Year 2017


Notes to the consolidated financial statements

Company information

Posti Group Corporation and its subsidiaries (together “Posti” or the “Group”) provides businesses and consumers postal and logistics services, e-commerce services as well as extended purchase-to-pay and order-to-cash solutions. Posti operates in 10 countries. The Group’s parent company, Posti Group Corporation (“the Company"), is domiciled in Helsinki, and its registered address is Postintaival 7 A, FI-00230 Helsinki.

Accounting policies

Posti’s consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), and related interpretation of the IFRS interpretation committee (IFRICs). The consolidated financial statements are also in compliance with Finnish accounting and company legislation.

The consolidated financial statements are prepared under the historical cost convention, with the exception of financial assets and liabilities measured at fair value through profit or loss and non-current assets held for sale and available-for-sale financial assets. All amounts in the consolidated financial statements are presented in millions of euros, unless otherwise stated. The figures are rounded and thus the sum total of individual figures may be different than the total presented. These policies have been consistently applied to all the years presented, unless stated otherwise.

The financial statements include exceptionally comparative data for two years to increase longer term comparability, as Posti has changed its segment reporting in 2017.

Consolidation Principles


The consolidated financial statements include the accounts of the parent company, Posti Group Corporation, and all of its subsidiaries. Subsidiaries are entities over which the Group has control. Control exists, directly or indirectly, if the Group has decision-making powers, is exposed to, and has rights to, variable returns, and is able to use its decision-making powers to affect the amount of the variable returns. Subsidiaries are consolidated from the date on which the Group is able to exercise control and are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combinations.

All intercompany transactions, balances, distribution of profits and unrealized gains on transactions between group companies are eliminated.


Associates are entities over which the Group has significant influence but not control or joint control. This is generally the case where the Group holds between 20 per cent and 50 per cent of the voting rights. Investments in associated companies are accounted for using the equity method of accounting, under which the investments are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses of the investee. The Group’s share of associates’ results is presented separately before operating profit in the consolidated income statement.

Joint operations

Posti has investments in mutual real estate companies. These investments are accounted for as joint operations. As such Posti’s direct share of the assets, liabilities, income and expenses in these arrangements is recognized in the consolidated financial statements under the appropriate headings.

Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in euros, which is the functional and presentation currency of the Company.

Transaction and balances

Transactions denominated in foreign currencies are translated into the functional currency using the exchange rates at the dates of the transactions. Monetary items in the balance sheet denominated in foreign currencies are translated into functional currency using the exchange rates at the balance sheet date and non-monetary items using the exchange rates at the transaction date, excluding items measured at fair value in a foreign currency which are translated using the exchange rates at the date when the fair value was determined. Foreign exchange gains and losses arising from business operations are presented in the income statement under the respective items above operating profit. Foreign exchange gains and losses that relate to financing activities are presented in the income statement within finance income and finance expenses.

Group companies

If the subsidiaries’ functional currency differs from the Group’s presentation currency, their income statements, statement of comprehensive income are translated into euros using the average exchange rates for the financial year, and their balance sheets using the exchange rates at the closing rate at the balance sheet date. All resulting translation differences are recognized in other comprehensive income.

On consolidation, exchange differences arising from the translation of the net investment and long-term intercompany loans that are attributable to the net investment in foreign entities are recognized in other comprehensive income. When a foreign entity is disposed of, the associated translation differences are reclassified through profit or loss, as part of gain or loss on disposal.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated into euros using the rate at the balance sheet date.

Revenue recognition

A significant portion of the Group’s revenue is generated by rendering of short-term services comprising of various delivery solutions, transporting and delivering mail, parcels and freight. Revenue for services is recognized when the service has been performed in accordance with the terms and conditions of the customer contract.

Net sales comprise the revenue generated by the sale of goods and services net of value added taxes, discounts and foreign exchange differences.

