Introductory notes

General information

1. General information

NV Bekaert SA (the ‘Company’) is a company domiciled in Belgium. The Company’s consolidated financial statements include those of the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in joint ventures and associates accounted for using the equity method. The consolidated financial statements were authorized for issue by the Board of Directors of the Company on 19 March 2010.

Accounting policies

2 Summary of principal accounting policies

2.1 Statement of compliance

The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRSs) which have been endorsed by the European Union. These financial statements are also in compliance with the IFRSs as issued by the IASB.

New and amended standards and interpretations

Standards, interpretations and amendments effective in 2009

In its 2008 financial statements, the Group already elected to early apply IAS 1 (Revised 2007), Presentation of Financial Statements (effective from 1 January 2009). The following new and revised standards and interpretations have been adopted in the current period and have affected the amounts reported in these financial statements:

  • IFRS 8, Operating Segments (effective from 1 January 2009). The new standard requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. The new geographical segmentation is in accordance with IFRS 8.
  • IFRS 7 (Amendment), Financial Instruments: Disclosures (effective from 1 January 2009). The amendment requires enhanced disclosures about fair value measurement and liquidity risk. Fair value measurements should be categorized in accordance with a fair value measurement hierarchy.

The following revised standards and new interpretations have also been adopted in these financial statements. Their adoption has not had any impact on the amounts reported in these financial statements but may impact the accounting for future transactions or arrangements.

  • IAS 23 (Amendment), Borrowing Costs (effective from 1 January 2009). The amendment requires an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. A qualifying asset is one that takes a substantial period of time to get ready for use or sale. Before this amendment came into effect, the accounting policy of the Group was to expense all borrowing costs. However, the impact of the amended IAS 23 on these financial statements was nil in the absence of any qualifying assets for which the construction started on or after 1 January 2009.
  • IFRS 2 (Amendment), Share-based Payment (effective from 1 January 2009), relating to vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only; all other (‘non-vesting’) conditions should be included in the fair value measurement at grant date. Furthermore, it clarifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment.
  • IFRS 1 (Amendment), First-time Adoption of IFRS, and IAS 27 (Amendment), Consolidated and Separate Financial Statements (both effective from 1 January 2009), relating to the measurement of the initial cost of investments in subsidiaries, joint ventures and associates in the separate financial statements and to the recognition of dividend income from subsidiaries in a parent’s financial statements.
  • IAS 32 (Amendment), Financial Instruments: Presentation, and IAS 1 (Amendment), Presentation of Financial Statements (both effective from 1 January 2009), relating to puttable financial instruments and obligations arising on liquidation.
  • IAS 28 (Amendment), Investments in Associates, and consequential amendments to IAS 32, Financial Instruments: Presentation, and IFRS 7, Financial Instruments: Disclosures (all effective from 1 January 2009), published in May 2008 in part I of the Improvements to IFRSs. This amendment requires that an investment in an associate be treated as a single asset for the purpose of impairment testing.
  • IAS 36 (Amendment), Impairment of Assets (effective from 1 January 2009), published in May 2008 in part I of the Improvements to IFRSs. This amendment requires that, where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculations be made.
  • IAS 38 (Amendment), Intangible Assets (effective from 1 January 2009), published in May 2008 in part I of the Improvements to IFRSs. This amendment requires that any prepayment only be recognized as an asset in the event that payment has been made in advance of obtaining right of access to goods or receipt of services.
  • IAS 19 (Amendment), Employee Benefits (effective from 1 January 2009), published in May 2008 in part I of the Improvements to IFRSs. Plan amendments reducing benefits affected by future salary increases constitute a curtailment, and plan amendments reducing benefits attributable to past service give rise to a negative past service cost. Plan administration costs should be deducted from the return on plan assets only to the extent that such costs have been excluded from the measurement of the defined benefit obligation. The distinction between short-term and long-term employee benefits will be based on whether benefits are due to be settled within or after 12 months of the employee service being rendered. IAS 37, Provisions, Contingent Liabilities and Contingent Assets, specifies that contingent liabilities should be disclosed, not recognized, and now IAS 19 has been amended to the same effect.
  • IAS 39 (Amendment), Financial Instruments: Recognition and Measurement (effective from 1 January 2009), published in May 2008 in part I of the Improvements to IFRSs.
  • IAS 1 (Amendment), Presentation of Financial Statements (effective from 1 January 2009), published in May 2008 as part of the IASB’s annual improvement project. The changes relate to the classification of assets and liabilities as current or non-current in view of the entity’s operating cycle.
  • A number of other minor amendments (all of which are effective from 1 January 2009) have been published in May 2008 in part II of the Improvements to IFRSs. These minor amendments relate to IFRS 7, Financial Instruments: Disclosures, IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10, Events after the Reporting Period, IAS 18, Revenue, IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, IAS 29, Financial Reporting in Hyperinflationary Economies, IAS 34, Interim Financial Reporting, IAS 40, Investment Property and IAS 41, Agriculture.
  • IFRIC 13, Customer Loyalty Programmes (effective from 1 January 2009), clarifying the treatment of customer award credits.
  • IFRIC 15, Agreements for the Construction of Real Estate (effective from 1 January 2009), clarifying the recognition of revenue by real estate developers for sales of units, such as apartments or houses, ‘off plan’, before construction is complete.
  • IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective from 1 January 2009), clarifying that net investment hedging should relate to functional currency risk only and that hedging instruments may be held anywhere in the Group.
  • IFRIC 18, Transfers of Assets from Customers (effective from 1 July 2009), clarifying the requirements for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water).
  • IFRIC 9 (Amendment), Reassessment of Embedded Derivatives (effective 1 January 2009).

