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Accounting policies for the consolidated financial statements

Basic information

Sponda Plc (hereinafter referred to as “the company”), together with the subsidiaries and other units incorporated within the consolidated financial statements specified in Note 35 (hereinafter collectively referred to as “the Group” or “Sponda”), is a leading real estate investment company that owns, leases and develops office, retail and logistics properties in the major cities of Finland and Russia.

Established on 23 October 1991, the company is a public limited company registered in Finland with the Business ID 0866692-3. The company is domiciled in Helsinki and its registered office is at Korkeavuorenkatu 45, 00130 Helsinki, Finland. The company’s shares are subject to public trading on the main list of the NASDAQ OMX Helsinki stock exchange.

At its meeting on 5 February 2014, the Board of Directors of Sponda Plc approved these financial statements for publication. According to the Finnish Limited Liability Companies Act, shareholders may approve or reject the financial statements at the General Meeting of Shareholders to be held after their publication. The meeting may also decide to amend the financial statements.

Copies of Sponda Plc’s financial statements can be obtained from Sponda Plc, Korkeavuorenkatu 45, 00130 Helsinki, Finland, and on the Internet at www.sponda.fi.

Basis of preparation

The consolidated financial statements have been prepared in conformity with International Financial Reporting Standards (IFRS) applying the IAS and IFRS standards and SIC and IFRIC interpretations endorsed for use in the EU and in force on 31 December 2013. Sponda also complies with the recommendations of The European Public Real Estate Association (EPRA) (www.epra.com).

The consolidated financial statements have been prepared in euros and are presented in millions of euros, rounding to the nearest 0.1 million. The consolidated financial statements are prepared on the historical cost basis except for investment properties, investments in real estate funds and certain financial instruments, which are measured at fair value. All figures have been rounded, so the sum of the individual figures may differ from the total amount presented.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment. This judgment affects the choice of accounting policies and their application, the amount of assets, liabilities, revenues and expenses to be reported, and the notes. In its judgments, management uses estimates and assumptions that are based on earlier experience and management’s best understanding on the balance sheet date, especially concerning future developments in the property market. The use of estimates and assumptions is described in more detail in the section “Critical accounting estimates and judgments”.

Going concern

The Group’s financial statements for the financial year 2013 have been prepared on a going concern basis, taking into account reasonably possible changes in the Group’s operating environment. The Group’s forecasts and estimates, which take into account the current liquidity position, indicate that the Group has sufficient financial resources to continue its operations for the foreseeable future.

Changes to accounting policies and notes presented with the financial statements

New and revised standards adopted in the financial year ended

The Group has adopted the following revised or amended standards from 1 January 2013 onwards.

  • IFRS 13 Fair Value Measurement: IFRS 13 establishes a single source for all fair value measurements and disclosure requirements for use across IFRSs. The new standard also provides a precise definition of fair value. IFRS 13 does not extend the use of fair value accounting, but it provides guidance on how to measure fair value under IFRSs when fair value is required or permitted. IFRS 13 has expanded some notes to Sponda’s consolidated financial statements.
  • Amendments to IFRS 7 Financial Instruments: Disclosures: The amendments clarify disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. The amended standard has not had a significant impact on Sponda’s consolidated financial statements.
  • Annual Improvements to IFRSs 2009-2011, May 2012): The annual improvements process provides a mechanism for minor and non-urgent amendments to IFRSs to be grouped together and issued in one package annually. The amendments cover in total five standards. Their impact has not been significant.
  • Amendments to IAS 1 Presentation of Financial Statements: The major change is the requirement to group items of other comprehensive income as to whether or not they will be reclassified subsequently to profit or loss when specific conditions are met. The amendments have only had an impact on the presentation of Sponda’s other comprehensive income and have not had a significant impact on the consolidated financial statements.
  • Amendment to IAS 19 Employee Benefits: The major changes are as follows: all actuarial gains and losses are immediately recognised in other comprehensive income, i.e. the corridor approach is no longer applied, and finance costs are calculated on a net funding basis. The amended standard has been applied retrospectively as required under the transitional provisions. The unrecognised actuarial gains and losses have been recorded in the opening statement of financial position as of 1 January 2012 of the comparative year. The comparative information for the financial year 2012 has been adjusted in accordance with the amended standard. The amended standard has not had a significant impact on Sponda’s consolidated financial statements. The impact of the amendment is presented in the table below.

  • Amendments to IAS 12 Income Taxes - Deferred Tax: The company has changed its accounting policy with regard to IAS 12 Income Taxes on the basis of IAS 8 14 (b). According to the previous accounting policy, Sponda estimated the proportion of the carrying amount of an asset recognised at fair value on the balance sheet that will be recovered through use (such as rental revenue) and the proportion to be recovered through sale. After the amendment, the carrying amount of investment properties measured at fair value is assumed to be mainly recovered through the sale of the asset in the future instead of through continuing use, and the company’s policy will be to realise its shareholding in property companies by selling the shares it owns. The impact of the amendment on the deferred taxes recognised for investment properties in Sponda’s consolidated financial statements is presented in the table below.

