Consolidated annual accounts

Viscofan, S.A. (hereinafter the Company or the parent) was incorporated with limited liability on 17 October 1975 as Viscofan, Industria Navarra de Envolturas Celulósicas, S.A. At a meeting held on 17 June 2002 the shareholders agreed to change the name of the Company to the current one.
Its statutory and principal activity consists of the manufacture of artificial casings, mainly for use in the meat industry; manufacture and distribution of collagen-based products for food and bioengineering use; as well as, to a lesser extent, the generation of electricity for sale to third parties through cogeneration systems. Its industrial installations are located in Cáseda and Urdiain (Navarra). The head office and registered office are located in Polígono Industrial Berroa, Calle Berroa nr. Its main offices and registered address are in Tajonar (Navarra).

Viscofan, S.A. is the parent of a group of companies (the Viscofan Group or the Group) which mainly carry out their activities in the food sector and in cellulose, plastic, fibrous and collagen casing sectors, as explained in more detail in Note 2.

The entirety of Viscofan S.A.'s shares have been listed since 1986, and are quoted on the Spanish electronic trading platform (continuous market).

The Group's 2017 consolidated financial statements were approved at the General Shareholders’ Meeting held on 25 May 2018.

The parent’s directors expect these 2018 consolidated financial statements, which were prepared on February 28, 2019, to be approved by the shareholders in general meeting without modification.

In February 2018, 100% of the shares of Transform Pack Inc. were purchased.
In November 2018, 100% of the shares of Globus Group Australia and New Zealand were purchased.
Vector UK Ltd was wound up in April 2018. 

In November 2017, 100% of the shares of Supralon International AG and Supralon Verpackungs AG were acquired, including their subsidiaries (Supralon Produktions und Vertriebs GmbH and Supralon France SARL). 

Through these acquisitions, the Group has reinforced its productive portfolio and opened new opportunities that expand the range of solutions available on the market. Furthermore, our commercial and productive presence has expanded to a new continent, Oceania. The fair value of net assets acquired, both in 2018 and 2017, is reflected in Note 8.

Details of the subsidiaries and associates comprising the Viscofan Group at December 31, 2018 and 2017, including certain additional information, are shown below:

2.1. Details of subsidiaries and associates comprising the Viscofan Group at 31 December 2018

2.2. Details of subsidiaries and associates comprising the Viscofan Group at 31 December 2017

The consolidated financial statements have been prepared based on the accounting records of Viscofan, S.A. and the companies comprising the Group. The consolidated financial statements for 2018 have been prepared under EU-endorsed International Financial Reporting Standards (EU-IFRS) to present fairly the consolidated equity and consolidated financial position of Viscofan, S.A. and subsidiaries at December 31, 2018 and 2017, as well as the consolidated results from its operations, its consolidated cash flows and consolidated recognized income and expenses for the year then ended. The Group adopted EU-IFRS on 1 January 2004, and also applied IFRS 1 First-time Adoption of International Financial Reporting Standards at that date.

3.1. New and amended standards and interpretations

The accounting policies used during the preparation of these consolidated financial statements are the same as those applied for the consolidated financial statements for the year ended 31 December 2017, with the exception of the application of standards that came into force on 1 January 2018 and are applicable to the Group. 

The Group has applied the following standards and amendments for the first time for its annual financial year beginning on 1 January 2018:

• IFRS 9 Financial Instruments
  
  Addresses the classification, measurement and recognition of financial assets and liabilities. The full version of IFRS 9 was published in July 2014 and replaced the IAS 39 guidelines on the classification and measurement of financial instruments. IFRS 9 maintains, but simplifies the current mixed measurement model and establishes three main measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income. The basis of classification depends on the business model at the entity and the contractual cash flow characteristics of the financial asset. Investments in equity instruments must be valued at fair value through profit or loss with the irrevocable option when initially presenting changes in fair value through non-recyclable other comprehensive income, provided that the instrument is not held as available for sale. If the equity instrument is held for trade, changes in fair value are presented through profit or loss. In relation to financial liabilities, there have been no changes in terms of classification and measurement, with the exception of the recognition of changes in credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. Under IFRS 9, there is a new impairment model, the estimated credit losses model, which replaced the impairment losses model set out in IAS 39 and that will give rise to the recognition of losses before occurred under IAS 39. IFRS relaxes the requirements concerning the effectiveness of the hedge. Under IAS 39, a hedge must be highly effective, both prospectively and retrospectively. IFRS 9 replaced this approach, requiring an economic relationship between the hedged item and the hedging instrument and requiring the same coverage ratio as the entity uses for its risk management. Contemporaneous documentation is still required, but it differs from the documentation prepared under IAS 39. Finally, broad information is required, including a reconciliation between initial and final amounts of the provision for expected credit losses, assumptions and data, and a reconciliation in the transition between the original classification categories under IAS 39 and the new classification categories under IFRS 9.
  
  IFRS 9 applies to years starting 1 January 2018 and is retroactive, although there is no need to restate comparative figures. 
• IFRS 15 Revenue from Customer Contracts
  
  In May 2014, the IASB and FASB issued a joint, converged standard on the recognition of revenue from contracts with customers. Under this standard, revenue is recognised when a customer gains control of the good or service sold, i.e. when the customer is able to govern its use as well as benefit from the good or service. This IFRS includes new guidance to determine whether revenue must be recognised over time or at a specific moment in time. IFRS 15 demands ample information about recognised revenue as well revenue that is expected to be recognised in the future as regards existing contracts. It also requires quantitative and qualitative information on significant assessments made by management to determine the revenue to be recognised and on any changes to these assessments. 
  
  In April 2016, the IASB amended the standard so as to clarify its most complex aspects without changing its key principles.
  
  IFRS 15 is effective for all years starting from 1 January 2018. 

The adoption of these amendments had no material effect on the amounts recognised in the year. Most of the changes will not affect future years.

3.2. Published standards which are not applicable

The Group intends to adopt these standards, interpretations, and amendments thereof published by the IASB but not considered mandatory in the European Union at the date these consolidated financial statements were prepared. However, they will be applied when they come into force. The group's assessment of the impact of these new standards and interpretations is set out below:

(a) IFRS 16 – Leases.

Applicable for years beginning on or after 1 January 2019, the Group plans to adopt the new standard on the required date of application and intends to apply the simplified transition approach and will not restate the comparative figures for the year prior to the first adoption.

Under the new standard, most leases will have to be recorded on the balance sheet as an asset for the right of use and a liability for the amounts payable. The only exceptions are short-term, low-value leases.

At the reporting date, the Group has non-cancellable operating lease commitments.  The Group has evaluated the potential effect of IFRS 16 on its Consolidated Financial Statements. in relation to the change in the definition of the lease term and the different treatment of variable lease payments and extension and termination options. The value of assets for right of use and lease liabilities that have to be recognised following the adoption of the new standard comes to 19.57 million euros.

Management does not believe that the impact on its consolidated financial statements will be material.

3.3. Policies used by the Group when several options are permitted

International Financial Reporting Standards occasionally allow for more than one alternative accounting treatment for a transaction. The criteria adopted by the Group for its most relevant transactions are the following:

• Capital grants can be recognised reducing the cost of the assets for which financing was granted or as deferred income (which was the Group's choice). They are recognised in the income statement under "Other income."
• Certain property, plant, and equipment may be measured at market value or historical cost less depreciation and impairment loss. Viscofan has chosen the latter criteria. 

3.4. Comparison of information

These consolidated financial statements present for comparative purposes, for each of the headings on the consolidated statement of financial position, the consolidated income statement, the consolidated comprehensive income statement, the consolidated cash flow statement, the consolidated statement of changes in equity and the notes to the consolidated financial statements, except when an accounting standard specifically establishes that this is unnecessary.

3.5. Relevant accounting estimates, assumptions and judgments

The preparation of financial statements in conformity with EU-IFRS requires Group management to make judgments, estimates, and assumptions, and to apply relevant accounting estimates in the process of applying Group accounting policies.

This section describes the main assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

(a) Taxes

The subsidiaries comprising the Group are inpidually responsible for their own local tax obligations, and do not file consolidated tax returns.

The Group analyses the possible inspections by the tax authorities of the respective countries and establishes provisions based on their best estimate. The amount of such provisions is based on various factors, such as experience of previous tax inspections and differing interpretations of tax regulations by the Group and the corresponding tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the country where the respective Group company is domiciled. The Group's policy, affecting all subsidiaries, is to apply conservative criteria when interpreting the different prevailing regulations in each of the countries where it operates. 

Deferred tax assets are recognised for all unused tax losses and other temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon likely timing and future taxable profits together with future tax planning strategies.

The years open for review by the tax authorities vary depending on each country's tax legislation, and returns are not considered definitive until the corresponding inspection period has elapsed or until they have been inspected and accepted by tax authorities.

The Company’s management considers that all applicable taxes have been duly paid so that even in the event of discrepancies in the interpretation of prevailing tax legislation with respect to the treatment applied, the resulting potential tax liabilities, if any, would not have a material impact on the accompanying financial statements.

Further details on taxes are disclosed in Note 21.

(b) Pension benefits

The cost of defined benefit pension plans and other obligations and the present value of pension obligations are determined using actuarial measurements. Actuarial measurements involve making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates, and future pension increases. Due to the complexity of the measurement and its long-term nature, calculating the obligation is highly sensitive to changes in these assumptions. 

Mortality rates are based on publicly available mortality tables for the specific country. Future salary and pension increases are based on expected future inflation rates for the respective countries.

Details on the hypotheses used and a sensitivity analysis are provided in Note 17.1.

(c) Provisions for litigation and contingent assets and liabilities

Estimation of the amounts to provision with respect to potential assets and liabilities arising from ongoing litigation is carried out based on the professional opinion of the legal representatives hired to deal with such matters and the internal evaluation performed by the Group's Legal Department. 

The breakdown of provisions for litigations is shown in Note 17.3, while the main contingent assets and liabilities that may give rise to the future recognition of assets and liabilities are described in Note 17.7.  

(d) Other accounting estimates and hypotheses

• Assessment of possible impairment losses on certain assets: (Notes 4.12 and 10).
• Useful life of property, plant, and equipment and intangible assets: (Notes 4.11 and 4.12)
• Measurement of derivative financial instruments: (Note 4.21)

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and its interpretations as endorsed by the European Union (EU-IFRS).

Changes in accounting policies

This note explains the impact of the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Customer Contracts has on the Group's financial statements.

As explained below, the application of IFRS 9 and 15 have had no significant impact on the Group's financial statements. In both cases, the analysis has been performed retrospectively, but without restating comparative information.

IFRS 9 Financial Instruments

IFRS 9 replaces the provisions of IAS 39 in terms of the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment in the value of financial assets and hedge accounting

The adoption of IFRS 9 Financial Instruments from 1 January 2018 resulted in changes to accounting policies and reclassifications of sums recognised in financial statements. The new accounting policies are established in Note 3.1. Pursuant to the transitory provisions of IFRS 9, paragraphs (7.2.15) and (7.2.26), comparative figures have not been restated.

On 1 January 2018 (date on which IFRS 9 first came into force), the Group's management assessed which business models apply to the financial assets held by the Group and reclassified their financial instruments in the corresponding categories under IFRS 9. 

There are no changes for significant amounts following the application of the standard.

Derivatives and hedge activities

Exchange rate insurance contracts and raw materials hedge contracts in force on 31 December 2017 classified cash flow hedges as provided for in IFRS 9. The Group's risk management strategies and hedge documentation are in line with the requirements of IFRS 9 and these relationships are therefore treated as continuing hedges.

IFRS 15 Revenue from Customer Contracts

The Group adopted IFRS 9 Revenue from Customer Contracts on 1 January 2018. Pursuant to the transitory provisions of IFRS 15, the Group has adopted the new rules retrospectively, without restating the 2017 figures. In any case, no significant impact has been identified following the application of IFRS 15. See Note 3.1.

A summary of the most significant principles is as follows:

4.1. Going concern basis

The consolidated financial statements have been prepared on a going concern basis. 

4.2. Method of consolidation

All the subsidiaries were consolidated using the full consolidation method.

Control is obtained when the Group is exposed, or has the rights attached to variable interest rates arising from its involvement in a subsidiary, and is able to influence them as a result of the exercise of power over the subsidiary. Specifically, the Group has control of a subsidiary if, and only if it has:

• Power over the subsidiary (existing rights allowing it to manage relevant subsidiary's activities)
• Exposure, or rights, to variable returns from its involvement with the other company 
• The ability to use its power over the other company to affect the amount of the company's return

Generally, it is presumed that the majority of voting rights grants control. 

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date it ceases. Subsidiaries are excluded from the consolidation scope from the moment control is lost. Note 2 breaks down the nature of the relationships between the parent and its subsidiaries.

