Accounting principles 2010 

Basis of presentation
KONE Corporation is a Finnish, public limited company domiciled in Helsinki, Finland.
KONE Corporation and its subsidiaries together form the consolidated KONE Corporation (“KONE” or “the Group”). KONE provides its customers with elevators and escalators and solutions for their maintenance and modernization. KONE also provides maintenance for automatic building doors.

The consolidated financial statements of KONE Corporation have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU observing the standards and interpretations effective on December 31, 2009 The Group has not applied the following relevant IFRS/IAS standards, which have been issued, but whose application is compulsory beginning from 2010 or later: IFRS 3 (revised) Business combinations
and IAS 27 (revised) Consolidated and separate financial statements.

The consolidated financial statements have been prepared for the accounting period of 12 months from January 1 to December 31, 2009. The financial statements have been authorized for issue by the Board of Directors of KONE Corporation on January 26, 2010. According to the Finnish Corporate Act the Annual General Meeting has the right to approve, reject or make changes to the financial statements after the publication. The consolidated financial statements are presented in millions of euros and prepared under the historical cost convention except as disclosed below.
Settlement date accounting is applied to all financial assets and liabilities.

Consolidation principles
The consolidated accounts include the parent company and those companies in which the parent company held, directly or indirectly, more than 50 percent of the voting power or controls the company through management agreements with shareholders holding majority of the voting
power at the end of the accounting period. In addition to these holdings, the consolidated accounts include possible holdings that are of a controlling-right nature (units/companies established for a specific reason). Subsidiaries acquired during the period were included in the consolidated financial statements from the date of acquisition, and divested subsidiaries up to the date of sale. Acquisitions of subsidiaries are accounted for using the purchase method of accounting. Acquisition costs are allocated as assets and liabilities on the basis of fair value. The excess cost of an acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see Goodwill and Other intangible assets).

An associated company is a company in which the Group holds 20–50 percent of the voting power and has a participating interest of at least 20 percent or in which the Group has considerable influence. Investments in associated companies were accounted for in the consolidated
financial statements under the equity method. KONE’s share of the profit or loss of an associated company is shown in the consolidated statement of income as a separate item and its investments in the associated companies upon the date of acquisition, adjusted for changes in the associated companies’ equity after the date of acquisition, are shown in the consolidated statement of financial position under “Investments in associated companies”.

Net income for the period is disclosed in the statement of income as an allocation
to the shareholders of the parent company and non-controlling interests. Non-controlling interests are disclosed separately under consolidated total equity. All intra-corporate transactions, receivables, liabilities and unrealized profits, as well as distribution of profits within the Group have been eliminated in the consolidated financial statements. Intra-corporate shareholdings have been eliminated by deducting the amount of each subsidiary’s equity at the time of acquisition from the acquisition cost of its shares.

Foreign currency transactions and translations
The items included in the financial statements are initially recognized in the functional currencies, which are defined for each group entity based on their primary economic environment.

The presentation currency of financial statements is the euro, which is also the functional currency of the parent company.

The initial transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the individual transaction. Foreign-currency denominated receivables and liabilities are translated using period end exchange rates. Foreign exchange gains and losses related to business operations are treated as adjustments to sales or costs. Foreign exchange gains and losses associated with financing are included as a net amount under financing income and expenses.

The statements of income of foreign subsidiaries, whose functional currency is not the euro, are translated into euros based on the average exchange rate of the accounting period. Statement of financial position items, with the exception of net income for the accounting period, are translated into euros at the statement of financial position exchange rate. Exchange rate differences arising from net investments and associated companies in non-euro currency subsidiaries, as well as the exchange rate differences resulting from translating income and expenses at the average rates and assets and liabilities at the closing rate, are recorded in translation differences in other comprehensive income. Exchange rate differences resulting from derivatives and loans designated as hedges on net assets in foreign subsidiaries have been entered as translation differences in other comprehensive income. The cumulative translation differences related to foreign operations are reclassified from equity to statement of income upon the disposal of the foreign operation.

Derivative financial instruments and hedge accounting
Derivative financial instruments are initially recognized in the statement of financial position at cost and subsequently measured at their fair value on each statement of financial position date. Hedge accounting for qualifying hedges is required in the companies that have a considerable volume of foreign exchange forward contracts.

In other companies with relatively small volumes of derivative financial instruments for the hedging of sales and purchases, hedge accounting is not applied.

When derivative contracts are entered into, the Group designates them as either cash flow hedges under IFRS hedge accounting for forecast transactions or firm commitments of sales or purchases, other hedges for forecast transactions or firm commitments, fair value hedges for loans or deposits in foreign currencies or other statement of financial position items or as hedges of investments in foreign entities.

