Basis of preparation
These consolidated financial statements of TVO Group have been prepared in accordance with International Financial Reporting Standards (IFRS). These financial statements have been prepared in accordance with the IAS and IFRS standards and SIC and IFRIC interpretations effective at 31 December 2018. In the Finnish Accounting Act and regulations issued by virtue of it, “IFRS” refers to the standards and interpretations which have been endorsed by the EU in accordance with the procedure defined in the EU Regulation (EY) No. 1606/2002.
The consolidated financial statements have been prepared under the historical cost convention, except for fund units and investments in shares and derivative financial instruments, which are recognized at fair value.
The consolidated financial statements are presented in euros, which is the functional and presentation currency of the Group's parent company.
The consolidated financial statements have been prepared according to the same accounting policies as in 2017. The Group has adopted the following amendments to existing standards on 1 January 2018:
- IFRS 9 Financial Instruments
The standard replaced the multiple classification and measurement models in IAS 39 and it brought changes to classification and measurement of financial assets, their impairment assessment and hedge accounting. The new impairment model requires the recognition of impairment provisions based on expected credit losses. The Group applies to the recognition of the credit risk of trade receivables a simplified provision matrix, because the annual consolidated credit losses have been very low and trade receivables do not include any significant financial components. Thus the expected credit losses referred to in the new model do not have any significant impact. The classification of financial assets will not change remarkably.
Loan receivables will still be measured at amortized cost and no changes has not come in the recognition practice applied to financial liabilities, because the Group does not have any liabilities to which fair value options would be applied.
Fund units investments are measured at fair value, and changes in fair value are recognized through profit or loss to the income statement. Direct market prices are not available for unquoted shares and therefore their fair value is determined using methods based on management judgement. The hedge accounting model presented in IFRS 9 facilitates the application of hedge accounting and the new hedge accounting rules aligned the accounting for hedging instruments more closely with common Group risk management practices. The hedge ratios of the Group, based on IAS 39, met the requirements of IFRS 9 as well. The application of consolidated operative hedge accounting was facilitated as the adoption of IFRS 9 eliminated the 80–125% retrospective effectiveness requirement. With the adoption of IFRS 9, the assessment of hedge effectiveness will be exclusively prospective. The ineffectiveness of consolidated hedge ratios is expected to remain very low also in the future.
The IFRS 9 standard defines three requirements for hedge effectiveness for the application of hedge accounting. The first one requires an economic relationship between the hedged item and the hedging instrument. This means that changes in the values of the hedging instrument and the hedged item can be expected to be opposite as they are based on a shared instrument or risk. The standard also requires that the effect of credit risk does not dominate value changes caused by the economic relationship. Thirdly, the hedging degree of the hedge ratio shall be the same as the hedging degree based on the quantity of the item actually hedged by the entity and the quantity of the hedging instrument actually used by the entity to hedge the quantity of the hedged item in question. IFRS 9 requires the same hedging degree as the one actually used in risk management. These changes did not have any significant impact on the Group.
- IFRS 15 Revenue from Contracts with Customers
The group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018, which resulted in changes in accounting policies and disclosure of new notes. The standard replaced IAS 18 which covered contracts for goods and services and IAS 11 which covers construction contracts.
The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards.
A new five-step process must be applied before revenue can be recognised:
- identify contracts with customers
- identify the separate performance obligation
- determine the transaction price of the contract
- allocate the transaction price to each of the separate performance obligations, and
- recognise the revenue as each performance obligation is satisfied.
The standard did not change the recognition of the revenue. Turnover of the Group mainly consist of electricity revenue, which will still be recognized based on delivery. Revenue on sales of the electricity are divided into variable and fixed charges, see General information on the Group, TVO's cost-price principle. As a result of the new standard, Group will disclose a new note concerning trade receivables starting from 2018 financial statements. The new note will divide trade receivables between nuclear power and coal-fired power and also between production of electricity and services.
