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Notes to the consolidated financial statements

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1. Segment information
As of 2019 Wärtsilä is organised into two business areas, Wärtsilä Marine Business and Wärtsilä Energy Business, according to its two main customer markets. The Businesses cover both new equipment sales and services for their respective markets. The new organisational structure enables Wärtsilä to accelerate growth and the implementation of its Smart Marine and Smart Energy strategies. Integrating newbuild and service activities enhances customer value by strengthening the focus on complete lifecycle solutions tailored to specific market needs. Wärtsilä Marine Business and Wärtsilä Energy Business constitute Wärtsilä’s operating and reportable segments.

Wärtsilä's highest operative decision maker (CODM, Chief Operating Decision Maker) is the President and CEO, with the support of the Board of Management and in some cases the Board of Directors.

Wärtsilä Marine Business and Wärtsilä Energy Business are both led by Presidents of respective business area and both are supported by Business management teams. Discrete financial information for the Businesses is provided to the CODM to support decision-making. The segment information presented by Wärtsilä reflects the internal management reporting. The segment information is reported to the level of operating result, as items below the operating result are not allocated to segments. The comparable operating result is used by the CODM also to measure the performance, both on segment and Group level. Assets and liabilities are measured on Group level and not allocated to segments.

Internal sales between segments is not reported in the management reporting, revenue and costs of sales are recognised directly to the respective customer projects and orders. The main factors affecting the allocation of indirect and administration costs to the segments are net sales and personnel amount. Management considers these allocation principles the most suitable to reflect the cost carried by each segment. The allocation principles are reviewed regularly.
Wärtsilä Energy Business
Wärtsilä Energy Business leads the transition towards a 100% renewable energy future. Wärtsilä helps its customers unlock the value of the energy transition by optimising their energy systems and future-proofing their assets. Wärtsilä’s offering comprises flexible power plants, energy management and storage systems, as well as lifecycle services that enable increased efficiency and guaranteed performance.

Wärtsilä’s three main customer segments in the energy markets are utilities, independent power producers and industrial customers. Wärtsilä’s energy solutions are used for a wide variety of applications. These include baseload generation, capacity for grid stability, peaking and load-following generation, and for the integration of wind and solar power. Wärtsilä provides its customers with a comprehensive understanding of energy systems, including fully integrated assets and software, complete with value adding lifecycle services.
Wärtsilä Marine Business
Wärtsilä’s aim is to lead the industry’s transformation towards a Smart Marine Ecosystem. Building on a sound foundation of being a leading provider of innovative products, integrated solutions and lifecycle services to the marine and oil & gas industries, Wärtsilä Marine aims to unlock new customer values through connectivity, digitalisation and smart technology. Wärtsilä provides marine power solutions, processing solutions and voyage solutions, which are supported by a broad scope of services ranging from spare part delivery to optimising customer operations, providing performance guarantees and offering cyber intelligence and incident support.

Wärtsilä Marine Business derives its revenues from the following products and services:
Marine power solutionsProcessing solutionsVoyage solutions
· Power supply· Water and waste treatment· Automation, navigation & communication
· Power conversion· Gas solutions for marine· Simulation & training solutions
· Propulsionand land-based applications· Fleet operations solutions
· Exhaust treatment· Ship traffic control solutions
· Special products
· Entertainment systems
Wärtsilä’s marine customer base covers all the main vessel segments, including traditional merchant vessels, gas carriers, cruise & ferry, navy, and special vessels. In the oil & gas industry, Wärtsilä is active in serving offshore installations and related industry vessels, as well as land-based gas installations. Wärtsilä’s customers comprise ship owners, shipyards and ship management companies.

In Wärtsilä Marine Business, order intake and net sales for retrofit scrubber projects have been transferred from services to new equipment. The comparison period figures for the segment reporting and the service information have been adjusted to reflect the new reporting structure.
MEUR20192018
Net sales
Wärtsilä Marine Business3 3302 815
Wärtsilä Energy Business1 8402 359
Total5 1705 174
Depreciation, amortisation and impairment
Wärtsilä Marine Business-147-102
Wärtsilä Energy Business-33-28
Total-180-130
Share of result of associates and joint ventures
Wärtsilä Marine Business-913
Total-913
Operating result
Wärtsilä Marine Business237349
Wärtsilä Energy Business125194
Total362543
Operating result as a percentage of net sales (%)
Wärtsilä Marine Business7.112.4
Wärtsilä Energy Business6.88.2
Total7.010.5
Comparable operating result
Wärtsilä Marine Business305380
Wärtsilä Energy Business152197
Total457577
Comparable operating result as a percentage of net sales (%)
Wärtsilä Marine Business9.113.5
Wärtsilä Energy Business8.38.4
Total8.811.2
Alternative performance measures
Wärtsilä provides certain financial performance measures, which are not defined by IFRS. These alternative performance measures are followed and used by management to measure the Group's performance and financial position. These alternative performance measures also provide useful information to the capital markets.

The alternative performance measures should not be evaluated in isolation from the IFRS measures. The alternative performance measure calculation definitions are disclosed in Calculations of financial ratios.
Wärtsilä discloses comparable performance measures to enhance comparability between periods. Certain income and expenses are presented as items affecting comparability when they have significant impact on the consolidated statement of income. Items affecting comparability consist of income and expenses, which result from restructuring activities aiming to adjust the capacity of Wärtsilä’s operations. They may also include other income and expenses incurred outside Wärtsilä’s normal course of business, such as impairment charges, acquisition related costs, settlements recorded as a result of legal proceedings with third parties or unforeseen obligations from earlier discontinued businesses.

The reconciliation of comparable operating result to operating result is presented in the table below:
Measures of profit and items affecting comparability
MEUR20192018
Comparable adjusted EBITA498621
Purchase price allocation amortisation-41-43
Comparable operating result457577
Items affecting comparability:
Restructuring costs
Social plan costs-31-8
Impairment and write-downs-23-19
Other restructuring costs and transfer costs-17-2
Other items affecting comparability
Impairment and write-downs-13
Litigation settlements-6
Acquisition related costs-6
Other-4
Items affecting comparability, total-95-35
Operating result362543
Entity wide information
In addition to segment information, Wärtsilä reports the services revenue and order intake for both segments. Wärtsilä continues to report information for the geographical areas Finland, other European countries, Asia, the Americas, and other. In the geographical information net sales are split by customer destination and non-current assets by customer origin. Non-current assets consist of goodwill, intangible assets, property, plant and equipment, right-of-use assets, and investments in associates and joint ventures.
Geographical information
During the financial period 1 January - 31 December 2019 and 1 January - 31 December 2018 Wärtsilä did not have any individual significant customers or countries. The sales to the USA represented 11% (14) and sales to China 11% (7) of the total net sales.
20192018
MEURNet salesNon-current
assets
Net salesNon-current
assets
Finland7832456242
Other European countries1 6121 5951 4291 534
Asia1 9681141 86790
The Americas1 0982711 245266
Other41475775
Total5 1702 3105 1742 137
Service information
MEUR20192018
Net sales
Marine service1 6391 577
Energy service863842
Total2 5022 419
2. Acquisitions
Acquisitions 2019
Ships Electronic Services Ltd
In May, Wärtsilä acquired 100% of Ships Electronic Services Ltd (“SES”), a UK based company specialising in navigation and communication electronics, installation, maintenance and repair services, mainly for commercial and leisure vessels. SES’ turnover was approximately GBP 10 million and the company employed a staff of 47. The enterprise value of the transaction was GBP 3.2 million.