Standards, amendments and interpretations that are not yet effective in 2009 and have not been early adopted
The Group did not elect for early application of the following new or amended standards, which could have an impact when applied:

  • IAS 27 (Revised 2008), Consolidated and Separate Financial Statements (effective from 1 January 2010). The revised standard requires the effects of all share transactions with non-controlling interests to be recorded in equity if there is no change in control. Consequently, such transactions will not result in goodwill or gains and losses recognized in profit or loss. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value, and a gain or loss is recognized in profit or loss.
  • IFRS 3 (Revised 2008), Business Combinations (effective from 1 January 2010). The revised standard includes some significant changes. The purchase consideration to acquire a business, including contingent payments, should be recorded at fair value at the acquisition date, while subsequent adjustments to the contingent payments resulting from events after the acquisition date should be recognized in profit or loss. The so-called full goodwill option, which can be elected on a case by case basis, allows the acquirer to measure the non-controlling interest in the acquiree either at fair value or at its proportionate share of the acquiree’s net assets. All acquisition-related costs, such as consulting fees, should be expensed.
  • IFRS 9 (Issued November 2009), Financial Instruments (effective from 1 January 2013). The present version of the new standard mainly simplifies the classification and measurement of financial assets.

At this stage, the Group does not expect first adoption of the following amendments to standards and new interpretations to have a material impact on the financial statements:

  • IAS 1 (Amendment), Presentation of Financial Statements (effective from 1 January 2010), published in April 2009 as part of the IASB’s annual improvements project. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current.
  • IAS 38 (Amendment), Intangible Assets (effective from 1 January 2010), published in April 2009 as part of the IASB’s annual improvements project. The amendment provides further guidance in measuring the fair value of an intangible asset acquired in a business combination and it permits the grouping of intangible assets as a single asset if they have similar useful economic lives.
  • IFRS 5 (Amendment), Non-current Assets Held for Sale and Discontinued Operations, and consequential amendments to IFRS 1, First-time Adoption of IFRS (both effective from 1 January 2010), published in May 2008 in part I of the Improvements to IFRSs. This amendment requires that all of a subsidiary’s assets and liabilities be classified as held for sale if a partial disposal sale plan results in loss of control.
  • IFRS 5 (Amendment), Non-current Assets Held for Sale and Discontinued Operations (effective from 1 January 2010), published in April 2009 in part I of the Improvements to IFRSs. The amendment specifies that disclosure requirements from other IFRSs do not apply to non-current assets (or disposal groups) classified as held for sale except in a limited number of specified circumstances.
  • IFRIC 17, Distributions of Non-cash Assets to Owners (effective from 1 January 2010). The interpretation clarifies that (i) a dividend payable should be recognized when the dividend is appropriately authorized; (ii) an entity should measure the dividend payable at the fair value of the net assets to be distributed; and (iii) an entity should recognize the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss.
  • IFRS 2 (Amendment), Share-based Payment – Group cash-settled and share-based payment transactions (effective from 1 January 2010), issued in June 2009. In addition to incorporating IFRIC 8, Scope of IFRS 2, and IFRIC 11, IFRS 2 – Group and treasury share transactions, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation.
  • IAS 7 (Amendment), Statement of Cash Flows (effective from 1 January 2010), published in April 2009 in part I of the Improvements to IFRSs. The amendment specifies that only expenditure that results in the recognition of an asset can be reported as an investing cash flow.
  • IAS 17 (Amendment), Leases (effective from 1 January 2010), published in April 2009 in part I of the Improvements to IFRSs. This amendment specifies that a lease of land can be classified as a finance lease even if title is not expected to pass to the lessee at the end of the lease term.
  • IAS 18 (Amendment), Revenue (effective from 1 January 2010), published in April 2009 in part I of the Improvements to IFRSs. This amendment provides additional guidance to determine whether an entity is acting as a principal or as an agent.
  • IAS 39 (Amendment), Financial Instruments: Recognition and Measurement (effective from 1 January 2010). This amendment deals with eligible hedged items.
  • IFRS 1 (Amendment), First-time Adoption of IFRS (effective from 1 January 2010). This amendment introduces some new exemptions.
  • IAS 24 (Revised 2009), Related Party Disclosures (effective from 1 January 2011). This revision basically introduces exemptions for state-owned entities.
  • IAS 32 (Amendment), Financial Instruments: Presentation (effective from 1 January 2011). This amendment deals with the classification of rights issues.
  • IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective from 1 January 2011). This interpretation provides guidance on debt for equity swaps.
  • IFRIC 14 (Amendment), IAS 19 – The Limit on a Defined-Benefit Asset, Minimum Funding Requirements and their Interaction (effective from 1 January 2011). This amendment deals with the prepayments of a minimum funding requirement.

