Note 1. General information/summary of significant accounting policies
ASM International NV ('ASMI' or 'the Company') is a Dutch public liability company domiciled in the Netherlands with its principal operations in Europe, the United States and Asia. The Company dedicates its resources to the research, development, manufacturing, marketing and servicing of equipment and materials used to produce mainly semiconductor devices.
The Company's shares are listed for trading on the Nasdaq (symbol ASMI) and the Euronext Amsterdam Stock Exchange (symbol ASM).
The accompanying consolidated financial statements include the financial statements of ASM International NV, headquartered in Almere, the Netherlands, and its consolidated subsidiaries (together referred to as 'ASMI' or the 'Company'). ASMI's significant subsidiaries and associates are listed in Note 2.
The financial information relating to ASM International NV is presented in the consolidated statements. Accordingly, in accordance with Article 402, Part 9 of Book 2 of the Netherlands Civil Code, the Company financial statements only contain an abridged statement of operations.
Basis of preparation
The consolidated financial statements for the year ended December 2014 have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. As the financial data of ASM International NV (the parent company) are included in the consolidated financial statements, the income statement in the parent company financial statements is presented in condensed form (in accordance with section 402, Book 2 of the Dutch Civil Code).
The financial statements have been prepared by the Management Board of the Company and authorized for issue on April 9, 2015 and will be submitted for adoption to the Annual General Meeting of Shareholders on May 21, 2015.
The consolidated financial statements have been prepared under the historical cost convention, unless otherwise indicated. The Company applies the going concern basis in preparing its financial statements,
The accompanying consolidated financial statements are presented in of euro ('EUR'), which is the Company's functional currency. All financial information is presented in euro unless stated otherwise and has been rounded to the nearest thousand; therefore amounts may not equal (sub)totals due to rounding.
Use of estimates and judgments
The preparation of the Company's consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ fmaterially from those estimates. On an ongoing basis, ASMI evaluates its estimates and underlying assumptions. ASMI bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Summary of significant accounting policies
The consolidated financial statements include the accounts of ASMI International NV ('ASMI') and all of its subsidiaries where ASMI holds a controlling interest. The non-controlling interest is disclosed separately, as appropriate, in the consolidated financial statements. All intercompany profits, transactions and balances have been eliminated in consolidation.
Control exists when ASMI has,
- the power over an investee;
- exposure, or rights, to variable returns from its involvement with the investee; and
- the ability to use its power over the investee to affect the amount of the investor's returns.
As from the date that these criteria are met, the financial data of the relevant company are included in the consolidation. The financial data are deconsolidated from the date on which ASMI's control ceases.
Loss of control
Upon the loss of control, ASMI derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss. If ASMI retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained.
An operation is classified as discontinued at the date on which the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation. Although balance sheet information is neither restated nor remeasured for discontinued operations, the statement of (comprehensive) income information is restated for the comparative period. Discontinued operations are presented separately in the income statement and the cash flow statement. The date of disposal of a subsidiary or disposal group is the date on which control passes. The consolidated income statement includes the results of a subsidiary or disposal group up to the date of disposal; the gain or loss on disposal is the difference between (a) the carrying amount of the net assets plus any attributable goodwill and amounts accumulated in other comprehensive income (for example, foreign translation adjustments and available-for-sale reserves); and (b) the proceeds of sale.
ASMI records business combinations under the acquisition method of accounting. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill. Purchased intangibles with definite lives are amortized over their respective useful lives. When a bargain purchase incurs, which is the case when the fair value of the acquired business exceeds the purchase price, this surplus in fair value is recognized as a gain from bargain purchase.
Before recognizing a gain on a bargain purchase, the Company reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and recognizes any additional assets or liabilities that are identified in that review. The Company then reviews the procedures used to measure the amounts IFRS requires to be recognized at the acquisition date for all of the following: the identifiable assets acquired and liabilities assumed; the non-controlling interest in the acquiree, if any; and the consideration transferred.
The Company organizes its activities in two operating segments, Front-end and Back-end. Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Executive Officer ('CEO'), which is the chief operating decision maker.
The Back-end segment is still reported as a separate segment after the Company ceased control on March 15, 2013, since the full results of the Bach-end segment are continued to be reviewed by our CODM.
