2. Operating assets and liabilities

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:

The individual value adjustments amounted to CHF 6 million (previous year: CHF 5 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.

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.

Of the total income taxes receivable of CHF 22 million (previous year: CHF 11 million), CHF 8 million relate to Germany, CHF 4 million relate to Sweden, CHF 3 million to the USA, CHF 2 million to Austria, CHF 1 million each to Switzerland, India and Turkey, and CHF 2 million to other countries.

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.

GF uses derivative financial instruments as part of its Corporation-wide risk management. Currency risk from accounts receivable, accounts payable, and financing in foreign currencies are partially hedged. The only hedging instruments employed are foreign currency contracts with a maximum maturity of twelve months. See also note 3.6.

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).

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.

The movement in assets under construction is mainly due to ongoing investment projects. This includes the refurbishment of an administration building in Schaffhausen (Switzerland) for GF Piping Systems amounting to CHF 13 million, ongoing investment in the newly built innovation and production center in Biel (Switzerland) and plant expansion in Changzhou (China) for GF Machining Solutions amounting to CHF 9 million each, ongoing investment into the light metal die-casting plant in Mills River (USA) of the joint venture with GF Casting Solutions and Linamar Corporation amounting to CHF 48 million, as well as the transfer of completed projects to other categories of property, plant, and equipment. 

The movements in the line “Changes in scope of consolidation” result from acquisitions and divestments, explained in more detail in note 4.1 (4.1.2 Acquitions and divestments).

Investments in property, plant, and equipment with an effect on liquidity in the 2020–2024 period amount to CHF 78 million. This amount mainly relates to investments for GF Piping Systems division in the amount of CHF 31 million and the GF Casting Solutions division in the amount of CHF 37 million.

The overall movements in the line “Other changes, reclassifications” are explained by the reclassification of a building used for own use to investment property following the divestment of the iron foundry in Herzogenburg, mold and tooling equipment used at production facilities in China that had to be moved from net working capital to property, plant, and equipment as well as demo machines earmarked for sale reclassified to inventories.

In the category investment properties, sale of properties in Garching (Germany) and Schaffhausen (Switzerland) is recorded. The fair value of investment properties, as determined by internal assessments on the basis of capitalized and current market values, is CHF 112 million (previous year: CHF 101 million).

Impairments amounting to CHF 12 million is entirely due to the relocation of production from Werdohl (Germany), started in the second half of 2019.

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. 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.

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:

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.

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 34 million).

Land use rights in the amount of CHF 12 million (previous year: CHF 13 million) and royalties, patents, others in the amount of CHF 7 million (previous year: CHF 8 million), remained almost unchanged compared to the previous year.

Software amounted to CHF 15 million (previous year: CHF 13 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.

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

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 6 million (previous year: CHF –4 million) is due to the adjustment of the conditional purchase price of Microlution Inc of CHF –0.7 million and the adjustment of the long-term investments in securities as collateral for non-mandatory retirement liabilities of GF Precicast SA of CHF 7 million (see note 5.1 for further details). The adjustment 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 GF Urecon Ltd, GF Precicast SA and GF Casting Solutions SRL. These goodwill items were tested for impairment. The three 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 GF Urecon, GF Precicast and GF Pitesti. 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 GF Urecon was calculated at 7.5%, for GF Precicast at 5.0% and for GF Pitesti at 9.2%.

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

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.

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.

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:

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.

Includes provisions for employee retirement benefits and other service-related employee benefits which are not provided by pension funds or similar institutions as well as anniversary bonuses and provisions for work accidents. For employee benefits provided by pension funds refer to note 5.1.

Cover expected expenses for warranty benefits such as repairs and replacements. All three divisions provide warranty benefits to their customers: 40% of the provisions relate to GF Machining Solutions (previous year: 39%), 40% to GF Casting Solutions (previous year: 24%) and 20% to GF Piping Systems (previous year: 37%).

Includes all obligations deriving from legal cases and litigations. None of the individual provision should lead to an outflow of more than CHF 10 million (previous year: CHF 6 million).

Summarizes contracts for which the fulfillment leads to unavoidable costs that exceed the associated economic benefits. Onerous contracts concern mainly GF Casting Solutions.

Summarizes provisions for legal and or constructive obligations deriving from restructurings. A constructive obligation arises when a detailed and formal plan for a restructuring exists and a valid expectation in those affected by the restructuring was raised. The increase in provision is related to restructuring and relocation activities in Europe.

Includes all other events that give raise to a provision such as non-warranty claims by customers and risks from business activities not allocated to warranties, legal or onerous contract category.

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.

Contingent liabilities amount to CHF 81 million (previous year: CHF 125 million) and include guarantees to related parties in favor of third parties and guarantees to third parties. The decrease is explained by the reduction in guarantees in favor of related parties in relation to the divestments in 2018. The divestment to third parties in 2019 added CHF 5 million to the overall amount.