The consideration paid and the impact on profit for the financial period are not significant.
Acquisitions 2018
Transas Group
In May, Wärtsilä acquired 100% of Transas, a global company headquartered in the U.K.
Transas is a global market leader in marine navigation solutions that include complete bridge systems, digital products and electronic charts. The company is also a leader in professional training and simulation services, ship traffic control, as well as monitoring, and support.
The following tables summarise the amounts for the consideration paid for Transas, the cash flow from the acquisition, and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date.
Total consideration MEUR
Consideration transferred 183
Total consideration transferred 183
Cash flow from the acquisition MEUR
Consideration paid in cash 183
Cash and cash equivalents of the acquired company -12
Total cash flow from the acquisition 171
The assets and liabilities arising from the acquisition MEUR
Intangible assets 66
Property, plant and equipment 2
Inventories 8
Trade and other receivables 50
Deferred tax assets 2
Cash and cash equivalents 12
Total assets 140
Provisions 3
Interest-bearing debt 29
Trade payables and other liabilities 39
Deferred tax liabilities 13
Total liabilities 83
Total net assets 57
Goodwill 113
The fair values of the acquired identifiable intangible assets at the date of the acquisition (including technology, customer relations, and trademarks) amounted to EUR 55 million. The fair value of the current trade receivables and other receivables is approximately EUR 50 million. The fair value of the trade receivables does not include any significant risk.
The goodwill of EUR 113 million reflects the value of know-how and expertise in digital marine solutions and services. The acquisition takes Wärtsilä a significant step closer to achieving its mission of enabling sustainable societies with smart technologies. It will also speed delivery on the company’s promise to disrupt the industry by establishing an ecosystem that is digitally connected across the entire supply chain, through applications that are secure, smart and cloud-based.
During 2018 the Group incurred acquisition-related costs of EUR 3 million related to external legal fees and due diligence costs. The costs have been included in the other operating expenses in the consolidated statement of income.
Pro forma
If the acquisition had occurred on 1 January 2018, management estimates that the consolidated net sales would have been EUR 5,213 million. The impact in the consolidated operating result would not have been significant. In determining these amounts, management has assumed that the fair value adjustments, which arose on the date of the acquisition would have been the same if the acquisition had occurred on 1 January 2018.
Other acquisitions
In February, Wärtsilä acquired 100% of Trident B.V. and LOCK-N-STITCH Inc. In October, Wärtsilä acquired 100% of Burriel Navarro, S.L.
Trident B.V. is a Netherland based company specialised in underwater ship maintenance, inspection, and repair services. With this acquisition, Wärtsilä builds in-house competence, captures the full potential of services’ product synergies, and strengthens its position in the market.
LOCK-N-STITCH Inc. is an American engineering company serving customers within the marine and energy sectors as well as other industries. It specialises in cast iron repairs. The acquisition strengthens Wärtsilä’s service portfolio for customers operating multiple brands.
Burriel Navarro, S.L is a company operating in underwater services in the main ports of Spain. The acquisition supports the growth of Wärtsilä’s underwater services and expands the company’s local presence in the European market.
The following tables summarise the amounts for the consideration paid, the cash flow from the acquisitions and the amounts of the assets acquired and liabilities assumed recognised at the acquisition dates.
Total consideration MEUR
Consideration transferred 27
Total consideration transferred 27
Cash flow from the acquisitions MEUR
Consideration paid in cash 23
Contingent consideration 4
Cash and cash equivalents of the acquired companies -1
Total cash flow from the acquisitions 26
The assets and liabilities arising from the acquisitions MEUR
Intangible assets 10
Property, plant and equipment 2
Inventories 1
Trade and other receivables 6
Cash and cash equivalents 1
Total assets 19
Trade payables and other liabilities 4
Deferred tax liabilities 3
Total liabilities 6
Total net assets 13
Goodwill 13
The fair values of acquired identifiable intangible assets at the dates of the acquisitions (including technology, customer relations, and trademarks) amounted to EUR 10 million. The fair value of current trade receivables and other receivables is approximately EUR 6 million. The fair value of the trade receivables does not include any significant risk.
The goodwill of EUR 13 million reflects the value of know-how and expertise in advanced underwater services.
During 2018, the acquisition-related costs the Group incurred related to external legal fees and due diligence costs were insignificant. The costs have been included in the other operating expenses in the consolidated statement of income.
Pro forma
If the acquisitions had occurred on 1 January 2018, management estimates that the consolidated net sales would have been EUR 5,176 million. The impact in the consolidated operating result would not have been significant. In determining these amounts, management has assumed that the fair value adjustments, which arose on the dates of the acquisitions would have been the same if the acquisitions had occurred on 1 January 2018.
3. Disposals
Disposals 2019
In 2019, there were no disposals.
Disposals 2018
Disposal of pumps business
On 31 October 2018, Wärtsilä divested its pumps business to Solix Group, a Scandinavian investment company. Wärtsilä Pumps has belonged to the Wärtsilä Marine Solutions organisation and became part of the Group along with the acquisition of Hamworthy in 2012. The Wärtsilä Pumps business recorded sales of approximately EUR 50 million in 2017. The cash consideration of the transaction was EUR 45 million, and in addition EUR 20 million of the transaction price was reported as a receivable in the non-current other receivables in the consolidated statement of financial position in 2018. Wärtsilä reported a gain of EUR 27 million in other operating income from the transaction.
Other disposals
On 20 October 2018, Wärtsilä sold its majority interest in Wärtsilä Yuchai Engine Co. Ltd. The consideration received and the impact on profit for the financial period were not significant.
4. Assets held for sale
In December, Wärtsilä announced the divestment of shares in Wärtsilä ELAC Nautik GmbH (ELAC Nautik) to Cohort plc. ELAC Nautik's main market focus is on hydroacoustic products, including sonars, underwater communication systems and echo systems for small and medium sized military submarines.

Wärtsilä, through its Smart Marine Ecosystem approach, is leading the marine industry’s transition into a new era of high efficiency, greater safety, and outstanding environmental performance. As this is Wärtsilä's core strategy for Marine Business, and ELAC Nautik business has no clear synergistic link to Wärtsilä’s Smart Marine activities in transforming the marine sector, the portfolio is aligned to those growth businesses that can drive this transition.

Additionally, Wärtsilä has started preparations to divest its Entertainment business, which is also classified as assets held for sale.

The assets held for sale belong to the Wärtsilä Marine Business segment and they are valued at the lower of book value or fair value.