General principles

Basis of preparation

The consolidated financial statements are presented in thousands of euros, under the historical cost convention, except for investments held for trading and available for sale, which are stated at their fair value. Financial assets which do not have a quoted price in an active market and the fair value of which cannot be reliably measured are carried at cost. Unless explicitly stated, the accounting policies are applied consistently with the previous year.

Principles of consolidation

Subsidiaries

Subsidiaries are entities over which NV Bekaert SA exercises control, which generally means that NV Bekaert SA, directly or indirectly, holds more than 50% of the voting rights attaching to the entity’s share capital and is able to govern its financial and operating policies so as to obtain benefits from its activities. In accordance with IFRS 3, Business Combinations, acquisitions are accounted for using the purchase method. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognized at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, which are recognized at fair value less costs to sell. The financial statements of subsidiaries are included in the consolidated financial statements from the date when the Group acquires control until the date when control is relinquished. All intercompany transactions, balances with and unrealized gains on transactions between Group companies are eliminated; unrealized losses are also eliminated unless the impairment is permanent. Equity and net result attributable to minority shareholders are shown separately in the balance sheet and income statement, respectively.

Joint ventures and associates

A joint venture is a contractual arrangement whereby NV Bekaert SA and other parties undertake, directly or indirectly, an economic activity that is subject to joint control, i.e. where the strategic, financial and operating policy decisions require the unanimous consent of the parties sharing control. Associates are companies in which NV Bekaert SA, directly or indirectly, has a significant influence and which are neither subsidiaries nor joint ventures. This is presumed if the Group holds at least 20% of the voting rights attaching to the shares. The financial information included for these companies is prepared using the accounting policies of the Group. The consolidated financial statements include the Group’s share of the results of joint ventures and associates accounted for using the equity method from the date when joint control or significant influence commences until the date when joint control or significant influence ceases. If the Group’s share of the losses of a joint venture or associate exceeds the carrying amount of the investment, the investment is carried at nil value and recognition of additional losses is limited to the extent of the Group’s commitment. Unrealized gains arising from transactions with joint ventures and associates are set against the investment in the joint venture or associate concerned to the extent of the Group’s interest. The carrying amounts of investments in joint ventures and associates are reassessed if there are indications that the asset has been impaired or that impairment losses recognized in prior years have ceased to apply. The investments in joint ventures and associates in the balance sheet include the carrying amount of any related goodwill.

Foreign currency translation

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in euro, which is the Company’s functional and the Group’s presentation currency. Financial statements of foreign entities are translated as follows:

  • assets and liabilities are translated at the closing exchange rate of the European Central Bank;
  • income, expenses and cash flows are translated at the weighted average exchange rate for the year;
  • shareholders’ equity is translated at historical exchange rates.

Exchange differences arising from the translation of the net investment in foreign subsidiaries, joint ventures and associates at the closing exchange rates are included in shareholders’ equity under ‘cumulative translation adjustments’. On disposal of foreign entities, cumulative translation adjustments are recognized in the income statement as part of the gain or loss on the sale. In the financial statements of the parent company and its subsidiaries, monetary assets and liabilities denominated in foreign currency are translated at the exchange rate at the balance sheet date. Unrealized and realized foreign-exchange gains and losses resulting from this translation are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Goodwill is treated as an asset of the acquiree and is accordingly accounted for in the acquiree’s currency and translated at the closing rate.

2.3 Balance sheet items

Intangible assets

Intangible assets acquired in a business combination are initially measured at fair value; intangible assets acquired separately are initially measured at cost. After initial recognition, intangible assets are measured at cost or fair value less accumulated amortization and any accumulated impairment losses. Intangible assets are amortized on a straight-line basis over the best estimate of their useful lives. The amortization period and method are reviewed at each financial year-end. A change in the useful life of an intangible asset is accounted for prospectively as a change in estimate. Under the provisions of IAS 38, intangible assets may have indefinite useful lives. If the useful life of an intangible asset is deemed indefinite, no amortization is recognized and the asset is reviewed at least annually for impairment.

Licenses, patents and similar rights

Expenditure on acquired licenses, patents, trademarks and similar rights is capitalized and amortized on a straight-line basis over the contractual period, if any, or the estimated useful life, which is normally considered to be not longer than ten years.

Computer software

Generally, costs associated with the acquisition, development or maintenance of computer software are recognized as an expense when they are incurred, but external costs directly associated with the acquisition and implementation of acquired ERP software are recognized as intangible assets and amortized over five years on a straight-line basis.

Rights to use land

Rights to use land are recognized as intangible assets and are amortized over the contractual period on a straight-line basis.

Research and development

Expenditure on research activities undertaken with the prospect of gaining new scientific or technological knowledge and understanding is recognized in the income statement as an expense when it is incurred.

