Basic Information on the Group and its Accounting Policies

Basic information on the company

Digia is a Finnish software solutions and service company, whose top professionals create inventive solutions and bring success for people, businesses and communities in everyday life. Digia delivers ICT solutions and services to various industries, focusing especially on finance, public sector, trade, services and telecommunications.

Registered in Finland, with a 1,000-strong personnel, the company operates in Finland, Russia, China, Sweden, Norway, Germany and the United States. Digia is listed on NASDAQ OMX Helsinki.

The Group’s parent company is Digia Plc. The parent company is domiciled in Helsinki and its registered office is at Valimotie 21, 00380 Helsinki.

Accounting policies

Basis of preparation

The consolidated financial statements have been prepared in compliance with the International Financial Reporting Standards (IFRS), observing the IAS and IFRS standards, as well as SIC and IFRIC interpretations valid on 31 December 2012.

Consolidation principles

The consolidated financial statements include the parent company Digia Plc and subsidiaries in which the parent company directly or indirectly controls more than 50 per cent of the votes associated with shares or over which the parent company otherwise exercises control. Acquired subsidiaries are consolidated using the cost method, according to which the assets and liabilities of the acquired entity are measured at fair value at the time of acquisition, and the remaining difference between the acquisition price and the acquired shareholders’ equity constitutes goodwill. In accordance with the exemption permitted by IFRS 1, acquisitions prior to the IFRS transition date have not been adjusted to correspond to the IFRS principles. Their values remain unchanged from Finnish Accounting Standards. Subsidiaries acquired during the fiscal period are included in the consolidated financial statements as of the date of acquisition, while divested subsidiaries are included until the date of divestment. Intra-Group transactions, receivables, liabilities, unrealised margins and internal profit distribution are eliminated in the consolidated financial statements. The profit for the period is divided between the parent company shareholders and the minority. The minority interest is also presented as a separate item within shareholders’ equity.


As of 1 January 2012, the Group has applied the following new or amended standards and interpretations:

  • Amendment: IFRS 7 Financial Instruments. Disclosures – Transfers of Financial Assets. The change is designed to improve the transparency of off-balance sheet transfers of financial asset. The changes will help users of financial statements to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities; and to evaluate the nature of and risks associated with the entity’s continuing involvement in derecognised financial assets. The Group does not consider the changes to have a significant effect on the consolidated financial statements.
  • Amendment: IFRS 1 First-Time Adoption of International Financial Reporting Standards – Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters. The amendment adds a deemed cost exemption that an entity can apply at the date of transition to IFRS, after being subject to severe hyperinflation. The Group does not consider the changes to have a significant effect on the consolidated financial statements.
  • Amendment: IAS 12 Income Taxes: Effect of the earnings model on the calculation of deferred tax on investment properties and intangible assets measured using a revaluation model. Deferred tax on investment properties and intangible assets measured using a fair value or revaluation model is determined based on the assumption that the carrying amount of the underlying asset will be recovered entirely through sale. The Group does not consider the changes to have a significant effect on the consolidated financial statements.
  • The following standards and interpretations are not considered to affect the Group:

- Changes to IFRIC 14 – IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

- IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments.

The preparation of financial statements under IFRS means that Group management must necessarily make certain estimates and judgments concerning the application of the accounting principles. Information about such considerations made by the management when applying the corporate accounting principles with the greatest influence on the figures presented in the financial statements are explained under the item ‘Accounting policies requiring consideration by management and crucial factors of uncertainty associated with estimates’.

Segment reporting

Towards the end of 2011, the company carried out a reorganisation which came into effect at the start of 2012. In the new organisation, business is managed according to four strategic portfolios: Solutions and Services, Industry-Specific Growth Businesses, International Product Business, and New Markets (e.g. Russia).

Based on this reorganisation, Digia will employ single-segment reporting from the beginning of 2012. This means that Digia’s operations and resources will be managed as a single entity.


Foreign currency translation

Items referring to the earnings and financial position of the Group’s units are recognised in the currency that is the main currency of the unit’s primary operating environment (‘functional currency’). The consolidated financial statements are given in euros, which is the operating and presentation currency of the parent company.

Receivables and liabilities denominated in foreign currency have been converted into euros at the exchange rate in effect on the balance sheet date. Gains and losses arising from foreign currency transactions are recognised through profit or loss. Foreign exchange gains and losses from operations are included in the corresponding items above operating profit.

The income statements of non-Finnish consolidated companies have been converted into euros at the weighted average exchange rate for the period, and their balance sheets have been converted at the exchange rate quoted on the balance sheet date. Translation differences arising from the application of the cost method are treated as items adjusting consolidated shareholders’ equity.