Prepaid services

The Group recognizes the revenue for certain prepaid services, including stamps, franking machines and prepaid envelopes, based on their estimated usage. Estimated usage is based on statistical model that incorporates historical sales and usage volumes and price changes. The unperformed services are accrued as a deferred revenue liability on the balance sheet. The amount of the liability is based on a statistical sampling that has been carried out to consumers, small businesses and associations. The volume of stamps held but not used by the customers to be used in the foreseeable future has been assessed based on the survey. Management estimates the value of these stamps based on the statistical model reflecting the usage of stamps and stamp prices. Stamp retailers’ share of the liability has been estimated based on a survey carried out to the retailers. Deferred revenue is presented on the balance sheet as current and non-current. The portion of the prepaid services that are estimated to be performed within the next 12 months is presented as a current liability. The rest of the liability is presented as non-current.

The commissions to the retailers are recognized as an expense when Posti has performed the prepaid service. Accordingly, the sales commissions estimated to relate to unused stamps which are paid in advance to the retailers are recognized as receivables on the balance sheet.

The Group has used external specialists for developing both the revenue recognition model and statistical research. These models and researches will be regularly updated in future financial periods to generate as up-to-date estimate as possible on the existing conditions. Changes in estimates will be accounted for in the consolidated financial statements in accordance with IAS 8.

Other services

Revenue for the delivery of letters, publications, and addressed direct marketing is recognized when the service has been performed. The net sales of unaddressed direct marketing is recognized monthly, based on the date of observation. The date of observation reflects the moment at which the delivery was entered into the production system. Where the payments are received for a service to be provided over a specified period of time (such as post office boxes), payments received are recognized as deferred revenue and released to the income statement over the period that the service is performed.

Revenue for the sale of goods comprising of various packaging materials, stationary products and office supplies sold in retail outlets is recognized when the customer makes the purchase and takes the possession of the goods.

Revenue for international mail and parcel services under universal service obligation is recognized as gross with terminal dues to third parties charged as expenses and reported as operating costs.

Volume-based invoicing of document processing automatization services is recognized as revenue for the period when the service has been performed.

Parcel and logistics services include comprehensive supply chain solutions, parcel and e-commerce services, freight and transportation services and warehousing services.

The net sales of parcel services is recognized monthly, based on the date of observation. The date of observation reflects the moment at which the first registration concerning a parcel was entered into the production system.

Revenue on freight and transportation services is recognized when the physical item is received for physical transportation. Revenue on warehousing services includes two components: processing and the rent for premises. Processing services comprises collection, packing, labeling and other value-added services performed on behalf of the customer and the revenue is recognized when the service has been performed on the basis of the number of occurrences. The rent income for premises is recognized as revenue reflecting the space allocated to the customer’s goods (pallet meters per day) on a straight-line basis over the contract period.

OpusCapita offers software solutions for corporate customers either by selling licenses or software as a service (SaaS). Revenue for licenses is recognized at the time when the license is granted and for services during the contract period. Revenue for software implementation projects is recognized during the project.

Government grants

Government grants mainly refer to product and business development grants and salary subsidies, which are recognized as income and presented in other operating income when management has reasonable assurance that the grants will be received and the Group will comply with all attached conditions.

Employee benefits


The company has several pension plans of which the majority relate to defined contribution plans. For the defined contribution plans, the Group pays contributions to pension insurance plans on a mandatory or contractual basis. The contributions are recognized as employee benefit expenses in the income statement when occurred. The Group has no further payment obligations once the contributions have been paid.

The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method.

The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation.

The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the income statement.

Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income. More information on the Group’s defined benefit pension plans is presented in note 18.

Income taxes

Income tax expense shown in the consolidated income statement includes Group companies’ current income tax calculated on their taxable profit for the financial year using the applicable income tax rate for each jurisdiction based on local tax laws enacted or substantively enacted at the balance sheet date, as well as any tax adjustments for previous financial years and changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.

Deferred taxes are calculated on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. The largest temporary differences arise from depreciation of property, plant and equipment, defined benefit pension plans, unused tax losses and fair value adjustments related to acquisitions. Deferred taxes are determined using the tax rates enacted or substantially enacted by the balance sheet date and which are expected to be applied when the related deferred tax asset is realized or deferred tax liability is settled.

A deferred tax asset is recognized to the extent that it appears probable that future taxable profit will be available against which the temporary difference and losses can be utilized.