Accordingly, the asset and profit/loss information regarding the operations that comprise the segment are disclosed. The full financial results are reviewed by the CODM, the external reporting of the segment are on an equity method investment basis. The total of all segments' financial amounts are reconciled to the corresponding amounts reported in the consolidated financial statements, eliminations are reflected in the reconciling column for amounts reported in excess of those amounts reflected in the consolidated financial statements.
The Front-end segment manufactures and sells equipment used in wafer processing, encompassing the fabrication steps in which silicon wafers are layered with semiconductor devices. The segment is a product driven organizational unit comprised of manufacturing, service, and sales operations in Europe, the United States, Japan and Southeast Asia.
The Back-end segment manufactures and sells equipment and materials used in assembly and packaging, encompassing the processes in which silicon wafers are separated into individual circuits and subsequently assembled, packaged and tested. The segment is organized in ASM Pacific Technology Ltd, in which the Company holds a 39.75% interest, whilst the remaining shares are listed on the Stock Exchange of Hong Kong.
Foreign currency translation
Items included in the financial statements of each ASMI's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial information is presented in euro ('EUR'), which is the functional currency of the Company and the group's presentation currency.
In the preparation of ASMI's consolidated financial statements assets and liabilities of foreign subsidiaries, of which the functional currency is not the euro, are translated into euros at the exchange rate in effect on the respective balance sheet dates. Income and expenses are translated into euros based on the weighted average exchange rates for the corresponding period. Resulting translation adjustments are directly recorded in shareholders' equity. Currency differences on intercompany loans that have the nature of a long-term investment are also accounted for directly in shareholders' equity.
Derivative financial Instruments
ASMI and its subsidiaries conduct business in a number of foreign countries, with certain transactions denominated in currencies other than the functional currency of the Company ('euro') or one of its subsidiaries conducting the business. The purpose of the Company's foreign currency management is to manage the effect of exchange rate fluctuations on income, expenses, cash flows and assets and liabilities denominated in selected foreign currencies, in particular denominated in US dollar.
The Company may use forward exchange contracts to hedge its foreign exchange risk of anticipated sales or purchase transactions in the normal course of business, which occur within the next twelve months, for which the Company has a firm commitment from a customer or to a supplier. The terms of these contracts are consistent with the timing of the transactions being hedged. The hedges related to forecasted transactions are designated and documented at the inception of the hedge as cash flow hedges, and are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income/loss net of taxes in shareholders' equity, and is reclassified into earnings when the hedged transaction affects earnings.
Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized in earnings. The Company records all derivatives, including forward exchange contracts, on the balance sheet at fair value in other current assets or accrued expenses and other.
Substantially all amounts, which are net of taxes, included in accumulated other comprehensive loss at December 31 will be reclassified to net earnings within the next twelve months, upon completion of the underlying transactions. If the underlying transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss is immediately recognized in earnings under foreign currency exchange gains (losses) in the consolidated statement of operations.
Furthermore, the Company might manage the currency exposure of certain receivables and payables using derivative instruments, such as forward exchange contracts (fair value hedges) and currency swaps, and non-derivative instruments, such as debt borrowings in foreign currencies. The gains or losses on these instruments provide an offset to the gains or losses recorded on receivables and payables denominated in foreign currencies. The derivative instruments are recorded at fair value and changes in fair value are recorded in earnings under foreign currency exchange gains (losses) in the consolidated statement of operations. Receivables and payables denominated in foreign currencies are recorded at the exchange rate at the balance sheet date and gains and losses as a result of changes in exchange rates are recorded in earnings under foreign currency exchange gains (losses) in the consolidated statement of operations.
The Company does not use forward exchange contracts for trading or speculative purposes. Financial assets and financial liabilities are recognized on the Company's Consolidated balance sheet when the Company becomes a party to the contractual provisions of the instrument.
Cash and cash equivalents
Cash and cash equivalents comprise deposits held at call with banks and other short-term highly liquid investments with original maturity of three months or less. Bank overdrafts are included in notes payable to banks in current liabilities.
Accounts receivable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method.
A significant percentage of our accounts receivable is derived from sales to a limited number of large multinational semiconductor device manufacturers located throughout the world. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers' financial condition. An allowance for doubtful accounts is maintained for potential credit losses based upon management's assessment of the expected collectability of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowance. In making this assessment, management takes into consideration any circumstances of which we are aware regarding a customer's inability to meet its financial obligations; and our judgments as to potential prevailing economic conditions in the industry and their potential impact on the Company's customers.
The allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues ASMI has identified. Changes in circumstances, such as an unexpected adverse material change in a major customer’s ability to meet its financial obligation to ASMI or its payment trends, may require us to further adjust our estimates of the recoverability of amounts due to ASMI, which could have an adverse material effect on ASMI’s financial condition and results of operations. On December 31, 2014 the allowance for doubtful accounts amounted to €19 compared to total accounts receivable of €81,971.
Inventories are stated at the lower of cost (first-in, first-out method) or net realisable value. Costs include net prices paid for materials purchased, charges for freight and custom duties, production labor cost and factory overhead. Allowances are made for slow moving, obsolete or unsellable inventory.
Allowances for obsolescence of inventory are determined based on the expected demand as well as the expected market value of the inventory. We regularly evaluate the value of our inventory of components and raw materials, work in progress and finished goods, based on a combination of factors including the following: forecasted sales, historical usage, product end of life cycle, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. We record write downs for inventory based on the above factors and take into account worldwide quantities and demand into our analysis.
On December 31, 2014 our allowance for inventory obsolescence amounted to €18,883, which is 13.0% of total inventory. If circumstances related to our inventories change, our estimate of the values of inventories could materially change. On December 31, 2014, an increase of our overall estimate for obsolescence and lower market value by 10% of our total inventory balance would result in an additional charge to cost of sales of €14.5 million.
Evaluation tools at customers
Evaluation tools at customers ('evaluation tools') are systems generally delivered to customers under evaluation or a conditional purchase order and include substantial customization by our engineers and Research and Development ('R&D') staff in the field. Evaluation tools are recorded at cost and depreciated over their useful life (five years). The depreciation period may be shorter, depending on circumstances. The depreciation expenses are reported as cost of sales.
On final acceptance of the system the purchase consideration is recognized as revenue. The carrying value of the evaluation system at that point in time is recognized as cost of sales. In the circumstance that the system is returned, at the end of the evaluation period, a detailed impairment review takes place, and future sales opportunities and additional costs are identified. Only when the fair value is below the carrying value of the evaluation tool an additional depreciation is recognized. The remaining carrying value is recognized as finished goods (inventory).
Accounts payable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method.
Notes payable to banks and long-term debt are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method. Any difference between the proceeds and the settlement or redemption of borrowings is recognized over the term of the debt.
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issuance costs.
Non-current assets include goodwill, other intangible assets and property, plant and equipment. Property, plant and equipment are carried at cost, less accumulated depreciation and any impairment losses. Capital leased assets are recorded at the present value of future lease obligations. Depreciation is calculated using the straight-line method over the estimated useful lives. Leasehold improvements are depreciated over the lesser of the estimated useful life of the leasehold improvement or the term of the underlying lease.
Business combinations are accounted for under the purchase acquisition method. The Company tests its recorded goodwill and other intangible assets with indefinite lives for impairment each year on December 31 and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Business combinations are accounted for under the purchase method. As from January 1, 2004, goodwill and other intangibles assets with indefinite lives are no longer amortized. Instead, the Company tests its recorded goodwill and other intangible assets with indefinite lives for impairment each year on December 31 or if events or changes in circumstances indicate that the carrying amount exceeds the fair value of the goodwill and other intangible assets with indefinite lives.
Development expenses are capitalized when all of the following criteria are demonstrated:
- the technical feasibility of completing the intangible asset so that it will be available for use or sale;
- its intention to complete the intangible asset and use or sell it;
- its ability to use or sell the intangible asset;
- how the intangible asset will generate probable future economic benefits;
- the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
- its ability to measure the expenditure attributable to the intangible asset during its development reliably.
As from 2005 onwards the Company capitalizes development expenses that meet the above-mentioned criteria in its Consolidated financial statements.
Amortization of capitalized development expenses is calculated using the straight-line method over the estimated useful lives of the developed product. Amortization starts when the developed product is transferred to high volume manufacturing. Other intangible assets with finite lives are amortized over the estimated useful lives using the straight-line method.
