Accounting Principles for the Consolidated Accounts

Basic information

Wärtsilä Corporation is a Finnish listed company organised under the laws of Finland and domiciled in Helsinki. The address of its registered office is John Stenbergin ranta 2, 00530 Helsinki. Wärtsilä Corporation is the parent company in Wärtsilä Group.

Wärtsilä is a global leader in complete lifecycle power solutions for the marine and energy markets. By emphasising technological innovation and total efficiency, Wärtsilä maximises the nvironmental and economic performance of the vessels and power plants of its customers.

In 2011, Wärtsilä’s net sales totalled EUR 4.2 billion with approximately 18,000 employees. The company has operations in nearly 170 locations in 70 countries around the world. Wärtsilä is listed on the NASDAQ OMX Helsinki, Finland.

These consolidated financial statements were authorised for release by the Board of Directors of Wärtsilä Corporation on 26 January 2012, after which, in accordance with the Finnish Corporate Act, the shareholders have a right to approve or reject the financial statements in the Annual General Meeting. The Annual General Meeting also has a possibility to decide upon changes in the financial statements.

Basis of preparation

The consolidated annual financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) by applying IAS and IFRS standards and their SIC and IFRIC interpretations, which were in force as at 31 December 2011. International Financial Reporting Standards refer to the standards, and their interpretations, approved for application in the EU in accordance with the procedures stipulated in the EU’s regulation (EC) No. 1606/2002 and embodied in Finnish accounting legislation and the statutes enacted under it. The notes to the consolidated financial statements also comply with the Finnish accounting principles and corporate legislation.

Reporting is based on the historical cost convention. Exceptions are the financial assets available-for-sale, the financial assets and liabilities designated at fair value through the statement of income, the items hedged at fair value and the share-based transactions made with cash and measured at fair value. The figures are in millions of euros.

Since 1 January 2011, the Group has applied the following updated standards, amendments and interpretations. The changes had nosignificant impact on the accounting policies or the notes of the consolidated financial statements.

  • Amendment to IAS 32 Financial instruments: Presentation: Classification of Rights Issues (effective for periods beginning at or after 1 February 2010). The amendment concerns the classification of rights (share options, share subscription rights or other share rights) offered for a fixed amount of foreign currency.
  • Revised IAS 24 Related Party Disclosures (effective for periods beginning at or after 1 January 2011). The change simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party.

Management assumptions and use of estimates

The preparation of the financial statements in accordance with the IFRS requires management to make estimates and assumptions that affect the valuation of the reported assets and liabilities and other information, such as contingent liabilities and the recognition of income and expenses in the statement of income. Although these estimates and assumptions are based on management’s best knowledge of current events and actions, actual results may differ from the estimates. The most important items in the consolidated statements, which require management’s estimates and which may include uncertainty, comprise the following:

Sales revenue is typically recognised when the product or service has been delivered, its value has been determined and it is probable that the trade receivable will be collected. These estimates affect the amount of sales revenue recognised. Revenue from long-term projects and long-term operations and maintenance agreements is recognised according to their percentage of completion when the profit on the project or agreement can be reliably determined. The degree of completion and the profit are based on management’s estimates as to the realisation of the project or agreement. These estimates are reviewed regularly. Recognised sales revenue and costs recorded are adjusted during the project when assumptions concerning the outcome of the entire project are updated. Changes in assumptions relate to changes in the project’s or agreement’s schedule, scope of supply, technology, costs and any other relevant factors.

Warranty provisions are recorded on the recognition of sales revenue. The provision is based on the accumulated experience of the level of warranty needed to manage future and current cost claims. Products can contain new and complex technology that can affect warranty estimates with the result that earlier recognised provisions are not always sufficient.

The Group is a defendant in several legal cases arising from its business operations. A provision for a court case is recorded when an unfavourable result is probable and the loss can be determined with reasonable certainty. The final result can differ from these estimates.