The Group has applied the exemption permitted by IFRS 1 First-time Adoption of International Financial Reporting Standards regarding business combinations. Consequently, only business combinations which occurred subsequent to 1 January 2004, the date of transition to EU-IFRS, have been recognised using the purchase method. Entities acquired prior to that date were recognised under the former Spanish general chart of accounts, once the necessary transition date adjustments and corrections were considered.

All of the assets, liabilities, equity, income, expenses, and cash flow arising from transactions between Group companies are totally eliminated during the consolidation process.

The accounting policies of subsidiaries have been adapted to those of the Group.

The financial statements of consolidated subsidiaries reflect the same reporting date as that of the parent.

4.3. Effects of changes in foreign exchange rates

(a) Foreign currency transactions

The consolidated financial statements are presented in thousands of euros, which is the functional and presentation currency of the parent.

Each Group entity determines its own functional currency and the balances included in the financial statements of each company are measured using this functional currency.

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the transaction date. 

Monetary assets and liabilities expressed in foreign currencies have been translated into euros at the year-end exchange rate, whereas non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using the exchange rate at the transaction date. Non-monetary assets denominated in foreign currencies measured at fair value are translated to euros at the foreign currency exchange rate prevailing at the date the value was determined. 

Differences arising on settlement of transactions in foreign currency and on translation of monetary assets and liabilities expressed in foreign currency are taken to the income statement. Exchange differences arising from the translation of monetary items forming part of the net investment in foreign operations are recognised as translation differences in equity. 

Translation gains or losses related to monetary financial assets or liabilities expressed in foreign currency are also recognised in the income statement.

(b) Translation of foreign operations

Translation differences are recognised in the Group’s equity. Translation of foreign operations, excluding foreign operations in hyperinflationary economies, is based on the following criteria:

• Assets and liabilities, including goodwill and adjustments to net assets arising from the acquisition of businesses, including comparative balances, are translated at the year-end exchange rate at each balance sheet date. 
• Income and expenses relating to foreign operations, including comparative balances, are translated at the exchange rates prevailing at each transaction date; and
• Foreign exchange differences arising from application of the above criteria are recognised under translation differences in equity

The Group does not carry out any business activities in hyperinflationary countries.

Translation differences arising as a result of the sale of foreign businesses recognised in equity are recognised as a single line item in the consolidated income statement when there is a loss of control of such businesses.

4.4. Classification of assets and liabilities as current and non-current

The Group classifies assets and liabilities in the consolidated statement of financial position as current or non-current based on the following criteria: For these purposes, current assets or liabilities are those that meet the following criteria:

• Assets are classified as current when they are expected to be realised, sold or traded in the Group’s ordinary course of business within 12 months of the balance sheet date and when held essentially for trading. Cash and cash equivalents are also classified as current, except where they may not be exchanged or used to settle a liability, at least within the 12 months following the balance sheet date. The Group classifies the remainder of its assets as non-current.
• Liabilities are classified as current when expected to be settled in the Group’s ordinary course of business within 12 months of the balance sheet date and when essentially held for trading, or where the Group does not have an unconditional right to defer settlement of the liability for at least 12 months from the balance sheet date. The Group classifies the remainder of its liabilities as non-current.
• Deferred tax assets and liabilities are classified as non-current assets and liabilities.

4.5. Calculation of fair value

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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability, or
• In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses measurement techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

• Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities
• Level 2 — Measurement techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
• Level 3 — Measurement techniques for which the lowest level input that is significant to the fair value measurement is unobservable

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

The Company considers that its cash, trade and other receivables, trade and other payables, and balances of accounts payable to and receivable from public administrations, have a fair value very close to their carrying amounts mainly as a result of their coming due in the short term.

The fair values for the remaining financial assets and liabilities are disclosed in Notes 13 and 19, respectively.

4.6. Financial instruments- Initial recognition and subsequent measurement

(a) Classification

Since 1 January 2018, the Group has classified its financial assets in the following valuation categories: 

• those valued subsequently at fair value (whether through profit or loss or through other comprehensive income), and
• those valued at amortised cost. 

The classification depends on the business model at the entity to manage financial assets and the contractual terms of cash flows.

For assets valued at fair value, gains or losses are recognised through profit or loss or through other comprehensive income). For investments in equity instruments that are not held for sale, this will depend on whether the group made an irrevocable choice at the time of the initial recognition to account for the investment in equity at fair value through other comprehensive income.

The Group only reclassifies investments in debt when the business model is changed to manage these assets.

(b) Recognition and derecognition

Conventional purchases and sales of financial assets are recognised on the trade date, the date on which the Group commits to buying or selling the asset. Financial assets are derecognised when the rights to cash flows relating to the financial assets expire and the Group has substantially transferred all risks and rewards inherent to ownership.

(c) Measurement

Upon initial recognition, the Group measures a financial asset at its fair value, plus, for financial assets that are not measured at fair value through profit or loss, the costs of the transaction directly attributable to the acquisition of the financial asset. The costs of the financial asset transaction recognised at fair value through profit or loss are recognised as expenses on the income statement.

Financial assets with implicit derivatives are considered as a whole when establishing whether their cash flows are exclusively for the payment of the principal and interest.

Debt instruments

The subsequent measurement of debt instruments depends on the Group's business model to manage the asset and the cash flow characteristics of the asset. There are three measurement categories under which the Group classifies its debt instruments:

• Amortised cost: Assets held for the collection of contractual cash flows, when these flows only represent the payments of principal and interest, are valued at amortised cost. Interests income on these financial assets are included in financial income in accordance with the effective interest rate method. Any gains or losses arising when they are derecognised are directly recognised in profit or loss for the year and appear under other gains/(losses) along with gains and losses on exchange differences. Impairment losses appear as a separate item in the profit and loss statement.
• Fair value through other comprehensive income: Assets held for the collection of contractual cash flows and the sale of financial assets, when the cash flows of assets only represent the payments of principal and interest, are valued at fair value through profit or loss Changes in the carrying amount are taken to other comprehensive income, with the exception of the recognition of impairment losses or gains, interest income and gains or losses from exchange differences, which are recognised in the statement of profit or loss. When the financial asset is derecognised, the accumulated gains or losses previously recognised in other comprehensive income are reclassified from equity to profit or loss and recognised in other gains/(losses). Interests income on these financial assets are included in financial income in accordance with the effective interest rate method. Gains and losses on exchange differences are presented in other gains and losses and impairment losses are presented as a separate item on the statement of profit or loss. 
• Fair value through other profit or loss: Assets that do not meet the criteria for being measured at amortised cost or at fair value through other comprehensive income are recognised at fair value through profit or loss. Gains or losses on a debt investment recognised subsequently at fair value through profit or loss are recognised through profit or loss and presented net on the statement of profit or loss under other gains/(losses) in the year in which they occur. 

Equity instruments

The Group subsequently measures all equity investments at fair value. When the Group's management has decided to present gains or losses at the fair value of equity investments through other comprehensive income, there is no subsequent reclassification of gains and losses at fair value through profit or loss following the derecognition of the investment in accounts. pidends from these investments are recognised in profit or loss for the year as other income when the company's right to receive payments is established.

(d) Impairment

Since 1 January 2018, the Group measures against a prospective base of expected credit losses associated with its assets at amortised cost and fair value through other comprehensive income. The methodology applied for impairments depends on whether there has been a significant increase in credit risk. 

For trade receivables, the Group takes the simplified approach permitted under IFRS 9, which requires that expected losses during their useful life are recognised from the initial recognition of the receivables. See Note 12 for further details.  

Accounts policies applied prior to 31 December 2017

The comparative information provided continues to be recognised in line with the Group's previous accounts policy.

(a) FINANCIAL ASSETS 

Initial recognition and measurement

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or derivatives designated as hedging instruments in "effective hedges," as appropriate. The Group determines the classification of its financial assets at initial recognition.

All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.

Subsequent measurement

Subsequent measurement of financial assets depends on their classification, as described below:

Loans and receivable

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, these financial assets are re-measured at amortised cost using the effective interest rate method, less any impairment losses. amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest. Interests accrued in accordance with the effective interest rate are included in "Finance income" in the consolidated income statement. The losses arising from impairment are recognised as "Finance costs" for loans and in "Other operating expenses" for receivables.

Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the intention and ability to hold to maturity and which are recognised at amortised cost.

Held-to-maturity investments are initially recognised at fair value, including transaction costs that are directly attributable to the acquisition, and are subsequently carried at amortised cost using the effective interest method.

Interests accrued in accordance with the effective interest rate are included in "Finance income" in the consolidated income statement. The losses arising from impairment are recognised under "Finance costs" in the consolidated income statement. 

Available-for-sale financial assets 

Available-for-sale financial investments include equity investments and debt securities. Equity investments classified as available for sale are those that are neither classified as held for trading nor designated at fair profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions. The Group did not hold any significant debt securities classified under this category during 2018 and 2017.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in the consolidated income statement, or if the investment is found to be impaired the cumulative loss is reclassified to "Financial expense" in the income statement. Interest earned while holding available-for-sale financial investments is reported as interest income using the EIR method.

The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and Management’s intention to do so may significantly change in the foreseeable future, the Group may elect to reclassify these financial assets. Reclassification to loans and receivables is permitted when the financial assets meet the definition of loans and receivables and the Group has the intent and ability to hold these assets for the foreseeable future or until maturity. Reclassification to the held-to-maturity category is permitted only when the entity has the ability and intention to hold the financial asset accordingly.

For a financial asset reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortised cost and any previous gain or loss on the asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortised cost and the maturity amount is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the income statement.

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

• The rights to receive cash flows from the asset have expired.
• The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations retained by the Group.

(b) Impairment and irrecoverability of financial assets

The Group assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists inpidually for financial assets that are inpidually significant, or collectively for financial assets that are not inpidually significant. If the Group determines that no objective evidence of impairment exists for an inpidually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are inpidually assessed for impairment and for which an impairment loss is, or continues to be, recognised, are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.

The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as finance income in the income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to finance costs in the income statement.

(c) Financial liabilities

Financial debt

Financial debt is initially recognised at fair value, net of the costs incurred in the transaction. Subsequently, financial debts are measured at amortised cost. Any difference between the income obtained (net of transaction costs) and the redemption value are recognised in profit or loss during the useful life of the debt in line with the effective interest rate method. Fees paid when taking out loans are recognised as the transaction costs of the loan, insofar as it is likely that part of the facility, or the entire facility, will be drawn down. In this case, fees differ until the amount is drawn down. Insofar as there is no evidence that it is likely that part of the facility, or the entire facility, will be drawn down, the fee is capitalised as an advanced payment for liquidity services and amortised in the period corresponding to the availability of the facility.

Preference shares with mandatory redemption on a specific date are classed as liabilities. pidends on these preference shares are recognised in the statement of profit or loss as finance costs.

The fair value of the liability component of a convertible bond is established using the market interest rate for an equivalent non-convertible bond. This amount is recognised as a liability on the basis of amortised cost until it is extinguished following the conversion or maturity of the bonds. Other income obtained is assigned to the conversion option that is recognised and included in shareholders' equity, net of the income tax effect.

Finance debt is eliminated from the balance sheet when the commitment in the contract is repaid, cancelled or expires. The difference between the carrying amount of the financial asset that has been cancelled or transferred and the compensation paid, including any asset transferred other than cash or liability assumed, is recognised in the statement of profit or loss as finance income or costs. 

When the terms of a financial liability are renegotiated and the entity issues equity instruments to a creditor to extinguish part or all of the liability (debt-for-equity swap), a gain or loss is recognised in the statement of profit or loss for the year for the difference between the carrying amount of the financial liability and the fair value of equity instruments issued.

Finance debt is classified as a current liability unless the Group has an unconditional right to defer the repayment of the liability for at least 12 months after the balance sheet date.  

Initial recognition and measurement

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are initially recognised at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, bank overdrafts, loans and borrowings, financial guarantee contracts, and derivative financial instruments.

Subsequent measurement

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. 

amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the income statement.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement.

4.7. Impairment of non-financial assets subject to depreciation or amortisation

The Group periodically evaluates whether there are indications of possible impairment losses on assets other than financial assets, inventories, deferred tax assets and non-current assets held for sale, to determine whether their carrying amount exceeds their recoverable value (impairment loss).

(a) Calculation of recoverable amount

The recoverable amount of assets is the greater of their net selling value and value in use. An asset's value in use is calculated based on the expected future cash flows deriving from use of the assets, expectations of possible variations in the amount or timing of those future cash flows, the time value of money, the price for bearing the uncertainty inherent in the asset and other factors that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

Recoverable amounts are calculated for inpidual assets, unless the asset does not generate cash inflows that are largely independent from those corresponding to other assets or groups of assets. In this case, the recoverable amount is determined for the cash-generating unit (CGU) to which the asset belongs.

