Other accounting policies

Consolidation
The consolidated financial statements comprise the financial statements of Novozymes A/S (the parent company) and all the companies in which the Group owns more than 50% of the voting rights or otherwise has a controlling influence (subsidiaries), as well as joint ventures. The consolidated financial statements are based on the financial statements for the parent company and for the subsidiaries, and are prepared by combining items of a uniform nature and subsequently eliminating intercompany transactions, internal shareholdings and balances, and unrealized intercompany profits and losses. All the financial statements used for consolidation are prepared in accordance with the Group’s accounting policies.

The Group’s holdings in joint ventures regarded as jointly controlled entities are consolidated using the proportionate consolidation method by including its proportional share of their assets, liabilities, revenues and costs line by line.

Business combinations
On acquisition of new companies, the assets, liabilities and contingent liabilities of each new company are recognized at fair value at the time of acquisition. Goodwill is adjusted for changes in the purchase price after acquisition and changes in the fair value of the identifiable assets, liabilities and contingent liabilities acquired since the acquisition date until 12 months afterwards. Newly acquired companies are recognized as from the date of acquisition, and no adjustment is made to comparative figures. Goodwill is allocated to business activities in order to test for impairment.

Translation of foreign currencies
The consolidated financial statements are presented in Danish kroner (DKK). Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction date. Monetary items denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Financial statements of foreign subsidiaries are translated into Danish kroner at the exchange rates prevailing at the balance sheet date for assets and liabilities, and at average exchange rates for income statement items.

Goodwill arising on the acquisition of new companies is treated as an asset belonging to the new subsidiaries and translated into Danish kroner at the exchange rates prevailing at the balance sheet date.

Realized and unrealized foreign exchange gains and losses are recognized under Financial income or Financial costs, with the exception of unrealized gains and losses relating to hedging of future cash flows, which are recognized in Shareholders’ equity under Cash flow hedges. The following exchange rate differences are also recognized directly in Shareholders’ equity under Currency translations, translated at the exchange rates prevailing at the balance sheet date:

• Translation of foreign subsidiaries’ net assets at beginning of year
• Translation of foreign subsidiaries’ income statements from average exchange rates to the exchange rates prevailing at the balance sheet date
• Translation of long-term intercompany receivables, which are considered to be an addition to net assets in subsidiaries
• Fair value adjustment of financial liabilities that qualify for hedging of net assets in foreign subsidiaries

Share-based payment
The Group’s employees are covered by share option programs. The programs comprise both equity-settled and cash-settled programs.

The fair value of the employee services received in exchange for the grant of share options is computed using the value of the granted share options. The fair value of the granted share options is calculated using the Black-Scholes model.

The fair value of share-based payment on the grant date is recognized as an employee cost over the period in which the right to the share options is accrued. In measuring the fair value, account is taken of the number of employees expected to gain entitlement to the options as well as the number of options the employees are expected to gain. This estimate is adjusted at the end of each period such that only the number of options to which employees are entitled, or
expected to be entitled, is recognized.

The value of equity-settled programs is offset against Shareholders’ equity. The value of cash-settled programs, which are offset against Other current liabilities, is adjusted to fair value at the end of each period, and the subsequent adjustment in fair value is recognized in the income statement under financial items.

Government grants
Government grants received which relate to research and development costs are recognized under Other operating income, net, based on the percentage completion of the projects. Grants received which relate to investments in property, plant and equipment are offset against the cost price of the grant-entitled assets.

Segment information
The consolidated accounts provide information on the Group’s geographical segments, which is the secondary segment. Novozymes’ business activities are considered to be integrated, as a result of which most of the production facilities and most research and development activities are common to the Group as a whole.

Leasing
Operating lease costs are recognized in the income statement on a straight-line basis over the period of the lease. Liabilities relating to non-cancellable contracts are specified in the notes.

Key figures
Key figures are mainly prepared in accordance with the 'Recommendations and Key Figures 2005' of the Danish Society of Financial Analysts, although certain key figures are adapted to the Novozymes Group.

Research and development costs
Research costs are expensed as incurred. Development costs pertaining to ongoing optimization of production processes for existing products, or to development of new products, where lack of approval by the authorities, approval by customers and other factors of uncertainty mean the development costs do not fulfill the criteria for recognition in the balance sheet, are expensed as incurred.

Other operating income, net
Other operating income, net comprises grants from public authorities and customers for research projects and collaborations, and income, net, of a secondary nature in relation to the main activities in the Group. The item also includes non-recurring income items, net in respect of damages, outlicensing, etc.

Tax
Corporation tax, comprising the current tax liability, change in deferred tax for the year and any adjustments relating to previous years, is recognized in the income statement at the amount attributable to net profit, and directly in Shareholders’ equity at the amount attributable to items recognized in Shareholders’ equity. Deferred tax is measured using the liability method, and comprises all temporary differences between the accounting and tax values of assets and liabilities. No deferred tax is recognized for goodwill, unless amortization of goodwill for tax purposes is allowed. Deferred tax is measured and recognized to cover retaxation of losses in jointly taxed foreign subsidiaries if this is expected to be realized on the sale of shares or when recapture of tax losses becomes applicable. The tax value of tax-loss carry-forwards is included in the calculation of deferred tax to the extent that the tax losses can be expected to be utilized in the future.