Subject to approvals, completion of these transactions is expected in the early part of 2020.
Items on statement of financial position
MEUR 31.12.2019
Property, plant and equipment 3
Right-of-use assets 4
Deferred tax assets 8
Inventories 18
Other receivables, current 39
Cash and cash equivalents 11
Assets held for sale 82
Interest-bearing debt, non-current 4
Deferred tax liabilities 8
Other liabilities, non-current 8
Other liabilities, current 47
Liabilities directly attributable to assets held for sale 68
Net assets 14
5. Disaggregation of revenue
Revenue from the contracts with customers is derived over time and at a point in time in the following revenue types.
Net sales by revenue type
MEUR 2019 2018
Products
Wärtsilä Marine Business 846 765
Wärtsilä Energy Business 338 380
Total 1 184 1 145
Goods and services
Wärtsilä Marine Business 509 469
Wärtsilä Energy Business 93 88
Total 603 557
Projects
Wärtsilä Marine Business 1 786 1 377
Wärtsilä Energy Business 1 113 1 615
Total 2 899 2 992
Long-term agreements
Wärtsilä Marine Business 189 204
Wärtsilä Energy Business 296 276
Total 484 480
Total 5 170 5 174
Timing of satisfying performance obligations
MEUR 2019 2018
At a point in time
Wärtsilä Marine Business 2 622 2 210
Wärtsilä Energy Business 1 105 1 531
Total 3 728 3 740
Over time
Wärtsilä Marine Business 708 606
Wärtsilä Energy Business 735 828
Total 1 442 1 434
Total 5 170 5 174
Product sales consist of sales of spare parts and standard equipment for which the revenue is recognised at a point in time when the control of the products has transferred to customer, in general at the delivery of the goods.
Goods and services -type of revenue involves short-term field service jobs, which includes the delivery of a combination of service and equipment. The revenue is recognised at a point in time when service is rendered.
Projects contain short-term and long-term projects. Depending on the contract terms and the duration of the project, the revenue is recognised at a point in time or over time. Revenue related to long-term projects, such as construction contracts, integrated solutions projects, ship design, and energy solutions contracts, is recognised over time. Revenue for tailor-made equipment delivery projects is recognised at a point in time.
Long-term agreements contain long-term operating and maintenance agreements for which the revenue is recognised over time.
6. Other operating income
MEUR 2019 2018
Capital gains 15 32
Government grants 8 7
Sale of scrapped material 3 3
Sale of by-products 2 2
Rental income 1
Income related to cancelled orders* 2 10
Insurance indemnities 9 4
Other 27 24
Total 67 80
* Expenses related to cancelled orders are recorded on respective expense accounts.
7. Material and services
MEUR 2019 2018
Purchases during the financial period -1 723 -1 598
Change in inventories 7 40
External services -1 287 -1 294
Total -3 003 -2 852
8. Employee benefit expenses
MEUR 2019 2018
Wages and salaries 1 028 954
Pension costs
Defined benefit plans 12 7
Defined contribution plans 74 71
Other compulsory personnel costs 146 142
Total 1 260 1 175
Management remuneration is specified in Note 32. Related party disclosures.
Long-term incentive schemes
Wages and salaries include EUR 4 million expenses arising from share based long-term incentive schemes (previous year positive impact EUR 21 million). At the end of 2019 Wärtsilä had three long-term incentive schemes active. These schemes are tied to the price development of the company’s share during a pre-determined timeframe, and an upper limit is set for the payable incentive. When an incentive scheme ends and the employment requirement is fulfilled, the incentive is settled in cash (2017-2019 and 2018-2020 incentives schemes) or in company shares (2019-2021 incentive scheme). The Board of Management members shall acquire Wärtsilä shares with 50% of the net bonuses received, until the share ownership corresponding to the individuals' annual gross base salary level has been achieved.
The payment for incentive schemes is based on the share price development during a three-year period. The 2017-2019 incentive scheme comprises 4,332,000 rights, the 2018-2020 incentive scheme 3,609,000 rights and the 2019-2021 incentive scheme 5,108,000 rights. For the incentive scheme 2017-2019 the basis of a share price is EUR 16.19, for the incentive scheme 2018-2020 EUR 22.58 and for the incentive scheme 2019-2021 EUR 16.76. The incentive schemes take into account 100% of dividends paid, and the paid bonus cannot exceed EUR 6.07 per incentive right in the 2017-2019 scheme, EUR 8.47 in the 2018-2020 scheme or EUR 6.56 in the 2019-2021 scheme.
The incentive rights, which are settled in cash, are valued and recognised at fair value at the balance sheet date taking into account the proportion of vesting period passed. The incentive rights, which are settled in company shares, are valued at fair value at the grant date of the scheme and expensed evenly during the vesting period. The fair value determined for the incentive right in 2019-2021 scheme is EUR 2.69.
2019 2018
Personnel on average 19 110 18 899
Personnel at the end of the financial period 18 795 19 294
9. Depreciation, amortisation and impairment
MEUR 2019 2018
Development expenses 11 11
Purchase price allocation amortisation 41 43
Other intangible assets 10 12
Buildings and structures 13 16
Land and buildings, right-of-use assets 43
Machinery and equipment 40 43
Machinery and equipment, right-of-use assets 6
Other tangible assets 1 1
Impairments 15 3
Total 180 130
10. Other operating expenses
MEUR 2019 2018
Travel costs 134 145
Rental costs 48 90
Legal and consultancy costs 95 89
Information technology costs 65 61
Other personnel related costs 59 58
Administrative costs 49 51
Other 128 153
Total 578 648
11. Financial income and expenses
MEUR 2019 2018
Interest income on loans and receivables 1 2
Interest income on financial assets at fair value through the statement of income 23 20
Interest income on investments at amortised cost 2 1
Other financial income 1 1
Total financial income 27 24
Interest expenses on financial liabilities recognised at amortised cost -10 -11
Interest expenses on lease liabilities recognised at amortised cost -5
Interest expenses on financial liabilities at fair value through the statement of income -36 -34
Net interest from defined benefit plans -3 -3
Changes in fair values of financial assets/liabilities at fair value through the statement of income -5 -4
Write-down of financial receivables -1
Exchange rate differences* -10 -6
Fee expenses -2 -2
Other financial expenses -4 -4
Total financial expenses -74 -65
Total -47 -40
* In 2019, the result from the ineffective portion of cash flow hedges related to cancelled orders, EUR -5 million (-2), and exchange rate differences from unhedged internal loans, EUR -8 million (-5) were included in exchange rate differences in the consolidated statement of income.
12. Income taxes
MEUR 2019 2018
Income taxes
for the financial period -130 -126
for prior financial periods -8 1
Change in deferred tax
origination and reversal of temporary differences 43 10
changes in tax rates -2 1
Total -97 -116
Reconciliation of effective tax rate:
Profit before taxes 315 502
Tax calculated at the domestic corporate tax rate 20.0% -63 -100
Effect of changed tax rates -2 1
Effect of different tax rates in foreign subsidiaries 15 6
Effect of income not subject to tax and non-deductible expenses -1 2
Effect of share of result of associates and joint ventures -2 3
Utilisation of previously unrecognised tax losses carried forward 1
Unrecognised taxes on losses carried forward -13 -17
Other taxes* -10 -10
Other temporary differences** -13 -1
Income taxes for prior financial periods -8 1
Tax charge in the consolidated statement of income -97 -116
Effective tax rate (%) 30.7 23.1
* Other taxes consist mainly of withholding taxes not utilised and taxes not directly based on taxable income.
** Includes EUR -11 million utilisation of deferred tax assets.
Income taxes related to other comprehensive income are presented in Consolidated statement of comprehensive income. Changes in deferred tax assets and liabilities are presented in Note 24. Deferred taxes.
Wärtsilä is subject to tax audits in some countries, which can result in tax reassessment decisions and obligations to pay additional taxes and related payments.
13. Earnings per share
Earnings per share is calculated by dividing the profit for the financial period attributable to equity holders of the parent company by the adjusted average number of shares outstanding. During the financial periods there were no programmes with dilutive effect.
MEUR 2019 2018
Profit for the financial period attributable to equity holders of the parent company 217 386
Thousands of shares
adjusted average number of shares outstanding* 591 723 591 723
Earnings per share attributable to equity holders of the parent company (basic and diluted):