Where positions taken in tax returns are subject to interpretation and uncertainty, current and deferred tax assets and liabilities are recorded based on Posti’s assessment of the expected outcome.

Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

Intangible assets

Business combinations and goodwill

Acquisition method of accounting is used to account for all business combinations. The purchase consideration for the acquisition of a subsidiary or business operations comprises the fair values of cash consideration and contingent consideration arrangements. Any contingent consideration for a business combination is estimated by calculating the present value of the future expected cash flows. Contingent consideration is classified as a financial liability and presented in other payables. It is subsequently remeasured to fair value with changes in fair value recognized in the profit or loss.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the purchase consideration over the Group’s interest in the fair value of the net identifiable assets acquired is recognized in the balance sheet as goodwill.

After initial recognition, goodwill is carried at cost less any accumulated impairment losses. Goodwill is not amortized but it is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose impairment testing goodwill is allocated to the cash generating units. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. For more information on impairment testing see below “Impairment testing” and note 10.

Research and development expenditure

Research and development costs are primarily expensed as incurred. Only development costs arising from new significant or substantially improved software products, service applications and enterprise resource planning systems are capitalized as intangible assets. Asset is capitalized only if it is technically and commercially feasible, the Group has intention and resources to complete the intangible asset and use or sell it, the expenditure attributable to the product during its development can be reliably measured and it is probable that the development asset will generate future economic benefits. Capitalized development costs are recognized as intangible assets and amortized over the assets’ useful lives 3–5 years from the moment that they are ready for use.

Other intangible assets

Separately acquired intangible assets, such as software licenses and applications, are initially recognized at cost. Intangible assets acquired through business combinations, such as customer portfolios, trademarks, acquired technology, are recognized at fair value at the acquisition date comprising the amortizable acquisition cost. Intangible rights in the balance sheet mainly comprise software licenses and customer portfolios and trademarks acquired through business combinations. The Group’s intangible rights have finite useful lives, over which period they are amortized. The expected useful lives are as follows:

Software licenses
Customer portfolios
Acquired technology 

3–5 years
5–10 years
5 years
5 years


Property, plant and equipment

Property, plant and equipment (PPE) are carried at cost less any accumulated depreciation and impairment losses. The initial costs of an asset includes the expenditure that is directly attributable to the acquisition of the items such as purchase price, costs of bringing the asset into working condition and installation costs. PPE are depreciated on a straight-line basis over their expected useful lives or in case of certain leased equipment, over the lease term, if shorter. Land and water are not depreciated. Useful lives are reassessed, and adjusted, if necessary if estimates over their useful lives change.

The Groups PPE comprises land and water areas, production and office buildings and structures, machinery and equipment such as letter and parcel sorting machines, conveyors, vehicles and forklifts as well as other tangible assets consisting of e.g. storage shelves and storage systems and parcel points.

The expected useful lives of PPE are as follows:

Production buildings
Office buildings
Production equipment
Storage shelves and systems
Other tangible assets 

15–40 years
25–40 years
15 years
3–13 years
3–5 years
5–13 years
3–10 years


If an asset under PPE constitutes several items with differing useful lives, each of them is accounted for as a separate asset. In such a case, the cost of replacing the item is recognized as an asset. Otherwise, subsequent costs, such as modernization and renovation project costs, are capitalized if it is probable that the future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. Regular repair, maintenance and service costs are expensed as incurred.

Assets held for sale

When an asset’s carrying amount is expected to be recovered principally through a sale rather than through continuing use, it is classified as held for sale. An asset is classified as held for sale if its sale is highly probable and it is available and ready for immediate sale. Furthermore, the company’s management must be committed to a plan to sell the asset within 12 months of classification as held for sale. Assets classified as held for sale are measured at the lower of their carrying amount and fair value less cost to sell. They are not amortized or depreciated while classified as held for sale.

Investment property

Investment property refers to land or buildings, or part thereof that Posti holds for rental income or capital appreciation. It is measured at cost less accumulated depreciation and impairment losses. Investment property buildings are depreciated over a period of between 30 to 40 years using the straight-line method and land is not depreciated. The fair value disclosed in the notes is determined by external, independent and qualified valuers and is used for impairment testing purposes. Impairment losses are recognized in accordance with the principles described under the section headed Impairment testing.