- Annual Improvements 2014-2016: IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures
- IFRS 4 (amendment) Insurance Contracts
- IFRS 2 (amendment) Share-based Payment Transactions
- IFRIC 22 Foreign Currency Transactions and Advance Considerations
- IAS 40 (amendment) Investment Property
The following new standards, interpretations and amendments to existing standards and interpretations issued already will be adopted by the Group in 2019:
The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
As at the reporting date, the group has non-cancellable operating lease commitments of EUR 1,462 thousand, see note 25 Obligations and other commitments. Of these commitments, approximately EUR 230 thousand relate to low value leases which will be recognised on a straight-line basis as expense in profit or loss.
The group will apply the standard from its mandatory adoption date of 1 January 2019. The group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property leases will be measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at the amount of the lease liability on adoption.
For the remaining lease commitments the group expects to recognise right-of-use assets of approximately EUR 760 thousand on 1 January 2019 and lease liabilities of approximately EUR 760 thousand.
- IAS 19 Employee Benefits1)
- IFRIC 23 Uncertainty over Income Tax Treatments
- IFRS 9 (amendment) Financial Instruments
- IAS 28 (amendment) Investments in Associates and Joint Ventures1)
- Annual Improvements 2015-20171)
The following new standards and amendments to existing standards issued already will be adopted by the Group in 2020 or later:
- IFRS 3 Business Combinations2)
- IAS 1 (amendment) Presentation of financial statements and IAS 8 (amendment) Accounting policies, changes in accounting estimates and errors2)
- IFRS 17 Insurance Contracts3)
Management is assessing the impact of these changes on the financial statements of the Group.
1)The standard, interpretation or amendment to published standard or interpretation is still subject to endorsement by the European Union. Effective date will be 1 January 2019.
2)The standard, interpretation or amendment to published standard or interpretation is still subject to endorsement by the European Union. Effective date will be 1 January 2020.
3)The standard, interpretation or amendment to published standard or interpretation is still subject to endorsement by the European Union. Effective date will be 1 January 2021.
Companies included in the consolidated financial statement
Subsidiaries
The consolidated financial statements include Teollisuuden Voima Oyj (TVO) and its subsidiary TVO Nuclear Services Oy. Subsidiaries are companies in which the Group has control at the end of the financial period. Control exists if the Group holds more than a half of the voting rights or otherwise has control. Subsidiaries acquired are consolidated from the date on which control is transferred to the Group, and subsidiaries sold are no longer consolidated from the date that control ceases.
The purchase method of accounting is used to consolidate subsidiaries into the Group. The purchase price is determined as the aggregate of the acquisition date fair values of the assets given as consideration and liabilities incurred or assumed. Costs directly attributable to the acquisition are recognized in profit or loss.
In the consolidation, intercompany share ownership, intercompany transactions, receivables, liabilities, unrealized gains and internal distributions of profits are eliminated. Unrealized losses are not eliminated, if the losses are due to impairment of the asset being transferred. To ensure consistency, subsidiaries’ accounting policies have, in all material respects, been changed to conform to the accounting policies adopted by the Group.
Joint ventures
The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor.
TVO’s joint venture is Posiva Oy, which main activities (A series) is final disposal of nuclear fuel of nuclear power plants. Both ventures are liable for its main activities in proportion to their own usage. Posiva Solutions Oy is a wholly-owned subsidiary of Posiva Oy (B series). Posiva Solutions Oy focuses on the sales of the know-how Posiva has accumulated from its design, research and development activities in the final disposal of spent nuclear fuel, as well as on associated consulting services. Posiva Group is accounted for by the equity method of accounting.
Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group's share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group's share of losses in a joint venture equals or exceeds its interests in the joint ventures, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.
Unrealized gains on transactions between the Group and its joint venture are eliminated to the extent of the Group's interest in the joint ventures. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Account policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.
Segment reporting
The Group has two reportable segments; nuclear power and coal power. The Board of Directors is the chief operation decision maker.
Revenue recognition principles
TVO operates on a cost-price principle. Revenue is recognized based on the consideration received when electricity is delivered or services are rendered. Revenue is presented net of indirect sales taxes. Revenue is recognized as follows:
Sales of electricity and other revenue
Revenue on sales of electricity is divided into variable and fixed charge. Revenue on sales of electricity concerning variable charge is recognized based on delivery. The recognized income for shareholders is based on the quantities delivered. The variable charge is invoiced and recognized in turnover monthly. These variable costs are payed retrospectively in the 24th next month. The fixed costs are invoiced one month in advance and recognized advance payments received. The fixed charge is entered as income in the right month. According to TVO's Articles of Association the fixed costs must be paid monthly in advance and no later than the 24th day of the preceding month .
