Transition to IFRS

Since 1 January 2015, VVO Group prepares its consolidated financial statements, including the Interim Reports, in accordance with International Financial Reporting Standards (IFRS). For periods up to and including the year ended 31 December 2014, VVO has drawn up its consolidated financial statements in accordance with Finnish Accounting Standards (FAS). 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 note describes the most important effects of the IFRS transition on financial statements, as well as the accounting policies with the most significant effects on the income statement, balance sheet and cash flows relating to the adoption of IFRS.

The transition from FAS to IFRS has affected the reported financial position, financial performance and cash flows of VVO Group. The most significant impacts relate to the following:

• Measurement of investment property
• Recognition of deferred taxes
• Measurement of financial instruments
• Changes in consolidation methods

Below are provided more details about the effects of the transition to IFRS on VVO Group’s financial result, balance sheet and key indicators.

Reconciliations and explanation of the effects of the transition to IFRS
The effects of the transition of VVO Group from FAS to IFRS on VVO Group’s balance sheet and result are described below. The following reconciliations are presented below:

• reconciliation of the consolidated equity reported in accordance with FAS to the consolidated equity in accordance with IFRS, as at 1 January 2014 (opening IFRS balance sheet) and as at 31 December 2014
• reconciliation of the total consolidated profit in accordance with FAS to the total comprehensive income in accordance with IFRS for the financial year 2014.

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Balance sheet 1 January 2014

Balance sheet 31 December 2014

Income statement for the financial year 2014

Explanation of the effects of the transition to IFRS

The accounting policies that have had the most significant effect on VVO Group’s consolidated income statement and balance sheet when adopting IFRS are described herein.

The Group applied IFRS 1 (First-time Adoption of International Financial Reporting Standards) in the transition to IFRS. VVO Group has decided to apply the following reliefs allowed by IFRS 1 to the requirements of other standards:

Business acquisitions:

The Group does not apply IFRS 3 Business combinations retrospectively to business combinations made before the IFRS transition date. Instead, the classification and recognition principles for as-sets and liabilities will be kept as they have been in consolidated financial statements prepared in accordance with Finnish laws and regulations.

Interest subsidy loans:

Interest subsidy loans granted to VVO Group are accounted for as government loans in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance . These loans have been granted by an organisation representing the government and they are subsidies in nature. VVO has applied the relief allowed by IFRS 1, under which the carrying amounts of said loans have not been adjusted in the opening IFRS balance sheet. After the transition, these loans will be accounted for in accordance with IAS 39.

Consolidation policies (joint arrangements)

The consolidation policies for housing companies in which VVO Group does not have 100% own-ership, as well as the consolidation policies for mutual real estate companies, have been changed, so that from 1 January 2014, these assets are accounted for as joint operations, as referred to in IFRS 11 Joint arrangements. In a joint operation, VVO Group has rights to the assets and obliga-tions for the liabilities relating to the arrangement. In these companies, the shares held by VVO carry entitlement to control over specified premises.

In IFRS financial statements, holdings in housing companies and mutual real estate companies are consolidated using proportionate consolidation in accordance with the holding. Thus, VVO Group’s share of their assets, liabilities, income and expenses is consolidated in proportion to VVO Group’s ownership on a line-by-line basis into the corresponding items in VVO Group’s financial statements, including the Group’s possible share of joint assets, liabilities, income and expenses.

Assets and liabilities in the FAS balance sheet have been adjusted as a result of the change in the consolidation method. These adjustments are shown in the balance sheet bridge presented above. The adjustments result from not consolidating the above assets and liabilities in full (100%) and not including non-controlling interests’ share in the consolidated financial statements. The counterpart of the adjustments concerning the consolidation method is the non-controlling interests’ share of equity.

These changes had an effect of EUR -7.5 million on the opening IFRS balance sheet and EUR -7.3 on the closing balance sheet for 2014.

The change in the consolidation method did not have a significant effect on the result. The effects on income statement items in 2014 are presented in the income statement reconciliation.

Intangible assets

The following intangible assets in the FAS balance sheet have been reclassified into Investment property: air-raid shelter and parking space rights, parking areas and shares in car parking facilities that meet the criteria for investment property, totalling EUR 8.2 million in the opening IFRS balance sheet (EUR 7.6 million on 31 December 2014).

Tangible assets

The following tangible assets in the FAS balance sheet have been reclassified into Investment property: land areas, entry fees, residential and business properties, machinery and equipment, acquisitions in progress and other capitalised long-term expenditure that meet the criteria for an investment property. This adjustment totalled EUR 2,142.0 million in the balance sheet at 1 January 2014 and EUR 2,316.4 million at 31 December 2014.

