VVO Group plc is Finland’s largest market-based, private-sector landlord that has offered versatile and effortless rental solutions for over 45 years. Its range of apartments is extensive. On 31 December 2015, the Group owned 41,153 rental apartments across Finland. Of these, 28,167 are Lumo apartments (market-based rent) and 12,986 are VVO apartments (cost principle rent).
VVO Group’s parent company, VVO Group plc, is a Finnish public limited company established under Finnish law and domiciled in Helsinki. Its registered address is Mannerheimintie 168, 00300 Helsinki, Finland. The Board of Directors approved the financial statements for 2015 on 2 March 2016. A copy of the consolidated financial statements is available at www.vvo.fi or the parent company head office.
In its meeting on 2 March 2016, VVO Group plc’s Board of Directors has approved these financial statements to be published. According to the Finnish Limited Liability Companies Act, the shareholders may approve or reject the financial statements in a General Meeting held after the publication of the financial statements. Moreover, the General Meeting may make a decision on altering the financial statements.
These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs). All IFRS and IAS, as well as SIC and IFRIC interpretations in force on 31 December 2015 and approved by the EU for application have been applied to the preparation of the financial statements. The International Financial Reporting Standards refer to the standards and associated interpretations in the Finnish Accounting Act and in regulations issued under it that are approved by the EU for application in accordance with the procedure laid down in Regulation (EC) No. 1606/2002. VVO has not early adopted any standards or interpretations. The notes to the consolidated financial statements are also in accordance with the requirements of the Finnish accounting and corporate legislation supplementing the IFRS rules.
The figures in the consolidated financial statements are in euro, presented mainly as million euro. All the figures presented are rounded. Consequently, the sum of individual figures may deviate from the aggregate amount presented. The key figures have been calculated using exact values. The consolidated financial statements are presented for the calendar year, which is also the reporting period for the parent company and the Group.
Investment properties, derivative instruments and available-for-sale financial assets are measured at fair value after initial recognition. In other respects, the consolidated financial statements are prepared on the basis of original acquisition cost, unless otherwise stated in the accounting policies.
The financial statements for 2015 are VVO’s first consolidated IFRS financial statements. For periods up to and including the year ended 31 December 2014, VVO has prepared its consolidated financial statements in accordance with Finnish Accounting Standards (FAS). VVO’s Annual Report 2014 includes FAS accounting policies. The Group’s date of transition to IFRS was 1 January 2014. VVO has applied IFRS 1 First-time Adoption of International Financial Reporting Standards in the transition. The accounting policies described below have been applied to the preparation of the financial statements for the financial year ended 31 December 2015, the comparative information for the financial year ended 31 December 2014 and the opening IFRS balance sheet 1 January 2014.
The transition from FAS to IFRS has affected the reported financial position, financial performance and cash flows of VVO. The effects of the transition are described in more detail in the notes to the consolidated financial statements, including:
The consolidated financial statements include the parent company VVO Group plc, the subsidiaries, interests in joint arrangements (joint operations) and investments in associated companies.
More detailed information on entities consolidated on the consolidated financial statements for 2015 is provided in Note 31 to the consolidated financial statements.
Subsidiaries are companies that are under the parent company’s control. VVO is considered to control an entity when VVO is exposed to, or has rights to, variable returns from its involvement in the entity and has the ability to affect those returns through its control over the entity. The control is usually based on the parent company’s direct or indirect holding of more than 50 per cent of the voting rights in the subsidiary. Should facts or circumstances change in the future, VVO will reassess whether it continues to have control over the entity.
Mutual shareholdings are eliminated using the acquisition cost method. Subsidiaries acquired during the financial year are consolidated in the financial statements from the day of acquisition, when the Group gained control of the company. Divested subsidiaries are consolidated until the date of divestment, when control ceases. Intra-Group transactions, receivables, liabilities, essential internal margins and internal profit distribution have been eliminated in the consolidated financial statements.
The result for the financial year and total comprehensive income are allocated to the owners of the parent company and non-controlling interests, and this allocation is presented in the income state-ment and comprehensive income. The result for the financial year and total comprehensive income are allocated to the owners of the parent company and to non-controlling interests even in situations where the allocation would result in the non-controlling interests’ share being negative, unless non-controlling interests have an exemption not to meet obligations which exceed non-controlling interests’ investment in the company. Equity attributable to non-controlling interests is presented on the balance sheet separate from equity attributable to shareholders of the parent company.
A joint arrangement is an arrangement in which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
A joint arrangement is either a joint operation or joint venture. In a joint operation, VVO has rights to the assets and obligations for the liabilities relating to the arrangement, whereas a joint venture is an arrangement in which VVO has rights to the net assets of the arrangement. All of VVO’s joint arrangements are joint operations. They include those housing companies and mutual real estate companies in which VVO has a holding of less than 100 per cent. In these companies, the shares held by VVO carry entitlement to control over specified premises.