Expenditure on development activities where research findings are applied to a plan or design for the production of new or substantially improved products and processes prior to commercial production or use is capitalized if, and only if, all of the recognition criteria set out below are met:

  • the product or process is clearly defined and costs are separately identified and reliably measured;
  • the technical feasibility of the product is demonstrated;
  • the product or process is to be sold or used in-house;
  • the assets are expected to generate future economic benefits (e.g. a potential market exists for the product or, if for internal use, its usefulness is demonstrated); and
  • adequate technical, financial and other resources required for completion of the project are available.

In most cases, these recognition criteria are not met. Capitalized development costs are amortized from the commencement of commercial production of the product on a straight-line basis over the period during which benefits are expected to accrue. The period of amortization does not normally exceed ten years. An in-process research and development project acquired in a business combination is recognized as an asset separately from goodwill if its fair value can be measured reliably.

Emission rights

In the absence of any IASB standard or interpretation regulating the accounting treatment of CO2 emission rights, the Group has applied the ‘net approach’, according to which:

  • the allowances are recognized as intangible assets and measured at cost (the cost of allowances issued free of charge being therefore zero) and
  • any short position is recognized as a liability at the fair value of the allowances required to cover the shortfall at the balance sheet date.
Other intangible assets

Other intangible assets mainly include customer lists and other intangible commercial assets, such as brand names, acquired separately or in a business combination. These are amortized on a straight-line basis over their estimated useful life.

Goodwill

Goodwill represents the excess of acquisition cost over the Group’s interest in the net fair value at the date of acquisition of the acquiree’s identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is carried at cost less any accumulated impairment losses. Goodwill is not amortized, but is reviewed for impairment at least annually. The excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the acquisition cost is recognized immediately as a profit. In accordance with IFRS 3, the purchase of a minority interest after control is obtained cannot be accounted for as a business combination but an appropriate accounting treatment is not foreseen in the current standard. As a consequence, Bekaert has decided to apply the accounting principles set out in IAS 27 (revised January 2008), Consolidated and Separate Financial Statements, in this respect. Consequently, a purchase of a minority interest after control is obtained is accounted for as a transaction between equity holders in that capacity. As such, the purchase of a minority interest cannot give rise to goodwill or to a gain or loss in the income statement. Any difference between the fair value of the acquired minority interest and the purchase consideration is recognized directly in equity.

Impairment of goodwill

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units that is expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit’s value may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit in proportion to the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

Property, plant and equipment

The Group has opted for the historical cost model and not for the revaluation model. Property, plant and equipment acquired separately is initially measured at cost. Property, plant and equipment acquired in a business combination is initially measured at fair value, which thus becomes its deemed cost. After initial recognition, property, plant and equipment is measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes all direct costs and all expenditure incurred to bring the asset to its working condition and location for its intended use. Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset. Depreciation is provided over the estimated useful lives of the various classes of property, plant and equipment on a straight-line basis. The useful life and depreciation method are reviewed at least at each financial year-end. Unless revised due to specific changes in the estimated economic useful life, annual depreciation rates are as follows:

land 0%
buildings 5%
plant, machinery and equipment 8%-16.7%
furniture and vehicles 20%
computer hardware 25%

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount (see section on ‘Impairment of assets’ below). Gains and losses on disposal are included in the operating result.

Leases

Finance leases

Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Items of property, plant and equipment acquired by way of finance lease are stated at the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. In calculating the present value of the minimum lease payments, the discount factor used is the interest rate implicit in the lease, when it is practicable to determine it; otherwise the Company’s incremental borrowing rate is used. Initial direct costs are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for leased assets is consistent with that for owned depreciable assets.

Operating leases

Leases under which substantially all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term. The aggregate benefit of incentives provided by the lessor is recognized, on a straight-line basis, as a reduction of rental expense over the lease term. Improvements to buildings held under operating leases are depreciated over their expected useful lives, or, where shorter, the term of the relevant lease.

Government grants

Government grants relating to the purchase of property, plant and equipment are deducted from the cost of those assets. They are recognized in the balance sheet at their expected value at the time of initial government approval and corrected, if necessary, after final approval. The grant is amortized over the depreciation period of the underlying assets.

Financial assets

The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Financial assets at fair value through profit or loss (FVTPL)

Financial assets are classified as at fair value through profit or loss if they are held for trading. Financial assets at FVTPL are stated at fair value, with any resultant gains or losses recognized in profit or loss. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as at FVTPL unless they are designated and effective as hedges.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. The Group’s loans and receivables category comprises trade and other receivables, short-term deposits and cash and cash equivalents in the balance sheet. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, have original maturities of three months or less and are subject to insignificant risk of change in value. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment.

Available-for-sale financial assets

Non-current available-for-sale assets include investments in entities which were not acquired principally for the purpose of selling in the short term, and which are neither consolidated nor accounted for using the equity method. Assets classified in this category are stated at fair value, with any resultant gains or losses recognized directly in equity, except if there exists an impairment loss, in which case the loss accumulated in equity is recycled to the income statement. However, they are stated at cost if they do not have a quoted price in an active market and their fair value cannot be reliably measured by alternative valuation methods.