  • The impacts of the voluntary change in accounting policies with regard to IAS 12 Income Taxes and the amendment of IAS 19 Employee Benefits:

 

M€

 

 

 

 

 

 

Effect on equity

 

 

 

 

 

 

 

 

 

 

 

Reported shareholders’ equity 31 December 2011

 

1,281.1

Effect of amendments to IAS 12, 1 January 2012

 

 

53.9

Effect of amendments to IAS 19, 1 January 2012

 

 

-0.6

Adjusted shareholders’ equity 1 January 2012

 

 

1,334.4

 

 

 

 

 

 

 

Reported shareholders’ equity 31 December 2012

 

1,395.6

Effect of amendments to IAS 12, 1 January 2012

 

 

53.9

Effect of amendments to IAS 19, 1 January 2012

 

 

-0.6

Effect of amendments to IAS 12, 31 December 2012

 

-1.2

Effect of amendments to IAS 19, 31 December 2012

 

0.0

Adjusted shareholders’ equity 31 December 2012

 

 

1,447.7

 

 

 

 

 

 

 

M€

 

 

 

 

 

 

Effect on deferred tax liabilities

 

 

 

 

 

 

 

 

 

 

Reported deferred tax liabilities 31 December 2011

235.7

Effect of amendments to IAS 12, 1 January 2012

 

 

-53.9

Effect of amendments to IAS 19, 1 January 2012

 

 

0.0

Adjusted deferred tax liabilities 1 January 2012

 

181.8

 

 

 

 

 

 

 

Reported deferred tax liabilities 31 December 2012

258.6

Effect of amendments to IAS 12, 1 January 2012

 

 

-53.9

Effect of amendments to IAS 19, 1 January 2012

 

 

0.0

Effect of amendments to IAS 12, 31 December 2012

 

1.2

Effect of amendments to IAS 19, 31 December 2012

 

0.0

Adjusted deferred tax liabilities 31 December 2012

 

205.9

 

 

 

 

 

 

 

M€

 

 

 

 

 

 

Effect on deferred tax assets

 

 

 

 

 

 

 

 

 

Reported deferred tax assets 31 December 2011

43.8

Effect of amendments to IAS 19, 1 January 2012

 

 

0.1

Adjusted deferred tax assets 1 January 2012

 

44.0

 

 

 

 

 

 

 

Reported deferred tax assets 31 December 2012

38.3

Effect of amendments to IAS 19, 1 January 2012

 

 

0.1

Effect of amendments to IAS 19, 31 December 2012

 

0.0

Adjusted deferred tax assets 31 December 2012

38.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

M€

 

 

 

 

 

 

Total effect on consolidated comprehensive income

 

 

 

 

 

 

 

 

Reported total comprehensive income for the period 1 January - 31 December 2012

112.8

Effect of amendments to IAS 12

 

 

 

-1.2

Effect of amendments to IAS 19

 

 

 

0.0

Adjusted total comprehensive income for the period 1 January - 31 December 2012

111.6

 

 

 

 

 

 

 

%

 

 

 

 

 

 

Substantially changed key figures

 

 

 

 

 

 

 

 

 

 

Reported equity ratio 31 December 2012

 

39.8

Adjusted equity ratio 31 December 2012

 

41.2

 

 

 

 

 

 

 

Reported equity per share 31 December 2012

4.27

Adjusted equity per share 31 December 2012

4.45

 

Adoption of new and amended standards and interpretations applicable in future financial years

Sponda has not yet adopted the following new and amended standards and interpretations already issued by the IASB. The Group will adopt them as of the effective date or, if the date is other than the first day of the financial year, from the beginning of the subsequent financial year. The standards will enter into effect in or after 2014.

* = Not yet endorsed for use by the European Union as of 31 December 2013.

