Notes to the consolidated financial statements as of March 31, 2020

1. Basis for preparation

1.1 Corporate information

The Sonova Group (the “Group”) specializes in the design, development, manufacture, worldwide distribution and service of technologically advanced hearing systems for adults and children with hearing impairment. The Group operates worldwide and distributes its products in over 100 countries through its own distribution network and through independent distrib­utors. The ultimate parent company is Sonova Holding AG, a limited liability company incorporated in Switzerland. Sonova Holding AG’s registered office is located at Laubis­rütistrasse 28, 8712 Stäfa, Switzerland.

1.2 Basis of consolidated financial statements

The consolidated financial statements of the Group are based on the financial statements of the individual Group companies at March 31, which are prepared in accordance with uniform accounting policies. The consolidated financial statements were prepared under the historical cost convention except for the revaluation of certain financial assets at market value, which were prepared in accordance with International Financial Reporting Standards (IFRS), including International Accounting Standards (IAS) and Interpretations issued by the International Accounting Standards Board (IASB). The consolidated financial statements were approved by the Board of Directors of Sonova Holding AG on May 14, 2020, and are subject to approval by the Annual General Shareholders’ Meeting on June 11, 2020.

The consolidated financial statements are presented in millions of Swiss Francs (CHF) and rounded to the nearest hundred thousand. Due to rounding, numbers presented throughout this report may not add up precisely to the totals provided. All ratios and variances are calculated using the underlying amount rather than the presented rounded amounts.

The consolidated financial statements include Sonova Holding AG as well as the domestic and foreign subsidiaries over which Sonova Holding AG exercises control. A list of the significant consolidated companies is given in Note 7.6.

Accounting policies of relevance for an understanding of the consolidated financial statements are set out in the specific notes to the financial statements.

1.3 Significant accounting judgments and estimates

Preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. This includes estimates and assumptions in the ordinary course of business as well as non-operating events such as the outcome of pending legal disputes. The estimates and assumptions are continuously evaluated and are based on experience and other factors, including expectations of future events that are believed to be reasonable. Actual results may differ from these estimates and assumptions.

The main estimates and assumptions with a significant risk of resulting in a material adjustment are described in the following notes:

Description

 

Further information

Allocation of the transaction price to performance obligations

 

Note 2.3: Revenue

Renewal options in leases

 

Note 3.4: Leases

Capitalization of development costs

 

Note 3.5: Intangible assets

Impairment test

 

Note 3.5: Intangible assets

Provisions for warranty, returns and product liabilities

 

Note 3.7: Provisions

Deferred tax assets

 

Note 5.1: Taxes

Business combinations

 

Note 6.1: Acquisitions/disposals of subsidiaries

Defined benefit plans

 

Note 7.3: Employee benefits

The current economic crisis and uncertainties resulting from the COVID-19 pandemic required management to make estimates and assumptions that significantly affected the financial statements for the financial year 2019/20. In particular, it affected cash flow projections in the goodwill impairment testing (described in Note 3.5) and allowances on receivables (described in Note 3.1 and Note 4.7). Furthermore, it also led to a suspension of the Group’s share buyback program (described in Note 4.6) and additional financing requirements (described in Note 4.5 and Note 7.5).

1.4 Changes in accounting policies

The Group has adopted IFRS 16 “Leases” beginning April 1, 2019 as described in Note 7.8.

In addition, in 2019/20 the Group adopted the following minor amendments to existing standards and interpretations, without having a significant impact on the Group’s result and financial position:

  • Prepayment Features with Negative Compensation – Amendments to IFRS 9
  • Long-term Interests in Associates and Joint Ventures – Amendments to IAS 28
  • Annual Improvements to IFRS Standards 2015 – 2017 Cycle
  • Plan Amendment, Curtailment or Settlement – Amendments to IAS 19
  • Interpretation 23 Uncertainty over Income Tax Treatments

The Group has assessed the expected impacts of the various new and revised standards and interpretations that will be effective for the financial year starting April 1, 2020 and beyond. These standards are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.

2. Operating result

2.1 Income statement reconciliation

The Group presents the “Consolidated income statement” based on a classification of costs by function and is continuously amending its business portfolio with acquisitions, resulting in acquisition-related intangibles (see section “Intangible assets” in Note 3.5) and related amortization charges. To calculate EBITA1), which is the key profit metric for internal (refer to Note 2.2) as well as external purposes, acquisition-related amortization is separated from the individual functions as disclosed below.

April 1 to March 31, CHF million

 

2019/20

 

 

Income statement as reported

 

Acquis. related amortization

 

Income statement EBITA separation

Sales

 

2,916.9

 

 

 

2,916.9

Cost of sales

 

(833.3)

 

 

 

(833.3)

Gross profit

 

2,083.6

 

 

 

2,083.6

Research and development

 

(167.0)

 

0.9

 

(166.1)

Sales and marketing

 

(1,074.3)

 

43.5

 

(1,030.8)

General and administration

 

(309.0)

 

 

 

(309.0)

Other income/(expenses), net

 

(23.4)

 

 

 

(23.4)

Operating profit before acquisition-related amortization (EBITA) 1)

 

 

 

 

 

554.3

Acquisition-related amortization

 

 

 

(44.4)

 

(44.4)

Operating profit (EBIT) 2)

 

510.0

 

 

 

510.0

April 1 to March 31, CHF million

 

2018/19

 

 

Income statement as reported

 

Acquis. related amortization

 

Income statement EBITA separation

Sales

 

2,763.2

 

 

 

2,763.2

Cost of sales

 

(797.0)

 

 

 

(797.0)

Gross profit

 

1,966.2

 

 

 

1,966.2

Research and development

 

(149.4)

 

1.0

 

(148.4)

Sales and marketing

 

(1,015.7)

 

45.4

 

(970.3)

General and administration

 

(269.3)

 

 

 

(269.3)

Other income/(expenses), net

 

4.4

 

 

 

4.4

Operating profit before acquisition-related amortization (EBITA) 1)

 

 

 

 

 

582.5

Acquisition-related amortization

 

 

 

(46.3)

 

(46.3)

Operating profit (EBIT) 2)

 

536.2

 

 

 

536.2

1) Earnings before financial result, share of profit/(loss) in associates/joint ventures, taxes and acquisition-related amortization (EBITA).

2) Earnings before financial result, share of profit/(loss) in associates/joint ventures and taxes (EBIT).

2.2 Segment information

Information by business segments

The Group is active in the two business segments, hearing instruments and cochlear implants, which are reported separately to the Group’s chief operating decision maker (Chief Executive Officer). The financial information that is provided to the Group’s chief operating decision maker, which is used to allocate resources and to assess the performance, is primarily based on the sales analysis as well as the consolidated income statements and other key financial metrics for the two segments. The Group uses EBITA as key metric to measure profit or loss for both segments (refer to Note 2.1). Transactions between segments are based on market terms.

Hearing instruments:

This operating segment includes the activities of the design, development, manufacture, distribution and service of hearing instruments and related products. Research and development is centralized in Switzerland while some supporting activities are also performed in Canada, Sweden and Germany. Production of hearing instruments is concentrated in three production centers located in Switzerland, China, and Vietnam. Technologically advanced production processes are performed in Switzerland, whereas standard assembly of products is conducted in Asia. Most of the marketing activities are steered by the brand marketing departments in Switzerland, Canada, the United States, Germany and Sweden. The execution of marketing campaigns lies with the sales organizations in each market. Product distribution is done through sales organizations in the individual markets. The distribution channels of the Group vary in the individual markets depending on the sales strategy and the characteristics of the countries. The distribution channels can be split broadly into a retail business where Sonova operates its own store network and sells directly to end consumers and a hearing instruments business, reflecting the wholesale sales to independent audiologists, 3rd party retail chains, multinational and government customers.

Cochlear implants:

This operating segment includes the activities of the design, development, manufacture, distribution and service of hearing implants and related products. The segment consists of Advanced Bionics and the related sales organizations. Research and development as well as marketing activities of Advanced Bionics are centralized predominantly in the United States and Switzerland while production resides in the United States. The distribution of products is effected through sales organizations in the individual markets.

CHF million

 

2019/20

 

2018/19

 

2019/20

 

2018/19

 

2019/20

 

2018/19

 

2019/20

 

2018/19

 

 

Hearing Instruments

 

 

 

Cochlear Implants

 

 

 

Corporate/ Eliminations

 

 

 

Total

 

 

Segment sales

 

2,700.7

 

2,527.2

 

233.5

 

241.1

 

 

 

 

 

2,934.1

 

2,768.3

Intersegment sales

 

(14.5)

 

(2.4)

 

(2.7)

 

(2.7)

 

 

 

 

 

(17.2)

 

(5.0)

Sales

 

2,686.2

 

2,524.8

 

230.7

 

238.4

 

 

 

 

 

2,916.9

 

2,763.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of revenue recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At point in time

 

2,530.0

 

2,361.1

 

222.3

 

230.6

 

 

 

 

 

2,752.4

 

2,591.8

Over time

 

156.2

 

163.7

 

8.4

 

7.8

 

 

 

 

 

164.5

 

171.5

Total sales

 

2,686.2

 

2,524.8

 

230.7

 

238.4

 

 

 

 

 

2,916.9

 

2,763.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit before acquisition-related amortization (EBITA)

 

601.6

 

563.1

 

(46.2)

 

19.7

 

(1.1)

 

(0.2)

 

554.3

 

582.5

Depreciation, amortization and impairment

 

(171.5)

 

(107.2)

 

(28.6)

 

(20.4)

 

 

 

 

 

(200.1)

 

(127.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets

 

4,018.3

 

3,921.0

 

613.0

 

632.3

 

(810.5)

 

(792.6)

 

3,820.9

 

3,760.7

Unallocated assets 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

665.6

 

531.8

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

 

4,486.5

 

4,292.5

1) Unallocated assets include cash and cash equivalents, other current financial assets (excluding loans), investments in associates/joint ventures and deferred tax assets.

Reconciliation of reportable segment profit CHF million

 

2019/20

 

2018/19

EBITA

 

554.3

 

582.5

Acquisition-related amortization

 

(44.4)

 

(46.3)

Financial costs, net

 

(10.0)

 

(8.7)

Share of gain in associates/joint ventures, net

 

2.4

 

2.1

Income before taxes

 

502.4

 

529.6

Entity-wide disclosures

Sales by business CHF million

 

2019/20

 

2018/19

Hearing Instruments business

 

1,613.0

 

1,474.7

Audiological Care business

 

1,073.2

 

1,050.1

Total Hearing Instruments segment

 

2,686.2

 

2,524.8

Cochlear Implant systems

 

163.9

 

178.9

Upgrades and accessories

 

66.8

 

59.5

Total Cochlear Implants segment

 

230.7

 

238.4

Total sales

 

2,916.9

 

2,763.2

Sales and selected non-current assets by regions CHF million

 

2019/20

 

2018/19

 

2019/20

 

2018/19

Country/region

 

Sales 1)

 

 

 

Selected non-current assets 2)

 

 

Switzerland

 

29.5

 

31.5

 

283.8

 

274.1

EMEA (excl. Switzerland)

 

1,514.9

 

1,489.5

 

1,755.1

 

1,585.7

USA

 

877.6

 

746.7

 

706.7

 

674.3

Americas (excl. USA)

 

220.9

 

228.5

 

167.0

 

150.4

Asia/Pacific

 

274.0

 

267.0

 

118.4

 

116.5

Total Group

 

2,916.9

 

2,763.2

 

3,031.1

 

2,800.9

1) Sales based on location of customers.

2) Total of property, plant & equipment, right-of-use assets, intangible assets and investments in associates/joint ventures.

As common in this industry, the Sonova Group has a large number of customers. There is no single customer who accounts for more than 10% of total sales.

2.3 Revenue

The Group generates revenue primarily from the sale of hearing instruments, cochlear implants and related services. A disaggregation of revenue from contracts with customers is included in Note 2.2. The following provides information about the Groups revenue recognition policies, performance obligations and related contract assets and liabilities.

The following table summarizes the contract assets and contract liabilities related to contracts with customers:

Contract balances CHF million

 

31.3.2020

 

31.3.2019

Contract assets

 

9.3

 

9.4

Contract liabilities

 

318.4

 

332.7

Contract liabilities relate to advance consideration received from customers for the Group’s various services, such as extended warranties, loss and damage and battery plans. In addition to the contract liabilities, the Group also recognizes contract assets that relate to loss and damage services. Contract assets are presented within other operating assets (refer to Note 3.6) in the consolidated balance sheets.

Significant changes in the contract liabilities during the period are as follows:

Movement in contract liabilities CHF million

 

2019/20

 

2018/19

Balance April 1

 

332.7

 

335.0

Changes through business combinations

 

0.8

 

(0.2)

Increase due to advance consideration received in the period

 

169.5

 

175.9

Decrease due to revenue recognized in the period that,

 

 

 

 

– was included in the contract liabilities at the beginning of the period

 

(132.8)

 

(105.9)

– relates to consideration received in the period

 

(33.2)

 

(65.6)

Exchange differences

 

(18.4)

 

(6.6)

Balance March 31

 

318.4

 

332.7

 

 

 

 

 

Expectation on timing of revenue recognition:

 

 

 

 

Within 1 year

 

105.6

 

106.5

Within 2 years

 

95.7

 

120.6

Within 3 years

 

56.9

 

51.3

Within 4 years

 

26.5

 

21.0

More than 4 years

 

33.6

 

33.2

No material revenue was recognized in the current period from performance obligations satisfied in previous periods.

Accounting policies

The Group recognizes revenue at point in time when ownership of the products is transferred to the buyer, mainly upon delivery. The transaction price is adjusted for any variable elements, such as rebates and discounts. For audiological care customers, revenue recognition usually occurs after fitting of the device or when the trial period lapses. For hearing instruments sold in bundled packages (i.e. including accessories and services), the transaction price is allocated to each performance obligation on the basis of the relative stand-alone selling price of all performance obligations in the contract.

For cochlear implants, sales are generally recognized at point in time when ownership of the products is transferred to the buyer (mainly hospitals), either at delivery or after surgery.

When the customer has a right to return the product within a given period, the amount of revenue is adjusted for expected returns, which are estimated based on historical product return rates. A return provision for the expected returns is recognized as an adjustment to revenue. In addition, an asset for the right to recover returned goods is recognized, measured by reference to the carrying amount, which is presented as part of other current operating assets.

