7)

581

Other income

(185)

0

(185)

Other expenses

6

(1)

5

Share of profit of associates and joint ventures

(140)

(55)

(195)

Financial expenses net

429

(10)

419

Depreciation, amortization and impairment of operating assets

1,430

(28)

1,402

Other non-cash items

217

4

221

Change in net working capital

(393)

15

(378)

Cash generated from operations

3,571

(82)

3,489

Dividends received

73

47

120

Interest received

124

2

126

Interest paid

(582)

6

(576)

Income taxes paid

(679)

10

(669)

Other expenses

(8)

1

(7)

Cash flow from operating activities (A)

2,498

(14)

2,484

 

 

 

 

Purchase of property, plant and equipment

(1,968)

23

(1,945)

Disposal of property, plant and equipment

209

(1)

208

Acquisition of participation in Group companies

(2)

0

(2)

Disposal of participation in Group companies

36

0

36

Purchase of financial assets, intangible and other assets

(300)

1

(299)

Disposal of financial assets, intangible and other assets

300

(1)

299

Cash flow from investing activities (B)

(1,724)

22

(1,702)

 

 

 

 

Payout on ordinary shares

(424)

0

(424)

Dividends paid to non-controlling interest

(297)

0

(297)

Capital paid-in by non-controlling interest

6

0

6

Movements of treasury shares

11

0

11

Net movement in current financial liabilities2

327

(13)

314

Proceeds from long-term financial liabilities

2,849

(38)

2,811

Repayment of long-term financial liabilities

(3,453)

42

(3,411)

Increase in participation in existing Group companies

(3)

0

(3)

Decrease in participation in existing Group companies

10

0

10

Cash flow from financing activities (C)

(975)

(8)

(983)

 

 

 

 

Decrease in cash and cash equivalents (A+B+C)

(201)

0

(201)

 

 

 

 

Cash and cash equivalents as at the beginning of the period (net)

1,993

(1)

1,992

Decrease in cash and cash equivalents

(201)

0

(201)

Currency translation effects

150

0

150

Cash and cash equivalents as at the end of the period (net)

1,942

(1)

1,941

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and related disclosures at the date of the financial statements. These estimates are based on management’s best knowledge of current events and actions that the Group may undertake in the future. However, actual results could differ from those estimates. Management also uses judgment in applying the Group’s accounting policies.

Critical estimates and assumptions

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are explained below:

  • the Group tests annually whether goodwill has suffered any impairment and in case of an impairment indication whether a non-financial asset may be impaired in accordance with its accounting policy. The recoverable amounts of cash-generating units have been determined based on value in use calculations. These calculations require the use of estimates such as discount rates and growth rates;
  • liabilities and costs for defined benefit pension plans and other post-employment benefits are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty;
  • the recognition of deferred tax assets requires assessment of whether it is probable that sufficient future taxable profit will be available against which the deferred tax assets can be utilized;
  • the measurement of site restoration provisions requires long-term assumptions regarding the phasing of the restoration work to be carried out and the appropriate discount rate to be used;
  • other long-term provisions require an estimate of the expenditure and timing of the settlement. The litigations and claims to which the Group is exposed are assessed by management with assistance of the legal department and in certain cases with the support of external specialized lawyers. Disclosures related to such provisions, as well as contingent liabilities, also require judgment;
  • the determination of depreciation and amortization charges depends on the useful lives for which judgment and estimates are required;
  • the determination of fair values of assets acquired and liabilities assumed in a business combination involves the use of estimates and assumptions such as discount rates used and valuation models applied as well as goodwill allocation; and
  • the fair value of financial instruments is estimated either on the basis of market quotations, on valuation techniques relying on observable market data or by estimating the present value of future cash flows. The use of different valuations, methodologies and assumptions may have a material effect on the estimated fair value amounts.

Scope of consolidation

The consolidated financial statements comprise those of LafargeHolcim Ltd and of its subsidiaries. The list of principal companies is presented in the note 39.