(b) Reversal of impairment

Impairment losses are only reversed if there has been a change in the estimates used to determine the recoverable amount. Impairment losses on goodwill are not reversible.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment had been recognised.

The amount of the reversal of the impairment of a CGU is allocated to its assets, except goodwill, pro rata on the basis of the carrying amount of the assets, to the limit referred to in the previous paragraph.

4.8. Revenue recognition 

Revenue from the sale of goods or services is recognised at the fair value of the consideration received or receivable. Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services, net of VAT and any other amounts or taxes which are effectively collected on the behalf of third parties. Volume or other types of discounts for prompt payment are recorded as a reduction in revenue if considered probable at the time of revenue recognition.

Before recognising revenue, the Group:

• identifies the customer contracts
• identifies the separate performance obligation
• establishes the transaction price of the contract
• allocates the transaction price between the separate performance obligations, and
• recognises the revenue when each performance obligation is satisfied

Accounting policies and significant judgements

(a) Sale of artificial casings 

The Group manufactures and sells artificial casings for cold meats. Sales are recognised when control of the products is transferred, i.e., when the products are delivered to the customer, this party has full discretion over the product and no obligations have been unfulfilled that may affect the customer's acceptance of the products. The delivery takes place based on agreements with customers (Incoterm) and it is at this time when risks of obsolescence and loss are transferred to the customer, and the Group has proof that all acceptance criteria have been met.

The products are often sold subject to volume discounts over a 12 month period. Income from these sales is recognised based on the price specified in the contract, net of estimated volume discounts. Accumulated experience is used to estimate and provide discounts, using the expected value method and ordinary income are only recognised insofar as it is highly likely that there is no significant reversal. No element of financing is considered to exist, as sales are completed with a credit term of 45-90 days, which is consistent with market practice. 

An account receivable is recognised when the assets are delivered, as this is the time at which the consideration is unconditional, as only the passing of time is required for the payment to mature.

Management does not believe there is any significant judgement in terms of these sales.

(b) Sale of energy 

Energy sales are recognised as energy is produced and made available to the customer. At this time, it is understood that there are no unfulfilled obligations. These sales are made at regulated tariffs in each location. No element of financing is considered to exist, as sales are completed with a credit term of 60 days.

Management does not believe there is any significant judgement in terms of these sales.

4.9. Earnings per share

Basic earnings per share are calculated by piding net profit for the year attributable to the ordinary shares of the parent by the weighted number of ordinary shares outstanding during that year, excluding the average number of shares of the parent, Viscofan, S.A. held by any of the Group companies.

Diluted earnings per share are calculated by piding net profit for the year attributable to the ordinary shareholders of the parent by the weighted average number of ordinary shares which would be in issue if all potential ordinary shares were converted into ordinary shares of Viscofan, S.A. 

In the case of the Viscofan Group's financial statements for the years ended December 31, 2018 and 2017, there is no difference in basic earnings per share and diluted earnings per share as there were no instruments potentially convertible into ordinary shares during those years.

4.10. Business combinations and goodwill

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises:

• the fair values of the assets transferred 
• liabilities incurred with former owners of the acquired business 
• equity investments issued by the group 
• the fair value of any asset or liability resulting from a contingent consideration arrangement, and 
• the fair value of any previous equity interest in the subsidiary. 

Identifiable assets acquired and contingent liabilities and liabilities assumed in a business combination, with limited exceptions, are initially measured at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquired entity on an acquisition-to-acquisition basis at fair value or by the proportionate share of the non-controlling interest in the acquiree's net identifiable assets. 

Acquisition-related costs are recognised as an expense when incurred. 

The excess of: 

• the consideration transferred 
• the amount of any non-controlling interest in the acquiree; and 
• the fair value at the acquisition date of any previous equity interest in the acquired entity the fair value of the identifiable net assets acquired is recognised as goodwill. If those amounts are less than the fair value of the acquired subsidiary's identifiable net assets, the difference is recognised directly in profit or loss as a purchase on very advantageous terms. 

When the settlement of any part of the cash consideration is deferred, future amounts payable are discounted to their present value at the exchange date. The discount rate used is the entity's incremental borrowing interest rate, the rate at which a similar loan could be obtained from an independent lender under comparable terms and conditions. 

The contingent consideration is classified as equity or financial liability. The amounts classified as a financial liability are subsequently restated to fair value with changes in fair value recognised in profit or loss. 

If the business combination is carried out in stages, the carrying amount at the acquisition date of the acquiree's equity interest in the previously-held acquiree is measured again at its fair value at the acquisition date, recognising any resulting gain or loss in profit or loss. 

4.11. Intangible assets

(a) Self-constructed assets

Expenditure on research activities is recognised in the consolidated income statement as an expense as incurred. 

Expenditure on activities which cannot be clearly distinguished from costs attributable to the development of intangible assets is recognised in the consolidated income statement. Expenditure on development that was recognised initially as an expense is not recognised subsequently as part of the cost of an intangible asset.  The Group has not capitalised any development expenses.  

(b) Other tangible assets

Other intangible assets are stated at cost, less accumulated amortisation and impairment losses.

Software maintenance costs are expensed as incurred.

(c) Useful lives and amortisation rates

The Group evaluates whether the useful life of each intangible asset acquired is finite or indefinite. An intangible asset is considered to have an indefinite useful life where there is no foreseeable limit to the period over which it will generate net cash inflows. At 31 December 2018 and 2017, the Group had no intangible assets with indefinite useful lives, except for Goodwill discussed in Note 9.

Intangible assets with finite useful lives are amortised by allocating the depreciable amount systematically on a straight-line basis over the useful lives of the assets in accordance with the following criteria:

The depreciable amount of intangible asset items is the cost of acquisition or deemed cost less the residual value.

The Group reassesses residual values, useful lives, and amortisation methods at the end of each financial year. Changes to initially established criteria are recognised as a change in accounting estimates.

4.12. Property, plant, and equipment

(a) Initial recognition

Property, plant, and equipment is stated at cost, less accumulated depreciation and any impairment losses. The cost of self-constructed assets is determined using the same principles as for an acquired asset, considering the principles established to determine the cost of production. The cost of production is capitalised with a charge to work performed by the Group on non-current assets in the consolidated income statement.

The cost of assets which have long installation periods includes finance costs accrued prior to their being put to use. Such costs meet the capitalisation requirements described above. 

The Group opted to use the previous GAAP remeasurement of property, plant, and equipment, as the cost recognised at 1 January 2004, as permitted by IFRS 1 First Time Adoption of IFRS.

(b) amortisation and depreciation

Property, plant, and equipment is depreciated systematically over the useful life of the asset. The depreciable amount of PP&E items is the cost of acquisition less the residual value. Each part of a PP&E item with a cost that is significant in relation to the total cost of the item is depreciated separately.

Depreciation of PP&E items is calculated using the straight-line method over their estimated useful lives, as follows:

The Group reassesses residual values, useful lives, and depreciation methods at the end of each financial year. Changes to initially established criteria are recognised as a change in accounting estimates.

(c) Subsequent recognition

Subsequent to initial recognition of the asset, only costs that will probably generate future economic benefits and which may be measured reliably are capitalised. Ordinary maintenance costs are expensed as they are incurred.

Replacements of property, plant, and equipment which meet the requirements for capitalisation are recognised as a reduction in the carrying amount of the items replaced. Where the cost of the replaced items has not been depreciated independently and it has not been practical to determine the respective carrying amount, the replacement cost is used as indicative of the cost of items at the time of acquisition or construction.

4.13. Leases

(a) Finance leases

The Viscofan Group classifies as finance leases all lease agreements in which the lessor substantially transfers to the lessee all the risks and rewards incidental to ownership of the asset. All other leases are classified as operating leases.

Assets acquired under finance leases are recognised as non-current assets according to their nature and purpose. Each asset is depreciated/amortised over its useful life when the Group considers there to be no doubt that it will acquire ownership of the assets at the end of the lease term. The assets are recognised at the lower of the fair value of the leased item and the present value of future lease payments.

(b) Operating leases

Lease payments under an operating lease, net of any incentives received, are recognised as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit.

Starting 1 January 2019, the Group is expected to apply the new IFRS 16, the impact of which is described in Note 10. 

4.14. Inventories

Inventories comprise non-financial assets which are held for sale by the consolidated entities in the ordinary course of business.

Cost comprises all costs of acquisition, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

Inventory conversion costs comprise the costs directly related with the units produced and a systematically calculated part of the indirect, variable or fixed costs incurred in the conversion process. Indirect fixed costs are distributed on the basis of the normal production capacity or actual production.

Indirect fixed costs distributed to each production unit are not increased as a result of a low level of production or idle production capacity. Indirect costs that are not distributed are recognised as expenses for the financial year in which they are incurred. In periods of abnormally high production, the amount of indirect costs distributed to each production unit is decreased so that inventories are not measured above cost. Variable indirect costs are distributed to each production unit on the basis of the actual use of the production facilities.

The methods applied by the Group to determine inventory costs are as follows:

• Raw materials, other materials consumed, and goods for resale: at weighted average cost.
• Finished and semi-finished products: at weighted average cost of raw and other materials and includes direct and indirect labour, plus other manufacturing overheads.

Volume discounts from suppliers are recognised when it is probable that the discount conditions will be met. Prompt payment discounts are recognised as a reduction in the cost of inventories acquired.

The cost of inventories is adjusted against profit or loss in cases where cost exceeds net realizable value. Net realizable value is considered as the following:

• Raw materials and other consumables: the Group only makes adjustments if the finished products in which the raw materials are incorporated are expected to be sold at a price equivalent to their production cost or lower; 
• Goods for resale and finished products: estimated sale price, less selling costs.
• Work in progress: estimated sale price for corresponding finished products, less the estimated costs for completion of their production and selling costs.

Write-downs and reversals of write-downs are recognised in the consolidated income statement for the year. When the circumstances that previously caused the inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the write-down is reversed against the following headings: “Changes in inventories of finished products” and “Work in progress and consumption of materials and other supplies.”  Write-downs may be reversed to the limit of the lower of cost and the new net realizable value.

(a) Emission rights

The Viscofan Group records emission rights when it owns them under the "Inventories" heading. 

Rights assigned free of charge to each plant under each national emission rights assignment plan are initially measured at market value on the date granted and are recognised as a credit to "Grants" (Note 4.18) in the consolidated statement of financial position. Rights acquired from third parties are recognised at their acquisition cost.

These assets are measured using the cost method. At each year end they are analysed for any indications of impairment of their carrying amounts.

These emission rights are eliminated from the statement of financial position when they are sold, delivered, or have expired. Should the rights be delivered, they are derecognised from the provision made when the CO2 emissions take place applying the FIFO method (first in, first out).

4.15. Non-current assets held for sale and discontinued operations

The Group classifies assets whose carrying amount is expected to be realised through a sale transaction, rather than through continuing use, as “Non-current assets held for sale” when the following criteria are met:

• When they are immediately available for sale in their present condition, subject to the normal terms of sale; and
• When it is highly probable that they will be sold. 

Non-current assets held for sale are accounted for at the lower of their carrying amount and fair value less cost to sell, except deferred tax assets, assets arising from employee benefits, and financial assets which do not correspond to investments in Group companies, joint ventures and associates, which are measured according to specific standards. These assets are not depreciated and, where necessary, the corresponding impairment loss is recognised to ensure that the carrying amount does not exceed fair value less costs to sell.

Disposal groups held for sale are measured using the same criteria described above. The disposal group as a whole is then remeasured at the lower of the carrying amount and fair value less costs to sell. 

Related liabilities are classified as “Liabilities held for sale and discontinued activities.”

A disposal group of assets is considered a discontinued operation if it is a component of an entity which either has been disposed of or is classified as held for sale and:

• Represents a significant and separate major line of business or geographical area of operations.
• Is part of a single coordinated plan to dispose of a significant and separate major line of business or geographical area of operations.

Discontinued operations are presented in the consolidated income statement separately from income and expenses from continuing operations, on a single line under "Profit from discontinued operations."

4.16. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and demand deposits with credit institutions. Other short-term, highly-liquid investments are also included under this heading, provided that they were readily convertible into specified amounts of cash and had an original maturity of close to or not exceeding three months. 

4.17. pidend

The interim pidends approved by the Board of Directors in 2018 and 2017 are included as a reduction of the Viscofan Group's equity.

4.18. Government grants

Government grants are recognised on the face of the balance sheet when there is reasonable assurance that they will be received and that the Group will comply with the conditions attached.

(a) Capital grants

Government grants in the form of non-monetary assets are recognised at fair value in the same manner, with a debit to deferred income. They are transferred to “Other income” in the consolidated income statement in line with the depreciation of the related asset.

