Summary of significant accounting policies
Basis of preparation
DSM's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and the provisions of section 362-8 of Book 2 of the Dutch Civil Code. The accounting policies applied by DSM comply with IFRS and the pronouncements of the International Financial Reporting Interpretation Committee (IFRIC) effective at 31 December 2018.
Effect of new accounting standards adopted in 2018
The International Accounting Standards Board (IASB) and IFRIC have issued IFRS 9 and IFRS 15, which became effective as of 1 January 2018. DSM's accounting policies were updated to reflect the changes driven by the implementation of these standards. For completeness, a summary of the impact on the accounting policies is provided below as well.
IFRS 9 ‘Financial Instruments'
IFRS 9 replaced IAS 39 ‘Financial Instruments: Recognition and Measurement'. For DSM this mainly impacted the classification and measurement of its other participating interests (OPI) reported under Other financial assets, which under IAS 39 were accounted for as available for sale securities measured at fair value, with changes in fair value recognized in Other comprehensive income (OCI) or at cost. Under IFRS 9, these OPIs will be measured at Fair value through profit or loss (FVTPL). However, in certain cases DSM will use the irrevocable election to classify an OPI at Fair value through OCI (FVOCI). The impact of this re-measurement was not material. The table below summarizes the impact of IFRS 9 on the measurement of the OPIs. The difference in the carrying amount is recognized in retained earnings at 1 January 2018.
Original classification under IAS 39
classification under IFRS 9
Other financial assets – OPI
Available for sale Fair value / At cost
Another impact of the implementation of IFRS 9 was the introduction of a new model for impairment, the Expected credit loss (ECL) model. For DSM, this model resulted in the recognition of a small and therefore insignificant default credit loss risk for loans to, and guarantees for, third parties and associated parties. For trade receivables, the transition to the new loss model did not have a significant impact on the valuation.
With regard to hedge accounting, DSM has elected to apply as of 1 January 2018 the new hedge requirements from IFRS 9 instead of the old requirements from IAS 39. This has no direct reportable impact on DSM's hedge practices. However, it ensures that the company's hedge accounting relationships are aligned with its risk management objectives and strategy, and it provides a more qualitative and forward-looking approach to assessing hedge effectiveness.
DSM has applied IFRS 9 retrospectively from 1 January 2018 and used the option not to restate comparative information for prior periods.
IFRS 15 ‘Revenue from contracts with customers'
IFRS 15 provides a framework for revenue recognition replacing old standards like IAS 11 ‘Accounting for Construction Contracts' and IAS 18 ‘Revenue'. DSM has adopted IFRS 15 as of 1 January 2018 using the cumulative effect method, where the impact of adoption should be recognized in retained earnings as of 1 January 2018, and the comparatives will not be restated. The effect of applying IFRS 15, however, was immaterial and did not have a significant impact on revenue recognition compared to the old revenue recognition policies.
Effect of forthcoming accounting standards not yet applied
IFRS 16 is forthcoming but is not yet being applied by DSM. It will be adopted on the required effective date of 1 January 2019.
IFRS 16 'Leases'
IFRS 16 establishes a new model for lessee accounting that requires a lessee to recognize right-of-use assets and lease liabilities for the rights and obligations created by leases.
Additionally, the nature of expenses related to leases will change, as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Furthermore, the classification of cash flows will also be affected, as operating lease payments under IAS 17 are presented as operating cash flows, whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will both be presented as financing cash flows. The new standard is effective for annual reporting periods beginning on or after 1 January 2019.
During 2018, DSM finalized its impact assessment of IFRS 16 on its consolidated financial statements. The standard will primarily affect the accounting for DSM's operating leases. The impact assessment performed indicates that the majority of these arrangements will meet the definition of a lease under IFRS 16, and hence DSM will recognize a lease liability and a corresponding right-of-use asset in respect of these leases. Based on the impact assessment of IFRS 16, DSM expects that the recognition of the leases will result in an impact of around €208 million on the balance sheet and will result in a reclassification in the profit and loss from operating expenses to depreciation/amortization and financial expenses of around €45 million. It should be noted that these are management estimates based on assumptions and contract data gathered up to and including 2018.