Earnings per share (EPS), basic and diluted, EUR 0.37 0.65
* Additional information on the number of shares is presented in Note 26. Equity.
14. Intangible assets
Goodwill 2019
MEUR 2019
Wärtsilä Group
Wärtsilä on 1 January 1 355
Acquisitions -1
Changes in exchange rates 26
Total 1 380
Goodwill allocation
Goodwill arising from business acquisitions is allocated to the Group cash generating units (CGU) that are the Group´s operating segments Wärtsilä Marine Business and Wärtsilä Energy Business. As of 1 January 2019 the goodwill formerly allocated to the Group CGU has been allocated to the respective CGUs based on the fair value of the operating segments. The operating segments represent the lowest level within the Group at which the goodwill is monitored. The companies acquired during the financial period are integrated to the the respective CGU at the acquisition date. The goodwill per CGU is presented in the table below.
Goodwill per cash generating unit
MEUR 2019
Wärtsilä Marine Business 847
Wärtsilä Energy Business 533
Total 1 380
Impairment testing of goodwill
The Group performs its annual impairment testing of goodwill on 30 September. Impairment of goodwill is also carried out when changes in circumstances indicate that the carrying amount may not be recoverable.
The recoverable amount from the CGUs is determined based on value-in-use calculation. The calculation is made on a discounted cash flow method basis, derived from the order book and five-year cash flow projections from management approved strategic plans. The estimated cash flow of the CGUs is based on utilisation of the existing property, plant and equipment in their current condition with normal maintenance capital expenditure, excluding any potential future acquisitions. Cash flow beyond the five-year period is calculated using the terminal value method. The terminal growth rate used in projections is based on management’s assessment on conservative long-term growth. The terminal growth rate used is 2%.
The key driver for the valuation is the growth in the global economy and in particular the development of the global power market, the global shipbuilding industry and the demand for related services. The projected development of total costs in the market affects the profitability, whereas no single cost item is considered to have a material impact. The valuation driver for the new equipment sales is the growth in the global economy, whereas for after sales the drivers are also the demand for related services and the projected development in labour cost.
The applied discount rates are the weighted average pre-tax cost of capital (WACC) for each CGU as defined by Wärtsilä. The components of the WACC rates are risk-free rate, market risk premium, industry specific beta, cost of debt and debt equity ratio. Wärtsilä has used a WACC rate of 9.1% in the calculations for Wärtsilä Marine Business CGU and a WACC rate of 9.4% for Wärtsilä Energy Business CGU.
As a result of the impairment test, no impairment loss for the CGUs was recognised for the financial period ended 31 December 2019. The recoverable amounts from both the CGUs exceeded their respective carrying value substantially.
Sensitivity analysis
The management has assessed that no reasonable possible changes in the key assumptions would cause carrying amount of either CGU to exceed its recoverable amount. Sensitivity analysis has been carried out for the valuation of the recoverable amount for each CGU by changing the assumptions used in the calculation. A change in an assumption that would cause the recoverable amount to equal the carrying amount is presented in the table below separately for each CGU.
Change
Wärtsilä Marine Business
Pre-tax discount rate increase more than 15 percentage points
Terminal growth rate decrease more than 35 percentage points
Profitability decrease more than 66 percentage
Wärtsilä Energy Business
Pre-tax discount rate increase more than 13 percentage points
Terminal growth rate decrease more than 28 percentage points
Profitability decrease more than 64 percentage
In management’s opinion, the changes in the basic assumptions shall not be seen as an indication that these factors are likely to materialise. The sensitivity analyses are hypothetical and should therefore be treated with caution.
Goodwill 2018
Goodwill allocation
Goodwill arising from business acquisitions is allocated to the Group cash generating unit (CGU) that is the Group´s operating segment. The operating segment represents the lowest level within the Group at which the goodwill is monitored. The companies acquired during the financial period are integrated to the Group CGU at the acquisition date. Previously separately presented CGUs have also been integrated to the Group CGU during the financial period. The goodwill per CGU is presented in the table below:
Goodwill per cash generating unit
MEUR 2018
Wärtsilä on 1 January 1 237
Acquisitions and disposals 113
Changes in exchange rates 4
Total 1 355
Impairment testing of goodwill
The Group performs its annual impairment testing of goodwill on 30 September. Impairment of goodwill is also carried out when changes in circumstances indicate that the carrying amount may not be recoverable.
The recoverable amount from the CGU is determined based on value-in-use calculation. The calculation is made on a discounted cash flow method basis, derived from the order book and five-year cash flow projections from management approved strategic plans. The estimated cash flow of CGU is based on utilisation of the existing property, plant and equipment in their current condition with normal maintenance capital expenditure, excluding any potential future acquisitions. Cash flow beyond the five-year period is calculated using the terminal value method. The terminal growth rate used in projections is based on management’s assessment on conservative long-term growth. The terminal growth rate used is 2%.
The key driver for the valuation is the growth in the global economy and in particular the development of the global power market, the global shipbuilding industry and the demand for related services. The projected development of total costs in the market affects the profitability, whereas no single cost item is considered to have a material impact. The valuation driver for the new equipment sales is the growth in the global economy, whereas for after sales the drivers are also the demand for related services and the projected development in labour cost.
The applied discount rate is the weighted average pre-tax cost of capital (WACC) as defined by Wärtsilä. The components of the WACC are risk-free rate, market risk premium, industry specific beta, cost of debt and debt equity ratio. When defining the WACC for 2018, it has been considered that the general interest rate is currently on a lower level. Wärtsilä has used a WACC of 8.9% in the calculations.
As a result of the impairment test, no impairment loss for the CGU was recognised for the financial period ended 31 December 2018. The recoverable amount from the CGU exceeded its carrying value remarkably.
Sensitivity analysis
The management has assessed that no reasonable possible changes in the key assumptions would cause the CGU´s carrying amount to exceed its recoverable amount. Sensitivity analysis have been carried out for the valuation of the recoverable amount for the CGU by changing the assumptions used in the calculation. A change in an assumption that would cause the recoverable amount to equal the carrying amount is presented in the table below:
Change
Pre-tax discount rate increase more than 20 percentage points
Terminal growth rate decrease more than 68 percentage points
Profitability decrease more than 82 percentage
In management’s opinion, the changes in the basic assumptions shall not be seen as an indication that these factors are likely to materialise. The sensitivity analyses are hypothetical and should therefore be treated with caution.
Intangible assets
2019
MEUR Develop-
ment
expenses
Construc-
tion in
progress
and
advances
paid
Other
intangible
assets
Goodwill Total
Cost on 1 January 2019 141 53 857 1 361 2 411
Changes in exchange rates 11 26 37
Acquisitions 1 -1
Additions 1 55 8 65
Decreases and other changes -1 -13 -14
Reclassifications 28 -24 -4
Cost on 31 December 2019 169 85 860 1 386 2 500
Accumulated amortisation and impairment on 1 January 2019 -94 -565 -6 -665
Changes in exchange rates -7 -8
Accumulated amortisation on decreases and other changes 11 11
Amortisation during the financial period -11 -52 -62
Accumulated amortisation and impairment on 31 December 2019 -104 -613 -6 -723
Carrying amount on 31 December 2019 65 85 247 1 380 1 776
Development costs for internally generated assets capitalised during the financial period amounted to EUR 49 million (30). The carrying amount was EUR 135 million (91).