The recoverable amounts of goodwill are determined for all cash-generating units annually, or more often if there is an indication that an asset may be impaired, where its value in use is determined. The value in use is determined using estimates of future market development, such as growth and profitability as well as other significant factors. The most important factors underlying such estimates are the net sales growth in the market area, the operating margin, the economic lifetime of the assets, future investment needs and the discount interest rate. Changes in these assumptions can significantly affect the expected future cash flows.

Estimates of pension obligations regarding defined benefit plans are based on actuarial estimates of factors including future salary increases, discount interest rates and income from reserve funds. Changes in these assumptions can significantly affect the company’s pension obligations and pension costs.

Principles of consolidation

Subsidiaries

The consolidated financial statements include the parent company Wärtsilä Corporation and all subsidiaries in which the parent company directly or indirectly holds more than 50% of the voting rights or in which Wärtsilä is otherwise in control on the reporting date. Being in control means the power to govern the financial and operating policies of the company to obtain benefits from its activities.

Acquired and established companies are accounted for using the purchase method of accounting. Accordingly, the purchase price and the acquired company’s identifiable assets, liabilities and contingent liabilities are measured at fair value on the date of acquisition. In the acquisition of non-controlling interests, if the Group already has control, the non-controlling interest is valued either at fair value or at the non-controlling interests’ proportionate share of the identifiable net assets. The difference between the purchase price, possible equity belonging to the non-controlling interests and the acquired company’s net identifiable assets, liabilities and contingent liabilities measured at fair value is goodwill. Goodwill is tested for impairment at least annually. The purchase price includes the consideration paid, measured at fair value. The consideration does not include transaction costs, which are recognised in the statement of income. The acquisition costs are expensed in the same reporting period in which they occur, except the costs resulting from issued liability or equity instruments.

Any contingent consideration (additional purchase price) connected to the combination of businesses is measured at fair value on the date of acquisition. It is classified as either liabilities or equity. Contingent consideration classified as liabilities is measured at fair value on the last day of each reporting period, and the resulting loss or gain is recognised through profit or loss. Contingent consideration classified as equity is not revalued.

For the acquisitions made before 1 January 2010, the accounting principles valid at the time of the acquisition have been applied.

The acquired subsidiaries are included in the consolidated financial statements from the day the Group has control, and disposed subsidiaries until the control ends. All intragroup transactions, dividend distributions, receivables and liabilities as well as unrealised margins are eliminated in the consolidated financial statements. In the statement of income, non-controlling interests have been separated from the income for the reporting period. In the Group’s statement of financial position, non-controlling interests are shown as a separate item under equity.

Associated companies and joint ventures

Companies, in which the Group usually holds voting rights of between 20% and 50% and on which the Group has a significant influence but no control over the financial and operating policies, are consolidated as associated companies. In joint ventures, the Group has joint control with another party, established by contractual agreement.

Associated companies and joint ventures are included in the consolidated financial statements using the equity method from the date the Group’s significant influence or joint control commences until the date it ceases. The Group’s share of the associated company’s or joint venture’s profit for the financial period are shown as a separate item before the Group’s operating result, on line Share of result of associates and joint ventures. The Group’s share of the associated company’s or joint venture’s changes recorded in other comprehensive income is recorded in the Group’s other comprehensive income. Wärtsilä’s proportion of the associated company’s or joint venture’s accumulated equity after the acquisition is included in the Group’s equity. If the Group’s share of the associated company's or joint venture's losses exceeds its interest in the company, the carrying amount is written down to zero. After this, losses are only reported if the Group has incurred obligations from the associated company or joint venture.

Translating the transactions in foreign currencies

The items included in the financial statements are initially recognised in the functional currencies, which are defined for each group company based on their primary economic environment. The presentation currency of the financial statements is the euro, which is also the functional currency of Wärtsilä Corporation.