The actual impact of applying IFRS 16 on the financial statements in the period of initial application will depend on future economic conditions, including DSM's borrowing rate in 2019, the composition of DSM's lease portfolio at that date, DSM's latest assessment of whether it will exercise any lease renewal options, and the extent to which DSM chooses to use practical expedients and recognition exemptions, as well as the transition approach.
DSM plans to apply the modified retrospective transition approach under which the right-of-use asset is measured at an amount equal to the lease liability, adjusted for any prepayments or accruals.
New IFRIC interpretations are not expected to have a material effect on the financial statements of DSM.
The consolidated financial statements comprise the financial statements of Royal DSM and its subsidiaries (together 'DSM' or 'group'). As a parent company, DSM is exposed, or has right to, the variable returns from its involvement with its subsidiaries and has the ability to affect the returns through its power over the subsidiary. The financial data of subsidiaries are fully consolidated. Non-controlling interests in the group's equity and profit and loss are stated separately. A joint arrangement is an entity in which DSM holds an interest and which is jointly controlled by DSM and one or more other venturers under a contractual arrangement. A joint arrangement can either be a joint venture where DSM and the other partner(s) have rights to the net assets of the arrangement or a joint operation where DSM and the partner(s) have rights to the assets, and obligations for the liabilities to the arrangement. For joint ventures the investment in the net assets is recognized and accounted for in accordance with the equity method. For a joint operation, assets, liabilities, revenues and expenses are recognized in the financial statements of DSM in accordance with the contractual entitlement or obligations of DSM.
Subsidiaries are consolidated from the acquisition date until the date on which DSM ceases to have control. From the acquisition date onwards, all intra-group balances and transactions and unrealized profits or losses from intra-group transactions are eliminated, with one exception: unrealized losses are not eliminated if there is evidence of an impairment of the asset transferred. In such cases an impairment of the asset is recognized.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, including liabilities incurred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. Acquisition costs incurred are expensed.
As of the acquisition date, identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized separately from goodwill. Identifiable assets acquired and the liabilities assumed are measured at acquisition date fair value. For each business combination, DSM elects whether it measures the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Any contingent consideration payable is measured at fair value at the acquisition date.
Segment information is presented in respect of the group's operating segments about which separate financial information is available that is regularly evaluated by the chief operating decision maker. DSM has determined that Nutrition, Materials and the Innovation Center represent reportable segments in addition to Corporate Activities. The Managing Board decides how to allocate resources and assesses the performance of the clusters. Cluster performance is reported and reviewed down to the level of Adjusted EBITDA. The clusters are organized in accordance with the type of products produced and the nature of the markets served. The same accounting policies that are applied for the consolidated financial statements of DSM are also applied for the operating segments. Prices for transactions between segments are determined on an arm's length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can reasonably and consistently be allocated. Selected information on a country and regional basis is provided in addition to the information about operating segments.
Foreign currency translation
The presentation currency of the group is the euro.
Each entity of the group records transactions and balance sheet items in its functional currency. Transactions denominated in a currency other than the functional currency are recorded at the spot exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in a currency other than the functional currency of the entity are translated at the closing rates. Exchange differences resulting from the settlement of these transactions and from the translation of monetary items are recognized in the income statement.
Non-monetary assets that are measured on the basis of historical costs denominated in a currency other than the functional currency continue to be translated against the rate at initial recognition and will not result in exchange differences.
On consolidation, the balance sheets of subsidiaries that do not have the euro as their functional currency are translated into euros at the closing rate. The income statements of these entities are translated into euros at the average rates for the relevant period. Goodwill paid on acquisition is recorded in the functional currency of the acquired entity. Exchange differences arising from the translation of the net investment in entities with a functional currency other than the euro are recorded in Other comprehensive income. The same applies to exchange differences arising from borrowings and other financial instruments in so far as those instruments hedge the currency risk related to the net investment. On disposal of an entity with a functional currency other than the euro, the cumulative exchange differences relating to the translation of the net investment are recognized in profit or loss.
Distinction between current and non-current
An asset (liability) is classified as current when it is expected to be realized (settled) within 12 months after the balance sheet date.