Changes in the fair value of hedges qualifying as cash flow hedges that are effective are recognized in equity under the “Fair value and other reserves”. Cumulative gain or loss of derivatives deferred to equity is transferred to the statement of income and classified as revenue or expense for the accounting period when the hedged item affected the statement of income. The ineffective part is recognized in the statement of income. Changes in the fair value of cash flow hedges that no longer qualify for hedge accounting under IAS 39 are recognized as they are incurred in the statement of income.

When no hedge accounting is applied, changes in the fair value of the hedges of sales and purchases are recognized in other income or expense in the statement of income. Changes in fair value of commodity derivatives are recognized in other income and expenses.

Changes in the fair value hedges for loans and deposits in foreign currencies or other statement of financial position items are recognized in financing items in the statement of income, alongside the change in the valuation of the underlying exposure.

Changes in the fair values of hedges of investments in foreign entities have been booked under “Translation differences” in the consolidated statement of financial position.

The fair values of FX forward contracts are calculated by discounting the future cash flows of the contracts with the interest rate yield curves of the currencies bought and sold, translating the discounted amounts into the reporting currency using the statement of financial position date foreign exchange rate and calculating the difference between the discounted amounts. The fair values of foreign currency options are calculated with an option pricing model using exchange rates, interest rate yield curves and volatilities of foreign currencies quoted in the FX market on the statement of financial position date. The fair values of interest rate swaps and cross currency swaps are determined by discounting the future cash flows of the contracts with the interest rate yield curves of the currencies concerned, translating the discounted amounts into the reporting currency using the statement of financial position date foreign exchange rate and calculating
the difference between the incoming and outgoing discounted amounts and by eliminating the accrued interests already booked as a net amount in deferred assets.

The fair value of electricity derivatives is the period end value listed by Nord Pool (Scandinavian electricity pool).

Operating segments
The profitability of KONE is presented as a single entity. The KONE business idea is to serve its customers by providing solutions throughout the entire lifecycle of the equipment, beginning from the installation of new equipment to the maintenance and modernization during their lifecycle and the full replacement of the equipment. Most of the equipment that are delivered are converted into long-term KONE maintenance contracts. KONE’s operating business structure is globally harmonized based on defined business processes. Material operative decisions are made by the Board of Directors of KONE. Such decisions are prepared and presented by full-time Chairman of the Board and President and Chief Executive Officer. Due to the business model of KONE, the nature of its operations and its governance structure, the corporation is the relevant reportable operating segment.

Revenue recognition
Revenue from the sale of goods is recognized after KONE has transferred the risks and rewards of ownership of the goods to the customer, and KONE retains neither a continuing right to dispose of the goods, nor effective control of the goods.

Revenues from separately defined, long-term major projects are recorded as sales under the percentage of completion method. The percentage of completion is defined as the proportion of individual contract cost incurred to date from the total estimated contract costs. The amount of project revenue and cost is based on latest project estimates, and adjusted by the typical estimation error for similar type of projects. Revenues from rendering of maintenance services and repairs are recognized when the services have been rendered or the work has been carried out.

Research and development costs
Research and development costs are expensed as they are incurred, since the future economic benefits of new products and development of existing products and services can only be proven after their successful introduction to the market.

Income tax
The Group tax expense includes taxes of Group companies based on taxable income for the period, together with tax adjustments for previous periods and changes in deferred taxes. Deferred taxes are provided for temporary differences arising between the tax basis of assets and liabilities and their book values in financial reporting, and measured with enacted tax rates. The principal temporary differences arise from defined benefit plans, provisions, inter-company inventory profits, untaxed reserves and tax losses carried forward. Tax losses carried forward are recognized only to the extent that it is probable that future taxable profits will be available, against which unused tax losses can be used. Only deferred tax assets that seem certain to be realized are recognized.
Deferred taxes are not provided for goodwill that is not deductible for tax purposes.

Goodwill and other intangible assets
Acquisitions of companies are accounted for using the purchase method of accounting.
Goodwill represents the excess of purchase cost over the fair value of assets and liabilities of acquired companies in connection with major acquisitions. Goodwill represents the value of business and market share acquired. Goodwill is not amortized but impairment tested (see Impairment of assets).

In connection with minor acquisitions, typically acquisitions of small elevator and door service companies, the excess of purchase cost over the fair value of the net identifiable assets is allocated to the acquired maintenance contracts and included in intangible assets with a definite lifetime. They are amortized on a straight-line basis over the expected useful lifetime, typically five years.
Expenditure on acquired patents, trademarks and licenses, including acquired software licenses, is included in other intangible assets and capitalized and amortized using the straight-line method over their useful lives, which does not usually exceed five years. Where an indication of impairment exists, the book value of any intangible asset is impairment tested (see Impairment of assets).

Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and less any impairment losses (see Impairment of assets). Depreciation is recorded on a straight-line basis over the economic useful lives of the assets as follows:

The expenditure on repairs and maintenance of property, plant and equipment are recognized as expense when incurred.

Impairment of assets
The book values of non-current tangible assets and other intangible assets are reviewed upon each statement of financial position date to determine whether there is any indication of impairment, or more frequently should any indication arise. If any such indication arises, the recoverable amount is estimated as the higher of the net selling price and the value in use. An impairment loss is recognized in the statement of income whenever the book value exceeds the recoverable amount.

A previously recognized impairment loss is reversed only if there has been a significant change in the estimates used to determine the recoverable amount, but not, however, to an extent higher than the book value that would have been determined had no impairment loss been recognized in prior years.

The Group assesses the book value of goodwill annually or more frequently if any indication of impairment exists. Goodwill is allocated to the cash generating units (CGUs) of the Group, which are identified according to the country of operation and business unit at the level at which goodwill is monitored for internal management purposes. The recoverable amount of a CGU is determined by value-in-use calculations. In assessing the recoverable amount, estimated future cash flows are discounted to their present value. Cash flow estimates are based on operative managerial estimates. The discount rate is the weighted average cost of capital (WACC) for the main currency area in the location of the CGU (country or business area), which reflects the market assessment for the time-value of money and for the risk specific in KONE business.

An impairment loss of goodwill is never reversed.

Leases
KONE has entered into various operating leases under which payments are treated as rentals and charged to the statement of income on a straight-line basis over the leasing term. Leases of plant and equipment where KONE fundamentally bears all the rewards and risks of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased equipment and the estimated present value of the underlying lease payments.

The corresponding rental obligations, net of finance charges, are included in interest-bearing liabilities. Lease payments are apportioned between the finance charge and the reduction of outstanding liability. Plant and equipment acquired under finance leasing contracts are depreciated over either the useful life of the asset or the lease period, whichever is less.

Shares
Share investments are valued at fair values.
Changes in fair values and exchange gains and losses of designated hedging instruments are recognized in the statement
of income. Investments in shares are measured at cost when fair values are not available.

Available-for-sale investments
Available-for-sale investments are measured at fair values and recognized through the statement of comprehensive income until the items are sold, collected, otherwise disposed or impaired, at which time the cumulative gain or loss recognized in other comprehensive income is included in the profit or loss for the period. However, when fair values are not available the investments are measured at cost.

Investments in commercial papers, bonds and other comparable financial assets are included in Available-for-sale investments. The fair values are based on market quotations or on net present value calculations of future cash flows of the assets.

Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined
on a first in first out (FIFO) basis. Raw materials and supplies, however, are valued at standard cost. Semi-manufactures have been valued at production costs.

Work in progress includes direct labor and material costs as of the consolidated statement of financial position date with a proportion of indirect costs related to manufacturing and installation costs of sales orders included in work in progress. Inventories are presented in the statement of financial position as a gross amount, although the advance payments received from customers for the orders in work in progress are presented in current assets. An allowance is recorded for obsolete items.

Accounts receivable
Accounts receivable are initially measured at cost. An impairment loss is recognized for doubtful accounts receivable, based on the aging profile of overdue receivables and a case-by-case analysis of individual receivables.

Derivative assets
Derivative assets, excluding FX forward contracts under IAS 39 hedge accounting, are measured at fair values through profit or loss. The profits and losses from the fair valuations are included in the result for the period in which they arise.

Deposits and loans receivable
Deposits and loans receivable with a fixed maturity are measured at amortized cost using the effective interest rate method and those that do not have a fixed maturity are measured at cost.

Deposits and loans receivable are impaired if the book value is greater than the estimated recoverable amount.

Cash and cash equivalents
Cash and cash equivalents include cash balances and bank deposits with a maturity up to three months. Used bank overdrafts are included in other current liabilities. Deposits at banks with a maturity longer than three months are included in current deposits and loans receivable.

Post-employment benefits
The Group operates various employee benefit plans in accordance with local conditions and practices. The plans are classified as either defined contribution plans or defined benefit plans. The pension plans are generally funded by payments from employees and by the relevant KONE companies. The assets of these plans are generally held in separate insurance companies or trustee-administered funds. Pension costs and liabilities are based on calculations by the local authorities or independent qualified actuaries. Contributions to the defined contribution plans are charged directly to the statement of income in the year to which these contributions relate. For defined benefit plans, pension cost is determined based on the advice of qualified actuaries who carry out a full valuation of the plan on a regular basis using the projected unit credit method. Under this method, the costs of providing pensions are charged to the statement of income so as to spread the regular costs over the working lives of employees.