Recoverability of non-current assets
Non-current assets (except those not being amortized) to be held and used by the Company are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the future discounted cash flows expected to result from the use of the asset. If the recoverable amount is less than the carrying amount of the asset, the asset is deemed impaired. The amount of the impairment is measured as the difference between the carrying value and the fair value of the asset. Long-lived assets and other intangibles (except those not being amortized) to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
The calculation of fair value involves certain management judgments and was based on our best estimates and projections at the time of our review. The value may be different if other assumptions are used. In future periods we may be required to record an impairment loss based on the impairment test performed, which may significantly affect our results of operations at that time. On December 31, 2014, we determined that a decrease in estimated cash flows of 10% and an increase of 10% of the discount rate used in calculating the fair value would not result in an impairment of the carrying value of goodwill.
Other intangible assets with finite lives are amortized over the estimated useful lives using the straight-line method. Other intangible assets and property, plant and equipment are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The cash flow estimates that we use include certain management judgments and are based on our best estimates and projections at the time of our review, and these may be different if other assumptions are used. In future periods, however, we may be required to record impairment losses, which may significantly affect our results of operations at that time. On December 31, 2014, we determined that a decrease in estimated cash flows of 10% would not result in an impairment of the carrying value of long-lived assets.
Assets classified as held for sale
A long-lived asset to be sold is classified as held for sale in the period in which all of the following criteria are met:
- management, having the authority to approve the action, commits to a plan to sell the asset;
- the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
- an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated;
- the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year; and
- the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
If at any time these criteria are no longer met a long-lived asset classified as held for sale will be reclassified as held and used.
If during the initial one-year period, circumstances arise that previously were considered unlikely and, as a result, a long-lived asset previously classified as held for sale is not sold by the end of that period and all of the following conditions are met:
- during the initial one-year period the entity initiated actions necessary to respond to the change in circumstances; and
- the asset is being actively marketed at a price that is reasonable given the change in circumstances.
The period required to complete the sale of a long-lived asset may be extended beyond one year.
If at any time the criteria for classification as held for sale are no longer met, the entity shall cease to classify the asset as held for sale. The entity shall measure a non-current asset that ceases to be classified as held for sale at the lower of:
- its carrying amount before the asset was classified as held for sale, adjusted for any depreciation that would have been recognized had the asset not been classified as held for sale; and
- its recoverable amount at the date of the subsequent decision not to sell.
A non-current asset classified as held for sale shall be presented separately in the statement of financial position.
Investments and associated companies
Investments in associated companies are accounted for under the equity method on a go forward basis. Dividend income from the Company’s subsidiaries and associated companies is recognized when the right to receive payment is established.
Impairment of investments and associated companies
ASMI does not separately test investment's underlying assets for impairment. However, ASMI recognizes its share of any impairment charge recorded by an investee and considers the effect, if any, of the impairment on the basis difference in the assets giving rise to the investee’s impairment charge. A loss in value of an investment which is other than a temporary decline will be recognized.
The ASMPT investment is accounted for under the equity method on a go forward basis. Equity method investments are tested for prolonged decline in value. An investment is considered impaired if the fair value of the investment is less than its carrying value. If after a prior recognized impairment the fair value is more than its carrying value this impairment is reversed. The determination of whether an investment is impaired is made at the individual security level in each reporting period.
If the fair value of an investment is less than its carrying value at the balance sheet date, the Company determines whether the decline in value is temporary or prolonged. The Company considers the following facts and guidelines when determining whether a prolonged decline in value exists:
- positive factors as the reasons that a prolonged decline in value does not exist must be more objectively verifiable; and
- with respect to measuring a prolonged decline in value, an investment's fair value as of the balance sheet date should be used to determine the new carrying value.
A prolonged decline in value is measured as of a balance sheet reporting date. Summarized below is a discussion of various factors (positive, negative, and otherwise) the Company considers when assessing the potential impairment of ASMPT.
If an investment’s fair value declines below cost the Company determines whether there is adequate evidence to overcome the presumption that the decline is prolonged. The positive factors are weighed against any negative evidence that is gathered about the security.
The Company recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller's price to buyer is fixed or determinable; and collectability is reasonably assured. The Company's revenue includes revenue from contractual arrangements consisting of multiple deliverables, such as equipment and installation. The revenue from the undelivered element of the arrangement is deferred at fair value until delivery of the element.
A major portion of our revenue is derived from contractual arrangements with customers that have multiple deliverables, such as installation. The revenue relating to the undelivered elements of the arrangements, the installation, is deferred until delivery of these elements.
In general, the Company recognizes revenue from sales of equipment upon shipment of equipment, only if testing at the factory has proved that the equipment has met substantially all of the customer's criteria and specifications.