Tangible assets

Property, plant and equipment (PPE) is carried at cost, less accumulated planned depreciation and impairment. Assets are depreciated over their estimated useful lives. Depreciation is not booked for land areas. Estimated useful lives are as follows:

Buildings and structures 25 years
Machinery and equipment 3–8 years

The residual value and useful life of assets is reviewed on each balance sheet date and, if necessary, adjusted to reflect any changes in expected economic value.

Capital gains and losses on elimination and the transfer of tangible assets are included either in other operating income or expenses.

Government grants

Grants received as compensation for costs are recognised in the income statements at the same time as the expenses related to the target of the grant are recognised as expenses. Grants of this kind are presented under other operating income.

Intangible assets

Goodwill

Goodwill corresponds to the proportion of the acquisition cost of an entity acquired between 1 January 2004 and 31 December 2012 that exceeds the Group’s share of the fair value of the entity’s net assets on the date of acquisition. The acquisition cost also includes other direct expenses related to the acquisition, such as professionals’ fees.

Goodwill is defined according to IFRS 3, i.e. as the difference between points 1 and 2 below:


1. Sum of the following items:

1.1 the fair value of the consideration paid at the time of acquisition

1.2 the amount of any non-controlling interest in the object of acquisition

1.3 the fair value of any previously held non-controlling interest in the object of acquisition, in the case of a phased business combination

2. The net sum of the acquisition date assets acquired and liabilities assumed.

The goodwill for business combinations prior to 2004 corresponds to goodwill in accordance with previous accounting standards that has been used as the deemed cost. A portion of the goodwill of acquired entities is allocated to customer relationships or products originating in acquisitions and recognised in intangible assets. The portions of acquisition cost recognised in intangible assets are amortised over their useful life.

No regular amortisation is booked on goodwill but it is tested quarterly for impairment. For this purpose, goodwill is allocated to cash generating units. Goodwill is recognised at the original cost from which the impairment is deducted. Any adjustments of acquisition cost are booked no later than 12 months after the date of acquisition.

Research and development costs

Research costs are recognised as expenses in the income statement. Development costs arising from the design of new products are capitalised as intangible assets in the statement of financial position, until the product is ready for commercial utilisation and future economic benefit is expected from the product. Depreciation begins once the product is ready for commercial utilisation. The useful life of capitalised development expenses is 2 to 5 years, during which time the capitalised assets will be recognised as expenses by straight-line depreciation.

Other intangible assets and long-term expenses

Patents, trademarks and licences with a limited useful life are booked in the statement of financial position and recognised as expenses in the income statement by straight-line depreciation over their useful life. Amortisation is not booked on intangible assets with an unlimited useful life but they are tested annually for impairment.

Long-term expenses are capitalised and depreciated over their financial lifetime, which is defined as 3 to 5 years.


Leases

Leases on property, plant and equipment in which the Group bears a significant part of the risks and benefits characteristic of ownership are categorised as finance leases. A finance lease is recognised in the balance sheet at the fair value of the leased asset at the start of the lease period or at a lower current value of minimum lease payments. Assets acquired on finance leases are depreciated over the asset’s useful life or the lease period, whichever is shorter. Lease obligations are included in interest-bearing debt. Leases in which the risks and benefits characteristic of ownership remain with the lessor are treated as operating leases. Leases payable on the basis of other leases are recognised as expenses in the income statement in equal instalments over the lease period.

Financing assets and liabilities

Financing assets are divided into receivables and liabilities, either as held-to-maturity, held-for-trading, or available-for-sale. Financial instruments are at first measured at fair value, with any fees deducted. Usually, the fair value corresponds with the sum paid or received for the instrument. Loans are included under non-current and current liabilities. Interest expenses are recognised as expenses in the period during which they have arisen. Loan arrangement costs are periodised during the loan period using the effective interest method.

Accounts receivable and other receivables

Accounts receivable and other receivables are measured at nominal value. A provision for impairment of accounts receivable is established when there is evidence based on a case-by-case risk assessment that the Group will not be able to collect all amounts due according to the original terms of receivables.

Cash and cash equivalents

Cash and cash equivalents consist of cash and withdrawable bank deposits and other short-term investments. Accounts with a credit facility are treated as short-term loans under current liabilities.

Amortisation

On each balance sheet date, the Group estimates whether there is evidence that the value of an asset may have been impaired. If there is evidence of impairment, the amount recoverable from the asset is estimated. In addition, the recoverable amount is estimated annually on the following assets regardless of whether there is an indication of impairment or not: goodwill, and intangible assets with an unlimited useful life. The need for impairment is reviewed at the level of cash generating units, which refers to the lowest level of unit that is mainly independent of other units and whose cash flows can be separated from other cash flows. If the carrying amount exceeds the recoverable amount, an impairment loss is recognised in the income statement. An impairment loss recognised for goodwill will not be revoked under any circumstances.