  • IFRS 9 Financial Instruments* and subsequent amendments (the effective date has been postponed): IFRS 9 is the first step of the IASB’s originally three-phase project to replace the current IAS 39 Financial Instruments: Recognition and Measurement. The amendments resulting from the first phase (published in November 2009) address the classification and measurement of financial assets. Based on measurement, financial assets are classified into two main groups: financial assets at amortised cost and financial assets at fair value. Classification depends on a company’s business model and the characteristics of contractual cash flows. The amendments published in October 2010 deal with the classification and measurement of financial liabilities and the standard retains most of the related IAS 39 requirements. Amendments dealing with general hedge accounting were issued in November 2013. The unfinished part of IFRS 9, impairment of financial assets, is still a work in progress. Furthermore, the IASB is also considering limited amendments regarding the classification and measurement of financial assets. The macro hedge accounting phase has been taken apart from the IFRS 9 project as a separate project. As the IFRS 9 project is incomplete, the impacts of the standard on the consolidated financial statements cannot yet be assessed.
  • IFRS 10 Consolidated Financial Statements and subsequent amendments (in the EU effective for financial years beginning on or after 1 January 2014): IFRS 10 builds on existing principles by identifying the concept of control as the determining factor when deciding whether an entity should be incorporated within the consolidated financial statements. The standard also provides additional guidance to assist in the determination of control where this is difficult to assess. The management has assessed the impact of these standards and interpretations on the consolidated financial statements. Based on the initial estimate the new standard is not assessed to have a material impact on Sponda’s consolidated financial statements.
  • IFRS 11 Joint Arrangements and subsequent amendments (in the EU effective for financial years beginning on or after 1 January 2014): In the accounting of joint arrangements IFRS 11 focuses on the rights and obligations of the arrangement rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. In future, jointly controlled entities are to be accounted for using only one method, the equity method, and the other alternative, proportional consolidation is no longer allowed. The management has assessed the impact of these standards and interpretations on the consolidated financial statements. The new standard is not assessed to have a material impact on Sponda’s consolidated financial statements.
  • IFRS 12 Disclosures of Interests in Other Entities and subsequent amendments (in the EU effective for financial years beginning on or after 1 January 2014): IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including associates, joint arrangements, structured entities and other off-balance sheet vehicles. The new standard will expand the notes the Group provides for its interests in other entities. The management has assessed the impact of these standards and interpretations on the consolidated financial statements. The new standard is not assessed to have a material impact on Sponda’s consolidated financial statements. IFRS 12 is assessed to expand some notes to Sponda’s consolidated financial statements.
  • IAS 27 Separate Financial Statements (revised 2011) and subsequent amendments (in the EU effective for financial years beginning on or after 1 January 2014): The revised standard includes the provisions on separate IFRS financial statements that were left after the control provisions were included in the new IFRS 10. The revised standard will not have a material impact on Sponda’s consolidated financial statements.
  • IAS 28 Investments in Associates and Joint Ventures (revised 2011) (in the EU effective for financial years beginning on or after 1 January 2014): Following the issue of IFRS 11 the revised IAS 28 includes the requirements for joint ventures, as well as associates, to be equity accounted. The revised standard will not have a material impact on Sponda’s consolidated financial statements.
  • Amendments to IAS 32 Financial Instruments: Presentation (effective for financial years beginning on or after 1 January 2014): The amendments provide clarifications on the application of presentation requirements for offsetting financial assets and financial liabilities on the statement of financial position and give more related application guidance. The amendments are not assessed to have a significant impact on Sponda’s consolidated financial statements.
  • Amendments to IAS 36 Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets* (effective for financial years beginning on or after 1 January 2014): The disclosure requirements added to the standard deal with the recoverable amount based on fair value less costs of disposal. The amended standard is not assessed to have a significant impact on Sponda’s consolidated financial statements.
  • Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Novation of Derivatives and Continuation of Hedge Accounting* (effective for financial years beginning on or after 1 January 2014): The amendments made to IAS 39 provide an exception to the requirement to discontinue hedge accounting in certain circumstances in which there is a change in the counterparty to a hedging instrument so that clearing for that instrument is achieved. The amendments are not assessed to have an impact on Sponda’s consolidated financial statements.
  • IFRIC 21 Levies* (effective for financial years beginning on or after 1 December 2014): The interpretation clarifies the accounting treatment of levies. A liability for a levy is recognised when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation is applicable to all levies other than income taxes, fines, penalties and outflows that are in scope of other standards. The interpretation is not assessed to have a significant impact on Sponda’s consolidated financial statements.
  • Amendments to IAS 19 Employee Benefits - Defined Benefit Plans: Employee Contributions*(effective for financial years beginning on or after 1 July 2014): The amendments clarify the accounting treatment under IAS 19 in respect of defined benefit plans that involve contributions from employees or third parties towards the cost of benefits. The amendments are not assessed to have an impact on Sponda’s consolidated financial statements.
  • Annual Improvements to IFRSs (2011-2013 cycle* and 2011-2012 cycle*, December 2013) (effective for financial years beginning on or after 1 July 2014): The annual improvements process provides a mechanism for minor and non-urgent amendments to IFRSs to be grouped together and issued in one package annually. The amendments cover in total four (2011-2013 cycle) and seven (2010-2012 cycle) standards. Their impacts vary standard by standard. The management has reviewed the amendments and assessed that they will not have a significant impact on the consolidated financial statements.

Principles of consolidation

Subsidiaries

The consolidated financial statements comprise the financial statements of Sponda Plc and its subsidiaries as at 31 December each year. The companies incorporated within the consolidated financial statements for the financial year 2013 are specified in Note 35.

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The group also assesses the existence of control in entities where it does not have more than 50 per cent of the voting power but is able to govern the financial and operating policies by virtue of de-facto control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

IFRS 3 (Business Combinations) is applied to acquisitions in which a business is acquired. Mutual in-Group holdings have been eliminated by the acquisition method. The consideration transferred and the detailed assets and accepted liabilities of the acquired company are measured at fair value. Goodwill is recorded as the sum of consideration transferred, interest of non-controlling shareholders in the acquiree and previously held interest in the acquiree minus the fair value of the acquired net assets. Acquisitions that do not fall within the definition of a business are recognized as acquired assets.

The classification by Sponda of individual acquisitions of investment properties as acquired assets is based on the view that a single property and its lease agreements do not form a business entity; the real estate business also requires marketing and development activities for properties, management of tenancies, and management of property repairs and renovation. Acquisitions of investment property classified as assets do not involve the transfer of business processes or employees.

The results of subsidiaries sold during the financial period are consolidated until the date that control in them ceases. Subsidiaries acquired during the financial period are consolidated from the date that control commenced.

All intra-group transactions, receivables, liabilities and unrealised margins, as well as distribution of profits within the Group, are eliminated in the preparation of consolidated financial statements. The result for the period and items recognised in other comprehensive income are allocated to the owners of the parent company and non-controlling interests and presented in the statement of income and other comprehensive income. Non-controlling interests are presented separately from the equity allocated to the owners of the parent. Comprehensive income is allocated to the owners of the parent company and to non-controlling interests even in situations where the allocation would result in the non-controlling interests’ share being negative, unless non-controlling interests have an exemption not to meet obligations which exceed non-controlling interests’ investment in the company.