Investment property (changes to balance sheet and fair value)

The Group has decided to apply the fair value model of IAS 40 Investment property to the valuation of its investment properties. This increased the balance sheet value of VVO Group’s property as-sets by EUR 1,326.3 million on 1 January 2014, and the resulting increase in deferred tax liability (20%) amounted to EUR 288.3 million. The change in the value of investment properties in the financial year 2014, EUR 26.2 million, has been recognised in the income statement.

Before the transition to IFRS, VVO Group measured its property and housing portfolio at cost less depreciation and impairment. The deferred taxes for allocated reserves and assets, previously cap-italised in fixed assets, were reversed in the transition to IFRS.

In connection with the transition, the property and housing portfolio owned by the Group has been reassessed and reclassified as applicable. Nearly all of them are assets that meet the investment property criteria. Investment property refers to a property (land, building or part of a building) that the Group retains to earn rental income or capital appreciation, or both.

Changes in fair value are recognised through profit and loss from 1 January 2014 and presented netted as a separate item in the income statement. When applying the fair value model, depreciation is no longer recognised in respect of investment properties. Changes in the fair values of properties may cause fluctuation in VVO Group’s result in the future.

The fair value of the rental apartments and business premises owned by the Group is determined quarterly on the basis of the company’s own evaluation. An external expert issues a statement on the valuation of rental apartments and business premises owned by VVO Group.

In the annual reports for 2013 and 2014, VVO Group presented the fair value of its investment property in a note. The fair value measurement principles for residential and business properties have been specified in more detail in connection with the transition to comply with IFRS. The effects were not significant.

Shares in associates

The Shares in associates item in the FAS balance sheet included investments in housing compa-nies and mutual real estate companies, which were consolidated in the consolidated financial statements using the equity method. From 1 January 2014, VVO Group’s investments in housing companies and mutual real estate companies in which the Group’s holding is 20–50 per cent are accounted for as joint operations and consolidated into the corresponding items in the consolidated financial statements using the proportionate consolidation method in accordance with the holding. The adjustment from Capital Expenditure into Investment property in the opening IFRS balance sheet and at 31 December 2014 amounted to EUR -7.7 million. The effect of the adjustment on the 2014 FAS income statement line Share of income and expenses of associates was not significant.

Other investments

VVO Group’s investments in companies in which the Group’s holding is less than 20 per cent were previously included in Capital expenditure in the balance sheet. They have been reclassified as available-for-sale financial assets (Available-for-sale financial assets under Non-current assets in the IFRS-balance sheet). The transfer between the balance sheet items amounted to EUR 0.6 million on 1 January 2014 and 31 December 2014. These investments are valued on the basis of their carrying amount at 31 December 2013 in accordance with Finnish financial statement regulations.

Derivative instruments

VVO Group’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 and resulting volatility in profits. The purpose of electricity derivatives is to limit fluctuations in VVO Group’s result caused by changing electricity prices.

All derivative instruments not included in the hedge accounting referred to in IAS 39 are included in financial assets and liabilities recognised at fair value through profit and loss. IFRS regulation re-quires initial recognition of derivative instruments at fair value and their subsequent measurement at fair value on the last day of each reporting period. Previously, VVO Group did not measure derivatives at fair value after the initial recognition, with the exception of interest rate swaptions.

Gains and losses from fair value measurement are accounted for as determined by the purpose of the derivative instruments. The effects on results of changes in the value of derivative instruments that are included in hedge accounting and that are effective hedging instruments are presented consistently with the hedged item. VVO Group has decided to apply hedge accounting in accord-ance with IAS 39 (cash flow hedge accounting) to the majority of interest rate derivatives. Fair value changes of hedging interest rate derivatives are recognised in other comprehensive income and reported in fair value reserve in equity net of tax. For derivative instruments not included in hedge accounting, changes in fair value are recognised through profit and loss in the period during which they arise. VVO Group does not apply hedge accounting to electricity derivatives and certain interest rate derivatives.

a) Appendix: Derivative instruments
Balance sheet adjustments due to changes in accounting practice were as follows:

The EUR -19.5 million change in the value of hedging interest rate derivatives, arising in 2014, has been recognised in components of other comprehensive income. Changes in the values of instru-ments not included in hedge accounting in 2014 were EUR -1.4 million for interest rate derivatives and EUR +0.2 million for electricity derivatives. These have not been recognised through profit and loss previously.

Financial assets

Previously, VVO Group measured financial assets at the lower of cost or market price. Financial assets were reclassified on 1 January 2014 into the following financial asset categories:

• Available-for-sale financial assets: These include investments in other instruments with a reliably determinable fair value, such as fund investments and investments in other unlisted securities. From 1 January 2014, investments measured at fair value are measured at fair value on the last day of the reporting period. As a rule, fair value changes are recognised in other comprehensive income, net of tax, and reported in fair value reserve in equity.