VVO includes in its consolidated financial statements on a line-by-line basis and in proportion to its ownership its share of the assets and liabilities on the balance sheet related to joint operations, as well as its share of any joint assets and liabilities. In addition, VVO recognises its income and expenses related to joint operations, including its share of the income and expenses from joint operations. VVO applies this proportional consolidation method to all the joint operations described above, regardless of the Group’s holding. If the proportionally consolidated companies have such items on the consolidated comprehensive income statement or balance sheet that solely belong to VVO or other owners, these items are dealt with accordingly also in VVO’s consolidated financial statements.
Associated companies are entities over which VVO has considerable influence. Considerable influence is basically defined as VVO holding 20–50 per cent of the votes in the company or VVO is otherwise exercising considerable influence but does not have control in the company. Holdings in associated companies are consolidated in the financial statements using the equity method from the date of acquiring considerable influence until the date when the considerable influence ends. VVO’s share of the results of associated companies is shown on a separate line on the income statement.
Acquisitions of investment properties by VVO are accounted for as an acquisition of asset or a group of assets, or a business combination within the scope of IFRS 3 Business Combinations. Reference is made to IFRS 3 to determine whether a transaction is a business combination. This requires the management’s judgment.
IFRS 3 is applied to the acquisition of investment property when the acquisition is considered to constitute an entity that is treated as a business. Usually, a single property and its rental agreement does not constitute a business entity. To constitute a business entity, the acquisition of the property should include acquired operations and people carrying out these operations, such as marketing of properties, management of tenancies and property repairs and renovation.
The consideration transferred in the business combination and the detailed assets and accepted liabilities of the acquired entity are measured at fair value on the acquisition date. Goodwill is recognised at the amount of consideration transferred, interest of non-controlling shareholders in the acquiree and previously held interest in the acquiree minus VVO’s share of the fair value of the acquired net assets. Goodwill is not amortised, but it is tested for impairment at least annually.
Acquisitions that do not meet the definition of business in accordance with IFRS 3 are accounted for as asset acquisitions. In this event, goodwill or deferred taxes, etc., are not recognised.
Transactions in foreign currency are recorded in EUR at the exchange rate on the transaction date. On the last date of the reporting period, monetary receivables and liabilities denominated in foreign currencies are translated into EUR at the exchange rate of the last date of the reporting period. Gains and losses arising from transactions denominated in foreign currency and from translating monetary items are recognised in profit or loss, and they are included in financial income and expenses. Consolidated financial statements are presented in EUR, which is the parent company’s functional and presentation currency.
The Group has very few transactions denominated in foreign currencies. VVO has no units abroad.
Investment property refers to an asset (land, building or part of a building) that VVO Group retains to earn rental income or capital appreciation, or both. An investment property can be owned directly or through an entity. Properties used for administrative purposes are owner-occupied property and included in the balance sheet line item “Property, plant and equipment”. An investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property.
Investment property is measured initially at acquisition cost, including related transaction costs, such as transfer taxes and professional fees, as well as capitalised expenditure arising from eligible modernisation. The acquisition cost also includes related borrowing costs, such as interest costs and arrangement fees, directly attributable to the acquisition or construction of an investment property. The capitalisation of borrowing costs is based on the fact that an investment property is a qualifying asset, i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The capitalisation commences when the construction of a new building or extension begins and continues until such time as the asset is substantially ready for its intended use or sale. Capitalisable borrowing costs are either directly attributable costs accrued on the funds borrowed for a construction project or costs attributable to a construction project.
After initial recognition, investment property is carried at fair value. The resulting changes in fair values are recognised in profit or loss as they arise. Fair value gains and losses are presented netted as a separate line item in the income statement. According to IFRS 13, Fair value measurement, fair value refers to the price that would be received from selling an asset or paid to trans-fer a liability in an orderly transaction between market participants at the measurement date.
Some of the investment properties are subject to legislative divestment and usage restrictions. The so-called non-profit restrictions apply to the owning company, and the so-called property-specific restrictions apply to the investment owned. The non-profit restrictions include, among other things, permanent restrictions on the company’s operations, distribution of profit, lending and provision of collateral, and the divestment of investments. The property-specific restrictions include fixed-term restrictions on the use of apartments, the selection of residents, the determination of rent and divestment of apartments.
VVO’s investment property portfolio incorporates the completed investment property, investment property under construction and under major renovation and VVO Group’s plot reserve. Properties classified as trading properties as well as properties classified as held for sale are included in the Group’s property portfolio but excluded from the balance sheet item “Investment properties”. A property is reclassified from ‘Investment properties’ under ‘Trading properties’ in the event of a change in the use of the property, and under ‘Investment property held for sale’, when the sale of an investment property is deemed highly probable.