Financial assets and financial liabilities are offset and the net amount is presented in the balance sheet when DSM has a legal right to offset the amounts and intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.
Goodwill represents the excess of the cost of an acquisition over DSM's share in the net fair value of the identifiable assets and liabilities of an acquired subsidiary, joint venture or associate. Goodwill paid on acquisition of subsidiaries is included in intangible assets. Goodwill paid on acquisition of joint ventures or associates is included in the carrying amount of these entities. Goodwill recognized as an intangible asset is not amortized but tested for impairment annually and when there are indications that the carrying amount may exceed the recoverable amount. A gain or loss on the disposal of an entity includes the carrying amount of goodwill relating to the entity sold.
Intangible assets acquired in a business combination are recognized at fair value on the date of acquisition and subsequently amortized over their expected useful lives, which vary from 4 to 20 years.
Separately acquired licenses, patents, drawing rights and application software are carried at historical cost less straight-line amortization and less any impairment losses. The expected useful lives vary from 4 to 15 years. Costs of software maintenance are expensed when incurred. Capital expenditure that is directly related to the development of application software is recognized as an intangible asset and amortized over its estimated useful life (5 to 8 years).
Research costs are expensed when incurred. Development expenditure is capitalized if the recognition criteria are met and if it is demonstrated that it is technically feasible to complete the asset; that the entity intends to complete the asset; that the entity is able to sell the asset; that the asset is capable of generating future economic benefits; that adequate resources are available to complete the asset; and that the expenditure attributable to the asset can be reliably measured. Development expenditure is amortized over the asset's useful life. Development projects under construction are included under 'Development projects'.
Property, plant and equipment
Property, plant and equipment are measured at cost less depreciation calculated on a straight-line basis and less any impairment losses. Interest during construction is capitalized when it meets the criteria of a qualifying asset. Expenditures relating to major scheduled turnarounds are capitalized and depreciated over the period up to the next turnaround.
Property, plant and equipment are systematically depreciated over their estimated useful lives. The estimated remaining lives of assets are reviewed every year, taking account of commercial and technological obsolescence as well as normal wear and tear. The initially assumed expected useful lives are in principle as follows: for buildings 10–50 years; for plant and machinery 5–15 years; for other equipment 4–10 years. Land is not depreciated.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use or the sale of the asset. Any gain or loss arising on derecognition of the asset is recorded in profit or loss.
Finance leases, which transfer to the group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. All other leases are operating leases.
Lease payments for finance leases are apportioned to finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are included in interest costs. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Operating lease payments are recognized as an expense over the lease term.
Associates and joint ventures
An associate is an entity over which DSM has significant influence but no control or joint control, usually evidenced by a shareholding that entitles DSM to between 20% and 50% of the voting rights. A joint venture is an entity where DSM has joint control and is entitled to its share of the net assets and liabilities. Investments in associates and joint ventures are accounted for by the equity method, which involves recognition in the income statement of DSM's share of the associate's or joint venture's profit or loss for the year determined in accordance with the accounting policies of DSM. Any other results at DSM in relation to associated companies are recognized under Other results related to associates and joint ventures. DSM's interest in an associate or joint venture is carried in the balance sheet at its share in the net assets of the associate or joint venture together with goodwill paid on acquisition, less any impairment loss.
When DSM's share in the loss of an associate or joint venture exceeds the carrying amount of that entity, the carrying amount is reduced to zero. No further losses are recognized, unless DSM has responsibility for obligations relating to the entity.
Non-derivative financial instruments
DSM initially recognizes loans and receivables and debt securities on the date when they are originated. All other financial assets and financial liabilities are initially recognized on the date when DSM becomes a party to the contractual provisions of the instrument. DSM derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or when DSM neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. DSM derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire.
Other financial assets
Other financial assets comprise loans to associates and joint ventures, other participating interests, other receivables and other deferred items.
DSM's business model objective for loans is to hold-to-collect contractual cash flows only. Loans and long-term receivables for which the contractual cash flows consist solely of principal and interest are measured at amortized cost, using the effective interest method, which generally corresponds to nominal value, less an adjustment for expected credit loss. The proceeds from these assets and the gain or loss upon their disposal are recognized in profit or loss.
