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Notes to the consolidated financial statements

The notes are grouped into six sections. The notes contain the relevant financial information as well as a description of accounting policy applied for the topic of the individual notes.

section 1: general information and basis of reporting
    1. General
76
Section 2: Results of the year
    5. Cost of sales
81
    10. Income tax
85
Section 3: Non-current assets and investments

6.1 Section 1: General information and basis of reporting

This section introduces the basis of preparation and the general accounting policy applied to the consolidated financial statements as a whole, as well as a summary of the areas that involve significant judgements and estimates.


6.1.11. General

TomTom N.V. (the company) has its statutory seat and headquarters in Amsterdam, the Netherlands. The activities of the company include the development and sale of navigation and location-based solutions, which include among others: PNDs, sport watches, action cameras, maps, traffic, navigation software and fleet management services.

The consolidated financial statements comprise the company and its subsidiaries (together referred to as the group). A condensed income statement is presented in the company financial statements in accordance with section 402 of Part 9 of Book 2 of the Dutch Civil Code.

The financial statements have been prepared by the Management Board and authorised for issue on 9 February 2016. The financial statements will be submitted for approval to the General Meeting on 22 April 2016.

6.1.22. Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations as adopted by the European Union.

The financial statements have been prepared on the historical cost basis, except for financial instruments (including derivatives) classified at fair value through profit or loss and derivatives used for hedging, which are stated at fair value.

Income and expenses are accounted for on an accrual basis.

Summary of significant accounting policy

The general accounting policies applied to the consolidated financial statements as a whole are described below, while other significant accounting policies related to specific line items are described under the relevant note. The description of accounting policy in the notes forms an integral part of the description of the accounting policies in this section. Unless otherwise stated, these policies have been consistently applied to all the years presented.

New accounting standards and developments

To the extent relevant, all IFRS standards and interpretations including amendments that were in issue and effective from 1 January 2015, have been adopted by the group from 1 January 2015. These standards and interpretations had no material impact for the group. All IFRS standards and interpretations that were in issue but not yet effective for reporting periods beginning on 1 January 2015 have not yet been adopted.

Change in estimates

In 2015, the group changed its estimate of the expected useful life of its new generation navigation technology to better reflect the longer time period the technology is expected to be deployed. This change resulted in lower amortisation charge of approximately €8 million for 2015. 

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the company and entities controlled either directly or indirectly by the company.

Control is achieved when the parent is exposed to, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policy in line with the group.

All intercompany transactions, balances and unrealised gains and losses on transactions between group companies are eliminated.

Foreign currencies

The company's primary activities are denominated in euros. Accordingly, the euro is the company's functional currency, which is also the group's presentation currency. Items included in the financial information of individual entities in the group are measured using the individual entity's functional currency, which is the currency of the primary economic environment in which the entity operates.

Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised under 'Other financial result' in the income statement, except for gains and losses that arise from intercompany borrowings that form part of net investment in subsidiaries which are recognised in 'Other comprehensive income'. 

Group companies and foreign operations
For consolidation purposes, the assets and liabilities of entities that have a functional currency other than the group's presentation currency are translated at the closing rate at the date of the balance sheet, whereas the income statement is translated at the average exchange rate for the period. Translation differences arising thereon are recognised in 'Other comprehensive income'.

Cash flow statements

Cash flow statements are prepared using the indirect method. Cash flows from derivative instruments are classified consistently with the nature of the instrument.


6.1.33. Accounting estimates

The preparation of these financial statements requires management to make certain assumptions, estimates and judgements that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and the future periods if the revision affects both current and future periods.

The table below presents the areas that involve a higher degree of judgement or areas where assumptions and estimates are significant to the financial statements: 

Table_13 Note 3 - Accounting estimates

 
 
  Note
Revenue recognition 4
Internally generated intangible assets 12
Impairment of non-financial assets 14
Income tax 10 - 11
Provisions and contingent assets / liabilities 31 - 32
 

Detailed explanations of the degree of judgement and assumptions used are included under each of the respective sections in the notes to the financial statements as referenced above.




6.2Section 2: Results of the year

This section presents the notes related to items in the income statement (except for financial income and expenses) and disclosure on operating segments. If applicable, relevant notes on balance sheet items related to the respective items in the income statement are presented in this section. A detailed description of the results for the year is provided in the business and financial review by business unit and group financial review sections in the Management Board report.

6.2.14. Segment reporting and revenue

The operating segments are identified and reported on the basis of internal reports about components of the group that are regularly reviewed by the Management Board to assess the performance of the segments.

The group's internal management reporting is structured primarily on the basis of the market segments in which the four operating segments - Consumer, Automotive, Licensing and Telematics - operate. Consumer generates revenue mainly from the sale of PNDs, sport watches, action cameras, maps and related navigation products and services. The Automotive business unit develops and sells navigation software components, services and content to car manufacturers and Tier 1 suppliers worldwide. Licensing generates revenue by licensing navigation software components, services and content to a wide range of customers, and Telematics provides fleet management services and related products to fleet owners including sale and/or rental of hardware products associated with the services.

Management assesses the performance of segments based on the measures of revenue and earnings before interest and taxes (EBIT), whereby the EBIT measure includes allocations of expenses from supporting functions within the group. Such allocations have been determined based on relevant measures that reflect the level of benefits of these functions to each of the operating segments. As the four operating segments serve only external customers, there is no inter-segment revenue. The effects of non-recurring items such as goodwill impairment are excluded from management's measurement basis. Interest income and expenses and tax are not allocated to the segments. There is no measure of segment (non-current) assets and/or liabilities provided to the Management Board. The non-current assets within the group include a significant portion of the carrying value of the step up resulting from the Tele Atlas acquisition in 2008. As this step up is not geographically allocated to the respective regions for internal management reporting, we believe that disclosure of geographic allocation would be highly judgemental and would not give a true representation of geographical spread of the group's assets.

Table_14 Segment reporting

 
 
(€ in thousands) 2015 2014
     
Consumer 623,648 619,099
Automotive 105,884 109,409
Licensing 142,117 111,575
Telematics 134,958 110,209
TOTAL REVENUE 1,006,607 950,292
     
The EBIT of each segment is as follows:    
Consumer1 2,636 36,168
Automotive2 -33,924 - 28,685
Licensing 48 - 11,360
Telematics 39,686 33,801
TOTAL EBIT 8,446 29,924
     
The EBITDA of each segment is as follows:    
Consumer 14,055 55,349
Automotive 26,133 20,093
Licensing 42,286 30,091
Telematics 49,030 39,102
TOTAL EBITDA 131,504 144,635
 
1. Consumer EBIT in 2015 includes a one-off gain of €9.0 million from a settlement of a legal case.
2. Automotive EBIT in 2015 includes an impairment charge of €11.5 million.

6.2.1.1

A reconciliation of the segment performance measure (EBIT) to the group's result before tax is provided below.

Table_15 Reconciliation Segment EBIT RBT

 
 
(€ in thousands) 2015 2014
Total Segment EBIT 8,446 29,924
Unallocated expenses -7,846 -8,810
Interest result -925 -3,145
Other finance result -7,343 -3,720
Result of associates 167 374
RESULT BEFORE TAX - 7,501 14,623
 

A breakdown of the external revenue to types of products and services and to geographical areas is as follows.

Table_16 External revenue by products and services

 
 
(€ in thousands) 2015 2014
External revenue by products and services    
Sale of goods1 586,089 578,086
Rendering of content and services 202,562 188,600
Royalty revenue 217,956 183,606
TOTAL 1,006,607 950,292
 
1. Includes navigation software and map components sold initially in bundle with the hardware.

The geographical split of the group's revenue from sale of goods and content and services is based on the location of the customers, while the split for royalty revenue is based on the coverage of the group's geographical map data and other contents.

Table_17 External revenue by geographical areas

 
 
(€ in thousands) 2015 2014
External revenue by geographical areas    
Europe1 771,491 718,767
North America2 186,115 163,461
Rest of world 49,001 68,064
TOTAL 1,006,607 950,292
1. Germany, France and the United Kingdom accounted for respectively 22%, 13% and 13% of our 2015 group revenue.
2. The North American revenue in 2015 is generated mainly in the United Stated of America.
 


Total revenue generated in the Netherlands during 2015 amounted to €65 million (2014: €74 million). The group has no significant concentration of sales from a particular individual external customer.

6.2.1.2


Accounting policy

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for products and/or services delivered in the normal course of business. Revenue is recognised net after deductions of estimated probable customer returns, rebates and other similar allowances whenever applicable.  The revenue recognition policy for each type of revenue or their combination is presented below:

SALE OF GOODS

Revenue from the sale of goods is only recognised when the risks and rewards of ownership of goods are transferred to the customers, which include distributors, retailers, end users and OEMs. The risks and rewards of ownership are generally transferred at the time the product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained. In cases where contractual acceptance is not required, revenue is recognised when management has established that all aforementioned conditions for revenue recognition have been met.

ROYALTY REVENUE

Royalty revenue is generated through licensing of geographic and/or other traffic-/location-based content to customers. Revenue is recognised on an accrual basis based on the contractual terms and substance of the relevant arrangements with the customers.

SALE OF SERVICES

Services revenue is generated from the sale of traffic and map update services, content sales, connected navigation and fleet management services to commercial fleets. The revenue relating to the service element is recognised over the agreed or estimated service period on a straight-line basis. In arrangements where devices are rented out to the customer in Telematics, the rental revenue is included in the revenue from subscriptions.

multiple-element arrangements

The group's product and services offerings include arrangements that require the group to deliver equipment (e.g. navigation hardware) and/ or a number of services (e.g. map update services) under one agreement, or under a series of agreements that are commercially linked (referred to as 'multiple-element arrangements'). In such multiple-element arrangements, the consideration received is allocated to each separately identifiable element, based on the estimated relative fair values of each identifiable element. To the extent that there is a discount on the arrangement, the discount is allocated between the elements of the contract in such a manner as to reflect the fair value of the elements and the substance of the transaction. The amount of revenue allocated to the hardware element is recognised in line with the accounting policy for the sale of goods as described above. The revenue relating to the service element is recognised over the agreed or estimated service period on a straight-line basis, which varies on average from 3 months to 48 months (for lifetime services).