Principles of consolidation

Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise is able to exercise control over the operations, are consolidated. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the fair value of the consideration given at the date of exchange. For each business combination, the Group measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed in the statement of income. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the date of acquisition.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date.

If the business combination is achieved in stages, the carrying amount of the Group’s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date with any resulting gain or loss recognized in the statement of income.

Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognized in the statement of income.

Contingent liabilities assumed in a business combination are recognized at fair value and subsequently measured at the higher of the amount that would be recognized as a provision and the amount initially recognized.

Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases.

All intercompany transactions and balances between Group companies are eliminated in full.

Changes in the ownership interest of a subsidiary that do not result in loss of control are accounted for as an equity transaction. Consequently, if LafargeHolcim acquires or partially disposes of a non-controlling interest in a subsidiary, without losing control, any difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received is recognized directly in retained earnings.

It is common practice for the Group to write put options and acquire call options in connection with the remaining shares held by the non-controlling shareholders mainly as part of a business combination. If the Group has acquired a present ownership interest as part of a business combination, the present value of the redemption amount of the put option is recognized as a financial liability with any excess over the carrying amount of the non-controlling interest recognized as goodwill. In such a case, the non-controlling interest is deemed to have been acquired at the acquisition date and therefore any excess arising should follow the accounting treatment as in a business combination. All subsequent fair value changes of the financial liability are recognized in the statement of income and no earnings are attributed to the non-controlling interest. However, where the Group has not acquired a present ownership interest as part of a business combination, the non-controlling interest continues to receive an allocation of profit or loss and is reclassified as a financial liability at each reporting date as if the acquisition took place at that date. Any excess over the reclassified carrying amount of the non-controlling interest and all subsequent fair value changes of the financial liability are recognized directly in retained earnings.

Interests in joint arrangements are interests over which the Group exercises joint control and are classified as either joint operations or joint ventures depending on the contractual rights and obligations arising from the agreement rather than the legal structure of the joint arrangement. If the interest is classified as a joint operation, the Group recognizes its share of the assets, liabilities, revenues and expenses in the joint operation in accordance with the relevant IFRSs.

Associates are companies in which the Group generally holds between 20 and 50 percent of the voting rights and over which the Group has significant influence but does not exercise control.

Associates and joint ventures are accounted for using the equity method of accounting.

Goodwill arising from the acquisition is included in the carrying amount of the investment in associated companies and joint ventures. Equity accounting is discontinued when the carrying amount of the investment together with any long-term interest in an associated company or joint venture reaches zero, unless the Group has also either incurred or guaranteed additional obligations in respect of the associated company or joint venture.

Foreign currency translation

The assets and liabilities of each of the Group’s companies are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). Statements of income of foreign entities are translated into the Group’s reporting currency at average exchange rates for the year and statements of financial position are translated at the exchange rates prevailing on December 31.

Goodwill arising from the acquisition of a foreign operation is expressed in the functional currency of the foreign operation and is translated at the closing rate, at the date of the reporting period.

Foreign currency transactions translated into the functional currency are accounted for at the exchange rates prevailing at the date of the transactions; gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income, except when deferred outside the statement of income as qualifying cash flow hedges or net investment hedges.

Exchange differences arising on monetary items that form part of a company’s net investment in a foreign operation are recognized in other comprehensive earnings (currency translation adjustment) and are fully reclassified to the statement of income should the Group lose control of a subsidiary, lose joint control over an interest in a joint arrangement or lose significant influence in an associate. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the statement of income as part of the net gain or loss on sale, except for a partial disposal of a subsidiary without loss of control, where a proportionate share of the cumulative currency translation adjustments is re-attributed to retained earnings and not recognized in the statement of income.