Impairment testing

Goodwill and intangible or tangible assets not yet in use (e.g. capitalized development projects not yet completed) are not subject to amortization and are tested annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Value in use refers to estimated future net cash flows from an asset or a cash generating unit, discounted to their present value. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.

For purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Posti’s cash-generating units that form the basis for goodwill impairment testing are presented in note 10.

Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.


Leases of property, plant and equipment, in which substantially all risks and rewards of ownership transfer to the lessee, are classified as finance leases. Leases in which risks and rewards remain with the lessor are classified as operating leases.

The Group as lessee

Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in long-term or short-term debt. Each lease payment is allocated between the liability and finance cost. Property, plant and equipment recognized under finance lease are depreciated over the shorter of the asset’s useful life and the lease term (notes 12 and 22).

Payments made under operating leases are expensed to profit or loss on a straight-line basis over the lease term (note 22).


Group’s inventories comprise stamps, packaging materials, retail goods and production material, such as paper and envelopes. Inventories are valued on a weighted average cost basis and carried at the lower of cost or net realizable value. Cost includes all direct expenditure attributable to the inventories. Net realizable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in selling and distribution.

Financial assets and liabilities

Financial assets are initially recognized at fair value. Their subsequent measurement depends on their classification. The Group’s financial assets are classified into the following categories: financial assets recognized at fair value through profit or loss, held-to-maturity investments, loans and receivables and financial assets available-for-sale. Classification of a financial asset depends on the purpose for which it was acquired. Transaction costs are included in the financial asset’s original carrying amount, in the case of the financial asset is not carried at fair value through profit of loss. Purchases and sales of financial assets are recognized or derecognized at settlement date.

The Group derecognizes a financial asset when its contractual right to the cash flows from the asset has expired or is forfeited, or it has transferred substantially all risks and rewards outside the Group.

Financial assets recognized through profit or loss include financial assets held-for-trading. This class includes investments in bonds and money-market investments with maturity more than 3 months. Also derivative instruments which are not hedge accounted for are classified as held-for-trading. Investments in bonds and money-market instruments are measured at fair value on the balance sheet date, based on price quotes on the market on the balance sheet date, or valuation models based on observable market information. Financial assets held-for-trading are included in current assets. Any unrealized and realized gains or losses resulting from fair value changes are recognized through profit or loss during the period in which they occur.

Investments held-to-maturity are financial assets with fixed payments and fixed maturity, which the Group intends to hold to maturity. This class includes fixed-term bank deposits. Held-to-maturity investments are measured at amortized cost using the effective interest-rate method.

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market and not held for trading. Loans and receivables are included in current and non-current assets and measured at amortized cost applying the effective interest-rate method. Trade and other receivables are recognized at cost, corresponding to their fair value and recorded under current assets. Impairment loss is recongized for trade receivables overdue for more than 180 days.

Available-for-sale assets are measured at fair value at each balance sheet date. Changes in fair value are recognized in other items of the comprehensive income, taking the related tax effect into account, and presented in the fair value reserve in equity. Changes in fair value are recorded through profit or loss if the investment is sold or if there is objective evidence of an impairment. Available-for-sale assets include unlisted shares and equity fund investments for which the fair value is determined by the fund manager.

Non-derivative financial liabilities are initially recognized based on the consideration received and subsequently measured at amortized cost applying the effective interest-rate method. Transaction costs are included in the initial carrying amount of financial liabilities. The carrying amount of trade and other current liabilities equal their fair value, since the effect of discounting is not substantial considering their short maturities. Financial liabilities are included in both non-current and current liabilities.

Derivative contracts and hedge accounting

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and subsequently remeasured to their fair value at each balance sheet date. Profit or loss arising from valuation at fair value is recognized in accordance with the derivative contract’s purpose of use. The income effect of the value changes of derivative contracts, which constitute effective hedging instruments and which are subject to hedge accounting, is shown consistently with the hedged item. The Group recognizes derivative contracts as hedges (fair value hedge) of either assets or fixed liabilities recorded on the balance sheet, or hedges of highly probable future business transactions (cash flow hedge) or as economic hedges, which do not meet the conditions for applying hedge accounting.