An investment property is derecognised from the balance sheet on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Gains and losses on disposals are presented netted as a separate line item in the income statement.
The fair value of investment property determined by VVO Group is based on transaction value, income value and acquisition cost.
Properties of which apartments can be sold by VVO Group without restrictions are measured using transaction value. The value as of the measurement date is based on actual sales prices of com-parable apartments for the two preceding years. The source of market data applied by VVO Group is price tracking service provided by the Central Federation of Finnish Real Estate Agencies (KVKL), including pricing information on sales of individual apartments in Finland provided by real estate agents. The resulting transaction value is individually adjusted based on the condition, loca-tion, and other characteristics of the rental property.
Income value (yield value)
Yield value is applied when a property is required to be kept in rental use based on state-subsidised loans (so-called ARAVA loans) or interest subsidy loans, and it can be sold just as an entire property and to a restricted group of buyers. In the yield value method, the fair value is determined by capitalising net rental income, using property-specific required rate of net rental income. The method also considers the impact of future renovations and the present value of any interest subsidies.
Acquisition cost (Balance sheet value)
VVO Group estimates that the acquisition cost of properties under construction, interest subsidised (long-term) rental properties and state-subsidised rental properties (so-called ARAVA properties) approximate their fair values. State-subsidised and interest subsidised (long-term) rental properties are carried at original acquisition cost, deducted by the depreciation accumulated up to the IFRS transition date and any impairment losses.
Inputs used in determining fair values (used in the valuation techniques) are classified on three levels in the fair value hierarchy. The fair value hierarchy is based on the source of inputs.
Level 1 inputs
Quoted prices (unadjusted) in active markets for identical investment property.
Level 2 inputs
Inputs other than quoted prices included within Level 1 that are observable for the investment property, either directly or indirectly.
Level 3 inputs
Unobservable inputs for investment property.
An investment property measured at fair value is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The fair value measurement for all of the investment property of VVO Group has been categorised as a Level 3 fair value, as observable market information for the determination of fair values has not been available.
If the sale of an operative investment property is deemed highly probable, such a property is transferred from the balance sheet item “Investment property” to “Investment property held for sale”. On that date, the carrying amount of the property is considered to be recovered principally through a sale transaction rather than through continuing use in rental. Reclassification requires that a sale is deemed highly probable and:
Investment properties classified as held for sale are measured at fair value.
Trading properties include properties meant for sale which do not meet the objectives of the company due to their location, type or size. A property is reclassified from the balance sheet item “Investment properties” under “Trading properties” in the event of a change in the use of the property. This is evidenced by commencement of development with a view to sale. If an investment property is being developed with a view to a sale, it will be accounted for as a trading property.
Trading properties are measured at the lower of the acquisition cost or the net realisation value. The net realisation value is the estimated selling price in the ordinary course of business deducted by the estimated costs necessary to make the sale. If the net realisation value is lower than the carrying amount, an impairment loss is recognised.
When a trading property becomes an investment property measured at fair value, the difference between the fair value on the transfer date and its previous carrying amount is recognised in the income statement under “Profit/loss on sales of trading properties”.
VVO Group’s trading properties includes mainly single apartments ready for sale, business premises and parking facilities that are meant for sale but have not been sold by the balance sheet date.
Property, plant and equipment are measured at their original acquisition cost, less accumulated depreciation and possible impairment losses, adding capitalised costs related to modernisations. VVO’s property, plant and equipment consist mainly of buildings, land and machinery and equipment.
The acquisition cost includes costs that are directly attributable to the acquisition of the property, plant and equipment item. If the item consists of several components with different useful lives, they are treated as separate items of property, plant and equipment. In this case, costs related to the replacement of a component are capitalised, and any remaining carrying amount is derecognised from the balance sheet in connection with the replacement. Government grants received for the acquisition of property, plant and equipment are recorded as a reduction of the acquisition cost of said property, plant and equipment asset. The grants are recognised in income as lower depreciation charges over the useful life of the asset.
Costs that arise later as a result of additions, replacements of parts or maintenance, such as modernisation costs, are included in the carrying amount of the property, plant and equipment asset only in the event that the future financial benefit related to the asset will probably benefit VVO and the acquisition cost can be reliably determined. Maintenance and repair expenses are recognised immediately through profit and loss.
Depreciation on property, plant and equipment is recognised as straight-line depreciation during the useful life. No depreciation is charged on land, as land is considered to have an indefinite useful life.