The Group also offers various services, such as extended warranties, loss and damage and battery plans. Revenue for these services is predominantly recognized on a straight-line basis over the service period. In the majority of countries in which the Group operates, the standard warranty period is two years and the extended warranty covers periods beyond the second year. Loss and damage is offered in some, but not all countries, in which the Group operates. This service assures replacement of hearing instruments that are not covered by the warranty. In some countries, the Group reinsures loss and damage. Insurance costs are capitalized as contract assets and are recognized as cost of sales over the loss and damage service period.

Payment terms vary significantly across countries and also depend on whether the customer is a private or public customer.

Accounting judgements and estimates

In order to allocate the transaction price to each performance obligation in a contract, management estimates the standalone selling price of the products and services at contract inception. Mostly, the standalone selling price is based on established price lists. For loss and damage services, management considers the likelihood of a customer claim in the calculation of the standalone selling price.

If the sum of the standalone selling prices of a bundle of goods or services exceeds the consideration in a contract, the discount is allocated proportionally to all of the performance obligations in the contract unless there is observable evidence that the discount relates to only one or some of the performance obligations.

2.4 Other income/expenses, net

“Other income/expenses, net” in the 2019/20 financial year shows net costs of CHF 23.4 million (previous year income of CHF 4.4 million). The regular and systematic assessment of the provision for product liabilities in the cochlear implants segment in relation to the voluntary recall of cochlear implant products in 2006 led to a release of CHF 0.8 million (previous year CHF 4.1 million). In addition, as announced on February 18, 2020, the group informed of a voluntary field corrective action by its US subsidiary Advanced Bionics LLC (AB). For potential product liability claims in connection with this voluntary field corrective action, a provision in the amount of CHF 24.1 million has been set up and the respective costs have been considered as “other expenses” (for further information refer to Note 3.7 “Provisions”). In the 2018/19 financial year, the divestment of audiological care stores in the USA led to a gain of CHF 0.3 million. 

2.5 Earnings per share

Basic earnings per share

 

2019/20

 

2018/19

Income after taxes (CHF million)

 

483.2

 

454.1

Weighted average number of outstanding shares

 

63,511,720

 

65,066,736

Basic earnings per share (CHF)

 

7.61

 

6.98

Diluted earnings per share

 

2019/20

 

2018/19

Income after taxes (CHF million)

 

483.2

 

454.1

Weighted average number of outstanding shares

 

63,511,720

 

65,066,736

Adjustment for dilutive share options

 

356,738

 

268,205

Adjusted weighted average number of outstanding shares

 

63,868,458

 

65,334,941

Diluted earnings per share (CHF)

 

7.57

 

6.95

Accounting policies

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

In the case of diluted earnings per share, the weighted average number of shares out­standing is adjusted assuming all outstanding dilutive options will be exercised. The weighted average number of shares is adjusted for all dilutive options issued under the stock option plans which have been granted in 2013 through to 2020 and which have not yet been exercised. Options that are out-of-the-money (compared to average share price) are not considered. The calculation of diluted earnings per share is based on the same income after taxes for the period as is used in calculating basic earnings per share.

3. Operating assets and liabilities

3.1 Trade receivables

CHF million

 

31.3.2020

 

31.3.2019

Trade receivables

 

434.0

 

559.6

Loss allowance for doubtful receivables

 

(51.9)

 

(39.0)

Total

 

382.1

 

520.6

As is common in this industry, the Sonova Group has a large number of customers. There is no significant concentration of credit risk. In the context of the COVID-19 impacts as of March 31, 2020, the allowance for doubtful receivables has been significantly increased. For further information on the process of the re-assessment of the allowance at the end of the financial year and for information about the aging of the trade receivables and related allowances please refer to Note 4.7.

During 2019/20, the Group utilized CHF 6.4 million (previous year CHF 2.2 million) of the loss allowance for doubtful receivables to write-off receivables.

The carrying amounts of trade receivables are denominated in the following currencies:

CHF million

 

31.3.2020

 

31.3.2019

BRL

 

10.9

 

18.2

CAD

 

15.8

 

22.4

CHF

 

12.5

 

20.9

EUR

 

155.5

 

203.3

GBP

 

11.1

 

22.0

USD

 

122.4

 

164.2

Other

 

53.9

 

69.8

Total trade receivables, net

 

382.1

 

520.6

Accounting policies

Trade receivables are initially recorded at original invoice amount and subsequently measured at amortized cost using the effective interest method, less loss allowance. The Group applies the IFRS 9 simplified approach to measuring credit losses, which uses a lifetime expected loss allowance for trade receivables. This approach considers historical credit loss experience as well as forward-looking factors (see Note 4.7). The charges to the income statement are included in general and administration costs. Due to the short-term nature of trade receivables, their carrying amount is considered to approximate their fair value.

3.2 Inventories

CHF million

 

31.3.2020

 

31.3.2019

Raw materials and components

 

34.6

 

49.6

Work-in-process

 

110.9

 

96.6

Finished products

 

167.1

 

172.6

Allowances

 

(47.1)

 

(36.8)

Total

 

265.4

 

282.1

The “cost of sales” corresponding to the carrying value of inventory (which excludes freight, packaging, logistics as well as certain overhead cost) amounted in 2019/20 to CHF 700.0 million (previous year CHF 666.0 million). The Group recognized write-downs of CHF 45.7 million (previous year CHF 29.4 million) on inventories in cost of sales.

Accounting policies

Purchased raw materials, components and finished goods are valued at the lower of cost or net realizable value. To evaluate cost, the standard cost method is applied, which approximates historical cost determined on a first-in first-out basis.

Manufactured finished goods and work-in-process are valued at the lower of production cost or net realizable value. Standard costs take into account normal levels of materials, supplies, labor, efficiency, and capacity utilization. Standard costs are regularly reviewed and, if necessary, revised in the light of current conditions. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion (where applicable) and selling expenses.

Allowances are established for slow moving, phase out and obsolete stock.

3.3 Property, plant and equipment

CHF million

2019/20

 

 

Land & buildings

 

Machinery & technical equipment

 

Room installations & other equipment

 

Advance payments & assets under construction

 

Total

Cost

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

199.0

 

306.0

 

357.2

 

9.8

 

872.1

Changes through business combinations

 

 

 

0.6

 

0.6

 

 

 

1.2

Additions

 

8.6

 

27.0

 

36.9

 

16.3

 

88.7

Disposals

 

(0.1)

 

(14.2)

 

(9.7)

 

 

 

(24.0)

Transfers

 

1.7

 

(8.5)

 

16.3

 

(9.6)

 

 

Exchange differences

 

(3.5)

 

(10.5)

 

(18.2)

 

(0.6)

 

(32.7)

Balance March 31

 

205.7

 

300.4

 

383.2

 

15.9

 

905.3

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

(79.2)

 

(226.1)

 

(242.0)

 

 

 

(547.2)

Additions

 

(5.8)

 

(26.3)

 

(34.1)

 

 

 

(66.2)

Disposals

 

0.1

 

13.5

 

8.5

 

 

 

22.1

Transfers

 

0.1

 

6.2

 

(6.3)

 

 

 

 

Exchange differences

 

1.5

 

7.3

 

10.2

 

 

 

18.9

Balance March 31

 

(83.3)

 

(225.4)

 

(263.7)

 

 

 

(572.4)

Net book value

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

119.8

 

79.9

 

115.3

 

9.8

 

324.9

Balance March 31

 

122.4

 

75.0

 

119.6

 

15.9

 

332.8

CHF million

2018/19

 

 

Land & buildings

 

Machinery & technical equipment

 

Room installations & other equipment

 

Advance payments & assets under construction

 

Total

Cost

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

195.5

 

294.3

 

343.8

 

10.6

 

844.2

Changes through business combinations

 

 

 

0.6

 

1.4

 

 

 

2.0

Additions

 

4.8

 

28.8

 

35.4

 

8.1

 

77.0

Disposals

 

 

 

(16.3)

 

(20.0)

 

 

 

(36.4)

Transfers

 

 

 

1.3

 

7.4

 

(8.7)

 

 

Exchange differences

 

(1.3)

 

(2.6)

 

(10.7)

 

(0.1)

 

(14.7)

Balance March 31

 

199.0

 

306.0

 

357.2

 

9.8

 

872.1

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

(74.0)

 

(220.0)

 

(234.7)

 

 

 

(528.7)

Additions

 

(5.8)

 

(25.5)

 

(31.5)

 

 

 

(62.8)

Disposals

 

 

 

15.3

 

19.3

 

 

 

34.6

Transfers

 

 

 

2.5

 

(2.5)

 

 

 

 

Exchange differences

 

0.6

 

1.6

 

7.4

 

 

 

9.7

Balance March 31

 

(79.2)

 

(226.1)

 

(242.0)

 

 

 

(547.2)

Net book value

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

121.5

 

74.3

 

109.1

 

10.6

 

315.5

Balance March 31

 

119.8

 

79.9

 

115.3

 

9.8

 

324.9

Accounting policies

Property, plant and equipment is valued at purchase or manufacturing cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the expected useful lifetime of the individual assets or asset categories. Where an asset comprises several parts with different useful lifetimes, each part of the asset is depreciated separately over its applicable useful lifetime.

The applicable useful lifetimes are 25 – 40 years for buildings and 3 – 10 years for production facilities, machinery, equipment, and vehicles. Land is not depreciated. Leasehold improvements are depreciated over the shorter of useful life or lease term.

Subsequent expenditure on an item of tangible assets is capitalized at cost only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Expenditure for repair and maintenance, which do not increase the estimated useful lifetimes of the related assets are recognized as an expense in the period in which they are incurred.

The Group assesses at each reporting date, whether there is any indication, that an asset may be impaired. If any such indication exists, the recoverable amount of the asset is estimated. If the recoverable amount is lower than carrying amount, an impairment loss is recognized.

3.4 Leases

Right-of-use assets CHF million

2019/20

 

 

Properties

 

Vehicles

 

Other assets

 

Total

Cost

 

 

 

 

 

 

 

 

Balance April 1

 

 

 

 

 

 

 

 

Effect on initial application of IFRS 16 "Leases"

 

269.3

 

7.5

 

1.3

 

278.1

Changes through business combinations

 

0.7

 

 

 

 

 

0.7

Additions

 

81.5

 

2.3

 

0.4

 

84.1

Exchange differences

 

(38.4)

 

(1.0)

 

(0.2)

 

(39.6)

Balance March 31

 

313.1

 

8.7

 

1.5

 

323.3

Accumulated depreciation

 

 

 

 

 

 

 

 

Balance April 1

 

 

 

 

 

 

 

 

Additions

 

(63.8)

 

(1.8)

 

(0.3)

 

(65.9)

Exchange differences

 

3.1

 

0.1

 

0.0

 

3.2

Balance March 31

 

(60.7)

 

(1.7)

 

(0.3)

 

(62.7)

Net book value

 

 

 

 

 

 

 

 

Balance April 1

 

 

 

 

 

 

 

 

Balance March 31

 

252.4

 

7.0

 

1.2

 

260.6

Lease liabilities CHF million

 

2019/20

Balance April 1

 

 

Effect on initial application of IFRS 16 "Leases"

 

285.0

Changes through business combinations

 

0.7

Additions

 

84.1

Interest expense

 

4.0

Payments

 

(68.3)

Exchange differences

 

(36.5)

Balance March 31

 

269.0

thereof short-term

 

61.2

thereof long-term

 

207.8

The maturity analysis of lease liabilities are disclosed in Note 4.7

Lease disclosures CHF million

 

2019/20

Expenses relating to short-term leases

 

13.4

Expenses relating to leases of low-value assets (excluding short-term leases of low-value assets)

 

0.6

Expenses relating to variable lease payments

 

0.3

The total cash outflow for leases in the financial year 2019/20 amounted to CHF 68.3 million and is included in the cash flow from financing activities. 

The Group has various lease contracts that as of March31, 2020, have not yet commenced. The future lease payments for these non-cancellable lease contracts amount to CHF 17.2 million. The future lease payments relating to variable lease payments amount to CHF 0.3 million.

Accounting policies

The group leases properties for retail stores as well as for office, laboratory, manufacturing and storage use. The leasing terms vary significantly across countries. The leases of office space typically run for a period of up to 10 years, and leases of retail stores typically for a period of 3 to 5 years. Leases of vehicles and other assets have an average lease term of 3.5 years. Some leases include an option to renew the lease for an additional period after the end of the contract term.

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and, subsequently at cost less accumulated depreciation and impairment losses and also includes adjustments for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date and are discounted using the Group’s incremental borrowing rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payment made. It is remeasured when there is a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

Accounting judgements and estimates

The Group uses judgement to determine the lease term for some lease contracts which include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term which significantly affects the amount of lease liabilities and right-of-use assets recognized. Extension options and termination options are re-assessed only when a significant event or change in circumstances occurs that is within the control of the Group and affects whether it is reasonably certain to exercise an option.

3.5 Intangible assets

CHF million

2019/20

 

 

Goodwill

 

Intangibles relating to acquisitions 1)

 

Capitalized development costs

 

Software and other intangibles

 

Total

Cost

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

2,116.7

 

636.0

 

195.5

 

91.9

 

3,040.1

Changes through business combinations

 

97.4

 

17.1

 

 

 

0.0

 

114.6

Additions

 

 

 

 

 

28.8

 

11.3

 

40.1

Disposals

 

0.0

 

(0.4)

 

 

 

(1.5)

 

(2.0)

Exchange differences

 

(113.9)

 

(37.2)

 

(0.5)

 

(1.1)

 

(152.7)

Balance March 31

 

2,100.2

 

615.5

 

223.9

 

100.5

 

3,040.1

Accumulated amortization and impairments

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

(153.4)

 

(296.8)

 

(59.2)

 

(67.5)

 

(576.9)

Additions

 

 

 

(44.4) 2)

 

(16.1)

 

(7.4)

 

(67.9)

Disposals

 

 

 

0.0

 

 

 

1.4

 

1.4

Exchange differences

 

4.6

 

18.5

 

 

 

0.6

 

23.6

Balance March 31

 

(148.8)

 

(322.7)

 

(75.3)

 

(73.0)

 

(619.8)

Net book value

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

1,963.3

 

339.1

 

136.3

 

24.4

 

2,463.2

Balance March 31

 

1,951.4

 

292.7

 

148.5

 

27.5

 

2,420.2

1) Intangibles relating to acquisitions consists of customer relationships (CHF 178.1 million), trademarks (CHF 106.8 million) and R&D in process (CHF 7.8 million).

2) Relates to research and development (CHF 0.9 million) and sales and marketing (CHF 43.5 million).