Non-repayable grants related to emission rights are initially recognised at market value on the date granted under "Grants," and are recognised in the consolidated income statement as they are used. They are recognised in "Other income" on the consolidated income statement. 

(b) Operating subsidies

Operating subsidies are recognised as “Other income” in the consolidated income statement.

Grants received as compensation for expenses or losses already incurred, or for the purpose of providing immediate financial support not related to future expenses, are recognised as a credit to "Other Income" in the consolidated income statement.

(c) Interest rate subsidies

Financial liabilities with implicit interest rate subsidies in the form of below-market rates of interest are initially recognised at fair value. The difference between this value, adjusted where applicable by the costs of issue of the financial liability and the amount received, is recorded as an official grant based on the nature of the grant. 

4.19. Employee benefits 

(a) Liabilities for retirement benefits and other commitments

Defined benefit plans include those financed by insurance premium payments for which a legal and implicit obligation exists to settle commitments with employees when they fall due or pay additional amounts in the event the insurer does not pay all employee benefits relating to employee service in the current and prior periods. 

Defined benefit liabilities recognised in the consolidated statement of financial position reflect the present value of defined benefit plans at year end, less the fair value of the assets related to those benefits. 

Defined benefit plan costs are recognised under "Employee benefits expense" in the consolidated income statement and comprise current service costs plus the effect of any reduction or liquidation of the plan. 

Interest on the net liability/(asset) relating to the defined benefit plan is calculated by multiplying the net liability/(asset) by the discount rate and is recognised in financial results under "Financial expenses." 

Subsequent to initial measurement, the re-evaluation, which comprises actuarial gains and losses, the effect of the limit on the assets, excluding amounts included in net interest and performance of the plan assets are recognised immediately in the statement of financial position with a credit or debit to reserves, as appropriate, through other comprehensive income in the period in which they occur. These changes are not reclassified to profit or loss in subsequent periods.

A description of each of the Group’s defined benefit pension plans is included in Note 17.1.

(b) Termination benefits 

The Group recognizes termination benefits unrelated to restructuring processes when it is demonstrably committed to terminating the employment of current employees before the normal retirement date. The Group is demonstrably committed to terminating the employment of current employees when a detailed formal plan has been prepared and those affected have valid expectations that the process will be carried out, and there is no possibility of withdrawing or changing the decisions made. Indemnities payable in over 12 months are discounted at interest rates based on market rates of quality bonds and debentures.

(c) Short-term employee benefits 

Short-term benefits accrued by Group personnel are recorded in line with the employees’ period of service. The amount is recorded as an employee benefit expense and as a liability net of settled amounts. If the contribution already paid exceeds the accrued expense, an asset is recorded to the extent that it will reduce future payments or a cash refund.

The Group recognizes the expected cost of short-term benefits in the form of accumulated compensated absences, when the employees render service that increases their entitlement to future compensated absences, and in the case of non-accumulating compensated absences, when the absences occur. 

The Group recognizes the expected cost of profit-sharing and bonus payments when it has a present legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the obligation can be made.

4.20. Provisions

(a) General criteria

A provision is recognised in the balance sheet 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, provided a reliable estimate can be made of the amount of the obligation. 

The amounts recognised as a provision in the consolidated statements of financial position are the best estimate of the expenditure required to settle the present obligation at the consolidated balance sheet date, taking into account the risks and uncertainties related to the provision and, where significant, financial effect of the discount, provided that the expenditures required in each period can be reliably measured. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 

The financial effect of provisions is recognised under finance costs in the consolidated income statement.

Reimbursement rights from third parties are recognised as a separate asset where it is practically certain that these will be collected. The income reimbursed, where applicable, is recognised in the consolidated income statement as a reduction in the associated expense and is limited to the amount of the provision. 

If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed against income. The provision is reversed against the consolidated income statement where the corresponding expense was recorded.

(b) Onerous contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. 

(c) Restructuring expenses

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Provisions for restructuring only include payments directly related to the restructuring which are not associated to continuing activities of the Group.

(d) Emission rights provision 

Provision is made systematically for expenses related to the emission of greenhouse gases. This provision is cancelled once the corresponding free-of-charge and market-acquired rights granted by public entities have been transferred. 

4.21. Derivatives and hedge accounting

Derivatives are initially recognised at fair value on the date the derivative contract is signed and subsequently restated to fair value at each balance sheet date. The accounting for subsequent changes in fair value depends on whether the derivative has been designated as a hedging instrument and, if so, on the nature of the item being hedged. The group designates certain derivatives as:

• fair value hedges of recognised assets or liabilities or a firm commitment (fair value hedges) 
• hedges of a specific risk associated with cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges), or 
• hedges of a net investment in a foreign operation (net investment hedges). 

At the start of the hedging relationship, the Group documents the economic relationship between hedging instruments and the hedged items, including whether it is expected that changes in the cash flows of hedging instruments offset changes in the cash flows of the hedged items. The Group documents its risk management target and strategy to undertake its hedging transactions.

The fair values of derivative financial instruments designated in hedging relationships are broken down in Note 20. Changes to hedging reserves included in shareholders' equity are shown in Note 15. The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities.

Cash flow hedges that qualify for hedge accounting

The effective portion of changes in the fair value of derivatives designated and classified as cash flow hedges is recognised under cash flow hedge reserves in equity. The gain or loss relating to the ineffective portion is immediately recognised in the income statement for the year within other gains/(losses). 

When option contracts are used to cover expected transactions, the Group only designates the intrinsic value of the option contract as the hedging instrument. Up until 31 December 2017, the Group classified currency option contracts as derivatives held for sale and recognised at fair value through profit or loss.

The gains or losses corresponding to the effective portion of changes in the intrinsic value of option contracts are recognised under cash flow hedge reserves in equity. Changes in the time value of option contracts related to the hedged item ("aligned time value") are recognised through other comprehensive income under hedge cost reserves in equity.

When forward contracts are used to cover expected transactions, the Group generally only designates the change in fair value of the forward contract relating to the cash component as the hedging instrument. The gains or losses relating to the effective portion of changes in the cash component of forward contracts are recognised under cash flow hedge reserves in equity. Changes in the forward element of the contract related to the hedged item ("aligned forward element") are recognised through other comprehensive income under hedge cost reserves in equity. In some cases, the gains or losses corresponding to the effective portion of changes in the fair value of the entire forward contract are recognised under cash flow hedge reserves in equity.

Accumulated amounts in equity are reclassified in the years when the hedged item affects profit or loss for the year, as follows:

• When the hedged item subsequently results in the recognition of a non-financial asset (such as inventories), both deferred hedge gains and losses and the deferred time value or deferred forward points, as applicable, are included in the initial cost of the asset. Deferred amounts are ultimately recognised in profit for the year, as the hedged item affects profit or loss for the year (for example, via the cost of sales).  
• Gains or losses corresponding to the effective portion of interest rate swaps covering floating rate loans are recognised in profit or loss under finance cost at the time as the interest cost on hedged loans.

4.22. Income tax

Income tax on the profit for the year comprises current and deferred tax.

Current tax is the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the year. Current tax assets or liabilities are measured for amounts payable to or recoverable from tax authorities, using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences, whereas deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused tax credits. Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base.

Current and deferred tax is recognised as income or an expense and included in profit or loss for the year except to the extent that the tax arises from a transaction or event which is recognised, in the same or a different year, directly in equity, or from a business combination. 

(a) Taxable temporary differences

Taxable temporary differences are recognised in all cases except where:

• Arising from the initial recognition of goodwill or an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit, or
• Associated with investments in subsidiaries over which the Group is able to control the timing of the reversal of the temporary difference and it is probable that the timing difference will reverse in the foreseeable future.

In the foreseeable future, the group does not intend to dispose of companies or repatriate pidends beyond the profit for the year.

(b) Deductible temporary differences

Deductible temporary differences are recognised provided that:

• It is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the differences arise from the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit.
• The temporary differences are associated with investments in subsidiaries to the extent that the difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

Tax planning opportunities are only considered on evaluation of the recoverability of deferred tax assets and if the Group intends to use these opportunities or it is probable that they will be used.

(c) Measurement

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the years when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date and reflecting the tax consequences that would follow from the manner in which the Group expects to recover or settle the carrying amount of its assets or liabilities.

The carrying amounts of deferred tax assets are reviewed by the Group at each balance sheet date to reduce these amounts to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of the deferred tax assets to be utilised. 

Deferred tax assets which do not comply with the aforementioned conditions are not recognised in the consolidated statement of financial position. At year end the Group reassesses unrecognised deferred tax assets.

(d) Classification and offsetting

The Group only offsets current tax assets and liabilities if it has a legally enforceable right to offset the recognised amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

The Group only offsets tax assets and liabilities where it has a legally enforceable right, where these relate to taxes levied by the same tax authority and on the same entity and where the tax authorities permit the entity to settle on a net basis, or to realize the asset and settle the liability simultaneously for each of the future years in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Deferred tax assets and liabilities are recognised on the consolidated statement of financial position under non-current assets or liabilities, irrespective of the date of realisation or settlement.

(e) investment tax credits

The group has investment tax credits in certain subsidiaries. These tax credits are recorded by reducing the corporate income tax expense for the year in which they are applied.

4.23. Environmental issues

The Group takes measures to prevent, reduce or repair the damage caused to the environment by its activities.

Costs incurred from these activities are recognised under “Other operating costs” in the year in which they are incurred. 

Assets used by the Group to minimize the environmental impact of its activity and protect and improve the environment, including the reduction or elimination of future pollution caused by the Group’s operations, are recognised in the consolidated balance sheet based on the criteria for recognition, measurement, and disclosure detailed in Note 25.

4.24. Related party transactions

Transactions with related parties are accounted for in accordance with the measurement criteria detailed throughout this Note. The only transactions with related parties are detailed in Note 23 on "Information relating to directors of the parent and key management personnel of the Group". 

5.1. Sales and rendered services: 

The sales and services provided in the consolidated income statement include the delivery of goods to customers, services rendered in the course of the Group's ordinary activities and the sale of energy, net of sales-related taxes.

The detail of this heading for 2018 and 2017 is as follows:

Disaggregation of revenue from customer contracts

Revenue from external customers can be traced to the sale of artificial casings generally made to manufacturers of cold meats, as well as, to a lesser extent, the generation of electricity for sale to third parties through cogeneration systems. 

In terms of the sale of artificial casings, the Group considers that there is only one type of customer contract: sales correspond to a single performance obligation (sale of casings) and are made at a moment in time. 

In terms of the sales of electricity produced, they are recognised as the energy generated by cogeneration systems is produced and delivered, applying the tariffs in force. 

As there are no other types of customer contract, the Group has disaggregated sales by geographic location.

5.2. Other operating income: 

The breakdown of "Other Operating Income" for 2018 and 2017 is as follows:

During 2018, Other income includes the amount of €15.4 million corresponding to compensation for patent infringement (€8.5 million) and the amount received resulting from the agreement reached with Crown Food España S.A.U. to end the legal action between both companies (€6.9 million).

In 2017, under this same item, €11 million were recognised corresponding to compensation for the fire in November 2016 at a spare parts warehouse on the site belonging to Naturin GmbH.

The conditions or contingencies associated to grants received.

5.3. Personnel expenses

The breakdown of "Personnel expenses" in 2018 and 2017 is as follows:

Group employees during 2018 and 2017, by professional category and gender, were as follows:

Four parent employees have a recognized degree of disability equal to or higher than the legally-stipulated 33%, this information is given in accordance to Royal Decree 602/2016 of December 2. The breakdown by professional category are 3 operators and 1 administrative employee.

In 2017, this figure stood at five employees: the breakdown by professional category was 3 operators, 1 administrative and one technician/middle management.

Due to the circumstances of the production process, since 3 May 2017, Viscofan S.A. has recognised, through Resolution 1187 of the Managing Director of the Navarre Employment Service, the recognition of exceptionality that justifies adopting alternative measures to comply with the reserve quota in favour of disabled workers and authorises, as an alternative measure, the conclusion of civil or commercial contracts with Special Employment Centres, for a period of three years.

5.4. Other operating expenses

The detail of "Other operating expenses" for 2018 and 2017 is as follows:

"Plant expenses" includes, among other things, the works carried out at the Weinheim plant (Germany) as a result of the fire that occurred in November 2016 and which lasted until the first half of 2017.

“Other expenses” includes those corresponding to the acquisition of the Transform Pack Inc. and Globus Group Australia and New Zealand, amounting to 1.419 thousand euros. Expenses relating to the acquisition of the Supralon Group companies amounting to 598 thousand euros were included in 2017.