Associates and joint ventures

Associates are all entities over which the Group has a significant influence, meaning that the Group has a shareholding of more than 20 per cent but less than 50 per cent, or the Group otherwise has significant influence, but not control through voting rights. They are incorporated within the consolidated financial statements using the equity method. The Group’s share of the associates’ results is separately disclosed in the consolidated statement of income. Sponda did not, on 31 December 2013 and 31 December 2012, have any associates as referred to in IFRS, as all mutual real estate companies, including those in which the Group’s holding is less than 50 per cent, are recognised as jointly controlled assets as described below.

Joint ventures and mutual real estate companies whose shares carry entitlement to control over specified premises, and in which the Group’s holding is less than 100 per cent, are consolidated in the Group’s financial statements row by row in proportion to the Group’s holding in these companies as jointly controlled assets, in accordance with IAS 31 (Interests in Joint Ventures). The consolidated financial statements contain the Group’s share of the assets, liabilities, gains and losses of joint ventures.

Transactions with non-controlling interests

The Group applies a policy of treating transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

Translation of foreign currency items

Functional currency and presentation currency

Items pertaining to the result and financial position of the Group’s units are measured using the currency of the primary economic environment in which the unit operates (“the functional currency”). The consolidated financial statements are presented in euro, which is the functional and presentation currency of the Group’s parent company.

Transactions and balances

Transactions carried out in foreign currencies are recorded in the functional currency at the exchange rate on the transaction date. Monetary receivables and liabilities denominated in foreign currencies are translated into euros at the exchange rate at year-end. Non-monetary items denominated in foreign currencies are valued at the exchange rate on the transaction date, except for items valued at fair value, which are translated into euros using the exchange rates on the valuation date.

Gains and losses arising from transactions denominated in foreign currencies and from translating monetary items are recorded under financial income and expenses in the income statement. Exchange rate gains and losses from business operations are included in the relevant items above operating profit.

Group companies

The revenue and expense items in the comprehensive income statements and separate income statements of foreign Group companies that use a functional currency other than the presentation currency are translated into euros using the average rate for the financial year, and balance sheets using the rate on the balance sheet date, which gives rise to a translation difference that is recorded in the balance sheet in shareholders’ equity, and the change in this is recorded in other comprehensive income. Translation differences arising from the elimination of the acquisition cost of foreign subsidiaries and from equity items accumulated after acquisition are also recorded in other comprehensive income. Translation differences from selling a subsidiary are recorded in the income statement under capital gains or losses.

Investment properties

An investment property is a property held by the Group for the purpose of earning rental income or for capital appreciation, or for both reasons. Sponda measures its investment properties using the fair value method, as stated in IAS 40, Investment Property, under which the profit or loss from changes in fair values is recognised through profit and loss in the period in which it is incurred.

Investment properties are valued initially at acquisition cost, including transaction costs. In measurements after the initial recognition, the fair value is used. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. An investment property’s fair value reflects the actual market circumstances on the balance sheet date, best manifested in prices paid on the active market under current market conditions at the measurement date for properties with a corresponding location and condition to those of the property under review and that are subject to corresponding lease or other contracts. If a reliable market price is not available, the value can be determined using discounted cash flows.

The fair value of completed business properties is calculated by Sponda itself using the discounted cash flows method (DCF). Cash flows are calculated over a period of at least 10 years. Net cash flows in the period are discounted from the midpoint of each accounting year to the assessment date and the terminal value is discounted from the end of the previous accounting period to the assessment date. The terminal value is calculated by capitalising the net cash flow of the year following the most recent accounting year with the required yield (Gordon growth model). The discount rate is determined by adding the expected long-term rate of inflation to the required yield. The yield is based on Sponda’s own assessment of the market situation and on information from published sources, including KTI Property Information Ltd.

In 2012, the company adopted the mid-period convention for discounting cash flow instead of the previously used end-of-year method. This change in estimation accounts for the timing of cash flow better and corresponds with the prevailing market practice. The new discounting convention resulted in changes to the calculations made for properties. The impact of the change was reviewed for all properties and the effect has been balanced by adjusting the yield requirements of properties so that the total change remains within the 1.0% rate of precision set for estimates.

Potential gross income is based on current lease contracts and, in the case of vacant premises, on estimated market rent levels. Potential gross income per property is adjusted annually by the estimated long-term vacancy rate taking into account any special aspects related to the property itself and the status of the lease contract. The estimated impact of inflation is calculated on maintenance expenses and on market and contract leases. Sponda’s lease agreements are primarily tied to the cost of living index.

The value of non-developed sites and unused but usable building rights is determined using the sales price method.

Sponda’s internal property assessment process, calculation methods and reporting are audited by an external valuer and are considered to fulfil the valuation criteria of the IFRSs and IVS (International Valuation Standards) as well as the AKA (Finnish authorised real estate auditors) criteria for good property valuation practice. In addition to auditing, Sponda also commissions at least twice a year an external valuer to examine the material used in calculating the market value of the property portfolio, in order to confirm that the parameters and values used are based on market indications.

An investment property is derecognised from the balance sheet when it is divested or taken permanently out of use. Gains and losses on sales of investment properties are presented as a separate item in the income statement.

Investment properties for development

The acquisition cost for an investment property built by the company itself consists of the construction costs, capitalised borrowing costs and other costs accumulated by the completion date. Development projects in which a new building or extension to a building is being constructed and that are unfinished at the balance sheet date are valued in accordance with IAS 40 Investment Properties at fair value.

The risk arising from the incomplete state of the property – which refers to the risk relating to construction costs, the construction schedule, financial costs and the yield requirement of the potential buyer of the unfinished property – is taken into account when determining the fair value of an unfinished property by not recognising the risk-weighted portion of the margin to be obtained on the property corresponding to the remaining construction time. All other risks relating to the unfinished property, including those relating to the leasing of the property, are taken into account in the same way as when valuing other investment properties.

