2. Operating assets and liabilities

This section provides additional information on current assets and liabilities that support the ongoing operational liquidity of the Corporation. The section further describes the non-current tangible and intangible assets required at the GF Corporate Companies to provide products and services to their customers. Finally, it provides a summary on the different items of goodwill and the theoretical impact of a capitalization and subsequent amortization of goodwill.

2.1 Accounts receivable

2. Operating assets and liabilities

2.1 Accounts receivable

2.1.1 Trade accounts receivable

Trade accounts receivable value-adjusted by region

in CHF

2018

2017

CHF million	2018	2017

Gross values	725	784

Individual value adjustments	–5	–6
Overall value adjustments	–23	–24
Net values	697	754

Europe	295	349
– Thereof Germany	88	105
– Thereof Switzerland	35	31
– Thereof Austria	10	14
– Thereof Rest of Europe	162	199
Americas	104	85
Asia	259	271
– Thereof China	194	211
Rest of world	39	49
Total	697	754

As of the balance sheet date, the aging structure of the trade accounts receivable, which are not subject to individual value adjustments, was as follows:

		2018		2017
CHF million	Receivable after individual value adjustments	Overall value adjustment	Receivable after individual value adjustments	Overall value adjustment

Not yet due	557		624
1 to 30 days overdue	76		84
31 to 90 days overdue	52		34
91 to 180 days overdue	19	8	17	8
More than 180 days overdue	16	15	19	16
Total	720	23	778	24

The individual value adjustments amounted to CHF 5 million (previous year: CHF 6 million). It is assumed that part of the underlying receivables will be paid. Receivables not due are mainly receivables arising from long lasting customer relationships. Based on experience, GF does not anticipate any significant defaults. For further information on credit management and trade accounts receivable, see note 3.6 (Risk management).

Accounting principles

Accounts receivable are stated at nominal value. Value adjustments for doubtful accounts are established based on maturity structure and identifiable solvency risks. Besides individual value adjustments with respect to specific known risks, other value adjustments are recognized based on statistical surveys of default risk.

2.1.2 Income taxes receivable

Of the total income taxes receivable of CHF 11 million, CHF 4 million relate to Sweden, CHF 3 million to the USA, CHF 1 million each to Switzerland, Austria, Turkey, and CHF 1 million to other countries.

2.1.3 Other accounts receivable

CHF million	2018	2017

Tax credits from indirect taxes	30	31
Other current accounts receivable	32	31
Total	62	62

2.2 Inventories

CHF million	2018	2017

Finished goods	495	499
Raw materials and components	242	271
Work in progress	180	163
Gross value of inventories on hand	917	933

Valuation adjustments	–138	–160
Inventories	779	773

Accounting principles

Goods held for trading are generally stated at average cost and internally manufactured products at standard cost, including direct labor and materials used, as well as a commensurate share of the related overhead costs. Cash discount deductions are treated as reductions in the purchase cost. If the net realizable value is lower than the above, a corresponding valuation adjustment is made. Inventories with an insufficient turnover rate are partly or fully value-adjusted.

2.3 Liabilities

2.3.1 Other liabilities

CHF million	2018	2017

Social security	17	18
Other non-interest-bearing liabilities	39	43
Derivative financial instruments	2	17
Other tax liabilities (e.g. withholding tax)	37	29
Total	95	107
– Thereof current	56	69
– Thereof non-current	39	38

2.3.2 Derivative financial instruments

			2018			2017
CHF million	Contract- or nominal value	Positive market value	Negative market value	Contract- or nominal value	Positive market value	Negative market value

Derivative financial instruments

Foreign exchange (e.g. forward exchange contracts)	463	3	–2	474	5	–3
Other underlyings	2			60		–14
Total	465	3	–2	534	5	–17

GF uses derivative financial instruments as part of its Corporation-wide risk management approach. Currency risks from accounts receivable, accounts payable, and financing in foreign currencies are partially hedged. The only hedging instruments employed are forward exchange contracts and currency swaps with a maximum maturity of twelve months. The hedging of other underlying assets consists of hedging against price fluctuations relating to the purchase of raw materials and energy.