Other receivables, for which the contractual cash flows are not solely principal and interest, are recognized at fair value, with changes in fair value recognized in profit or loss.
Other participating interests comprise equity interests in entities in which DSM has no significant influence; these are accounted for as assets at fair value through profit or loss. With the adoption of IFRS 9 in 2018, DSM has opted for the existing other participating interests to apply the irrevocable election to present fair value changes in other comprehensive income (Fair value reserve) instead of profit or loss. These changes will not be recycled through profit and loss upon disposal of the asset. Dividends received will be presented in profit or loss.
Impairment of assets
When there are indications that the carrying amount of a non-current asset (an intangible asset or an item of property, plant and equipment) may exceed the estimated recoverable amount (the higher of its value in use and fair value less costs to sell), the possible existence of an impairment loss is investigated. If an asset does not generate largely independent cash flows, the recoverable amount is determined for the cash generating unit (CGU) to which the asset belongs. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market interest rates and the risks specific to the asset.
When the recoverable amount of a non-current asset is less than its carrying amount, the carrying amount is impaired to its recoverable amount and an impairment charge is recognized in profit or loss. An impairment loss is reversed when there has been a change in estimate that is relevant for the determination of the asset's recoverable amount since the last impairment loss was recognized. Impairment losses for goodwill are never reversed.
Expected credit loss
All financial assets measured at amortized cost are reviewed for expected credit loss as of initial recognition of the asset. Credit losses are measured as the present value of the difference between the cash flows due to DSM, and the cash flows that DSM expects to receive. Expected credit losses are recognized in the income statement. Loss allowances for trade receivables are always measured at lifetime expected credit loss.
Inventories are stated at the lower of cost and net realizable value. The first in, first out (FIFO) method of valuation is used unless the nature of the inventories requires the use of a different cost formula, in which case the weighted average cost method is used. The cost of intermediates and finished goods includes directly attributable costs and related production overhead expenses. Net realizable value is determined as the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Products whose manufacturing cost cannot be calculated because of joint cost components are stated at net realizable value after deduction of a margin for selling and distribution efforts.
Current receivables for which the contractual cash flows are solely principal and interest are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method, which generally corresponds to nominal value, less an adjustment for expected credit loss.
Current investments are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method. Deposits with banks with a maturity between 3 and 12 months are classified as current investments.
Cash and cash equivalents
Cash and cash equivalents comprise cash at banks and in hand and deposits held at call with banks with a maturity of less than three months at inception. Bank overdrafts are included in current liabilities. Included in cash and cash equivalents are investments in money market funds that do not meet the SPPI criterion but are held to meet short-term cash demand. Cash and cash equivalents are measured at fair value through profit and loss, or amortized cost.
Non-current assets and disposal groups held for sale
Non-current assets and disposal groups (assets and liabilities relating to an activity that is to be sold) are classified as 'held for sale' if their carrying amount is to be recovered principally through a sales transaction rather than through continuing use. The reclassification takes place when the assets are available for immediate sale and the sale is highly probable. These conditions are usually met as from the date on which a letter of intent or agreement to sell is ready for signing. Non-current assets held for sale and disposal groups are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets held for sale are not depreciated or amortized. For transparency, non-current assets and disposal groups that will contribute to joint ventures are reported separately from other assets and liabilities held for sale.
Discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period, and represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes.
Royal DSM Shareholders' equity
DSM's ordinary shares and cumulative preference shares are classified as Royal DSM Shareholders' equity. This is the case for the latter, as there is no mandatory redemption, and distributions to the shareholders are at the discretion of DSM. The price paid for repurchased DSM shares (treasury shares) is deducted from Royal DSM Shareholders' equity until the shares are cancelled or reissued. Treasury shares are presented in the treasury share reserve. When treasury shares are sold or reissued, the amount received is recognized as an increase in equity, and the result on the transaction is presented as share premium. Dividend to be distributed to holders of cumulative preference shares is recognized as a liability when the Supervisory Board approves the proposal for profit distribution. Dividend to be distributed to holders of ordinary shares is recognized as a liability when the Annual General Meeting of Shareholders approves the profit appropriation.