6.2.1.3


SIGNIFICANT ESTIMATES

6.2.1.4

Significant revenue estimates include the estimates of various pricing allowances deducted from the revenue as well as the estimates of relative fair value of various elements in multiple-element arrangements.

The estimated sales return deduction is based upon historical data on the return rates and information on the inventory levels in the distribution channel. For sales incentives including channel- and end user rebates, the reduction in revenue is based on the group's historical experience, taking into account future expectations on rebate payments. If there is excess stock at retailers when a price reduction becomes effective, the group will compensate its customers on the price difference for their existing stock, provided certain criteria are met. To reflect the costs related to known price reductions in the income statement, an accrual is created against revenue based on an estimate of the inventory levels in the channel and future price reductions.

In the absence of a stand-alone selling price, the fair value of each element under a multiple-element arrangement is estimated using other methods allowed under IFRS, such as the cost plus reasonable margin or the residual method or a combination thereof. In making such estimates, management make use of judgement and assumptions to arrive at an outcome that best reflects a transaction's substance. Total deferred revenue balance relating to the elements deferred under such multiple-element arrangements as at 31 December 2015 amounted to €106 million (31 December 2014: €85 million).

6.2.1.5

Deferred revenue balance by segment

Deferred revenue amounted to €187 million at the end of the year (2014: €146 million). The year on year increase mainly related to the increase of deferred revenue from the lifetime maps and traffic services bundled in our PND ranges as well as an increased deferred revenue position related to Licensing and Automotive contracts with upfront payments.

Table_80 Deferred revenue

 
 
(€ in thousands) 2015 2014
Consumer 130,385 104,807
Automotive 22,614 12,575
Licensing 31,180 25,646
Telematics 2,694 2,652
TOTAL 186,873 145,680
 

6.2.25. Cost of sales

The group's cost of sales consists of material costs for goods sold to customers, royalty and license expenses and fulfillment costs incurred on inventory sold during the year as well as amortisation and impairment of certain technologies specifically developed/used for particular customers.

6.2.36. Personnel expenses

Included in the operating expenses are, amongst others, the following items: 

Table_18 Additional information re operating expenses

 
 
(€ in thousands) 2015 2014
Salaries 178,776 155,771
Social security costs 34,257 26,478
Pensions 9,415 7,758
Share-based compensation1 20,511 8,742
Other2 28,661 49,596
PERSONNEL EXPENSES 271,620 248,345
 
1. Share-based compensation increased mainly due to an increase of the share price over 2015 (31 Dec 2015: €11.6, 31 Dec 2014: €5.5)
2. Other personnel expenses include costs of secondary benefits such as health insurance, vehicle lease costs, sales commissions and bonuses offset by capitalised personnel expenses in an amount of €60.0 million (2014: €47.9 million).

The average number of employees (in FTE equivalents) in 2015 was 4,301 (2014: 3,888) spread across the following functional areas: 

Table_19 #FTE across functional areas

 
 
  2015 2014
Research and development 2,913 2,602
Marketing 114 97
Sales, general and administrative 1,274 1,189
TOTAL 4,301 3,888
 

At 31 December 2015, the group had 4,666 (2014: 4,172) employees. During 2015, 3,169 of employees worked outside the Netherlands (2014: 2,797). The increase in our average employees is mainly driven by increased headcount in our R&D departments as well as in Telematics sales force.

Pensions 

The group's pension plans primarily comprise of defined contribution plans, limiting the employer's legal obligation to the amount it agrees to contribute during the period of employment and a defined benefit plan for a German subsidiary. This defined benefit plan is unfunded and has no plan asset. Management is of the opinion that the plan has limited risks to the group as it was frozen in 2007. In the extraordinary event that the group is unable to meet its obligations, the participants will receive (partial) payments from a state-owned pension protection fund.

The total pension costs of €9.4 million (2014: €7.8 million) consist of the costs of the defined contribution plans of €9.2 million (2014: €7.5 million) and of the German-defined benefit plan of €0.2 million (2014: €0.3 million).

The movement of the German-defined benefit obligation is presented below:

Table_20 German-defined benefit obligation

 
 
(€ in thousands) 2015 2014
PRESENT VALUE OF OBLIGATION AS AT 1 JANUARY 8,383 6,763
Current service cost 60 36
Interest cost 192 229
  8,635 7,028
Remeasurements:    
- Experience (gains) / losses due to change in demographical assumptions -130 59
- Losses from change in financial assumptions 265 1,394
  135 1,453
Benefits paid -35 -98
PRESENT VALUE OF OBLIGATION AS AT 31 DECEMBER 8,735 8,383
 

The service cost and the interest cost are recognised as pension costs, while the actuarial (gains)/losses are credited/charged to 'Other comprehensive income'. The defined benefit obligation is included as part of 'Other provisions' as disclosed in Note 31.

The significant actuarial assumptions were as follows: 

Table_21 Significant actuarial assumptions

 
 
  2015 2014
Discount rate 2.10% 2.30%
Average life expectancy1 20 21
 
1. The above average life expectancy is the average actual value for males and females retiring at age 65 set in accordance with the common German mortality tables 'Heubeck 2005 G'.

A 0.1% increase or decrease in discount rate would result in a decrease or increase in the defined benefit obligation of approximately €0.1 million and a 1-year increase or decrease in average life expectancy would result in a €0.1 million increase or decrease in the defined benefit obligation.

In Italy, employees are paid a leaving indemnity on termination of their employment. This is a statutory payment based on Italian civil law. An amount is accrued each year based on the employee's remuneration and previously revalued accruals. The indemnity has the characteristics of a defined contribution obligation and is an unfunded, but fully provided liability. This liability is included as part of  'Accruals and other liabilities'.

Employees in the United States are offered the opportunity to participate in the 401K pension plan, which involves no contribution or obligation from the group besides withholding and paying the employee's contribution.


Accounting policy

For defined contribution plans, the group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses when service has been rendered to the group. Prepaid contributions are recognised as an asset to the extent that a cash refund or reduction of future payments is available.

In relation to the defined benefit plan, the group recognised a liability on the balance sheet based on the present value of the defined benefit obligation at the end of the reporting period. The defined benefit obligation is calculated annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and which have terms to maturity approximating to the terms of the related pension obligation.

Service costs and interest costs are charged to the pension expenses. Actuarial gains and losses are charged or credited to equity in 'Other comprehensive income' in the period in which they arise.

6.2.47. Share-based compensation

The group operates two equity-settled plans as well as a cash-settled phantom share plan. The purpose of the share-based compensation is to retain management and employees and align the interests of management and eligible employees with those of shareholders, by providing additional incentives to improve the group's performance on a long-term basis.

Stock option plans and restricted stock plan

The group's equity-settled share-based payment plans comprise of stock option plans and a restricted stock plan.

The group has adopted stock option plans for members of the Management Board and eligible employees. Under the schemes, the General Meeting has granted options to members of the Management Board to subscribe for shares. The Management Board in turn has granted options to eligible employees.The options granted from 2011 onwards will vest after three years (cliff vesting). The options cannot be transferred, pledged or charged and may be exercised only by the option holder over a period of seven years from the grant date but only after completion of the three year vesting period. Options expire after the exercise period. The options will be covered at the time of exercise by issuing new shares.

As from 2011, the group also introduced a restricted stock plan to retain a selected group of talented employees. Each restricted-stock unit gives the right to receive one TomTom share after a three-year vesting period and qualifies as an equity-settled plan. The costs that arise from this plan are spread over the vesting period and have been determined based on TomTom's share price at the grant date. Total 2015 stock compensation expenses charged to the stock compensation reserve for this plan amounted to €133 thousand (2014: €228 thousand). As this plan is not material, no further disclosures are provided.

The following table summarises movements in the equity reserve relating to the stock options and the restricted stock units during 2015:

Table_22 Stock options balance

 
 
(€ in thousands) 2015 2014
Opening balance 29,405 29,441
Stock compensation expense 3,788 4,126
Transfer to accumulated deficit -210 -936
Stock options and restricted stock plans excercised -15,641 -3,226
CLOSING BALANCE 17,342 29,405
 

6.2.4.1

The following table summarises information about the stock options outstanding on 31 December 2015: 

Table_23 Stock options outstanding

 
 
Year of grant Number outstanding at 31-12-2015 Exercise price per share (€) Weighted average remaining life Number exercisable at 31-12-2015 Weighted average exercise price (€)
2009 1,411,153 5.71-6.00 0.46 1,411,153 5.75
2010 1,480,983 4.81-5.48 1.35 1,480,983 5.34
2011 476,500 6.08-6.20 2.36 476,500 6.12
2012 1,447,000 3.34-3.88 3.36 1,447,000 3.50
2013 2,496,000 3.36-5.90 4.35 - n/a
2014 1,747,880 4.93-5.28 5.36 - n/a
2015 1,472,620 7.60-7.83 6.36 - n/a
 

A summary of the group's stock option plans and the movements during the years 2015 and 2014 are presented below: 

Table_24 Stock option plans and movements

 
 
Option plans 2015 2014
  No. Weighted average exercise price (€) No. Weighted average exercise price (€)
OUTSTANDING AS AT 1 JANUARY 16,461,793 4.80 17,182,090 5.39
Granted 1,594,420 7.80 1,960,080 5.24
Exercised -6,864,159 5.03 -1,363,610 5.96
Expired -14,568 5.94 -691,485 8.00
Forfeited -645,350 4.80 -625,282 5.21
OUTSTANDING AS AT 31 DECEMBER 10,532,136 5.07 16,461,793 4.80
 

The fair value of the stock options granted was determined using the binomial tree model. This model contains the input variables, including the risk-free interest rate, volatility of the underlying share price, exercise price and share price at the date of grant. The fair value calculated is allocated on a straight-line basis over the vesting period, based on the group's estimate of equity instruments that will eventually vest.

Table_25 Input fair value stock options calculation

 
 
  2015 2014
Share price at grant date (€) 7.60 5.28
Exercise price (€) 7.60-7.83 4.93-5.28
Expected volatility 42% 45%
Expected average option life in years 5.3 5.3
Weighted average risk-free rate 0.60% 0.98%
Expected dividends Zero Zero
 

The option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Volatility is determined using industry benchmarking for listed peer group companies as well as the historic volatility of the TomTom NV's stock. The group's employee stock options have characteristics that are significantly different from those of traded options, and changes in the subjective input assumptions can affect the fair value estimate.