Purchase price allocation amortisation amounted to EUR 41 million (43) and the carrying amount was EUR 209 million (248).
2018
MEUR Develop-
ment
expenses
Construc-
tion in
progress
and
advances
paid
Other
intangible
assets
Goodwill Total
Cost on 1 January 2018 142 21 783 1 243 2 189
Changes in exchange rates -2 4 2
Acquisitions and disposals -2 10 66 113 187
Additions 2 35 8 1 45
Decreases and other changes -12 -1 -13
Reclassifications -13 13
Cost on 31 December 2018 141 53 857 1 361 2 411
Accumulated amortisation and impairment on 1 January 2018 -85 -521 -6 -612
Changes in exchange rates 1 1
Accumulated amortisation on decreases and other changes 2 12 1 15
Amortisation during the financial period -11 -55 -66
Impairments -1 -1 -2
Accumulated amortisation and impairment on 31 December 2018 -94 -565 -6 -665
Carrying amount on 31 December 2018 47 53 292 1 355 1 747
15. Property, plant and equipment
2019
MEUR Land
and
water
Build-
ings
and
struc-
tures
Machin-
ery
and
equip-
ment
Construc-
tion in
progress
and
advances
paid
Other
tangible
assets
Total
Cost on 1 January 2019 31 297 780 40 24 1 171
Transfer to right-of-use assets -1 -1 -2
Changes in exchange rates 1 2 3
Additions 3 27 18 1 49
Decreases -1 -18 -30 -50
Reclassifications 1 22 -25 -2
Cost on 31 December 2019 30 283 798 32 25 1 167
Accumulated depreciation and impairment on 1 January 2019 -1 -177 -648 -21 -847
Changes in exchange rates -1 -1
Accumulated depreciation on decreases 11 29 41
Depreciation during the financial period -13 -40 -1 -54
Impairments -1 -1
Accumulated depreciation and impairment on 31 December 2019 -1 -179 -659 -21 -860
Carrying amount on 31 December 2019 29 104 139 31 3 307
2018
MEUR Land
and
water
Build-
ings
and
struc-
tures
Machin-
ery
and
equip-
ment
Construc-
tion in
progress
and
advances
paid
Other
tangible
assets
Total
Cost on 1 January 2018 43 313 787 18 23 1 185
Changes in exchange rates -1 -1 -3
Acquisitions and disposals -9 -22 -19 -50
Additions 1 5 23 35 64
Decreases -4 -4 -22 -30
Reclassifications 7 12 -14 5
Cost on 31 December 2018 31 297 780 40 24 1 171
Accumulated depreciation and impairment on 1 January 2018 -2 -172 -642 -20 -835
Changes in exchange rates 1 1 1
Accumulated depreciation on decreases and disposals 1 11 41 53
Depreciation during the financial period -16 -43 -1 -60
Impairments -2 -2
Reclassifications -1 -4 -5
Accumulated depreciation and impairment on 31 December 2018 -1 -177 -648 -21 -847
Carrying amount on 31 December 2018 30 120 132 39 3 324
Value of finance-leased assets included in carrying amount 1 1 3
16. Leases
MEUR 2019
Land and buildings, right-of-use assets
Carrying amount on 1 January 2019 203
Additions 28
Depreciation and impairment -43
Decreases and reclassifications -14
Carrying amount on 31 December 2019 174
Machinery and equipment, right-of-use assets
Carrying amount on 1 January 2019 12
Additions 6
Depreciation and impairment -6
Decreases and reclassifications -1
Carrying amount on 31 December 2019 11
Lease liabilities
Carrying amount on 1 January 2019 215
Additions 33
Interest expense 2
Payments -49
Other adjustments -13
Carrying amount on 31 December 2019 188
Total lease liabilities
Non-current 146
Current 42
MEUR 2019
Amounts recognised in statement of income
Depreciation and impairment of right-of-use assets -49
Interest expense -5
Expense short-term leases -32
Expense – leases of low-value assets -6
Expense – variable lease payments -4
17. Investments in associates and joint ventures
MEUR 2019 2018
Carrying amount on 1 January 66 83
Investments 1
Share of result -9 13
Dividends -1 -17
Translation differences -1 -1
Reduction of share capital in associates and joint ventures -13
Impairment -13
Carrying amount on 31 December 42 66
Summary of financial information (100%):
2019
MEUR Holding % Assets Equity Liabil-
ities
Net
sales
Profit
for the
financial
period
Joint ventures
Wärtsilä Qiyao Diesel Company Ltd. China 50.0 39 19 20 30 2
Wärtsilä Hyundai Engine Co Ltd. South Korea 50.0 71 68 3 19 -21
CSSC Wärtsilä Electrical & Automation Co., Ltd. China 49.0 11 2 9 9
CSSC Wärtsilä Engine (Shanghai) Co., Ltd. China 49.0 96 20 76 78 1
Repropel Sociedad de reparacao de helices Portugal 50.0 1 1 1
Associated companies
Wärtsilä Land & Sea Academy, Inc. Philippines 40.0 -2 2
Neptun Maritime AS Norway 40.0 1 1
CSSC Wärtsilä Engine (Shanghai) Co., Ltd. factory is manufacturing medium and large bore medium speed diesel and dual-fuel engines at Lingang, Shanghai. Wärtsilä Hyundai Engine Co Ltd. manufactures Wärtsilä 50DF dual-fuel engines for LNG carriers and other marine application in Mokpo, South Korea. Wärtsilä Qiyao Diesel Company Ltd. manufactures marine auxiliary engines in Shanghai, China. CSSC Wärtsilä Electrical & Automation Co., Ltd. manufactures advanced electronical and automation solutions for cruise industry.
2018
MEUR Holding % Assets Equity Liabil-
ities
Net
sales
Profit
for the
financial
period
Joint ventures
Wärtsilä Qiyao Diesel Company Ltd. China 50.0 26 19 8 17
Wärtsilä Hyundai Engine Co Ltd. South Korea 50.0 111 91 20 164 29
CSSC Wärtsilä Electrical & Automation Co., Ltd. China 49.0 2 2 1 -1
CSSC Wärtsilä Engine (Shanghai) Co., Ltd. China 49.0 70 19 51 49 -3
Repropel Sociedad de reparacao de helices Portugal 50.0 1 1 1 1
Associated companies
Wärtsilä Land & Sea Academy, Inc. Philippines 40.0 -2 2
Neptun Maritime AS Norway 40.0 1 1 1
18. Financial assets and liabilities by measurement category
2019
MEUR Measured
at
amortised
cost
At fair
value
through
the
statement
of income
At fair
value
through
other
compre-
hensive
income
Carrying
amounts
of the
statement
of financial
position
items
Fair
value
Non-current financial assets
Interest-bearing investments 1 1 1
Trade receivables 19 19 19
Derivatives 5 5 5
Other investments 18 18 18
Other receivables 2 2 2
Current financial assets
Trade receivables 1 232 1 232 1 232
Trade receivables for sale 4 4 4
Derivatives 5 14 18 18
Other financial receivables 6 6 6
Cash and cash equivalents 343* 15 358 358
Carrying amount by measurement category 1 600 48 14 1 662 1 662
Non-current financial liabilities
Interest-bearing debt 997 997 1 005
Derivatives 14 2 16 16
Current financial liabilities
Interest-bearing debt 99 99 99
Trade payables 624 624 624
Derivatives 1 6 7 7
Other financial liabilities 4 4 4
Carrying amount by measurement category 1 724 15 8 1 747 1 756
* In addition, the Group has cash and cash equivalents measured at amortised cost of EUR 11 million related to assets held for sale.
2018
MEUR Measured
at
amortised
cost
At fair
value
through
the
statement
of income
At fair
value
through
other
compre-
hensive
income
Carrying
amounts
of the
statement
of financial
position
items
Fair
value
Non-current financial assets
Interest-bearing investments 3 3 3
Trade receivables 49 49 49
Derivatives 3 3 3
Other investments 16 16 16
Other receivables 20 20 20
Current financial assets
Trade receivables 1 219 1 219 1 219
Trade receivables for sale 3 3 3
Derivatives 5 3 8 8
Other financial receivables 3 3 3
Cash and cash equivalents 466 21 487 487
Carrying amount by measurement category 1 758 52 3 1 813 1 813
Non-current financial liabilities
Interest-bearing debt 748 748 754
Derivatives 16 16 16
Current financial liabilities
Interest-bearing debt 74 74 74
Trade payables 596 596 596
Derivatives 27 36 63 63
Other financial liabilities 9 9 9
Carrying amount by measurement category 1 428 43 36 1 507 1 513
Fair value hierarchy
Financial instruments measured at fair value are classified according to the following fair value hierarchy: instruments measured using quoted prices in active markets (level 1), instruments measured using inputs other than quoted prices included in level 1 observable either directly or indirectly (level 2), and instruments measured using inputs that are not based on observable market data (level 3). Financial instruments measured at fair value include financial assets and liabilities at fair value through the statement of income. Due to the short nature of the current receivables, their carrying amount is considered to be same as their fair value.
Specific valuation techniques used to value financial instruments include:
• the fair value of forward foreign exchange contracts is determined by using forward rates at the closing date
• the fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves
• the use of quoted market prices or dealer quotes for similar instruments
2019 2018
MEUR Level 2 Level 3 Level 2 Level 3
Financial assets
Other investments 18 16
Interest-bearing investments, non-current 1 3
Other receivables, non-current 2 3
Derivatives 24 12
Financial liabilities
Interest-bearing debt, non-current* 1 005 754
Derivatives 23 79
* Measured at amortised cost in the consolidated statement of financial position.
Additional information on financial liabilities is presented in Note 28. Financial liabilities.
Other investments
Other investments include unlisted shares carried at fair value. These investments are valued using certain DCF models where critical assumptions relate to WACC level and expected cash flows from future dividends. However, the results from different scenarios vary a lot. Thus, the management considers that the valuation at amortised cost is the best estimate of fair value.
MEUR 2019 2018
Carrying amount on 1 January 16 13
Acquired shares 2 3
Carrying amount on 31 December 18 16
In 2019, the cost for other unlisted shares (level 3) was EUR 18 million (16), and the market value of them was EUR 18 million (16).
19. Inventories
MEUR 2019 2018
Materials and consumables 484 471
Work in progress 736 615
Finished products 53 35
Advances paid 93 43
Total 1 365 1 165
In 2019, EUR 4 million (1) impairment for obsolete inventories has been recognised in the consolidated statement of income. Acquisition-related increase in inventories is EUR 1 million (8).
In 2019, the principles for estimating inventory write-down have been adjusted. The current principles are based on a range of coverage, which specifies how long the available quantity of material at a certain date or period can cover the requirements in a subsequent period. In 2019, the total impact is EUR 11 million from the change of write-down estimates to the value of the inventories.
20. Contract balances
MEUR 2019 2018
Trade receivables 1 255 1 271
Contract assets 515 557
Contract liabilities
Advances received 452 584
Deferred income 465 345
Trade receivables and contract assets
Non-current 19 49
Current 1 752 1 779
Contract liabilities
Non-current 38 41
Current 880 888
Revenue recognised in the financial period that was included in the contract liability on 1 January 888 724
Unsatisfied performance obligations, all revenue types 7 427 7 242
of which remaining performance obligations from projects and contracts under execution 3 959 3 794
Trade receivables related to contracts with customers are non-interest-bearing receivables. Trade receivables have decreased during 2019 due to reclassification to assets held for sale as well as through collection of overdue receivables.