Employee benefits

Pension liabilities

The Group’s pension schemes are arranged through a pension insurance company. The pension schemes are mainly defined contribution plans, and payments are recognised in the income statement during the period to which the payment applies. The Finnish Employees' Pensions Act (TyEL) pension scheme was treated as a defined contribution plan in 2011 and 2012.

Share-based payments

The Group has incentive schemes where payments are made either in equity instruments or in cash. The benefits granted through these arrangements are measured at fair value on the date of their being granted and recognised as expenses in the income statement evenly during the vesting period. Correspondingly, in arrangements where the payment is made in cash, the liability and the change in its fair value is recognised as a liability on an accrual basis. The impact of these arrangements on the financial results is shown in the income statements under the cost of employee benefits.

Provisions

A provision is recognised when the Group has a legal or factual obligation based on previous events, the realisation of a payment obligation is probable and the amount of the obligation can be reliably estimated.

A restructuring provision is recognised when the Group has prepared a detailed restructuring plan, begun its implementation and disclosed the matter. The provision is based on expected actual costs, such as agreed compensation for termination of employment.

The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.

A guarantee provision is recognised once a product or service subject to guarantee terms has been sold and the amount of potential guarantee costs can be estimated with sufficient accuracy.

Shares, dividends and shareholders’ equity

Dividends proposed by the Board of Directors will not be deducted from distributable shareholders’ equity before the Board’s approval has been received. Immediate costs relating to the acquisition of Digia Plc’s own shares are recognised as deductions in shareholders’ equity.

Earnings per share

Earnings per share are calculated by dividing the period’s earnings after tax belonging to the parent company’s shareholders by the weighted average of shares outstanding during the fiscal period, excluding own shares acquired by Digia Plc. Diluted earnings per share are calculated assuming that all subscription rights and options have been exercised by the beginning of the next fiscal year. In addition to the weighted average of shares outstanding, the denominator also includes shares received from subscription rights and options assumed to have been exercised. The subscription rights and options assumed to have been exercised will not be taken into account in earnings per share if their actual price exceeds their average price during the fiscal year.

Income taxes

Taxes recognised in the income statement include taxes based on taxable income for the financial period, adjustments to taxes for previous periods, as well as changes in deferred taxes. Tax based on taxable income for the period is calculated using the corporate income tax rate applicable in each country. Deferred tax assets and liabilities are recognised for temporary differences between the taxable values and book values of asset and liability items. The biggest temporary differences arise from depreciation of fixed assets, unused tax losses, and the revaluation of financial and derivative instruments at the fair price resulting from the purchase. Deferred taxes are determined on the basis of the tax rate enacted by the balance sheet date. Deferred tax receivables are recognised up to the probable amount of taxable income in the future, against which the temporary difference can be utilised.

Income recognition

Work carried out by people is recognised monthly in accordance with progress. Long-term projects with a fixed price are recognised on the basis of their percentage of completion once the outcome of the project can be reliably estimated. The percentage of completion is determined as the proportion of costs arising from work performed for the project up to the date of review in the total estimated project costs. If estimates of the project change, the recognised sales and profit/margin are amended in the period during which the change becomes known and can be estimated for the first time. Any loss expected from a project is recognised as an expense immediately after the matter has been noted. Licensing income is recognised in accordance with the factual substance of the agreement. Depending on the nature of the licence, recognition is based on either the installation date, the delivery date, or the degree of completion. Maintenance fees are allocated over the agreement period.

One-off items

Items recorded as one-off items are ones which occur only once or very rarely. These may include business divestments, reorganisations and goodwill write-downs.


Accounting policies requiring consideration by management and crucial factors of uncertainty associated with estimates

Estimates and assumptions regarding the future have to be made during the preparation of the financial statements, and the outcome may differ from the estimates and assumptions. Furthermore, the application of accounting policies requires consideration. These estimates and assumptions are based on historical experience and other justifiable assumptions that are believed to be reasonable under the circumstances and that serve as a foundation for evaluating the items included in the financial statements. The estimates mainly concern the following items:

Impairment testing

The Group carries out annual impairment testing of goodwill and intangible assets with an unlimited useful life and evaluates any indications of impairment as described above in the accounting policies. Recoverable amounts from cash generating units are determined as calculations based on value in use. The preparation of these calculations requires the use of estimates.

Entry as income

As described in the revenue recognition policies, the revenue and costs of a long-term project are recognised as income and expenses, on the basis of percentage of completion once the outcome of the project can be reliably estimated. Recognition associated with the degree of completion is based on estimates of expected income and expenses of the project and reliable measurement and estimation of project progress. If estimates of the project’s outcome change, the recognised sales and profit/margin are amended in the period during which the change becomes known and can be estimated for the first time. Any loss expected from a project is immediately recognised as an expense.

