Company’s field of business and its effect on the accounting principles applied to the financial statements
The company’s field of business is private equity and other related investment. The company aims to promote Finnish businesses by making investments in private equity and venture capital funds as well as directly in companies.
The term of private equity funds is generally 10 years, during which time the funds call in commitments given to the fund by investors. The company’s outstanding commitments are listed under contingent liabilities. Liquid assets to cover unpaid commitments are entered as liquid securities in the balance sheet and as cash in hand and at banks in the balance sheet.
The distribution of profit from funds as well as sales gains and sales losses on liquid assets are entered in financial income and financial expenses in the income statement. Owing to the nature of Group companies’ operations, with the exception of Aker Arctic Technology Inc., they have no net sales. Sales gains arising from exits from direct investments are included in other operating income, and sales losses arising from exits from direct investments in other operating expenses, both in the income statement. Interest on loans is entered as income to the extent that its realisation can be deemed probable.
Accounting principles and scope of consolidated financial statements
Finnish Industry Investment Ltd’s wholly-owned subsidiaries Start Fund Management Oy, Tesi Fund Management Oy and Tesi Industrial Management Oy, as well as Aker Arctic Technology Inc. (which is 66.4% owned by Tesi Industrial Management Oy), have been included in the consolidated financial statements using the past equity method.
Tesi Industrial Management Oy acquired its 66.4% holding in Aker Arctic Technology Inc. in December 2013. Aker specialises in ship engineering and associated testing services. The accounts of Aker Arctic Technology Inc. were not included in the consolidated financial statements for 2013 since under the provisions of Finland's Accounting Act (Chapter 6 Section 3 paragraph 1) this was deemed unnecessary for giving a true and fair view of the Group’s operating result and financial position and since consolidation would occur in the consolidated financial statements for 2014. Aker Arctic Technology Inc.’s field of operation differs from Finnish Industry Investment’s other operations, so the consolidation had an impact on the structure and content of the Group’s income statement and balance sheet for 2014 and thus on their comparability with the previous year.
Finnish Industry Investment Ltd’s subsidiary Start Fund I Ky, which is wholly-owned through Start Fund Management Oy, has been included in the consolidated financial statements using the past equity method. No separate financial statements were prepared for subgroups Start Fund Management Oy, Start Fund I Ky, Tesi Industrial Management Oy or Aker Arctic Technology Inc.
Due to the nature of direct investments and shares in funds, these have not been treated as associated companies in the consolidated financial statements, although in some cases the holding exceeds 20%.
Measurement and recognition principles applied in the accounts
Intangible and tangible assets are entered in the balance sheet at acquisition cost less depreciation according to plan.
Depreciation periods are:
Other long-term expenses, 5-10 years
Buildings and structures, 30 years
Heavy machinery and equipment, 20 years
Light structures, machinery, equipment and facilities, 5 years / 25%
Group goodwill, 2 years
Shares and holdings (Ky's) and other long-term investments are valued in the balance sheet at acquisition cost or at a lower fair value. Fair value has been defined based on the International Private Equity And Venture Capital Valuation Guidelines (IPEVG). Owing to the nature of the investments, the definition of the fair value of an investment calls for the discretion of and valuations by Finnish Industry Investment Ltd’s management.
A reduction in value has been made on fund investments (Ky's) if the reduction was of significance (at least 20%) and permanent. Permanence was judged against the life of the fund (life of at least 48 months) and the amount invested (capital calls to fund totalling at least 40% of commitments).
The valuation practices for the fair values of private equity and venture capital investments were changed in the financial statements for 2014, compared to previous years. Owing to the nature of the investments, the management to a considerable degree exercised its judgement and made necessary estimates in valuation calculations. The fair value of investments is deemed to be the price that would be received when selling an investment in an orderly transaction between market participants at the measurement date. The book values derived from the fair values of private equity and venture capital investments have been calculated using the same principles as previously.
The fair value of investments in private equity and venture capital funds has been defined independently following International Private Equity and Venture Capital Valuation Guidelines (IPEVG) in the case of those fund investments whose investment operations did not correspond in a risk review to the original and the results of whose investment operations are expected to permanently fall short of the set targets. The fair values reported by fund managers (Net Asset Value) was used as the fair values of other investments in private equity and venture capital funds. The fair values of funds in the fund valuations of fund investments were compared to the corresponding acquisition prices. A reduction in value was then made if the reduction of fair value with respect to acquisition price was considered substantial and permanent. The one-off impact of the change in the valuation principles for investments in funds had a €-10.3m impact on the Group’s result.
The fair values of direct investments have been defined according to International Private Equity and Venture Capital Valuation Guidelines, as in previous years. The impact of the expected future profitability and business risks of portfolio companies on the permanent value of the portfolio companies has been given more weight in the valuations of direct investments than before.
According to Finnish accounting legislation, when the fair value of investments exceeds the acquisition price, the difference is not entered in the accounts as an uncapitalised increase in value. The fair value of the Group’s investments on 31 December 2014 was €405.3m and the book value was €345.5m. The difference between them, €59.8m, is an uncapitalised increase in value that grew by €8.6m during 2014 and that has not been entered in the accounts.
Inventories (only Aker Arctic Technology Inc.)
Work in process is valued at costs occured, consisting mostly of own personnel costs and costs incured from model testing activity.
Liquid securities are valued at acquisition cost or at a lower market value.
Deferred tax liabilities and tax assets are calculated on the temporary differences between the taxable values and the book values of assets, as well as on confirmed losses. As at 31 December 2014, the Group and parent company had deferred tax assets of €17.2m, of which €3.3m was entered in the balance sheet of the Group and of the parent company. The total deferred tax asset is estimated to be the probable amount of the tax asset.
Revenue recognition (only Aker Arctic Technology Inc.)
Revenues from services and hourly based work are recognized when the work has been carried out. Model testing services are recognized when the model testing serie is completed and preliminary results provided to the customer, rest 10 % when the final report has been delivered. Revenues from long-term and major projects are recorded as sales under the percentage of completion method. The percentage of completion is defined as proportion of each projects cost incurred to date from the total estimated project costs. The estimated project profit is recognized after 10 % of percentage of completion. The company has not any project related external debts. Any foreseenable losses related order book are recognized as they occur.
Comparability with data of previous financial year
The changes in Group structure presented above should be taken into account in any comparison of the accounting data for this financial year to the previous financial year.
Items denominated in foreign currency
Receivables and debts denominated in foreign currencies have been converted to Finnish currency at the rate of exchange valid on the balance sheet date.