Phantom share plan

The existing phantom share plan was introduced in 2011. Under this plan, eligible employees are entitled to receive a cash payment equal to the value of the number of shares that have vested. These cash-settled phantom shares are conditional on the employee completing three years of service (the vesting period). On 31 December 2015, the outstanding liability with regard to the phantom share plan was €18.4 million (2014: €8.0 million).

The following table provides the movement in the number of phantom shares.

Table_26 Phantom shares balance

 
 
  2015 2014
OUTSTANDING AS AT 1 JANUARY 2,994,330 2,356,730
Vested and paid out -769,100 -393,300
Granted 850,350 1,235,855
Forfeited -264,080 -204,955
OUTSTANDING AS AT 31 DECEMBER 2,811,500 2,994,330
 



Accounting policy

Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period. The costs are determined based on the fair value of the granted instruments and the number expected to vest. At each balance sheet date, the group revises its estimates of the number of instruments expected to vest. Cash-settled share-based payments are initially recognised at the fair value of the liability and are expensed over the vesting period. The liability is remeasured at each balance sheet date to its fair value, with all changes recognised immediately as either a profit or a loss.

6.2.58. Depreciation and amortisation

Total depreciation, amortisation and impairment for the year was €123.1 million (2014: €114.7 million) of which €21.6 million (2014: € 6.1 million) is included in cost of sales. Excluding the impairment charge of €11.5 million, the amortisation charge would be slightly lower in 2015 mainly driven by an €8 million decrease as a result of a change in expected useful life of certain navigation technologies offset by higher amortisation from other intangibles.

Table_27 Depreciation & amortisation

 
 
(€ in thousands) 2015 2014
Amortisation1 108,609 102,089
Depreciation 14,487 12,622
TOTAL 123,096 114,711
 
1. Amortisation charge in 2015 includes an €11.5 million impairment.

Amortisation charge totalling €108.6 million (2014: €102.1 million) are included in the following line items in the Income Statement:

  • Cost of sales: €21.0 million (2014: €5.7 million) of which impairment €11.5 million (2014: nil);
  • Amortisation of technology and databases: €76.7 million (2014: €88.1 million);
  • R&D expenses: €0.9 million (2014: €2.2 million); and
  • Selling, general and administration expenses: €10.0 million (2014: €6.1 million)

Reference is made to Note 14 for an explanation of the impairment charge.

6.2.69. Government grants

In 2015, the group received government grants amounting to €5.6 million, in relation to the research and development activities performed by the group (2014: €4.7 million) which have been accounted as a deduction of wage tax expense in line with the nature of the grants.


Accounting policy

Government grants are recognised at their fair value when there is a reasonable assurance that the group will comply with the conditions attached to them, and that the grants will be received. Government grants that are receivable as compensation for expenses or losses already incurred, or for the purpose of giving immediate financial support to the group with no future related costs, are recognised as a deduction of the related expense in the period in which they become receivable.

6.2.710. Income tax

Income tax expense represents the sum of the tax currently payable and deferred tax. The activities of the group are subject to corporate income tax in several countries, depending on presence and activity. The applicable statutory tax rates vary between 12.5% and 41.0%.

The different tax jurisdictions in which the group operates can cause the Effective Tax Rate (ETR) to differ from the Dutch corporate tax rate.

Table_28 Income tax

 
 
(€ in thousands) 2015 2014
Current tax -880 4,054
Deferred tax -24,914 -12,086
INCOME TAX (GAIN) / EXPENSE -25,794 -8,032
 

In 2015, the ETR was 343.9% compared with –54.9% last year. The reconciliation between the tax charge on the basis of the Dutch tax rate and the ETR is as follows:

Table_29 Effective Tax Rate (ETR)

 
 
  2015 2014
Dutch tax rate 25.0% 25.0%
(Lower) / higher weighted average statutory rate of group activities -13.2% 9.8%
Income exempted from tax 38.8% -26.2%
Non-deductible expenses and non-expense deductibles 14.3% 17.7%
Capitalisation of losses 14.0% -19.6%
Effect of prior years' settlements and/or adjustments1 148.3% -40.6%
Remeasurement of deferred tax2 103.5% -25.6%
Other 13.3% 4.7%
EFFECTIVE TAX RATE 343.9% -54.9%
 
1. The effect of prior year's settlements and/or adjustments for 2015 was €11.1 million.
2. Remeasurement of deferred tax resulted in a gain of €7.8 million in 2015.

Our ETR for the year is primarily impacted by the remeasurement of deferred tax assets and liabilities and the effect of prior years' settlements. The remeasurement of deferred tax assets and liabilities to a lower tax rate mainly relates to the application of the innovation box facility in the Netherlands. The effect of prior years' settlements is the consequence of one-off releases of provisions, mainly due to expirations of statutes of limitations and finalisations of tax audits. 

The income tax credited directly in equity in 2015 amounted to €9.3 million (2014: credit of €6.9 million). This mainly relates to current year tax losses resulting from the foreign currency revaluation of certain intercompany borrowings that have been charged through equity as they form part of net investment in subsidiaries.


Accounting policy

Current and deferred taxes are recognised as an expense or income in the profit and loss account, except when they relate to items that arise from initial accounting for a business combination or items credited or debited directly to equity. For the latter, the tax is also recognised either in Other comprehensive income or directly in equity. The group's income tax expense is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

6.2.811. Deferred income tax

As at 31 December 2015, the group had a deferred tax liability of €149.8 million (2014: €166.6 million) and a deferred tax asset of €33.4 million (2014: €18.4 million). The deferred tax asset and liability result from timing differences between the tax and accounting treatment of intangible assets, cash-settled share-based payments, certain provisions and tax loss carry forwards.

Table_30 Deferred income tax

 
 
(€ in thousands) 2015 2014
DEFERRED TAX    
To be recovered after more than 12 months -113,043 -147,016
To be recovered within 12 months -3,270 -1,097
TOTAL -116,313 -148,113
 

The movement of deferred tax is as follows:

Table_31 Movement of deferred tax

 
 
(€ in thousands) Stock compensation expense Other Intangible assets Provisions Assessed losses Total
BALANCE AS AT 31 DECEMBER 2013 1,326 -595 -195,087 6,238 26,072 -162,046
Acquisitions through business combination 0 0 -3,705 0 0 -3,705
(Charged)/credited to income statement 668 437 12,899 497 -2,415 12,086
(Charged)/credited to equity 0 0 0 436 6,4301 6,866
Currency translation differences 0 -200 -4,386 -460 3,732 -1,314
BALANCE AS AT 31 DECEMBER 2014 1,994 -358 -190,279 6,711 33,819 -148,113
Acquisitions through business combination 0 129 -2,012 0 0 -1,883
(Charged)/credited to income statement 2,607 631 16,757 -1,413 -991 17,591
(Charged)/credited to equity 0 0 0 -31 9,3051 9,274
Impact of remeasurement (charged)/credited to income statement -553 0 7,916 0 -30 7,333
Currency translation differences 0 102 -3,166 679 1,870 -515
BALANCE AS AT 31 DECEMBER 2015 4,048 504 -170,784 5,946 43,973 -116,313
 
1. The amounts credited to equity mainly relate to tax losses for the respective years resulting from the foreign currency revaluation of certain intercompany borrowings that have been charged through equity as they form part of net investment in subsidiaries.

Deferred tax balances are presented in the balance sheet as follows:

Table_32 Deferred tax in balance sheet

 
 
(€ in thousands) 2015 2014
Deferred tax assets 33,493 18,438
Deferred tax liabilities -149,806 -166,551
TOTAL -116,313 -148,113
 

The group has in some jurisdictions tax loss carry forwards that have not been recognised as deferred tax assets as the amounts as well as possible future recovery of these losses against future taxable income are uncertain. As at 31 December 2015, these losses amounted to approximately €86.0 million (2014: €90.0 million). These losses have no future expiry date.


Accounting policy

Deferred taxes are calculated using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled, using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets are recognised when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilised. The carrying amounts of deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.


SIGNIFICANT ESTIMATES

The determination of the group's provision for income tax as well as deferred tax assets and liabilities involves significant judgements and estimates on certain matters and transactions, for which the ultimate outcome may be uncertain. If the final outcome differs from the group's estimates, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

6.3Section 3: Non-current assets and investments

The notes in this section specify the group’s non-current assets including investments made during the year either through separate asset acquisitions or business combinations.

6.3.112. Intangible assets

Table_33 Intangible assets

 
 
(€ in thousands) 2015 2014
Goodwill 403,437 381,569
Other intangible assets 810,908 800,583
TOTAL INTANGIBLE ASSETS 1,214,345 1,182,152
 

The movements in the intangible assets are as follows:

Table_34 Movements of intangibles assets

 
 
(€ in thousands) Goodwill Database and tools3 Internally generated Other1 Total
BALANCE AS AT 31 DECEMBER 2013          
Investment cost 1,902,489 997,021 143,319 238,172 3,281,001
Accumulated amortisation and impairment -1,520,920 -299,315 -83,656 -191,906 -2,095,797
  381,569 697,706 59,663 46,266 1,185,204
Movements          
Investments 0 38,114 30,434 5,203 73,751
Acquisitions through business combination 0 381 0 24,167 24,548
Disposal (net) 0 -17 -125 -63 -205
Amortisation charges 0 -66,972 -26,801 -8,317 -102,090
Currency translation differences 0 720 82 142 944
  0 -27,774 3,590 21,132 -3,052
BALANCE AS AT 31 DECEMBER 2014          
Investment cost 1,902,489 1,036,892 139,741 250,795 3,329,917
Accumulated amortisation and impairment -1,520,920 -366,960 -76,488 -183,397 -2,147,765
  381,569 669,932 63,253 67,398 1,182,152
Movements          
Investments 0 44,649 36,140 13,183 93,972
Acquisitions through business combination 21,868 10,942 0 15,459 48,269
Disposal (net)2 0 0 0 -36 -36
Amortisation charges 0 -66,051 -18,377 -12,697 -97,125
Impairment 0 0 -11,484 0 -11,484
Currency translation differences 0 -1,846 283 160 -1,403
  21,868 -12,306 6,562 16,069 32,193
BALANCE AS AT 31 DECEMBER 2015          
Investment cost 1,924,357 1,068,496 171,443 239,146 3,403,442
Accumulated amortisation and impairment -1,520,920 -410,870 -101,628 -155,679 -2,189,097
  403,437 657,626 69,815 83,467 1,214,345
 
1. Other intangible assets include technology, customer relationships, brand name and software.
2. During the year we disposed certain intangibles. The total gross amount of the assets disposed across all asset classes was €66.9 million (2014: €51.8 million).
3. The database as acquired at acquisition date (June 2008) represents geographical content data used for the group's digital maps and has a remaining useful life of 12 years and 5 months.
           