Accounting principles

Derivative financial instruments are stated at market values. Positive market values are reported in the balance sheet under the item “Marketable securities”, while negative values are recognized under “Other liabilities”. Foreign currency and interest rate risks are hedged by the Corporation using forward exchange contracts and swaps. Foreign currency risks related to highly probable future cash flows from sales in foreign currencies are hedged, using cash flow hedges in particular.

2.3.3 Categories of financial instruments

The following table shows the carrying amount of all financial instruments per category. For details on the market values of the bonds, see note 3.1 (3.1.1 Interest-bearing financial liabilities).

CHF million	2018	2017

Financial instruments (assets)

Cash and cash equivalents (excluding fixed-term deposits)	504	592

Trade accounts receivable	697	754
Fixed-term deposits	29	32
Other accounts receivable 1	32	31
Accrued income	15	16
Other financial assets 2	91	12
Loans and receivables stated at amortized cost	864	845

Marketable securities and funds	6	4
Financial assets recognized in income statement at market value	6	4

Derivative financial instruments for hedging purposes	3	5

Financial instruments (liabilities)

Trade accounts payable	498	593
Bonds	574	524
Other financial liabilities	202	264
Accrued liabilities and deferred income 3	253	258
Other current/non-current liabilities 4	93	90
Liabilities stated at amortized cost	1’620	1’729

Derivative financial instruments	2	17

1 The balance sheet item “Other accounts receivable” includes tax credits. For more details, see note 2.1 (2.1.3 Other accounts receivable).

2 Relates to loans to third parties, security deposits, and long-term-invested securities for the settlement of pension liabilities. For more details, see note 5.2.

3 For more details, see note 2.6 (2.6.2 Accrued liabilities and deferred income).

4 The balance sheet item “Other current/non-current liabilities” includes derivative financial instruments. For more details, see note 2.3 (2.3.1 Other liabilities).

The carrying amount of the securities and listed non-controlling interests recognized at their fair value is determined on the basis of the share prices at the balance sheet date. Derivative financial instruments are stated at their replacement value (market value) at the balance sheet date.

2.4 Movements in property, plant, and equipment

CHF million	Invest- ment properties	Machinery and production equipment	Buildings	Building com- ponents	Other equipment	Assets under construction	Land	Un- developed property	Assets held under finance leases	Property, plant, and equipment for own use

Cost
As of 31 December 2018	200	1’441	563	132	211	182	45	4	24	2’602

Additions	2	44	7	5	11	160	5		4	236
Disposals	–2	–159	–5	–3	–10				–1	–178
Changes in scope of consolidation		–493	3	–27	–19	–4				–540
Other changes, reclassifications	140	52	–93	10	11	–127	–1		4	–144
Translation adjustment	–5	–54	–16	–3	–6	–2	–2		–1	–84
As of 31 December 2017	65	2’051	667	150	224	155	43	4	18	3’312

Additions		41	2	5	8	150			1	207
Disposals	–1	–34	–1	–1	–12					–48
Changes in scope of consolidation		11	9		2	2	4			28
Other changes, reclassifications	–6	60	17	4	6	–83	–1	1		4
Translation adjustment	3	106	26	6	8	2				148
As of 31 December 2016	69	1’867	614	136	212	84	40	3	17	2’973

Accumulated depreciation
As of 31 December 2018	–116	–999	–311	–81	–155				–10	–1’556

Additions	–1	–102	–18	–7	–13				–2	–142
Disposals		93	4	3	10				1	111
Changes in scope of consolidation		444	–1	17	15					475
Other changes, reclassifications	–89	3	86	3						92
Translation adjustment	3	36	7	2	4				1	50
As of 31 December 2017	–29	–1’473	–389	–99	–171				–10	–2’142

Additions	–1	–94	–17	–6	–12				–2	–131
Disposals	1	32	1	1	11					45
Other changes, reclassifications	4	2	–3	–2	1					–2
Translation adjustment	–1	–80	–16	–4	–7					–107
As of 31 December 2016	–32	–1’333	–354	–88	–164				–8	–1’947

Carrying amount
As of 31 December 2018	84	442	252	51	56	182	45	4	14	1’046
As of 31 December 2017	36	578	278	51	53	155	43	4	8	1’170
As of 31 December 2016	37	534	260	48	48	84	40	3	9	1’026

Management assumptions and estimates

The values of non-current assets and intangible assets are reviewed whenever there are indications that their carrying amount may no longer be recoverable, due to changed circumstances or events. If such a situation arises, the recoverable amount is determined on the basis of expected future cash flows. It corresponds to the higher of the discounted value of expected future net cash flows and the expected net selling price. If the recoverable amount is lower than the carrying amount, a corresponding impairment loss is recognized in the income statement. The main assumptions on which these measurements are based include growth rates, margins, and discount rates. The actual future cash flows can differ considerably from discounted projections.