The depreciation periods according to plan, based on the useful life, are as follows:
|Machinery and equipment in buildings||10-50 years|
|Office machinery and equipment||4 years|
Gains and losses from sales and disposals of property, plant and equipment are recognised in the income statement and presented as other operating income and expenses.
Intangible assets are recognised in the balance sheet only in the event that the acquisition cost of the asset can be reliably determined and the expected future financial benefit related to the asset will probably benefit VVO. Any other costs are immediately recognised as expenses. Intangible assets are valued at acquisition cost less amortisation and any impairment loss. The Group’s intangible assets consist of licences and IT systems. Intangible assets are amortised on a straight-line basis over their estimated useful lives. Intangible assets with a time limit are amortised over the life of the contract. The amortisation periods for intangible assets are four to five years.
Research costs are recognised as an expense as incurred. Development costs are recognised as ingangible assets in the balance sheet, providing that they can be reliably determined, the product or process is technically and commercially feasible, it will probably generate financial benefit in the future and the Group has the resources required for completing the research work and for using or selling the intangible asset.
The residual value, useful life and amortisation method of the asset are checked at least at the end of each financial year. When necessary, they are adjusted to reflect changes in the expectations on financial benefit.
VVO’s consolidated balance sheet did not include goodwill in the periods being presented.
At least once a year, VVO carries out an assessment of possible signs of impairment of intangible assets and property, plant and equipment. In practice, this is usually an asset group-specific assessment. If any signs of impairment are detected, the recoverable amount of the asset is determined.
The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The value in use is based on the expected future net cash flows resulting from the asset, discounted to the present. The recoverable amount is compared with the asset’s carrying amount. An im-pairment loss is recognised if the recoverable amount is lower than the carrying amount. Impair-ment losses are recognised in the statement of income. In connection with the recognition of the impairment loss, the useful life of the amortisable/depreciable asset is reassessed.
The impairment loss will be reversed later if the circumstances change and the recoverable amount has increased after the recognition of the impairment loss. However, reversal of impairment loss shall not exceed the asset’s carrying amount less impairment loss. An impairment loss recognised for goodwill cannot be reversed under any circumstances.
VVO applies the following principles to the classification of financial assets and liabilities and their recognition, derecognition and measurement.
The fair value hierarchy related to the fair value determination of financial assets and liabilities is similar to the hierarchy described in the Fair value hierarchy note to the consolidated financial statements.
Financial assets are classified as follows for the determination of measurement principles:
The classification depends on the purpose for which the financial assets were acquired and takes place at initial recognition. Transaction costs are included in the original carrying amount of financial assets for items that are not measured at fair value through profit and loss. All purchases and sales of financial assets and liabilities are recognised on the transaction date, which is the date on which the VVO undertakes to purchase or sell the financial instrument. Financial assets are derecognised from the balance sheet when VVO has lost its contractual right to the cash flows or when it has transferred a significant part of the risks and yield outside the Group.
Financial assets recognised at fair value through profit and loss
VVO uses derivative instruments only for hedging purposes. Those derivative instruments that do not meet the requirements of IAS 39 Financial instruments: Recognition and Measurement con-cerning the application of hedge accounting, or if VVO has decided not to apply hedge accounting to the instrument, are included in financial assets or liabilities recognised at fair value through profit and loss. These instruments are classified as held for trading.
Derivative instruments are initially recognised at fair value and are subsequently recognised at fair value on the last day of each reporting period.
VVO’s derivative instruments consist of interest rate derivatives and electricity derivatives. The Group uses interest rate derivatives to hedge its interest rate risk exposure related to long-term loans. This refers to changes caused by fluctuating market interest rates to future interest payment cash flows (cash flow hedging) and resulting volatility in profits. The purpose of electricity deriva-tives is to limit fluctuations in the Group’s result caused by changing electricity prices.
Financial assets held for sale
Available-for-sale financial assets are non-derivatives that are either designated to this category or not classified in any other financial asset category. They are included in non-current assets, unless the investment matures or the company intends to dispose of the investment within 12 months of the reporting date.
Available-for-sale financial assets are measured at fair value. If the fair value cannot be reliably determined (unlisted securities), they are measured at cost less any impairment loss. The fair value is determined using quoted market rates and market prices and other appropriate valuation methods, such as recent transaction prices. Fair value changes of available-for-sale financial assets are recognised as other comprehensive income and presented in the fair value reserve net of tax. When a financial asset classified as available for sale is sold or an impairment is recognised on it, the cumulative change in fair value is transferred from equity and recognised in profit or loss.
Loans and other receivables
Loans and other receivables are non-derivative financial assets with fixed or determinable payments. They do not have quoted market prices and they are not held for trading. Loans and other receivables include VVO’s financial assets obtained by handing over cash, goods or services directly to a debtor. VVO’s loans and other receivables consist of sales receivables and other receivables.