Foreign subsidiaries

The statements of income and other comprehensive income of foreign subsidiaries are translated into euros at the quarterly average exchange rates. Statements of financial position are translated into euros at the exchange rates prevailing at the end of the reporting period. The translation of the profit for the financial period and other comprehensive income using different exchange rates in the statement of comprehensive income and the statement of financial position causes translation differences, which are recognised in equity and in other comprehensive income as change. Translation differences of foreign subsidiaries’ acquisition cost eliminations and post acquisition profits and losses are recognised in other comprehensive income and are presented as a separate item in equity. The goodwill generated in the acquisition of foreign entities and their fair value adjustments of assets and liabilities are considered as assets and liabilities of foreign entities, which are converted into euros using the exchange rates prevailing at the end of the reporting period.

Transactions in foreign currencies

Transactions denominated in a foreign currency are translated into the functional currency, the euro, using the exchange rate prevailing at the dates of the transactions. Receivables and liabilities are translated into euros at the exchange rate prevailing at the end of the reporting period. Exchange rate gains and losses related to non-financial receivables and liabilities are reported on the applicable line in the statement of income and are included in operating result. Exchange rate differences related to financial assets and financial liabilities are reported as financial items in the statement of income, except the exchange rate differences from loans which have been determined as effective hedging instruments for net investments made in foreign entities. These exchange rate differences are recognised in other comprehensive income.

Net sales and revenue recognition

Sales are presented net of indirect sales taxes and discounts. Sales are recognised when the significant risks and rewards connected with ownership have been transferred to the buyer. This typically means that revenue recognition occurs when a product or service is delivered to the customer in accordance with the terms of delivery.

Revenue from long-term construction contracts and long-term operating and maintenance agreements is recognised in accordance with the percentage of completion method when the outcome of the contract can be estimated reliably. The percentage of completion is based on the ratio of costs incurred to total estimated costs to date for long-term construction contracts, whereas for long-term operating and maintenance agreements it is calculated on the basis of the proportion of the contracted services performed. When the final outcome of a long-term project cannot be reliably determined, the costs arising from the project are expensed in the same reporting period in which they occur, but the revenue from the project is recorded only to the extent that the company will receive an amount corresponding to actual costs. Any losses due to projects are expensed immediately.

Employee benefits

Pension and other long-term employee benefits
Pension plans

Group companies in different countries have various pension plans in accordance with local conditions and practices. These pension plans are classified either as defined contribution or defined benefit plans.

The fixed contributions to the defined contribution plans are expensed in the year to which they relate. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay retirement benefits. All other plans are defined benefit plans.

Defined benefit plans are funded through contributions to pension funds or pension insurance companies. The present value of the obligation arising from the defined benefit plans is determined per each plan using the projected unit credit method, and the plan assets are measured at fair value as at the measurement date. Pension expenses are recognised as costs over the working lives of employees. The pension plan assets measured at fair value at the measurement date, the portion of unrecognised actuarial gains and losses and the non-vested past service costs are deducted from the present value of the pension obligation recorded in the statement of financial position. The Group’s obligation with respect to a plan is calculated by identifying the extent to which the cumulative unrecognised actuarial gain or loss exceeds by more than 10% the greater of the present value of the defined benefit obligation and the fair value of the plan assets. The excess is recognised in the statement of income over the expected average remaining working lives of employees participating in the plan. The defined benefit plans are calculated by qualified actuaries.

Other long-term employee benefits

In addition to defined benefit plans, Wärtsilä has other long-term employee benefits. These employee benefits are dealt with in a similar manner as post-employment benefits, and they are presented separately from the defined benefit plans.

Share-based payments

The company’s bonus programme, which is fixed to share value, is valued at the fair value of the share on the reporting date and reported in the statement of income for the term-to-maturity of the bonus programme.

Goodwill and other intangible assets

Goodwill

Goodwill is the difference between the aggregate of the acquisition-date fair value of the consideration transferred and the acquirer’s share of the company’s net identifiable assets and liabilities valued at fair value on the acquisition date. The consideration transferred is valued at fair value, including also the acquirer’s previously held equity interest.

Research and development costs

Research costs are expensed in the reporting period during which they occur. Development costs are capitalised when it is probable that the development project will generate future economic benefits for the Group and when the criteria of IAS 38 (Intangible assets), including commercial and technological feasibility, have been met. These projects involve the development of new or significantly improved products or production processes. Earlier expensed development costs are not capitalised.