5.5. Financial income and expense

The breakdown of financial income and expenses for 2018 and 2017, according to the origin of the items making it up, is as follows:

6.1. Basic

The calculation of basic earnings per share is based on the profit for the year attributable to the shareholders of the parent and a weighted average number of ordinary shares in circulation throughout the year, excluding treasury shares.

The breakdown of the calculation of basic earnings per share is as follows:

6.2. Diluted

Diluted earnings per share are calculated by piding profit attributable to equity holders of the parent by the weighted average number of ordinary shares in circulation considering the diluting effects of potential ordinary shares. As there are no potential ordinary shares, diluted earnings per share does not differ from basic earnings per share.

GIRL 8: "Operating segments" establishes that an operating segment is a component of an entity:

1. when it engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity);
2. when its operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
3. for which discrete financial information is available.

The Group's management bases its decisions on the assignment of resources and performance evaluations on the profitability of the markets in which it operates; its key geographic areas are Spain, Europe, and Asia, North America, and South America. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss on the consolidated financial statements.

The Group also carries out production-related activities, and sells electricity through its cogeneration plants in Spain, Mexico, and Germany. These cogeneration activities have three aims: to decrease the cost of electricity while remaining self-sufficient, and at the same time reducing CO₂ emissions. Although the plants located in Spain and Mexico sell part of the energy produced to third parties, these activities are not organised as business segments, nor are they contemplated as business units to be reported on per se.

The following PP&E items and intangible assets in different segments were acquired during 2018 and 2017:

8.1 Acquisitions in 2018

a) Transform Pack Inc.

In February 2018, 100% of the shares of Transform Pack Inc. were purchased.

The fair value of the consideration at the acquisition date amounted to 2,232 thousand euros, 1,793 thousand euros of which were paid for in cash in 2018, leaving 439 thousand euros as a deferred amount that could be reduced by achieving certain sales goals included in the contract.

The incorporation of Transform Pack, its innovative spirit, combined with the know-how of Viscofan, our productive portfolio and our commercial network, opens up new opportunities that expand the range of solutions available on the market and that will make the development of this type of product available in many countries worldwide.

Amounts recognised at the date the assets, liabilities, and contingent liabilities were recognised at their fair value follow:

The goodwill generated and measured at cost amounts to 864 thousand euros, being the excess of the aggregate of the consideration transferred over the fair value of assets acquired and liabilities assumed.

The acquired business generated consolidated losses for the period for the Group amounting to 480 thousand euros during the period ranging from the acquisition date and year end, and ordinary income totalling 99 thousand euros, which were incorporated in the consolidated income statement.

Ordinary income generated during the entire year from the acquired business totalled 280 thousand euros, with net ordinary total losses of 1,069 thousand euros.

b) Globus Group Australia and New Zealand 

In November 2018, 100% of the shares of Globus Group Australia and New Zealand were purchased. 

The fair value of the consideration at the acquisition date amounted to 6,296 thousand euros, 5,536 thousand euros of which were paid for in cash in 2018, leaving 760 thousand euros as a deferred amount that could be reduced by achieving certain sales goals included in the contract.

The inclusion of Globus means that we will continue to expand our commercial and productive presence on a new continent, including the knowledge of this market and providing our customers with a better service and new solutions.

Amounts recognised at the date the assets, liabilities, and contingent liabilities were recognised at their fair value follow:

The acquired business generated consolidated losses for the period for the Group amounting to 217 thousand euros during the period ranging from the acquisition date and year end, and ordinary income totalling 2,391 thousand euros, which were incorporated in the consolidated income statement.

Revenue generated during the 2018 tax year (July 2017 - June 2018) from the acquired business totals 34,396 thousand euros, with a net ordinary total of 91 thousand euros.

The profit arising from the transaction totalled 5,486 thousand euros, and is recognised on the consolidated income statement under “Negative difference on business combinations.”

The most relevant factors contributing to the generation of a negative difference on business combinations is primarily attributable to the company's need for a strategic lift and the impact of the depreciation of the Australian dollar on last year's statement of profit or loss.

Net assets recognised on the financial statements a 31 December 2018 were definitively measured at fair value for both tangible and intangible assets. The Group used an independent expert to carry out the main valuations.

8.2 Acquisitions in 2017

In November 2017, the Group, through its subsidiary Naturin Viscofan GmbH, acquired 100% of the shares of Supralon International AG and Supralon Verpackungs AG, including their subsidiaries (Supralon Produktions und Vertriebs GmbH and Supralon France SARL).

The fair value of the compensation received at the acquisition date amounted to 12 million euros, 10,5 million euros of which were paid in cash; an agreement was reached to pay the remainder in instalments.

With this acquisition, the Viscofan Group strengthens its position in plastics technology, broadens its product range and improves its supply capacity in Europe, one of the main markets for this type of packaging.

Amounts recognised at the date the assets, liabilities, and contingent liabilities were recognised at their fair value follow:

The goodwill generated and measured at cost amounted to 1,386 thousand euros, being the excess of the aggregate of the consideration transferred over the fair value of assets acquired and liabilities assumed.

The acquired business generated a consolidated profit for the period for the Group amounting to 203 thousand euros during the period ranging from the acquisition date and year end, and ordinary income totalling 1,807 thousand euros, which were incorporated in the consolidated income statement.

Ordinary income generated during the entire year from the acquired business totalled 17,042 thousand euros, with net ordinary losses of 213 thousand euros.

Net assets recognised on the 2017 financial statements were definitively measured at fair value; obtained through an independent valuation of the land, buildings and machinery owned by Supralon Verpackungs AG and its subsidiaries. The remaining acquired net assets were also valued, including those which are intangible. The Group used an independent expert to carry out the main valuations.

The breakdown and movements in other intangible assets during 2018 and 2017 are as follows:

The balances of this heading at December 31, 2018 and 2017 are the following:

“Software” includes the ownership and usage rights for IT programs acquired from third parties.

Details of the cost of fully amortized intangible assets in use at December 31, 2018 and 2017 are as follows:

Impairment test

Below, we provide details of the calculation used in the impairment test for the different goodwill recognised at 31 December 2018.

a) Nanopack Technology & Packaging, S,L,

Goodwill for the sum of 3,520 thousand euros, recognised on the Group’s consolidated balance sheet corresponds to Nanopack Technology & Packaging, S.L.; its CGU corresponds to the legal company or subgroup (Note 5.2). It engages in manufacturing and marketing of film plastics and new products based on the acquired technology and its expected development.

The company acquired in 2015 is a start-up that is extremely focused on R&D&i in plastics technology in which they had made promising progress. As befits any company with these characteristics, it needs investment and commercial support to launch its novel products onto the market. After an improvement in UGE's turnover in 2018, it is expected to continue with increases in turnover in 2019, once the new products with high added value go on sale and following the completion of the stages prior to their launch, and once important customer accounts are consolidated following sales efforts underway, thus accelerating the foundations for growth in the future.

During 2017, the second complete year within the Group, Viscofan continued investing in increasing capacity and plant and equipment by following the initial plan, based on the forecasts of future growth expected by the Management, which is coherent with the long-term view and industrial policies of Viscofan Group.

The assumptions include an increasing volume of sales during the first year’s activity. 5-year projections were done, in which Management established forecasted business figures broken down by CGU managers (by year, country, customer, average product sales prices) based on historic data (internal/external sources), market, competition scenarios, information on new products and those in development, and actions to be implemented aimed at geographical expansion, and available macroeconomic forecasts.

The main assumption affecting cash flows arise from the projections made based on hypotheses on increases in average volumes and use of the installed capacity, as well as increases in sales prices and moderate costs. 

The residual growth rate stands at 1.5%, in line with estimated long-term growth. The pre-tax discount rate is 9.4%.

The investments made in 2017 make it possible to achieve the level of production required to satisfy sales of the last projected year on which the residual value is calculated. Current investments totalling ‘0.5 million euros should suffice to ensure that the plant remains operational and competitive.

The estimated residual value included a sustainable average flow and a growth rate of 1.5%. The sustainable average flow corresponds to cash flows during the most recently projected period.

Based on a sensitivity analysis;

• Variations of 10% in the discount rate do not imply the recognition of impairment.
• Sensitivity to reasonably possible changes in turnover does not entail the need to record any impairment losses. 

The consolidated carrying amount totalled 6,228 thousand euros (goodwill totalling 3,520 thousand, with PP&E items amounting to 2,708 thousand euros).

Therefore, taking the above into consideration, the Directors consider that at 31 December 2018, there were no indications that any impairment losses should be recorded.

b) CGU Supralon Group

Goodwill for the sum of 1,549 thousand euros, recognised on the Group’s consolidated balance sheet corresponds to the Supralon Group, whose CGU corresponds to the legal company or subgroup, dedicated to the production and distribution of casings for the meat industry.

The company, acquired in 2017, is a company with a productive presence in Germany and commercial distribution in the main European markets. 

During 2018, the first complete year within the Group, Viscofan continued investing and focussed efforts on optimising commercial resources and access to new customer accounts, following the initial plan set out by the Viscofan Group.

The assumptions include an increasing volume of sales during the first year’s activity. 5-year projections were done, in which Management established forecasted business figures broken down by CGU managers (by year, country, customer, average product sales prices) based on historic data (internal/external sources), market, competition scenarios, information on new products and those in development, and actions to be implemented aimed at geographical expansion, and available macroeconomic forecasts.

The residual growth rate stands at 1.5%, in line with estimated long-term growth. The pre-tax discount rate is 9.4%.

The estimated residual value included a sustainable average flow and a growth rate of 1.5%. The sustainable average flow corresponds to cash flows during the most recently projected period.

Based on a sensitivity analysis;

• Variations of 10% in the discount rate do not imply the recognition of impairment.
• Sensitivity to reasonably possible changes in turnover does not entail the need to record any impairment losses. 

The consolidated carrying amount totalled 7,204 thousand euros (goodwill totalling 1,549 thousand, with PP&E items amounting to 5,655 thousand euros).

Therefore, taking the above into consideration, the Directors consider that at 31 December 2018, there were no indications that any impairment losses should be recorded.

c) Transform Pack Inc.

Goodwill for the sum of 864 thousand euros, recognised on the Group’s consolidated balance sheet corresponds to the Transform Park Inc. whose CGU corresponds to the legal company or subgroup.

Transform Pack Inc., based in Moncton (Canada), is a pioneering company in the industry that is defined by the development of innovative products with value-added technology. Worth particular mention are the casings capable of transferring ingredients: spices, flavours, aromas and colours to cold meats and other meat products in natura. Transform Pack Inc. significantly facilitate certain production processes of our customers and improve the consumer experience.

The incorporation of Transform Pack Inc., its innovative spirit, combined with the know-how of Viscofan, our productive portfolio and our commercial network, opens up new opportunities that expand the range of solutions available on the market and that will make the development of this type of product available in many countries worldwide.

The assumptions include an increasing volume of sales during the first year’s activity. 5-year projections were done, in which Management established forecasted business figures broken down by CGU managers (by year, country, customer, average product sales prices) based on historic data (internal/external sources), market, competition scenarios, information on new products and those in development, and actions to be implemented aimed at geographical expansion, and available macroeconomic forecasts.

The residual growth rate stands at 1.5%, in line with estimated long-term growth. The pre-tax discount rate is 9.4%.

The estimated residual value included a sustainable average flow and a growth rate of 1.5%. The sustainable average flow corresponds to cash flows during the most recently projected period.

Based on a sensitivity analysis;

• Variations of 10% in the discount rate do not imply the recognition of impairment.
• Sensitivity to reasonably possible changes in turnover does not entail the need to record any impairment losses. 

The consolidated carrying amount totalled 2,446 thousand euros (goodwill totalling 835 thousand, with PP&E items amounting to 1,611 thousand euros).

Therefore, taking the above into consideration, the Directors consider that at 31 December 2018, there were no indications that any impairment losses should be recorded.

The breakdown and movements in property, plant, and equipment during 2018 and 2017 are as follows:

The balances of this heading at December 31, 2018 and 2017 are the following:

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In 2018, investments in property, plant and equipment in the Group totalled 67,157 thousand euros. The main projects have been the completion of the Cáseda plant (Spain), the installation of new technology to manufacture viscose-based casings and the installation and commissioning of a new edible collagen capacity in Serbia.

In 2017, investments in property, plant and equipment in the Group totalled 103,417 thousand euros. The main projects were the construction of a new plant to install fibrous production in Cáseda (Spain), improvement of capacity and processes in cellulose, fibrous, plastic and collagen, energy optimisation improvements as well as improving safety conditions in various facilities.

Details of fully depreciated property, plant, and equipment in use at December 31, 2018 and 2017 are as follows:

The Group’s buildings, plant, and equipment were partly financed by government grants of 274 and 181 thousand euros in 2018 and 2017, respectively (Note 16).