The Company recognizes revenue from installation of equipment upon completion of installation at the customer's site. At the time of shipment, the Company defers that portion of the sales price related to the installation. The relative selling price of the installation process is measured based upon the per-hour amounts charged by third parties for similar installation services. Installation is completed when testing at the customer's site has proved that the equipment has met all of the customer's criteria and specifications. The completion of installation is signed-off by the customer ('final acceptance'). The revenue relating to the undelivered elements of the arrangements is deferred at their relative selling prices until delivery of these elements. At December 31, 2014 we have deferred revenues from installations in the amount of €7.8 million (2013: €3.9 million).
We provide training and technical support service to customers. Revenue related to such services is recognized when the service is rendered. Revenue from the sale of spare parts and materials is recognized when the goods are shipped.
The Company's sales frequently involve complex equipment, which may include customer-specific criteria, sales to new customers or equipment with new technology. For each sale, the decision whether to recognize revenue is, in addition to shipment and factory acceptance, based on the contractual agreement with a customer, the experience with a particular customer, the technology and the number of similarly configured equipment previously delivered. Instead of recognizing revenue, the Company could decide to defer revenue recognition until completion of installation at the customer's site and obtaining final acceptance from the customer.
Freight charges billed to customers are recognized as revenue, the related costs are recognized as cost of sales. Revenues are recognized excluding the taxes levied on revenues.
Cost of sales
Cost of sales comprise direct costs such as labor, materials, cost of warranty, depreciation, shipping and handling costs and related overhead costs. Cost of sales also includes third party commission, depreciation expenses of evaluation tools at customers, royalty payments and costs relating to prototype and experimental products, which the Company may subsequently sell to customers. Costs of warranty include the cost of labor, material and related overhead necessary to repair a product during the warranty period.
We provide maintenance on our systems during the warranty period, usually one to two years. Costs of warranty include the cost of labor, material and related overhead necessary to repair a product during the warranty period. We accrue for the estimated cost of the warranty on products shipped in a provision for warranty, upon recognition of the sale of the product. The costs are estimated based on actual historical expenses incurred and on estimated future expenses related to current sales, and are updated periodically. Actual warranty costs are charged against the provision for warranty. The actual warranty costs may differ from estimated warranty costs, and we adjust our provision for warranty accordingly. Future warranty costs may exceed our estimates, which could result in an increase of our cost of sales.
Restructuring expenses are recognized for exit or disposal activities when the liability arising from restructuring plans is incurred. Distinction is made in one-time employee termination expenses, contract termination expenses and other associated expenses. For the accounting on the distinguished elements of restructuring expenses we apply to the policy as mentioned below. The expenses have been charged to 'restructuring expenses'.
One-time termination expenses represent the payments provided to employees that have become redundant and are terminated under the terms and conditions of a restructuring plan. A restructuring plan exists at the date the plan meets all of the following criteria and has been communicated to employees:
- management commits to the plan;
- the plan identifies the number of employees that become redundant and the expected completion date;
- the plan sets out the terms and conditions of the arrangement in sufficient detail to enable employees to determine the type and amount of benefits they will receive; and
- actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The timing of the recognition and measurement of a liability for one-time termination expenses depends on whether employees will be retained to render service beyond a minimum retention period.
Contract termination expenses are related to the termination of an operating lease or another contract. These expenses are distinguished in:
- Expenses related to the termination of the contract before the end of its term. These expenses are recognized when the contract is terminated. The liability is measured at its fair value in accordance with the contract terms.
- Expenses related to contracts that will last for its remaining term without economic benefit to the entity. This is the case when a lease contract for premises is not terminated while the premises are not (completely) in use anymore. The liability is accrued for at the cease-use date, the date the company determined that it would no longer occupy the premises, which is conveyed to it under the contractual operating lease. The liability is measured at its fair value in accordance with the contract terms.
Other costs related to restructuring include costs to consolidate or close facilities and relocate employees. A liability for other expenses related to a restructuring such as transition costs is recognized and measured in the period in which the liability is incurred. The costs incurred are directly related to the restructuring activity. The definition of exit costs excludes expected future operating losses.
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the Consolidated statement of operations during the period in which the enacted rate changes. Deferred tax assets are reduced through a valuation allowance, based on available evidence at such time, it is more likely than not that the deferred tax assets will not be realized.