Impairment of financial assets

Financial assets, other than those at FVTPL, are tested for impairment when there is objective evidence that they could be impaired. An impairment loss is directly recognized in the income statement. For trade receivables, amounts deemed uncollectible are written off against the allowance account for trade receivables at each balance sheet date. Additions to and recoveries from this allowance account are reported under ‘selling expenses’ in the income statement.

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out (FIFO) method. For processed inventories, cost means full cost including all direct and indirect production costs required to bring the inventory items to the stage of completion at the balance sheet date. Net realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and costs necessary to make the sale.

Share capital

When shares are repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a change in equity. Repurchased shares (treasury shares) are presented in the balance sheet as a deduction from equity. The result on the disposal of treasury shares sold or cancelled is recognized in retained earnings.

Minority interests

Minority interests represent the shares of minority shareholders in the equity of subsidiaries which are not fully owned by the Group. The item includes the minority shareholders’ proportion of the fair values of net assets recognized on acquisition of a subsidiary (business combination) together with the appropriate proportion of subsequent profits and losses. The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the equity of the subsidiary. Any such excess, and any further losses applicable to the minority, are charged to the Group’s profit except to the extent that the minority has a binding obligation and is able to reimburse the losses. If the subsidiary subsequently reports profits, all such profits are credited to Group income until the minority’s share of losses previously absorbed by the Group has been recovered.

Provisions

Provisions are recognized in the balance sheet when the Group has a present obligation (legal or constructive) as a result of a past event, which is expected to result in an outflow of resources embodying economic benefits which can be reliably estimated. Each provision is based on the best estimate of the expenditure required to settle the present obligation at the balance sheet date. When appropriate, provisions are measured on a discounted basis.

Restructuring

A provision for restructuring is only recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly before the balance sheet date. Restructuring provisions include only the direct expenditure arising from the restructuring which is necessarily incurred on the restructuring and is not associated with the ongoing activities of the entity.

Site remediation

A provision for site remediation in respect of contaminated land is recognized in accordance with the Group’s published environmental policy and applicable legal requirements.

Employee benefit obligations

The parent company and several of its subsidiaries have pension, death benefit and health care benefit plans covering a substantial part of their workforce.

Defined-benefit plans

Most pension plans are defined-benefit plans with benefits based on years of service and level of remuneration. For defined-benefit plans, the amount recognized in the balance sheet (net liability) is the present value of the defined-benefit obligation less the fair value of any plan assets and any past service costs not yet recognized. The present value of the defined-benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods. The present value of the defined-benefit obligation and the related current and past service costs are calculated using the projected unit credit method. The discount rate used is the yield at balance sheet date on high-quality corporate bonds with remaining terms to maturity approximating those of the Group’s obligations. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions.

The Group has elected to recognize all actuarial gains and losses through equity as from its 2007 annual report, whereas the former policy was to defer recognition in accordance with the corridor approach.

Past service cost is the increase in the present value of the defined-benefit obligation for employee service in prior periods and resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service costs are recognized as an expense on a straight-line basis over the average period to vesting. To the extent that the benefits are already vested following the introduction of, or changes to, a defined-benefit plan, past service costs are expensed immediately. Where the calculated amount to be recognized in the balance sheet is negative, an asset is only recognized if it does not exceed the net total of any unrecognized past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan (the asset ceiling principle). Past service costs are also recognized immediately if their deferred recognition would result under the asset ceiling principle in a gain being recognized solely as a result of a past service cost in the current period. The amount charged to the income statement consists of the aggregate of current service cost, recognized past service cost, interest cost, expected return on plan assets and impact of the change in asset ceiling. In the income statement, current and past service costs are included in the operating result and all other elements are included in interest expense. Pre-retirement pensions in Belgium and plans for medical care in the United States are also treated as defined-benefit plans.

Defined-contribution plans

Obligations in respect of contributions to defined-contribution pension plans are recognized as an expense in the income statement as they fall due. Death and disability benefits granted to employees of the parent company and its Belgian subsidiaries are covered by independent pension funds. Death and disability benefits granted to the staff of other Group companies are mainly covered by external insurance policies where premiums are paid annually and charged to the income statement.
As defined-contribution plans in Belgium are legally subject to a minimum guaranteed return, the Belgian supplementary pension plan for managers, which offers participants limited investment choice, is accounted for as a defined-benefit plan. The other Belgian defined-contribution plans for blue-collar and white-collar employees are still accounted for as defined-contribution plans, as the legally required return is basically guaranteed by the insurance company.

Other long-term employee benefits

Other long-term employee benefits, such as service awards, are accounted for using the projected unit credit method. However, the accounting method differs from the method applied for post-employment benefits, as actuarial gains and losses and past service cost are recognized immediately.

Share-based payment plans

The Group issues equity-settled and cash-settled share-based payments to certain employees. Stock option plans which allow Group employees to acquire shares of NV Bekaert SA are of the equity-settled type.

Share appreciation rights plans and phantom stocks plans are of the cash-settled type, as they entitle Group employees to receive payment of cash bonuses, the amount of which is based on the price of the Bekaert share on the Euronext stock exchange.

Equity-settled share-based payments are recognized at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed, with a corresponding increase in equity (retained earnings), on a straight-line basis over the vesting period, based on the Group’s estimate of the stock options that will eventually vest and adjusted for the effect of non-market-based vesting conditions.