Investment properties held for sale

An investment property is derecognised from the statement of financial position on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. As a main rule, investment properties not under construction or development for the purpose of a sale are measured at fair value in accordance with IAS 40 and presented under "Investment properties" in the statement of financial position. However, if the sale of an operative investment property is deemed probable, such a property is transferred to "Investment properties held for sale" in the statement of financial position. Classification as "Investment properties held for sale" requires that the following criteria is fulfilled: the sale is deemed highly probable, the property is available for immediate sale in its present condition subject to usual and customary terms, the management is committed to a plan to sell the property and the sale is expected to qualify for recognition as a completed sale within one year. Investment properties held for sale are still recognized at fair value in accordance with IAS 40. Sponda had no investment properties held for sale on 31 December 2013 and 31 December 2012.

Investments in real estate funds

Sponda owns and manages through real estate funds holdings in retail, office and logistics properties. The investments in real estate funds contain these holdings. Investments in real estate funds are measured at fair value. The change in fair value is recorded in the income statement under “Valuation gains/losses on fair value assessment”.

An external consultant assesses the fair value of properties held by the real estate funds at least once a year.

Property, plant and equipment

Property, plant and equipment comprises land areas, office premises, equipment and furniture in company use, other tangible assets and advance payments and incomplete acquisitions. These are valued at their original acquisition cost, less accumulated depreciation and possible impairment losses, adding capitalised costs related to modernisation work.

The properties, office equipment and furniture and vehicles used by the company itself are depreciated over their useful lives.

Land areas are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their acquisition cost and residual value over their estimated useful lives as follows:

Office premises used by Sponda

           100 years

Office machinery and equipment

           3–20 years

Other tangible assets

             10 years

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at the end of each reporting period.

If an asset’s carrying amount is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount (see “Impairment of assets”).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement under “Other operating income or expenses, net”.

Goodwill and other intangible assets

Goodwill is recorded as the sum of consideration transferred, interest of non-controlling shareholders in the acquiree and previously held interest in the acquiree less the fair value of the acquired net assets. Goodwill is not amortised. Instead, it is tested for impairment annually or more often if there are events or circumstances indicating impairment.

For impairment testing, goodwill obtained through business combinations is allocated to the cash-generating units that are expected to obtain synergy benefits from combining business.

If there is any indication of impairment, the recoverable amount is allocated to the cash generating unit to which the goodwill belongs. The recoverable amount is compared to the unit’s carrying amount and an impairment loss is recognised if the recoverableamount is smaller than the carrying amount. The impairment loss is recognised in the income statement and it cannot be reversed at a later date. Testing is described in more detail in the section “Critical accounting estimates and judgments”.

Other intangible assets include computer software recorded at acquisition cost and amortised on a straight-line basis over three years.

Trading properties

Trading properties are properties that are meant for sale and which do not correspond to the company’s strategic goals owing to their size, location or type. Trading properties are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the direct costs resulting from completion of the sale. The net realisable values are mainly determined using the market value method. If the net realisable value is lower than the carrying amount, an impairment loss is recognised.

All of Sponda’s trading properties were acquired in the Kapiteeli acquisition.

When a trading property becomes an investment property that is measured on the balance sheet at fair value, the difference between the fair value on the transfer date and its previous carrying amount is recognised in the profit or loss under profit/loss on sales of trading assets.

Impairment of assets

At each balance sheet date the Group assesses the carrying amounts of its assets to determine whether any indication of impairment exists. If any such indication exists, the recoverable amount is estimated. With respect to goodwill, the recoverable amount is always estimated annually, regardless of whether there are indications of impairment or not.

The recoverable amount is the fair value of the asset less cost to sell. Impairment losses are recognised in the income statement when the carrying amount of the asset is higher than its recoverable amount. An impairment loss is reversed if there has been a change in circumstances and the recoverable amount of the asset has increased after the date when the impairment loss was recognised. An impairment loss is not reversed, however, to an extent higher than the carrying amount that would have been determined had no impairment loss been recognised in prior years. Impairment losses recognised for goodwill are never reversed.

Financial assets and liabilities

In accordance with IAS 39 Financial Instruments: Recognition and Measurement, Sponda Group’s financial assets are classified as follows: financial assets recognised at fair value through profit and loss, loans and receivables, and available-for-sale financial assets. Correspondingly, financial liabilities are classified as financial liabilities recognised at fair value through profit and loss and financial liabilities measured at amortised cost. Financial assets and liabilities are classified on the basis of the purpose for which they were acquired. The management decides on the classification of financial assets in conjunction with their initial recognition. Financial instruments are recognised initially at fair value based on the consideration received or paid. Transaction costs are included in the original carrying amount of financial assets and liabilities for items that are not measured at fair value through profit and loss. All purchases and sales of financial assets and liabilities are recognised on the transaction date.

Financial assets are derecognised from the balance sheet when the Group has lost the contractual right to the cash flows or when it has transferred a significant part of the risks and yield outside the Group.

Financial assets recognised at fair value through profit and loss contain assets held for trading. Items belonging to financial assets are recognised in this category if they are acquired primarily to be sold in the near future. Derivatives are also classified as assets held for trading assets unless hedge accounting, as described in IAS 39 Financial Instruments: Recognition and Measurement, applies to them. Assets in this category as classified as current assets, unless they mature after more than 12 months after the end of the reporting period.