Management of financing risks

Financial risk management consists, for instance, of the planning and monitoring of solvency of liquid assets, the management of investments, receivables and liabilities denominated in a foreign currency, and the management of interest rate risks on non-current interest-bearing liabilities.

In accordance with the company’s investment policy, cash and cash equivalents are invested only in low-risk short rate funds and bank deposits. The Group’s policy defines creditworthiness requirements for customers in order to minimise the amount of credit losses. A sufficient provision was made for uncertain accounts receivable at the end of the fiscal period.

The most significant currency risks relating to accounts receivable or accounts payable are managed by means of forward foreign exchange contracts, when necessary. At the end of the fiscal year, the company did not have any such forward contract in force. Interest rate trends are monitored systematically in different bodies within the company, and possible interest rate risks hedges are made with the appropriate instruments. At the end of the fiscal year, the company had no such hedging instruments in force.


Application of new and amended IFRS standards

The IASB has published the following new or amended standards and interpretations that are not yet effective and thus have not yet been applied by the Group. The Group will introduce each standard and interpretation as of its effective date or, if the effective date is some other date than the first day of the fiscal period, as of the beginning of the fiscal period following the effective date.

  • Amendment: IAS 1 Presentation of Other Comprehensive Income. Items of other comprehensive income will in future be classified as those which can be reclassified subsequently to profit or loss and those which can never be reclassified to profit or loss. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • Amendment: IFRS 1 Government Loans. Based on the amendment, first-time adopters of IFRS do not have to apply IAS 30 Financial Instruments: Recognition and Measurement retrospectively to government loans with a below-market rate of interest. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • Amendment: IFRS 7 Financial Instruments: Disclosures and IAS 32 Financial Instruments: Offsetting Financial Assets and Financial Liabilities. The aim is to improve the disclosure in the financial statements of how the offsetting of assets and liabilities in the balance sheet has affected the company’s balance sheet, rights and responsibilities. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • IFRS 10 Consolidated Financial Statements and revised IAS 27 Separate Financial Statements. The new IFRS 10 Consolidated Financial Statements replaces the rules concerning consolidated financial statements in the existing IAS 27 Consolidated and Separate Financial Statements and the interpretation SIC 12 Consolidation – Special Purpose Entities. IFRS 10 does not affect how a company is consolidated into the group but whether it is consolidated according to the new definition of control. The standard redefines the concept of control and may affect the consolidation of come companies and structured entities. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • IFRS 11 Joint Arrangements and revised IAS 28 Investments in Associates and Joint Ventures. The standard replaces IAS 31 Interests in Joint Ventures and the interpretation SIC 13 Jointly Controlled Entities – Non-monetary Contributions. According to the new standards, recognition of joint ventures must pay closer attention to the true nature of the arrangement, rather than its legal form. A significant new feature concerning joint arrangements is that joint arrangements in which the party has a share of net assets may no longer be consolidated proportionately but must use the equity method. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • IFRS 12 Disclosure of Interests in Other Entities. This standard brings together all the requirements concerning the notes to consolidated financial statements. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • IFRS 13 Fair Value Measurement. The standard proposes a single definition of fair value to apply to all IFRS standards, and a shared approach to measuring fair value. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • Revised IAS 19 Employee Benefits. The revised standard contains several changes concerning the accounting of defined benefit pension plans to make it more uniform and comparable. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • The interpretation IFRIC 20 Stripping Costs in Production Phase of a Surface Mine has had no bearing on the Group’s consolidated financial statements.

Annual updates to IFRS

The following standards are not considered to affect the Group:

  • IFRS 1 First-time Adoption of IFRS. The amendment specifies how IFRS 1 is to be applied by companies which have previously stopped applying IFRS and are adopting it again.
  • IAS 1 Presentation of Financial Statements. The amendment specifies some of the requirements for presenting comparative information.
  • IAS 16 Property, Plant and Equipment. The amendment clarifies the definition of property, plant and equipment.
  • IAS 32 Financial Instruments: Presentation. The amendment removes the specifications concerning income tax on dividends and specifies that IAS 12 Income Taxes applies.
  • IAS 34 Interim Financial Reporting. The amendment clarifies the information to be presented on segment-specific assets and liabilities in interim reporting, making it in line with the requirements of IFRS 8 Operating Segments.

Amendments coming into effect subsequently

The following standards are not considered to affect the Group:

  • IFRS 9 Financial Instruments. IFRS 9 will entirely replace the current IAS 39 Financial Instruments: Recognition and Measurement. The Group does not expect the changes to have a significant effect on upcoming consolidated financial statements.
  • IFRS 10 Consolidated Financial Statements, IASB amendment from October 2012.