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Accounting Standards

Accounting Principles

Basis of Preparation

The consolidated financial statements have been prepared in compliance with the International Financial Reporting Standards (IFRS) including the International Accounting Standard (IAS) and International Financial Reporting Standards (IFRS) as well as the interpretations by Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) in force as of 31 December 2013. The aforementioned standards are the standards and interpretations thereof approved for use in the EU pursuant to Regulation (EC) No. 1606/2002 implemented in the Finnish Accounting Act and legislation based thereon. The notes to the consolidated financial statements are also compliant with Finnish accounting and company legislation.

The consolidated financial statements are based on original acquisition costs unless otherwise noted in the accounting principles. The consolidated financial statements are presented in full euros unless otherwise stated.

In November 2009, the former Management Group and former CEO of the Group set up a company named SSH Management Investment Oy (SMI), through which the management incentive scheme has been implemented. The company owns 1,433,750 shares in the parent company. This arrangement is explained in more detail under note 29 ‘Group companies and related party transactions’ to the consolidated financial statement. The parent company holds a controlling interest in SSH Management Investment Oy pursuant to the terms and conditions of the shareholders’ agreement, and accordingly the company is incorporated in the consolidated financial statements. The shares in the parent company held by SSH Management Investment Oy are deducted from the Group’s unrestricted equity. The deduction from equity is recognized under the fund for own shares. The investments made in the company by the shareholders of SSH Management Investment Oy are recognized as non-controlling interest in the consolidated balance sheet.

Subsidiaries

The consolidated accounts include the parent company SSH Communications Security Corporation and all its subsidiaries. Subsidiaries are companies in which the Group has a controlling interest. A controlling interest is created when the Group owns more than half of the votes in a company or the Group otherwise exercises control over a company. Potential voting powers are also taken into account when evaluating a controlling interest if the instruments in which the potential voting powers are vested are realizable at the time of analysis. A controlling interest means having the right to issue orders concerning a company’s finances and business principles in order to benefit from its operations.

Group-internal share ownership is eliminated using the purchase method. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date on which that control ceases. All Group-internal transactions, receivables and debts, unrealized profit, and profit distribution have been eliminated.

Converting Foreign Currency Transactions

Items of each subsidiary included in the consolidated financial statements are measured using the currency of the operating environment of that subsidiary (‘functional currency’). The consolidated financial statements are presented in euros, which is the functional and reporting currency of the parent company.

Transactions in Foreign Currency

Foreign currency denominated transactions are recognized at the exchange rate of the functional currency on the transaction date. In practice, the exchange rate used is approximately the rate of the transaction date. Outstanding receivables and liabilities in foreign currencies are measured using the exchange rates on the balance sheet date. Exchange rate gains and losses on financing are included in financing income and costs.

Translation of Financial Statements of Foreign Subsidiaries

The comprehensive income statements of subsidiaries whose functional currency is other than EUR are translated into euros using the exchange rate of the transaction dates. In practice, the translations are done once a month using the monthly average exchange rate. Balance sheet items are translated into euros with the exchange rate of the balance sheet date. The translation of the comprehensive profit/loss for the financial period using different exchange rates in the comprehensive income statement on the one hand and in the balance sheet on the other causes a translation difference recognized under Group equity under other comprehensive profit/loss items.

Translation differences generated through elimination of the acquisition costs of foreign subsidiaries and translation of equity items accrued after acquisition are recognized under other comprehensive profit/loss items. When a subsidiary is sold, accumulated translation differences are recognized in the income statement as part of the gain or loss on the sale.

Revenue Recognition

SSH Communications Security net sales derive mainly from software license sales, consulting sales and maintenance fees. Net sales comprise the invoiced value for the sale of goods and services adjusted with any discounts given, sales taxes, and exchange rate differences.

The revenue from product sales is recognized at the time when significant risks and rewards of the product or the right of use of the product have been transferred to the buyer and there is a binding contract between the parties, the delivery has taken place in accordance with the contract, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will accrue to the company.

Maintenance agreements are recognized evenly on an accrual basis throughout the contract period. Revenues from services are recognized when the service has been delivered and it is probable that the economic benefits associated with the transaction will accrue to the company.

Government Grants

Government grants, for example, grants received from the government for a purchase of tangible assets, are entered as a deduction of the book value of the asset when there is reasonable assurance that the company will receive the grant and will comply with the conditions attaching to the grant. Grants are recognized as income over the life of a depreciable asset by way of a reduced depreciation. Government grants that are intended to compensate costs are recognized as income over the same period as the related costs are recognized. These government grants are presented under other operating income. The company has an R&D capital loan from TEKES (the Finnish Funding Agency for Technology and Innovation) which was transferred as part of the Siltanet business operations transaction in 2010. This loan is not of a significant magnitude.