The Group has insurance policies covering the various risks to which its items of property, plant, and equipment are exposed. The coverage of these policies is considered sufficient.
Within the framework of the annual investment plan, at year-end 2018 there were commitments to acquire PP&E for 4,850 thousand euros, which was mainly related to the improvement of technological processes.

At year-end 2017 there were commitments to acquire PP&E for 7,000 thousand euros, which was mainly related to the reconstruction of the building that burned down in Germany and innovation in technological processes.

Finance leases

The Group leases buildings and other items under finance leases as follows:

Details of minimum payments and current finance lease liabilities, by maturity date, are as follows:

Operating leases

The Group leases various warehouses and other PP&E items in various countries.

Lease-related expenses during the year totalled 6,714 thousand euros (2017: 6,652 thousand euros - Note 5.4).

The Group has assessed the potential effect of IFRS 16 on its consolidated financial statements, with the value of use right assets as follows:

Commitments in 2018 have not substantially differed from those in 2017.

The minimum future payments on these contracts, by nature of the fixed assets in 2017, came to 7,613 thousand euros. The difference between the two periods corresponds to the estimates made to calculate future payments to be made under the new standard, IFRS 16, applicable from 1 January 2019.

Details of inventories at December 31, 2018 and 2017 are as follows:

The valuation adjustments in 2018, corresponding to impairment and obsolescence, entailed an expense of 1,696 thousand euros (an income of 139 thousand euros in 2017 and they are recognised under "Consumption of raw materials and other consumables" and “Changes in inventory of finished goods and work in progress” on the consolidated income statement and are recognised under "Consumption of raw materials and other consumables" and “Changes in inventory of finished goods and work in progress” on the consolidated income statement.

The emission rights consumed by the Company during 2018 and 2017 amounted to 258,960 and 250,324 tons, respectively.

Group companies have contracted various insurance policies to cover the risk of damage to inventories. The coverage of these policies is considered sufficient.

12.1 Trade and other receivables

The breakdown for "Trade and other receivables" at December 31, 2018 and 2017 is as follows:

At December 31, 2017 and 2017, the age of balances receivable related to sales based on their maturity, including balances which have not yet fallen due, those which have, and those which are totally impaired is the following:

The Group has credit insurance contracts which cover the collection of the greater portion of its customer balances.

The movement in provisions for irrecoverable debt from trade receivables and other receivables is as follows:

Trade receivables do not carry interest, and generally payment conditions range from 45 to 90 days.

The breakdown by currency for “Trade and other receivables” is as follows:

12.2. Receivables from public administrations

At December 31, 2018 and 2017, balances receivable from public administrations are as follows:

A breakdown by currency is as follows:

In 2018, VAT payable includes a balance to be recovered by ICMS (Brazilian VAT equivalent) amounting to 3,785 thousand euros. In this regard, Viscofan do Brasil has taken steps to enable it to compensate and recover these balances in the short term (see Note 13).

Impairment losses on financial assets

Trade and other receivables are subject to the expected credit loss model. However, the impairment identified is immaterial.

Cash and cash equivalents is also subject to the impairment requirements under IFRS 9, although the impairment identified is also immaterial.

To establish the expected credit loss, the Group applies the simplified approach set out under IFRS 9.

To measure expected credit loss, trade receivables have been grouped together based on the characteristics of the shared credit risk and the days past due.

The expected loss rates are based on the payment profiles of sales during a 36-month period prior to 1 January 2018 and the corresponding historic credit losses experienced during this period. Historic loss rates are adjusted to reflect annual, forward-looking information about macroeconomic factors that affect the ability of customers to repay accounts receivable.

Furthermore, the Group impairs these accounts receivable by assessing the specific risks of irrecoverability, as was the case in the previous year, to establish whether there is objective evidence that an impairment has occurred. The Group considers that an impairment occurs when the debtor experiences significant financial difficulties or when there is a non-payment or delay in payments of more than 180 days.

The accounts receivable for which an impairment provision was recognised are eliminated against the provision when there is no expectation that additional cash will be recorded.

All financial instruments at 31 December 2018 and 2017 are included in level 2: assets and liabilities whose fair value has been determined with technical valuation techniques that use hypotheses observable in the market.

The breakdown at 31 December 2018 and 2017 of current and non-current financial assets not including trade and other receivables is as follows:

Within the sum of financial investments, the recoverable balance of ICMS (Brazilian VAT equivalent) is included, for the sum of 6,439 thousand euros. In the State of Sao Paulo, ICMS on imports is borne at a rate of 18%, whilst the ICMS charged depends on the State in which sales are made and can oscillate between 4% and 18% in the State of Sao Paulo alone. This is the reason for the negative ICMS balance which, the Sao Paulo state’s tax authorities only permit recovery through offsetting against other balances generated by the same tax. In this regard, Viscofan do Brasil took steps to enable it to compensate and recover them within an estimated 2-3 years.

A breakdown of financial instruments by maturity is as follows:

Impairment losses on financial assets

All debt investments by the entity at amortised cost and at fair value through profit or loss and through other comprehensive income are considered as being under credit risk and, therefore, the value adjustment recognised during the year is limited to the losses expected in 12 months. The management believes that the investment is "low risk" when the risk of non-payment is low and the issuer has a strong ability to fulfil its contractual cash flow obligations in the short term.

The Group has not recognised any impairment in relation to these assets at 31 December 2018 (or 31 December 2017).

"Cash and cash equivalents" at December, 31 2018 and 2017 correspond entirely to balances held by the Group in cash and credit accounts, and an account which earns interest at market rates. The Group had no banking overdrafts during the periods, with all its balances freely distributable.

A breakdown by currency is as follows:

15.1. Share capital

At 31 December 2018 and 31 December 2017, the parent's share capital consisted of 46,603,682 registered ordinary shares with a par value of 0.70 euros each, fully subscribed and paid in. The shares were fully subscribed and paid in. The total capital value amounts to 32,623 thousand euros.

All shares bear the same voting and dividend rights and obligations, and are listed on the official Stock Exchanges of Madrid, Barcelona, and Bilbao under the automatic quotation system (continuous market).

All shares are freely distributable.

At December 31, 2018 and 2017, the parent was aware of the following shareholders with a direct or indirect stake of over 3%:

Additionally, in accordance with Article 32 of Royal Decree 1362/2007, of 19 October, on shareholders obliged to notify their residence in tax havens or in countries not requiring the payment of taxes, or with whom there is no effective exchange of tax information, no notification was received at year-end 2018 and 2017.

Capital management

The primary objective of the Viscofan Group’s capital management is to safeguard its capital ratios to ensure the continuity of its business and maximize performance.

To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders, increase capital or cancel treasury shares.

The Group monitors capital by analysing trends in its leverage ratio, in line with common practice in Spain. This ratio is calculated as net financial debt divided by total equity. Net financial debt includes total borrowings in the consolidated financial statements less cash and cash equivalents, and excluding current financial assets.
 

The Viscofan Group's primary objective is to maintain a healthy capital position. The leverage ratios as well as the analysis of net debt, at 31 December 2018 and 2017 were as follows:

The change in net debt, at 31 December 2018 and 2017 is as follows:

15.2. Share premium and other reserves

The revised text of the Spanish Corporate Enterprises Act expressly permits companies to use the balance of the share premium account to increase capital and does not place any limit on the amount of the balance which may be used for this purpose.

Changes in this item are as follows:

(a) Legal reserves

In accordance with the Spanish Corporate Enterprises Act, companies registered in Spain are obliged to transfer 10% of the profits for the year to a legal reserve until it reaches an amount of at least an amount equivalent to 20% of share capital. This reserve is not distributable to shareholders and its value at 31 December 2018 and 2017 amounts to 2,935 thousand euros.

(b) Revaluation reserve

The parent opted for the voluntary revaluation of PP&E items as established in the Navarre Regional Law 21/2012 of December 26, on modifying various taxes and other tax measures. The revaluation was carried out with respect to items recorded in the balance sheet for the year ended 31 December 2012, with the resulting reserve, net of 5% tax, amounting to 7,329 thousand euros. The effect of said revaluation was not recognised in the consolidated financial statements of the Group.

Once the inspection period had past, during 2018 the balance may be used to:

• Offset prior years’ losses.
• Increase share capital.
• Increase freely distributable reserves once ten years have elapsed from the closing date of the balance sheet for the year in which the revaluation was recognised. However, said balance can only be distributed, directly or indirectly, when the remeasured equity items have been fully depreciated, transferred, or derecognised.

Revaluation reserve in accordance with Navarra Regional Law 23/1996, is considered as distributable from 31 December 2006, on to the extent that gains have been realised, that is, when the related assets have been depreciated, disposed of or otherwise written off.

(c) Treasury share reserves

Pursuant to Article 148 of Royal Legislative Decree 1/2010, of 2 July, approving the revised text of the Corporate Enterprises Act, the Parent Company must establish an unavailable reserve equivalent to the value of treasury shares in its possession (see Note 15.5). These reserves must be held for both stakes and shares that have not been disposed of.

15.3. Valuation adjustments

Movements in the years ended December 31, 2018 and 2017 were as follows:

15.4. Exchange gains (losses)

The detail of the most significant translation differences by company for the years ended 31 December 2018 and 2017 is as follows:

15.5. Movement in treasury shares

At the Ordinary Meeting of 23 May 2018, an agreement was reached to invalidate the authorisation granted to the Board of Directors at the General Meeting of 30 April 2013 and new authorisation granted to the Board of Directors to acquire and hold treasury shares as follows:

Provide new authorisation to the Board of Directors to buy and sell on the market, through the person, Company or institution that it deems advisable, shares in the Company at the market price on the transaction date, for the maximum number of shares permitted by the Corporate Enterprises Act and related provisions, with the minimum price not being below the nominal value or more than 15% higher than the share price listed on the Spanish Automated Quotation System at the time of the acquisition.

In 2018, the following treasury share acquisitions took place. At 31 December 2018, Viscofan, S.A. held a total of 103,682 treasury shares that represented 0.22% of the voting rights, acquired at a total price of 5,289 thousand euros.

In 2017, there were no changes in treasury shares.

15.6. Appropriation of profit and other remuneration paid to the shareholders

The proposed distribution of income of the parent for 2018, formulated by the Directors of the parent and pending approval by the General Shareholders' Meeting, corresponds to a total remuneration to shareholders of 1.73 euros per share, of which, the distribution of earnings in the form of dividends is 1.59 euros per share and 0.01 euros per share for the premium payment for attending the General Shareholders' Meeting in 2019.

Additionally, an extraordinary dividend of 0.13 euros per share (paid on 22 March 2018) was distributed for the extraordinary capital gain from the payment of compensation for the patent.

In relation to 2017, the total remuneration for shareholders amounted to a total of 1.55 euros per share. Of the above, the distribution of profit represented a per-share dividend of 1.54 euros and 0.01 euros corresponding to the payment of attendance fees related to the 2018 General Shareholders Meeting. This premium was recognised as an expense for the year.

Parent profits for the year ended 31 December 2017 were distributed as approved by the shareholders at their annual general meeting held on 25 May 2018.

On 22 November 2018, based on projected profit for the year, the Board of Directors approved an interim dividend for 2018 of 29,760 thousand euros, equal to 0.64 euros per share. This dividend was paid on December 20, 2018.

Total remuneration in 2018 came to 35,818 thousand euros, of which 6,058 thousand euros correspond to the extraordinary dividend and 29,760 thousand euros to the interim dividend.

The value of the dividend is less than the maximum limit permitted by prevailing legislation on distributable profit after the previous year end.

The statement required by current legislation and prepared by the parent's Board of Directors in respect of the distribution of the interim dividend for 2018 is as follows:

The movements under this heading in 2018 and 2017 were as follows:

The breakdown of capital grants during 2018 and 2017, all related to PP&E items, is as follows:

Details at 31 December 2016 and 2015 are as follows:

17.1. Provisions for defined benefit plans

The Group makes contributions to various different defined benefit plans. The most relevant plans are located in Germany.

Independent actuarial valuations are used for all of them and there are no assets assigned to pension plans.

• Pension plans in Germany

A contribution is made through the Naturin Viscofan GmbH subsidiary for a defined benefit plan consisting of a life pension plan for retired employees. At December 31, 2018, there were 386 employees, 442 retirees, and ex-employees. At December 31, 2017, there were 401 employees and 449 retirees and ex-employees.

The number of the above beneficiaries does not included retirees which, from 2010 and 2013 are paid by the insurance company. The agreement does not imply cutting back or cancelling the policy, as the obligation ultimately lies with Naturin Viscofan GmbH. However, the characteristics of the plan make the value of the assets and liabilities constant for the duration of the contract, so that both the assets and the liabilities offset each other, resulting in a current value of zero for the obligation.