Cash-settled share-based payments are recognized as liabilities at fair value, which is remeasured at each reporting date and at the date of settlement. Changes in fair value are recognized in the income statement. The Group uses a binomial model to estimate the fair value of the share-based payment plans.

Interest-bearing debt

Interest-bearing debt includes loans and borrowings which are initially recognized at the fair value of the consideration received net of transaction costs incurred. In subsequent periods, they are carried at amortized cost using the effective interest-rate method, any difference between the proceeds (net of transaction costs) and the redemption value being recognized in the income statement on a straight-line basis over the period of the liability. If financial liabilities are hedged using derivatives qualifying as a fair value hedge, both the hedging instruments and the hedged items are recognized at fair value (see accounting policies for derivatives and hedging) on a clean-price basis, i.e. excluding accrued interests.

Trade payables and other current liabilities

Trade payables and other current liabilities, except derivatives, are stated at cost, which is the fair value of the consideration payable.

Income taxes

Income taxes are classified as either current or deferred taxes. Current income taxes include expected tax charges based on the accounting profit for the current year and adjustments to tax charges of prior years. Deferred taxes are calculated, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. The principal temporary differences arise from depreciation of property, plant and equipment, provisions for pensions, pre-pensions and other post-retirement benefits, undistributed earnings and tax losses carried forward. Deferred taxes are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled, based on tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized; this criterion is reassessed at each balance sheet date. Deferred tax on temporary differences arising on investments in subsidiaries, associates and joint ventures is provided for, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not be reversed in the foreseeable future.

Derivatives, hedging and hedging reserves

The Group uses derivatives to hedge its exposure to foreign-exchange and interest-rate risks arising from operating, financing and investing activities. The net exposure of all subsidiaries is managed on a centralized basis by Group Treasury in accordance with the aims and principles laid down by general management. As a policy, the Group does not engage in speculative or leveraged transactions.

Derivatives are initially and subsequently measured and carried at fair value. The fair value of traded derivatives is equal to their market value. If no market value is available, the fair value is calculated using standard financial valuation models, based upon the relevant market rates at the reporting date. In the case of interest-bearing derivatives, the fair values correspond to the clean price, excluding interest accrued.

The Group applies hedge accounting in accordance with IAS 39 to reduce income statement volatility. Depending on the nature of the hedged item, a distinction is made between fair value hedges, cash flow hedges and hedges of a net investment in a foreign entity.

Fair value hedges are hedges of the exposure to variability in the fair value of recognized assets and liabilities. The derivatives classified as fair value hedges and the related hedged asset or liability are both carried at fair value. The corresponding changes in fair value are recognized in the income statement. When a hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged interest-bearing financial instrument is recognized as income or expense and will be fully amortized on a straight-line basis over the period of maturity of the hedged item.

Cash flow hedges are hedges of the exposure to variability in future cash flows related to recognized assets or liabilities, highly probable forecast transactions or unrecognized firm commitments. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are recognized directly in shareholders’ equity (hedging reserve). The ineffective portion is recognized immediately in the income statement. If the hedged cash flow results in the recognition of a non-financial asset or liability, all gains and losses previously recognized directly in equity are transferred from equity and included in the initial measurement of the cost or carrying amount of the asset or liability. For all other cash flow hedges, gains and losses initially recognized in equity are transferred from the hedging reserve to the income statement when the hedged firm commitment or forecast transaction results in the recognition of a profit or loss. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively and the accumulated gain or loss is retained in equity until the forecast transaction occurs. If the forecast transaction is no longer expected to occur, any net cumulative gain or loss previously reported in equity is transferred to the income statement.

If a net investment in a foreign entity is hedged, all gains or losses on the effective portion of the hedging instrument, together with any gains or losses on the foreign-currency translation of the hedged investment, are taken directly to equity. Any gains or losses on the ineffective portion are recognized immediately in the income statement. The cumulative remeasurement gains and losses on the hedging instrument, that had previously been recognized directly in equity, and the gains and losses on the currency translation of the hedged item are recognized in the income statement only on disposal of the investment.

In order to comply with the requirements of IAS 39 regarding the use of hedge accounting, the strategy and purpose of the hedge, the relationship between the financial instrument used as the hedging instrument and the hedged item and the estimated (prospective) effectiveness are documented by the Group at the inception of the hedge. The effectiveness of existing hedges is monitored on a quarterly basis. Hedge accounting for ineffective hedges is discontinued immediately.

The Group also uses derivatives that do not satisfy the hedge accounting criteria of IAS 39 but provide effective economic hedges under the Group’s risk management policies. Changes in the fair value of any such derivatives are recognized immediately in the income statement.

Impairment of assets

Goodwill and intangible assets with an indefinite useful life or not yet available for use are reviewed for impairment at least annually; other tangible and intangible fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized in the income statement as and when the carrying amount of an asset exceeds its recoverable amount (being the higher of its fair value less costs to sell and its value in use). The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs to sell, while value in use is the present value of the future cash flows expected to be derived from an asset. Recoverable amounts are estimated for individual assets or, if this is not possible, for the cash-generating unit to which the assets belong. Reversal of impairment losses recognized in prior years is included as income when there is an indication that the impairment losses recognized for the asset are no longer needed or the need has decreased, except for impairment losses on goodwill, which are never reversed.