CHF million

2018/19

 

 

Goodwill

 

Intangibles relating to acquisitions 1)

 

Capitalized development costs

 

Software and other intangibles

 

Total

Cost

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

2,094.4

 

645.3

 

165.1

 

84.9

 

2,989.7

Changes through business combinations

 

55.4

 

22.3

 

0.0

 

0.1

 

77.8

Additions

 

0.0

 

0.0

 

30.4

 

10.5

 

40.9

Disposals

 

(0.3)

 

(6.5)

 

0.0

 

(3.2)

 

(10.0)

Exchange differences

 

(32.9)

 

(25.2)

 

0.1

 

(0.4)

 

(58.4)

Balance March 31

 

2,116.7

 

636.0

 

195.5

 

91.9

 

3,040.1

Accumulated amortization and impairments

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

(147.2)

 

(264.2)

 

(47.0)

 

(64.9)

 

(523.3)

Additions

 

 

 

(46.3) 2)

 

(12.3)

 

(6.2)

 

(64.8)

Disposals

 

 

 

4.3

 

0.0

 

3.1

 

7.4

Exchange differences

 

(6.1)

 

9.4

 

0.0

 

0.5

 

3.8

Balance March 31

 

(153.4)

 

(296.8)

 

(59.2)

 

(67.5)

 

(576.9)

Net book value

 

 

 

 

 

 

 

 

 

 

Balance April 1

 

1,947.2

 

381.1

 

118.1

 

20.0

 

2,466.4

Balance March 31

 

1,963.3

 

339.1

 

136.3

 

24.4

 

2,463.2

1) Intangibles relating to acquisitions consists of customer relationships (CHF 221.7 million), trademarks (CHF 115.1 million) and R&D in process (CHF 2.3 million).

2) Relates to research and development (CHF 1.0 million) and sales and marketing (CHF 45.4 million).

Based on the impairment tests performed, there was no need for the recognition of any impairment of goodwill for the 2019/20 and 2018/19 financial years.

The cash flow projections used for impairment testing, were based on the most recent business plan, and considers impacts from COVID-19 and from the voluntary field corrective action as announced on February 18, 2020. The business plan was projected over a five year period.

Hearing instruments

As of March 31, 2020, the carrying amount of the goodwill, expressed in various currencies, amounted to an equivalent of CHF 1,639.9 million (prior year CHF 1,642.4 million).

Cash flows beyond the projection period were extrapolated with a long-term growth rate of 2.1% (prior year 2.2%) that represents the projected inflation rate. For the calculation, a pre-tax weighted average discount rate of 8.3% (prior year 8.4%) was used. The Group performed a sensitivity analysis, which shows that changes to the main input parameters (increase of discount rate +1%, or long-term growth rate –1%) would not result in an impairment of goodwill.

Cochlear implants

As of March 31, 2020, the carrying amount of the goodwill, expressed in various currencies, amounted to an equivalent of CHF 311.5 million (prior year CHF 320.9 million).

Cash flows beyond the projection period were extrapolated with a long-term growth rate of 2.3% (prior year 2.4%) that represents the projected inflation rate. For the calculation, a pre-tax weighted average discount rate of 9.0% (prior year 8.7%) was used. The Group performed a sensitivity analysis, which shows that changes to the main input parameters (increase of discount rate +1%, or long-term growth rate –1%) would not result in an impairment of goodwill.

The capitalized development costs are reviewed on a regular basis. In the current financial year 2019/20, this review did not lead to any valuation adjustments. The capitalized development costs are included in the reportable segment “cochlear implants” disclosed in Note 2.2.

Accounting policies

Goodwill

Goodwill is recognized for any difference between the cost of the business combination and the net fair value of the identifiable assets, liabilities, and contingent liabilities (refer to accounting policies in Note 6.1). Goodwill is not amortized, but is assessed for impairment annually, or more frequently if events or changes in circumstances indicate that its value might be impaired. For the purpose of impairment testing, goodwill is allocated to the cash-generating unit, which is expected to benefit from the synergies of the corresponding business combination. For the Group, a meaningful goodwill allocation can only be done at the level of the segments, hearing instruments and cochlear implants. This also reflects the level that the goodwill is monitored by management. For both of the two cash-generating units, the recoverable amount is compared to the carrying amount. The carrying amount is determined based on a value-in-use calculation considering a five-year cash flow projection period and extrapolated using a terminal value for cash flows beyond the planning period. The cash flow projections are estimated on the basis of the strategic plan approved by the Board of Directors. Future cash flows are discounted with the Weighted Average Cost of Capital (WACC) including the application of the Capital Asset Pricing Model (CAPM).

Intangibles, excluding goodwill

Purchased intangible assets such as software, licenses and patents are measured at cost less accumulated amortization (applying the straight-line method) and any impairment in value. Software is amortized over a useful lifetime of 3 – 5 years. Intangibles relating to acquisitions of subsidiaries (excluding goodwill) consist generally of technology, client relationships, customer lists, and brand names, and are amortized over a period of 3 – 20 years. Other intangible assets are generally amortized over a period of 3 – 10 years. For capitalized development costs in the cochlear implants segment, amortization starts when the capitalized asset is ready for use, which is generally after receipt of approval from regulatory bodies. These assets are amortized over the estimated useful lifetime of 2 – 7 years applying the straight-line method. For in-process capitalized development costs, these capitalized costs are tested annually for impairment. Except for goodwill, the Sonova Group has no intangible assets with an indefinite useful life.

Research costs are expensed as incurred. Development costs are capitalized only if the identifiable asset is commercially and technically feasible, can be completed, its costs can be measured reliably and will generate probable future economic benefits. Group expenditures, which fulfill these criteria are limited to the development of tooling and equipment as well as costs related to the development of cochlear implants. All other development costs are expensed as incurred. In addition to the internal costs (direct personnel and other operating costs, depreciation on research and development equipment and allocated occupancy costs), total costs also include externally contracted development work. Such capitalized intangibles are recognized at cost less accumulated amortization and impairment losses.

Accounting judgements and estimates

Goodwill

The recoverable amount from cash-generating units is measured on the basis of value-in-use calculations and as such is significantly impacted by the projected cash flows, the discount rate, and the long-term growth rate, which are subject to management judgment. Actual cash flows as well as other input parameters could vary significantly from these estimates.

Capitalized development costs

The Group capitalizes costs relating to the development of cochlear implants. The capitalized development costs are reviewed on a regular basis as a matter of a standard systematic procedure. In determining the commercial as well as the technical feasibility, management judgment may be required.

3.6 Other operating assets

Other current operating assets CHF million

 

31.3.2020

 

31.3.2019

Other receivables

 

57.6

 

69.0

Prepaid expenses

 

31.5

 

32.0

Contract assets

 

2.9

 

2.9

Right to recover products

 

9.9

 

10.4

Total

 

101.9

 

114.3

 

 

 

 

 

Other non-current operating assets CHF million

 

31.3.2020

 

31.3.2019

Contract assets

 

6.4

 

6.5

Total

 

6.4

 

6.5

The largest individual items included in other receivables are recoverable value added taxes and deposits. Prepaid expenses mainly consist of advances to suppliers. Contract assets relate to reinsurance of loss and damage services and rights to recover returned goods relate to hearing instrument sales with a right of return (refer to Note 2.3).

3.7 Provisions

CHF million

2019/20

 

 

Warranty and returns

 

Reimbursement to customers

 

Product liabilities

 

Other provisions

 

Total

Balance April 1

 

111.3

 

7.7

 

100.9

 

32.2

 

252.1

Effect on initial application of IFRS 16 "Leases"

 

 

 

 

 

 

 

(6.9)

 

(6.9)

Changes through business combinations

 

 

 

 

 

 

 

1.2

 

1.2

Amounts used

 

(71.6)

 

(5.3)

 

(1.2)

 

(10.8)

 

(89.0)

Reversals

 

(3.3)

 

(1.2)

 

(0.9)

 

(1.9)

 

(7.4)

Increases

 

82.4

 

4.2

 

24.6

 

19.2

 

130.5

Present value adjustments

 

0.0

 

 

 

0.6

 

 

 

0.6

Exchange differences

 

(7.2)

 

(0.3)

 

(3.5)

 

(1.5)

 

(12.5)

Balance March 31

 

111.6

 

5.0

 

120.4

 

31.5

 

268.6

thereof short-term

 

85.6

 

5.0

 

11.1

 

23.5

 

125.2

thereof long-term

 

26.0

 

 

 

109.3

 

8.0

 

143.4

CHF million

2018/19

 

 

Warranty and returns

 

Reimbursement to customers

 

Product liabilities

 

Other provisions

 

Total

Balance April 1

 

125.6

 

9.2

 

118.4

 

31.3

 

284.5

Effect on initial application of IFRS 15

 

(19.8)

 

 

 

 

 

 

 

(19.8)

Changes through business combinations

 

 

 

0.0

 

 

 

0.8

 

0.8

Amounts used

 

(71.2)

 

(4.3)

 

(19.0)

 

(13.3)

 

(107.8)

Reversals

 

(3.2)

 

(2.3)

 

(4.1)

 

(5.0)

 

(14.5)

Increases

 

80.8

 

5.0

 

 

 

18.9

 

104.7

Present value adjustments

 

0.0

 

 

 

0.7

 

 

 

0.7

Exchange differences

 

(1.0)

 

0.1

 

4.8

 

(0.4)

 

3.5

Balance March 31

 

111.3

 

7.7

 

100.9

 

32.2

 

252.1

thereof short-term

 

87.6

 

7.7

 

15.0

 

19.0

 

129.2

thereof long-term

 

23.7

 

 

 

85.9

 

13.3

 

122.9

Warranty and returns

The provision for warranty and returns considers any costs arising from the warranty given on products sold. In general, the Group grants a 12 to 24 months warranty period for hearing instruments and related products and up to 10 years on cochlear implants. The calculation is based on turnover, past experience and projected number and cost of warranty claims and returns. In the 2018/19 financial year, the decrease in provision for warranty was due to the implementation of IFRS 15 as of April 1, 2018. Under IFRS 15, extended warranty is treated as a separate performance obligation with revenue being allocated to contract liabilities.

Reimbursement to customers

The provision for reimbursement to customers considers commitments to provide volume rebates. The provision is based on expected volumes. The large majority of the cash outflows are expected to take place within the next 12 months.

Product liabilities

The provision for product liabilities considers the expected cost for claims in relation to the voluntary recall of cochlear implant products of Advanced Bionics in 2006 and Advanced Bionics voluntary field corrective action regarding cochlear implant products, as announced on February 18, 2020.

For the claims regarding the voluntary recall of AB products in 2006, the calculation of this provision is based on past experience regarding the number and cost of current and future claims and is estimated based on a financial model. The model used to calculate the provision for the end of the 2019/20 financial year is consistent to the prior year. It covers the cost of replacement products, medical expenses, compensation for actual damages as well as legal fees. The provision is reassessed on a regular and systematic basis. Further improvements in the expected number and cost of current and future claims led to a slight reduction of CHF 0.8 million (previous year CHF 4.1 million) in “other income/(expense), net”. As per March 31, 2020 the product liability in relation to the voluntary recall amounts to CHF 96.3 million (previous year CHF 100.9 million). The timing of the cash outflows corresponding to the said provision for product liabilities is uncertain since it will largely depend on the outcome of administrative and legal proceedings. Considering periods of limitation, claims will have to be filed until 2026 in most jurisdictions. However, depending on the length of proceedings and negotiations, further years may pass until all claims are settled. We expect the main cash outflow relating to this provision to occur within the next 7 years. 

For potential claims regarding the voluntary field corrective action as announced on February 18, 2020, the calculation follows a similar financial model as applied for the voluntary recall of AB products in 2006 and is estimated based on an expected number and cost for potential future claims. It covers the cost of replacement products, medical expenses, compensation for actual damages as well as legal fees. As per March 31, 2020 the product liability in relation to the voluntary field corrective action amounts to CHF 24.1 million. The timing of the cash outflows corresponding to the said provision for product liabilities is uncertain since it will largely depend on the outcome of administrative and legal proceedings. We expect the main cash outflow relating to this provision to occur within the next 10–15 years.

Other provisions

Other provisions include provisions for specific business risks such as litigation and restructuring costs, which arise during the normal course of business. The timing of cash outflows for the other provisions is expected to take place within the next two years.

Accounting policies

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, where it is probable that an outflow of resources will be required to settle the obligation, and where a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows.

Accounting judgements and estimates

Provisions are based upon management’s best estimate, taking into consideration past experience regarding the number and cost of claims. Management believes that the provisions are adequate based upon currently available information. However, given that judgment has to be applied, the actual costs and results may differ from these estimates.

3.8 Other operating liabilities

Other short-term operating liabilities CHF million

 

31.3.2020

 

31.3.2019

Other payables

 

72.9

 

74.2

Accrued expenses

 

224.2

 

221.7

Deferred income

 

0.4

 

0.1

Total

 

297.5

 

296.0

 

 

 

 

 

Other long-term operating liabilities CHF million

 

31.3.2020

 

31.3.2019

Retirement benefit obligations

 

73.5

 

26.0

Total

 

73.5

 

26.0

Other payables include amounts to be remitted for withholding taxes, value added taxes, social security payments and employees’ income taxes deducted at source. Accrued expenses include salaries, social expenses, vacation pay, bonus and incentive compensation as well as accruals for outstanding invoices from suppliers.

The retirement benefit obligation relates to defined benefit plans. For details refer to Note 7.3.

3.9 Contingent assets and liabilities

Guarantees

At March 31, 2020 and 2019, there were no pledges given to third parties other than in relation to bank loans and mortgages.

Deposits in the amount of CHF 1.8 million (previous year CHF 5.1 million) have been pledged in relation to bank guarantees. Mortgages are secured by properties in the amount of CHF 0.1 million (previous year CHF 0.1 million). The net book value of these properties amounts to CHF 0.7 million at March 31, 2020 (previous year CHF 0.8 million). Open purchase orders as of March 31, 2020 and 2019, were related to recurring business activities.

Lawsuits and disputes

In 2007, the Alfred E. Mann Foundation for Scientific Research (AMF) initiated a lawsuit claiming patent infringement by Cochlear Ltd. on two patents. Advanced Bionics LLC had exclusively licensed the patents in question from AMF and joined AMF as a plaintiff. On November 4, 2018, a U.S. District Court reinstated a jury verdict from 2014 and awarded damages of USD 268 million. Cochlear’s appeal of the District Court judgement was dismissed in March 2020, and Cochlear has announced that it will seek an ‘en banc’ review by the Court of Appeals. Advanced Bionics expects that such review will be concluded in the first half of 2020. Advanced Bionics will be entitled to a portion of any damages awarded once the verdict is final. 