The revenue from services is recognized on an accrual basis on the accounting period when the services are rendered to the customer and when the control of the service transfers to a customer. Revenue on long-term consulting services projects that spread over several accounting periods is recognized based on the proportion of costs incurred from work performed up to the balance sheet date and the estimated total expenses of the project. If it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.
Other income
Revenue from activities outside the ordinary course of business is reported as other income. This includes joint ventures' revenue from services, rental income and non-recurring items, such as gains from sales of property, plant and equipment. Rental income is recognized on a straight line basis over the rental period and gains from sales of property, plant and equipment when the significant risks and rewards of ownership, interests and control have been transferred to the buyer.
Government grants
Grants are recognized at their fair value, when the Group meets all the conditions attached to them and where there is a reasonable assurance that the grant will be received. Government grants relating to costs are deferred on the balance sheet and recognized in the income statement over the period in which their relevant costs are recorded. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset.
Research and development costs
Research and development costs (except R&D costs related to nuclear waste management) of the Group are recognized as an expense as incurred and included in other expenses in the income statement. Development costs are capitalized if it is assured that they will generate future income, in which case they are capitalized as intangible assets and amortized over the period of the income streams. Currently the Group does not have any development costs that would qualify for capitalization.
Research costs that relate to nuclear waste management are discussed in paragraph Assets and provisions related to nuclear waste management obligations.
Property, plant and equipment
Property, plant and equipment of the Group are stated on the consolidated balance sheet at historical cost less grants received, accumulated depreciation and impairment charges, if any. Historical cost includes expenditure that is directly attributable to the acquisition of an item.
In the historical costs of power plant projects and other significant investments (completion time more than a year) the financing costs incurred during the construction period will be included.
The historical costs of nuclear power plants include furthermore the estimated costs of dismantling and removing an item and restoring the site on which it is located (more information is included in paragraph Assets and provisions related to nuclear waste management obligations).
Land and water areas are not depreciated.
Other property, plant and equipment are depreciated using the straight-line method over their estimated useful lives.
Straight-line depreciation is based on the following estimated useful lives:
OL1 and OL2 nuclear power plant units:
| - Basic investment | 61 years |
| - Investments made according to the modernization program | 20–35 years |
| - Automation investments associated with the modernization | 15 years |
- Additional investments
| 10 years |
| Buildings and structures | 10–40 years |
| TVO's share in the Olkiluoto gas turbine power plant | 30 years. |
The assets' residual values and useful lives are reviewed, and adjusted if appropriate to reflect the changes in expectations of economic benefits.
Costs of renewal of an item or a part of an item of property, plant and equipment are capitalized if the part is accounted for as a separate item. Otherwise, the subsequent expenditure is included in the carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Group.
Annual repair and maintenance costs are recognized in profit or loss, when they occur. Investments connected with the modernization and maintenance of the power plant units are capitalized.
OL3 EPR is nuclear power plant unit under construction. All the realized costs on the OL3 EPR-project that meet recognition criteria are shown as incomplete plant investment. See note 12 Property, plant and Equipment.
Intangible assets
Intangible assets are shown at historical cost less grants received, accumulated amortization and impairment losses if applicable. Historical cost includes costs directly attributable to the acquisition of the particular asset.
Other long-term expenditure included in intangible assets are amortized on a straight-line basis over their estimated useful lives. These include computer software and certain payments made for the use of assets.
The amortization periods of the intangible assets are as follows:
| - Computer software | 10 years |
| - Other intangible assets | 10 years. |
The amortization period of an intangible asset is changed where necessary if the estimated useful life changes from that previously estimated.
Furthermore, intangible assets include carbon dioxide (CO2) emission rights. Emission rights are recognized at historical cost, and are presented under emission rights. The current liability for returning emission rights is recognized at the carrying value of possessed emission rights. If there is a shortfall, a current liability is recognized to cover the acquisition of the missing emission rights. This current liability is valued at the current market value of the emission rights at the balance sheet date. The cost of the emission rights is recognized in the income statement under costs of materials and services. The gains from the sales of emission rights are refunded to the equity holders of the company.