2.4 Income statement items

Revenue recognition

Revenue is recognized when it is probable that the economic benefits associated with a transaction will flow to the entity and the amount of the revenue can be measured reliably. Sales are recognized net of sales taxes and discounts. Revenue from the sale of goods is recognized when delivery takes place and the transfer of risks and rewards is completed. When it can be measured reliably, revenue from construction contracts is recognized by reference to the stage of completion. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of the contract costs incurred that are likely to be recoverable. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. No revenue is recognized on barter transactions involving the exchange of similar goods or services. Interest is recognized on a time-proportional basis that reflects the effective yield on the asset. Royalties are recognized on an accrual basis in accordance with the terms of agreements. Dividends are recognized when the shareholder’s right to receive payment is established.

Non-recurring items

Operating income and expenses that are related to restructuring programs, impairment losses, environmental provisions or other events and transactions that are clearly distinct from the normal activities of the Group are presented on the face of the income statement as non-recurring items. Bekaert believes that the separate presentation of non-recurring items is essential for the readers of its financial statements to understand fully the sustainable performance of the Group.

2.5 Statement of comprehensive income and statement of changes in equity

The statement of comprehensive income has been introduced as a consequence of electing for the IAS 19 option to recognize actuarial gains and losses on defined-benefit plans directly in equity. Its purpose is to present an overview of all income and expenses recognized both in the income statement and in equity. In accordance with the revised guidance of IAS 1 Presentation of Financial Statements (revised September 2007), an entity can elect to present either a single statement of comprehensive income or two statements, i.e. an income statement immediately followed by a comprehensive income statement. The Group elected to do the latter. A further consequence of presenting a statement of comprehensive income is that the content of the statement of changes in equity is confined to owner-related changes only.

2.6 Miscellaneous

Non-current assets held for sale and discontinued operations

A non-current asset or disposal group is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. A discontinued operation is a component of an entity which the entity has disposed of or which is classified as held for sale, which represents a separate major line of business or geographical area of operations and which can be distinguished operationally and for financial reporting purposes.

For a sale to be highly probable, the entity should be committed to a plan to sell the asset (or disposal group), an active program to locate a buyer and complete the plan should be initiated, and the asset (or disposal group) should be actively marketed at a price which is reasonable in relation to its current fair value, and the sale should be expected to be completed within one year from the date of classification. Assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs necessary to make the sale. Any excess of the carrying amount over the fair value less costs to sell is included as an impairment loss. Depreciation of such assets is discontinued as from their classification as held for sale. Comparative balance sheet information for prior periods is not restated to reflect the new classification in the balance sheet.

Contingencies

Contingent assets are not recognized in the financial statements. They are disclosed if the inflow of economic benefits is probable. Contingent liabilities are not recognized in the financial statements, except if they arise from a business combination. They are disclosed unless the possibility of a loss is remote.

Events after the balance sheet date

Events after the balance sheet date which provide additional information about the company’s position as at the balance sheet date (adjusting events) are reflected in the financial statements. Events after the balance sheet date which are not adjusting events are disclosed in the notes if material.

Accounting judgments and estimation uncertainty

3 Critical accounting judgments and key sources of estimation uncertainty

3.1 General business risks

Like many global companies, Bekaert is exposed to risks affecting businesses which are expanding around the world both in mature markets and in rapidly developing growth markets. The growth of these economies, the potential political and financial risks they present, the emergence of new technologies and competitors, the shifting economic flows between continents, the growing environmental awareness, the volatile supply of and demand for raw materials and the probability of consolidation of all or part of industrial segments present as many risks for the Group as they create opportunities. The Bekaert Group Executive, the Strategic Committee and the Board of Directors monitor these developments closely and take the actions they consider necessary to safeguard the Group’s future as effectively as possible.

With regard to the current economic crisis, Bekaert is confident that its broad geographical coverage with a strong presence in emerging markets, as well as its growing portfolio of product innovations, are of strategic importance. Bekaert continues to monitor market developments and customer requirements closely, so advantage can be taken of opportunities the moment they arise.