Accounting policy

GOODWILL

Goodwill represents the excess of the cost of an acquisition over the fair value of the group's share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition and is carried at cost less accumulated impairment losses.

INTANGIBLE ASSETS OTHER THAN GOODWILL

Intangible assets other than goodwill comprise of assets that have been acquired separately either through separate asset acquisitions or business combinations and assets that have been generated internally such as the group's core technology and geographical content database.

INTERNALLY GENERATED INTANGIBLE ASSETS

Internal development costs for core technology are recognised as an intangible asset if, and only if, all of the following have been demonstrated:
• The technical feasibility to complete the project;
• The intention to complete the intangible asset, and use or sell it;
• The ability to use or sell the intangible asset;
• How the intangible asset will generate probable future economic benefits;
• The availability of adequate resources to complete the project; and
• The cost of developing the asset can be measured reliably.

Internally generated databases are capitalised until a certain level of map coverage is reached and ongoing activities focus on maintenance. At this point, capitalisation is discontinued.

Internal software costs relating to development of non-core software with an estimated average useful life of less than one year and engineering costs relating to the detailed manufacturing design of new products are expensed in the period in which they are incurred.

The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. All expenditures on research activities are expensed in the income statement as incurred.

ACQUIRED INTANGIBLE ASSETS

Definite-lived intangible assets acquired separately are initially recognised at cost. The cost of assets acquired separately includes directly attributable costs to bring the asset to its intended use. Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date.

Subsequent to initial recognition, all intangible assets other than goodwill are carried at cost less accumulated amortisation and accumulated impairment losses.

The amortisation of other intangible assets is recorded on a straight-line basis over the following estimated useful lives as follows:
• Internally generated core technology: 3-5 years;
• Databases and tools: 5-20 years;
• Customer relationships: 5-27 years;
• Computer software: 2-5 years;
• Acquired technology: 4-5 years.

Customer relationships include customers for maps; there is a high cost involved in changing map providers and historically there is a high customer retention.



SIGNIFICANT ESTIMATES

Management made use of assumptions and judgement in assessing the expected future economic benefits that can be attributed to the internally generated technology, databases and tools, as well as their expected useful lives. For internally generated databases, assumption is also made on the level of completion, at which point the capitalisation is discontinued and future activities are considered as maintenance.

Such estimates are made on a regular basis, as they can be significantly affected by changes in technology and other factors.

6.3.213. Property, plant and equipment

Table_35 Property, plant & equipment

 
 
(€ in thousands) Furniture and fixture Computer and harware Other1 Total
BALANCE AS AT 31 DECEMBER 2013        
Investment cost 14,328 51,638 48,089 114,055
Accumulated amortisation and impairment -12,590 -38,883 -36,778 -88,251
  1,738 12,755 11,311 25,804
Movements        
Investments 1,945 8,186 6,354 16,485
Transfer between categories 270 297 -567 0
Acquisitions through business combination 6 303 10 319
Disposals (net) -60 -73 -50 -183
Depreciation charges -647 -5,859 -6,116 -12,622
Currency translation differences 86 242 163 491
  1,600 3,096 -206 4,490
BALANCE AS AT 31 DECEMBER 2014        
Investment cost 10,499 53,769 36,811 101,079
Accumulated amortisation and impairment -7,161 -37,918 -25,706 -70,785
  3,338 15,851 11,105 30,294
Movements        
Investments 2,217 11,437 8,950 22,604
Acquisitions through business combination 134 859 133 1,126
Disposals (net)2 -12 -1,013 -118 -1,143
Depreciation charges -1,117 -7,849 -5,521 -14,487
Net foreign currency exchange differences 65 284 126 475
  1,287 3,718 3,570 8,575
BALANCE AS AT 31 DECEMBER 2015        
Investment cost 12,441 63,974 45,779 122,194
Accumulated amortisation and impairment -7,816 -44,405 -31,104 -83,325
  4,625 19,569 14,675 38,869
 
1. Other assets balance as at 31 December 2015 mainly comprises of leasehold improvements with a carrying value of €4.8 million (31 December 2014: €4.2 million).
2. The total gross amount of the assets disposed across all asset classes was €4.3 million (2014: €31.8 million).

The costs for operating leases in 2015 amounted to €14.1 million (2014: €13.0 million). For disclosures of our operating lease commitments reference is made to note 32 Commitments, contingent assets and liabilities.


Accounting policy

The group leases certain property, plant and equipment. Leases are classified as finance leases whenever the terms of the lease substantially transfer all the risks and rewards of ownership to the group. All other leases are classified as operating leases. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment charges. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets as follows:
• Furniture and fixtures: 4-10 years;
• Computer equipment and hardware: 2-7 years;
• Vehicles: 4 years;
• Tools and moulds: 1-2 years;
• Leasehold improvements: 4-10 years.


The estimated useful lives, residual values and depreciation methods are reviewed at each year-end, with the effect that any changes in estimate are accounted for on a prospective basis. The gain or loss arising on disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset, and is recognised in profit or loss.

6.3.314. Impairment testing of non-financial assets

Non-financial assets comprises of goodwill, other intangible assets and property, plant and equipment. 

At the end of 2015 we recorded an impairment charge of  €11.5 million on certain technologies which have been specifically developed and attributed to certain customer contracts in Automotive . The impairment was triggered by lower projections of future cash flows on those contracts which resulted in lower recoverable amounts (determined based on discounted cash flow model) in comparison with their respective carrying value.

Goodwill is allocated to the operating segments identified according to the core business activities as monitored by management for the purpose of impairment testing. The allocation is made to those operating segments that are expected to benefit from the business combination in which the goodwill arose.

A segment-level summary of the goodwill allocation for the group's segments in 2015 and 2014 is presented below:

Table_36 Segment-level goodwill allocation

 
 
(€ in thousands) 2015 2014
Consumer 168,687 168,687
Automotive 83,389 83,389
Licensing 85,217 85,217
Telematics 66,144 44,276
TOTAL 403,437 381,569
 


Accounting policy

Assets, such as goodwill, that have an indefinite useful life, which are not subject to amortisation, and intangible assets not yet ready to use are tested for impairment at least annually, or whenever management identifies conditions that may trigger a risk of impairment. Assets that are subject to amortisation/depreciation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount and is recognised immediately in the income statement. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. In estimating the recoverable amount, management is required to make an estimate of the expected future cash flows from the cash-generating unit in the forecasted period and also to determine a suitable discount rate in order to calculate the present value of those cash flows. Such estimates might be subject to a certain degree of judgement and uncertainty.

Non-financial assets, other than goodwill, which have been subject to an impairment, are reviewed for possible reversal of the impairment at each reporting date.



SIGNIFICANT ESTIMATES

IMPAIRMENT TEST OF GOODWILL

The recoverable amount of a segment is determined based on the higher of the value in use or fair value less costs of disposal calculations. The fair value less costs of disposal calculation resulted in a higher recoverable amount.

The calculations of fair value less costs of disposal use post-tax cash flow projections based on financial forecasts approved by management covering a five-year period (forecasted period). Management's cash flow projections for each of the segments in the forecasted period are based on management's assumptions on the expected revenue growth rate, gross margin and operating margin after allocation of operating expenses from shared units, taking into account management's expectation of market size and market share development.

The revenue projections of Consumer and Licensing in the forecasted period show a single digit growth rate, while Automotive and Telematics revenues are projected to grow significantly throughout the forecasted period. Given the limited visibility on the longer-term growth, the growth rates in the later years are more subject to uncertainty compared to the earlier years. Gross margin and operating margin projections of each of the segments are consistent with the expected revenue developments. The growth rates after the forecasted period as well as the discount rate used for each of the segments are presented in the table below. The input to the group's key assumptions include those that are based on non-observable market data (level 3 input in accordance with IFRS 13).

Table_37 Impairment test for goodwill

 
 
  Consumer Automotive Licensing Telematics
2015        
Revenue - perpetual growth1 0.0% 2.0% 0.0% 2.0%
Discount rate2 9.0% 9.0% 9.0% 9.0%
         
2014        
Revenue - perpetual growth1 0.0% 2.0% 0.0% 2.0%
Discount rate2 9.5% 9.5% 9.5% 9.5%
 
1. Weighted average growth rate used to extrapolate cash flows beyond the forecasted period.
2. Post-tax discount rate applied to the cash flow projections.

Discount rates used are post-tax and reflect specific risks relating to the relevant operating segments. Management considered the effects of applying a pre-tax approach and concluded that this will not materially change the outcome of the impairment test.

Expectations and input to the impairment calculation, as well as the overall outcome, have been compared with the available external information from various analysts and to the extent available with market information on recent comparable transactions.

The impairment test performed resulted in no goodwill impairment for 2015 and 2014 for any of the segments. Management performed a sensitivity analysis on the relevant key assumptions in the group's 2015 year-end annual impairment testing.

The sensitivity test for the Licensing segment showed that the level of headroom available at year-end 2015 (headroom: €27 million, 2014: €104 million) would fall to nil should the compound annual revenue growth rate in the forecasted period decrease from 3% to 2% and/or should the discount rate increase from 9% to 10% while other factors remain constant.

For Consumer, Automotive and Telematics, a reasonably possible change in any of the above-mentioned key assumptions as well as other assumptions in the forecasted period would not cause the fair value less costs of disposal of any of these units to fall below the level of their respective carrying value.

6.3.415. Business combinations

2015

In 2015, the group made two acquisitions for an aggregate consideration of €42.4 million. This consideration includes cash considerations as well as an estimated contingent consideration of €2.0 million, which has been determined based on certain financial and non-financial key performance indicators. The acquisitions comprise of Location Navigation Pty. Ltd, a mapping company in Australia on 30 April 2015 and Finder S.A., a leading Polish fleet management service provider on 23 December 2015. With these acquisitions, we expanded our global map flootprint and our fleet management business.