Segment information

The Group is organized by countries. Countries or regional clusters are the Group’s operating segments. For purposes of presentation to the Chief Operating Decision Maker, five regions corresponding to the aggregation of countries or regional clusters are reported:

Asia Pacific

Latin America

Europe

North America

Middle East Africa

While each operating segment is reviewed separately by the Chief Operating Decision Maker, the countries have been aggregated into five reportable segments as they have similar long-term average gross margins and are similar in respect of products, production processes, distribution methods and types of customers.

Each of the above reportable segments derives its revenues from the sale of cement, aggregates and other construction materials and services.

The Group has three product lines:

Cement, which comprises clinker, cement and other cementitious materials

Aggregates

Other construction materials and services, which comprises ready-mix concrete, concrete products, asphalt, construction and paving, trading and other products and services

Group financing (including financing costs and financing income) and income taxes are managed on a Group basis and are not allocated to any reportable segments.

Transfer prices between segments are set on an arm’s-length basis in a manner similar to transactions with third parties. Segment revenue and segment result include transfers between segments. Those transfers are eliminated on consolidation.

Cash and cash equivalents

Cash and cash equivalents are financial assets. Cash equivalents are readily convertible into a known amount of cash with original maturities of three months or less. For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at banks and in hand, deposits held on call with banks and other short-term, highly liquid investments, net of bank overdrafts.

Accounts receivable

Trade accounts receivable are carried at the original invoice amount less an estimate made for doubtful debts based on a review of all outstanding amounts of the financial asset at the year end.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined by using the weighted average cost method. The cost of finished goods and work in progress comprises raw materials and additives, direct labor, other direct costs and related production overheads. Cost of inventories includes transfers from equity of gains or losses on qualifying cash flow hedges relating to inventory purchases.

Long-term financial assets

Long-term financial assets consist of (a) financial investments – third parties, (b) long-term receivables – associates and joint ventures, (c) long-term receivables – third parties, and (d) derivative assets. Financial investments in third parties are classified as available-for-sale and long-term receivables from associates, joint ventures and third parties are classified as loans and receivables. Derivative assets are regarded as held for hedging unless they do not meet the strict hedging criteria under IAS 39 Financial Instruments. Accounting policies on derivative instruments are detailed further below.

All purchases and sales of long-term financial assets are recognized on trade date, which is the date that the Group commits to purchase or sell the asset. The purchase cost includes transaction costs, except for derivative instruments. Loans and receivables are measured at amortized cost using the effective interest method. Available-for-sale investments are carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale investments are included in other comprehensive earnings until the financial asset is either impaired or disposed of, at which time the cumulative gain or loss previously recognized in other comprehensive earnings is reclassified from equity to the statement of income.

Property, plant and equipment

Property, plant and equipment is valued at acquisition or construction cost less depreciation and impairment loss. Cost includes transfers from equity of any gains or losses on qualifying cash flow hedges. Depreciation is charged so as to write off the cost of property, plant and equipment over their estimated useful lives, using the straight-line method, on the following bases:

Land and mineral reserves

No depreciation except on land with raw material reserves

Buildings and installations

20 to 40 years

Machinery and equipment

3 to 30 years

Costs are only included in the asset’s carrying amount when it is probable that economic benefits associated with the item will flow to the Group in future periods and the cost of the item can be measured reliably. Costs include the initial estimate of the costs for dismantling and removing the item and for restoring the site on which it is located. All other repairs and maintenance expenses are charged to the statement of income during the period in which they are incurred.

Mineral reserves are valued at cost and are depreciated based on the unit-of-production method over their estimated commercial lives.

Costs incurred to gain access to mineral reserves (typically stripping costs) are capitalized and depreciated over the life of the quarry, which is based on the estimated tonnes of raw material to be extracted from the reserves.

Interest costs on borrowings to finance construction projects, which necessarily take a substantial period of time to get ready for their intended use, are capitalized during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed in the period in which they are incurred.

Government grants received are deducted from property, plant and equipment and reduce the depreciation charge accordingly.