Property, Plant, and Equipment

The property, plant, and equipment of Group companies are measured in the balance sheet at cost less accumulated straightline depreciation and eventual impairment losses. When a part of a current assets item is treated as a separate asset, expenses related to its replacement are capitalized and any remaining book value is written off. Expenses incurring at a later date are included in the class of property, plant, and equipment only if it is probable that the property will provide future economic benefits to the Group and that the acquisition cost can be reliably determined. Other repair and maintenance expenses are recognized in profit/loss as and when incurred.

Depreciation is calculated on a straight-line basis to reduce the purchase value of each asset item to its residual value over its estimated useful life.

  • Machinery and equipment: 5 years from month of acquisition.
  • Computer hardware: 3 years from month of acquisition.
  • Leased assets based on finance leasing agreements: 3–5 years from month of acquisition, depending on the depreciation period for corresponding items.
  • Major renovations of rental premises: According to length of the rental agreement, though no more than 7 years from year of acquisition.

The residual value and useful life of assets are reviewed for each financial statement and, if necessary, adjusted to indicate changes expected in the assets’ economic benefits.

The depreciation on property, plant, and equipment is ceased when the asset is classified as held for sale in accordance with standard IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Capital gains and losses are determined by comparing proceeds received with the book value of sold assets. Impairment losses incurred through transfer are recognized under other operating costs.

Intangible Assets

Research and Development Costs

Research costs are recognized as costs in the income statement. Development costs (related to the design and testing of new or improved products) are recognized as intangible assets if capitalization criteria are fulfilled and if it is probable that their economic benefits will accrue to the company pursuant to IAS 38. The most significant development costs to be capitalized constitute R&D personnel costs and sub-contracting costs. Other development costs are recognized directly as costs. Development costs once recognized as costs are not capitalized in subsequent financial periods.

Depreciation begins when an asset is ready for use. Incomplete assets are tested annually for impairment. After initial recognition, capitalized development costs are measured at cost less accumulated depreciation and impairment losses. Capitalized development costs are depreciated on a straightline basis over their economic lifetime, estimated at 3–5 years.

Software

Software includes acquired software licenses. These assets are entered in the balance sheet at cost and depreciated on a straight-line basis over their economic lifetime. The residual value and useful life of assets are reviewed for each financial statement and, if necessary, adjusted to indicate changes expected in the assets’ economic benefits. The economic lifetime does not generally exceed 5 years. The depreciation period for software acquired for internal use is 3–5 years.

Other Immaterial Rights

Immaterial rights include obtained technology patents, trademarks, customer registers, and technology rights. These are entered in the balance sheet at cost and depreciated on a straightline basis over their economic lifetime. The residual value and useful life of assets are reviewed for each financial statement and, if necessary, adjusted to indicate changes expected in the assets’ economic benefits. The economic lifetime does not generally exceed 5 years.

Impairment of Tangible and Intangible Assets

The Group will review on each balance sheet date whether there is any indication of an impaired asset. Whenever indicators of impairment exist, the book value of such an asset is compared with its recoverable amount. The recoverable amount is the fair value of the asset less the costs of its sale, or its value in use, whichever is the higher. The value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. The discount rate used to calculate the above is pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the asset.

Whenever the book value of an asset exceeds its recoverable amount, an impairment loss will be recognized for that asset. The impairment loss is recognized immediately in the income statement. After the recognition of an impairment loss, the economic lifetime of an asset subject to depreciation is re-evaluated. An impairment loss recognized in prior periods for an asset other than goodwill will be reversed if there is a change in the estimates that have been used in assessing the recoverable amount of that asset.

Financial Assets and Liabilities

Financial Assets

The Group has classified its financial assets into the following categories: investments held to maturity, and loans and receivables. The assets are classified when originally acquired. The assets are initially recognized at fair value. Transaction costs are included in the original book value of an asset if the asset is not to be recognized at fair value in profit/loss. Financial assets are written off from the balance sheet when the contractual right to cash flows from an asset included in financial assets ends or when the significant risks and rewards related to the asset are transferred outside the Group. All asset purchases and sales are recognized on the date of the transaction.