The items in this category are measured at fair value and the fair value of all the investments in this category is determined on the basis of publicly quoted prices or generally accepted option pricing models. Realised and unrealised gains and losses resulting from changes in the fair value are recognised in the income statement in the period in which they are incurred.

Payments relating to loans and receivables are fixed or determinable, they are not quoted on the active market, and the company does not hold them for trading purposes. They are classified as current assets, unless they mature after more than 12 months after the end of the reporting period, in which case they are classified as non-current assets. This category includes the Group’s financial assets that have been obtained by handing over cash, goods or services to a debtor.

Loans and receivables are measured at amortised cost using the effective interest method. The Group recognises an impairment loss for an individual receivable if there is objective evidence that the receivable will not be recovered in full. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, or the probability of bankruptcy or other financial reorganisation.

The Group assesses at the end of each reporting period whether there is objective evidence that an item or group classified under loans and receivables is impaired. An item or group recognised under loans and receivables is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (“loss event”) and that loss event (or events) has a reliably estimable impact on the estimated future cash flows.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement.

Available-for-sale financial assets are assets that are not part of derivative assets and have been specifically allocated to this category or have not been allocated to any other category. They belong to non-current financial assets unless they mature within 12 months of the end of the reporting period, or the management intends to sell them within 12 months of the end of the reporting date.

Changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income and are presented in the fair value reserve after tax. Changes in fair value are taken from equity to the income statement when the investment is sold or its value has fallen so that an impairment loss has to be recognised.

The Group assesses at the end of each reporting period whether there is objective evidence that an item or group classified available-for-sale financial assets is impaired.

If the financial asset in question is a debt security, the Group applies the criteria specified above for loans and receivables. In case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also considered evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss.

Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. If the fair value of an equity instrument classified as available-for-sale increases in a subsequent period and the increase can be objectively considered to be associated with an event after the recognition of the impairment loss in profit or loss, the impairment loss is reverse through the income statement.

The Group had no available-for-sales financial assets on 31 December 2013 or 31 December 2012.

Financial liabilities recognised at fair value through profit and loss are financial liabilities held for trading. The held for trading category also includes derivative instruments to which hedge accounting, as described in IAS 39, is not applied. Financial liabilities held for trading that mature within 12 months are included in other current liabilities. The items in this category are measured at fair value and the fair value of all the investments in this category is determined on the basis of publicly quoted prices or generally accepted option pricing models. Realised and unrealised gains and losses resulting from changes in the fair value are recognised in the income statement in the period in which they are incurred.

Financial liabilities measured at amortised cost include the Group’s financial liabilities that are initially recognised at fair value, net of transaction costs incurred. These financial liabilities are subsequently measured at amortised cost using the effective interest method. The difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over time using the effective interest method. Financial liabilities are included in non-current and current liabilities and they can be interest-bearing or non-interest-bearing.

Derivative instruments and hedge accounting

Sponda uses derivative contracts mainly to hedge its interest rate risk exposure. Interest rate swaps are designated as hedging instruments for future interest flows and the Group applies cash flow hedge accounting to certain such contracts when they meet the hedge accounting criteria under IAS 39.

The relationship between the hedged item and the hedging instrument is documented at the inception of the contract. The risk management objectives and strategies, based on which various hedging transactions are undertaken, are also documented. The Group documents at the inception of the hedging contract, and on an ongoing basis thereafter, its assessment of whether the derivatives used for hedging are effective in offsetting changes in the fair values or cash flows of hedged items.

Derivatives are initially measured at cost and subsequently at fair value. The change in the fair value of derivative contracts that are defined as cash flow hedges and satisfy the relevant conditions is recognised in equity to the extent that hedging is effective. The ineffective (non-qualifying) portion of the hedging is recognised immediately in financial items in the income statement. Fair value changes accumulated in equity are reclassified in profit or loss in the period in which the hedged item affects profit or loss.

Should an interest rate swap used as a hedging instrument mature, be sold or terminated prematurely, but it is highly probable that the hedged cash flows will be realised, the gains and losses accrued from the derivative contracts remain under equity until they are realised, at which point they are recognised in the income statement. If it is no longer highly probable that the hedged cash flows will be realised, the gains and losses accrued from the derivative contracts are taken immediately from equity to financial income and expenses in the income statement.

Derivatives that do not meet the hedge accounting criteria are recognised through profit and loss. They are measured at fair value and changes in their fair value are recognised in the income statement.

The fair values of derivatives used for hedging purposes are presented in Note 31. The full fair value of a derivative used for hedging is classified as a non-current asset or liability if the hedged item matures after more than 12 months, and as a current asset or liability if it matures within 12 months.

Borrowing costs

Borrowing costs are recognised as an expense in the period in which they are incurred.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of the asset. For Sponda, capitalised borrowing costs are costs arising from loans taken for property development construction projects or the costs calculated for construction projects multiplied by a financial costs factor, if a separate loan has not been taken out for a construction project. The financial costs factor is the weighted average interest rate for Sponda Group’s interest-bearing loans during the fiscal period, which is determined each quarter. The capitalisation of borrowing costs is continued until such time as the assets are substantially ready for their intended use or sale.