Impairment of property, plant and equipment and intangible assets
The Group assesses at each balance sheet date whether there are indications that the carrying amount of an asset may not be recoverable. If such indications exist, the recoverable amount of the asset in question will be measured. For the purposes of assessing impairment, assets are examined at the level of cash-generating units, that is, at the lowest level that is mainly independent of other units and for which there are separately identifiable cash flows and largely independent from those of corresponding units.
The recoverable amount is the higher of an asset’s fair value less costs to sell or value in use. The value in use is determined by reference to discounted future cash flows expected to be generated by the asset. The discount rate used is pre-tax and reflects the time value of money and asset specific risks.
Impairment loss is recognized when the carrying amount of the asset is greater than its recoverable amount. Impairment loss is charged directly to the income statement. If a cash-generating unit is subject to an impairment loss, it is allocated first to decrease the goodwill and subsequently, to decrease the other assets of the unit. At recognition of the impairment loss, the useful life of the reamortized assets is reassessed. Impairment loss of other assets than goodwill is reversed in the case that a change has occurred in the estimates used in measuring the recoverable amount of the asset. The increased carrying amount must not, however, exceed the carrying amount that would have been determined had no impairment loss been recognized in prior years.
Inventories
Inventories are measured at acquisition cost. The acquisition cost comprises raw materials, direct labor and other direct costs. The carrying amount of inventories is not reduced to a value that is less than its acquisition cost, as TVO operates at cost price, so the net realizable value of inventories always covers their acquisition cost. The cost of coal is determined by using the FIFO (first in, first out) method and the cost of supplies is determined by using the rolling weighted average cost formula. The use of nuclear fuel is recognized according to calculated consumption.
Leases
Finance leases
Leases are classified as finance leases when all substantial risks and rewards incidental to ownership are transferred to the Group. Assets acquired under finance leases are recognized in the balance sheet at the commencement of the lease term at the fair value of the leased asset or, if lower, the present value of the minimum lease payments. Leased assets are depreciated over the shorter of the useful life of the asset and the lease term. Lease obligations are recognized under interest-bearing liabilities.
Lease payments are apportioned during the lease term between the finance charge and the reduction of the outstanding liability to produce a constant periodic rate of interest on the remaining balance of the liability.
Other leases
Lease payments under other leases are recognized in the income statement as an expense under the accrual principle on a straight-line basis over the lease term.
Lease payments received are recognized as income on a straight-line basis over the lease term and presented in the income statement under other income.
Financial assets
The IFRS 9 Financial Instruments standard has replaced the IAS 39 standard and brought changes to measuring and classifying financial assets, determining their impairment as well as the principles of hedge accounting. In the Group, financial assets are divided into the following categories in accordance with the IFRS 9 standard: assets measured at fair value through profit or loss, at fair value through other comprehensive income items and at amortised cost. According to the standard, the classification is based on the business goal of the financial assets and contractual cash flows, and they are classified during their original acquisition.
Transaction expenses are included in the original book value of the financial liabilities, except in the case of items measured at fair value through profit or loss. All purchases and sales of financial assets are recognised at fair value on their trade date.
Financial assets are derecognised once the Group has lost its contractual right to the cash flows or transferred a significant portion of the risks and revenue out of the Group.
Recognised at fair value through profit or loss
Derivative financial instruments that do not meet the criteria of the IFRS 9 standard are recognised at fair value through profit or loss. Profit and loss resulting from changes in fair value are recognised in the income statement in the financial period during which they have arisen. However, if expenses or income resulting from derivative financial instruments are caused by the construction of the OL3 EPR power plant, they are activated as part of the acquisition cost of the asset.
Fund holdings are recognised at fair value through profit or loss as either current or non-current items. In the Group, fund holdings are included in current receivables, except in the case of items whose maturity exceeds 12 months from the reporting date. Fund investments measured at fair value through profit or loss are classified as fund holdings.