Loans and other receivables are initially measured at fair value and subsequently at amortised cost using the effective interest method. They are included in current financial assets if they mature within 12 months of the end of the reporting period. Otherwise, they are included in non-current financial assets.
Held-to-maturity investments are non-derivative financial assets with fixed or definable related payments. They mature on a given date and VVO firmly intends and is able to keep them until this date. They are measured at amortised cost less any impairment loss, using the effective interest method. They are included in non-current assets, providing that they do not mature within 12 months of the end of the reporting period.
Cash and cash equivalents
Cash and cash equivalents consist of cash and other liquid assets. Cash equivalents include bank deposits that can be raised on demand and other short-term highly liquid investments, such as interest securities. Items classified as cash equivalents mature within three months of the date of acquisition. They are readily convertible to a known amount of cash, and the risk of changes in value is insignificant. The cash and cash equivalents of non-profit companies are kept separate from those of other companies.
Impairment of financial assets
At the end of each reporting period, VVO assesses whether there is objective evidence of the impairment of any single financial asset or group of assets. ‘Objective evidence’ may refer to evidence such as a significant or long-lasting decrease in the value of an equity instrument, falling below the instrument’s acquisition cost. Impairment loss is immediately recognised in the income statement. If the value is later restored, the reversal of the impairment is recognised in equity for equity instruments and through profit or loss for other investments.
Sales receivables are amounts that arise from renting our apartments. VVO recognises an impairment loss on an individual sales receivable when there is objective evidence that VVO will not be able to collect the full amount due. Credit losses are included in other operating expenses. Subsequent recoveries of amounts recognised as expenses are credited against other operating expenses in the income statement.
A financial liability is classified as current unless VVO has the unconditional right to defer the payment of the debt to at least 12 months from the end of the reporting period. Financial liabilities, or parts thereof, are not derecognised from the balance sheet until the debt has extinguished, i.e. once the contractually specified obligation is discharged or cancelled or expires.
Financial liabilities recognised at fair value through profit and loss
Financial liabilities recognised at fair value through profit and loss include electricity derivatives and those interest rate derivatives that are not subject to hedge accounting in accordance with IAS 39. Realised and unrealised gains and losses from changes in fair value are recognised in the income statement in the period in which they have arisen. In the balance sheet, the fair values of interest rate derivatives and electricity derivatives are included in current liabilities.
Financial liabilities measured at amortised cost (other financial liabilities)
Financial liabilities measured at amortised cost are initially recognised at fair value. Transaction costs directly attributable to the acquisition of loans, such as arrangement fees that can be allocated to a particular loan, are deducted from the original amortised cost of the loan. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. The difference between the proceeds and the redemption value is recognised as financial cost through profit and loss over the loan period.
Derivative instruments and hedge accounting
VVO Group uses interest rate derivatives to hedge its exposure to changes in future interest payment cash flows concerning long-term loans. The majority of interest rate derivatives is subject to cash flow hedge accounting in accordance with IAS 39. Fluctuations in the Group’s result caused by changing electricity prices are restricted by using electricity derivatives. Electricity derivatives are not subject to hedge accounting in accordance with IAS 39, even though these instruments are used for hedging.
Derivative instruments are initially recognised at fair value on the date a derivative contract is entered into, and they are subsequently recognised at fair value.
At the beginning of the hedging relationship, the Group documents the relationships between each hedging instrument and hedged item as well as the objectives of risk management and the hedging strategy. The hedge effectiveness is assessed both at the beginning of and during hedging in all financial statements. This includes demonstrating whether the derivatives are effective in reversing the changes in the cash flows of the hedged items.
Changes in the fair values of derivatives within hedge accounting are recognised in components of other comprehensive income insofar as the hedging is effective. Changes in value are reported in fair value reserve in equity. Interest payments arising from interest rate derivatives are recognised in interest costs. If market interest rates are negative, interest rate swat hedges may lead to a situation in which both fixed and variable interest must be paid. The ineffective portion of a hedge is immediately recognised in the income statement in financial items. The gains and losses accumulated in equity are recognised in the income statement at the same time with the hedged item.
Changes in value from derivatives not included in hedge accounting are recognised in financial items through profit and loss.
VVO may receive various grants for its operations from different representatives of public administration. State-subsidised loans granted by the State Treasury constitute the most important form of government grants. VVO may receive a state-subsidised low-interest loan for specific properties supported by the government. The actual net interest rates of these loans may be lower than interest expenses of market-based loans. The interest advantage obtained through the support from government is therefore netted into interest expenses in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance and is not shown as a separate item in interest income.
Government grants are recognised only where it is reasonably certain that they will be received and VVO meets the criteria attached to the grant. Public grants are accounted for as part of the effective interest rate of the loan in question. The amount of government grants was low in the financial year.