Contract assets primarily relate to the Group’s right to consideration for transferred goods or services, but which is not yet billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

The contract liabilities mainly relate to the advance consideration received from customers for contracts, but for which the corresponding good or service has not yet been transferred.

The contract assets and liabilities arise from long-term service agreements and projects recognised over time such as gas solutions construction contracts, integrated solutions projects, ship design, and energy solutions turnkey contracts. The decrease in contract assets in 2019 contains reclassification to assets held for sale and usual business-related variation mainly in Marine Business projects. In addition, the accrued revenue has decreased in long-term service agreements. The decrease in contract liabilities in 2019 arises from usual business-related variation in projects in both segments.
21. Other receivables
MEUR 2019 2018
Derivatives 24 12
Interest and other financial items 6 3
Insurance receivables 6 5
Rental accruals 3 3
Prepaid expenses 14 6
Other accruals 41 42
Loan receivables 2 3
Defined benefit plans 1
VAT receivables 111 104
Other* 88 83
Total 296 262
Non-current 15 34
Current 281 228
* Other receivables includes payroll related tax receivables of EUR 9 million (9) in Brazil, which cannot be utilised likely within a year. Other receivables also includes a receivable of EUR 21 million (20) relating to disposal of pumps business. The receivable has been classified as current receivable in 2019.
22. Cash and cash equivalents
MEUR 2019 2018
Cash and bank balances* 343 461
Cash equivalents 15 26
Total 358 487
* EUR 171 million (128) of cash and bank balances relate to cash in countries where repatriation is limited due to local regulation and consequently the cash is not immediately available to the parent company.
In addition, the Group has cash and cash equivalents of EUR 11 million related to assets held for sale.
23. Net debt reconciliation
Net interest-bearing debt
MEUR 2019 2018
Interest-bearing debt, non-current 851 748
Lease liabilities, non-current 146
Interest-bearing debt, current 58 74
Lease liabilities, current 42
Total interest-bearing liabilities 1 096 823
Interest-bearing receivables -1 -3
Cash and cash equivalents -358 -487
Cash and cash equivalents pertaining to assets held for sale -11
Total interest-bearing assets -370 -490
Total net interest-bearing debt 726 333
Net debt reconciliation
MEUR Carrying
amount on
1 January 2019
Cash
flows
Changes
in
exchange
rates
Other
non-cash
movements
Carrying
amount on
31 December 2019
Interest-bearing debt, non-current 746* 104 851
Interest-bearing debt, current 73* -11 -5 58
Lease liabilities 215** -52 26 188
Interest-bearing receivables -3 2 -1
Cash and cash equivalents -487 119 -369***
Net debt 545 162 -5 26 726
* Finance lease liabilities have been classified in line with IFRS 16 separately under lease liabilities.
** Lease liabilities according to IFRS 16.
*** Includes cash and cash equivalents pertaining to assets held for sale.
MEUR Carrying
amount on
1 January 2018
Cash
flows
Changes
in
exchange
rates
Acquistions
and
disposals
Carrying
amount on
31 December 2018
Interest-bearing debt, non-current 517 231 -1 748
Interest-bearing debt, current 102 -40 -6 18 74
Interest-bearing receivables -5 -2 6 -3
Cash and cash equivalents -379 -101 4 -11 -487
Net debt 234 87 -2 13 333
24. Deferred taxes
Changes in deferred taxes during 2019
MEUR 1 January 2019 Recog-
nised in
the con-
solidated
statement
of income
Other
compre-
hensive
income
Transla-
tion dif-
ferences
Acquisi-
tions
31 December 2019
Deferred tax assets
Tax loss carry-forwards 18 17 -1 34
Pension obligations 21 1 5 27
Provisions 28 7 35
Elimination of intragroup margin in inventories 5 1 6
Fair value reserve 9 -3 6
Other temporary differences 49 6 -1 55
Reclassification to assets held for sale -8
Total 129 32 2 -2 155
Deferred tax liabilities
Intangible assets and property, plant and equipment 66 -10 2 59
Fair value reserve 1 1
Other temporary differences 32 32
Reclassification to assets held for sale -8
Total 99 -10 1 1 83
Net deferred tax assets/liabilities 30 41 1 -1 -2 72
On 31 December 2019, the Group had temporary differences on which no deferred tax assets were booked totalling EUR 64 million (63), as it is uncertain if they will be realised. Most of the unrecognised deferred tax assets are related to cumulative tax losses. Of these, EUR 29 million (18) will expire within the next five years and the rest will expire later or never. Most of the cumulative tax losses on which deferred tax assets have been booked will never expire.
Changes in deferred taxes during 2018
MEUR 1 January 2018 Recog-
nised in
the con-
solidated
statement
of income
Other
compre-
hensive
income
Transla-
tion dif-
ferences
Acquisi-
tions and
disposals
31 December 2018
Deferred tax assets
Tax loss carry-forwards 18 2 18
Pension obligations 23 -2 21
Provisions 30 -2 28
Elimination of intragroup margin in inventories 5 5
Fair value reserve 6 3 9
Other temporary differences 49 6 1 -7 49
Total 131 1 3 1 -6 129
Deferred tax liabilities
Intangible assets and property, plant and equipment 57 -6 14 66
Fair value reserve 2 -2
Other temporary differences 42 -2 -7 32
Total 102 -8 -2 7 99
Net deferred tax assets/liabilities 29 9 5 1 -13 30
25. Pension obligations
MEUR 2019 2018
Net defined benefit liabilities on 31 December 155 149
Liability for other long-term employee benefits on 31 December 15 13
Wärtsilä has defined benefit plans for its employees mainly in Europe and Asia. The major plans are located in Switzerland, Germany, Great Britain and Sweden. The Swiss defined benefit plan accounts for 31% of the Group's total defined benefit obligations and 55% of the plans' assets. Most of the plans provide a lifetime pension to the members at the normal retirement age but there are also plans, which provide a lump sum payment at the retirement date. Most of these defined benefit pension plans are managed by pension funds. Their assets are not included in the Group's assets. The plans' assets are typically invested according to the investment strategies approved by the funds' Board of Trustees, or in some cases they are completely administered by insurance companies. Wärtsilä's subsidiaries make their payments to pension funds in accordance with the local legislation and practice. Authorised actuaries in each country have performed the actuarial calculations required for the defined benefit plans.
The Swiss Plan
Wärtsilä operates a defined benefit plan in Switzerland in accordance with the local pension laws and regulations. The plan provides benefits to the members in the form of a pension payable after retirement. The level of benefits provided depends on the accrued retirement savings capital, which is a result of contributions paid up to retirement plus respective interest. The plan is run as a pension fund by the Board of Trustees separately from the company.