When hedge accounting is applied, Posti documents at the inception of the hedging transaction the relationship between the hedged item and the hedge instruments as well as the objectives of the Group’s risk management and the strategy for carrying out the hedging transaction. The Group also documents and assesses the effectiveness of the hedging relationship by inspecting the hedge instruments’ ability to offset the changes in fair values or cash flows of hedged items.

Effective portion of changes in the fair value of derivatives that are designated and qualify as cash-flow hedges are recognized in other comprehensive income. Amounts accumulated in equity are reclassified into profit or loss when the hedged item is recognized through profit or loss. The Group applies cash flow hedging for hedging against foreign exchange risk on certain commitments in foreign currencies and interest-rate risk of a loan with variable interes-rate. The gains or losses on hedging instruments are netted against the cost as the hedged item realizes. If a derivative contract classified as a cash flow hedging instrument expires or it is sold, or it no longer meets the conditions for hedge accounting, the accrued fair value gain or loss is carried in the equity until the projected business transaction occurs. However, if the projected business transaction is no longer expected to occur, the accrued fair value gain or loss is recognized trough profit or loss immediately.

Certain derivative instruments while entered into for risk management purposes do not qualify hedge accounting. Such derivatives include currency derivatives hedging against foreign exchange risk of currency denominated receivables and liabilities as well as electricity derivatives which were utilized in previous periods. These contracts have been classified as held for trading and changes in their fair value are recognized through profit or loss, and presented in financial items or other operating income or expenses, depending on the purpose of hedging.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, deposits held at call with financial institutions and other short-term, highly liquid investments that can be easily exchanged for a pre-determined amount of cash and which are subject to an insignificant risk of changes in value. The money-market investments classified as the Group’s cash and cash equivalents have a maximum maturity of three months.

Provisions and contingent liabilities

A provision is recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions for restructuring are recognized when the related, detailed and official plan has been approved and disclosed.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as interest expense.

Contingent liabilities represent possible obligations whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of the Group. Contingent liabilities also include obligations that will most likely not require the fulfillment of a payment obligation or the amount of which cannot be reliably determined. Contingent liabilities are disclosed in the notes to the consolidated financial statements.

Fair Value Measurement

The Group measures financial assets and liabilities held for trading purposes, financial assets available-for-sale, derivatives, as well as assets and liabilities acquired through a business combination at fair value. Also assets held-for-sale are carried at fair value if the fair value is lower than book value.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy as follows:

Level 1: Fair values are based on the quoted prices of identical asset or liabilities in active markets.

Level 2: Fair values are, to a significant degree, based on data other than quoted prices included in level 1, but on data that are either directly or indirectly observable for the asset or liability in question. To determine the fair value of these instruments, the Group uses generally accepted valuation models that are, to a significant degree, based on observable market data.

Level 3: Fair values are based on data regarding the asset group or liability that is not based on observable market data.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Critical accounting estimates and judgments in applying accounting policies

Preparing the consolidated financial statements in compliance with IFRS requires that Group management make certain estimates and judgments in applying the accounting policies. These estimates and assumptions are based on the management’s best knowledge of current events and actions, but the actuals may differ from the estimates and assumptions stated in the financial statements. The areas involving a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong are disclosed below.

Impairment testing of Posti’s cash generating unit Itella Russia

Itella Russia offers its customers comprehensive logistics solutions comprised of warehousing, freight and e-commerce last-mile delivery in all significant economic regions in Russia. The Russian economy is largely driven by raw material exports and depends heavily on oil price. Fluctuations of oil price also affect the Russian ruble (“RUB” or the “ruble”) that in its turn determines the purchasing power of imported goods. The prolonged Ukraine crisis and related sanctions have, in turn, affected the Russian economy and weakened Russian's growth and growth prospects. Also property prices in the real estate market have decreased. As the market situation in Russia continues to be difficult, conducting business in Russia is subject to uncertainties and challenges especially in relation to Posti’s ability to predict with certainty the development of Itella Russia’s logistics operations in the long-term.