Capitalised development costs are valued at initial cost less accumulated amortisations and impairment. Capitalised development costs are amortised and the cost of buildings, machinery and facilities for development depreciated on a systematic basis over their expected useful lives, 5-10 years. Amortisations are started when the asset is finished and can be taken into use. Before that, the asset is tested for impairment annually. Grants received for research and development are reported as other operating income.

Other intangible assets

Other intangible assets are recorded at initial cost if the cost is reliably measurable and the future economic benefits for the Group are probable. Wärtsilä’s other intangible assets include patents, licenses, software, customer relations and other intellectual property rights that can be transferred to a third party. These are valued at initial cost, except for intangible assets identified in connection with acquisitions, which are valued at the fair value at the acquisition date. The acquisition cost of intangible assets comprises the purchase price and all costs that can be directly attributed to preparing an asset for its intended use.

Other intangible assets are amortised on a straight-line basis over their estimated useful lives. Intangible assets, for which the time limit for the right of use is agreed, are amortised over the life of the contract. Amortisation ends when the intangible asset is classified as for sale.

The general guidelines for scheduled amortisation are:

  • Software 3-7 years
  • Other intangible assets 5-20 years

The estimated useful lives and the residual values are reviewed at least at the end of each reporting period, and if they differ significantly from previous estimates, amortisation periods are adjusted accordingly.

A gain or loss arising from the sale of intangible assets is recognised in other operating income or other operating expenses in the statement of income.

Property, plant and equipment

Fixed assets acquired by the Group are valued in the statement of financial position at initial cost less accumulated depreciation and impairment losses. The acquisition cost of asset includes costs directly attributed to preparing an asset for its intended use. Grants received are reported as a reduction in acquisition costs. The property, plant and equipment of acquired subsidiaries are valued at their fair value at the acquisition date. The borrowing costs that are directly attributable to the asset acquisition, construction or production and to completion of the asset for its intended use or sale requiring necessarily a considerable length of time will be capitalised in the statement of financial position as part of the cost of the asset. Other than immediate borrowing cost are expensed in the period in which they are incurred.

Other expenditure occurring later is included in the cost of asset only if the future economic benefits for the Group are probable and the costs are reliably measurable. Expenditure related to regular, extensive inspections and maintenance is treated as investment, capitalised and depreciated during the economical lifetime. All other expenditure such as ordinary maintenance and repairs is recognised in the statement of income as an expense as incurred.

Depreciation is based on the following estimated useful lives:

  • Buildings 10-40 years
  • Machinery and equipment 5-20 years
  • Other tangible assets 3-10 years

Depreciation is charged to the statement of income on a straight-line basis over the estimated useful lives of the assets. Land is not depreciated, as its economic lifetime is considered as infinite. Depreciations end when the asset is classified as for sale. The estimated useful lives and the residual values are reviewed at least at the end of each reporting period, and if they differ significantly from previous estimates, depreciation periods are adjusted accordingly.

A gain or loss arising from the sale of property, plant and equipment is recognised in other operating income or other operating expenses in the statement of income.

Impairment of intangible assets and property, plant and equipment

The carrying amount of assets is reviewed regularly for signs of possible impairment. If any such indication exists, the recoverable amount of the asset is estimated. The recoverable amount is estimated annually also for the goodwill whether or not there are signs of impairment. In order to define a possible impairment, the Group’s assets are divided up into the smallest possible cash-generating units which are mainly independent of other units and the cash flows of which are separately identifiable and to a large extent independent of the cash flows of other similar units.

An impairment loss is recorded when the carrying amount of an asset is greater than its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The value in use is based on the expected discounted future net cash flows resulting from the asset or cash generating unit. A rate before tax which reflects the markets’ position on the time value of money and special risks related to the asset is used as the discount interest rate.

An impairment loss is recognised immediately in the statement of income. In connection with the recognition of the impairment loss, the useful life of the depreciable asset is reassessed. An earlier impairment loss recognised for an asset other than goodwill is reversed if the estimates used to determine the recoverable amount change. However, reversal of impairment shall not exceed the asset’s carrying amount less impairment loss. An impairment loss recognised for goodwill is not reversed under any circumstances.