On October 4, 2018 MED-EL Elektronische Geräte GmbH and MED-EL Corporation, US, filed a complaint against Advanced Bionics LLC in the US federal court for the district of Delaware for alleged patent infringement of two MED-EL patents related to a recently launched product. Advanced Bionics believes the complaint has no merits and is vigorously defending its position and intellectual property.

On January 20, 2020, Advanced Bionics Corporation (“AB”), Delaware, received a subpoena from the Office of the Inspector General at the U.S. Department of Health and Human Services, (the “HHS-OIG”). The subpoena requests documents relating to AB’s testing of radio frequency emissions of its devices and AB’s reporting of those test results in submissions to the U.S. Food and Drug Administration from 2010 to the present. AB is cooperating fully with the HHS-OIG and the U.S. Department of Justice in connection with this subpoena and is currently unable to predict the timing or outcome of this investigation.

4. Capital structure and financial management

4.1 Cash and cash equivalents

CHF million

 

31.3.2020

 

31.3.2019

Cash on hand

 

0.9

 

1.2

Current bank accounts

 

448.5

 

312.2

Term deposits

 

0.8

 

61.4

Total

 

450.2

 

374.8

Bank accounts and term deposits are mainly denominated in CHF, EUR and USD. The assessment on the credit risk related to cash and cash equivalents is disclosed in Note 4.7.

Accounting policies

Cash and cash equivalents includes cash on hand and cash at banks, bank overdrafts, term deposits and other short-term highly liquid investments with original maturities of three months or less. The consolidated cash flow statement summarizes the movements in cash and cash equivalents.

4.2 Financial income/expenses, net

CHF million

 

2019/20

 

2018/19

Interest income

 

2.5

 

1.6

Other financial income

 

0.4

 

1.8

Total financial income

 

2.9

 

3.4

Interest expenses

 

(2.1)

 

(1.7)

Interest expenses on lease liabilities

 

(4.0)

 

 

Unwinding of the discount on provisions

 

(0.6)

 

(0.7)

Foreign exchange hedge costs

 

(3.4)

 

(6.3)

Other financial expenses

 

(2.7)

 

(3.4)

Total financial expenses

 

(12.9)

 

(12.1)

Total financial income/expenses, net

 

(10.0)

 

(8.7)

Other financial expenses in 2019/20 include, amongst other items, primarily the fair value adjustments of financial instruments.

4.3 Dividend per share

At the Annual General Shareholders’ Meeting in June 2020, the Board of Directors will propose a stock dividend. This would be met from shares bought back under the recent share buyback program, which have not yet been canceled. Each shareholder would be entitled to receive one Sonova share for 150 existing Sonova shares with fractions paid out in cash. In the financial year 2019/20 a cash dividend in the amount of CHF 2.90 was paid out. 

4.4 Other financial assets

Other current financial assets

CHF million

 

31.3.2020

 

31.3.2019

 

 

Financial assets at amortized cost

 

Financial assets at fair value through profit or loss

 

Total

 

Financial assets at amortized cost

 

Financial assets at fair value through profit or loss

 

Total

Marketable securities

 

 

 

0.2

 

0.2

 

 

 

0.0

 

0.0

Positive replacement value of forward foreign exchange contracts

 

 

 

2.3

 

2.3

 

 

 

0.3

 

0.3

Loans to third parties

 

5.3

 

 

 

5.3

 

10.6

 

 

 

10.6

Total

 

5.3

 

2.5

 

7.7

 

10.6

 

0.3

 

11.0

The Group regularly hedges its net exposure from foreign currency balance sheet positions with forward contracts. Such contracts are not qualified as cash flow hedges and are, therefore, not accounted for using hedge accounting principles. Gains and losses on these transactions are recognized directly in the income statement (refer to Note 4.7).

Other non-current financial assets

CHF million

 

31.3.2020

 

31.3.2019

 

 

Financial assets at amortized cost

 

Financial assets at fair value through profit or loss

 

Total

 

Financial assets at amortized cost

 

Financial assets at fair value through profit or loss

 

Total

Loans to associates

 

4.5

 

 

 

4.5

 

9.3

 

 

 

9.3

Loans to third parties

 

20.0

 

 

 

20.0

 

14.2

 

 

 

14.2

Rent deposits

 

3.8

 

 

 

3.8

 

3.7

 

 

 

3.7

Other non-current financial assets

 

 

 

1.7

 

1.7

 

 

 

1.8

 

1.8

Total

 

28.3

 

1.7

 

30.0

 

27.2

 

1.8

 

29.0

The loans are primarily denominated in CAD, CHF, EUR, GBP, JPY and USD. Loans to third parties consist mainly of loans to customers. As of March 31, 2020, the respective repayment periods vary between one and nine years and the interest rates vary generally between 1% and 5%. 

Other non-current financial assets mainly consist of certain minority interests in patent and software development companies specific to the hearing aid industry.

Accounting policies

Financial assets are classified into the following three categories:

  • Financial assets at amortized cost
  • Financial assets at fair value through profit or loss (FVPL)
  • Financial assets at fair value through other comprehensive income (FVOCI).

The classification depends on the business model for managing the financial assets and the contractual terms of the cash flows. For assets measured at fair value, gains and losses will be recorded either in the income statement or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI). The Group reclassifies debt investments when and only when its business model changes for managing those assets.

At initial recognition, the Group measures a financial asset at its fair value. In the case of financial assets at amortized cost and FVOCI the fair value includes transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss. Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset.

Financial assets at amortized cost

Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in the income statement.

Financial assets at fair value through profit or loss (FVPL)

Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in the income statement in the period in which it arises.

Financial assets at fair value through other comprehensive income (FVOCI) and equity instruments

The Group currently holds no financial assets at fair value through other comprehensive income (FVOCI) and no has not elected to account for equity instruments in this category.

4.5 Financial liabilities

During the 2019/20 financial year, the Group had the following bonds outstanding:

  • A three year fixed-rate bond with a nominal value of CHF 250 million (ISIN CH0340912143) issued at 100.15% with a 0.00% interest rate. The bond was repaid on October 11, 2019.
  • A five year fixed-rate bond with a nominal value of CHF 360 million (ISIN CH0340912150) issued at 100% with interest of 0.01% p.a. and maturity on October 11, 2021. Interests will be paid on an annual basis. 
  • A 10 year fixed-rate bond with a nominal value of CHF 100 million (ISIN CH0419041592) issued at 100% with a 0.00% interest rate and maturity on October 11, 2029. 
  • A 15 years fixed-rate bond with a nominal value of CHF 100 million (ISIN CH0419041600) issued at 100% with interest of 0.40% p.a. and maturity on October 11, 2034. Interests will be paid on an annual basis.

During the 2019/20 financial year, the Group entered into an agreement for a syndicated credit facility in the amount of CHF 150 million with an option to increase to CHF 250 million. The option to increase the credit facility was exercised in March 2020 and the increased credit facility will become available in May 2020. The agreement ends on June 30, 2022 with an additional option to extend until August 31, 2024. As of March 31, 2020 CHF 150 million of the credit facility was drawn.

The Group maintains further uncommitted credit facilities from various lenders. The credit facilities are denominated in CHF and can be cancelled at short notice. As of March 31, 2020 CHF 80 million were drawn with a one to three months maturity.

Furthermore, in the context of the COVID-19 impacts, in April 2020 the Group has obtained additional financing and new credit lines (refer to Note 7.5).

Current financial liabilities

CHF million

 

31.3.2020

 

31.03.2019

 

 

Financial liabilities at amortized cost

 

Financial liabilities at fair value through profit or loss

 

Financial liabilities at FVOCI

 

Total

 

Financial liabilities at amortized cost

 

Financial liabilities at fair value through profit or loss

 

Total

Bank debt

 

230.2

 

 

 

 

 

230.2

 

0.3

 

 

 

0.3

Bond

 

 

 

 

 

 

 

 

 

250.0

 

 

 

250.0

Deferred payments and contingent considerations

 

8.0

 

4.1

 

10.0

 

22.1

 

0.5

 

5.5

 

6.0

Other current financial liabilities

 

 

 

2.6

 

 

 

2.6

 

 

 

0.1

 

0.1

Total

 

238.2

 

6.7

 

10.0

 

254.9

 

250.7

 

5.6

 

256.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused borrowing facilities

 

 

 

 

 

 

 

111.0

 

 

 

 

 

36.2

Non-current financial liabilities

CHF million

 

31.3.2020

 

31.03.2019

 

 

Financial liabilities at amortized cost

 

Financial liabilities at fair value through profit or loss

 

Financial liabilities at FVOCI

 

Total

 

Financial liabilities at amortized cost

 

Financial liabilities at fair value through profit or loss

 

Total

Bank debt

 

0.0

 

 

 

 

 

0.0

 

0.0

 

 

 

0.0

Bonds

 

559.1

 

 

 

 

 

559.1

 

359.5

 

 

 

359.5

Deferred payments and contingent considerations

 

9.9

 

1.2

 

19.1

 

30.2

 

7.4

 

1.4

 

8.8

Other non-current financial liabilities

 

0.1

 

2.5

 

 

 

2.6

 

0.2

 

4.1

 

4.2

Total

 

569.1

 

3.7

 

19.1

 

591.8

 

367.1

 

5.5

 

372.6

Besides the bonds, financial liabilities mainly consist of contingent considerations (earn-out agreements) and deferred payments from acquisitions.

Other non-current financial liabilities mainly consist of amounts due in relation to the share appreciation rights (SARs) (refer to Note 7.4).

Analysis of non-current financial liabilities by currency

Analysis by currency CHF million

 

31.3.2020

 

31.3.2019

 

 

Bank debt

 

Bonds

 

Other non-current financial liabilities

 

Total

 

Bank debt

 

Bonds

 

Other non-current financial liabilities

 

Total

CHF

 

 

 

559.1

 

13.9

 

573.0

 

 

 

359.5

 

10.0

 

369.5

USD

 

 

 

 

 

0.7

 

0.7

 

 

 

 

 

0.5

 

0.5

EUR

 

 

 

 

 

15.9

 

15.9

 

 

 

 

 

0.1

 

0.1

Other

 

0.0

 

 

 

2.2

 

2.2

 

0.0

 

 

 

2.5

 

2.6

Total

 

0.0

 

559.1

 

32.7

 

591.8

 

0.0

 

359.5

 

13.1

 

372.6

Reconciliation of liabilities arising from financing activities

Liabilities from financing activities CHF million

 

 

 

 

 

 

 

 

 

 

 

2019/20

 

 

Bank debt

 

Bonds

 

Deferred payments and contingent considerations

 

Lease liabilities

 

Other financial liabilities

 

Total

Balance April 1

 

0.3

 

609.5

 

14.8

 

 

 

4.3

 

628.9

Effect on initial application of IFRS 16 "Leases"

 

 

 

 

 

 

 

285.0

 

 

 

285.0

Changes through business combinations

 

 

 

 

 

40.6

 

0.7

 

 

 

41.3

Additions to lease liabilities

 

 

 

 

 

 

 

84.1

 

 

 

84.1

Proceeds from borrowings

 

230.0

 

198.1

 

 

 

 

 

5.7

 

433.8

Repayment of borrowings

 

 

 

(249.8)

 

 

 

 

 

 

 

(249.8)

Repayment of lease liabilities – principal portion

 

 

 

 

 

 

 

(64.3)

 

 

 

(64.3)

Repayment of lease liabilities – interest portion

 

 

 

 

 

 

 

(4.0)

 

 

 

(4.0)

Exchange differences

 

 

 

 

 

(0.9)

 

(36.5)

 

 

 

(37.4)

Other

 

(0.1)

 

1.3

 

(2.1)

 

4.0

 

(4.8)

 

(1.8)

Balance March 31

 

230.2

 

559.1

 

52.3

 

269.0

 

5.2

 

1,115.8

thereof short-term

 

230.2

 

 

 

22.1

 

61.2

 

2.6

 

316.1

thereof long-term

 

0.0

 

559.1

 

30.2

 

207.8

 

2.6

 

799.7

Liabilities from financing activities CHF million

 

 

 

 

 

 

 

 

 

2018/19

 

 

Bank debt

 

Bonds

 

Deferred payments and contingent considerations

 

Other financial liabilities

 

Total

Balance April 1

 

0.1

 

759.3

 

17.2

 

4.1

 

780.7

Repayments

 

0.2

 

(150.0)

 

(1.7)

 

0.9

 

(150.6)

Exchange differences

 

(0.0)

 

 

 

0.2

 

0.0

 

0.2

Other

 

 

 

0.2

 

(0.9)

 

(0.7)

 

(1.4)

Balance March 31

 

0.3

 

609.5

 

14.8

 

4.3

 

628.9

thereof short-term

 

0.3

 

250.0

 

6.0

 

0.1

 

256.4

thereof long-term

 

0.0

 

359.5

 

8.8

 

4.2

 

372.6

Accounting policies

Financial liabilities are classified as measured at amortized cost, at fair value through profit or loss (FVPL) or at fair value through other comprehensive income (FVOCI). A financial liability is classified as at FVPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVPL are measured at fair value and net gains and losses, including any interest expense, are recognized in the income statement. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in the income statement.

Derivative financial instruments are initially recognized in the balance sheet at fair value and are remeasured as to their current fair value at the end of each subsequent reporting period.

Bonds are initially measured at fair value and direct transaction costs included. In subsequent accounting periods, they are remeasured at amortized costs applying the effective interest method.

Accounting policies for lease liabilities are included in Note 3.4.

4.6 Movement in share capital

Issued registered shares

 

Issued registered shares

 

Treasury shares 1)

 

Outstanding shares

Balance April 1, 2018

 

65,330,887

 

(3,622)

 

65,327,265

Purchase of treasury shares

 

 

 

(368,000)

 

(368,000)

Sale/transfer of treasury shares

 

 

 

338,048

 

338,048

Purchase of shares intended to be cancelled 2)

 

 

 

(932,750)

 

(932,750)

Balance March 31, 2019

 

65,330,887

 

(966,324)

 

64,364,563

 

 

 

 

 

 

 

Purchase of treasury shares

 

 

 

(437,421)

 

(437,421)

Sale/transfer of treasury shares

 

 

 

343,537

 

343,537

Cancellation of treasury shares 3)

 

(932,750)

 

932,750

 

 

Purchase of treasury shares from share buyback

 

 

 

(1,843,090)

 

(1,843,090)

Balance March 31, 2020

 

64,398,137

 

(1,970,548)

 

62,427,589

 

 

 

 

 

 

 

Nominal value of share capital CHF million

 

Share Capital

 

Treasury shares 1)

 

Outstanding share capital

Balance March 31, 2020

 

3.2

 

(0.1)

 

3.1

Each share has a nominal value of CHF 0.05.