Itella Russia is a group of cash generating units with most significant assets relating to real estate investments in several locations. Due to the uncertainties in the Russian market, Posti has determined that it is not possible to determine value in use for Itella Russia as a whole and as such, management has determined that the appropriate way of testing for impairment for the Itella Russia long-lived assets is using the fair value less cost to sell method.

Posti has engaged external, independent and qualified valuers to determine the fair value for its real estate property in Russia each year. The valuation is performed at minimum annually on an asset by asset basis and the valuation method takes into consideration the current market prices in each active market for the properties. The key inputs in the valuation are the rent levels and investors’ yield requirements. The most significant estimates in the valuation relate to these key inputs and if the RUB continues to decline or if the key inputs of the valuation change unfavourably, it may result in an impairment of Itella Russia’s carrying values for its property potentially leading into an adverse effect on Posti’s business, financial condition, results of operations and future prospects.

Goodwill impairment testing in Posti’s cash generating unit Opus Capita

Posti has made significant investments in business acquisitions and intangible assets including IT systems, licences, acquired trademarks and customer portfolios as well as in property, plant and equipment comprising mainly vehicles and other production equipment. One of the most significant goodwill balance subject to the annual impairment testing is allocated to OpusCapita, one of Posti’s cash generating units that have goodwill on their balance sheets. Goodwill and intangible assets not yet in use are tested for impairment annually or more often if indicators of impairment exist, whereas other assets are tested for impairment when circumstances indicate there may be a potential impairment.

The determination of impairments of goodwill and other intangible assets involves the use of estimates that include, but are not limited to, the cause, timing, and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in Posti’s businesses, increased cost of capital, technological obsolescence, discontinuance of services, current replacement costs, prices paid in comparable transactions, and other changes in circumstances that indicate an impairment exists. The identification of impairment indicators, as well as the estimation of future cash flows and the determination of fair values for assets (or groups of assets) require management to make significant judgments concerning the identification and validation of impairment indicators, expected cash flows, applicable discount rates, useful lives, and residual values. When determining the values in use for the cash generating units, additional planning uncertainties are factored in that reflect the risks of macroeconomic development, which could adversely affect future results of operations. The most significant assumptions in goodwill impairment testing comprise of growth in net sales, development of EBIT margin, determination of the discount rate (WACC), and long-term growth rate used after the five-year forecast period.

Based on the annual impairment test, an impairment loss amounting to EUR 33.9 milloin on OpusCapita’s goodwill. The Group changed its segments and redefined its cash-generating units in 2017. The goodwill included in the affected units was reallocated and part of OpusCapita’s goodwill was allocated to Postal Services unit. The carrying amount of goodwill subject to impairment testing before reallocation was EUR 122.7 million (31 December 2016: EUR 122.7 million and 31 December 2015: EUR 107.1 million). Further details on goodwill impairment testing, including a sensitivity analysis, are included in note 10.

Uncertainty regarding the utilization of deferred tax assets

Deferred tax assets are recognized to the extent that it probable that future taxable amounts will be available to utilize the underlying temporary differences and losses. Significant judgement is required to determine the amount that can be recognized and depends foremost on the expected timing and level of taxable profits as well as potential tax planning opportunities. The judgements relate primarily to tax losses carried forward generated in some of Posti’s foreign operations and whether these tax loss carryforwards will be utilized in these jurisdictions or in Finland. Posti assesses at each balance sheet date the expected utilization of deferred tax assets considering the likelihood of (a) expected future taxable profits and (b) positions taken in tax returns being sustained.

When an entity has a history of recent losses the deferred tax asset arising from unused tax losses is recognized only to the extent that there is convincing evidence that sufficient future taxable profit will be generated. Estimated future taxable profit is not considered as convincing evidence unless the entity has demonstrated the ability of generating significant taxable profit for the current year or there are certain other events providing sufficient evidence of future taxable profit. Uncertainty related to new transactions and events and the interpretation of new tax rules may also affect these judgements.

As at December 31, 2017 Posti had unused tax losses for which it has not recognized deferred tax assets of EUR 153.7 million (December 31, 2016 EUR 153.0 million and December 31, 2015 EUR 139.9 million). Refer to note 13 for detail on deferred tax assets and liabilities.