Contributions to the plan are paid both by the employees as well as by the employers based on a percentage of the insured salary as defined in the pension fund regulations. Contributions by the employers vary depending on the age of the employee and cover on average two thirds of the total contributions.

The investment strategy for a pension fund's asset is the responsibility of the Board of Trustees. Assets are invested in accordance with the strategy and the corridors for different investment categories as defined by local laws. Other risks of the plan are longevity of plan members as well as death or disability of employees before their retirement. The pension plan is reinsured for the risk of death and disability until 31 December 2019. Inflationary increases for pensions in payment are at the discretion of the Board of Trustees as benefits paid by the plan are exceeding the minimum level required by law.
The German Plans
Wärtsilä operates defined benefit plans in Germany in accordance with the local pension laws and regulations. The plans provide benefits to the members in the form of a pension payable after retirement. The level of benefits provided depends on the accrued retirement savings capital, which is a result of contributions paid up to retirement plus respective interest. The plans vary from unfunded plans to a plan run as a pension fund.

In some of the plans, contributions are paid to the plan both by the employees and the employers based on a percentage of the insured salary as defined in the pension fund regulations. However, in some plans only the employer is obliged to make the payments. Contributions by the employers vary depending on the age of the employee, the duration of the employment and also on the position of the employee.

The main risks of the plans are longevity of plan members and death or disability of employees before their retirement. In a funded plan, also the investment strategy chosen includes certain risk. Inflationary increases for pensions in payment are valuated on a yearly basis.
MEUR 2019 2018
Present value of unfunded defined benefit obligations 119 108
Present value of funded defined benefit obligations 182 177
Fair value of plan assets -146 -135
Net liability in the statement of financial position 155 149
% Present
value of
defined
benefit
obligations
Fair
value
of plan
assets
Switzerland 31 55
Germany 23 5
Other Europe 37 28
Asia 9 12
Total 100 100
MEUR Present
value of
defined
benefit
obligation
Fair
value
of plan
assets
Net
defined
benefit
liability
Balance on 1 January 2018 307 -154 154
Changes in exchange rates 2 -2 -1
Recognised in the statement of income:
Current service cost 10 10
Past service cost -1 -1
Gains (-) / losses (+) on curtailments and settlements -21 20 -2
Interest cost (+) / interest income (-) 5 -3 3
Remeasurements recognised in other comprehensive income:
Return on plan assets, excluding interest income 11 11
Experience adjustments -6 -6
Changes in financial assumptions -2 -2
Contribution paid by the plan members 1 -1
Contribution paid by the employer -11 -11
Benefits paid -13 5 -8
Balance on 31 December 2018 282 -134 149
Balance on 1 January 2019 282 -134 149
Changes in exchange rates 5 -4
Recognised in the statement of income:
Current service cost 13 13
Gains (-) / losses (+) on curtailments and settlements -1 -1
Interest cost (+) / interest income (-) 5 -2 3
Remeasurements recognised in other comprehensive income:
Return on plan assets, excluding interest income -11 -11
Experience adjustments 1 1
Changes in demographic assumptions -1 -1
Changes in financial assumptions 30 30
Contribution paid by the plan members 1 -1
Contribution paid by the employer -10 -10
Benefits paid -21 10 -12
Reclassification to assets held for sale -15 7 -8
Balance on 31 December 2019 299 -146 155
Plan assets invested in:
% 2019 2018
Shares and other equity instruments 18 17
Bonds and other debt instruments 35 33
Property 17 17
Other assets 30 33
The main actuarial assumptions at the end of the financial period are (expressed as weighted averages):
% 2019 2018
Discount rate 1.08 1.78
Future salary growth 2.03 2.16
Future pension growth 1.14 1.18
On 31 December 2019, the weighted average duration of the defined benefit obligation was 12 years. The Group expects to contribute EUR 7 million to the plans during the next financial period.
Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in each country. These assumptions translate into a weighted average life expectancy in years for a pensioner at the retirement age as follows:
2019 2018
Plan participants retiring at the end of the financial period:
Male 17.4 17.0
Female 20.0 17.1
Plan participants retiring 20 years after the end of the financial period:
Male 18.4 16.1
Female 20.4 18.1
The following table presents a sensitivity analysis for each significant actuarial assumption showing how the defined benefit obligation would have been affected by changes in the relevant actuarial assumption that were reasonably possible at the end of the financial period. This sensitivity analysis applies to the defined benefit obligation only and not to the net defined benefit pension liability in its entirety.
Sensitivity analysis
Effect to defined
benefit obligation, MEUR
Change in assumption 2019 2018
Discount rate increase 1% -41 -33
Discount rate decrease 1% 51 41
Future salary growth increase 1% 10 9
Future salary growth decrease 1% -8 -8
Future pension growth increase 1% 30 25
Future pension growth decrease 1% -16 -15
26. Equity
Equity consists of share capital, share premium, translation differences, fair value reserve, remeasurements of defined benefit liabilities and retained earnings.
Share capital and number of shares
MEUR
Share capital Number
of shares
and votes
Share
capital
Share
premium
Total
1 January 2018 197 241 130 336 61 397
Share issue without payment on 12 March 2018 394 482 260
31 December 2018 591 723 390 336 61 397
31 December 2019 591 723 390 336 61 397
Wärtsilä's share does not have a nominal value. Wärtsilä has one series of shares. Each share is assigned one vote in the Annual General Meeting and has equal right to dividend.
Share Capital
The subscription price of a share received by the company in connection with share issues is credited to the share capital, unless it is provided in the share issue decision that a part of the subscription price is to be recorded in the fund for invested non-restricted equity.
Share Premium
Share premium is restricted equity. It may be reduced in accordance with the rules applying to decreasing share capital in accordance with the Finnish Limited Liability Companies Act. It can also be used to increase the share capital.
Translation differences
Translating foreign subsidiaries' financial statements by using different exchange rates in the statement of comprehensive income and in the statement of financial position causes translation differences, which are recognised in equity. Translation differences of foreign subsidiaries’ acquisition cost eliminations and post acquisition gains and losses are also presented in equity. Also translation differences arising from subsidiary net investment and non-current subsidiary loan without agreed settlement dates are presented in equity. The change in translation differences is recognised in other comprehensive income.