Amortised cost
Amortised cost includes non-current loan and other receivables as well as current trade and other receivables. If an item is due in over 12 months, it is recognised as a non-current asset. After initial recognition, all loan and other receivables are measured at amortised cost using the effective interest method. Trade receivables are recognised on the balance sheet at their original nominal value, which corresponds to their fair value.
Fair value through other comprehensive income items
Share investments are included in the “Non-current asset investments in shares” class and recognised at fair value through other comprehensive income items. Changes in fair value are entered in other comprehensive income items and presented in the equity fair value reserve.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances, call deposits and other short-term, liquid investments. Items classified as cash and cash equivalents have a maturity of no more than three months from the date of acquisition.
Impairment of financial assets
According to the new impairment model, the impairment of financial assets must be determined using a model based on expected credit losses. From the Group’s perspective, the new impairment model applies to trade receivables and the earlier recognition of their credit losses. The Group’s credit position has not changed between the standards.
According to the IFRS 9 standard, the Group applies a simplified provision matrix to recognising the credit risks in trade receivables, on the basis of which a deductible item is recognised for all trade receivables based on the expected credit losses over the entire period of validity.
The Group’s annual credit losses have been very minor, and the expected credit losses according to the new model are not expected to have a significant impact. The impairment model has no impact on financial assets measured at fair value, since expected credit losses are already taken into account in the fair value in accordance with the IFRS 9 standard. As regards financial instruments measured at amortised cost, the Group performs active monitoring and recognises impairment in profit or loss in accordance with the criteria.
On each closing date, the Group estimates whether objective evidence exists of the impairment of an individual financial asset or a group thereof. If the fair value of the financial assets has fallen substantially below their acquisition cost on the closing date, this is considered evidence of impairment of the financial assets. The impairment loss of equity convertible investments classified as items recognised at fair value through other comprehensive income items is not reversed by means of the income statement.
Evidence of impairment may include, for example, the counterparty’s substantial financial difficulties, failure to pay interest or instalments, probability of bankruptcy or other financial reorganisation, or observable information indicating determinable reduction of the estimated deferred cash flows, such as changes in the delay of payments and the counterparty’s deteriorated financial situation correlating with the failure to pay.
Financial liabilities
The Group’s financial liabilities are divided into the following categories in accordance with the IFRS 9 standard: assets measured at fair value through profit or loss, at fair value through other comprehensive income items and at amortised cost.
Financial liabilities are recognised at fair value including transaction expenses. After initial recognition, all financial liabilities are measured at amortised cost using the effective interest method. Financial liabilities are included in non-current and current liabilities and may be either interest-bearing or non-interest-bearing. An item is recognised in current liabilities if it is due within 12 months of the closing date.
Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments to hedge against the currency risk of fuel acquisitions and currency and interest rate risk of loans. Derivative financial instruments are recognised on the balance sheet at fair value on the day on which the Group becomes a party to the derivative financial instruments contract and are thereafter always measured at fair value on the closing date.
Items covered by hedge accounting in accordance with the IFRS 9 standard include instruments used for hedging against the currency risk of the Group’s uranium supply contracts (forward exchange contracts, currency swaps) and some of the interest rate swaps used for hedging against the fluctuation of interest cash flows in the Group’s loan agreements.
The Group shall document, both at the beginning of and after the hedging, its estimate of whether the derivative financial instruments used for hedging transactions are efficient. Derivative financial instruments included in hedge accounting are divided into non-current and current assets and liabilities based on the maturity of the hedged instrument. The Group applies both cash flow and fair value hedge accounting.
With the adoption of the IFRS 9 standard, the assessment of hedge effectiveness is based on future orientation. The ineffectiveness of the Group’s hedging relationships is expected to continue being very minor.
The IFRS 9 standard defines three hedge effectiveness requirements for the application of hedge accounting. The first requirement requires a financial connection between the hedged item and hedging instrument. It must be expectable that the changes in the value of the hedging instrument and hedged item are opposite due to the instrument or risk used as the shared basis. Secondly, the standard requires that changes in value due to the financial relationship are not dominated by the impact of credit risk. Thirdly, the hedging rate of the hedging relationship must equal the hedging rate resulting from the amount of the hedged item that the organisation actually hedges and the amount of the hedging instrument that the organisation actually uses for hedging that amount of the hedged item. The IFRS 9 standard requires the same hedging rate that is actually used in risk management. These changes have no significant impact for the Group.