The overall net carrying amount of property, plant, and equipment decreased by CHF 124 million to CHF 1’046 million (previous year. CHF 1’170 million) due to the divestment of the two iron casting plants in Singen and Mettmann (Germany) including the subsequent asset sale of a relating production equipment. Additions to property, plant, and equipment are mainly due to the acquisition of Precicast Industrial Holding SA (Switzerland). These movements are shown in the line “Changes in scope of consolidation” and explained in more detail in note 4.1.

In the course of the divestments in Singen and Mettmann, land and buildings that were not part of the divestment were reclassified from property, plant, and equipment for own use to investment properties. Also subsequently to the divestment, production equipment in the amount of CHF 58 million was sold to the acquirer of these production entities.

The fair value of investment properties, as determined by internal assessments on the basis of capitalized and current market values, is CHF 101 million (previous year: CHF 62 million).

The movement in assets under construction is mainly due to ongoing investment projects, including a new innovation and production center in Biel (Switzerland) for GF Machining Solutions in the amount of CHF 43 million, the refurbishment of an administration building in Schaffhausen (Switzerland) for GF Piping Systems in the amount of CHF 7 million, ongoing investment into the light metal die-casting plant in Mills River (USA) of the joint venture with GF Casting Solutions and Linamar Corporation in the amount of CHF 35 million, as well as the transfer of completed projects to other categories of property, plant, and equipment.

Accounting principles

Property, plant, and equipment are stated at cost or manufacturing cost less depreciation and impairment. Financing costs of assets under construction are part of the costs of the asset if material. Assets held under finance lease contracts are capitalized at the lower of the present value of the minimum lease payments and fair value. The related outstanding finance lease obligations are presented as liabilities.

Assets are depreciated on a straight-line basis over their estimated useful lives or lease terms:

–Investment properties and buildings: 30–40 years
–Building components: 8–20 years
–Machinery and production equipment: 6–20 years
–Other equipment (vehicles, IT systems, etc.): 1–5 years
–Assets under construction are usually not depreciated

When components of larger assets have different useful lives, these are depreciated separately. Useful lives and residual values are reviewed annually on the balance sheet date and adjustments are recognized in the income statement. Any gains or losses on the disposal of items of property, plant, and equipment are recognized in the income statement.

Assets held under the terms of a finance lease are described in note 3.3.

2.5 Movements in the intangible assets

The major categories of the intangible assets are subdivided into “Land use rights”, “Software”, and “Royalties, patents, others”.

In the period under review, the intangible assets amounted to CHF 34 million (previous year: CHF 29 million).

Land use rights increased to CHF 13 million (previous year: CHF 10 million). The main reason was the increase in land use rights for the new plant in Changzhou at GF Machining Solutions. Software also amounted to CHF 13 million (previous year: CHF 10 million). The main reason for this increase was the industrial software and SAP implementation in various companies by GF Piping Systems and GF Machining Solutions.

Royalties, patents, others in the amount of CHF 8 million (previous year: CHF 9 million), remained almost unchanged compared to the previous year.

Goodwill

The theoretical capitalization of the goodwill would affect the result of the consolidated financial statements as follows:

Theoretical movements in goodwill

CHF million	2018	2017

Cost
As of 31 December	655	608

Additions from acquisitions	77	64
Adjustments	–4	–1
Translation adjustment	–26
As of 1 January	608	545

Accumulated amortization
As of 31 December	–526	–510

Additions regular	–38	–33
Translation adjustment	22	–2
As of 1 January	–510	–475

Theoretical book values, net
As of 31 December	129	98
As of 1 January	98	70

Effect on income statement

CHF million	2018	2017

Operating result (EBIT)	382	352
Return on sales (EBIT margin) %	8.4	8.5
Amortization goodwill	–38	–33
Theoretical operating result (EBIT) incl. amortization of goodwill	344	319
Theoretical return on sales (EBIT margin) %	7.5	7.7