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Property, plant and equipment acquired through a finance lease is capitalized at the date of the commencement of the lease term at the present value of the minimum future lease payments or, if lower, at an amount equal to the fair value of the leased asset as determined at the inception of the lease. The corresponding lease obligations, excluding finance charges, are included in either current or long-term financial liabilities.

For sale-and-lease-back transactions, the book value of the related property, plant or equipment remains unchanged. Proceeds from a sale are included as a financing liability and the financing costs are allocated over the term of the lease in such a manner that the costs are reported over the relevant periods.

Gains and losses on disposals are determined by comparing proceeds with carrying amounts, and are recognized in the statement of income in “Other income (expenses)”.

Non-current assets (or disposal groups) classified as held for sale and discontinued operations

Non-current assets (or disposal groups) are classified as held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use.

Non-current assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale.

Gains and losses on disposals of non-current assets (or disposal groups) are determined by comparing proceeds with carrying amounts, and are recognized in the statement of income in “Other income (expenses)”.

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and represents a separate major line of business or geographical area of operations and is part of a single coordinated plan to dispose a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale.

Goodwill

Goodwill represents the excess of the aggregate of the consideration transferred and the amount recognized for the non-controlling interest over the fair value of the net identifiable assets acquired and liabilities assumed. Such goodwill is tested annually for impairment or whenever there are impairment indicators, and is carried at cost less accumulated impairment losses. Goodwill on acquisitions of associates and joint ventures is included in the carrying amount of the respective investments. If the consideration transferred is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income.

On disposal of a subsidiary or joint operation, the related goodwill is included in the determination of profit or loss on disposal.

For the purpose of impairment testing, goodwill on acquisitions of subsidiaries is allocated to cash generating units expected to benefit from the synergies of the business combination. Impairment losses relating to goodwill cannot be reversed in future periods.

Intangible assets

Expenditure on acquired trademarks, mining rights, software, patented and unpatented technology and other intangible assets is capitalized and amortized using the straight-line method over their estimated useful lives, but not exceeding 20 years, except for mining rights which are depleted on a volume basis.

Impairment of non-financial assets

At each reporting date, the Group assesses whether there is any indication that a non-financial asset may be impaired. If any such indication exists, the recoverable amount of the non-financial asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual non-financial asset, the Group estimates the recoverable amount of the smallest cash generating unit to which the non-financial asset belongs. The recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs of disposal and its value in use. If the recoverable amount of a non-financial asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the non-financial asset or cash generating unit is reduced to its recoverable amount. Impairment losses are recognized immediately in the statement of income.

Where an impairment loss subsequently reverses, the carrying amount of the non-financial asset or cash generating unit is increased to the revised estimate of its recoverable amount. However, this increased amount cannot exceed the carrying amount that would have been determined if no impairment loss had been recognized for that non-financial asset or cash generating unit in prior periods. A reversal of an impairment loss is recognized immediately in the statement of income.

Impairment of financial assets

At each reporting date, the Group assesses whether there is any indication that a financial asset may be impaired. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the future estimated cash flows discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss is recognized in the statement of income.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Any reversal of an impairment loss is recognized in the statement of income.

An impairment loss in respect of an available-for-sale financial asset is recognized in the statement of income and is calculated by reference to its fair value. Individually significant financial assets are tested for impairment on an individual basis. Reversals of impairment losses on equity instruments classified as available-for-sale are recognized in other comprehensive earnings, while reversals of impairment losses on debt instruments are recognized in the statement of income if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the statement of income. Impairment losses of financial assets carried at cost cannot be reversed.

Objective evidence that an available-for-sale financial asset is impaired includes observable data about the following loss events:

  • the occurrence of significant financial difficulties of the issuer or obligor;
  • 
adverse changes in national or local economic conditions have occurred;
  • adverse changes that have taken place in the technological, economic or legal environment; and
  • the existence of a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

In relation to accounts receivable, a provision for doubtful debts is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of accounts receivable is reduced through use of an allowance account. Impaired accounts receivable are derecognized when they are assessed as uncollectable.