1) Treasury shares are purchased on the open market and are not entitled to dividends.

2) Shares purchased by the Group as part of the share buyback program.

3) The Annual General Shareholders’ Meeting of June 13, 2019, approved the proposed cancellation of 932,750 treasury shares, resulting in a reduction of share capital of 46,637.50 Swiss francs, retained earnings and other reserves of CHF 157.8 million offset by changes in treasury shares of CHF 157.9 million. This cancellation has been executed on September 24, 2019.

On August 31, 2018, Sonova Holding AG announced that its Board of Directors approved a new share buyback program of up to CHF 1.5 billion (but for a maximum of 11,759,560 registered shares). The shares were planned to be repurchased for the purpose of a capital reduction, subject to approval by future Annual General Shareholders’ Meetings. The program started in October 2018 and will run up to 36 months. As of March 31, 2020 2,775,840 shares were purchased as part of the share buyback program.

Effective March 16, 2020, Sonova Holding AG suspended the Group’s current share buyback program. This precautionary measure reflects the short-term uncertainties regarding the financial impact of the global spread of the novel coronavirus (COVID-19).

At the Annual General Shareholders’ Meeting on July 7, 2005, the conditional share capital of CHF 264,270 (5,285,400 shares) has been increased by CHF 165,056 (3,301,120 shares) to CHF 429,326 (8,586,520 shares). Consistent with the prior year, 5,322,133 shares remain unissued as of March 31, 2020. These shares are reserved for long-term incentive plans (2,021,013 shares) as well as for initiatives to increase the company’s financial flexibility (3,301,120 shares).

Accounting policies

Ordinary shares are classified as equity. Dividends on ordinary shares are recorded in equity in the period in which they are approved by the parent companies’ shareholders.

In case any of the Group companies purchase shares of the parent company, the consideration paid is recognized as treasury shares and presented as a deduction from equity. Any consideration received from the sale of own shares is recognized in equity.

4.7 Risk management

Group risk management

Risk management at Group level is an integral part of business practice and supports the strategic decision-making process. The assessment of risk is derived from both “top-down” and “bottom-up” and covers corporate, all business segments, and all consolidated Group companies. This approach allows for the Group to examine all types of risk exposures caused by internal and external impacts and events, from financial, operational processes, customer and products, management and staff. The risk exposures are managed by specific risk mitigating initiatives, frequent re-evaluations, communication, risk consolidation and prioritization.

The responsibility for the process of risk assessment and monitoring is allocated to the corporate risk function. The Management Board, in addition to Group companies and functional managers, supports the annual risk assessment and is responsible for the management of the risk mitigating initiatives. The Board of Directors discusses and analyzes the Group’s risks at least once a year in the context of a strategy meeting.

Financial risk management

Due to Sonova Group’s worldwide activities, the Group is exposed to a variety of financial risks such as market risks, credit risks and liquidity risks. Financial risk management aims to limit these risks and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses selected financial instruments for this purpose. They are exclusively used as hedging instruments for cash in- and outflows and not for speculative positions. The Group does not apply hedge accounting.

The fundamentals of Sonova Group’s financial risk policy are periodically reviewed by the Audit Committee and carried out by the Group finance department. Group finance is responsible for implementing the policy and for ongoing financial risk management.

Market risk

Exchange rate risk

The Group operates globally and is therefore exposed to foreign currency fluctuations, mainly with respect to the US dollar and the Euro. As the Group uses Swiss francs as presentation currency and holds investments in different functional currencies, net assets are exposed to foreign currency translation risk. Additionally, a foreign currency transaction risk exists in relation to future commercial transactions, which are denominated in a currency other than the functional currency.

To minimize foreign currency exchange risks, forward currency contracts are entered into. The Group hedges its net foreign currency exposure based on future expected cash in- and outflows. The hedges have a duration of between 1 and 6 months. No hedge accounting has been applied to these hedges.

Positive replacement values from hedges, which do not qualify for hedge accounting, are recorded as financial assets at fair value through profit or loss whereas negative replacement values are recorded as financial liabilities at fair value through profit or loss.

As of March 31, 2020, the Group engaged in forward currency contracts amounting to CHF 337.3 million (previous year CHF 271.4 million). The open contracts on March 31, 2020 as well as on March 31, 2019 were all due within one year.

Notional amount of forward contracts CHF million

31.3.2020

 

31.3.2019

 

 

Total

 

Fair value

 

Total

 

Fair value

Positive replacement values

 

119.3

 

2.3

 

132.2

 

0.3

Negative replacement values

 

218.0

 

(2.3)

 

139.2

 

(0.1)

Total

 

337.3

 

0.0

 

271.4

 

0.2

Foreign currency sensitivity analysis

CHF million

 

2019/20

 

2018/19

 

2019/20

 

2018/19

 

 

Impact on income after taxes 1)

 

 

 

Impact on equity

 

 

Change in USD/CHF +5%

 

2.8

 

4.4

 

13.2

 

13.8

Change in USD/CHF –5%

 

(2.8)

 

(4.4)

 

(13.2)

 

(13.8)

Change in EUR/CHF +5%

 

3.0

 

3.6

 

21.3

 

16.1

Change in EUR/CHF –5%

 

(3.0)

 

(3.6)

 

(21.3)

 

(16.1)

1) Excluding the impact of forward currency contracts.

Interest rate risk

The Group has only limited exposure to interest rate changes. The most substantial interest exposure on assets relates to cash and cash equivalents with an average interest-bearing amount for the 2019/20 financial year of CHF 574 million (previous year CHF 402 million). If interest rates during the 2019/20 financial year had been 1% higher, the positive impact on income before taxes would have been CHF 3.2 million. If interest rates had been 1% lower, the income before taxes would have been negatively impacted by CHF 4.9 million.

Other market risks

Risk of price changes of raw materials or components used for production is limited. A change in those prices would not result in financial effects being above the Group’s risk management tolerance level. Therefore, no sensitivity analysis has been conducted.

The Group aims to ensure cost effective sourcing, while at the same time managing the risk of supply shortages that could lead to a failure to deliver certain products at the quantities required. Wherever feasible, critical components are sourced from multiple suppliers in order to mitigate this risk.

The relationship with suppliers is governed by Sonova’s Group Supplier Principles (SGSP). We regularly audit and visit suppliers and inspect their management capabilities through employee interviews and on-site inspections. Suppliers have to follow all applicable laws and regulations, ensure a healthy and safe working environment and are prohibited from using child labor.

Through its multiple manufacturing sites around the globe, the Group maintains effective options to rebalance its production capacity between different facilities and to shift production where necessary to avoid delivery shortages and to adapt to potential changes of the operating or general environment.

Credit risk

Financial assets, which could expose the Group to a potential concentration in credit risk, are principally cash and bank balances, receivables from customers and loans.

Core banking relations are maintained with at least “BBB+” rated (S & P) financial institutions. As of March 31, 2020, the largest balance with a single counterparty amounted to 51% (previous year 27%) of total cash and cash equivalents. 

The Group performs continuous credit checks on its receivables. Due to the customer diversity, there is no single credit limit for all customers, however, the Group assesses its customers based on their financial position, past experience, and other factors. Due to the fragmented customer base (no single customer balance is greater than 10% of total trade accounts receivable), the Group is not exposed to any significant concentration risk. The same applies to loans to third and related parties. As part of the normal process, management held the regular Expected Credit Loss (ECL) Committee meeting to review the expected credit loss rates on an annual basis in March 2020. Given the current uncertainties in the markets, the ECL rates have been significantly increased. In addition, customer specific reviews were performed to consider the increased credit risk caused by COVID-19. Furthermore, subsequent to March 31, 2020, management also considered any late developments in the markets and the overall risk position from a group perspective based on macro-economic considerations and the revised business outlook for the financial year 2020/21.

Impairment of financial assets

Impairment losses on financial assets are calculated based on the expected credit loss (ECL) model of IFRS 9. The Group’s loss allowances on financial assets other than trade receivables are not material.

Accounting policies

The Group applies the IFRS 9 simplified approach for measuring expected credit losses (ECLs) for trade receivables, which uses a lifetime expected loss allowance for trade receivables at each reporting date. To measure ECLs, trade receivables are grouped based on regions and the days past due. ECLs are calculated separately for state and non-state customers considering historical credit loss experience as well as forward-looking factors. Data sources in determining ECLs include actual historical losses, credit default swaps, country specific risk ratings, development of the customer structure and change in market performance and trends. 

The following table provides information about the exposure to credit risk and ECLs for trade receivables:

CHF million

 

 

 

 

 

 

 

31.3.2020

 

 

 

 

 

 

 

31.3.2019

State customers

 

Expected loss rate

 

Gross carrying amount

 

Loss allowance

 

Net carrying amount

 

Expected loss rate

 

Gross carrying amount

 

Loss allowance

 

Net carrying amount

Not overdue

 

0.5%

 

63.2

 

(0.3)

 

62.9

 

0.4%

 

81.4

 

(0.3)

 

81.1

Overdue 1–90 days

 

1.2%

 

24.5

 

(0.3)

 

24.2

 

0.7%

 

28.4

 

(0.2)

 

28.2

Overdue 91–180 days

 

6.5%

 

3.1

 

(0.2)

 

2.9

 

6.7%

 

3.0

 

(0.2)

 

2.8

Overdue 181–360 days

 

23.3%

 

3.0

 

(0.7)

 

2.3

 

9.1%

 

2.2

 

(0.2)

 

2.0

Overdue more than 360 days

 

97.3%

 

3.7

 

(3.6)

 

0.1

 

86.5%

 

5.2

 

(4.5)

 

0.7

Total

 

5.2%

 

97.5

 

(5.1)

 

92.4

 

4.5%

 

120.2

 

(5.4)

 

114.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHF million

 

 

 

 

 

 

 

31.3.2020

 

 

 

 

 

 

 

31.3.2019

Non-state customers

 

Expected loss rate

 

Gross carrying amount

 

Loss allowance

 

Net carrying amount

 

Expected loss rate

 

Gross carrying amount

 

Loss allowance

 

Net carrying amount

Not overdue

 

6.1%

 

218.6

 

(13.4)

 

205.2

 

0.8%

 

314.2

 

(2.6)

 

311.6

Overdue 1–90 days

 

10.9%

 

72.6

 

(7.9)

 

64.7

 

4.2%

 

77.9

 

(3.3)

 

74.6

Overdue 91–180 days

 

33.6%

 

13.1

 

(4.4)

 

8.7

 

25.9%

 

13.5

 

(3.5)

 

10.0

Overdue 181–360 days

 

48.5%

 

13.0

 

(6.3)

 

6.7

 

49.7%

 

14.9

 

(7.4)

 

7.5

Overdue more than 360 days

 

76.7%

 

19.3

 

(14.8)

 

4.5

 

88.9%

 

19.0

 

(16.9)

 

2.1

Total

 

13.9%

 

336.6

 

(46.8)

 

289.8

 

7.7%

 

439.5

 

(33.7)

 

405.8

The closing loss allowances for trade receivables as at March 31, 2019 reconcile to the closing loss allowance as at March 31, 2020 as follows:

CHF million

 

2019/20

 

2018/19

Loss allowance for doubtful receivables, April 1

 

(39.0)

 

(37.0)

Changes through business combinations

 

(0.0)

 

(0.2)

Utilization

 

6.4

 

2.2

Reversal

 

2.6

 

4.2

Additions

 

(24.7)

 

(8.9)

Exchange differences

 

2.9

 

0.6

Loss allowance for doubtful receivables, March 31

 

(51.9)

 

(39.0)

Trade receivables are written off when there is no reasonable expectation of recovery. Impairment losses on trade receivables and subsequent recoveries are included in general and administration costs.

The additions to the loss allowance for doubtful receivables in 2019/20 relate to an increase in the expected credit loss (ECL) rates and the increased credit risk caused by COVID-19 as described above.

Liquidity risk

Group finance is responsible for centrally managing the net cash/debt position and to ensure that the Group’s obligations can be settled on time. The Group aims to grow further and wants to remain flexible in making time-sensitive investment decisions. This overall objective is included in the asset allocation strategy. A rolling forecast based on the expected cash flows is conducted and updated regularly to monitor and control liquidity.

Visibility over the lion’s share of bank accounts is provided by central treasury organization. Cash pools are automated and daily SWIFT balance tracking is applied where feasible.

In the context of the COVID-19 impacts, the Group has obtained additional financing and new credit lines (refer to Note 7.5) and continues to actively pursue appropriate measures to secure liquidity.

The following table summarizes the contractual maturities of financial liabilities as of March 31, 2020 and 2019:

CHF million

31.3.2020

 

 

Due less than 3 months

 

Due 3 months to 1 year

 

Due 1 year to 5 years

 

Due more than 5 years

 

Total

Short-term debt

 

80.0

 

150.2

 

 

 

 

 

230.2

Other current financial liabilities

 

14.7

 

10.0

 

 

 

 

 

24.7

Trade payables and other short-term liabilities

 

246.9

 

158.7

 

 

 

 

 

405.6

Total current financial liabilities

 

341.6

 

318.9

 

 

 

 

 

660.5

 

 

 

 

 

 

 

 

 

 

 

Current lease liabilities

 

21.6

 

39.6

 

 

 

 

 

61.2

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

 

 

 

359.7

 

199.4

 

559.1

Other non-current financial liabilities

 

 

 

 

 

32.8

 

 

 

32.8

Total non-current financial liabilities

 

 

 

 

 

392.5

 

199.4

 

591.9

 

 

 

 

 

 

 

 

 

 

 

Non-current lease liabilities

 

 

 

 

 

146.9

 

60.9

 

207.8

 

 

 

 

 

 

 

 

 

 

 

Total financial liabilities

 

363.2

 

358.5

 

539.4

 

260.3

 

1,521.4

 

 

 

 

 

 

 

 

 

 

 

CHF million

31.3.2019

 

 

Due less than 3 months

 

Due 3 months to 1 year

 

Due 1 year to 5 years

 

Due more than 5 years

 

Total

Bonds

 

 

 

250.0

 

 

 

 

 

250.0

Other current financial liabilities

 

3.3

 

3.1

 

 

 

 

 

6.4

Trade payables and other short-term liabilities

 

240.3

 

158.5

 

 

 

 

 

398.8

Total current financial liabilities

 

243.6

 

411.6

 

 

 

 

 

655.2

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

 

 

 

359.5

 

 

 

359.5

Other non-current financial liabilities

 

 

 

 

 

12.6

 

0.5

 

13.1

Total non-current financial liabilities

 

 

 

 

 

372.1

 

0.5

 

372.6

 

 

 

 

 

 

 

 

 

 

 

Total financial liabilities

 

243.6

 

411.6

 

372.1

 

0.5

 

1,027.8

Capital risk management

It is the Group’s policy to maintain a strong equity base and to secure a continuous “investment grade” rating. The Group’s strong balance sheet and earnings tracking provides for additional debt capacity.