Both acquisitions were effectuated through the acquisition of 100% of the shares. The main assets and liabilities that arose from both acquisitions combined were intangible assets of €48.3 million, which includes €21.9 million goodwill and deferred tax liabilities of €1.8 million. The fair value of the assets and liabilities acquired have been determined using discounted cash flow technique, which includes inputs that are not based on observable market data (level 3 input). Given the timing of the Finder acquisition, the purchase price allocation has been made based on provisional information at year-end. The acquired businesses contributed a revenue of €2.9 million and a net profit of €1.7 million in 2015. Excluding the impact of the acquisition-related amortisation from the purchase price allocations, the contributed result in 2015 was a net profit of €2.2 million. If the group had acquired all companies from 1 January 2015, the group revenue and net result for 2015 would have been €1,023.6 million and €18.8 million respectively. The acquisition of Finder added over 60,000 subscribers to our Telematics subscriber installed base.

As none of the transactions are material individually, they are not disclosed separately in accordance with IFRS 3.

2014

In 2014, the group made several acquisitions for an aggregate consideration of €22.0 million. This consideration includes cash considerations as well as an estimate of contingent consideration, which has been determined based on certain financial and nonfinancial key performance indicators. The main acquisitions were the acquisitions of DAMS Tracking in France on 1 June 2014 and Fleetlogic in the Netherlands on 1 December 2014. Both companies are fleet management service providers which in aggregate added approximately 54,000 subscribers to our Telematics subscriber installed base.

The main assets and liabilities that arose from all acquisitions combined were intangible assets of €24.5 million and deferred tax liabilities of €3.7 million. None of the acquisitions resulted in goodwill.

As none of the transactions are material individually, they are not disclosed separately in accordance with IFRS 3.

6.3.4.1


Accounting policy

The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets.

Acquisition of additional interest in associates, which results in the group gaining control over the associate, is accounted for as a business combination. The previously held interest in the associate is considered as part of the consideration and hence is remeasured to its fair value. The gain or loss from this remeasurement is included in the 'Result of associates' in the income statement. The associate is accounted for as a subsidiary and included in the consolidated financial statements from the date the control passes to the group.

6.3.516. Investments in associates

As of 31 December 2015, the group held non-controlling interests in a number of associates: Cyient Ltd. ('Cyient'), WayTag (Pty) Ltd. (WayTag) and Beijing Golden Tom Information Technology Co. Ltd. (Beijing Golden Tom). Cyient provides content development and support services. WayTag is a South Africa-based company that allows people and businesses to create a unique location identifier that either refers to a fixed location or to an individual's current location. Although our Chinese activities will continue, Beijing Golden Tom is in process to be liquidated.

The movements in the investments in associates can be specified as follows:

Table_38 Investments in associates

 
 
(€ in thousands) 2015 2014
BALANCE AS AT 1 JANUARY 3,289 2,854
Result of associates1 167 536
Dividend received -167 -117
Other direct equity movements 257 16
BALANCE AS AT 31 DECEMBER 3,546 3,289
 
1. The group's share in 'Other comprehensive income' of the associates are presented under 'Other direct equity movements' in the table above.

As the associates are not material to the group, no further information is provided other than those detailed below. The group has no commitment in providing additional financing to any of its associates. The (estimated) full year revenues and net profits of the associates and their assets (excluding goodwill) and liabilities are as follows:

Table_39 Overview associates

 
 
Name of associate Country of incorporation Assets Liabilities Revenue Net result Interest held
    (€ in thousands) (%)
2015            
Cyient Ltd.1 India 358,605 102,149 406,997 50,304 1.35%
Beijing Golden Tom China 106 1,217 132 294 49.00%
WayTag South Africa 48 11 0 6 26.00%
             
2014            
Cyient Ltd. (prev. Infotech Ent. Ltd.)1 India 255,243 46,954 287,021 34,339 1.35%
Beijing Golden Tom China 788 1,489 1,124 -637 49.00%
WayTag South Africa 106 596 0 -1,200 16.00%
 
1. This associate has a 31 March year-end. Data for calculating the result of associate, based on the equity method, is obtained from January through to December. The summarised financial information presented above is based on financial statements for the year ending 31 March 2015 and 31 March 2014.


Cyient is regarded as an associate as TomTom is represented on its Board of Directors. The fair value of the investment in Cyient is €10.0 million (2014: €10.1million).


Accounting policy

Associates are all entities over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights, or other evidence of significant influence. Investments in associates are accounted for using the equity method of accounting, and are initially recognised at cost. The group's investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.

The group's share of its associates' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in 'Other comprehensive income' is recognised in 'Other comprehensive income'. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the group and its associates are eliminated to the extent of the group's interest in the associates. Unrealised losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred. Accounting policy of associates has been changed where necessary to ensure consistency with the policy adopted by the group.

6.4Section 4: Working capital

The notes in this section specify items that form part of group’s working capital. Disclosure on cash and cash equivalents is included in this section.

6.4.117. Inventories

Table_40 Inventories

 
 
(€ in thousands) 2015 2014
Finished goods 23,807 24,632
Components and sub-assemblies 24,850 21,943
INVENTORIES 48,657 46,575
 

The amount of inventories recognised as an expense when the inventories are sold and included in cost of sales amounted to €373 million (2014: €319 million). As a result of the write-down of inventories to their net realisable value, the group recognised a cost of €4.4 million (2014: €3.1 million). These costs are included in cost of sales.


Accounting policy

Inventories are stated at the lower of cost and net realisable value.  The cost of inventories comprises costs of purchase, assembly and conversion to finished products. The cost of inventories is determined using the first-in, first-out (FIFO) method, net of reserves for obsolescence and any excess stock. Net realisable value represents the estimated selling price less an estimate of the costs of completion and direct selling costs.

6.4.218. Trade receivables

Table_41 Trade receivables

 
 
(€ in thousands) 2015 2014
Gross accounts receivables 142,829 136,812
Allowance for doubtful receivables -4,236 -3,546
TRADE RECEIVABLES (NET) 138,593 133,266
 

The group expects to recover all receivables within a year. An allowance has been made for estimated unrecoverable amounts from the sale of goods. The carrying amount of trade receivables approximates their fair value. The group does not hold any collateral over these balances.

The group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. Management actively monitors the credit risk related to these customers and takes pro-active action to reduce credit limits if required.

The following table summarises the movement in the allowance for doubtful trade receivables account:

Table_42 Movement in provision for doubtful accounts

 
 
(€ in thousands) 2015 2014
BALANCE AS AT 1 JANUARY -3,546 -3,117
Additional receivables impairment -2,299 -1,321
Acquisition -641 0
Receivables written off during the year as uncollectible 2,172 837
Unused amounts reversed 0 15
Translation effects 78 40
BALANCE AS AT 31 DECEMBER -4,236 -3,546
 

The following table sets out details of the age of trade accounts receivable that are not overdue, as the payment terms specified in the terms and conditions established with the group's customers have not been exceeded, and an analysis of overdue amounts and related provisions for doubtful trade accounts receivable:

Table_43 Age of trade accounts receivables

 
 
(€ in thousands) 2015 2014
Of which:    
Not overdue 134,891 118,289
Overdue < 3 months 4,128 13,422
3 to 6 months 199 2,826
Over 6 months 3,611 2,275
less provision -4,236 -3,546
TRADE RECEIVABLES (NET) 138,593 133,266
 

The provisions recorded in 2015 and 2014 are mainly related to the overdue amounts.

Trade accounts receivable include amounts denominated in the following major currencies:

Table_44 Trade accounts breakdown per major currencies

 
 
(€ in thousands) 2015 2014
EUR 78,923 71,358
GBP 20,764 24,785
USD 18,898 22,914
Other 20,008 14,209
TRADE RECEIVABLES (NET) 138,593 133,266
 


Accounting policy

Trade receivables are initially recognised at fair value, and subsequently measured at amortised cost (if the time value is material), using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the group will not be able to collect all amounts due, according to the original terms of the receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement within 'Cost of sales'. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against 'Cost of sales' in the income statement.

6.4.319. Other receivables and prepayments

Table_45 Other receivables and prepayments

 
 
(€ in thousands) 2015 2014
Prepayments 21,905 12,673
VAT and other taxes 9,770 3,389
Unbilled revenue 14,150 9,475
Deferred cost of sales1 4,603 4,721
Other receivables 3,105 2,940
TOTAL OTHER RECEIVABLES 53,533 33,198
 
1. Deferred cost of sales related to cost of providing services which have been paid in advance.

The carrying amount of the other receivables and prepayments approximates their fair value.

6.4.420. Other financial assets/liabilities

Other financial assets/liabilities include derivative financial instruments carried at fair value through profit or loss.

Table_46 Other financial assets/liabilities

 
 
(€ in thousands) 2015 2014
  Assets Liabilities Assets Liabilities
Derivatives at fair value through profit or loss 967 -573 1,186 -23
 

The notional principle amounts of the outstanding forward foreign exchange and option contracts on 31 December 2015 were €58 million (2014: €54 million). All the group's outstanding options and forwards have a contractual maturity of less than one year. The group does not apply hedge accounting.


Accounting policy

Derivatives are initially and subsequently measured at fair value. Gains or losses arising from changes in fair value of derivatives are recognised in the income statement, except for derivatives designated as hedging instruments, in a highly effective hedge relationship, for which cash flow hedge accounting is applied. Transaction costs are expensed in the income statement.

6.4.4.1

6.4.521. Cash and cash equivalents

Table_47 Cash & cash equivalents

 
 
(€ in thousands) 2015 2014
Cash and equivalents 147,565 148,614
Deposits 0 4,335
TOTAL CASH AND CASH EQUIVALENTS 147,565 152,949
 

Cash and cash equivalents consist of cash held by the group sometimes invested in short-term bank deposits with an original maturity of three months or less. The carrying amount of cash and cash equivalents approximates its fair value. All cash and cash equivalents are available for immediate use by the group.


Accounting policy

Cash and cash equivalents are stated at face value and comprise cash on hand, deposits held on call with banks, and other short-term highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.

6.4.5.1

6.4.622. Trade payables

All trade payable balances have a contractual maturity of less than six months and the carrying amount approximates their fair value.