Long-term financial liabilities

Bank loans acquired and bonds issued are recognized initially at the proceeds received, net of transaction costs incurred. Subsequently, bank loans and bonds are stated at amortized cost, using the effective interest method, with any difference between proceeds (net of transaction costs) and the redemption value being recognized in the statement of income over the term of the borrowings.

Financial liabilities that are due within 12 months after the end of the reporting period are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability until more than 12 months after the reporting period. The repayment of the current portion of such liabilities is shown in the statement of cash flows in the line “Repayment of long-term financial liabilities”.

Derivative instruments

The Group mainly uses derivative financial instruments in order to reduce its exposure to changes in interest rates, foreign currency exchange rates and commodities prices. The Group enters into foreign exchange contracts and interest rate swaps to hedge certain exposures relating to debt, foreign exchange contracts to hedge firm commitments for the acquisition of certain property, plant and equipment and into swaps and options in order to manage its exposure to commodity risks.

Derivatives are regarded as held for hedging unless they do not meet the strict hedging criteria stipulated under IAS 39 Financial Instruments: Recognition and Measurement, in which case they will be classified as held for trading. Financial derivatives expected to be settled within 12 months after the end of the reporting period are classified as current liabilities or current assets. Movements in the cash flow hedging reserve are shown in the consolidated statement of changes in equity.

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss is dependent on the nature of the item being hedged. On the date a derivative contract is entered into, the Group designates certain derivatives as either (a) a hedge of the fair value of a recognized asset or liability (fair value hedge) or (b) a hedge of a particular risk associated with a recognized asset or liability, such as future interest payments on floating rate debt (cash flow hedge) or (c) a hedge of a foreign currency risk of a firm commitment (cash flow hedge) or (d) a hedge of a net investment in a foreign entity.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective are recorded in the statement of income, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk.

Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly effective are recognized outside the statement of income. Where the firm commitment results in the recognition of an asset, for example, property, plant and equipment, or a liability, the gains or losses previously deferred in equity are transferred from equity and included in the initial measurement of the non-financial asset or liability. Otherwise, amounts deferred in equity are transferred to the statement of income and classified as revenue or expense in the same periods during which the cash flows, such as hedged firm commitments or interest payments, affect the statement of income.

Deferred taxes

Deferred tax is provided, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Tax rates enacted or substantively enacted by the end of the reporting period are used to determine the deferred tax expense.

Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which temporary differences or unused tax losses can be utilized. Deferred tax liabilities are recognized for taxable temporary differences arising from investments in subsidiaries, associates and interests in joint arrangements except where the Group is able to control the distribution of earnings from these respective entities and where dividend payments are not expected to occur in the foreseeable future.

Deferred tax is charged or credited in the statement of income, except when it relates to items credited or charged outside the statement of income, in which case the deferred tax is treated accordingly.

Site restoration and other environmental provisions

The Group provides for the costs of restoring a site where a legal or constructive obligation exists. The estimated future costs for known restoration requirements are determined on a site-by-site basis and are calculated based on the present value of estimated future costs. The cost of raising a provision before exploitation of the raw materials has commenced is included in property, plant and equipment and depreciated over the life of the site. The effect of any adjustments to the provision due to further environmental damage as a result of exploitation activities is recorded through operating costs over the life of the site, in order to reflect the best estimate of the expenditure required to settle the obligation at the end of the reporting period. Changes in the measurement of a provision that result from changes in the estimated timing or amount of cash outflows, or a change in the discount rate, are added to or deducted from the cost of the related asset to the extent that they relate to the asset’s installation, construction or acquisition. All provisions are discounted to their present value.