Borrowing costs are usually recognised as financial costs in the financial year during which they are incurred. However, borrowing costs attributable to qualifying assets, that is, mainly borrowing costs attributable to VVO’s investment properties, such as interest costs and arrangement fees, directly resulting from the acquisition or construction of the above assets, are capitalised as part of the cost of the asset. The capitalisation principles of borrowing costs are described in more detail in section 1.2.1 of the Accounting policies for consolidated financial statements, General recognition and measurement principles for investment property.
An equity instrument is any contract that demonstrates a residual interest in VVO’s assets after deducting all of its liabilities. The share capital consists of the parent company’s ordinary shares classified as equity. Transaction costs directly attributable to the issue of new shares are presented in equity as a deduction, net of tax, from the proceeds.
Where any Group company purchases parent company’s shares (treasury shares), the considera-tion paid, including any directly attributable transaction costs (net of taxes), is deducted from equity attributable to the owners of the parent company, until the shares are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable transaction costs and net of taxes, is directly recognised in equity attributable to the owners of the parent company.
Dividend distribution to the parent company’s shareholders is recognised as a liability in the consolidated balance sheet in the period in which the dividends are approved by the company’s General Meeting of Shareholders.
Provisions are recognised in the balance sheet when all the following criteria are met:
Provisions may result from restructuring plans, onerous contracts or obligations related to the environment, legal action or taxes. The Group’s provisions on 31 December 2015 consisted ten-year guarantee reserves for VVO Kodit Oy’s (VVO Rakennuttaja Oy’s) founder construction. Their amount is based on VVO’s experience of costs arising from the realisation of such liabilities.
The amount recognised as provision is the management’s best estimate of costs required for settling an existing obligation on the last day of the reporting period. Where it can be expected some of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
A contingent liability is a potential obligation resulting of past events and may be incurred depending on the outcome of an uncertain future event that is beyond the Group’s control (such as the result of pending legal proceedings). In addition, an existing obligation that will probably not require meeting the liability to pay or the amount of which cannot be reliably determined is considered as a contingent liability. Contingent liabilities are presented in the notes.
VVO’s turnover consists of rental income and charges for utilities. The turnover has been adjusted with indirect taxes and sales adjustment items. In addition, VVO recognises income for the selling of investment properties and financial income.
VVO’s turnover consists mainly of rental income from investment properties. Rental agreements of investment properties with VVO as the lessor are classified as other rental agreements, as VVO retains a substantial proportion of the risks and rewards of ownership. Most of the rental agreements are in force until further notice. Rental income accrued from other rental agreements is dis-tributed evenly across the rental period. As a lessor, VVO does not have rental agreements that could be classified as financial leasing agreements.
Relating to the rental agreements, VVO collects utility charges, mainly sauna fees. This income is allocated to the period during which the related cost is recognised as expense.
Interest income is recognised using the effective interest method, and dividend income is recog-nised when a right to receive payment has arisen.
An existing property owned by VVO is considered as sold, once the substantial risks and rewards associated with ownership have been transferred from VVO to the buyer. This usually takes place when control over shares is transferred. Income from selling property is presented in the income statement under Profit/loss on sales of investment properties.
Other operating income includes income not related to the actual business. It includes items such as sales profit from intangible assets and property, plant and equipment, as well as income from debt collection activities.
Net rental income is calculated by deducting property maintenance and repair costs from turnover. These expenses comprise maintenance and annual repair costs arising from the regular and continuous maintenance of the properties and are recognised immediately in the income statement.
IAS 1 Presentation of Financial Statements does not define the concept of operating profit. At VVO, operating profit is defined as the net amount after adding other operating income to net rental income, then deducting sales and marketing expenses, administrative expenses and other operat-ing expenses, the share in profits of associated companies and amortisation, depreciation and impairment, and then adding/deducting gains/losses from the disposal of investment properties, from assessment at fair value, and from the disposal of trading properties. All the other income statement items except those mentioned above are presented below operating profit. Changes in the fair values of derivative instruments are included in the business result if they arise from items related to business operations; otherwise they are recognised in financial items.
The Group’s employee benefits include the following:
Short-term employee benefits
Wages, salaries, fringe benefits, annual leave and bonuses are included in short-term employee benefits.
Post-employment benefits (pension plans)
Post-employment benefits are payable to employees after the completion of employment. At VVO, these benefits are related to pensions. Pension coverage in the Group is arranged through external pension insurance companies.
Pension schemes are classified as defined contribution and defined benefit plans. VVO has only defined contribution schemes. A defined contribution plan is a pension plan under which VVO pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the payee does not hold sufficient assets to pay out all pension benefits. Pension plans that are not defined contribution plans are defined benefit plans. Payments made into defined contribution systems are recognised through profit and loss in the periods that they concern.