6.4.723. Accruals and other liabilities

Accruals and other liabilities comprise of the following:

Table_48 Accruals and other liabilities

 
 
(€ in thousands) 2015 2014
Margin-related accruals1 65,140 64,238
Operating expenses accruals 78,648 86,456
TOTAL 143,788 150,694
 
1. Margin-related accruals include items such as sales return allowance, rebates and stock protection accrual.

6.5Section 5: Financing, financial risk management and financial instruments

This section includes notes related to financing items such as equity and borrowings as well as financial risk management and financial instruments. Related items such as earnings per share calculation as well as financial income and expenses, are included in this section.

6.5.124. Shareholder's equity

Table_49 Shareholders' equity

 
 
  2015 2014
  No. (€ in thousands) No. (€ in thousands)
AUTHORISED:        
Ordinary shares 600,000,000 120,000 600,000,000 120,000
Preferred shares 300,000,000 60,000 300,000,000 60,000
TOTAL 900,000,000 180,000 900,000,000 180,000
ISSUED AND FULLY PAID:        
Ordinary shares 230,495,981 46,099 223,569,822 44,714
 



In 2015, 6,926,159 shares were issued following the exercise of stock options (6,864,159) and the restricted stock units (62,000) by employees (2014: 1,393,610).

Reserves are freely distributable except for €210.9 million of legal reserves (2014: €172.9 million). Note F. Other reserves in the company financial statements provides an overview of the non-distributable reserves. 

All shares have a par value of €0.20 per share (2014: €0.20 per share). Further information on the rights, restrictions and other conditions attached to ordinary and preferred shares is provided in the Corporate Governance section in the annual report.

The Corporate Governance section of this annual report provides a detailed description regarding the use of Foundation Continuity TomTom as a protective measure. Management is of the opinion that the call option as described in the Corporate Governance section does not represent a significant value as meant in IAS 1, paragraph 31, due to the fact that the likelihood that the call option will be exercised is remote. In the remote event that the call option is exercised, the preferred shares that are issued are intended to be cancelled shortly after issuance (within 1 year period). The option is therefore not accounted for in the annual accounts, nor is any additional information as meant in IAS 32 and 39 provided.


Accounting policy

SHARE CAPITAL

Ordinary shares are classified as share capital.

SHARE PREMIUM

The share premium represents the amount by which the fair value of the consideration received exceeds the nominal value of shares issued. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

6.5.225. Earnings per share

The calculation of basic and diluted earnings per share is based on the following data:

Table_50 Net result and adjusted net result

 
 
(€ in thousands) 2015 2014
Earnings    
Net result attributed to equity holders 18,122 22,549
Adjusted net result    
Net result attributed to equity holders 18,122 22,549
Remeasurement of deferred tax liability -7,535 0
Amortisation of acquired intangibles 52,056 50,332
Tax effect of adjustments -13,014 -12,583
ADJUSTED NET RESULT 49,629 60,298
Number of shares    
Weighted average number of ordinary shares for basic earnings per share 227,771,117 222,689,197
Effect of dilutive potential ordinary shares    
Share options and restricted stock 4,606,654 2,432,734
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES FOR DILUTED EARNINGS PER SHARE 232,377,771 225,121,931
EARNINGS PER SHARE (in €)    
Basic 0.08 0.10
Diluted 0.08 0.10
ADJUSTED EARNINGS PER SHARE (in €)1    
Basic 0.21 0.27
Diluted 0.21 0.27
 
1. Adjusted earnings per share is not an IFRS performance measure and hence is not comparable across companies.




Accounting policy

Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all potential dilutive ordinary shares arising from stock options and other equity-settled share-based plans.

For the stock options, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the company's shares), based on the monetary value of the subscription rights attached to outstanding share options.

The number of shares calculated as above is compared with the number of shares that would have been issued, assuming the exercise of the stock options. When the effect of the options and other equity-settled share-based plans is anti-dilutive, the number is excluded from the calculation of diluted earnings.

Adjusted earnings per share

Adjusted earnings per share is calculated by dividing the adjusted earnings by the weighted average number of ordinary and diluted shares outstanding during the year.

6.5.2.1

6.5.326. Non-controlling interests (minority interests)

6.5.3.1

The following table presents the interest held by third parties in the group's consolidated subsidiaries:

Table_52 Minority interests subsidiaries and interest %

 
 
Subsidiary Country % of non controling interest
    31 Dec 2015 31 Dec 2014
TomTom Africa (Pty) Ltd. South Africa 24% 24%
TomTom Navigation Taiwan Co., Ltd. Rep. of China 30% 30%
TomTom Telematics Chile SpA1 Chile 0% 20%
TomTom Telematics Solutions Mexico S.A. de C.V. Mexico 30% 30%
 
1. The group acquired the remaining 20% interest in TomTom Telematics Chile SpA in 2015.

6.5.3.2

The movements in non-controlling interest is presented below:

Table_53 Minority interests

 
 
(€ in thousands) 2015 2014
BALANCE AS AT 1 JANUARY 2,073 2,115
Non-controlling interests in the net result of subsidiaries 171 106
Dividends paid 0 -177
Change in share of non-controlling interests -5 0
Currency translation differences -516 29
BALANCE AS AT 31 DECEMBER 1,723 2,073
 

The main part of the balance of the non-controlling interest relates to TomTom Africa (Pty) Ltd. There are no material cash balances or assets held by any of the abovementioned subsidiaries.

6.5.427. Borrowings

Table_54 Borrowings

 
 
(€ in thousands) 2015 2014
Non-current 44,254 48,925
Current 4,287 0
TOTAL 48,541 48,925
 

On 22 December 2014, the group signed a credit facility agreement (the 'facility'), replacing the previous facility agreement. The initial agreement which was effective up to 31 March 2018, has been extended by one additional year to 31 March 2019 and includes another one-year extension option. The facility comprises of a revolving credit facility for an amount of €250 million, of which €45 million was drawn at the end of December 2015. Netted with the transaction costs of €0.7 million, the carrying amount of the group's outstanding borrowings at 31 December 2015 was €44.3 million (31 December 2014: €48.9 million). The interest is in line with market conditions and is based on Euribor plus a margin that depends on certain leverage covenants. The average interest paid on borrowings in 2015 was 0.7% (2014: 1.3%).

At the end of December 2015, the acquisition of Finder added an additional €4.3 million of borrowings to our balance sheet which has been fully repaid in January 2016. The outstanding borrowings from the credit facility are presented as a non-current liability as management expects to maintain approximately similar level of utilisation in the coming twelve months. As the contractual interest rate on the credit facility is based on market interest rates plus a certain margin, the fair value of the borrowings at the end of 2015 and 2014 is estimated to approximate their carrying value.


Accounting policy

Borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequently, amounts are stated at amortised cost with the difference being recognised in the income statement over the period of the borrowings using the effective interest rate method.

6.5.528. Financial risk management

6.5.5.1

Financial risk factors 

The group's activities result in exposure to a variety of financial risks including credit, foreign currencies, liquidity and loan covenants interest rates and capital risk. Management policies have been established to identify, analyse and monitor these risks, and to set appropriate risk limits and controls. Financial risk management is carried out in accordance with our Corporate Treasury Policy. The written principles and policies are reviewed periodically to reflect changes in market conditions, the activities of the business and laws and regulations affecting the group's business.

Credit

Credit risk arises primarily from cash and cash equivalents held at financial institutions and, to a certain extent, from trade receivables.

Cash balances are held with counterparties that have a credit risk rating of at least BBB-, as rated by an acknowledged rating agency. Moreover, to avoid significant concentration of exposure to particular financial institutions, we ensure that transactions and businesses are properly spread among different counter-parties.

The group's exposure from its customers is managed through establishing proper credit limits and continuous credit risk assessments for each individual customer.

Procedures include aligning credit and trading terms and conditions with an assessment of the individual characteristics and risk profile of each customer. This assessment is made based on past experiences and independent ratings from external rating agencies whenever available.

As at 31 December 2015, total bad debt provision represented approximately 0.4% of group revenue (2014: 0.4%).

Foreign currencies

The group operates internationally and conducts business in multiple currencies. Revenues are earned in euro, pound sterling (GBP), the US dollar (USD) and other currencies, and do not necessarily match cost of sales and other costs which are largely in euro and the US dollar and to a certain extent in other currencies. Foreign currency exposures on commercial transactions relate mainly to estimated purchases and sales transactions that are denominated in currencies other than reporting currency - the euro (€).

The group manages foreign currency transaction risk through options and forward contracts to cover forecasted net exposures. All such transactions are carried out within the guidelines set by Corporate Treasury Policy, which is reviewed annually by the Audit Committee.

A 2.5% strengthening/weakening of the euro as at 31 December 2015 against the currencies listed below would have increased (decreased) profit or loss by the amount shown below. This analysis assumes that all other variables remain constant. The analysis was performed on the same basis as in 2014.

Table_55 FX sensitivity

 
 
(€) 2015 2014
  Strengthen Weaken Strengthen Weaken
GBP 258,353 -245,823 248,885 -236,708
USD -1,372,337 1,305,573 -823,283 783,392
 

A 2.5% strengthening/weakening of the euro as at 31 December 2015 against GBP and USD would have increased / decreased the equity by €6.8 million  (2014: increase / decrease of equity by €6.7 million).

Liquidity and loan covenants

The approach to managing liquidity is to ensure that sufficient funds are available to meet financial obligations when they fall due under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the group's reputation. To ensure there is sufficient cash to meet expected operational expenses, including the servicing of financial obligations, actual and future cash flow requirements are regularly monitored, taking into account the maturity profiles of financial assets and liabilities and the rolling forecast of the group's liquidity reserve, which comprises cash and cash equivalents and an undrawn credit facility of €205 million. 

Under the covenants of the facility, the group is required to meet certain performance indicators with regard to its interest cover (4.0) and leverage ratio (3.0), which are tested twice a year. Interest cover is defined as the ratio of the last twelve months (LTM) EBITDA to LTM interest expense for the relevant test period. The leverage ratio is defined as the ratio of total consolidated net debt as at the testing date to the consolidated LTM EBITDA in respect of the relevant period ending on that date. In case of a breach of these covenants, the banks are contractually entitled to request early repayment of the outstanding amount.

On 31 December 2015, the group complied with the loan covenants and, based on the group's plan for 2016, management expects to be able to comply with the loan covenants during 2016.