Trade receivables

Trade receivables are amounts due from customers arising from the leasing of office, retail or logistics premises. If collection is expected within one year, they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables are recognised initially at fair value. Subsequently, a provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect the full amount due. Any impairment is recognised in the income statement within other operating expenses. When a trade receivable is uncollectable, it is written off against the provision for impairment of trade receivables. Subsequent recoveries of amounts previously written off are credited against other operating expenses in the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash, bank deposits that can be raised on demand, and other short-term extremely liquid investments. Items classified as cash and cash equivalents have a maturity of less than three months from the acquisition date.

Share capital

Share capital consists solely of ordinary shares. Ordinary shares are classified as equity.

Transaction costs directly attributable to the issue of new shares or options are presented in equity as a deduction, net of tax, from the proceeds.

Where any Sponda Group company purchases the company’s shares (treasury shares), the consideration paid, including any directly attributable costs (net of income taxes), is deducted from equity attributable to the owners of the company until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable transaction costs and the related income tax effects, is included in equity attributable to the owners of the company.

Hybrid bond

A hybrid bond is a bond that is subordinated to the company’s other debt instruments but is senior to other equity instruments. The interest on a hybrid loan is paid if the Annual General Meeting decides to pay a dividend. If a dividend is not paid, the company decides separately on whether to pay the interest. Unpaid interest accumulates. Hybrid loan holders have no control over the company and no right to vote at shareholders’ meetings, nor does the hybrid bond have a diluting effect.

Provisions

A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation has been made.

Provisions are made for compensation relating to land-use agreements; for costs arising from property demolition; and for soil restoration costs for properties where it is known or suspected that the soil is contaminated in the area because of earlier activity. Provisions are also recognised for obligations arising from disputes in progress when the settlement of the obligation is probable. No provisions are recognised for future losses from business operations.

Leases, the Group as a lessor

Property leases are classified as operating leases when the risks and rewards incidental to ownership remain with Sponda.

When the risks and benefits incidental to ownership have been substantially transferred to the lessee, a property lease is classified as a finance lease. In that case, the parts of the properties covered by the finance lease are recognised as finance lease receivables on the balance sheet at the commencement of the lease term in an amount that equals the net investment in the lease, i.e. the present value of the minimum lease payment plus the present value of the non-guaranteed residual value.

The leases collected by Sponda are total leases, separate capital and maintenance leases, or leases indexed to the lessee’s net sales. Maintenance costs associated with the property are either included in the lease or they remain the responsibility of the tenant, depending on the contract. Most of the leases are linked to the cost-of-living index. Leases are either signed for an indefinite period or are fixed-term.

Leases, the Group as a lessee

Those leases in which the risks and rewards of ownership remain with the lessor are treated as operating leases. Leases paid by Sponda based on operating leases (net of any incentives received from the lessor) are expensed in the income statement on a straight-line basis over the lease term.

The Group had no finance leases on 31 December 2013 or 31 December 2012.

Revenue recognition

Sponda’s revenue mainly consists of rental income from its investment properties, fund management fees and interest income.

Total leases as well as separate capital and maintenance leases are recognised in the income statement on a straight-line basis over the lease term. Rental income tied to the tenant’s net sales are recognised on the basis of the tenant’s actual sales. Fees paid for lease assignments are allocated over the lease term.

Fees paid for fund management are allocated to the financial period during which the service has been provided.

Interest income is recognised using the effective interest rate method and dividend yield in the period in which the entitlement has occurred if the dividends are disclosed at this point. If not, they are recognised at payment date.

Total revenue

In Sponda, total revenue includes rental income and charges for consumption, interest income on finance leases and the fees for managing the real estate funds.

Expenses

Expenses include maintenance expenses and direct fund expenses. Maintenance expenses are maintenance and annual repair costs arising from the regular and continuous maintenance of the properties and are recognised immediately in the income statement.

Net income

Net income is defined in the Group as the net amount after deducting expenses from total revenue.

Operating profit

In the Group, operating profit is defined as the net amount after adding other operating income to net income, then deducting sales and marketing expenses, administrative expenses and other operating expenses, the Group’s share of the results of associated companies and amortisation of goodwill, and then adding/deducting gains/losses from the disposal of investment properties, from assessment at fair value, and from the disposal of trading properties.

Employee benefits

Sponda has various post-employment benefit plans, which include both defined contribution and defined benefit pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation.

Pension coverage has been arranged via a pension insurance company. Contributions made for defined contribution plans are recognised in the income statement for the year to which they relate. The liability recognised on 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. Actuarial gains and losses are charged or credited to equity in other comprehensive income in the period in which they arise. Past-service costs are recognised immediately in income.

Share-based payments

Sponda has had several long-term executive incentive schemes, and key individuals within these schemes are entitled to a bonus determined on the basis of defined targets.

The payment of the bonus is conditional upon the achievement of performance targets set by the company’s Board of Directors and the person’s continued employment in the company. Taxes and statutory employer’s contributions are deducted from the bonus, and the remaining sum is used to acquire Sponda’s shares from the market. The shares may not be surrendered during a commitment period following the reference period.

The incentive schemes are accounted for as equity-settled share-based business transactions and recorded as personnel expenses on a straight-line basis over the vesting period. The counter-entry for the part paid in shares is taken directly to retained earnings.

Trade and other payables

Trade payables are obligations to pay for goods or services that have been acquired from suppliers in the ordinary course of business. Trade payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. The carrying amounts of trade and other payables approximate their fair value.

Income tax

Income tax expense in the income statement consists of the current tax and changes in deferred tax assets or liabilities. The tax payable by Group companies for the period is calculated using the taxable profit as determined in accordance with local legislation. The tax is adjusted for any taxes related to prior periods.

