ACCOUNTING POLICIES
INTRODUCTION
The annual accounts comprise the profit and loss statement, the
balance sheet, the cash flow statement and the notes, and have
been prepared in accordance with the Act relating to Innovation
Norway, the Accounting Act and generally accepted accounting
principles in Norway in effect as of 31 December 2006.
To make the accounts easier to read, the financial statements are
presented in summarised form. The necessary specifications are
shown in the notes. Consequently, the notes form an integral part
of the annual accounts.
The accounting policies and format of the profit and loss
statement and balance sheet primarily follow the regulation on
annual accounts for banks and financing enterprises issued by the
Financial Supervisory Authority of Norway.
Innovation Norway
is not subject to taxation, but invoices with VAT for some of the
services that are provided.
VALUATIONS
Losses on loans
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Low-risk loans including loans for fishing vessels and
agriculture.
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Subordinated loans connected with the equity and investment
funds.
The rules issued by the Financial Supervisory Authority of Norway
on the valuation of losses on loans, etc. apply to these loan
schemes. A new loan regulation is planned for implementation in
2007.
Each loan that is in default is assessed and valued at its assumed
realisable value in accordance with the underlying collateral. In
this context, a loan in default in any loan with unmet payments at
least 90 days after the due date.
The realisable value is determined following a specific valuation
in each case, depending on location, market value of similar
properties or vessels, as well as any appraisals and rental
income. Where the assumed value is lower than the loan, the
difference is booked as a specified loss provision, given that the
loan is regarded as a potential loss.
The same assessment is performed on loans that are not in default,
but where a definite risk has been identified and the level of the
enterprise’s earnings may indicate future insolvency. Any
shortfall in market value compared to the loan’s book value is
booked as a specified loss provision. Interest accrued and due but
unpaid interest is not booked as income on loans in which a
specified loss provision has been made, nor on loans for which the
interest receivable must otherwise be regarded as uncertain.
In addition to ordinary specified loss provisions on agricultural
loans, an overall assessment is undertaken of the specified loss
potential for other loans in default. The number of loans is so
large that the assessment of potential losses is performed
somewhat more summarily. The assessment is performed on the basis
of a formula based on historical data, the trend in losses and
loans in default and other relevant information Innovation Norway
is able to use this method as it has traditionally benefited from
low risk levels and low levels of losses in its portfolio.
Unspecified loan loss provisions, intended to cover latent losses
in parts of the portfolio which have not been identified as
exposed, are made on the basis of empirical data and specific
assessments of developments in particular industries. No
unspecified loss provisions are made for subordinated loans linked
to equity and investment funds.
-
Risk loans and guarantees, loans from the Norwegian State
Environmental Fund and regional loan scheme
Except for the official regulations on unspecified loss
provisions, the rules on bookings of loan losses also apply to
these schemes.
The booking of losses on loans is considered when the loan has
been in default for more than three months or if bankruptcy/debt
settlement proceedings have been initiated, enforcement
proceedings have been undertaken without result or a guarantee
that Innovation Norway has pledged is to be redeemed.
As for low-risk loans, the underlying collateral for the loan will
be reviewed and the market price determined according to a
specific assessment in each case. Where the assumed value is lower
than the loan, the difference is booked as a specified loan loss
provision, given that the loan is regarded as exposed. Accrued
unpaid interest is included in specified loan loss provisions and
booked as income; see the section below on provisions for losses.
- Subordinated loans from the Seed Capital Fund
The loans from the Seed Capital Fund to the individual seed
capital companies are made as subordinated loans and are
interest-only, with full redemption after 15 years. Interest is
not paid, but is accumulated and added to the principal each year
on 31 December. The seed capital monies are used by the companies
for equity capital investment in start-ups.
Confirmed losses and loan loss provisions are based on assessments
of the individual investment projects. In addition, the seed
capital companies are assessed.
Provisions for losses
- Risk loans and guarantees
Previously, provisions for losses were allocated annually in the
government budget to cover future losses on risk loans and
guarantees. The allocations/provisions were 25 – 40 percent of the
loan and guarantee limits. Losses over and above allocations
granted were covered by the State.
Starting in 2002, provisions for losses are covered by the
commitment budget for grants. Innovation Norway must therefore
make its own assessment of how much of the grant allocations
should be used for provisions for future losses on the loan
scheme.