The outstanding borrowings of €45 million from the credit facility has a one-month maturity period from the date of draw down but can continuously be rolled-over up to the end date of the facility agreement at management's discretion. Assuming the amount utilised remains the same until the end of the agreement and the level of market interest as well as the required performance indicators remain constant based on the situation as at 31 December 2015, the expected annual interest payments up to 31 March 2018 would be €0.3 million. The current portion of our borrowings relating to our Polish subsidiary has been repaid in January 2016.

Interest rates

Interest rate risk arises primarily from the existing borrowings. These borrowings have a floating interest coupon based on Euribor plus a spread that depends on leverage levels. Interest rate risk is hedged with appropriate hedging instruments whenever deemed necessary in accordance with the Corporate Treasury Policy.

Based on the expectation of interest rate movements in the coming period and the acceptability of potential exposure, the current policy is not to hedge the interest rate of our borrowings. Accordingly, changes in Euribor may have an impact on the group's results for the coming year.

Market-related interest income is received on the cash balances. Our intention is to prioritise capital preservation and when possible we invest our surplus cash using approved investment instruments, such as bank deposits and money market fund investments. All transactions and counterparty risk limits are governed by Corporate Treasury Policy. 

Capital risK

The group's financing policy aims to maintain a capital structure that enables the group to achieve its strategic objectives and daily operational needs, and to safeguard the group's ability to continue as a going concern.

In order to maintain or adjust the capital structure, the group may issue new shares, adjust its dividend policy, return capital to shareholders or sell assets to reduce debt, taking into account relevant interest cover and leverage covenants of external borrowings as disclosed above.

As at 31 December 2015, the group had a net cash position of €98.3 million (31 December 2014: €103.0 million). 

Further quantitative disclosures reference is made to Note 21, Note 24 and Note 27.

6.5.629. Financial instruments

The following table presents the group's financial instruments according to the categories as defined in IAS 39:

Table_57 Financial instruments

 
 
(€ in thousands) Loans and receivables Assets/liabilities at fair value through profit or loss Other financial assets/liabilities at amortised cost Total
AS AT 31 DECEMBER 2015        
ASSETS        
Other financial assets 0 967 0 967
Trade receivables 138,593 0 0 138,593
Cash and cash equivalents 147,565 0 0 147,565
TOTAL 286,158 967 0 287,125
LIABILITIES        
Trade payables 0 0 94,951 94,951
Other financial liabilities 0 573 0 573
Borrowings 0 0 48,541 48,541
TOTAL 0 573 143,492 144,065
AS AT 31 DECEMBER 2014        
ASSETS        
Other financial assets 0 1,186 0 1,186
Trade receivables 133,266 0 0 133,266
Cash and cash equivalents 152,949 0 0 152,949
TOTAL 286,215 1,186 0 287,401
LIABILITIES        
Trade payables 0 0 88,218 88,218
Other financial liabilities 0 23 0 23
Borrowings 0 0 48,925 48,925
TOTAL 0 23 137,143 137,166
 


Accounting policy

Financial assets

The group classifies its financial assets in the following categories: at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Financial assets at fair value through profit or loss

Derivatives are categorised at fair value through profit or loss unless they are designated as hedges. Derivatives are recorded as financial assets when their fair value is a positive number; otherwise the derivative is classified as a financial liability. All derivative financial instruments are classified as current or non-current assets or liabilities based on their maturity dates and are accounted for at trade date.


Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the group has substantially transferred all risks and rewards of ownership.


Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than twelve months after the balance sheet date, which are classified as non-current assets. Loans and receivables are initially recognised at fair value and subsequently measured at amortised cost (if the effect of time value is material) using the effective interest method, less any impairment. The group's financial assets classified in the category 'Loans and receivables' comprise 'Trade receivables' and 'Cash and cash equivalents' in the balance sheet (note 18. Trade receivables and note 21. Cash and cash equivalents).

Financial liabilities and equity instruments

Financial liabilities and equity instruments issued by the group are classified according to the substance of the contractual arrangements entered into, and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.

Equity instruments are recorded at the proceeds received, net of direct issue costs.



Fair value estimation

The group classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy divides the inputs into the following levels:
• Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities;
• Level 2: inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly (for example, derived from prices); and
• Level 3: inputs for the asset or liability that are not based on observable market data.

The fair value of financial assets/liabilities carried at fair value through profit or loss and the derivatives in a hedging relationship is determined using valuation techniques that maximise the use of observable market data where it is available and which rely as little as possible on entity-specific estimates. In accordance with the fair value hierarchy established by IFRS 13, these types of inputs classify as level 2 inputs.

6.5.730. Financial income and expenses

Financial income and expenses include the following items:

Table_58 Financial income and expenses

 
 
(€ in thousands) 2015 2014
Interest income 462 1,161
Interest expense -1,387 -4,306
INTEREST RESULT -925 -3,145
     
Other financial result 44 124
Foreign exchange result -7,387 -3,844
OTHER FINANCIAL RESULT -7,343 -3,720
 

The interest expense relates mainly to interest paid on borrowings and amortised transaction costs (see note 27. Borrowings).

The foreign exchange result includes results related to hedging contracts and balance sheet item revaluations. Hedging contracts are entered into to protect the group from adverse exchange rate fluctuations that may result from USD and GBP exposures.


Accounting policy

Interest income and expense are recognised using the effective interest method.

6.6Section 6: Other disclosures

This section includes the notes on provisions, commitments and contingent liabilities, remunerations of Members of the Management Board and the Supervisory Board, related party transactions and Auditor's remuneration.

6.6.131. Provisions

Table_59 Provisions

 
 
(€ in thousands) 2015 2014
Non-current 35,065 48,496
Current 32,573 34,074
TOTAL 67,638 82,570
 

The movements in each category of provisions are as follows:

Table_60 Movements of provisions

 
 
(€ in thousands) Warranty Claims & litigations Other Total
BALANCE AS AT 31 DECEMBER 2013 32,573 33,604 13,655 79,832
Increases in provisions 20,188 13,086 6,913 40,187
Utilised -20,266 -1,721 -2,418 -24,405
Released 206 -12,9981 -252 -13,044
BALANCE AS AT 31 DECEMBER 2014 32,701 31,971 17,898 82,570
Increases in provisions 10,667 1,989 3,420 16,076
Utilised -13,678 -335 -4,637 -18,650
Released -2,305 -8,5981 -1,455 -12,358
BALANCE AS AT 31 DECEMBER 2015 27,385 25,027 15,226 67,638
 
1. The releases were made to reflect the latest facts and circumstances and changes in estimates.


Accounting policy

Provisions are recognised when:
• The group has a present obligation as a result of a past event;
• It is probable that the group will be required to settle that obligation; and
• The amount can be reliably estimated.

Provisions are measured at management's best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. 

Provisions for warranty costs are recognised at the date of sale of the relevant products, at management's best estimate of the expenditure required to settle the group's obligation. Warranty costs are recorded within cost of sales.




SIGNIFICANT ESTIMATES

WARRANTY PROVISON

The group generally offers warranties for its products. Management estimates the related provision for future warranty claims based on historical warranty claim information, as well as evaluating recent trends that might suggest that past cost information may differ from future claims. From the total warranty provision of €27.4 million (2014 €32.7 million), it is estimated that an amount of €16.4 million (2014 €20.1 million) will be utilised within 12 months while the remaining will be utilised between 1-3 years.


CLAIMS AND LITIGATION

The group made a provision for potential legal, tax and other risks in various jurisdictions. The legal matters consist mainly of intellectual property infringement issues. In the normal course of business, the group receives claims relating to allegations that it has infringed intellectual property assets. In such cases, the companies making the claims seek payments that may take the form of licenses and/or damages. While these claims will be resisted, some are likely to be settled by negotiation and others are expected to result in litigation. 

The cases and claims against the group often raise difficult and complex factual and legal issues which are subject to many uncertainties and complexities, including but not limited to the facts and circumstances of each particular case and claim, the jurisdiction in which each suit is brought, and the differences in applicable law. In the normal course of business, management consults with legal counsel and certain other experts on matters related to such claims and litigation. The group accrues a liability when it is determined that an adverse outcome is more likely than not, and the amount of the loss can be reasonably estimated. If the likelihood of an adverse outcome is reasonably possible or an estimate is not determinable, the matter is disclosed, provided it is material. Management is of the opinion that the provision is adequate to resolve these claims.

The methodology used to determine the amount of the liability requires significant judgements and estimates regarding the costs of settling asserted claims. Due to the fact that there is limited historical data available, the estimated liability cannot be based upon recent settlement experience for similar types of claims.

Based on the best estimate, the portion of the claims and litigation provision expected to be settled in the coming twelve months amounts to approximately €12.3 million (2014 €9.7 million).

OTHER PROVISIONS

Other provisions include an amount of €8.7 million (2014: €8.4 million) related to the defined benefit pension plan in Germany as disclosed in note 6. Personnel expenses, and the remainder relates mainly to provisions for expected earn-out payments. The amount of 'Other provisions' estimated to be settled/utilised within the coming twelve months amounted to €3.8 million (2014: €4.2 million).

6.6.232. Commitments, contingent assets and liabilities

The group has a number of long-term financial commitments, which are not shown in the group's balance sheet as at 31 December 2015.

Operating leases

These are operating leases for buildings, cars and office equipment, which consist of:

Table_61 Operating leases

 
 
(€ in thousands) 2015 2014
Commitments less than 1 year 17,306 15,298
Commitments between 1 - 5 years 30,659 34,380
Commitments longer than 5 years 1,034 974
TOTAL 48,999 50,652
 

No discount factor is used in determining the operating lease commitments.

Purchase commitments

As at 31 December 2015, the group had open purchase commitments with contract manufacturers for certain products and components. Contract manufacturers order the requisite component parts from their suppliers on the basis of forecasts of the number of units required. Manufacturers have commitments on these components. In certain circumstances, the group has a contractual obligation to purchase these components from the manufacturers.

Other commitments

The group has contracts with third-party suppliers or other business partners that include minimum royalty or revenue share payments over the duration of the contracts that range from 1 to 5 years. The total commitments under these contracts are presented below.