Deferred tax liabilities and assets are recognised for all temporary differences between the book values and the carrying amounts for tax purposes of assets and liabilities, apart from the initial recognition of acquisitions of individual assets as referred to in IAS 12.15b, for which no deferred tax is recorded. In Sponda, these acquired assets are typicallyinvestment property acquisitions which do not meet the criteria of business entities and are therefore classified as assets.

The most significant temporary difference in Sponda is the difference between the fair values and the purchase costs of the shareholding in property companies owned by Sponda. The recovery of the carrying amount of investment properties valued at fair value in the calculation of deferred taxes will normally happen through sale. The company's principle is to realise its shareholding in property companies by selling the shares it owns. Other temporary differences arise, for example, from the measurement of financial instruments at fair value and unused tax losses. Deferred taxes are calculated using tax rates that are either enacted or actually in force by the balance sheet date.

Changes in deferred taxes are recognised in the income statement apart from when they are related to items recognised as crediting or debiting shareholders’ equity or to other comprehensive income items. A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which deductible temporary differences can be utilised. The deferred tax assets are reassessed on an annual basis in relation to the Group’s capacity to produce future taxable profits.

Earnings per share

Undiluted earnings per share is calculated by dividing profit for the period attributable to the equity holders of the parent company, adjusted by the tax-adjusted interest expenses of the hybrid loan and the hybrid loan repayment premium, by the weighted average number of shares outstanding.

Dividend distribution

Dividend distribution to the company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the company’s General Meeting of Shareholders.

Critical accounting estimates and judgments

Sponda’s management exercises judgment when making decisions about the choice of accounting policies for the financial statements and their application. This concerns in particular situations in which the IFRS standards have alternatives for recognition, measurement or presentation.

The preparation of the financial statements in accordance with IFRSs requires management to some extent to make estimates and assumption that affect the recognition of assets, liabilities, income and expenses. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from the estimates.

In Sponda, significant estimates and assumptions requiring the management’s judgment mainly concern the fair value measurement of investment properties, impairment testing for goodwill and the recognition of deferred taxes.

Fair value of investment properties

The most significant component of the financial statements involving uncertainties related to estimations and judgments is the fair value measurement of investment properties. The measurement of the fair value of investment properties requires significant management estimates and judgment, particularly with respect to the future development of yield requirements, market rents and occupancy rates. The fair value of investment properties reflects, among other things, the rental income based on existing leases as well as reasonable and well-founded estimates of future rental income made by knowledgeable willing parties in the light of current conditions. It also reflects expected future cash payments related to each property in question. The yield requirement is determined for each property taking into account the property-specific risks and the market risk. The discount rate is determined by adding the expected long-term rate of inflation to the required yield.

The fair value of the investment properties amounted to EUR 3,253.3 million on 31 December 2013 (2012: EUR 3,261.3 million). A sensitivity analysis of the fair value of investment properties using key variables is presented in Note 14: Investment properties.

Impairment risk of goodwill

Impairment testing for goodwill relates to the goodwill allocated to certain development projects that came with the Kapiteeli acquisition and are in the Property Development unit. Impairment testing requires management’s judgment concerning the costs during construction and the fair value of an investment property when it is completed and is transferred to the category of completed investment properties.

Before starting a project, the fair value at completion of the investment property being developed is determined using the 10 year discounted cash flows method with the same variables and parameters as for the fair value of completed investment properties. Rental income is based either on leases made in advance with future tenants or on management estimates of future rents and occupancy rates. Management assesses the accuracy of the calculations by testing for impairment. If there is any indication of changes in the estimates and assumptions due to the market or other reasons, the calculations are revised to correspond to the best understanding at the moment of testing. The sensitivity of the yield requirement to change is also assessed.

Management also checks that the construction costs for the project remain within the prepared cost estimate. If there are any indications of a rise in costs or of other causes as a result of which costs may be exceeded, the values are updated.

Deferred tax liabilities and assets

Deferred tax liabilities and assets are recognised for all temporary differences between the book values and the carrying amounts for tax purposes of assets and liabilities, apart from the initial recognition of acquisitions of individual assets as referred to in IAS 12.15b, for which no deferred tax is recorded. Management has exercised its judgment so that individual acquisitions of investment properties at Sponda are classified as acquired assets, since a single property and its lease agreements do not form a business entity. To constitute a business entity they would require related marketing and development activities as well as management of tenancies, property repairs and renovation. Acquisitions of investment property classified as assets do not involve the transfer of business processes or employees responsible for them.

The most important temporary difference in Sponda derives from the difference between the fair values and the purchase costs of the shareholding in property companies owned by Sponda. The recovery of the carrying amount of investment properties valued at fair value in the calculation of deferred taxes will normally happen through sale. The company's principle is to realise its shareholding in property companies by selling the shares it owns. Other temporary differences arise, for example, from tax losses carried forward, provisions and financial instruments. Deferred tax liabilities arising from the fair value measurement of investment properties stood at EUR 181.6 million on 31 December 2013 (2012: EUR 203.8 million).

Determining whether to recognise deferred tax assets on the balance sheet requires the management’s judgment. A deferred tax asset is recognised to the extent that it is probable that future taxable profit will be available against which deductible temporary differences or unused tax losses can be utilised. It may become necessary to decrease the carrying amount of deferred tax assets if future taxable income differs from the estimate. Deferred tax assets arising from losses confirmed in taxation amounted to EUR 9.4 million on 31 December 2013 (2012: EUR 23.1 million).