Investments held to maturity are financial assets other than derivative assets whose payments are made according to a fixed plan, which mature on a defined date and which the Group can and intends to keep until they mature. These are measured at amortized acquisition cost and recognized under current assets. Loans and other receivables are assets other than derivative assets and with a fixed or definite series of payments. These assets are unlisted and not held for trading. They are measured at amortized acquisition cost. They are recognized under current or non-current financial assets in the balance sheet depending on their nature: assets expiring in more than 12 months are recognized under non-current assets.

Cash and Cash Equivalents

Cash and cash equivalents include cash balances, short-term deposits with banks, and other short-term liquid investments with maturity up to 3 months at the time of acquisition.

Impairment of Financial Assets

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired. If there is, the impairment will immediately be entered in the income statement. If an impairment on an interest instrument is later reversed, this will be recognized in profit/loss.

The Group recognizes an impairment loss on trade receivables when there is objective evidence that a receivable is not fully collectible. Significant financial difficulties, likelihood of bankruptcy, neglect of payments or delay of payment by more than 90 days on part of a debtor may be considered to constitute such evidence for an impairment loss on trade receivables. The impairment loss recognized in the income statement is the difference between the book value and current value of estimated future cash flows of a receivable discounted at the effective interest rate. If impairment loss is decreased during any later period and the basis for this can objectively be related to an event occurred after the original impairment, the reversal will be recognized in profit/loss in the income statement.

Financial Liabilities

The Group’s financial liabilities are classified into financing liabilities recognized at fair value in profit/loss and other financial liabilities (financing liabilities recognized at amortized acquisition cost). A financial liability is classified as current if the Group does not have the absolute right to postpone repayment to at least 12 months from the end of the period under review. A financial liability (or part thereof) will not be written off the balance sheet until it has ceased to exist, i.e., when the obligation specified in the agreement has been discharged or reversed and its period of validity has expired.

In the SSH Communications Security Group, financial liabilities recognized at fair value in profit/loss includes the derivative instruments which do not fulfill the criteria for hedging accounting and which are not warrants (currency derivatives). Unrealized and realized profits/losses due to changes in the fair value of these derivatives are recognized in profit/loss in the financial period during which they are generated.

Other financial liabilities (financing liabilities recognized at amortized cost) include, most significantly, the Group’s finance leasing liabilities and accounts payable. They are initially recognized at fair value. After the original recognition, other financial liabilities are measured at amortized acquisition cost using the effective interest rate method.

Leases

Lease liabilities on tangible assets which expose the Group to significant risks and rewards inherent in holding such assets are classified as finance leases. Finance leasing agreements are capitalized at the beginning of the lease at the fair value of the leased asset or the current value of the minimum lease payments, whichever is lower. An asset based on a finance leasing agreement will be depreciated over its useful life or within the lease term, whichever is shorter. Lease payments are apportioned between the finance charge and repayment on the outstanding liability over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Rental obligations are included in interest-bearing liabilities.

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as other operating leases. Payments made under operating leases, included in other operating expenses, are recognized in the income statement on a straightline basis over the period of the lease.

Earnings Per Share

The undiluted earnings per share is calculated by dividing the net profit/loss for the financial year by the weighted average number of ordinary shares outstanding during the financial year. Treasury shares held by the Group are not included in the number of outstanding shares. A dilutive effect caused by stock options exists when the subscription price of a share is lower than the fair value of the share. In the calculation of diluted earnings per share, stock options are only considered dilutive when their conversion to ordinary shares would decrease earnings per share or increase the loss per share from continuing operations. In other words, when the Group declares a loss, no dilutive effect will be calculated.

Share Capital

Ordinary shares are presented as share capital. Dividends paid on ordinary shares are deducted from equity in the period during which the decision to distribute dividends is made.

Share Issue Costs

Costs directly related to an issue of new shares, other than costs attributable to a business combination, are deducted, net of tax, from the proceeds recognized under equity. Share issue costs directly attributable to business combinations are included in acquisition costs.

Own Shares

If SSH Communications Security Corporation or its subsidiaries purchase SSH shares, the compensation paid, including any related incremental external costs, net of tax, is deducted from total equity as own shares until the shares are canceled or transferred. If own shares are subsequently sold, any compensation received will be recognized under equity.

Gross Margin

Gross margin is equal to net sales less the acquisition costs of materials and services.

Operating Profit/Loss

Operating profit/loss is equal to earnings before interest and taxes.

Income Tax

Tax expenses in the income statement comprise tax based on taxable income for the period and deferred tax. Income tax is recognized in the income statement except for taxes related to items recognized under comprehensive profit/loss or directly under equity, in which case the tax impact will be incorporated in the aforementioned items. Tax based on taxable income for the period is calculated using the corporate income tax rate effective in each country, adjusted for any tax from previous periods.