3.2 Critical judgments in applying the entity’s accounting policies

  • Management assessed that a constructive obligation exists to provide pre-retirement schemes for employees as from the first day of service (cf. note 6.14 ‘Employee benefit obligations’) and therefore these pre-retirement schemes are treated as defined-benefit plans using the projected unit credit method.
  • Management concluded that the criteria for capitalizing development expenditure were not met (cf. note 6.1 ‘Intangible assets’).
  • Management concluded that the functional currency of Bekaert Izmit Celik Kord Sanayi ve Ticaret AS (Turkey) is the euro, consistent with the economic substance of the transactions relevant to that entity. For the same reason, management concluded that the functional currency of Vicson SA (Venezuela) is the US dollar. Consequently, hyperinflationary accounting is not applicable to Vicson SA.
  • In accordance with Venezuelan laws, all US dollar transactions concluded by Venezuelan companies should be approved by the monetary foreign exchange control authorities (CADIVI). US dollars received should be sold to CADIVI at the official rate and approved payments in
    US dollars are effected via CADIVI at the official rate. The official rate for approved transactions was 2.15 VEF/USD at the balance sheet date. If a purchase transaction in US dollar is not approved by CADIVI, a Venezuelan company can turn to the parallel market for converting bolivares fuertes (VEF) into US dollars; the parallel market rate was 5.97 VEF/USD at the balance sheet date. In accordance with IAS 21 (1) and due to growing uncertainty about obtaining CADIVI approvals, management concluded that the parallel market rate should be used to convert bolivares fuertes into US dollars as from 31 December 2009. The effect of translating the monetary items at the parallel rate at balance sheet date is included in other financial income and expenses (cf. note 5.4 ‘Other financial income and expenses’).
    On 8 January 2010, the Venezuelan authorities announced a devaluation of the bolivar fuerte and the imposition of a dual-rate foreign exchange system (cf. note 7.6 ‘Events after the balance sheet date’). Management is convinced that, in view of the continuing monetary and economic uncertainty in Venezuela, using the parallel market rate instead of a dual official rate will result in a more appropriate measurement of its financial position and performance. With respect to the limited visibility on the outcome of the approval process, Bekaert uses the parallel rate and records a realized exchange result when the dollars are obtained from CADIVI at the official rate.
  • Management concluded that Bekaert, given its minority participating interest of 13.0% at year-end 2009, has no significant influence in Shougang Concord Century Holdings Ltd and therefore the investment is treated as a financial asset available for sale.
  • Given its global presence, Bekaert is exposed to tax risks in many jurisdictions. Tax authorities in those jurisdictions conduct regular tax audits which may reveal potential tax issues. While the outcome of such tax audits is not certain, management is convinced that Bekaert, based on an overall evaluation of potential tax liabilities, has recorded adequate tax liabilities in its consolidated financial statements.
  • Given its global presence, Bekaert is exposed to currency risks, both transactional and translational in nature. Transactional risks arise from the Group’s investing, financing and operating transactions, while translational risks arise from converting financial statements of foreign entities to the Group’s presentation currency, the euro. Management is convinced that it has adequate risk policies in place to mitigate transactional risks to the best of its ability, but the Group does not hedge against translational risks to the extent that these do not affect cash flows
    (cf. note 7.3 ‘Financial risk management and financial derivatives’).
  • Management concluded that the Company has control over Bekaert Ansteel Tire Cord (Chongqing) Co Ltd and accordingly consolidates this entity.

3.3 Key sources of estimation uncertainty

  • Deferred tax assets are recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. In making its judgment, management takes into account elements such as long-term business strategy and tax planning opportunities (cf. note 6.6 ‘Deferred tax assets and liabilities’).
  • Based on the expected economic life of specific product lines, which is expected to be significantly shorter than average, higher depreciation rates are applied, i.e. 16.7% instead of 8% for plant, machinery and equipment, to dedicated assets which are not expected to be reallocated to another product line.
  • Credit risk related to customers: management closely reviews the outstanding trade receivables, also considering ageing, payment history and credit risk coverage. In comparison with the end of 2008, the improved payment record of several customers previously identified as bad debtors has led to a decrease in the bad debt reserve, mainly in China (cf. note 6.7 ‘Operating working capital’).
  • Employee benefit obligations: the defined-benefit obligations are based on actuarial assumptions such as discount rate and expected rate of return on plan assets, which are extensively detailed in note 6.14 ‘Employee benefit obligations’.
  • Provisions for environmental issues: at each year-end an estimate is made of future expenses in respect of soil pollution, based on the advice of an external expert
    (cf. note 6.15 ‘Provisions’).
  • Impairment: the Group performs annual impairment tests on goodwill and on cash-generating units for which there are indicators that the carrying amount might be higher than the recoverable amount. This analysis is based upon assumptions such as market evolution, market share, margin evolution and discount rates (cf. note 6.2 ‘Goodwill’).
  • Tax receivable (ICMS) in Brazil: recovery of the tax receivables of Belgo Bekaert Arames Ltda and BMB-Belgo Mineira Bekaert Artefatos de Arame Ltda is deemed highly probable as several action plans have already been successfully implemented. Other tax claims in Brazil, including claims relating to the taxability of ICMS incentives received by Belgo Bekaert Nordeste, have not been provided for, supported by legal advice (cf. note 6.4 ‘Investments in joint ventures and associates’).
  • Fair value adjustments for business combinations: in accordance with IFRS 3 ‘Business Combinations’, Bekaert remeasures the assets, liabilities and contingent liabilities acquired through a business combination to fair value. Where possible, fair value adjustments are based on external appraisals or valuation models, e.g. for contingent liabilities and intangible assets which were not recognized by the acquiree. Internal benchmarks are often used for valuing specific production equipment. All of these valuation methods rely on various assumptions such as estimated future cash flows, remaining useful economic life etc.

(1) IAS21 ‘The Effects of Changes in Foreign Exchange Rates’ §26 states ‘When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date’.

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