The company aims to return excess cash to shareholders as far as not required for organic and acquisition related growth, and amortization of debt. In the context of the COVID-19 impacts, the Group aims to maintain a higher cash balance.

4.8 Financial instruments

This note discloses the categorization of financial instruments measured at fair value based on the fair value hierarchy.

Accounting policies

Financial instruments measured at fair value are allocated to one of the following three hierarchical levels:

Level 1:

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date.

Level 2:

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques are based on observable market data, where applicable. If all significant inputs required to value an instrument are observable, the instrument is included in level 2.

Level 3:

If a significant amount of inputs is not based on observable market data, the instrument is included in level 3. For this level, other techniques, such as ­discounted cash flow analysis, are used to determine fair value.

During the reporting period, there were no reclassifications between the individual levels.

The following table summarizes the financial instruments of the Group and the valuation method for financial instruments at fair value through profit and loss.

CHF million

 

31.3.2020

 

 

Notes

 

Carrying amount

 

Fair value 1)

 

Level 1

 

Level 2

 

Level 3

Financial assets at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4.1

 

450.2

 

 

 

 

 

 

 

 

Other financial assets

 

4.4

 

33.6

 

 

 

 

 

 

 

 

Trade receivables

 

3.1

 

382.1

 

 

 

 

 

 

 

 

Other receivables

 

3.6

 

57.6

 

 

 

 

 

 

 

 

Total

 

 

 

923.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

Other financial assets

 

4.4

 

4.2

 

4.2

 

 

 

 

 

4.2

Total

 

 

 

4.2

 

4.2

 

 

 

 

 

4.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

Bank debt

 

4.5

 

230.2

 

 

 

 

 

 

 

 

Bond

 

4.5

 

559.1

 

538.9

 

538.9

 

 

 

 

Deferred payments

 

4.5

 

17.9

 

 

 

 

 

 

 

 

Other financial liabilities

 

4.5

 

0.1

 

 

 

 

 

 

 

 

Trade payables

 

 

 

104.3

 

 

 

 

 

 

 

 

Other short-term operating liabilities

 

3.8

 

297.5

 

 

 

 

 

 

 

 

Total

 

 

 

1,209.1

 

538.9

 

538.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

4.5

 

5.3

 

5.3

 

 

 

 

 

5.3

Negative replacement value of forward foreign exchange contracts

 

4.7

 

2.3

 

2.3

 

 

 

 

 

2.3

Other financial liabilities

 

4.5

 

2.8

 

2.8

 

 

 

 

 

2.8

Total

 

 

 

10.4

 

10.4

 

 

 

 

 

10.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities at fair value through other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

4.5

 

29.1

 

29.1

 

29.1

 

 

 

 

Total

 

 

 

29.1

 

29.1

 

29.1

 

 

 

 

1) For financial assets and financial liabilities measured at amortized cost, fair value information is not provided if the carrying amount is a reasonable approximation of fair value.

CHF million

 

31.3.2019

 

 

Notes

 

Carrying amount

 

Fair value 1)

 

Level 1

 

Level 2

 

Level 3

Financial assets at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4.1

 

374.8

 

 

 

 

 

 

 

 

Other financial assets

 

4.4

 

37.8

 

 

 

 

 

 

 

 

Trade receivables

 

3.1

 

520.6

 

 

 

 

 

 

 

 

Other receivables

 

3.6

 

69.0

 

 

 

 

 

 

 

 

Total

 

 

 

1,002.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

Other financial assets

 

4.4

 

2.1

 

2.1

 

 

 

 

 

2.1

Total

 

 

 

2.1

 

2.1

 

 

 

 

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

Bank debt

 

4.5

 

0.3

 

 

 

 

 

 

 

 

Bond

 

4.5

 

609.5

 

613.3

 

613.3

 

 

 

 

Deferred payments

 

4.5

 

7.9

 

 

 

 

 

 

 

 

Other financial liabilities

 

4.5

 

0.2

 

 

 

 

 

 

 

 

Trade payables

 

 

 

102.8

 

 

 

 

 

 

 

 

Other short-term operating liabilities

 

3.8

 

296.0

 

 

 

 

 

 

 

 

Total

 

 

 

1,016.7

 

613.3

 

613.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

4.5

 

6.9

 

6.9

 

 

 

 

 

6.9

Negative replacement value of forward foreign exchange contracts

 

4.7

 

0.1

 

0.1

 

 

 

 

 

0.1

Other financial liabilities

 

4.5

 

4.2

 

4.2

 

 

 

 

 

4.2

Total

 

 

 

11.2

 

11.2

 

 

 

 

 

11.2

1) For financial assets and financial liabilities measured at amortized cost, fair value information is not provided if the carrying amount is a reasonable approximation of fair value.

The following table presents the changes in level 3 financial instruments for the year ended March 31, 2020 and 2019:

Financial assets at fair value through profit or loss CHF million

 

2019/20

 

2018/19

Balance April 1

 

2.1

 

2.3

Additions/(disposals), net

 

2.2

 

0.5

Losses recognized in profit or loss

 

(0.1)

 

(0.7)

Balance March 31

 

4.2

 

2.1

 

 

 

 

 

Financial liabilities at fair value through profit or loss CHF million

 

2019/20

 

2018/19

Balance April 1

 

(11.2)

 

(17.9)

(Additions)/disposals, net

 

0.8

 

7.9

Gains/(losses) recognized in profit or loss

 

0.0

 

(1.2)

Balance March 31

 

(10.4)

 

(11.2)

Financial liabilities at fair value through profit or loss mainly consist of contingent consideration arrangements arising from business combinations (refer to Note 6.1). The fair values are determined by considering the possible scenarios of the future performance of the acquired companies, contractual obligations and milestone achievements, the amount to be paid under each scenario, and the probability of each scenario. The significant unobservable inputs are the forecast sales and other performance criteria. As at March 31, 2020 and 2019 the maximum potential payments under contingent considerations do not differ significantly from the amounts provided.

4.9 Exchange rates

The following main exchange rates were used for currency translation:

 

 

31.3.2020

 

31.3.2019

 

2019/20

 

2018/19

 

 

Year-end rates

 

 

 

Average rates for the year

 

 

AUD 1

 

0.59

 

0.71

 

0.67

 

0.72

BRL 1

 

0.19

 

0.26

 

0.24

 

0.26

CAD 1

 

0.68

 

0.74

 

0.74

 

0.75

CNY 1

 

0.14

 

0.15

 

0.14

 

0.15

EUR 1

 

1.06

 

1.12

 

1.10

 

1.15

GBP 1

 

1.20

 

1.30

 

1.25

 

1.30

JPY 100

 

0.89

 

0.90

 

0.91

 

0.89

USD 1

 

0.97

 

1.00

 

0.99

 

0.99

Accounting policies

The consolidated financial statements are expressed in Swiss francs (“CHF”), which is the Group’s presentation currency. The functional currency of each Group company is based on the local economic environment to which an entity is exposed, which is normally the local currency.

Transactions in foreign currencies are accounted for at the rates prevailing on the dates of the transactions. The resulting exchange differences are recorded in the local income statements of the Group companies and included in net income.

Monetary assets and liabilities of Group companies, which are denominated in foreign currencies are translated using year-end exchange rates. Exchange differences are recorded as an income or expense. Non-monetary assets and liabilities are translated at historical exchange rates. Exchange differences arising on intercompany loans that are considered part of the net investment in a foreign entity are recorded in other comprehensive income in equity.

When translating foreign currency financial statements into Swiss francs, year-end exchange rates are applied to assets and liabilities, while average annual rates are applied to income statement accounts. Translation differences arising from this process are recorded in other comprehensive income in equity. On disposal of a Group company, the related cumulative translation adjustment is transferred from equity to the income statement.

5. Taxes

5.1 Taxes

CHF million

 

2019/20

 

2018/19

Current taxes

 

79.0

 

67.3

Deferred taxes

 

(66.1)

 

2.1

Total income taxes

 

12.9

 

69.4

 

 

 

 

 

Reconciliation of tax expense

 

 

 

 

Income before taxes

 

502.4

 

529.6

Group’s expected average tax rate

 

13.3%

 

13.5%

Tax at expected average rate

 

66.8

 

71.7

+/– Effects of

 

 

 

 

Expenses not subject to tax, net

 

1.6

 

5.6

Changes of unrecognized loss carryforwards/deferred tax assets

 

8.2

 

12.5

Local actual tax rate different to Group’s expected average tax rate

 

(15.0)

 

(25.6)

Change in tax rates on deferred tax balances

 

(1.8)

 

3.0

Transitional effect of Swiss tax reform

 

(64.1)

 

 

Prior year adjustments and other items, net 1)

 

17.3

 

2.3

Total income taxes

 

12.9

 

69.4

Weighted average effective tax rate

 

2.6%

 

13.1%

1) In 2019/20, other items include changes in uncertain tax positions.

The Group’s expected average tax rate is the aggregate rate obtained by applying the expected tax rate for each individual jurisdiction to its respective result before taxes, adjusted for significant one-time effects. The expected tax rate might vary on a year-on-year basis depending on where the results are achieved.

Deferred tax assets and (liabilities) CHF million

 

31.3.2020

 

31.3.2019

 

 

Assets

 

Liabilities

 

Net amount

 

Assets

 

Liabilities

 

Net amount

Inventories

 

28.0

 

(3.9)

 

24.1

 

34.8

 

(2.8)

 

32.0

Property, plant & equipment

 

1.4

 

(8.0)

 

(6.6)

 

1.4

 

(8.6)

 

(7.2)

Intangible assets

 

 

 

(88.4)

 

(88.4)

 

 

 

(104.9)

 

(104.9)

Right-of-use assets and lease liabilities

 

67.3

 

(67.1)

 

0.2

 

 

 

 

 

 

Other assets and liabilities 1)

 

158.4

 

(49.4)

 

109.0

 

98.6

 

(55.0)

 

43.6

Tax loss carryforwards

 

35.2

 

 

 

35.2

 

42.1

 

 

 

42.1

Total tax assets (liabilities)

 

290.3

 

(216.8)

 

73.5

 

176.9

 

(171.3)

 

5.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Offset of assets and liabilities

 

(92.3)

 

92.3

 

 

 

(32.7)

 

32.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in the balance sheet

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

198.0

 

 

 

198.0

 

144.2

 

 

 

144.2

Deferred tax liabilities

 

 

 

(124.5)

 

(124.5)

 

 

 

(138.6)

 

(138.6)

Total deferred taxes, net

 

 

 

 

 

73.5

 

 

 

 

 

5.6

1) Deferred tax assets manly relate to provisions and contract liabilities, deferred tax liabilities mainly relate to provisions, contract assets and trade and other receivables. In 2019/20, including deferred tax assets in the amount of CHF 60.5 million related to the Swiss tax reform as described below.

Movement of deferred tax assets and (liabilities) CHF million

2019/20

 

 

Inventories

 

Property, plant & equipment

 

Intangible assets

 

Right-of-use assets and lease liabilities

 

Other assets and liabilities

 

Tax loss carryforwards

 

Total

Balance April 1

 

32.0

 

(7.2)

 

(104.9)

 

 

 

43.6

 

42.1

 

5.6

Effect on initial application of IFRS 16 "Leases"

 

 

 

 

 

 

 

(0.3)

 

 

 

 

 

(0.3)

Changes through business combinations

 

 

 

 

 

(3.6)

 

 

 

 

 

 

 

(3.6)

Deferred taxes recognized in the income statement 1)

 

2.2

 

0.6

 

0.6

 

0.8

 

72.9

 

(11.1)

 

66.1

Deferred taxes recognized in OCI 2)

 

 

 

 

 

 

 

 

 

4.9

 

 

 

4.9

Exchange differences

 

(10.1)

 

0.1

 

19.4

 

(0.4)

 

(12.5)

 

4.2

 

0.8

Balance March 31

 

24.1

 

(6.6)

 

(88.4)

 

0.2

 

109.0

 

35.2

 

73.5

1) In 2019/20, deferred taxes recognized in the income statement include the impact from the Swiss tax reform as described below.

2) Other comprehensive income.

Movement of deferred tax assets and (liabilities) CHF million

2018/19

 

 

Inventories

 

Property, plant & equipment

 

Intangible assets

 

Other assets and liabilities

 

Tax loss carryforwards

 

Total

Balance April 1

 

28.2

 

(7.1)

 

(104.0)

 

3.6

 

52.6

 

(26.7)

Effect on initial application of IFRS 15 and IFRS 9

 

 

 

 

 

 

 

33.2

 

 

 

33.2

Changes through business combinations

 

 

 

 

 

(10.3)

 

0.6

 

 

 

(9.7)

Deferred taxes recognized in the income statement

 

1.3

 

(0.2)

 

3.1

 

4.8

 

(11.1)

 

(2.1)

Deferred taxes recognized in OCI 1)

 

 

 

 

 

 

 

2.3

 

 

 

2.3

Exchange differences

 

2.5

 

0.2

 

6.3

 

(1.0)

 

0.6

 

8.6

Balance March 31

 

32.0

 

(7.2)

 

(104.9)

 

43.6

 

42.1

 

5.6

1) Other comprehensive income.

Deferred tax assets have been capitalized based on the projected future performance of the Group companies.

The gross values of unused tax loss carryforwards, which have not been capitalized as deferred tax assets, with their expiry dates are as follows:

CHF million

 

31.3.2020

 

31.3.2019

Within 1 year

 

41.5

 

29.0

Within 2–5 years

 

69.9

 

96.0

More than 5 years or without expiration

 

770.9

 

479.9

Total

 

882.3

 

604.9

Tax loss carryforwards, which have not been capitalized also include pre-acquisition tax losses with limitation of use and losses, which do not qualify for capitalization. The inherent uncertainty regarding the level and use of such tax losses, and changes in tax regulations and laws can impact the annual assessment of these unused tax loss carryforwards.