Determination of the fair value of assets acquired through business combinations

In significant business combinations, the Group has used external advisors when estimating the fair values of property, plant and equipment and intangible assets. For property, plant and equipment, comparisons have been made of the market prices of similar assets, and the depreciation of the acquired assets due to aging, wear and other similar factors has been estimated. The fair valuation of intangible assets is based on estimates of the future cash flows associated with the assets.

Investment properties

Properties that are not used in the Group’s operating activities or that are held to earn rental income or for capital appreciation, or both, are classified as investment properties. Investment properties are recognised in the statement of financial position on a separate line in non-current assets and valued at acquisition cost less accumulated depreciations and impairment. A gain or loss arising from the sale of investment properties is recognised in other operating income or other operating expenses in the statement of income.

Leases

Lease agreements related to property, plant and equipment in which all material rewards and risks of ownership have been transferred to the Group are classified as finance leases. Assets acquired under a finance lease are recognised as fixed assets at the lower of the fair value of the leased asset or the estimated present value of the underlying lease payments. The corresponding rental obligation, net of finance charge, is included in interest-bearing debt with the interest element of the finance charge being recognised in the statement of income over the lease period. Assets acquired under a finance lease are depreciated over their estimated useful lives in accordance with the same principles that apply to Group’s other similar fixed assets. The shorter alternative of the following is selected: either the economical lifetime of the leased asset or the leasing period.

Lease agreements in which the risks and benefits of ownership have not been transferred to the Group are classified as operating leases. Rental payments under operating leases are charged in the statement of income regularly during the leasing period.

Inventories

Inventories are carried at the lower of cost or net realisable value. Costs include allocated purchasing and manufacturing overhead costs in addition to direct manufacturing costs. Inventory valuation is primarily based on the weighted average cost.

Financial assets and liabilities

Financial assets

Financial assets are classified into the following categories: financial assets designated at fair value through the statement of income, investments held to maturity, loans and other receivables and financial assets available for sale. Financial assets are classified on the basis of their purpose upon initial recognition.

At the end of the reporting period, the Group assesses whether objective indication exists of impairment of an individual financial asset item other than those recognised at fair value through the statement of income. There is impairment in a financial asset item if objective indication exists thereof and if it has an effect on expected future cash flows from financial assets that can be reliably evaluated. A significant decline in a counterparty’s result, a debtor’s breach of contract and, for equity instruments, a significant or persistent decline in value below its acquisition cost, for example, can be considered as objective indication of impairment.

Financial assets at fair value through the statement of income

The financial assets at fair value through the statement of income category includes derivatives that do not qualify for hedge accounting and are not guarantee agreements, cash and cash equivalents as well as other financial assets recognised at fair value through the statement of income, which are financial assets held for trading. Derivatives are initially reported at cost in the statement of financial position and are thereafter valued at their fair value at the end of each reporting period. Realised and unrealised gains and losses from changes in fair values are recognised in the statement of income in the period in which they have arisen. Derivatives held for trading, as well as financial assets maturing within 12 months, are included in current assets.

Investments held to maturity

Investments held to maturity are assets with fixed or determinable payments that mature on a fixed date and which the Group intends to and is able to hold until maturity. They are measured at amortised cost using the effective interest rate method.

Loans and other receivables

Loans and other receivables are non-derivative financial assets that have fixed or measurable payments and that are not quoted on active markets. They arise when the Group provides a loan or delivers products and services directly to a debtor. Loans and receivables are measured at amortised cost using the effective interest rate method. They are included in non-current receivables, unless they have a maturity of less than 12 months from the reporting date. Such items are classified as current receivables.

Trade receivables are recognised at their anticipated realisable value, which is the original invoiced amount less an estimated valuation allowance for impairment. Trade receivables are valued individually. Credit losses are expensed immediately when indication exists that the Group is not able to collect its trade receivables according to initial agreements. Examples of events giving rise to impairment include a debtor’s serious financial problems, a debtor’s probable bankruptcy or other financial arrangement.