In case of expected interest and penalties related to income tax liabilities these will be accrued for and included in the provision for income taxes.
We currently have significant deferred tax assets, which resulted primarily from operating losses incurred in prior years as well as other temporary differences. We have established a valuation allowance to reflect the likelihood of the realization of deferred tax assets. Based on available evidence, we regularly evaluate whether it is more likely than not that the deferred tax assets will not be realized. This evaluation includes our judgment on the future profitability and our ability to generate taxable income, changes in market conditions and other factors. On December 31, 2014, we believe that there is insufficient evidence to substantiate recognition of substantially all net deferred tax assets with respect to net operating loss carry forwards, and we have established a valuation allowance in the amount of €55.4 million. Future changes in facts and circumstances, if any, may result in a change of the valuation allowance to these deferred tax asset balances which may significantly influence our results of operations at that time. If our evaluation of the realization of deferred tax assets would indicate that an additional 10% of the net deferred tax assets as of December 31, 2014 is not realizable, this would result in an additional valuation allowance and an income tax expense of €0.3 million.
Unrecognized tax benefits mainly relate to transfer pricing positions, operational activities in countries where we are not tax registered and tax deductible costs. We estimate that no interest and penalties are related to these unrecognized tax benefits. Unrecognized tax benefits would, if recognized, impact the Company’s effective tax rate.
The calculation of our tax positions involves dealing with uncertainties in the application of complex tax laws. Our estimate for the potential outcome of any uncertain tax position is highly judgmental. Settlement of uncertain tax positions in a manner inconsistent with our estimates could have a material impact on our earnings, financial position and cash flows.
Pension plans and similar commitments
The Company has retirement plans covering substantially all employees. The principal plans are defined contribution plans, except for the plans of the Company's operations in the Netherlands and Japan. The Company's employees in the Netherlands participate in a multi-employer defined benefit plan. Payments to defined contribution plans and the multi-employer plan are recognized as an expense in the Consolidated statement of operations as they fall due. The Company accounts for the multi-employer plan as if it were a defined contribution plan since the manager of the plan is not able to provide the Company with the required Company-specific information to enable the Company to account for the plan as a defined benefit plan.
The Company's employees in Japan participate in defined benefit plans. Pension costs in respect to this defined benefit plan are determined using the projected unit credit method. These costs primarily represent the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect to employee service in previous years, net of the expected return on plan assets.
For the defined benefit plan of Japan the Company recognizes in its Consolidated balance sheet an asset or a liability for the plan's over-funded status or underfunded status respectively. Actuarial gains and losses are recognized in income when incurred. Reference is made to Note 17.
The costs relating to employee stock options and shares (compensation expense) are recognized based upon the grant date fair value of the stock options or the shares. The fair value at grant date of employee stock options is estimated using a Black-Scholes option valuation model. This model requires the use of assumptions including expected stock price volatility, the estimated life of each award and the estimated dividend yield. The risk-free interest rate used in the model is determined, based on a euro government bond with a life equal to the expected life of the options. The estimated fair value at grant date of shares is based on the share price of the ASMI share at grant date minus the discounted value of expected dividends during the vesting period.
The grant date fair value of the stock options and shares is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of stock options and shares that will eventually vest. The impact of the true up of the estimates is recognized in the consolidated statement of operations in the period in which the revision is determined. The total estimated share-based compensation expense, determined under the fair value based method, net of related tax effect, is amortized ratebly over the option vesting periods. Reference is made to Note 17.
Issuance of shares by an associate
As further described in the Notes to Consolidated financial statements herein, from time to time, the associate ASMPT will issue common shares pursuant to their Employee share incentive scheme. The effect of these issuances is a dilution of the Company's ownership in ASMPT. The Company recognizes the impact of these issuances directly into equity.
Commitments and contingencies
The Company has various contractual obligations, some of which are required to be recorded as liabilities in the Company's consolidated financial statements, including long- and short-term debt. Others, namely operating lease commitments, purchase commitments and commitments for capital expenditure, are generally not required to be recognized as liabilities on the Company's balance sheet but are required to be disclosed. Reference is made to Note 18.
Comprehensive income consists of net earnings (loss) and other comprehensive income. Other comprehensive income includes gains and losses that are not included in net earnings, but are recorded directly in Shareholders' equity.
