Basic Information on the Group and its Accounting Policies

Basic Information on the Group and its Accounting Policies

Basic information on the company

Digia is a profitably growing IT service company that helps its customers harness digital opportunities. As a visionary partner, Digia develops and innovates solutions that support business operations together with its customers. We adapt our expertise to their specific industries to help them develop digital services, manage operations and utilise information. We employ almost 900 experts in Finland and Sweden. We are expanding our international presence together with our customers.

One of our major assets is our profound knowledge and understanding of the core processes of local organisations, and of the supporting operational systems and integrations. Our digital business services give us a bigger role in our customers’ value chains. Our service model also includes consultancy, service design, development partnerships, and life-cycle services. We have solid industry expertise in commercial, logistics and industrial sectors, in the public sector, and in banking and insurance.

We operate in seven locations in Finland – Helsinki, Jyväskylä, Oulu, Rauma, Tampere, Turku and Vaasa – and in Stockholm, Sweden. The company is listed on NASDAQ Helsinki (DIG1V). Digia Plc is domiciled in Helsinki and its registered office is at Atomitie 20 A, 00370 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 2016.


Consolidation principles

The consolidated financial statements include the parent company, Digia Plc, and all 100% owned subsidiaries. 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. Subsidiaries acquired during the fiscal period are included in the consolidated financial statements as from when control was gained, while divested subsidiaries are included until the date of divestment.

The earnings for the period are divided between the shareholders in the parent company and non-controlling interests. Non-controlling interests, if any, are also presented as a separate item within shareholders’ equity.

As of 1 January 2016, the Digia Group has applied the following new and amended standards:

  • Annual Improvements to IFRSs, collection of amendments 2012–2014 (effective for financial periods beginning on or after 1 January 2016): In the Annual Improvements procedure, all the minor and less urgent changes to the standards are gathered together and carried out once a year. Changes apply to four standards. The effects of the amendments vary depending on the standard but are not material.
  • Amendments to IAS 1 Presentation of Financial Statements: Disclosure Initiative (effective for financial periods beginning on or after 1 January 2016). The amendments clarify the IAS 1 guidance with respect to materiality, the aggregation of items in the income statement and balance sheet, the presentation of headings, the structure of the financial statements and the accounting principles. Minor changes have been made to the presentation of Digia’s consolidated financial statements.
  • Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets – Clarification of Acceptable Methods of Depreciation and Amortisation (effective for financial periods beginning on or after 1 January 2016): The amendments prohibit the depreciation of intangible assets on the basis of sales revenue. Exceptionally, assets can be depreciated on the basis of sales revenue only if revenue and consumption of the intangible asset are highly correlated. Sales income-based depreciation methods are not applicable to property, plant and equipment. The amendments had no effect on Digia's consolidated financial statements

Other new or amended standards and interpretations have no effect on the consolidated financial statements.

The preparation of financial statements under IFRS means that Group management must necessarily make certain estimates and judgements 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

The demerger of Digia Plc and Qt Group Plc came into force on 1 May 2016, as of which date Digia has reported on a single business segment. As from 1 October 2016, Digia has comprised four service areas: Digital Services, Integration and Information Management, Industry Solutions, and Digia Financial Solutions and Services. The change has no effect on the company’s reporting.


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 currencies have been converted into euro 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 euro 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) are 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
Leasehold improvements 3–5 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 2016 that exceeds the Group’s share of the fair value of the entity’s net assets on the date of acquisition.

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

1. Sum of the following items:

  • the fair value of the consideration paid at the time of acquisition
  • the amount of any non-controlling interest in the object of acquisition
  • 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.

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 annually 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

The R&D spend is primarily recognised as expenses. R&D expenses are capitalised if they fulfil the IFRS capitalisation criteria for intangible assets.

Other intangible assets

Patents, trademarks and licences with a limited useful life are booked in the balance sheet 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. After the demerger of Qt Group Plc, Digia does not have any other such intangible assets that would have an unlimited useful life.


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. Loans are included under non-current and current liabilities. Interest expenses are recognised as expenses in the period during which they have arisen. Loan transaction 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. An 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, Digia 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 reversed 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 has been treated as a defined contribution plan.

Share-based payments

Digia 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 the depreciation of fixed assets and revaluation at fair value in connection with acquisitions. 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.

Revenue 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. Income recognition requires a binding contract and complete delivery of the product. Depending on the type of the licence, income is recognised based on the time of delivery. Licence maintenance fees are allocated over the agreement period.

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.

Revenue recognition

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.

Financial 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.

New and amended standards and interpretations to be applied in future financial periods

The Digia Group has not yet applied the following new or revised standards and interpretations published by the IASB. 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.

* = The regulation has not been approved for application within the EU on 31 December 2016.