Provisions are recognized when all of the following conditions are met (1) there is a present legal or constructive obligation as a result of past events, (2) it is probable that a transfer of economic benefits will settle the obligation, and (3) a reliable estimate can be made of the amount of the obligation.
The probable amount required to settle long-term obligations is discounted if the effect of discounting is material. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest costs.
Borrowings are not held for trading and are initially recognized at fair value of the proceeds received, net of transaction costs. Subsequently, borrowings are stated at amortized cost using the effective interest method. Amortized cost is calculated taking into account any discount or premium. Interest expenses are recorded in profit or loss.
Where the interest rate risk relating to a long-term borrowing is hedged through a fair value hedge, and the hedge is effective, the carrying amount of the long-term loan is adjusted for changes in fair value of the interest component of the hedged loan.
Other current liabilities
Other current liabilities are measured at amortized cost, which generally corresponds to the nominal value.
Financial derivatives are recognized on the day of trading at fair value, with changes recognized in profit and loss.
Revenue for contracts with customers
Revenues from contracts with customers are recognized by identifying the contract and its performance obligations as well as determination and allocation of the transaction price to these performance obligations. At DSM, revenue related to the sale of goods is recognized in the income statement when the performance obligation, which is at the point in time when transfer of control of the goods passes to the buyer, is satisfied. This revenue is measured at the fair value of the transaction price received.
Income coming from the rendering of services is recognized when the service, i.e. the performance obligation, has been performed. The revenue is measured at the fair value of the transaction price received.
Net sales represent the invoice value less estimated rebates and cash discounts, and excluding indirect taxes.
Income relating to the sale or licensing of technologies or technological expertise is recognized in the income statement at a point in time when the contractually identified performance obligations are satisfied, such as transfer of the rights and obligations associated with those technologies. This income is reported in Net sales when the income is part of the ordinary and recurring activities of the business and, if not, in Other operating income. Interest income is recognized on a time-proportionate basis using the effective interest method.
Dividend income is recognized when the right to receive payment is established.
Government grants are recognized at their fair value if there is reasonable assurance that the grant will be received and all related conditions will be complied with. Cost grants are recognized as income over the periods necessary to match the grant on a systematic basis to the cost that it is intended to compensate. If the grant is an investment grant, its fair value is initially recognized as deferred income in Other non-current liabilities and then released to profit or loss over the expected useful life of the relevant asset.
The costs of option plans are measured by reference to the fair value of the options on the date on which the options are granted. The fair value is determined using the Black-Scholes model, taking into account market conditions linked to the price of the DSM share. The costs of these options are recognized in profit or loss (Employee benefit costs) during the vesting period, together with a corresponding increase in Equity in the case of equity-settled options or Other non-current liabilities in the case of cash-settled options (Share Appreciation Rights). No expense is recognized for options that do not ultimately vest, except for options where vesting is conditional upon a market condition, which are treated as vesting, irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are met.
Performance shares and restricted share units are granted free of charge and vest after three years on the achievement of previously determined targets. The cost of performance shares and restricted share units is measured by reference to the fair value of the DSM shares on the date on which the performance shares and restricted share units were granted and is recognized in profit or loss (Employee benefit costs) during the vesting period, together with a corresponding increase in equity.
DSM is subject to legislation encouraging reductions in greenhouse gas emissions and has been awarded emission rights (principally CO2 emission rights) in a number of jurisdictions. Emission rights are reserved for meeting delivery obligations and are recognized at cost (usually zero). Revenue is recognized when surplus emission rights are sold to third parties. When actual emissions exceed the emission rights available to DSM, a liability is recognized for the expected additional costs.
Alternative performance measures (APMs)
DSM uses Alternative performance measures to present and discuss DSM's financial results. To arrive at these APMs, adjustments are made to material items of income and expense arising from circumstances such as Acquisitions/divestments, Restructuring, Impairments and Other.
'Other' APM adjustments include site closure costs, environmental cleaning, litigation settlements or other non-operational (contractual) arrangements. Other than items related to acquisition and integration costs incurred in the first year from the acquisition date (including non-recurring inventory value adjustments) as well as adjustments due to previously recognized APM adjusting events, the threshold is €10 million.