Deferred taxes are calculated on all temporary differences between the book value and taxable value. The largest temporary differences arise from the financial leasing agreements and unused tax losses which are deductible at a later date. Company didn´t have significiant financial leasing agreements in 2013 and 2012.

Deferred taxes are calculated using the statutory tax bases or the tax bases whose confirmed content has been announced by the closing date. Deferred tax assets are recognized to the extent that it is probable that taxable income against which the temporary difference can be applied will materialize in the future. Deferred tax liabilities are recognized at full value in the balance sheet.

Employee Benefits

Pensions

The Group’s pension schemes comply with the relevant regulations and practices in each relevant country. Pension security for Group personnel is handled through external pension insurance companies. The Group applies defined-contribution pension plans, in which the Group pays fixed contributions to an outside unit. The Group has no obligation to make additional payments in case the recipient of the aforementioned contributions cannot discharge its pension payment obligations. Contributions under the defined-contribution plan are recognized in the income statement for the financial period during which the contributions were made.

Equity-Based Benefits

Option rights have been issued to the Group management (excluding the CEO) and personnel. Option rights are issued with a fixed subscription price determined in the terms and conditions of the option plan.

Option rights are measured at fair value on their date of issue and recognized as a cost in the income statement on a straight-line basis over the vesting period. The expense determined at the time of issuing the stock options is based on the Group’s estimate of the number of stock options to which it is assumed that rights will vest by the end of the vesting period. The fair value is determined using the Black-Scholes pricing model. The non-market criteria are not included in the fair value of the option but taken into account in the number of stock options that are assumed to vest at the end of the vesting period. On the date of each financial statement, the Group updates its estimate of the final amount of the stock options that will vest, and changes in this estimate are recognized in the income statement. When the option rights are exercised, the proceeds received, net of any transaction costs, are recognized under share capital and the share premium account.

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, when it is probable that expenditure will be required to settle the obligation, and when a reliable estimate of the amount can be made. If the Group expects an obligation to be partly reimbursed by a third party, the reimbursement is recognized as a separate asset but only when the reimbursement is certain in practical terms. The Group recognizes a provision on loss-making agreements when the expected benefits of an agreement are less than the unavoidable costs of meeting the obligations under the agreement. Provisions are measured at the current value of the costs required to discharge the obligation. The discount rate is determined to reflect current market assessments of the time value of money and the risks specific to the obligation.

New or Amended IFRS Standards/Miika

The following standards, interpretations, and amendments that entered into force during the 2013 financial period did not have a substantial impact on the Group’s financial statement:

  • Amendments to IFRS 7 Financial Instruments: Disclosures (effective for financial periods beginning on or after 1 July 2011): Enhancing disclosures about transfers of financial assets, disclosures about fair value and liquidity risk, and their impact on a company’s financial position, especially in the case of securitization of financial assets. The changes have impact on the notes of the Group’s financial statements.

The following, already published new or amended by IASB, standards and interpretations have not yet been applied by SSH Communications Security. The Group will introduce these as of the effective date of each standard or interpretation or, if the effective date is not the first day of the financial period, from the beginning of the financial period following the effective date.
* = This amendment has not yet been accepted for application in the EU.

Financial period 2013

  • Amendments to IAS 1 Presentation of Financial Statements (effective for financial periods beginning on or after 1 July 2012): The key change here is the requirement to revise the way items under other comprehensive income are presented depending on whether they may later be recognized in profit/loss if certain criteria are fulfilled. The amendments have impact on the presentation of the Group’s other comprehensive income/cost.
  • Amendments to IAS 19 Employee Benefits (effective for financial periods beginning on or after 1 January 2013): In the future, all actuarial gains and losses will be recognized immediately under other items in the comprehensive income statement, i.e., the ‘pipe method’ will be abandoned and the financing cost will be determined on an offset basis.
  • IFRS 13 Fair Value Measurement (effective for financial periods beginning on or after 1 January 2013): IFRS 13 is a compilation of the requirements for measuring fair value and for presenting related information in financial statements, together with a new definition of ‘fair value’. The application of fair value is not extended, but the standard provides instructions on how to determine fair value when it is applicable or required under another standard. The standard is not estimated to have an impact on the Group’s consolidated financial statements.
  • Annual Improvements to IFRSs 2009-2011, May 2012* (effective for financial periods beginning or after 1 January 2013): The Annual improvements procedure gathers all minor and less urgent amendments into one collection implemented once a year. The amendments concern five standards and vary by standard, but they do not have substantial impact.
  • Amendments to IFRS 7 Financial Instruments: Disclosures (effective for financial periods beginning on or after 1 January 2013): The revised standard requires disclosure of any information related to the impact of offsetting arrangements in the balance sheet. The notes required by these amendments must be presented retroactively. The changes are not estimated to have an impact on the Group’s consolidated financial statements.

