Critical accounting policies

Novozymes’ management considers the following accounting policies as most significant to the Group.

Sales
Sales covers sales of goods and services for the year less goods returned, volume and cash discounts. Sales are recognized at the time of risk transfer relating to the goods sold, provided that the revenue can be measured on a reliable basis and is expected to be received.

The Group has entered into few agreements where the other contracting party undertakes sales to third parties and the profit is distributed between the Group and the other contracting party on the basis of a predetermined formula. Sales are recognized using information on the other contracting party’s realized sales, and a liability is recognized for the distribution of the profit, which is calculated and settled with final effect once a year.

The Group has entered into commission agreements where agents undertake sales to third parties in return for commission on realized sales. These sales are recognized when they are realized. A liability is recognized when it is permitted for goods to be returned and this is likely.

Financial assets and liabilities
The Novozymes Group categorizes financial assets and liabilities as follows: Loans and receivables, Hedge accounting, Available-for-sale financial assets and Financial liabilities.

Loans and receivables are non-derivatives with fixed or determinable payments that are not noted on an active market. Loans and receivables are entered in the balance sheet under the following items: Trade receivables, Other receivables and Cash at bank and in hand. The items are measured at amortized cost or a lower net realizable value equivalent to nominal value less allowances for doubtful receivables. Assessment of allowances is based on a specific assessment and a general assessment. The specific assessment is based on information about suspension of payments, bankruptcy, non-payments, etc. The general assessment is based on historic data about payment statistics and similar according to the risk types: country and customer type.

Hedge accounting consists of positive and negative fair values of derivatives, which are itemized respectively in the balance sheet under Other financial assets and Other financial liabilities.

Derivatives used to hedge assets and liabilities are measured at fair value on the balance sheet date, and value adjustments are recognized as Financial income or Financial costs.

Derivatives used to hedge expected future cash flows are measured at fair value on the balance sheet date, and value adjustments are recognized directly in Shareholders’ equity.

Derivatives used to hedge net investments in foreign subsidiaries are measured at fair value, and value adjustments are recognized directly in Shareholders’ equity.

Income and costs relating to cash flow hedges and hedging of net investments in subsidiaries are transferred from Shareholders’ equity on realization of the hedged item and are recognized as Financial income or Financial costs.

The fair value of derivatives is calculated using rates obtained from stock exchanges or other reliable data sources. All share options are valued using the Black-Scholes model.

Derivatives are recognized on the settlement date, while other financial instruments are recognized on the transaction date.

Available-for-sale financial assets are the remaining financial assets not included in the above categories. Available-for-sale financial assets are itemized in the balance sheet as Other financial assets and are measured at fair value (share price) on the balance sheet date. Unrealized fair value adjustments are recognized directly in Shareholders’ equity. Value adjustments are transferred from Shareholders’ equity to Financial income or Financial costs when realized. Write-downs are recognized as Financial costs.

Financial liabilities are entered in the balance sheet under the following items: Other financial liabilities, Trade payable and as a part of Other liabilities.

Provisions
Provisions are recognized where a legal or constructive obligation has been incurred, as a result of past events, and it is probable it will lead to an outflow of financial resources. Provisions are measured at the present value of the expected expenditure required to settle the obligation.