Income tax expense is recognized in the income statement except to the extent that it relates to an item recognized directly in Other comprehensive income or Shareholders' equity.
Current tax is the expected tax payable or receivable on the taxable income for the year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable with respect to previous years. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the carrying amount of assets and liabilities and their tax base. Deferred tax assets and liabilities are measured at the tax rates that have been enacted or substantially enacted at the balance sheet date. They are expected to apply when the related deferred tax assets are realized or the deferred tax liabilities are settled. Deferred tax assets, including assets arising from losses carried forward and tax credits, are recognized to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and unused tax losses can be utilized. Deferred tax assets and liabilities are stated at nominal value.
Deferred taxes are not provided for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax assets and deferred tax liabilities are offset and presented net when there is a legally enforceable right to offset, and the assets and liabilities relate to income taxes levied by the same taxation authority.
Financial instruments are contractually agreed rights and obligations resulting in an inflow or outflow of financial assets or the issue of equity instruments. They are initially measured at fair value plus any directly attributable transaction costs. Transaction costs for financial instruments assigned to the category at fair value through profit and loss are recognized directly in the income statement. Subsequent measurement is based on the classification of financial instruments defined in IFRS 9.
Financial derivatives and hedging
The group uses financial derivatives such as foreign currency forward contracts and interest rate swaps to hedge risks associated with foreign currency and interest rate fluctuations. Financial derivatives are initially recognized in the balance sheet at fair value. Subsequently, financial derivatives, bank balances and deposits in foreign currency are valued against the rates applicable on the balance sheet closing date. Changes in fair value are recognized in profit or loss unless cash flow hedge accounting or net investment hedge accounting is applied. For the measurement basis, see Financial instruments and risks.
Changes in the fair value of financial derivatives designated and qualifying as cash flow hedges are recognized in Other comprehensive income (Hedging reserve) to the extent that the hedge is effective. Upon recognition of the related asset or liability, the cumulative gain or loss is transferred from the hedging reserve and included in the carrying amount of the hedged item if it is a non-financial asset or liability. Any ineffective portion of the changes of the fair value of the derivative is recognized immediately in profit and loss. If the forecast transaction is no longer expected to occur, the hedge no longer meets the criteria for hedge accounting, the hedging instrument expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the amount accumulated in equity is reclassified to profit or loss. If the hedged item is a financial asset or liability, the gain or loss is transferred to profit or loss. Changes in the fair value of financial derivatives designated and qualifying as net investment hedges are recognized in Other comprehensive income (Translation reserve) to the extent that the hedge is effective and the change in fair value is caused by changes in currency exchange rates. Accumulated gains and losses are released from Other comprehensive income and are included in profit or loss when the net investment is disposed of. Changes in the fair value of financial derivatives designated and qualifying as fair value hedges are immediately recognized in the income statement, together with any changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.
Pensions and other post-employment benefits
DSM has both defined contribution plans and defined benefit plans. In the case of defined contribution plans, obligations are limited to the payment of contributions, which are recognized as Employee benefit costs. In the case of defined benefit plans, the aggregate of the value of the defined benefit obligation and the fair value of plan assets for each plan is recognized as a net defined benefit liability or asset. Defined benefit obligations are determined using the projected unit credit method. Plan assets are recognized at fair value. If the fair value of plan assets exceeds the present value of the defined benefit obligation, a net asset is only recognized to the extent that the asset is available for refunds to the employer or for reductions in future contributions to the plan. Defined benefit pension costs consist of three elements: service costs, net interest, and remeasurements. Service costs are part of Employee benefit costs and consist of current service costs. Past service costs and results of plan settlements are included in Other operating income or expense. Net interest is part of Financial income and expense and is determined on the basis of the value of the net defined benefit asset or liability at the start of the year, and on the interest on high-quality corporate bonds. Remeasurements are actuarial gains and losses, the return (or interest cost) on net plan assets (or liabilities) excluding amounts included in net interest and changes in the effect of the asset ceiling. These remeasurements are recognized in Other comprehensive income as they occur and are not recycled through profit or loss at a later stage.