Termination benefits are not based on work performance but the termination of employment. These benefits consist of severance payments. Termination benefits result either from the Group’s decision to terminate the employment or the employee’s decision to accept the benefits offered by VVO in exchange for the termination of employment.
Other long-term employee benefits
VVO has a remuneration scheme that covers the entire personnel, entitling them to benefits after a specific number of years of service. The discounted present value of the obligation resulting from the arrangement is recognised as a liability in the balance sheet on the last day of the reporting period.
Group as lessee
Leases in which the risks and rewards of ownership substantially remain with the lessee are ac-counted for as operating leases. Payments made under operating leases are recognised as ex-pense through profit and loss as balance sheet items over the lease term. More information about VVO’s operating leases is available in Note 26 to the consolidated financial statements (Operating leases).
The tax expense in the income statement comprises current tax and the change in deferred tax liabilities and receivables. Income tax is recognised in profit and loss, except when income tax is related to items recognised directly in equity or components of other comprehensive income. In this event, the tax is also included in these items.
Current taxes are calculated from taxable profit determined in Finnish tax legislation with reference to a valid tax rate, or a tax rate that is in practice approved by the balance sheet date. Taxes are adjusted by possible taxes related to previous years.
As a rule, deferred tax assets and liabilities are recognised for all temporary differences between the carrying amounts and tax bases of assets and liabilities using the liability method. Acquisitions of individual assets constitute an exception to this rule. In VVO, these assets include such investment property acquisitions that do not meet the criteria of business entities and are therefore classified as asset acquisitions.
The most significant temporary difference in the Group is the difference between the fair values and tax bases of investment properties owned by VVO. After the initial recognition, the investment property is measured at fair value through profit and loss at the end of the reporting period. At the same time, deferred tax is recognised in profit and loss on the basis of the temporary difference. The tax is based on the assumption that, as a rule, VVO will dispose of the investment property by selling it in the form of property. Other temporary differences arise, for example, from the meas-urement of financial instruments at fair value.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available to VVO against which temporary differences can be utilised. The eligibility of the de-ferred tax asset for recognition is reassessed on the last day of each reporting period. Deferred tax liabilities are usually recognised in the balance sheet in full.
Deferred taxes are determined applying those tax rates (and tax laws) that will probably be valid at the time of paying the tax. Tax rates in force on the last day of the reporting period are used as the tax rate, or tax rates for the year following the financial year if they are in practice approved by the last day of the reporting period.
The preparation of financial statements in accordance with the IFRS requires VVO’s management to make judgement-based decisions on the application of the accounting policies, as well as esti-mates and assumptions that affect the amounts of reported assets, liabilities, income and expenses and the presented notes.
Management’s judgment-based decisions affect the choice of accounting policies and their application. This particularly applies to cases for which the current IFRS norms include alternative recognition, measurement or presentation methods.
VVO’s management must make judgement-based decisions when applying the following accounting policies:
Classification of properties:
VVO classifies its property portfolio into investment properties, trading properties and investment properties held for sale, in accordance with the principles described above. For instance, determin-ing when selling is considered to be very likely in different circumstances requires judgement from the management. The classification has an effect on the financial statements, as the character of the intended use of a property held by VVO affects the content of the required IFRS financial statements information.
Classification of long-term leases:
Long-term leases are classified as financial leases or operating leases. These leases signed by VVO with different municipalities have been analysed and on the basis of the analyses VVO has deemed them to be operating leases. This is based on the management’s opinion that the significant risks and rewards associated with these lease arrangements are not transferred to VVO. More information about VVO’s operating leases is available in Note 26 to the consolidated financial statements (Operating leases).
Business acquisitions and asset acquisitions:
Acquisitions of investment properties are classified either as acquisitions of asset or assets (IAS 40) or business combinations (IFRS 3) If the acquisition of an investment property involves other operations in addition to the property, it is considered as a business combination.
Deferred tax assets:
Determining whether to recognise a deferred tax asset on the balance sheet requires the management’s judgement. A deferred tax asset is recognised to the extent that it is probable that future taxable profit will be available to VVO against which deductible temporary differences or tax losses carried forward can be utilised. A deferred tax asset recognised in a previous reporting period is recognised as an expense in the income statement, if VVO is not expected to accrue enough taxable income to utilise the temporary differences or unused losses that constitute the basis for the deferred tax asset.
Recognition principle of deferred taxes:
As a rule, the deferred tax for investment properties measured at fair value is determined assuming that the temporary difference will reverse through selling. VVO can usually dispose of an investment property either by selling it in the form of property or by selling the shares in the company, such as a housing company.