Capitalization of development expenses
In determining the capitalization of development expenses the Company makes estimates and assumptions based on expected future economic benefits generated by products that are the result of these development expenses. Other important estimates and assumptions are the required internal rate of return, the distinction between research, development and high-volume manufacturing and the estimated useful life.
Cash flow statement
Dividends received from ASMPT are classified under cash flow from financing activities as these dividends have been used to pay dividends to common shareholders of ASMI.
Recent accounting pronouncements
The following IFRS standards are effective as of 1 January 2014 (endorsed) and have been applied in these Financial Statements:
- IAS 36 Impairment of assets has been amended regarding disclosure requirements for the recoverable amount of non-financial assets. Certain disclosure requirements of the recoverable amount of the cash-generating units have been removed from IAS 36 since these are now covered by IFRS 13. The impact is limited to disclosures in ASMI’s Financial statements.
- IAS 39 Financial instruments: recognition and measurement has been amended to ensure that novation of derivatives, designated as hedge instruments, from one counterparty to a central counterparty as a consequence of law or regulation would not result in discontinuance of the hedge relationship. The amendment has no impact on ASMI’s financial position.
- IFRS 10 Consolidated financial statements establishes a single control model that applies to all entities including special purpose entities. The introduction of this new standard has not changed ASMI’s financial position.
- IFRS 11 Joint arrangements classifies joint arrangements either as joint operation or joint venture by focusing on the rights and obligations of the parties to the arrangement rather than its legal form. The introduction of this new standard has not changed ASMI’s financial position.
- IFRS 12 Disclosures of interests in other entities includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. It is the complement of IFRS 10 and IFRS 11 and the impact is limited to the disclosures in ASMI’s Financial Statements.
- The amendments to IFRS 10, IFRS 12 and IAS 27 as issued in October 2012 and endorsed in November 2013 provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated financial statements. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments have no impact on ASMI since the Company has not qualified any entities as investment entities under IFRS 10.
The following standards have an effective date of January 1, 2014 (or July 1, 2014) and will be implemented as of January 1, 2015 (retrospectively) due to the timing of their endorsement by the European Union:
- IFRIC 21 Levies provides guidance in addition to IAS 37 Provisions, contingent liabilities and contingent assets on how to account for levies imposed by governments other than income taxes, specifically on when to account for the liability. This IFRIC is effective as of January 1, 2014 and has been endorsed in June 2014. ASMI will apply this standard as of January 1, 2015. No material impact is expected.
- IAS 19 Employee benefits has been amended regarding treatment of employee contributions in defined benefit plans. The amendment aims to simplify the calculation of employee contributions and will not affect ASMI’s financial position. This amendment is effective as of July 1, 2014 and will be applied after endorsement.
The following new standards, interpretations and amendments to existing standards will become effective on or after January 1, 2015. These standards have not been applied in preparing these 2014 Financial statements:
- IFRS 15 Revenue from contracts with customers. This standard has been issued in May 2014 and is effective as of January 1, 2017, endorsement is pending. The standard introduces new guidance on the recognition and measurement requirements of revenues. The standard applies to revenue from contracts with customers and also provides a model for the sale of some non-financial assets that are not an output of a company’s ordinary business activities (such as the sale of property, plant and equipment or intangibles). IFRS 15 provides more detailed requirements than the current standards. ASMI is currently reviewing the extent of the impact of this new standard in anticipation of endorsement. No material impact is expected.
- IAS 16 Property, plant and equipment and IAS 36 Impairment of assets have been amended to clarify the acceptable methods of depreciation and amortization. The principle for the basis of depreciation and amortization is the expected pattern of consumption of the future economic benefits of an asset. These amendments have been issued in May 2014 and are effective as of January 1, 2016, endorsement is pending. ASMI does not expect an impact on its financial performance.
- IFRS 11 Joint arrangements has been amended to include new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The amendment has been issued in May 2014 and is effective as of January 1, 2016, endorsement is pending. Based on current practice ASMI does not expect a material impact.
- IFRS 9 Financial instruments. This standard is the first step in the process taken by the IASB to replace IAS 39 Financial instruments: recognition and measurement. Since the standard has not yet been endorsed by the European Commission, it is uncertain when it needs to be applied by the Company.
There are no other IFRS standards or IFRIC interpretations taking effect for the first time for the financial year beginning January 1, 2014 that would be expected to have a material impact on the 2014 accounts of the Company.