Fair value reserve
Fair value reserve includes the changes in fair value of derivative financial instruments, if the hedging is effective and eligible for hedge accounting. The changes in items included in fair value reserve are recognised in other comprehensive income.
MEUR Cash flow
hedges
Difference between fair value and carrying amount on 1 January 2018 -14
Taxes related to fair value adjustments 3
Fair value reserve on 1 January 2018 -10
Transferred to the statement of income, net of taxes -6
Fair value adjustments -17
Taxes related to fair value adjustments 3
Fair value reserve on 31 December 2018 -31
Transferred to the statement of income, net of taxes 16
Fair value adjustments 4
Fair value reserve on 31 December 2019 -11
Parent company's distributable funds
After the balance sheet date, the Board of Directors proposed that a dividend of EUR 0.48 per share be paid for the financial period 2019, total dividend payable being EUR 284 million. The remaining part of the retained profits will be carried further in the unrestricted equity. For the profit for the financial period 2018, a dividend of EUR 0.48 per share was distributed, totalling EUR 284 million, and the rest of the retained profits were carried further in the unrestricted equity.
Additional information on equity is presented in Notes to the parent company financial statements, in Note 10. Shareholders' equity.
27. Provisions
2019
MEUR Litigation Warranties Onerous
contracts
Restruc-
turing
Other
provisions
Total
Provisions on 1 January 2019 21 172 67 7 38 305
Changes in exchange rates 1
Additions 4 52 100 20 14 190
Used provisions -14 -51 -71 -13 -9 -159
Released provisions -1 -7 -2 -5 -14
Provisions on 31 December 2019 10 174 89 13 38 323
Non-current 45
Current 278
2018
MEUR Litigation Warranties Onerous
contracts
Restruc-
turing
Other
provisions
Total
Provisions on 1 January 2018 19 173 27 6 35 261
Acquisitions 1 1 1 3
Additions 12 60 107 9 11 198
Used provisions -2 -62 -64 -6 -5 -138
Released provisions -9 -5 -4 -4 -21
Provisions on 31 December 2018 21 172 67 7 38 305
Non-current 54
Current 251
Warranty provisions include estimated future warranty costs relating to products delivered. The amount of future warranty costs is based on accumulated historical experience. The standard warranty period is one year from the delivery onwards.
The Group is a defendant in a number of legal cases which arise out of, or are incidental to, the ordinary course of its business. These lawsuits concern mainly issues such as contractual and other liability, labour relations, property damage and regulatory matters. The Group receives from time to time claims of different amounts and with varying degrees of substantiation. There is currently one unusually sizeable claim, but it is highly unlikely that the outcome of it would be unfavourable. The claim is treated as a contingent liability as it is the Group’s policy to provide for amounts related to the claims as well as for the litigation and arbitration matters when an unfavourable outcome is probable and the amount of loss can be reasonably estimated.
28. Financial liabilities
2019
Current Non-current
MEUR < 1 year 1–3 years 3–5 years > 5 years Total
Loans from other financial institutions* 56 263 258 328 906
Lease liabilities 48 65 37 64 215
Other interest-bearing debt* 2 2
Trade payables 624 624
Derivatives** 7 10 5 2 23
Other liabilities 4 4
Total 741 339 301 392 1 774
* Estimated interest expenses, total 8 12 8 3 31
Estimated contractual cash flows 748 351 309 395 1 804
2018
Current Non-current
MEUR < 1 year 1–3 years 3–5 years > 5 years Total
Loans from other financial institutions* 63 186 311 250 809
Finance lease liabilities* 1 2 2
Other interest-bearing debt* 11 11
Trade payables 596 596
Derivatives** 63 12 3 79
Other liabilities 9 9
Total 744 199 314 250 1 507
* Estimated interest expenses, total 8 13 11 7 39
Estimated contractual cash flows 752 212 326 257 1 546
** Valuation for derivatives with negative market value by maturity date. Nominal contractual amounts are presented in Note 30. Derivative financial instruments.
Interest expenses for long-term loans are calculated by using the average interest rate prevailing on 31 December 2019. Fair values of financial liabilities are presented in Note 18. Financial assets and liabilities by measurement category.
29. Other liabilities
MEUR 2019 2018
Accrued expenses 320 295
Personnel costs 125 124
Derivatives 23 79
Interest and other financial items 4 9
Other accruals 41 45
VAT liabilities 39 26
Other 70 67
Total 623 645
Non-current 1 1
Current 622 645
30. Derivative financial instruments
The Group applies hedge accounting to significant foreign currency forward contracts. Detailed financial information is presented in Note 33. Financial risks.
MEUR 2019 of which
closed
2018 of which
closed
Nominal values of derivative financial instruments (level 2)
Interest rate swaps 400 270
Cross currency swaps 246 238
Currency forwards, included in hedge accounting 1 769 873 1 227 314
Currency forwards, no hedge accounting 597 213 1 600 721
Total 3 012 1 086 3 335 1 035
Fair values of derivative financial instruments (level 2)
Interest rate swaps -7 -4
Cross currency swaps -4 -8
Currency forwards, included in hedge accounting 8 -22
Currency forwards, no hedge accounting 4 -33
Total -67
In addition, the Group had copper futures and swaps amounting to 173 tons (264) valued at EUR 1 million (1).
Foreign currency forward contracts are against transactional risks and fall due during the following 12 months (12). A currency forward is considered closed when there are offsetting cash flows in the same currency with the same value date. Interest rate swaps are denominated in euros and their average maturity is 69 months (48). The average maturity for cross currency swaps is 41 months (54).
Normally all of the Groups' derivatives are done under International Swaps and Derivatives Association's Master Agreements (ISDA). In case of an event of default under these agreements the non-defaulting party may request early termination and set-off of all outstanding transactions. These agreements do not meet the criteria for offsetting in the statement of financial position. The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements.
MEUR 2019 2018
Gross fair values of derivative financial instruments subject to ISDAs
Assets
Cross currency swaps 5 3
Currency forwards 18 8
Total 24 12
Liabilities
Interest rate swaps -7 -4
Cross currency swaps -9 -11
Currency forwards -7 -63
Total -23 -79
Net fair values of derivative financial instruments subject to ISDAs
Assets 8
Liabilities -8 -67
Total -67
31. Collateral, contingent liabilities and other commitments
2019 2018
MEUR Debt in the
statement
of financial
position
Collateral Debt in the
statement
of financial
position
Collateral
Mortgages given as collateral for liabilities and commitments
Other commitments 18 10 15 10
Total 18 10 15 10
Chattel mortgages and other pledges and securities given as collateral for liabilities and commitments
Loans from credit institutions 5 1 8 2
Other commitments 21 17
Total 5 22 8 19