  • IFRS 15 Revenue from Contracts with Customers (effective for financial periods beginning on or after 1 January 2018): The new standard replaces the current IAS 18 and IAS 11 standards and their related interpretations. IFRS 15 includes a five-step model for the recognition of revenue with respect to the timing and amount. Revenue is recognised as control is passed, either over time or at a point in time. The standard also increases the amount of disclosures in the notes to the financial statements. The effects of IFRS 15 on Digia’s consolidated financial statements have been assessed as follows:
    • The key concepts of IFRS 15 have been analysed with respect to different revenue flows. These include own licences and their maintenance, third-party licences and their maintenance, and the sale of work and services.
    • The standard will be adopted at the beginning of 2018, using a partly retroactive approach and practical tools. The company will apply this standard to each previous reporting period presented.
    • A preliminary review indicates that the expected impacts are not large. The IFRS 15 project was launched in autumn 2016, at which time sales agreements were analysed with respect to the four abovementioned revenue flows. The preliminary review indicates that the current revenue recognition principles will not change with regard to sales of work and third-party licence or service sales. A difference in timing will be introduced to some of the company’s own licences and their maintenance. Earlier, these licences were recognised as revenue for a delivery project, but in future they will be recognised upon installation in the customer environment. That is, the licences comprise separate performance obligations and the related delivery project will be recognised over time.
  • Clarifications to IFRS 15 Revenue from Contracts with Customers* (effective for financial periods beginning on or after 1 January 2018): The clarifications have been included in the evaluation of the effects of IFRS 15 described above.
  • IFRS 9 Financial Instruments and its amendments (effective for financial periods beginning on or after 1 January 2018): IFRS 9 replaces the current IAS 39. The new standard includes revised guidance on the recognition and measurement of financial instruments. It also incorporates a new expected loss impairment model to be used for specifying impairment recognised on financial assets. The general provisions regarding hedge accounting have also been revised. The provisions included in IAS 39 concerning the recognition and derecognition of financial instruments remain unchanged. Assessments indicate that the impacts of IFRS 9 on Digia’s consolidated financial statements will be slight.
  • IFRS 16 Leases* (effective for financial periods beginning on or after 1 January 2019): The new standard replaces IAS 17 and related interpretations. IFRS 16 requires lessees to recognise leases as lease payment obligations and related asset items in the balance sheet. Balance sheet entry is very similar to the accounting treatment of finance leases under IAS 17. There are two concessions with regard to recognition of leases in the balance sheet, relating to leases with a short term of less than 12 months and leases in respect of assets valued at no more than USD 5,000. For lessors, accounting treatment will largely remain the same as under the current IAS 17. The Group has started the preliminary assessment of the effects of the standard. Based on that, it is estimated that Digia’s lease payment obligation to be recognised in the consolidated financial statements and balance sheet will amount to about EUR 10 million.

  • Amendment to IAS 7 Statement of Cash Flows – Disclosure Initiative* (effective for financial periods beginning on or after 1 January 2017). The amendments seek to enable users of financial statements to evaluate changes in liabilities – both those and those without an effect on cash flow – arising from financing activities. The amendment affects the notes to Digia’s consolidated financial statements.
  • Amendment to IAS 12 Income Taxes – Recognition of Deferred Tax Assets for Unrealised Losses* (effective for financial periods beginning on or after 1 January 2017). The amendments clarify that the existence of deductible temporary differences depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or how an amount equivalent to said carrying amount will be accrued in the future. The amendment has no effect on Digia's consolidated financial statements.
  • Amendments to IFRS 2 Share-based Payment -Clarification and Measurement of Share-based Payment Transactions* (effective for financial periods beginning on or after 1 January 2018). The amendments clarify the accounting treatment of certain kinds of arrangements. They concern three subareas: measurement of cash-settled payment transactions; share-based payment transactions net of withholding tax; and modification of share-based payment transactions from cash-settled to equity-settled.
  • Interpretation IFRIC 22 Foreign Currency Transactions and Advance Consideration* (effective for financial periods beginning on or after 1 January 2018). When advance consideration denominated in foreign currency is paid or received for the related asset, income or expense, IAS 21 The Effects of Changes in Foreign Exchange Rates does not express an opinion on how the date of transaction should be determined for the purpose of translating said item. The interpretation clarifies that the date of transaction is the date of initial recognition of the advance payment or deferred income. If there are multiple payments or receipts in advance, a date of transaction is established for each. The amendment has no effect on Digia's consolidated financial statements.
  • Annual Improvements to IFRSs, collection of amendments 2014–2016* (for IFRS 12, effective for financial periods beginning on or after 1 January 2017, and for IFRS 1 and IAS 28 for financial periods beginning on or after 1 January 2018): In the Annual Improvements procedure, all the minor and less urgent changes to the standards are gathered together and carried out once a year. Changes apply to three standards. The effects of the amendments vary depending on the standard but are not material.

Other new or amended standards and interpretations have no effect on the consolidated financial statements.