Net profit	279	258
Amortization goodwill	–38	–33
Theoretical net profit incl. amortization of goodwill	241	225

Effect on balance sheet

CHF million	2018	2017

Equity according to balance sheet	1’428	1’369
Theoretical capitalization of net book value of goodwill	129	98
Theoretical equity incl. net book value of goodwill	1’557	1’467

Equity as % of balance sheet total	41.5	37.9
Theoretical equity incl. net book value of goodwill as % of balance sheet total (incl. goodwill)	43.6	39.6

Management assumptions and estimates

For goodwill positions, that are listed in the theoretical movements, an impairment test is performed if there is any indication that these goodwill positions could be affected from such an impairment. If such indications exist, an impairment test is performed for the goodwill positions offset against equity to determine the recoverable amount. As a basis for the calculation, business plans for the next five years are used. Subsequent years are included in the calculation using a perpetual annuity with a growth assumption of zero. The projections are based on knowledge and experience as well as on current judgments made by management as to the probable economic development of the relevant markets. It is assumed that there are no significant planned changes in the organization of any of the divisions, except for the measures already decided and announced.

Goodwill from acquisitions is offset against the Corporation’s equity at the acquisition date. The theoretical amortization is based on the straight-line method over the useful life of five years. The adjustment in the year under review in the amount of CHF –4 million (previous year: CHF –1 million) is due to the adjustments of the conditional purchase price of GF Casting Solutions SRL, Pitesti of CHF –3.3 million and of Microlution Inc of CHF –0.2 million. The adjustments will be amortized together with the goodwill over the remaining period of amortization.

At the balance sheet date no indications of impairment were found except for the goodwill of Symmedia GmbH and Microlution Inc. These goodwill items were tested for impairment. Both impairment tests revealed that the resulting recoverable amounts based on value in use calculations, exceeded the carrying amounts.

By applying the capital asset pricing model, individual costs of capital were calculated for Symmedia GmbH and Microlution Inc. The calculation required an assessment of the relative market risk of different peer groups as well as the determination of specific risk-free interest rates, an equity market risk premium, the borrowing costs and relevant tax rates.

Since the cash flow projections were based on cash flows after tax, the discount rate has also been determined after tax. The discount rate for Symmedia GmbH was calculated at 7.0% and for Microlution Inc at 9.5%.

It was confirmed that the theoretical goodwill of both companies retained its carrying amount.

Accounting principles: intangible assets

Acquired licenses, patents, and similar rights are capitalized and, with the exception of land use rights, amortized on a straight-line basis over their estimated useful lives of 3 to 15 years. Land use rights are amortized over the duration of the usage rights granted. For this item, useful lives can be up to 50 years. Software is amortized on a straight-line basis over the estimated useful lives of 1 to 5 years.

In the event of business combination, goodwill at the date of acquisition is calculated as follows: the acquisition price plus transaction costs incurred in connection with the business combination less the value of the acquired and re-valued net assets on the balance sheet.

The positive or negative goodwill resulting from acquisitions is offset in equity against retained earnings at the date of acquisition. Upon the disposal of a GF Corporate Company, the goodwill previously offset in equity is transferred to the income statement. If parts of the purchase price are dependent on future results, they are estimated as accurately as possible at the acquisition date and recognized in the balance sheet. In the event of disparities when the definitive purchase price is settled, the goodwill offset in equity is adjusted accordingly.

The carrying amount of non-current assets (especially property, plant, and equipment, intangible assets, financial asssets as well as the goodwill reported in the sample accounting) is reviewed at least once a year. If there is any indication of an impairment, an impairment test is performed immediately. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized in the income statement. As the goodwill is already offset with equity at the date of the acquisition, an impairment of the goodwill does not affect the income statement, but leads to a disclosure in the notes only.