Cash flow hedging
The effective portion of the changes in fair value of the derivative instruments that have been specified as cash flow hedges and meet the criteria for cash flow hedging are entered in other comprehensive income items and presented in the equity fair value reserve. Profit or loss relating to the ineffective portion is recognised in the income statement, except if they are caused by the construction of the OL3 EPR power plant, in which case the finance charges are capitalized as part of the acquisition cost. Changes in fair value accumulated in equity are recognised in the balance sheet for the financial period in which the hedged item affects the profit or loss. The “At fair value through other comprehensive income items” category also includes derivative financial instruments in cash flow hedge accounting.
In hedging against the currency risk of fuel acquisitions, the hedging instrument’s profits and losses are moved from equity to amend the cost of the inventory item in question. In the hedging of fuel acquisitions, profit or loss recognised in inventories is recognised according to the inventory recognition principles to adjust fuel acquisitions in “Materials and services”.
When the interest rate risk hedging of loans no longer meets the requirements for applying hedge accounting, or when a hedging instrument acquired for hedging falls due or is sold, the profit or loss accumulated in equity at the time in question is recognised in profit or loss during the validity of the hedged item in question. When the forecast transaction is no longer expected to take place, the profit or loss accumulated in equity is recognised in the income statement.
When the currency risk hedging of fuel acquisitions no longer meets the requirements for applying hedge accounting, or when a hedging instrument acquired for hedging falls due or is sold, the profit or loss accumulated in equity at the time in question is recognised in inventories at the same time as the purchase of inventories. When the forecast transaction is no longer expected to take place, the profit or loss accumulated in equity is recognised in the income statement.
Fair value hedging
The Group applies fair value hedges in the interest rate risk hedging of publicly quoted fixed-rate liabilities. Changes in the fair value of derivative instruments that meet the criteria for fair value hedge accounting, as well as the change in fair value caused by the interest rate risk of the related hedged items, are recognised in profit or loss in the financial items in the income statement. The balance sheet values of loans and fair values of hedging instruments directed at loans are included in interest-bearing liabilities and assets. If the criteria for hedge accounting are no longer met, the adjustments made to the hedged loan are released into the income statement using the effective interest method for the remaining maturity of the loan.
Derivatives outside hedge accounting
Changes in the fair value of interest rate options, interest rate swaps and forward exchange contracts left outside hedge accounting are presented in financial income and expenses to the extent that they are not activated as part of the acquisition cost caused by the construction of the OL3 EPR power plant.
Borrowing costs
Borrowing costs are recognized in profit or loss in the period when they have incurred, except when they relate to the construction of a power plant or any other significant investment, of which completion time exceeds one year. In that case, borrowing costs are capitalized as part of the cost of the asset.
Foreign currency items
Transactions and financial items denominated in a foreign currency are recognized at the rates on the day when they occur. Receivables and liabilities denominated in a foreign currency are measured in the financial statements at the ECB’s official exchange rate on the closing date. Exchange gains and losses from operating activities are included in the corresponding items above operating profit or loss. Exchange differences arising from financial items are recognized in finance income and expenses.
Equity
Share capital
TVO has in its possession three series of shares, A, B and C. The A series entitles the shareholder to the electricity generated by the OL1 and OL2 nuclear power plant units. The B series entitles the shareholder to the electricity that will be generated by the OL3 unit. The C series entitles the shareholder to the electricity generated by the TVO share in the Meri-Pori coal-fired power plant.
Payments received from shares in connection with setting up the TVO and in the form of increases in share capital are recognized under share capital, statutory reserve and share premium reserve. When share capital was reduced, some assets from share capital was returned to the shareholders. At the same time reserve for invested non-restricted equity was founded.
Subordinated shareholder loans (hybrid equity)
Subordinated shareholder loans (hybrid equity) are treated as equity. Subordinated shareholder loans (hybrid equity) are initially recognized at fair value including related transaction costs. There is no maturity date for the subordinated shareholder loans (hybrid equity), but the borrower is entitled to repay the loan in one or several installments. The Board of Directors of the borrower has the right to decide not to pay interest during any current interest period. Unpaid interest does not accumulate to the following interest periods.