Provisions – onerous contracts

Provisions for onerous contracts by Posti are determined based on the net present value (NPV) of Posti’s total estimated unavoidable costs for onerous contracts. The estimates are based on future estimated level of losses taking into account the estimated revenue from these contracts and related directly attributable expenses. The estimates take into account the effect of inflation, cost-base development, the exchange rate development and discounting. Because of the inherent uncertainties in this evaluation process, actual losses may different from the originally estimated provision and the carrying amounts of provisions are regularly reviewed and adjusted to take into account of any changes in estimates.

Contingent liabilities

Posti exercises judgement in measuring and recognising provisions and the exposures to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement is necessary to assess the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of any financial settlement.

The claims were rejected in their entirety by a decision of the Helsinki District Court on September 18, 2015, and by a decision of the Helsinki Court of Appeal on September 14, 2017. Of the six plaintiffs that appealed the District Court’s decision to the Court of Appeal, one decided to take no further legal action. Five of the plaintiffs have requested the Supreme Court for leave to appeal. The total amount of the compensations claimed by the five plaintiffs is approximately EUR 99 million, and the interest claimed amounted to approximately EUR 61 million on December 31, 2017.

At this point in time, it is not possible to assess how or when the case will be resolved. No provision has been recognized in the consolidated statements of financial position as Posti considers the allegations made by the plaintiffs are without merit. It is expected to take several years until all of the final court orders are rendered in the matter. The outcome of the process may have a material adverse effect on Posti’s financial position, results of operations and cash flows. For more information on this case, see note 23.

Application of new or amended IFRS standards

The amendments to IFRS standards effective as of 1 January 2017 had no impact on Group’s financial statements.

The Group will apply the following new or amended standards as they become effective:

IFRS 9 Financial Instruments replaces the multiple classification and measurement models in IAS 39 and it will bring changes to classification and measurement of financial assets their impairment assessment and to hedge accounting.

A debt instrument is measured at amortized cost only if the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and the contractual cash flows under the instrument solely represent payments of principal and interest.

All other debt and equity instruments, including investments in debt instruments and equity investments, must be recognized at fair value. All fair value movements on these assets are taken through the income statement, except for equity investments that are not held for trading, which may be recorded in the income statement or in the equity (without subsequent recycling to profit or loss). In addition, some debt instruments can be classified at fair value through other comprehensive income according to entity’s business model.

The group expects based on its assessment that the new guidance impacts on the classification and measurement of its financial assets. This is because debt instruments currently classified at fair value through profit or loss will be classified at amortized cost category based on business model and SPPI (solely payments of principal and interest) test. Further, equity instruments now classified as available for sale will be classified at fair value through profit or loss.

The Group expects that changes in classification of financial assets due to new standard will decrease the volatility in the income statement to some extent.

Impairment of financial asset will be based on new expected credit loss method. The group will apply a simplified provision matrix approach for trade receivables whereby the impairment loss is measured over the life of the asset unless the asset is already impaired due to credit risk. Financial assets at amortized cost are subject to impairment testing. Following the application of the new standard, the Group will recognize the credit losses earlier than currently.

The new hedge accounting rules align hedge accounting more closely with common risk management practices. The group does not expect to increase hedge accounting. As a general rule, it will be easier to apply hedge accounting going forward due to the fact that only prospective effectiveness testing is required.

The new standard also introduces expanded disclosure requirements and changes in presentation.

IFRS 9 is effective from 1 January 2018 which is also the initial application date for the Group. The impact of the transition will be recognized in retained earnings on the effective date, but it will not have a material effect on the Group’s equity or key figures.

IFRS 15 Revenue from contracts with customers. The new standard shall be applied for the annual reporting periods beginning on or after 1 January 2018. The new standard defines a five-step model to recognize revenue based on contracts with the customers and replaces the current standards IAS 18 and IAS 11 as well as their interpretations. The timing of the revenue recognition can take place over time or at a point of time, depending on the transfer of control. The standard also entails increased disclosures on revenue from customer contracts.