Exception to the initial recognition of deferred taxes:
As a rule, deferred tax assets and liabilities are recognised for all temporary differences between the carrying amounts and tax bases of assets and liabilities. An exception to this principal rule is constituted by acquisitions of single investment properties, which are not considered to meet the definition of business according to IFRS 3. In this case, they are classified as asset acquisitions, for which no deferred tax is recorded in the balance sheet at initial recognition. Therefore, the classification of property acquisitions described above has an effect on the recognition of deferred taxes.
The estimates and related assumptions are based on VVO’s historical experience and other factors, such as expectations concerning future events. These are considered to represent the man-agement’s best understanding at the time of evaluation and believed to be reasonable considering the circumstances. The actual results may differ from the estimates and assumptions used in the financial statements. Estimates and related assumptions are continually evaluated. Changes in accounting estimates are recorded for the period for which the estimate is being checked, if the change in the estimate concerns only that period. If the change in the estimate concerns both the period in question and later periods, the change in the estimate is recorded both for the period in question and the future periods.
Below are presented the most significant sections of the financial statements where the judgement described above has been applied by management, as well as the assumptions about the future and other key uncertainty factors in estimates at the end of the reporting period which create a significant risk of change in the carrying amounts of VVO’s assets and liabilities within the next financial year.
The key sources of estimation uncertainty concern the following section of the financial statements
Fair value measurement of investment property:
In VVO’s consolidated financial statements, the determination of the fair value of investment prop-erty is the key area that involves the most significant uncertainty factors arising from the estimates and assumptions that have been used. The determination of the fair value of investment property requires significant management discretion and assumptions, particularly with respect to return requirements, vacancy rates, the development of rent levels and the comparability of transaction values in relation to the property being evaluated. More information about the fair value determina-tion for VVO’s investment properties is available in Note 11 to the consolidated financial statements (Investment properties).
VVO uses valuation techniques that are appropriate under those circumstances, and for which sufficient data is available to measure fair value. VVO aims to maximise the use of relevant ob-servable inputs and minimise the use of unobservable inputs.
Determination of the fair value and impairment of financial instruments:
If there is no active market for the financial instrument, judgement is required to determine fair value and impairment. External mark to market valuations may be used for some interest rate derivatives. Recognition of impairment is considered if the impairment is significant or long-lasting. If the amount of impairment loss decreases during a subsequent financial year and the decrease can be considered to be related to an event occurring after the recognition of impairment, the impairment loss will be reversed. More information about VVO’s financial instruments is available in Note 14 to the consolidated financial statements (Amounts of financial assets and liabilities by category).
IASB has issued new and amended standards and interpretations, the application of which is mandatory in financial years beginning on or after 1 January 2016. VVO has not applied these standards and interpretations to the preparation of these consolidated financial statements. The Group will adopt them as of the effective date or, if the date is other than the first day of the financial year, from the beginning of the subsequent financial year. VVO estimates that, in practice, the following new standards may have significant effects on the Group’s future financial statements
(* = Not yet endorsed for use by the European Union as at 31 December 2015.)
Amendment to IAS 1 Presentation of Financial Statements: Disclosure Initiative (effective for financial years beginning on or after 1 January 2016). The amendments are designed to encourage companies to apply judgement in determining the information to be presented in the financial statements. For example, the amendments clarify the application of the concept of materiality and judgement when determining where and in what order information is presented in the notes to the financial statements. The amendments to the standard are not expected to have a significant impact on VVO’s consolidated financial statements.
Amendments to IFRS 11 Joint Arrangements – Accounting for Acquisitions of Interests in Joint Operations (effective for financial years beginning on or after 1 January 2016). The amendments add new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. In this case, the application of business combination accounting is required. The amendments to the standard are not expected to have a significant impact on VVO’s consolidated financial statements.
Annual Improvements to IFRS, 2012–2014 cycle (effective for financial years beginning on or after 1 January 2016): In the Annual Improvements process, minor and non-urgent amendments to the standards are grouped into a package and issued once a year. The amendments cover four standards. The impacts vary depending on the standard, but they are not significant.
New IFRS 15 Revenue from Contracts with Customers* (effective for financial years beginning on or after 1 January 2018): IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue can be recognised. It replaces existing revenue guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. Under IFRS 15, an entity shall recognise revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
New IFRS 9 Financial Instruments* (effective for financial periods beginning on or after 1 January 2018): The standard replaces the existing standard IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments. This also covers a new expected credit loss model for determining impairment on financial assets. The requirements concerning general hedge accounting have also been revised. The requirements on recognition and derecognition of financial instruments from IAS 39 have been retained. The Group is still assessing the impact of the standard.
The adoption of the other amended standards and interpretations is not expected to have any ma-terial effect on the Group’s financial statements.