Individual provisions are transferred to one provision for losses
per scheme and commitment year. Provisions for losses for unused
borrowing facilities and commitments are returned to the State
Provisions for losses are placed in an earmarked account at Norges
Bank, which does not generate interest for Innovation Norway.
The provisions for losses are debited with loss provisions and
confirmed losses, including lost interest and expenses. Liquidity
coverage from the provisions for losses is only transferred when
the loss is finally confirmed.
-
Loans from the Norwegian State Environmental Fund and the
regional loan scheme
Provisions for losses are debited according to the same criteria
as for risk loans. The provision for losses for the Norwegian
State Environmental Fund scheme was established through a one-time
allocation. There is no specific loss fund per commitment year and
unused loans and commitments are not deducted from the provision
for losses but returned to the State.
- Subordinated loans from the Seed Capital Fund
A provision for losses corresponding to 25 percent of the original
loan capital has been allocated to the Seed Capital Fund. The
provision is debited with 50 percent of confirmed losses on
individual projects until 25 percent of the original disbursed
loan capital is lost. Only the principal may be charged to the
provision for losses; no interest may be charged. The remaining 50
percent of project losses are covered by the private investors in
the seed capital companies. Accumulated losses over and above 25
percent of the disbursed loan capital must be covered by the seed
capital companies.
Repossessed assets
Repossessed assets are booked at assumed realisation value
according to the same valuation principles as for losses on loans
Any write-downs/gains on the sale are booked as losses on
loans/included in previously written-off loans respectively.
Repossessed assets are classified as current assets.
Income and expenses on repossessed assets from low-risk loans are
booked as operating revenue and operating expenses in the profit
and loss accounts.
Equities
Investments in equities are valued according to the lowest value
principle. All equities are classified as current assets.
Innovation Norway has three portfolios in all. These are:
- Risk loans converted to shares
-
Equities related to the Investment Fund for Northwest Russia
-
Equities related to the Investment Fund for Eastern and Central
Europe
The market price is used for the market value of listed
securities. The valuation of unlisted equities and listed equities
with low liquidity is based on the individual valuation of each
investment.
Dividends received and other dividends from the companies are
booked as income under Miscellaneous operating income.
- Long-term equity holdings
Innovation Norway has equities in three companies which are
classified as fixed assets. These equities are valued at cost
price in the accounts. The stake and the size of the companies
indicate that no consolidated accounts should be prepared.
Innovation Norway owns 100 percent of the shares in Nortra AS,
which in turn owns 100 percent of the shares in VisitNorway AS.
The companies have no operations or book assets apart from bank
accounts valued at book value. Due to the trivial importance of
the subsidiaries for the accounts, no consolidated accounts have
been prepared.
Subsidiaries are valued according to the cost method in Innovation
Norway’s accounts. The investment is valued at the acquisition
cost of the equities unless depreciation has been necessary.
Depreciation to the fair value of the asset is undertaken when the
fall in value is due to reasons which cannot be expected to be
temporary and it must be assumed necessary according to good
accounting practice. Depreciations are reversed when the reason
for depreciation no longer applies.
Classification and valuation of balance sheet items
Current assets and short-term liabilities comprise items that are
due for payment within one year after their date of acquisition.
Other items are classified as a fixed asset/long-term liability.
Current assets are valued at the acquisition cost or fair value,
whichever is lower. Short-term liabilities are entered in the
balance sheet at a nominal amount on the date of establishment.
Fixed assets are valued at their acquisition cost, but written
down to their fair value in the event of a fall in value that is
not expected to be temporary. Long-term liabilities are entered in
the balance sheet at a nominal amount on the date of
establishment.
Losses on accounts receivable
Accounts receivable relating to project activities are entered at
face value less provisions for expected losses. Provisions for
losses are made on the basis of an individual assessment of each
receivable. In addition, an unspecified provision for accounts
receivable is made to cover a general risk of losses.
Balance sheet items in foreign currencies
Balance sheet items in foreign currencies are converted at the
rate of exchange on the balance sheet date.
ACCRUALS
Booking of interest generated by the Seed Capital Fund
Innovation Norway does not book as income interest on subordinated
loans made to seed capital companies. Since these are high risk
projects and the seed capital companies only start to pay interest
after fifteen years (and then only on the investments that are
profitable), there is no booking of interest received on loans as
it accrues, only upon redemption.