• The value of investments measured at fair value in the opening IFRS balance sheet on 1 January 2014 was EUR 50.3 million, and EUR 55.5 million on 31 December 2014.

• The effect of fair value changes on the income statement of 2014 was EUR 2.4 mil-lion, including an EUR 0.7 million impairment loss adjustment, previously recognised through profit and loss.

• Unlisted securities are still measured at cost less impairment loss, as their fair value cannot be reliably determined.

• Loans and other receivables: This category includes fixed-term deposits and similar. Loans and other receivables are initially measured at fair value and subsequently at amortised cost using the effective interest method. The carrying amount of financial assets included in this category did not change in the opening IFRS balance sheet.

• Held-to-maturity investments: Held-to-maturity securities are measured at amortised cost.

 

Deferred taxes

b) Appendix: Deferred taxes
Adjustments of deferred taxes consist of the following items:

Deferred taxes in the 2014 income statement have been adjusted with a total of EUR -16.8 million, of which EUR -5.2 million result from the fair value measurement of investment properties.

Deferred taxes are accounted for in accordance with IAS 12 Income 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 using the liability method.

In practice, the changes concerning income taxes result from the fair value measurement of in-vestment properties and financial instruments, which has increased the number of deferred tax items. The largest item (EUR 332 million) is constituted by the temporary difference between the fair values and tax bases of investment properties owned by VVO Group. 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 calculation of tax is based on the assumption that, as a rule, VVO Group will dispose of the investment property by selling it in the form of property, not by selling the shares in the company. Before the transition to IFRS, the Group already recognised income taxes mainly in accordance with IFRS regulations. With the exception of the new items mentioned above, changes in deferred taxes have mainly been minor adjustments of the previous recognition practice. Deferred taxes are measured using the tax rates (and tax legislation) in force on 31 December 2014.

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Investment properties (depreciation)

The depreciation on assets classified as investment properties recognised in the FAS income statement in the financial year 2014 has been reversed. The effect of the adjustment was EUR +50.6 million.

Retained earnings and equity

IFRS adjustments recognised in retained earnings consist of the following items:

c) Appendix: Bridging calculation of equity 1 January 2014

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d) Appendix: Bridging calculation of equity 31 December 2014

Other non-current liabilities (other long-term employee benefit)

 VVO Group has a remuneration scheme that covers the entire personnel, entitling them to benefits after a specific number of years of service. A liability of approximately EUR 1.5 million has been recognised in the opening IFRS balance sheet for this arrangement, in accordance with IAS 19 Employee benefits.

Previously the expense resulting from the benefit was recognised when the beneficiary used it.

Financial liabilities

In the transition to IFRS, the Group’s financial liabilities have been classified either into financial liabilities recognised at fair value through profit and loss (derivative liabilities) or financial liabilities measured at cost (other financial liabilities). Other financial liabilities mainly consist of VVO Group’s various promissory note loan instruments, measured at amortised cost using the effective interest method.

Carrying amounts of the Group’s financial liabilities were adjusted in the opening IFRS balance sheet on 1 January 2014 with the amount of loan fees not recognised in the result. The effect of the adjustment was insignificant.

Other adjustments

The transition to IFRS did not result in significant differences in the cash flow statement. After the transition, deposits over three months are accounted for in the investment cash flow instead of cash and cash equivalents.

Effects on key indicators

• Turnover: IFRS adjustments decreased the turnover by EUR 11.3 million. This was mainly due to not including sales of trading properties in turnover any longer.
• Operating profit: the adjustments increased the operating profit by EUR 56.2 million. This was attributa-ble to the reclassification of investment properties and their measurement at fair value.
• As a result of the IFRS adjustments, profit before taxes increased by EUR 56.1 million.
• Equity per share at carrying amount increased by EUR 138.65, mainly as a result of recognising invest-ment properties at fair value.
• Comparable equity per share at fair value decreased by approximately 10 euro, mainly resulting from the fair value measurement of financial instruments and more detailed determination of the fair value of in-vestment properties.
• IFRS adjustments decreased the return on equity by 6.1%, while equities strengthened compared with the result when investment properties were measured at fair value.
• Cash and cash equivalents decreased by EUR 7.6 million, as deposits over three months are not classi-fied into liquid assets.

Other

The transition to IFRS has no effect on the Group’s segment division. Thus, the reporting of VVO Group’s financial entity will continue to be divided into two segments: VVO Non-subsidised and VVO State-subsidised. The basis for the segment division is the profit distribution restriction defined by the Act on State-Subsidised Housing Loans (ARAVA Act).

Summary of the effects of the transition to IFRS on the result and equity, presented by standard

e) Appendix: Result

f) Appendix: Equity

Formulas used in the calculation of the key figures