Financial assets available for sale

Financial assets available for sale are financial assets not included in derivatives allocated to this group. They are included in non-current assets unless the Group intends to dispose of the investment within 12 months from the reporting date.

Wärtsilä’s investments in other companies are classified as financial assets available for sale, including investments in listed and unlisted shares. Listed shares are valued at fair value, based on their market value. Unlisted shares for which the fair value cannot be reliably measured are valued at cost less impairment. Changes in the fair value of shares valued at fair value are reported directly in other comprehensive income and reported in fair value reserves in equity with the tax impact, until the shares are disposed of or written down, at which point the accumulated fair value changes are released from equity to the statement of income. Changes in the fair values of financial assets available for sale are reported in other comprehensive income.

Gains and losses on disposal and impairments of shares that are attributable to operating activities are included in operating income, while gains and losses on disposal and impairments of other shares are included in financial income and expenses.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, deposits held at call with banks and similar investments. Other liquid funds comprise short-term highly liquid investments that are subject to only minor fluctuations in value. Other cash and cash equivalent items have a maturity of up to three months on the date of acquisition. Credit accounts related to Group accounts are included in current financial liabilities.

Financial liabilities

The Group’s financial liabilities are classified either into financial liabilities recognised at amortised cost or financial liabilities recognised at fair value through the statement of income. Financial liabilities are classified as current unless the Group 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 only derecognised once the debt has ceased to exist, i.e. once the contractually specified obligation has been met or repealed or once its validity has expired.

Financial liabilities recognised at amortised cost

The loans raised by the Group are included in financial liabilities recognised at amortised cost. They are valued at their initial recognition at fair value using the effective interest rate method. After the initial recognition, loans are valued at amortised cost. Interests on loans are expensed through the statement of income over the maturity of the debt using the effective interest rate method.

Financial liabilities recognised at fair value through the statement of income

In the Wärtsilä Group, financial liabilities recognised at fair value through the statement of income include derivatives that are not eligible for hedge accounting. Realised and unrealised gains and losses from changes in fair values of derivatives are recognised in the statement of income in the period in which they have arisen.

Derivatives and hedge accounting

Derivatives are valued at fair value. Gains and losses from fair value measurement are treated as determined by the purpose of the derivatives. The effects on results of changes in the value of derivatives that are eligible for hedge accounting and that are effective hedging instruments are presented consistent with the hedged item.

For derivatives eligible for hedge accounting in accordance with IAS 39, the Group documents the relationship between each hedging instrument and the hedged asset upon entering into a hedging arrangement, along with the risk management objective and the strategy applied. Through this process, the hedging instrument is linked to the relevant assets and liabilities, projected business transactions or binding contracts. The Group also documents its ongoing assessment of the effectiveness of the hedge as regards the relationship between a change in the derivative’s fair value and a change in the value of the hedged cash flows or transactions.

Hedging of sales and purchases

Wärtsilä hedges its sales and purchases in foreign currencies with foreign exchange derivatives or currency options. Certain foreign exchange derivatives are eligible for hedge accounting in accordance with IAS 39. Changes in the fair value of derivative contracts that have been signed to hedge future cash flows are reported under other comprehensive income and presented in the fair value reserve in equity, provided that the hedging is effective. The ineffective portion is reported in the statement of income in the reporting period. Changes in fair value due to interest rate differences are reported in the statement of income. Any accrued profit or loss in the hedge reserve under other comprehensive income is reported as an adjustment to selling proceeds or transaction costs in the same period as any transactions relating to the hedged obligations or estimates. Currency forwards are valued at existing forward rates at the end of the reporting period and currency options at their market value at the end of the reporting period.