Financial period 2014

  • IFRS 10 Consolidated Financial Statements (effective for financial periods beginning on or after 1 January 2014): In accordance with current principles, IFRS 10 defines controlling interest as the key factor for deciding whether to incorporate a company in the consolidated financial statement. The standard also provides further instructions on how to determine a controlling interest in situations where it is difficult to estimate. The new standard is not estimated to have a substantial impact on the Group’s consolidated financial statements.
  • IFRS 11 Joint Arrangements (effective for financial periods beginning on or after 1 January 2014): IFRS 11 describes the accounting for joint arrangements with joint control. There are two forms of joint arrangements: joint operations and joint ventures. The reporting of the joint ventures is required to be done using one unified method, the equity method, and the former proportionate consolidation is no longer permitted. The new standard is not estimated to have a substantial impact on the Group’s consolidated financial statements.
  • IFRS 12 Disclosure of Interests in Other Entities (effective for financial periods beginning on or after 1 January 2014): IFRS 12 is a compilation of the requirements for information to be presented in financial statements. These have to do with holdings in other entities, including associated companies, joint ventures, structured units, and other off-balance-sheet entities. The new standard expands the notes the Group presents concerning its holdings in other entities. The new standard is not estimated to have a substantial impact on the Group’s consolidated financial statements.
  • IAS 27: Separate Financial Statements (re-issued in 2011) and the amendments thereto (effective for financial periods beginning on or after 1 January 2014): The re-issued standard outlines the accounting and disclosure requirements, that remained when consolidation requirements were moved to IFRS 10, for ‘separate financial statements’. The re-issued standard has no impact on the Group’s consolidated financial statements.
  • IAS 28: Investments in Associates (re-issued in 2011) (effective for financial periods beginning on or after 1 January 2014): The standard was re-issued due to issuing IFRS 11. The standard outlines the accounting for investments in associates and joint ventures, and includes the requirements for using the equity method. The re-issued standard is not estimated to have an impact on the Group’s consolidated financial statements.
  • Amendments to IAS 32 Financial Statements: Presentation (effective for financial periods beginning on or after 1 January 2014): These amendments clarify the requirements pursuant to regulation of offsetting financial assets and liabilities in the balance sheet. The amended standard must be applied retroactively. The changes are not estimated to have an impact on the Group’s consolidated financial statements.

Financial period 2015

  • IFRS 9 Financial Instruments* and amendments thereto (the effective date from 1 January 2013 to 1 January 2015): The new standard is intended to replace the existing IAS 39 Financial Instruments: Recognition and Measurement and will be published in three stages. Amendments in the first stage (published in March 2009) have to do with the classification, recognition, and measurement of financial assets and liabilities. Different measurement methods are retained but they have been simplified. Financial assets are divided into two classifications based on their measurement: financial assets measured at amortized cost and financial assets measured at fair value. The classification (published in October 2010) depends on the company’s business model and the contractual provisions of the instrument. Regarding financial liabilities, the majority of the provisions of IAS 39 have been incorporated in the new standard without changes. The incomplete amendments of IFRS 9 are related to depreciations of financial assets and to hedge accounting. In addition, IASB considers certain amendments to classification and valuation principles of the financial assets. The part concerning macro hedge accounting has been differentiated to a separated project from IFRS 9. Because IFRS 9 amendments are still not complete, no estimates on the impacts on the Group’s consolidated financial statements can be given at this point.

Management Judgment in Applying the Most Significant Accounting Policies and Other Key Sources of Estimation Uncertainty

When preparing the financial statement, the Group management has to make estimates and assumptions influencing the content of the financial statement. The management must also exercise its judgment regarding the application of accounting policies. These estimates are based on the management’s best knowledge of current events and actions at the time. Potential effects of changes in estimates and assumptions are recorded in the income statement and balance sheet for the financial period during which these estimates and assumptions are adjusted, and also in all subsequent financial periods.

The most important of these estimates and assumptions are related to business combination of business, R&D activations, the credit risk of trade receivables, and the utilization of deferred tax assets.