Restructuring provisions

A provision for restructuring costs is recognized when the restructuring plans have been approved by the management, a detailed formal plan exists and when the Group has raised a valid expectation in those affected that it will carry out the restructuring plan either by announcing its main features to those affected by it or starts to implement that plan and recognize the associated restructuring costs. The provision only includes direct expenditures arising from the restructuring, notably severance payments, early retirement costs, costs for notice periods not worked and other costs directly linked with the closure of the facilities.

Other provisions

A provision is recognized when there exists a legal or constructive obligation arising from past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of this amount.

Emission rights

The initial allocation of emission rights granted is recognized at nominal amount (nil value). Where a Group company has emissions in excess of the emission rights granted, it will recognize a provision for the shortfall based on the market price at that date. The emission rights are held for compliance purposes only and therefore the Group does not intend to speculate with these in the open market.

Employee benefits – Defined benefit plans

Some Group companies provide defined benefit pension plans for employees. Professionally qualified independent actuaries value the defined benefit obligations on a regular basis. The obligation and costs of pension benefits are determined using the projected unit credit method. The projected unit credit method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. Past service costs, which comprise plan amendments and curtailments, as well as gains or losses on the settlement of pension benefits are recognized immediately in the statement of income when they occur.

Remeasurements, which comprise actuarial gains and losses on the pension obligation, the return on plan assets and changes in the effect of the asset ceiling excluding amounts included in net interest, are recognized directly in other comprehensive earnings and are not reclassified to the statement of income in a subsequent period. The pension obligation is measured at the present value of estimated future cash flows using a discount rate that is determined by reference to the interest rate on high quality corporate bonds where the currency and terms of the corporate bonds are consistent with the currency and estimated terms of the defined benefit obligation.

A net pension asset is recorded only to the extent that it does not exceed the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The cost for defined benefit plans charged to the statement of income consists of service cost (current service cost, past service cost and curtailments as well as gains or losses on settlements) and the net interest expense. The service costs are recorded in “Cost of goods sold”, “Distribution and selling expenses” or “Administrative expenses” based on the beneficiaries of the plan and the net interest expense is recorded in the “Financial expenses”.

Employee benefits – Defined contribution plans

In addition to the defined benefit plans described above, some Group companies sponsor defined contribution plans based on local practices and regulations. The Group’s contributions to defined contribution plans are charged to the statement of income in the period to which the contributions relate.

Employee benefits – Other long-term employment benefits

Other long-term employment benefits include long-service leave or sabbatical leave, medical aid, jubilee or other long-service benefits, long-term disability benefits and, if they are not expected to be settled wholly within twelve months after the year end, profit sharing, variable and deferred compensation.

The measurement of these obligations differs from defined benefit plans in that all remeasurements are recognized immediately in the statement of income and not in other comprehensive earnings.

Employee benefits – Equity compensation plans

The Group operates various equity-settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options or shares is recognized as an expense. The total amount to be expensed is determined by reference to the fair value of the equity instruments granted. The amounts are charged to the statement of income over the relevant vesting periods and adjusted to reflect actual and expected levels of vesting.

Equity

Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

Treasury shares (own equity instruments held by the Group) are accounted for as a reduction of equity at acquisition cost and are not subsequently remeasured. When shares are sold out of treasury shares, the resulting profit or loss is recognized in equity, net of tax.

Revenue recognition

Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the entity and the amount of the revenue can be measured reliably. Revenue is measured at the fair value of the consideration received net of sales taxes and discounts. Revenue from the sale of goods is recognized when delivery has taken place and the transfer of risks and rewards of ownership has been completed. The significant risks and rewards of products sold are transferred according to the specific delivery terms that have been formally agreed with the customer, generally upon delivery when the bill of lading is signed by the customer as evidence that they have accepted the product delivered to them.

Interest is recognized on a time proportion basis that reflects the effective yield on the asset. Dividends are recognized when the shareholder’s right to receive payment is established.

Contingent liabilities

Contingent liabilities arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of LafargeHolcim. They are accordingly only disclosed in the notes to the financial statements.