The net obligation corresponding to pension plans amounts to 16,153 thousand euros at 31 December 2018, and 16,446 thousand euros at 31 December 2017.

a) Changes in the present value of the obligations are as follows:

b) The following table provides information relating to the amounts recognised in the consolidated income statement. Current service costs for the period are included in employee benefits expenses.

c) The following table provides information relating to the amounts recognised in the consolidated statement of comprehensive income:

d) The principal actuarial assumptions used in the plans located in Germany are as follows:

The mortality tables used to quantify the defined benefit obligation were those corresponding to Heubeck Richttafeln 2005 G.

Future payments expected for coming periods are shown in the following table:

The following table shows the sensitivity analysis for each of the main hypotheses on how a possible reasonable change in each hypothesis would affect the obligation at year end:

The sensitivity analysis is based on a change in one hypothesis while considering the remaining hypotheses as unchanged.

17.2. Other employee benefits and long-term remuneration

The movements at December 31, 2018 and 2017, are as follows:

Included under this heading are prizes that the subsidiary Naturin Viscofan GmbH has established for its employees. When its employees complete 10 years of service, a payment of 1,000 euros, 25 and 40 years of service (both amounting to 1,000 euros plus the gross monthly salary multiplied by 1.6 and one day of holiday), and, if applicable, 50 years of service (one day of holiday). They are settled with lump sum payments on the date on which the workers complete the relevant years of service.

The hypotheses used for calculating the obligations were the same as those used for the pension plan of the same subsidiary as described in the previous point.

The number of beneficiaries amounts to 386 employees (401 in the previous period), while the obligation amounts to 2,754 and 2,593 thousand euros at 31 December 2018 and 2017, respectively. The beneficiaries received 126 thousand euros in payments during 2017 (2016: 166 thousand euros). The payable amount expected for 2019 totals 298 thousand euros.
recognised service costs and financial expenses for the current period amounted to 163 thousand and 48 thousand euros, respectively (2017: 137 thousand and 43 thousand euros, respectively).

17.3. Provisions for other litigations

The movements at December 31, 2018 and 2017, are as follows:

The provision for other litigation mainly covers claims brought against the Brazilian subsidiary by the Brazilian tax authorities and certain company employees. After seeking appropriate legal counsel, the directors consider that the result of the litigation will not significantly differ from the amounts provisioned at 31 December 2018.

17.4. Provision for guarantees / refunds

A provision is recognised for warranty claims anticipated for products sold during the last year, based on past experience regarding the volume of returns. Most of these costs are expected to be incurred in the following year.

17.5. Safety in the workplace provision

The safety in the workplace provision covers claims brought against the Group by certain employees, most of whom are based in the US, related to workplace accidents. These claims did not arise as a result of a specific incident, but are customary practice in many companies. After seeking appropriate legal counsel, the directors consider that the result of the litigation will not significantly differ from the amounts provisioned at 31 December 2018.

17.6. Emission rights provision

The emission rights provision includes the estimated consumption of emission rights during 2018 and 2017 valued in accordance with the measurement standard described in Note 4.14.

17.7. Contingent assets and liabilities

(a) Contingent liabilities

At year end, there were a number of different legal claims filed against the Brazilian subsidiary totalling 4.47 million euros.

As indicated in Note 17.3, at 31 December 2018, a 0.3 million euro provision was recognised (2017: 0.4 million euros). In the opinion of the Group's legal advisors in Brazil, all those which are not recognised under liabilities are considered to be potential risks, or that possible related amounts cannot be determined at the moment. Based on historic experience, the related amounts of all possible claims are under 5%.

Also, at year end, there were a number of ongoing lawsuits against Griffith Colombia, S.A. (“Griffith”) which sold Viscofan Group products in Colombia. In the year ending 31 December 2012, Viscofan terminated its commercial relationship with Griffith. As a result of this termination, Griffith Colombia stopped paying invoices and, to date, Griffith owes Viscofan CZ, S.R.O. an amount acknowledged in a final ruling of approximately 800,000 euros. On the other hand, Griffith presented a claim in Colombia against Viscofan do Brasil, Viscofan CZ and Viscofan SA claiming compensation for the termination of the contract, with there having been no significant changes in the proceedings in 2018. Griffith also presented a claim of unfair competition in Colombia against Viscofan do Brasil, Viscofan CZ and Viscofan SA that was rejected at first instance and partially upheld on appeal. In 2018, Viscofan do Brasil, Viscofan CZ and Viscofan SA appealed the ruling handed down in the appeal before the Supreme Court, which remains outstanding, which is considered unlikely to be successful. In conclusion, and in light of the circumstances addressed, it is believed that Griffith's claims represent a remote risk of a negative impact on Viscofan's financial statements.

(b) Contingent assets

Viscofan S.A. filed legal proceedings before the Mercantile Court against Sayer Technologies S.L. for revealing confidential information. The case has been heard and the action is currently pending the first-instance ruling.

In terms of the electricity sector regulation in Spain, in September 2018, Viscofan, S.A. received the combined agreement from the Treasury of Navarre rejecting the applications for the refund of revenue obtained unduly in terms of the tax on Electricity Production corresponding to 2013, 2014 and 2015 on the basis that this tax breaches different legal provisions at a European level and in the Spanish Constitution. On 31 October 2018, Viscofan, S.A., filed an administrative economic claim against this rejection before the Administrative Economic Court of Navarre.

In July 2018, Supralon International AG initiated arbitration proceedings against Podanfol S.A. for different breaches of a supply contract it had entered into. In these proceedings, Supralon International AG is requesting the payment of contractual penalties for the sum of 3 million euros and damages for an amount yet to be defined.

18.1. Trade and other payables

The breakdown of "Trade and other payables" is as follows:

A breakdown by currency is as follows:

18.2. Payable to public administrations

The breakdown of this heading is as follows:

A breakdown by currency is as follows:

18.3. Information on late payments to suppliers in Spain in commercial transactions

In accordance with the Third transitory provision "Disclosure requirements" of Law 15/2010 dated 5 July, information the average payment period to Spanish Group suppliers to the Spanish entities included in the consolidated group follows:

The breakdown of current and non-current financial liabilities, taking into account discounted contractual maturities at December 31, 2018 and 2017, is as follows:

All current and non-current financial liabilities are included in Level 2 within the valuation hierarchies: assets and liabilities whose fair value has been determined with technical valuation techniques that use hypotheses observable in the market.

As can be seen in the previous table, the carrying amount of financial liabilities agrees with the fair value as the long-term debt corresponds to financing obtained in recent years under similar conditions to those currently obtainable in the market.

The classification was determined based on actual maturities of balances drawn down from credit lines. Thus, the balance drawn down from credit lines whose annual renewal has already been agreed upon subsequent to year end are included in the 3-month period.Financial liabilities for bank borrowings bearing interest at floating rates are referenced to Euribor or Libor plus an average spread of 0.683 percentage points (0.744 percentage points in 2017).

The average fixed interest rate on financial liabilities for bank borrowings in 2018 is 1% (1.067% in 2017).

"Other financial liabilities" at 31 December 2018, both current and non-current, mainly includes:

• A loan from the parent amounting to 2,500 thousand euros. The nominal amount received from COFIDES (Compañía Española de Financiación del Desarrollo) totalled 5,000 thousand euros. It accrues interest at market rates.
• Loans with interest rates sponsored by entities such as the CTDI and the Ministry of Economy and Competitiveness amounting to 10,588 thousand euros.
• Non-current assets suppliers, amounting to 7,838 thousand euros.
  December 31, 2017 mainly includes:
• A loan from the parent amounting to 3,333 thousand euros. The nominal amount received from COFIDES (Compañía Española de Financiación del Desarrollo) totalled 5,000 thousand euros. It accrues interest at market rates.
• Loans with interest rates sponsored by entities such as the CTDI and the Ministry of Economy and Competitiveness amounting to 10,211 thousand euros.
• Non-current assets suppliers, amounting to 8,079 thousand euros.

The Group recognizes the implicit interest on these loans using market interest rates.

A breakdown by currency is as follows:

The limits, the amount drawn down, and the drawable amount under credit and discount lines, as well as customer invoice advances at December 31 are as follows:

The undiscounted value of financial liabilities classified by maturity at December 31, 2018 and 2017 is as follows:

At 31 December 2018, the Group had reverse factoring facilities with a joint limit of 5,600 thousand euros (5,600 as at 31 December 2017), as well as multi-risk policies totalling 8,000 thousand euros, as in December 2017.

The breakdown of balances which include the values of derivatives at December 31, 2018 and 2017 is as follows:

20.1. Raw material hedges

A significant amount of the Company's production costs is linked to energy costs. For this reason, and in order to mitigate the negative effect that variations in energy prices could have on energy prices, in 2018 the Company entered into hedging contracts on the cost of gas for a total of 840,000 MWh, covering gas purchases for the period from February 2019 to January 2020, the contracted prices of which range from 2.05 to 2.368 euro cents per kilowatt hour. The amount contracted in 2016, for 2018, amounted to a total of 540,000 MWh. These contracts were arranged based on the parent's hedging policies, which cover up to 80% of the foreseen gas consumption.

The valuation formula used included, among other variables, Brent forward prices; and there are no significant inefficiencies.

20.2. Exchange rate insurance

Part of the fair value of the exchange rate insurances at year end was recognised as income or expense on the consolidated income statements for 2018 and 2017. The amount recognised directly in the consolidated income statements relates to exchange rate insurances designated as hedges to cover amounts payable or receivable recognised in the consolidated statements of financial position at the exchange rate at year end. No significant inefficiencies were noted in 2018 and 2017 in any derivative financial instruments contracted.

The Viscofan Group uses derivatives to hedge exchange rates in order to mitigate the possible adverse effects that exchange rate fluctuations might have on transactions in currencies other than the functional currency of certain Group companies.

The nominal value of the main exchange rate insurances in effect at December 31, 2018 and 2017, is as follows:

The breakdown for deferred tax assets and liabilities, by type, is as follows:

Deferred tax assets, on current assets, are mainly due to the effect on tax of the elimination of the margin in inventory acquired between Group companies, as well as provisions on inventories that are not tax-deductible in some countries. With respect to the deferred tax asset from non-current assets, this relates mainly to the activation of tax credits for tax losses. In addition, deferred tax assets arising from current and non-current tax liabilities relate mainly to provisions at different Group companies that will be used for tax purposes when applied. A large number of the provisions described in Note 17 have led to adjustments in the tax assessment basis in the different countries.

Deferred tax liabilities arising from non-current assets for the years ended 31 December 2018 and 2017, mainly relate to the application of different amortisation rates by certain Group subsidiaries (mostly in the USA) than those used for tax purposes. Also included is the tax effect of net unrealised gains on PP&E items acquired in different business combinations.

The breakdown of changes during the year in recognised deferred tax assets and liabilities arising from temporary differences recognised as income tax expense/(income) on the consolidated statement of recognised income and expense and as “Other income and expenses” on the consolidated comprehensive income statement is as follows:

The breakdown of deferred taxes charged directly against “Other comprehensive income" on the consolidated income statement is as follows:

The major components of income tax expense for the years ended December 31, 2018 and 2017, are as follows:

A reconciliation between tax expense/(income) on continued operations and the product of profit before tax multiplied by the tax rate prevailing in Spain on 31 December, is as follows:

During 2016 the Chinese subsidiary Viscofan Technology (Souzhou) Co. Ltd.'s rating was again deemed as "High Tech" for 3 years and therefore its tax rate dropped from 25% to 15%.

Viscofan CZ, s.r.o. obtained investment incentives from the Czech Republic's Ministry of Industry and Commerce which will materialize in deductions in upcoming years. The maximum amount of the deduction is 3.65 million Czech crowns corresponding to investments of up to 16.23 million Czech crowns over the next 9 years. The deduction to be applied each year may not cause the effective corporation tax expense to be less than that from the two preceding years. In 2018 and 2017 no deductions were applied because the aforementioned requirement was not met.

Koteks Viscofan, d.o.o. may avail itself of a tax incentive which would reduce the corporate income tax quota 83% in tax returns presented until 2021 thanks to investments and the creation of jobs in the Serbian Republic.
In addition, Uruguay's Ministry of Economy and Finance approved in 2012 the exemption from corporation tax for an amount related to the eligible investment, which will be applicable for a period of 25 years. The exemption may not exceed a maximum percentage of net tax revenue (90% in the first half of the 25-year period and thereafter will fall to 10%).

Income tax payable from continued operations was calculated as follows:

This amount is broken down in the consolidated statement of financial position as follows:

In accordance with current legislation, taxes cannot be considered definitive until they have been inspected by the tax authorities or the inspection period of four years has elapsed. At 31 December 2018, the parent and subsidiaries in Spain are open to inspection of all applicable taxes to which they are liable and for which the corresponding inspection periods have yet to expire. The situation of foreign companies depends on the legislation prevailing in each country.