Deferred tax is measured according to current tax rules and at the tax rate expected to be in force on elimination of the temporary differences. Changes in deferred tax due to tax rate changes are recognized in the income statement where they can be attributed to net profit, and directly in Shareholders’ equity where they can be attributed to items recognized in Shareholders’ equity.

Novozymes A/S and its Danish subsidiaries are jointly taxed with the Danish companies in the Novo and Novo Nordisk Groups. The tax for the individual companies is allocated in full on the basis of the expected taxable income.

Intangible assets
Intangible assets are measured at cost less accumulated amortization and impairment losses.

Costs associated with large IT projects on the development of software for internal use are capitalized if they are incurred with a view to developing new and improved systems. Associated borrowing costs are expensed in the financial year in which they are incurred. Amortization is based on the straight-line method over the expected useful lives of the assets, as follows:

• Completed IT development projects are amortized over the useful life. Booked IT development assets are amortized over 3-5 years.
• Acquired patents, licenses and know-how are amortized over their useful lives. Patents are amortized over their useful lives, normally identical to the patent period, and licenses are amortized over the agreement period. Booked patents, licenses and know-how are amortized over 7-20 years.

Some assets are amortized over a shorter period.

Property, plant and equipment
Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Borrowing costs in respect of construction of major assets are expensed in the financial year in which they are incurred.

Depreciation is based on the straight-line method over the expected useful lives of the assets, as follows:

• Property: 12-50 years
• Plant: 5-16 years
• Other equipment: 3-16 years

The assets’ residual value and useful life are reviewed on an annual basis, and adjusted if necessary at each balance sheet date.

Gains and losses on the sale or disposal of assets are recognized in the income statement under the same items as the associated depreciation charges.

Impairment of intangible and tangible assets
Property, plant and equipment and intangible assets are reviewed for impairment losses when there is an indication that the assets have diminished in value beyond the level of normal depreciation. Goodwill is also subject to impairment testing each year, and when there is an indication that the assets have become impaired.

An impairment loss resulting from an asset having diminished in value beyond the level of normal depreciation is recognized at the amount by which the book value exceeds its recoverable amount.

Inventories
Inventories are measured at cost determined on a first-in first-out basis or net realizable value where this is lower.

The cost of Work in progress and Finished goods comprises direct production costs such as raw materials and consumables, energy and labor directly attributable to production, and indirect production costs such as employee costs and maintenance and depreciation of plant, etc.

If the expected sales price less any completion costs and costs to execute sales (net realizable value) of inventories is lower than the carrying amount, the inventories are written down to net realizable value.

Cash at bank and in hand
Cash at bank and in hand comprises the cash balance and funds held at financial institutions.

Dividend
The dividend proposed for the financial year is shown under Retained earnings in the Statement of shareholders’ equity.

Treasury shares
The cost price and proceeds from the sale of treasury shares are recognized directly in Shareholders’ equity as a separate item. Among other things, the company’s holding of treasury shares is used to hedge employees’ exercise of granted share options.

Other liabilities
Other liabilities are measured at amortized cost.

Pension obligations and other long-term employee benefits
Costs relating to defined contribution plans are recognized in the income statement in the financial year to which they relate. 

Costs and liabilities relating to defined benefit plans are stated using the projected unit credit method. Liabilities for the major plans are calculated annually by an external actuary. Actuarial gains and losses are recognized in the income statement over the employees’ expected average remaining working life if these differences exceed 10% of either the present value of the liability or the fair value of the plan assets in the previous year, whichever is the higher. Pension assets can only be recognized to the extent that the Group is able to achieve future financial benefits in the form of refunds from the pension plan or a reduction in future benefits.

Costs relating to other long-term employee benefits are accrued over the employees’ expected average remaining working life.

Statement of cash flows and financial resources
The Statement of cash flows and financial resources for the Group, which is compiled using the indirect method, shows cash flows from operating, investing and financing activities, and the Group’s cash and cash equivalents at the beginning and end of the year.

Cash flow from operating activities comprises net profit adjusted for non-cash expenses, paid financial items, corporation tax paid and change in working capital. Cash flow from investing activities comprises payments relating to the acquisition and sale of companies and minority shares, intangible assets and property, plant and equipment.

Cash flow from financing activities comprises proceeds from borrowings, repayment of principal on interest-bearing borrowings, payment of dividends, proceeds from share issues, and the purchase and sale of treasury shares and other securities.

Cash and cash equivalents comprises cash at bank and in hand less current bank loans due on demand. Financial resources comprises cash and cash equivalents plus undrawn committed credit facilities expiring in more than one year.