The interest of the subordinated shareholder loans (hybrid equity) are recognized in liabilities when the obligation to pay interest is incurred. Interest expenses are recognized in the retained earnings and are not recognized in profit or loss.
Earnings per share
The Group does not report earnings per share, as the parent company is operating at cost price. The shares of TVO are not traded on a public market.
Provisions
The Group recognizes a provision for environmental restorations, asset retirement obligations, as well as legal and other claims, when the Group has a legal or constructive obligation and it is likely that an outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated. The provision is measured at the present value of the expenditure expected to be required to settle the obligation. The interest rate used in the measurement of provisions is the estimated long-term borrowing rate plus the ECP's inflation target and an estimated company-specific risk premium. The increase in the provision due to the passage of time is recognized as interest expense.
The most significant provision is that for the nuclear waste management obligation under the Nuclear Energy Act. The provision covers all future expenditure arising from nuclear waste management, including the decommissioning of nuclear power plants, the disposal of spent fuel and a risk marginal.
Assets and provisions related to the nuclear waste management obligation
The parent company's nuclear waste management obligation which is based on the Nuclear Energy Act is covered by payments made to the Finnish State Nuclear Waste Management Fund. The obligation covers all the future expenditures for nuclear waste management, including the decommissioning of nuclear power plants, the disposal of spent fuel, and a risk marginal. The amount of payments is determined by assuming that the decommissioning would start at the beginning of the year following the assessment year. The research relating to the disposal, as well as the actual disposal of TVO's spent fuel, are carried out by Posiva Oy, which charges from TVO the costs arising from these activities, including the acquisition cost of property, plant and equipment.
In the consolidated financial statements, TVO's share of the Finnish State Nuclear Waste Management Fund is shown as non-current assets. It is accounted for in accordance with IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. It is stated that the fund assets are measured at the lower value or the value of the related liabilities since TVO does not have control or joint control over the Finnish State Nuclear Waste Management Fund.
The nuclear waste management obligation is shown as a provision under non-current liabilities. The fair value of the nuclear waste management provision has been determined by discounting the future cash flows which are based on plans about future activity and the estimated expenditure relating to it, taking into account actions already taken.
The present initial value of the provision for the decommissioning of a nuclear power plant (at the time of commissioning the nuclear power plant) has been capitalized as property, plant and equipment and will be adjusted later for possible changes in the plan. The amount recognized relating to decommissioning will be depreciated over the estimated operating time of the nuclear power plant.
The provision for spent fuel covers the future disposal costs of fuel used by the end of each accounting period. The costs for the disposal are expensed during the operating time of the plant, based on fuel usage. The impact of any changes to the plan will be recognized immediately in the income statement based on fuel used by the end of each accounting period.
The timing factor is taken into account by recognizing the interest expense related to discounting the nuclear waste management provision. The interest accruing on TVO's share in the Finnish State Nuclear Waste Management Fund is presented as finance income.
TVO's share in the Finnish State Nuclear Waste Management Fund is higher than the corresponding asset recognized in the balance sheet. The nuclear waste management obligation is covered by TVO's share in the Fund, as required by the Nuclear Energy Act. The obligation for nuclear waste management is not discounted. The amount of the annual payment to the Finnish State Nuclear Waste Management Fund is based on the change on the nuclear waste management obligation and funding obligation target, the share of the profit or loss of the Fund, and the changes resulting from actions taken.
Taxes
The Group does not recognize deferred taxes, because TVO operates at cost price. According to this principle, TVO will not pay taxes on its operations, and therefore there is no taxable income. The tax recognized by the Group consists of tax relating to non-deductible expenses. It also includes any taxes for previous financial years.
Employee benefits
The pension benefits for Group personnel have been arranged with external pension insurance companies. The insurance policies relating to earnings-based pensions, as well as some voluntary pension insurance policies, have been accounted for as defined contribution plans.
Payments made to defined contribution plans as to pensions are recognized on an accrual basis in the income statement.
Critical accounting estimates and judgements
The preparation of financial statements requires estimates and assumptions concerning the future. Estimates and assumptions have an effect on the reported amounts of assets and liabilities, and expenses and income during the accounting period. The actual results may differ from these estimates.