Swiss tax reform

On May 19, 2019, the Swiss electorate passed the Federal Act on Tax Reform and AHV Financing (TRAF). The tax reform abolished the tax regimes for holding, domiciliary and mixed companies as of January 1, 2020 and introduced new tax measures. To the extent that the tax reform requires cantonal and communal tax law changes, these had to be implemented through modification of the cantonal tax law. On September 1, 2019, in a public vote, the electorate of the canton of Zurich accepted the respective revision of the cantonal tax law. The relevant changes to the Group include a decrease in the statutory income tax rate in the canton of Zurich, effective from January 1, 2021.

The TRAF and tax practice also foreseen measures to ease the transition between the old and new tax regime. After a substantial change in the Swiss tax administration interpretation of such practices early December 2019, the Group has revalued its Swiss deferred tax positions which resulted in one time deferred tax liabilities and assets for a total net impact of 64.1 million on income after taxes in the financial year 2019/20. 

Accounting policies

Income taxes include current and deferred income taxes. The Group is subject to income taxes in numerous jurisdictions and significant judgment is required in determining the worldwide provision for income taxes. The multitude of transactions and calculations implies estimates and assumptions. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and outcome is uncertain. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Deferred tax is recorded on the valuation differences (temporary differences) between the tax bases of assets and liabilities and their carrying values in the consolidated balance sheet. Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which the temporary differences and tax losses can be offset. Deferred income tax liabilities are provided for on taxable temporary differences arising from investments in subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Accounting judgements and estimates

The consolidated balance sheet includes deferred tax assets of CHF 137.5 million (previous year CHF 144.2 million) related to deductible differences and, in certain cases, tax loss carry forwards, provided that their utilization appears probable. The recoverable value is based on forecasts of the corresponding taxable Group company over a period of several years. As actual results may differ from these forecasts, the deferred tax assets may need to be adjusted accordingly.

Deferred tax assets further include CHF 60.5 million (previous year: none) related to the Swiss tax reform as described above. The calculation of the deferred tax assets required management to make significant estimates and assumptions. Some of these estimates are based on interpretations of existing tax laws or regulations. The final outcome is still uncertain and might lead to adjustments in the next financial year. Whenever circumstances have changed or there is new information that affects these judgements, the judgements and estimates will be reassessed.

6. Changes in Group structure

6.1 Acquisitions/disposals of subsidiaries

In the financial year 2019/20, the Group acquired several small companies in EMEA and North America.  All of these companies acquired are in the business of producing and/or distributing and servicing hearing instruments. Due to the size of these transactions, they had no material impact on the financial statements. During the financial year 2018/19, the Group acquired several small companies in Europe, North America and Asia/Pacific. Furthermore, the Group divested several audiological care stores in the US region.

In the current financial year, the Group acquired a 51% majority stake in a company active in technology development. An agreement has been concluded with the seller for the acquisition of the remaining 49% shares in the company. Based on the terms and conditions of the agreement, the Group considers the outstanding minority interests to have already been acquired and consolidates 100% of the company since acquisition.

Except for one acquisition, which is active in technology and development, all other acquired companies are engaged in the business of selling hearing instruments and have been accounted for applying the acquisition method of accounting. Assets and liabilities resulting from the acquisitions are as follows:

CHF million

 

2019/20

 

2018/19

 

 

Total

 

Total

Trade receivables

 

1.1

 

1.9

Other current assets

 

4.0

 

9.0

Property, plant & equipment

 

1.2

 

2.0

Rights of use the assets

 

0.7

 

 

Intangible assets

 

17.2

 

22.4

Other non-current assets

 

0.4

 

0.7

Current liabilities

 

(4.3)

 

(10.7)

Non-current liabilities

 

(4.5)

 

(10.7)

Net assets

 

15.8

 

14.7

Goodwill

 

97.4

 

55.4

Purchase consideration

 

113.3

 

70.1

Fair value of previously held stake before the business combination

 

(1.3)

 

(2.4)

Liabilities for contingent considerations and deferred payments 1)

 

(45.9)

 

(7.7)

Cash and cash equivalents acquired

 

(3.2)

 

(4.5)

Cash outflow for investments in associates, contingent considerations and deferred payments

 

11.9

 

8.6

Cash consideration for acquisitions, net of cash acquired

 

74.8

 

64.1

Settlement of pre-existing financing relationships

 

 

 

2.3

Total consideration paid, net of cash acquired

 

74.8

 

66.4

1) Contingent considerations and deferred payments (earn-out payments) are dependent on the future performance of the acquired companies as well as contractual conditions. The liability for contingent considerations and deferred payments is based on the latest estimate of the future performance.

The initial accounting for the acquisitions completed in the current financial year is provisional and the fair values assigned to the identifiable assets acquired and liabilities assumed are still subject to change.

Liabilities for contingent considerations amount to CHF 34.1 million (previous year CHF 5.3 million) and deferred payments amount to CHF 11.8 million (previous year CHF 2.4 million). The liability acquired for contingent considerations and deferred payments in the current financial year relates primarily to the acquisition of the before mentioned technology development company. Contingent considerations are dependent on the future performance of the acquired companies as well as contractual obligations and milestone achievements. The liability for the contingent considerations is based on the latest estimate of the future performance and milestone achievement and is expected to be paid out in tranches over a period of 4 years.

The goodwill is attributed mainly to economies of scale and expected synergies such as favorable sales growth potential, increase in share of Sonova products within acquired distribution companies and cost reduction in administrative and corporate functions as well as to the labor force. For one acquisition, the goodwill is mainly attributable to the labor force. Recognized goodwill is not expected to be deductible for income tax purposes. 

Acquisition-related intangible assets in the amount of CHF 17.2 million (previous year CHF 22.4 million) contain in-process research & development of CHF 7.0 million (previous year: none) and customer relationships of CHF 10.2 million (previous year CHF 22.4 million). The assigned lifetime range is 5 years for in-process research & development and between 10 and 15 years for customer relationships. On these intangibles deferred taxes have been considered.

Acquisition-related transaction costs in the amount of CHF 1.0 million (previous year CHF 0.5 million) have been expensed and are included in the line “General and administration”. 

April 1 to March 31, CHF million

 

2019/20

 

2018/19

 

 

Total

 

Total

Contribution of acquired companies from date of acquisition

 

 

 

 

Sales

 

7.8

 

10.6

Net income

 

0.3

 

2.9

 

 

 

 

 

Contribution, if the acquisitions occurred on April 1

 

 

 

 

Sales

 

15.2

 

32.8

Net income

 

1.4

 

6.4

In the financial year 2018/19, the Group divested several audiological care stores in the US region. The total consideration amounting to CHF 1.5 million was settled in cash. The resulting net gain of those transactions of CHF 0.3 million has been recognized in the income statement and is included in “other income/(expense), net”.

Accounting policies

Business combinations are accounted for using the acquisition method of accounting. The cost of a business combination is equal to the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Sonova Group, in exchange for control over the acquired company. Any difference between the cost of the business combination and the net fair value of the identifiable assets, liabilities, and contingent liabilities recognized is treated as goodwill. Goodwill is not amortized, but is assessed for impairment annually, or more frequently if events or changes in circumstances indicate that its value might be impaired (Refer to Note 3.5). Acquisition-related costs are expensed. For each business combination, the Group recognizes the non-controlling interests in the acquiree at fair value or at the non-controlling interests proportionate share in the recognized amounts of the acquiree’s identifiable net assets.

If a business combination is achieved in stages (control obtained over an associate), the previously held equity interest in an associate is remeasured to its acquisition date fair value and any resulting gain or loss is recognized in “financial income/expenses” in profit or loss.

Accounting judgements and estimates

Business combinations

In the course of recognizing assets and liabilities from business combinations, management judgments might be required for the following areas:

  • Acquisition-related intangibles resulting from technology, customer relationships, client lists, or brand names.
  • Contingent consideration arrangements.

Cost of business combinations

A business combination agreement may provide for an adjustment to the cost of the combination contingent on future events. If the future events do not occur or the estimate needs to be revised, the cost of a business combination is revised accordingly, with a resulting change in the income statement. At the end of the 2019/20 financial year, such liabilities contingent on future events amount to CHF 34.4 million (previous year CHF 6.9 million) and are disclosed under other financial liabilities (Note 4.5).

6.2 Investments in associates/joint ventures

The Group’s share in the results as well as in assets and liabilities of associates/joint ventures, all unlisted enterprises, is as follows:

CHF million

 

2019/20

 

2018/19

Current assets

 

2.6

 

1.2

Non-current assets

 

2.5

 

1.5

Total assets

 

5.1

 

2.6

Current liabilities

 

(0.7)

 

(0.4)

Non-current liabilities

 

(0.6)

 

(0.0)

Total liabilities

 

(1.3)

 

(0.4)

Net assets

 

3.8

 

2.2

 

 

 

 

 

Income for the year

 

5.9

 

5.2

Expenses for the year

 

(3.4)

 

(3.1)

Profit for the year

 

2.4

 

2.1

 

 

 

 

 

Net book value at year-end

 

17.4

 

12.8

Share of gain/(loss) recognized by the Group

 

2.4

 

2.1

In the financial year 2019/20, the Group acquired two associates with a share of 49% and 24.99% respectively. One company is in the business of selling hearing instruments, the other one is a medical technology company. The total consideration for both transactions amounted to CHF 6.2 million. In addition, the group acquired additional shares in one previously held equity investment, resulting in a change of control (step up acquisition). Since the change of control, this company is fully consolidated. The net book value at the time of gaining control over this entity amounted to CHF 1.4 million.

In the financial year 2018/19, the Group acquired additional shares in one previously held equity investment, resulting in a change of control (step up acquisition). Since the change of control, this company is fully consolidated. The net book value at the time of gaining control over this entity amounted to CHF 1.3 million.

Sales to associates/joint ventures in the 2019/20 financial year amounted to CHF 8.7 million (previous year CHF 9.1 million). At March 31, 2020, trade receivables towards associates/joint ventures amounted to CHF 1.9 million (previous year CHF 2.2 million).

At the end of the 2019/20 and 2018/19 financial years, no unrecognized losses existed.

Investments with a net book value of CHF 17.4 million (previous year CHF 12.8 million) have a business year different than the Sonova Group. The latest available information for the respective companies are as per December 2019.

Accounting policies

Investments in associates and joint ventures are accounted for using the equity method of accounting. Investments in associates are entities in which Sonova has a significant influence but does not exercise control (usually 20%–50% of voting rights). Joint ventures are joint arrangements whereby two or more parties have rights to the net assets of the arrangement.

Under the equity method, the investment in an associate/joint venture is recognized initially at cost (including goodwill on acquisition) and the carrying amount is increased or decreased to recognize Sonova’s share of profit or loss of the associate/joint venture after the acquisition date. When the Group’s share of losses in an associate/joint venture equals or exceeds its interest in the associate/joint venture, no further losses are recognized, unless there is a legal or constructive obligation. In order to apply the equity method the most recent available financial statements of an associate/joint venture are used, however, due to practicability reasons the reporting dates might vary up to three months from the Group’s reporting date.

7. Other disclosures 

7.1 Number of employees

On March 31, 2020, the Sonova Group employed the full time equivalent of 15,184 people (previous year 14,740). They were engaged in the following regions and activities:

By region

 

31.3.2020

 

31.3.2019

Switzerland

 

1,290

 

1,224

EMEA (excl. Switzerland)

 

6,866

 

6,748

Americas

 

3,550

 

3,443

Asia/Pacific

 

3,478

 

3,325

Total

 

15,184

 

14,740

 

 

 

 

 

By activity

 

 

 

 

Research and development

 

842

 

778

Operations

 

4,618

 

4,665

Sales and marketing, general and administration

 

9,724

 

9,297

Total

 

15,184

 

14,740

The average number of employees (full time equivalents) of the Sonova Group for the year was 15,002 (previous year 14,418). Total personnel expenses for the 2019/20 financial year amounted to CHF 1,037.6 million (previous year CHF 1,010.9 million).

7.2 Transactions and relations with members of the Management Board and the Board of Directors

CHF million

 

2019/20

 

2018/19

 

2019/20

 

2018/19

 

2019/20

 

2018/19

 

 

Management Board

 

 

 

Board of Directors

 

 

 

Total

 

 

Short-term employee benefits

 

8.6

 

7.8

 

1.9

 

1.8

 

10.5

 

9.6

Post-employment benefits

 

0.6

 

0.7

 

 

 

 

 

0.6

 

0.7

Share based payments

 

4.8

 

4.5

 

1.5

 

2.0

 

6.3

 

6.5

Total

 

14.0

 

13.1

 

3.4

 

3.8

 

17.4

 

16.8

The total compensation to the Management Board for the 2019/20 reporting period, as shown above, relates to nine members of the Management Board. The total compensation to the Management Board for the 2018/19 reporting period, as shown above, related to nine members.

The total compensation to the Board of Directors for the 2019/20 reporting period, as shown above, relates to eight active members and one former member (previous year nine members).

Transactions between the Group and the various post-employment benefit plans for the employees of the Group are described in Note 7.3.

Further information in accordance with Swiss law relating to remuneration and ownership of shares and options of the Board of Directors and the Management Board can be found in the compensation report and in the Note 3.6 of the financial statements of Sonova Holding AG.

7.3 Employee benefits

Defined benefit plans

Sonova Group’s retirement plans include defined benefit pension plans in Switzerland, Austria, Canada, Germany and Israel. These plans are both funded and unfunded and governed by local regulations using independent actuarial valuations according to IAS 19. Sonova Group’s major defined benefit plan is located in Switzerland, which in total accounts for CHF 442.9 million or 99.6% (previous year CHF 405.5 million or 99.6%) of Sonova’s defined benefit obligation.

Pension plans in Switzerland

The current pension arrangement for employees in Switzerland is made through a plan governed by the Swiss Federal Occupational Old Age, Survivors and Disability Pension Act (BVG). The plan of Sonova’s Swiss companies is administered by a separate legal foundation, which is funded by regular employer and employee contributions as defined in the pension fund rules. The Swiss pension plan contains a cash balance benefit which is, in essence, contribution-based with certain minimum guarantees. Due to these minimum guarantees, the Swiss plan is treated as a defined benefit plan for the purposes of these IFRS financial statements, although it has many of the characteristics of a defined contribution plan. The plan is invested in a diversified range of assets in accordance with the investment strategy and the common criteria of an asset and liability management. A potential under-funding may be remedied by various measures such as increasing employer and employee contributions or reducing prospective benefits. Above a set insured salary, the savings capital will be split into pension-accumulating and capital-accumulating savings capital. The pension-accumulating savings capital will generate a life-long retirement pension upon retirement. The capital-accumulating savings capital will generate a one-off capital payment upon retirement. An annuity rate of 5.4% to the individual accumulated retirement savings capital was applied for the financial years 2019/20 and 2018/19. 