Accounting principles: research and development

All research costs are recognized in the income statement in the period in which they were incurred. Development costs are recognized as an asset only to the extent that the following specific recognition criteria are all met cumulatively:

–costs are clearly defined, clearly attributable to the product or process, and can be separately identified and measured reliably
–the technical feasibility can be demonstrated
–the company intends to produce and market the product or to use the process
–a market exists
–the required internal resources are available
–the amount recognized is covered by future cash flows

2.6 Movements in provisions, accrued liabilities and deferred income and contingent liabilities

2.6.1 Movements in provisions

CHF million	Personnel and social security	Warranties	Legal cases	Onerous contracts	Restruc- turing provisions	Other provisions	Provisions	Deferred tax liabilities	Provisions and deferred tax liabilities

As of 31 December 2018	62	33	18	16		20	149	63	212

Reclassifications
Increase	11	23	8	7		11	60	17	77
Use	–5	–15	–2	–4		–1	–27		–27
Release	–1	–8	–8	–5		–9	–31	–3	–34
Changes in scope of consolidation	–16			6		–4	–14	2	–12
Translation adjustment	–2	–2					–4		–4
As of 31 December 2017	75	35	20	12		23	165	47	212

Reclassifications	–1	1
Increase	10	18	8	7	1	3	47	5	52
Use	–5	–11	–1	–3	–1	–1	–22		–22
Release	–2	–5	–5	–3		–2	–17	–6	–23
Changes in scope of consolidation	1						1	2	3
Translation adjustment	5	1	1	1			8	1	9
As of 31 December 2016	67	31	17	10		23	148	45	193

Maturity structure of the provisions 2018
– current	4	21	2	6		5	38		38
– non-current	58	12	16	10		15	111	63	174

Maturity structure of the provisions 2017
– current	4	22	2	11		6	45		45
– non-current	71	13	18	1		17	120	47	167

Management assumptions and estimates

In the course of their ordinary operating activities, GF Corporate Companies can become involved in litigation. Provisions for pending legal proceedings are measured on the basis of the information available and a realistic estimate of the expected outflow of resources. The outcome of these proceedings may result in claims against the Corporation that cannot be met or cannot be met in full through provisions or insurance cover. If there are any contractual obligations for which the unavoidable costs of meeting the obligations exceed the expected economic benefits (e.g. onerous delivery contracts), provisions are made for the agreed amounts over the entire period or over a prudently estimated period. These provisions are based on management assumptions.

The valuation of provisions in all categories is based on actual data if available (e.g. claims that have occurred or been reported) or on the experience of recent years and management estimates. The deferred tax liabilities are based on temporary valuation differences, which are reported in the balance sheet at the level of GF Corporate Companies.

Personnel and social security provision
Expenditures not connected with pension plans in the narrow sense, such as awards for length of service and anniversary bonuses are recognized in the “Personnel and social security” category and amounted to CHF 62 million (previous year: CHF 75 million).

The non-current provisions in the “Personnel and social security” category in the amount of CHF 58 million (previous year: CHF 71 million) are expected to result in a cash outflow in an average of ten years, the non-current provisions in the other categories are expected to result in a cash outflow within the next two to three years.

Warranty provision

Warranty provisions amounted to CHF 33 million (previous year: CHF 35 million). Due to the favorable claims outcome, it was possible to release CHF 8 million. At the same time, new warranty provisions of CHF 23 million had to be set aside, and CHF 15 million were utilized.

38.5% of the warranty provisions are for GF Machining Solutions and 24.0% for GF Casting Solutions. They derive from complaints and claims for damages made to the various locations.

Legal cases
Provisions in the “Legal cases” category relate to a number of individual cases involving the divisions. For none of the existing legal cases is an estimated cash outflow of more than CHF 6 million expected.

Other provisions
The “Other provisions” category contains provisions for pension plans in the amount of CHF 3 million (previous year: CHF 11 million) and for other operating risks.

2.6.2 Accrued liabilities and deferred income

CHF million	2018	2017

Overtime, holiday, bonuses, and sales-related premiums	113	112
Accrued liabilities/deferred income for commissions and discounts	33	32
Accrued liabilities/deferred income for annual audit fees	4	4
Other accrued liabilities and deferred income	103	110
Total	253	258

2.6.3 Contingent liabilities

Contingent liabilities amounted to CHF 125 million (previous year: CHF 0 million) and include guarantees to related parties in favor of third parties. The increase compared to the previous year is explained by the reclassification from guarantees in favor of GF Corporate Companies to guarantees in favor of related parties in relation to the divestments in 2018. The contingent liabilities will continously be reduced over a period of five years.