A significant portion of the Group’s revenue is generated by rendering of short-term services. These services include freight services in Finland and in the Baltic countries, parcel services in the Baltic countries, delivery of international mail from Finland and via Finland, and delivery of unaddressed direct marketing. According to IFRS 15 revenue for these services should be recognized over time. However, the Group continues to recognize the revenue for these services when the delivery is received to Posti’s delivery network because the Group has concluded that this has only a minor impact on the Group’s income statement and balance sheet.

In addition to the short-term services described above, where the impact of the new standard is minor, the Group has identified the following areas where the new standard involves special consideration:

  • Revenue recognition for parcel business in Finland will change and the revenue for delivered parcels will be recognized when the parcel has been delivered. The impact of the transition to be recognized in the shareholders’ equity will be EUR 0.8 million.
  • Revenue recognition for long term transport services in Itella Russia segment will be redefined and the timing of the recognition of revenue for these services will be changed so that the revenue will be recognized during the progress of the transport. The impact of the transition will be minor.
  • Posti has identified that some of the customer contracts of Supply Chain Solutions and Posti Messaging include payments and costs relating to the implementation of the services. According to IFRS 15 these contract cost for fulfilling the service obligation will be capitalized and amortized over the contract period. Also the payments received for these services will be allocated over the contract period. The impact of the change will be minor.
  • The Group’s customer contracts include some variable fee components, such as volume discounts. Volume discounts continue to be accrued during the financial year, therefore the accounting treatment will not change.
  • Service level penalty fees are currently recognized as expense and according to IFRS 15 they will be recognized as a deduction of net sales. Posti estimates that the impact on the financial statements will be minor.
  • OpusCapita sell its customers either licenses or software as a service (SaaS). Licenses or service agreements do not involve significant tailoring but may include implementation services, which are considered as separate performance obligations. According to IFRS 15 the revenue for licenses is recognized when the license is granted and for SaaS the revenue is recognized over time. Revenue for implementation services is recognized for the period during which the service is performed. Before the implementation of IFRS 15 revenue for part of these services has been recognized on invoicing basis, but the Group estimates that the impact of this accounting policy change will be immaterial.
  • Any possible sales bonuses for obtaining a customer contract are currently recognized as an expense. According to IFRS 15 they should be capitalized and accrued over the contract period. However, the Group has only a small amount of sales bonuses, relating to a limited amount of customers, that fulfill the capitalization criteria of IFRS 15 and consequently this will not have a material impact on the Group’s income statement or balance sheet.
  • Posti does not grant its customers payment terms which are longer than 12 months and the customer contracts do not contain significant financing components.

The Group adopts the new standard on 1 January 2018 for the future periods with prospective application and provides additional disclosures on the transition.

IFRS 16 Leases will affect primarily the accounting by lessees and as a result Posti will recognize almost all leases on balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. An optional exemption exists for short-term and low-value leases.

Posti’s income statement will be affected because the total expense is typically higher in the earlier years of a lease and lower in later years. Additionally, operating expense will be replaced with interest and depreciation, so key metrics like EBITDA will change.

Operating cash flows will be higher as cash payments for the principal portion of the lease liability are classified within financing activities. Only the part of the payments that reflects interest can continue to be presented as operating cash flows.

Posti has not yet determined the total impact of the application of IFRS 16 -standard to its consolidated financial statements. Given that Posti leases a large number of production, office and warehousing premises, transportation vehicles and production equipment from third parties for time periods longer than a year or under cancellable leases, the application of the standard is expected to have a significant impact on Posti’s consolidated financial statements. Posti expects a significant increase in its leased assets and respective lease liabilities. In addition, related operating lease expenses will be reclassified as depreciation and financial expenses.

As at the December 31, 2017, the Group has non-cancellable operating lease commitments of EUR 254.3 million (see note 22). However, the Group has not yet determined to what extent these commitments and other cancellable leases will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s income statement and classification of cash flows as judgement will be required to determine the lease period that Posti expects to maintain under the cancellable leases or leases with extension options. Some of the commitments may be covered by the exception for short-term and low-value leases and some commitments may relate to arrangements that will not qualify as leases.

The standard becomes effective for years commencing on or after 1 January 2019. Posti will adopt the standard on its effective date retrospectively.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.