Due to the different possible interpretations of prevailing legislation, additional liabilities could be identified in the event of inspection. Nonetheless, parent management considers that any additional liabilities that might arise would not have a significant impact on these consolidated financial statements.

Risk management is controlled by the Group, in keeping with policies approved by the Board of Directors. The risk control system is described in section E. Risk management and control systems of the Annual Corporate Governance Report from the parent company, listing those that might affect the achievement of objectives, their materiality in 2018, and response and supervision plans. We will now focus on the financial risks described below.

The Group's activities are exposed to various financial risks: foreign currency, credit, liquidity and interest rate risk in cash flows and fair value. The Group’s global risk management program focuses on the uncertainty of financial markets and aims to minimize the potential adverse effects on the Group’s profitability. Certain risks are hedged by derivative instruments.

22.1. Exchange rate risk

As the Group operates internationally, it is exposed to variations in exchange rates, particularly the US Dollar. The exchange rate risk arises from future commercial transactions, recognised assets and liabilities and net investments abroad.

The risk management policy of the Group is to cover the net balance between collections and payments in currencies other than the functional currency with the most net risk. Therefore, forward currency contracts were formalised at the time the yearly budget was prepared; EBITDA forecasts were used as the basis for the following year, the degree of exposure, and the degree of risk the Group is willing to assume.

The following table shows the sensitivity of a possible exchange rate variation on net results for the year arising from certain currencies in the countries in which the Group carries out its activities, while maintaining the other variables constant:

The following table shows the impact on consolidated equity of changes in the exchange rates of certain currencies of countries where the Group conducts business:

22.2. Credit risk

The Viscofan Group’s main financial assets are cash balances, trade and other receivables, and investments, which represent the Group’s maximum exposure to credit risk.

The Group's credit risk relates mainly to trade receivables. Amounts reflected on the consolidated balance sheet, net insolvency provisions, estimated based on experiences gleaned from prior years, age, and valuation in the current economic environment. This would be the maximum amount of exposure to this type of risk.

There is no significant concentration of credit risk within the Group; its exposure is spread among a large number of counterparties and customers. No clients or associated group companies represented sales and amounts receivable higher than 10% of total risk.

The Group has a credit policy, with exposure risk managed as part of its normal course of business. Credit evaluation of clients is performed in all cases where amounts exceed a set limit. It is habitual practice of Group companies to partially cover non-payment risk through contracting loan guarantee and sureties covering approximately 90% of each client’s debt. For countries at risk, coverage is reduced to 80%. In Countries without insurance coverage, guarantees such as advances and deposits on account are mandatory.

Credit risk arising from liquid funds and derivative financial instruments is limited due to the fact that counterparties are banking institutions with high credit ratings assigned by international agencies.

The Directors consider that during 2018, there were no significant assets which might be impaired as concerns their net realisable value.

 
22.3. Liquidity risk

The Group has a prudent policy to cover its liquidity risks which is focused on having sufficient cash and marketable securities as well as the ability to draw down sufficient financing through its existing borrowing facilities to settle the market positions of its short-term investments. Given the dynamic nature of its underlying business, the Group aims to be flexible with regard to financing through drawdowns on its contracted credit lines.

The Group adequately monitors each month expected collections and payments to be made in the coming months and analyses any deviations from expected cash flows in the previous month to identify any possible deviations which might affect liquidity.

The following ratios show the level of liquidity at December 31, 2018 and 2017:

The amounts available on credit and discount lines do not include confirming lines or multi-risk policies which are described in Note 19.

Certain of the Group’s non-current loans must meet a series of ratios calculated based on its consolidated financial statements. Lack of compliance represents an increase in finance costs and, depending on the case, represents the early termination of a contract. As of 31 December 2018 and 2017, all the main ratios have been satisfactorily met and neither Viscofan, S. A. nor any of its material subsidiaries were in breach of their financial commitments or any kinds of obligation that could trigger their early redemption.

In 2018 and 2017 there were no defaults or other noncompliance of the principal, interest, or repayments of debts with credit entities. No defaults are foreseen for 2019.

22.4. Interest rate risks in cash flows and fair value

The Group manages interest rate risk by maintaining a balanced portfolio of fixed and floating rate loans and credits. The Group's policy is to hold between 50% and 85% of its loans at a fixed interest rate. To manage it, the

Group receives fixed-interest loans. At 31 December 2018, approximately 62% of the Group's loans are remunerated at a fixed interest rate (2017: 81 %).

The Group does not own significant remunerated assets.

At 31 December 2018 and 2017 the structure of financial liabilities subject to interest rate risk, once hedges through the derivatives arranged have been taken into account, is as follows:

(*) Granted loans included

In 2018 and 2017, the floating interest rates on loans are linked to Euribor and Libor dollar.

The Group is likewise exposed to changes in the interest rates used to calculate the pension plan obligations in US and Germany (Note 17.1).

The following table shows the sensitivity of profit (loss) for the year to a possible 1% variation in discount and/or interest rates:

22.5. Fuel price risk (gas and other oil derivatives)

The Viscofan Group is exposed to variations in Brent prices, which is the main indicator affecting the price of gas and other fuels used in processing its casings.

The Group policy is to set the prices for main fuels through the arrangement of year-long contracts with suppliers, or by using hedging policies (Note 20.1). It thus attempts to mitigate the impact of Brent variations on the consolidated income statement.

The following table reflects the sensitivity to a possible Brent price fluctuation on 10% of operating results.

The operations with directors and members of senior management are detailed in Note 24. No material transactions have been carried out with the Company or its group of companies that were outside the ordinary course of business of the company or were not carried out under normal market conditions.

Financial debt includes a 5 million euro loan granted in 2018 by Banca March, a financial entity linked to Corporación Financiera Alba, S.A., which owns 13% of the Company's shares at year-end 2018 (2017: 11.32%). At 31

December 2017, this included a loan of 2.5 million euros granted in 2013 by said financial entity, which was renegotiated and completely repaid in 2018, the payment of which totalled 2,538 thousand euros, including financial expenses. Viscofan S.A. has also underwritten exchange rate insurance with the financial entity associated with Corporación Financiera Alba, S.A., worth 24 thousand euros at 31 December 2018 (0 thousand euros in 2017).

No additional services were received by companies related to this shareholder in 2018 or 2017. All transactions took place in normal market conditions.

Directors compensation is outlined in Article 27 ter of the bylaws and remuneration policies approved by the shareholders during their general meeting.

The breakdown for Board remuneration in 2018 and 2017 is as follows:

Remuneration paid to Mr. Alejando Legarda Zaragüeta correspond until the month of May 2018, when he stepped down as member of the parent's Board of Directors, in accordance with the decision made during the General Shareholders’ Meeting held on 25 May 2018.

During the same meeting, Ms. Laura González Molero was appointed as an independent director of the parent company.

The two Executive directors, José Domingo de Ampuero y Osma and José Antonio Canales García earned a variable compensation totalling 375 thousand euros in the short term and 228 thousand euros in the long term (2017: 432 thousand euros). These were calculated based on EBIDTA, net profit, sales, and share price values which were determined in accordance with the annual and multi-year plan as well as personal performance.

Under "Other items", 35 thousand euros correspond to life and accident insurance premiums, health insurance and company cars.

During 2018, amounts were paid for insurance premiums covering the civil liability of its directors for damage caused by acts or omissions in their position amounting to 50 thousand euros (the same amount as in 2017).

At 31 December 2018 and 2017, no advances or loans had been granted to the Viscofan Group, nor did the Group have any pension commitments or other non-current savings plans. Likewise, no type of guarantee was granted on behalf of any present or former members of the Board of Directors, related individuals or entities. In addition, no remuneration was based on shares or share options.

In 2018 and 2017 the members of the Board of Directors and related individuals or entities did not perform any transactions with the Company or with Group companies other than in the ordinary course of business or on terms other than on an arms' length basis.

Viscofan's directors have communicated that insofar as article 229 of the Capital Companies Law is concerned they do not have any conflicts of interest with the Company.

In 2018, all the Group companies had no legal person administrators in any companies

The Viscofan Group has contracts with its two executive directors which include golden parachute clauses. The termination of these contracts in certain in certain objective terms not attributable to these board members, may entitle them to indemnification worth twice their fixed remuneration, comprising two years of non-competition.

The breakdown of parties holding executive positions during 2018 follows:

(*) Ms. Elena Ciordia held office until December 2018. Mr. José Antonio Cortajarena was appointed Head of Legal and Vice Secretary of the Board of Directors in December 2018.
(**) Mr. Bertram Trauth served in his post until his retirement in December 2018, when Mr. Don Wilfried Schobel was appointed as Managing Director in Germany

Effective 1 January 2019, Mr. César Arraiza was appointed Chief Strategy, Organization & Systems Officer,

On 1 January 2019, Ms. María Carmen Peña was appointed CFO of the Viscofan Group.

In 2018, remuneration received by key management personnel totalled 4,679 thousand euros. This remuneration includes a payment for multi-year complements of 678 thousand euros. During 2017, remuneration amounted to 4,161 thousand euros and did not include any additional payments for multi-year allowances. This amount does not include the abovementioned payments made to José Antonio Canales García and José Domingo de Ampuero y Osma, which is reflected further on.

The cost of items related to the Group’s environmental projects acquired during 2018 was 50,279 thousand euros (2017: 44,562 thousand euros), with an accumulated amortisation of 24,432 thousand euros (2017: 22,578 thousand euros).

In accordance with the 2013-2020 National Emission Allowance Assignment Plan, and after applying the inter-sectoral adjustment factors outlined in Appendix II to EU Decision 2013/448/EU to non-electricity generators, and the annual 1.74% annual reduction in electricity generators, in accordance with Articles 8 and 9 bis of EC Directive 2003/87/EC, the Group was assigned emission allowances equivalent to 356.915 tones.

The emission rights consumed by the Company during 2018 and 2017 amounted to 258,960 and 250,324 tons, respectively.

In 2018, the Group incurred in environmental protection and improvement costs amounting to 4,684 thousand euros. In 2017 this amount totalled 3,797 thousand euros.

The Group arranged civil liability insurance coverage for damages to third parties caused by accidental and unintentional contamination; the insurance coverage refers to any possible risk involved and to date no significant claims in environmental matters have been filed.

The Parent's Directors do not deem it necessary to make any provisions to cover environmental contingencies and expenses.

The auditors of the Group's consolidated Financial Statements, PricewaterhouseCoopers Auditores, S.L. in 2018, and other related companies as defined in the fourteenth additional disposition of legislation governing the reform of the financial system have accrued fees for professional services, with the exception of "Other Services, which are based on their production date, for the year ended 31 December 2018 and 2017 as follows:

In order to simplify the Group's shareholder structure, on 7 January 2019, Viscofan Canada Inc, in which Viscofan S.A. holds a 100% indirect shareholding, started the liquidation process of Transform Pack

Inc. All assets, liabilities, rights and obligations have been transferred to Viscofan Canada Inc.

Furthermore, the winding up process has begun for Supralon International AG, whose headquarters are in Liechtenstein and which is 100% owned by Viscofan, S.A. To fulfil the legal requirements of the process, the company's name has been changed to Supralon International AG under liquidation.

At its meeting of 24 January 2019, the Board of Directors of Viscofan S.A. has agreed to execute a capital reduction for a nominal amount of 72,577.40 euros, through the amortisation of the 103,682 own shares in the portfolio acquired under the authorisation granted by the General Shareholders' Meeting held on 25 May 2018 under item five of the agenda.

The share capital remaining after the reduction is set at 32,550,000 euros represented by 46,500,000 shares with a par value of 0.70 euros per share.

On 6 February 2019, Viscofan S.A purchased 1,100 shares in Nanopack Technology & Packaging, S.L. for the nominal sum of 110,000 euros. Thus, the direct shareholding of Viscofan, S.A. in this subsidiary has increased from 90.57% to 95.35%.

In its meeting held on 28 February 2019, the Board of Directors agreed to propose a final dividend payment amounting to 0.95 euros per share on 6 June 2019 to the Shareholders' Meeting. Therefore, the total payout to shareholders comes to 1.73 euros per share, including the interim dividend of 0.64 euros paid out on 20 December 2018, the aforementioned final dividend of 0.95 euros per share and a premium for attending the Shareholder's Meeting of 0.01 euros per share and the extraordinary dividend of 0.13 euros per share paid out on 22 March 2018. This proposal is 11.6% higher than the total payout of 1.55 euros approved the previous year.

There are no significant events other than those mentioned above, from year-end to the date of preparation of these financial statements