Premiums/discounts on borrowing and lending
Premiums and discounts related to new borrowings are booked as
income or charged as an expense, respectively, during the lifetime
of the loan as an adjustment of current interest expenses. The
establishment fee connected with the disbursement of loans is
booked as income on the disbursement date.
Interest support fund
When an interest-fee risk loan is granted, the interest support on
the loan scheme is booked as income corresponding to the loss of
income owing to the exemption from paying interest.
The scheme is financed by an annual allocation of grant monies to
the interest support fund. The allocations must be taken from the
annual grant budget for regional development from the Ministry of
Local Government and Regional Development and the Innovation
Scheme from the Ministry of Trade and Industry. For each year,
sufficient funds must be allocated to cover the granting of
exemptions from paying interest during the year in question.
Revenue and expenses for project activities
For projects, revenue is booked as it is earned. This means that
revenue is booked in line with project progress. In other words,
the accumulated share of the project’s earnings is recorded as
income. The progress rate is determined on the basis of completed
production.
For projects expected to result in a loss, the entire expected
loss is expensed. Disputed claims are not booked as revenue until
they have been decided or are certain.
Internal netting of expenses
The internal netting of Innovation Norway’s operating expenses
among its various business areas is based on a calculation of
Full-Time Equivalents used per operation. This netting has to be
based on estimates to a certain extent.
Tangible fixed assets
Tangible fixed assets are recorded in the balance sheet and
depreciated over the anticipated lifetime of the fixed asset.
Direct maintenance of fixed assets is expensed on an ongoing basis
under operating costs, while significant added costs or
improvements are added to the cost price of the fixed asset and
depreciated in step with the fixed asset. If the recoverable
amount of the fixed asset is lower than the balance sheet value,
depreciation is performed to the recoverable amount. The
recoverable amount is the net market value or the value in use,
whichever is greater. Value in use is the present value of the
future cash flows that the asset will generate.
Operational leasing is expensed as a normal rental cost and
classified as an ordinary operating cost.
Ordinary depreciation is calculated on a straight line basis over
the economic lifetime of the fixed assets based on the historical
cost price. Corresponding principles are used for intangible
assets.
OTHER
Booking of income related to government allocations
Allocations are booked as income in line with accrued expenses
connected with the purposes that the allocations are intended to
meet. This means that some of the allocation may be transferred to
the following year. Innovation Norway receives allocations for
administration, promotion, innovation, etc.
Grant funds
Innovation Norway has annual commitment budgets for grant schemes
for various purposes. The following rules apply to the grant
schemes organised with funds:
Until they are disbursed, grant monies that are allocated through
the government budget, are placed in earmarked accounts at Norges
Bank that do not pay interest to Innovation Norway. This
liquidity, with appurtenant funds, is recorded in the balance
sheet.
For some grant schemes, the commitments lapse if the monies are
not used within three years after they are granted. Unused grant
monies for these schemes are returned to the State.
Grant monies that are disbursed have no effect on Innovation’s
earnings and are therefore neither recorded as income nor expensed
in the profit and loss account.
Innovation Norway also receives grant monies from the counties,
which are placed in an interest-bearing fund at DNBNOR. The
interest is used to increase the grant commitment budget for the
following year.
Pension obligations
Pension expenses and pension obligations are calculated according
to linear accrual based on anticipated final salary. The
calculation is based on a number of assumptions, including
discount rate, future pay adjustments, pensions and benefits from
the national insurance scheme, future returns on pension funds and
actuarial assumptions regarding mortality and voluntary
withdrawal. Pension funds are valued at fair value and deducted in
net pension obligations in the balance sheet. Changes in the
obligation owing to plan amendments are amortised over the assumed
remaining earning period or twelve years. Changes in obligations
and pension funds owing to changes in and deviations from estimate
assumptions (estimate changes) are amortised over the average
remaining earning period if the deviations exceed 10 percent of
the gross pension obligation/pension funds.
Cash flow statement
The cash flow statement has been prepared according to the
indirect method. Cash and cash-equivalents comprise cash, bank
deposits and other short-term liquid investments, which
immediately and with an insignificant exchange risk can be
converted to known cash amounts and have maturities of less than
three months.