The provision for future obligations for the decommissioning of the nuclear power plant and for the disposal of spent fuel
Estimates and assumptions have been used when estimating the assets, liabilities, expenses and income related to the future decommissioning of the nuclear power plant and the disposal of spent fuel. These are based on long-term cash-flow forecasts of estimated future costs.
The main assumptions relate to technical plans, time factor, cost estimates and the discount rate. The technical plans are approved by State authorities. Any changes in the assumed discount rate would change the provision. If the discount rate used were lowered, the provision would increase.
Any future increase in the provision would be offset by the recognition of an equal increase in TVO's share in the assets of the Finnish State Nuclear Waste Management Fund. According to IFRS, the carrying amount of the assets is limited to the value of the provision, as TVO does not have control in the Finnish State Nuclear Waste Management Fund (see note 24 Assets and provisions related to nuclear waste management obligation).
Power plant construction in progress - OL3 EPR
OL3 EPR is a power plant unit under construction that has been ordered under a turnkey principle. According to an announcement of the OL3 turnkey supplier, the delivery will be delayed from the original schedule according to which the power plant unit should have been in production as of 30 April 2009.
According to the comprehensive settlement agreement signed in March 2018, TVO and the Supplier jointly withdrew the pending arbitration proceedings under the International Chamber of Commerce (ICC) rules with respect to costs and losses incurred in relation to delays in the construction of the OL3 EPR project. In June 2018, the ICC tribunal confirmed the arbitration settlement by a consent award, and the arbitration proceedings were terminated. The parties also withdrew the pending appeals in the General Court of the European Union.
The settlement agreement between TVO and the plant supplier consortium companies Areva NP, Areva GmbH and Siemens AG as well as with Areva Group parent company Areva SA, a company wholly owned by the French State, concerning the completion of the OL3 EPR project and related disputes entered into force late March 2018.
The settlement agreement stipulates that:
- In order to provide and maintain adequate and competent technical and human resources for the completion of the OL3 EPR project, Areva will source the necessary additional resources from Framatome S.A.S., whose majority owner is Electricité de France (EDF).
- The supplier consortium companies undertake that the funds dedicated to the completion of the OL3 EPR project will be adequate and will cover all applicable guarantee periods, including setting up a trust mechanism funded by Areva companies to secure the financing of the costs of completion of the OL3 EPR project.
- The turnkey principle of the OL3 EPR plant contract and the joint and several liability of the supplier consortium companies remain in full force.
- The ICC arbitration concerning the costs and losses caused by the delay of the OL3 EPR project was settled by financial compensation of EUR 450 million to be paid to TVO in two installments by the supplier consortium companies.
- The parties withdraw all on-going legal actions related to OL3 EPR, including the ICC arbitration and appeals in the General Court of the European Union.
- In the event that the supplier consortium companies fail to complete the OL3 EPR project by the end of 2019, they will pay a penalty to TVO for such delay in an amount which will depend on the actual time of completion of the OL3 EPR project and may not exceed EUR 400 million.
The amount corresponding to the settlement amount have been entered as property, plant and equipment in the Group balance sheet.
All the realized costs on the OL3 EPR-project that meet recognition criteria have been booked as acquisition costs of property, plant and equipment on the Group balance sheet.
TVO's management have estimated that there is not known any technical or other issues that would prevent the completion of OL3 EPR-project or the commencement of the unit as stipulated in the settlement agreement. The recognition criterias of the acquisition costs OL3 EPR-project are realized because all the necessary actions will be completed to prepare the asset for its intended use.
Impairment testing
Impairment testing of non-current assets is performed when there are indications that the carrying amount of an asset may not be recoverable. In testing, future discounted cash flows which can be recovered by use of the asset and its possible sale are used as an indicator.
TVO operates on a cost-price principle. According to the company documents, the shareholders are obliged to pay all the expenses of the Company in electricity prices including amortization of property, plant and equipment. When assessing by means of recoverable amounts possible impairment of assets and subsequent need for recognition of impairment loss, the recoverable amounts always correspond, with some exceptions, to the carrying amount of the asset and thus, as a rule, no need for recognition of impairment loss arises.