The liability of defined benefit pension plans is the present value of the defined benefit obligation less the fair value of plan assets together with adjustments for unrecognized actuarial gains or losses. The discount rates used in actuarial calculations of employee benefits liabilities are adjusted to market rates. Actuarial gains and losses are recognized in the statement of income for the employees’ average remaining working lives to the extent that they exceed the greater of 10 percent of the defined benefit obligation or 10 percent of the fair value of plan assets. Obligations to pay long-term disability benefit, whose level is dependent on the length of service of the employee, are measured to reflect the probability that payment will be required and the length of service for which it is expected to be made.

Provisions
Provisions are recognized when KONE has a current legal or constructive obligation
as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Recognition and measurement of a provision generally employes managerial estimates of the probability and the amount of the liability.

Provisions for warranties cover the estimated liability to repair or replace products still under warranty on the statement of financial position date. This provision is calculated based on historical experience of levels of repair and replacements.

A provision for business restructuring is recognized only when a detailed and formal plan has been established, when there is a valid expectation that such a plan will be carried out and the plan has been communicated.

Provisions for loss contracts are recognized when it is probable that the costs will exceed the estimated total revenue.

The probable loss is recognized as an expense immediately.
Other provisions include various items, such as those related to severance, unemployment and other employment expenses, and the sale of divested operations.

Derivative liabilities
Derivative liabilities, excluding FX forward contracts under IAS 39 hedge accounting, are measured at fair values through profit or loss. The profits and losses from the fair valuations are included in the result for the period in which they arise.

Loans payable
Loans payable are classified in valuation category other financial liabilities. They are measured at amortized cost using the effective interest rate method. Costs directly attributable to the issuing of the debt are deducted from the amount of loans payable and initially recognized.

Earnings per share
Basic earnings per share is calculated by dividing the net profit attributable to shareholders of the parent company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held own shares. Diluted earnings per share has been computed by applying the “treasury stock” method, under which earnings per share data is computed as if the warrants and options were exercised at the beginning of the period, or if later, on issue and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. In addition to the weighted average number of shares outstanding, the denominator includes the incremental shares obtained through the assumed exercise of the warrants and options. If the criteria for options set in the terms and conditions of the option plan are not met, the options are not included in the calculated number of shares.

Equity
When KONE purchases KONE’s own shares, the consideration paid and directly attributable costs are recognized as a deduction in equity. When such shares are sold, the consideration received, net of directly attributable transaction costs, is included in equity.

Dividend
The dividend and distribution of profits proposed by the board is not deducted from the equity prior to acceptance by a shareholders’ meeting.

Share-based compensation
The fair value of the 2007 options granted to the key employees was determined at the grant date and will be recognized as an expense over the vesting period. The total amount to be expensed over the vesting period is determined based on the Group’s estimate of the number of the options that are expected to be vested by the end of the vesting period. The fair value of the options granted is determined by the Black-Scholes pricing model. The impact of any non-market vesting conditions (sales growth and EBIT development) has been excluded, but they are included in assumptions about the number of options that are expected to become exercisable. At each consolidated statement of financial position date, the entity revises its estimates of the number of options that are expected to become exercisable. The impact of the revision of original estimates is recognized in the statement of income. When the options are exercised, the proceeds received (net of any transaction costs) are credited to equity.

The Board has granted a share ownership plan to the Group’s management. Pursuant to the share ownership plan, the reward to the management will be settled as a combination of KONE class B shares and cash when the criteria set in the terms and conditions for the plan are met. The fair value of the share-based payments settled with KONE class B shares was determined at the grant date and will be recognized as an expense over the vesting period. The total amount to be expensed over the vesting period is determined based on the Group’s estimate of the number of the shares that are expected to be vested by the end of the vesting period. The impact of any non-market vesting conditions (sales and EBIT development) has been excluded, but they are included in assumptions about the number of shares that are expected to be distributed. At each consolidated statement
of financial position date, the entity revises its estimates of the number of shares that are expected to be distributed. It recognizes the impact of the revision of original estimates in the statement of income. The fair value of the share-based payments settled with cash has been determined so that it covers taxes and taxable benefit costs that are incurred. The liability shall be measured, initially and at each reporting date until settled, at the fair value of the shares expected to be distributed, by applying the option pricing model and the extent to which the employees have rendered service to date. It recognizes the impact of the revision of original estimates, if any, in the statement of income, with a corresponding adjustment to the liability.