Table_62 Royalty payments

 
 
(€ in thousands) 2015 2014
Commitments less than 1 year 25,699 9,541
Commitments between 1 - 5 years 14,679 9,430
TOTAL1 40,378 18,971
 
1. Other commitments in 2015 include a commitment to purchase services with a total value of €26 million from our associate, Cyient Ltd.

The group has issued bank guarantees for a total amount of €14 million.

The group has also given a guarantee as described in section 479C of the UK Companies Act to TomTom Software Ltd. Accordingly, TomTom Software Ltd. is exempted from the requirements of the Companies Act 2006 relating to audit by virtue of section 479A.

In addition, a German subsidiary, TomTom Germany GmbH & Co. KG., which is included in these consolidated financial statements, applies the exemption as described in section 264b of the German Commercial Code (HGB) with regard to the publication of the annual financial statements and the drawing up of a management report and the notes to the financial statements.

Contingencies

Please refer to Note 31. for disclosures on tax and legal contingencies.

In 2014, we won an arbitration award in which the Tribunal ruled that one of our suppliers must repay royalties paid by TomTom in prior periods. In 2015, our supplier initiated legal action to annul the arbitration award which is still before the Courts. While we believe it is more likely than not that the arbitration award will be upheld by the Courts, we cannot be certain of such an outcome, and a final judgement in this matter, including the quantum and timing of any final judicial award, remains uncertain. Consequently, we have not recognised the asset, and given that further disclosure could seriously prejudice our position, we apply the exception under IAS 37.92 and do not disclose further information.

Based on legal advice, there were no other contingencies that management expects to have a material adverse effect on the group's financial position as at 31 December 2015.

6.6.333. Remunerations of members of the Management Board and the Supervisory Board

The Remuneration Policy

The Remuneration Policy for members of the Management Board is drawn up by the Supervisory Board and approved by the General Meeting.

The on-target bonus percentage is set at 80% of the base salary for the CEO and at 64% of the base salary for the other members of the Management Board. The maximum annual incentive achievable is 120% of the annual base salary for the CEO and 96% of the annual base salary for the other members of the Management Board. The actual bonus pay-out depends on certain challenging financial targets (revenue and EBIT). The total remuneration paid/payable to or on behalf of the members of the Management Board for the year ended 31 December 2015, amounted to approximately €1.6 million (2014: €2.3 million), of which 13% represented bonus payments (2014: 38%). In 2015, the bonus achievement was 31% of the on-target bonus percentage (2014: 101%).

In accordance with the Code, the remuneration of Supervisory Board members does not depend on the results of the company. The company does not grant either stock options or shares to its Supervisory Board members and the company does not provide loans to them.

Overview of salaries, performance-related bonuses and other emoluments of the Management Board

The remuneration of the Management Board members comprises of the direct remuneration paid or payable in relation to their employment in the year and other remuneration related expenses that comprise social security contributions and share-based awards. The expenses/ (gains) recognised for share-based awards are determined in accordance with IFRS 2 and do not represent the amounts paid or payable to Management Board members. The expenses for the direct remuneration and other remuneration-related expenses are presented below:

Direct remuneration:

Table_63 Overview of salaries, performance related bonuses and other emoluments

 
 
(in €) Short-term benefits    
  Salary Bonus Other emoluments Post-employment benefits Total Direct remuneration
2015          
Harold Goddijn 462,150 114,613 0 0 576,763
Taco Titulaer1 137,500 27,280 0 11,458 176,238
Alain De Taeye 385,125 76,409 21,000 77,025 559,559
Marina Wyatt2 239,633 0 33,536 32,687 305,856
TOTAL 1,224,408 218,302 54,536 121,170 1,618,416
2014          
Harold Goddijn 450,000 363,600 0 0 813,600
Marina Wyatt 400,000 258,560 53,716 78,087 790,363
Alain De Taeye 375,000 242,400 21,000 37,500 675,900
TOTAL 1,225,000 864,560 74,716 115,587 2,279,863
 

Other remuneration:

Table_64 Other MB remuneration related expenses

 
 
(in €) Share-based expenses3 Other short-term expenses Total including Other and Direct remuneration
2015      
Harold Goddijn 472,363 8,280 1,057,406
Taco Titulaer1 37,696 3,450 217,384
Alain De Taeye 293,264 8,280 861,103
Marina Wyatt2 -370,954 360,303 295,205
TOTAL 432,369 380,313 2,431,098
2014      
Harold Goddijn 236,486 8,381 1,058,467
Marina Wyatt 167,218 26,439 984,020
Alain De Taeye 164,765 8,381 849,046
TOTAL 568,469 43,201 2,891,533
 
1. Taco Titulaer was appointed CFO effective from 1 August 2015, although he was only appointed as member of the Management Board as of 8 October 2015. His remuneration is shown as of the date he was appointed CFO.
2. Marina Wyatt stepped down at the end of July 2015.
3. The gain in the share-based expenses in 2015 for Marina Wyatt results from the forfeiture of the 2013, 2014 and 2015 share options. Following this forfeiture the costs incurred in previous periods have been reversed.

The share-based awards scheme is set out in the Management Board Stock Option Plan and is most recently amended in the 2014 General Meeting. In May 2015, each of the Management Board members were granted new stock options under this plan except for Taco Titulaer who was granted regular employee stock options in 2015.

The following tables summarise information about outstanding stock options of each member of the Management Board, as well as the movements during the year.

Table_65 Outstanding stock options MB

 
 
Board member Year of grant Outstanding 1 Jan 2015 Granted in 2015 Exercises in 2015 Transfer in 2015 Forfeited in 2015 Outstanding 31 Dec 20151 Exercise price (€) Expiry date
Harold Goddijn 2009 181,500         181,500 5.71 16/6/2016
  2010 150,000         150,000 5.32 12/5/2017
  2012 113,750         113,750 3.51 9/5/2019
  2013 155,000         155,000 3.53 8/5/2020
  2014 300,000         300,000 5.28 13/5/2021
  2015   210,000       210,000 7.83 7/5/2022
Marina Wyatt2 2009 181,500   -181,500     - 5.71 16/6/2016
  2010 150,000   -150,000     - 5.32 12/5/2017
  2012 113,750   -113,750     - 3.51 9/5/2019
  2013 155,000       -155,000 - 3.53 8/5/2020
  2014 160,000       -160,000 - 5.28 13/5/2021
  2015   115,000     -115,000 - 7.83 7/5/2022
Taco Titulaer 2013       50,000   50,000 3.53 8/5/2020
  2014       34,600   34,600 5.28 13/5/2021
  2015       39,200   39,200 7.83 7/5/2022
Alain De Taeye 2009 181,500         181,500 5.71 16/6/2016
  2010 150,000         150,000 5.32 12/5/2017
  2012 113,750         113,750 3.51 9/5/2019
  2013 155,000         155,000 3.36 8/5/2020
  2014 150,000         150,000 4.93 13/5/2021
  2015   110,000       110,000 7.83 7/5/2022
TOTAL   2,410,750 435,000 -445,250 123,800 -430,000 2,094,300    
 
1. The preformance criteria for the options in 2013 have been met. The 2014 and 2015 options have no performance criteria. The options will vest three years after the grant date conditional to the Management Board members still being in service.
2. Marina Wyatt stepped down at the end of July 2015 and Taco Titulaer was appointed as CFO effective from 1 August 2015. Disclosures are provided in line with the mentioned dates.

For a description of the stock option plans, reference is made to note 7. Share-based compensation.

Overview of remuneration of the members of the Supervisory Board

Table_66 Overview of Supervisory Board's remuneration

 
 
(€) 2015 2014
Peter Wakkie1 61,000 56,667
Doug Dunn 47,000 47,000
Guy Demuynck 51,000 51,000
Ben van der Veer 50,000 50,000
Toine van Laack2 31,333 47,000
Jacqueline Tammenoms Bakker3 48,000 32,000
Anita Elberse3 47,000 31,333
Karel Vuursteen4 0 20,333
Rob van den Bergh4 0 15,667
TOTAL 335,333 351,000
 
1. Peter Wakkie was appointed Chairman as of 1 May 2014.
2. Toine van Laack served as a member of the Supervisory Board until 1 September 2015.
3. Jacqueline Tammenoms Bakker and Anita Elberse serve as a member of the Supervisory Board from 1 May 2014.
4. Karel Vuursteen and Rob van den Bergh resigned on 1 May 2014.

6.6.434. Related party transactions

The expenses relating to remuneration of key management personnel are presented in the following table:

Table_67 Related party transactions

 
 
(€) Salary and bonus1 Other short-term benefits2 Post employment benefits Share-based expenses Total remuneration
2015          
Management board and senior management 1,890,961 538,191 121,170 684,574 3,234,896
Supervisory Board 335,333 0 0 0 335,333
           
2014          
Management board and senior management 2,588,885 222,095 115,587 727,803 3,654,370
Supervisory Board 351,000 0 0 0 351,000
 
1. In 2015, the total bonus expense amounted to €0.3 million versus €1.0 million in 2014.
2. The other short-term benefits in 2015 include the social security charge in relation to the exercise of share options. In 2014, an amount of €192 thousand is included related to crisis levy.

Certain key management personnel also hold ownership interests in TomTom NV, as disclosed in the Corporate Governance section under 'Notification of substantial shareholdings and short positions'.

In the normal course of business, the group receives map development and support services from its associate Cyient Ltd. Such transactions take place at normal market conditions and the total payments made for these services in 2015 amounted to €16.7 million (2014: €18.9 million). There was no outstanding payable due to Cyient Ltd. as at 31 December 2015 and 31 December 2014. Transactions and balances with other associates are not material and hence are not disclosed.

6.6.4.1

6.6.535. Auditor's remuneration

The total remuneration to Ernst & Young Accountants LLP for the statutory audit of 2015 for the group amounted to €360,000 (Deloitte 2014: €505,000). The total service fees paid/payable to the Ernst & Young network amounted to €591,000 (Deloitte 2014: €763,000).

Included in the total remuneration is an amount of €405,000 (Deloitte 2014: €558,000) invoiced by Ernst & Young Accountants LLP, which includes an amount of €45,000 (Deloitte 2014: €73,000) for other statutory audits. The service fees paid to the EY Network included an amount of €76,000 (Deloitte 2014: €117,000) relating to tax services and €110,000 (Deloitte 2014: €68,000) relating to statutory audits. Details of the audit, audit-related and non-audit fees paid to EY can also be found in the Audit Committee report.