Equity hedging in foreign units

Equity in foreign subsidiaries situated outside the euro zone and goodwill amounts in foreign currency may be hedged against exchange rate fluctuations, mainly through foreign exchange derivatives using the equity hedging method to reduce the effect of exchange rates on the Group’s equity. Changes in the fair values of instruments determined as equity hedging are reported in other comprehensive income, provided that the hedging is effective. The ineffective portion of the change in the fair value of the hedging and the interest rate difference are immediately recognised in the statement of income in the financial items. When a foreign unit is sold or otherwise disposed of in full or in part, the cumulative translation differences in equity are transferred, for the part that has been disposed of, to the statement of income as part of the gain or loss on disposal. Currency forwards are valued at existing forward rates at the end of the reporting period and currency options at their market value at the end of the reporting period.

Derivatives not included in hedge accounting

For derivatives not included in hedge accounting in accordance with IAS 39, changes in fair value are reported immediately in financial income or expenses in the statement of income. For example, interest rate swap hedges belong to this group. The fair value of interest rate swaps is calculated by discounting the future cash flows.

Fair value hierarchy

Financial instruments measured at fair value are classified according to the following fair value hierarchy: instruments measured using quoted prices in active markets (level 1), instruments measured using inputs other than quoted prices included in level 1 observable either directly or indirectly (level 2) and instruments measured using inputs that are not based on observable market data (level 3). Financial instruments measured at fair value include financial assets and liabilities at fair value through the statement of income and financial assets available for sale.

Provisions and contingent liabilities

Provisions are recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions can arise, for example, from warranties, environmental risks, litigation, forecast losses on projects and restructuring costs. The amount to be recognised as provisions corresponds to the management’s best estimate of the expenses that will be necessary to meet the existing obligation at the end of the reporting period.

Estimated future warranty costs relating to products supplied are recorded as provisions. The amount of future warranty costs is based on accumulated experience. Provisions for restructuring costs are made once the personnel concerned have been informed of the terms or a restructuring plan has been approved. The plan must indicate which activities and personnel will be affected and the timing and cost of implementation. Restructuring costs consist mainly of social plan costs.

Contingent liabilities are possible obligations resulting from previous events, the existence of which will only be ascertained once the uncertain event that is beyond the Group’s control materialises. Existing obligations that are not likely to require the fulfilment of a payment obligation or the amount of which cannot be reliably determined are also considered contingent liabilities. Contingent liabilities are presented in the notes.

Income taxes

The statement of income includes taxes on the Group’s consolidated taxable income for the reporting period in accordance with local tax regulations, tax adjustments for previous reporting periods and changes in deferred taxes. Tax effects related to transactions recognised through profit or loss and other events are recognised in the statement of income. Tax effects related to transactions or other events to be presented as components of other comprehensive income or directly in equity are also recognised, respectively, in other comprehensive income or directly in equity.

Deferred tax liabilities and assets are calculated on all temporary differences arising from the difference between the tax basis of assets and liabilities and the carrying values using the enacted tax rates at the end of the reporting period. The statement of financial position includes deferred tax liabilities in their entirety and deferred tax assets at their estimated probable amount.

Dividends

The dividend proposed by the Board of Directors is deducted from distributable equity when approved by the company’s Annual General Meeting.

Adoption of new and updated IFRS standards

In 2012, the Group will adopt the following new and updated standards and interpretations issued by the IASB. Other standards, their interpretations and amendments will have no material impact on the future financial statements.

  • Amendment to IFRS 7 Financial Instruments: Disclosures (effective for periods beginning or after 1 July 2011): The amendment will promote transparency in the reporting of transfer transactions and improve users’ understanding of the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position, particularly those involving securitisation of financial assets. The amendment will have no significant impact on future financial statements of Wärtsilä.

In 2013, the Group will adopt the following new and updated standards and interpretations issued by the IASB. Other standards, their interpretations and amendments will have no material impact on the future financial statements.

  • Amendment to IAS 19 Employee benefits (effective for periods beginning or after 1 January 2013): In the future all actuarial gains and losses are recognised in the other comprehensive income as they occur. The amendment eliminates the corridor approach, and finance costs are calculated on a net funding basis. The amendment will have no significant impact on future financial statements of Wärtsilä. The amendment has not yet been approved for application in the EU.
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