As of March 31, 2020, 1,328 employees (previous year 1,270 employees) and 133 beneficiaries (previous year 123 beneficiaries) are insured under the Swiss plan. The defined benefit obligation has a duration of 13.9 years (previous year 13.7 years).

The results of all defined benefit plans are summarized below:

Amounts recognized in the balance sheet CHF million

 

31.3.2020

 

31.3.2019

Present value of funded obligations

 

(444.5)

 

(407.0)

Fair value of plan assets

 

375.4

 

383.2

Net present value of funded plans

 

(69.1)

 

(23.8)

Present value of unfunded obligations

 

(4.4)

 

(2.2)

Total liabilities, net

 

(73.5)

 

(26.0)

 

 

 

 

 

Amounts in the balance sheet:

 

 

 

 

Retirement benefit obligation

 

(73.5)

 

(26.0)

Remeasurements recognized in equity CHF million

 

2019/20

 

2018/19

Balance April 1

 

32.0

 

15.0

Actuarial losses/(gains) from

 

 

 

 

– changes in financial assumptions

 

6.0

 

15.9

– changes in experience adjustments

 

15.2

 

3.1

Return on plan assets excluding interest income

 

23.9

 

(2.0)

Balance March 31

 

77.1

 

32.0

Amounts recognized in the income statement CHF million

 

2019/20

 

2018/19

Current service cost

 

27.7

 

26.0

Participants’ contributions

 

(11.8)

 

(11.4)

Net interest cost

 

0.2

 

0.1

Total employee benefit expenses 1)

 

16.0

 

14.7

1) The amount recognized in the consolidated income statement 2019/20 has been charged to:

– cost of sales CHF 2.8 million (previous year CHF 2.7 million);

– research and development CHF 5.3 million (previous year 4.9 million);

– sales and marketing CHF 3.4 million (previous year 3.0 million);

– general and administration CHF 4.3 million (previous year CHF 4.0 million);

– financial expenses CHF 0.2 million (previous year CHF 0.1 million).

Movement in the present value of the defined benefit obligations CHF million

 

2019/20

 

2018/19

Beginning of the year

 

409.2

 

373.0

Interest cost

 

2.3

 

3.2

Current service cost

 

27.7

 

26.0

Benefits paid, net

 

(11.4)

 

(12.0)

Actuarial loss on obligations

 

21.2

 

19.0

Exchange differences

 

(0.2)

 

(0.1)

Present value of obligations at end of period

 

448.9

 

409.2

Movement in the fair value of the plan assets CHF million

 

2019/20

 

2018/19

Beginning of the year

 

383.2

 

365.6

Interest income on plan asset

 

2.1

 

3.1

Employer’s contributions paid

 

13.5

 

12.7

Participants’ contributions

 

11.8

 

11.4

Benefits paid, net

 

(11.3)

 

(11.7)

Return on plan assets excluding interest income

 

(23.9)

 

2.0

Exchange differences

 

(0.0)

 

0.0

Fair value of plan assets at end of period

 

375.4

 

383.2

The plan assets consist of:

 

31.3.2020

 

31.3.2019

Cash

 

2.4%

 

2.3%

Domestic bonds

 

17.0%

 

16.4%

Foreign bonds

 

8.7%

 

10.0%

Domestic equities

 

12.5%

 

13.3%

Foreign equities

 

28.7%

 

31.2%

Real estates

 

16.3%

 

15.0%

Alternative investments

 

14.4%

 

11.8%

All of the plan assets have quoted market prices. The actual return on plan assets amounted to CHF –21.8 million (previous year CHF 5.1 million). The expected employer’s contributions to be paid in the 2020/21 financial year amount to CHF 13.7 million.

Principal actuarial assumptions (weighted average)

 

2019/20

 

2018/19

Discount rate

 

0.45%

 

0.55%

Future salary increases

 

1.00%

 

1.00%

Future pension increases

 

0%

 

0%

Fluctuation rate

 

10%

 

10%

Demography

 

BVG 2015GT

 

BVG 2015GT

The following sensitivity analysis shows how the present value of the benefit obligation for the Swiss retirement benefit plan would change if one of the principal actuarial assumptions was changed. For the analysis, changes in the assumptions were considered separately and no interdependencies were taken into account.

Sensitivity analysis – impact on defined benefit obligation CHF million

 

31.3.2020

 

31.3.2019

Discount rate

 

 

 

 

Discount rate +0.25%

 

(14.2)

 

(12.9)

Discount rate –0.25%

 

16.1

 

14.6

Salary growth

 

 

 

 

Salary growth +0.25%

 

0.8

 

0.7

Salary growth –0.25%

 

(0.8)

 

(0.7)

Pension growth

 

 

 

 

Pension growth +0.5%

 

16.5

 

14.8

Pension growth –0.5%

 

(16.5)

 

(14.8)

Fluctuation rate

 

 

 

 

Fluctuation rate +5%

 

(16.7)

 

(14.9)

Fluctuation rate –5%

 

28.6

 

25.4

Defined contribution plans

Several of the Group’s entities have a defined contribution plan. The employer’s contributions amounted to CHF 23.5 million in the year ended March 31, 2020 (previous year CHF 21.4 million) and are recognized directly in the income statement.

Accounting policies

Most employees are covered by post-employment plans sponsored by corresponding Group companies in the Sonova Group. Such plans are mainly defined contribution plans (future benefits are determined by reference to the amount of contributions paid) and are generally administered by autonomous pension funds or independent insurance companies. These pension plans are financed through employer and employee contributions. The Group’s contributions to defined contribution plans are charged to the income statement in the year to which they relate.

The Group also has several defined benefit pension plans, both funded and unfunded. Accounting and reporting of these plans are based on annual actuarial valuations. Defined benefit obligations and service costs are assessed using the projected unit credit method, with the cost of providing pensions charged to the income statement so as to spread the regular cost over the service lives of employees participating in these plans. The pension obligation is measured as the present value of the estimated future outflows using interest rates of government securities, which have terms to maturity approximating the terms of the related liability. Service costs from defined benefit plans are charged to the appropriate income statement heading within the operating results.

A single net interest component is calculated by applying the discount rate to the net defined benefit asset or liability. The net interest component is recognized in the income statement in the financial result.

Actuarial gains and losses, resulting from changes in actuarial assumptions and differences between assumptions and actual experiences, are recognized in the period in which they occur in “Other comprehensive income” in equity.

Accounting judgements and estimates

The Sonova Group has various employee benefit plans. Most of its salaried employees are covered by these plans, of which some are defined benefit plans. The present value of the defined benefit obligations at the end of the 2019/20 financial year amounts to CHF 448.9 million (previous year CHF 409.2 million). This includes CHF 442.9 million (previous year CHF 405.5 million) from the Swiss pension plan. With such plans, actuarial assumptions are made for the purpose of estimating future developments, including estimates and assumptions relating to discount rates, and future wage as well as pension trends. Actuaries also use statistical data such as mortality tables and staff turnover rates with a view to determining employee benefit obligations. If these factors change due to a change in economic or market conditions, the subsequent results could deviate considerably from the actuarial reports and calculations. In the medium term, such deviations could have an impact on the equity.

7.4 Equity plans

Equity plans are offered annually to the members of the Board of Directors (BoD), to the members of the Management Board (MB) as well as to other management and senior employees of the Group, entitling them to receive long-term incentives in the form of equity plans free of charge. Equity plans are settled either with Sonova Holding AG shares (equity-settled share-based payment) or for certain US employees with an equivalent amount in cash (cash-settled share-based payment). The amount granted varies depending on the degree of management responsibility held.

In the 2019/20 and 2018/19 financial years, as part of the Executive Equity Award Plan (EEAP) Sonova granted restricted shares, restricted share units (RSUs), performance share units (PSUs), options, and for US employees, share appreciation rights (SARs). Options as well as PSUs granted to the Management Board in 2019/20 and 2018/19 include a performance criterion (for further information refer to compensation report). 

For further details on the different instruments granted (especially in regards to performance criteria) to the members of the Management Board, please refer to the compensation report.

The following share-based payment costs have been recognized in the financial years:

CHF million

 

2019/20

 

2018/19

Equity-settled share-based payment costs

 

19.3

 

18.8

Cash-settled share-based payment costs

 

0.6

 

0.4

Total share-based payment costs

 

19.9

 

19.2

The following table shows the outstanding options and/or SARs, granted as part of the EEAP 2014 to 2020. All of the equity instruments listed below (except for the non-recurring performance options granted to the COO in 2017/18) vest in 4 equal tranches, annually over a period of 4 years. The non-recurring performance options granted to the CEO vest on April 1, 2023, subject to the achievement of the performance criteria.

Summary of outstanding options and SARs granted until March 31, 2020:

Financial year granted

 

Instruments granted

 

First vesting date/ expiry date

 

Granted

 

Exercise price (CHF)

 

Outstanding

 

Average remaining life (years)

 

Exercisable

2013/14

 

Options/SARs 1)

 

1.6.2015 31.1.2021

 

242,673

 

124.60

 

12,606

 

0.8

 

12,606

2014/15

 

Options/SARs 2)

 

1.6.2016 31.1.2022

 

308,459

 

121.10

 

58,864

 

1.8

 

58,864

2015/16

 

Options/SARs 3)

 

1.6.2017 31.1.2023

 

298,520

 

124.20

 

100,288

 

2.8

 

55,705

2016/17

 

Options/SARs 4)

 

1.6.2018 31.1.2024

 

378,652

 

130.00

 

199,599

 

3.8

 

64,861

2017/18

 

Options 5)

 

1.4.2023 30.9.2027

 

47,415

 

147.85

 

47,415

 

7.5

 

 

2017/18

 

Options/SARs 6)

 

1.6.2019 31.1.2028

 

341,943

 

147.85

 

257,169

 

7.8

 

44,433

2018/19

 

Options/SARs 7)

 

1.6.2020 31.1.2029

 

249,760

 

182.40

 

233,867

 

8.8

 

 

2019/20

 

Options/SARs 8)

 

1.6.2021 31.1.2030

 

208,245

 

241.80

 

208,245

 

9.8

 

 

Total

 

 

 

 

 

2,075,667

 

 

 

1'118'053 9)

 

6.8

 

236'469 10)

Thereof:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-settled

 

 

 

 

 

1,840,411

 

 

 

1,010,087

 

 

 

216,608

Cash-settled

 

 

 

 

 

235,256

 

 

 

107,966

 

 

 

19,861

1) Including 107,567 performance options, granted to the CEO and MB members.

2) Including 135,223 performance options, granted to the CEO and MB members.

3) Including 126,206 performance options, granted to the CEO and MB members.

4) Including 147,948 performance options, granted to the CEO and MB members.

5) Non-recurring performance options, granted to the COO (now CEO).

6) Including 150,114 performance options, granted to the CEO and MB members.

7) Including 80,850 performance options, granted to the CEO and MB members.

8) Including 77,574 performance options/SAR, granted to the CEO and MB members.

9) Weighted average exercise price of outstanding options/SARs amounts to CHF 165.60

10) Weighted average exercise price for exercisable options/SARs amounts to CHF 129.48

The fair value of options and/or SARs is calculated at the grant date by using an “Enhanced American Pricing Model”. The expected volatility is based on historical measures. The main valuation assumptions used for the options and/or SARs granted in the current and in the previous financial year are as follows:

Assumptions for valuation at grant date

 

EEAP 2020 – Management Board Options/SARs

 

EEAP 2020 Options/SARs

 

EEAP 2019 Options/SARs

Valuation date

 

1.2.2020

 

1.2.2020

 

1.2.2019

Expiry date

 

31.01.2030

 

31.01.2030

 

31.1.2029

Restriction period

 

5 years

 

 

 

 

Share price on grant date

 

CHF 241.80

 

CHF 241.80

 

CHF 182.40

Exercise price

 

CHF 241.80

 

CHF 241.80

 

CHF 182.40

Volatility

 

20.3%

 

20.3%

 

21.0%

Expected dividend yield

 

1.6%

 

1.6%

 

1.8%

Weighted risk free interest rate

 

(0.5%)

 

(0.6%)

 

(0.2%)

Weighted average fair value of options/SARs issued

 

33.34

 

31.98

 

26.12

Options

The exercise price of options is equal to the market price of Sonova Holding AG shares on the SIX Swiss Exchange at grant date. The fair value of the options granted is estimated at grant date and recorded as an expense over the corresponding vesting period. Assumptions are made regarding the forfeiture rate which is adjusted during the vesting period (including adjustments due to re-assessments of the likely ROCE targets achievements for performance options granted to the CEO and the other members of the MB) to ensure that only a charge for vested amounts occur. Options may be exercised after the vesting date, until their expiry date. If options are exercised, one share per option from the conditional share capital is issued, or treasury shares are used for fulfillment. In the financial year 2019/20 the options granted to the CEO and the members of the MB include a restriction period of 5 years, which was considered in the fair value of the options at grant date.

Changes in outstanding options:

 

2019/20

 

2018/19

 

 

Number of options

 

Weighted average exercise price (CHF)

 

Number of options

 

Weighted average exercise price (CHF)

Outstanding options at April 1

 

1,147,865

 

142.76

 

1,197,443

 

130.87

Granted 1)

 

182,407

 

241.80

 

215,382

 

182.40

Exercised/sold 2)

 

(248,711)

 

125.49

 

(232,189)

 

119.59

Forfeited

 

(71,474)

 

145.40

 

(32,771)

 

133.06

Outstanding options at March 31

 

1,010,087

 

165.54

 

1,147,865

 

142.76

Exercisable at March 31

 

216,608

 

129.56

 

217,568

 

121.64

1) 2019/20 includes 72,176 performance options (previous year 80,850 performance options), granted to the CEO and MB members.

2) The total consideration from options exercised amounted to CHF 27.9 million (previous year CHF 27.9 million). The weighted average share price of the options exercised during the year 2019/20 was CHF 223.68 (previous year CHF 176.49).

Share appreciation rights (SARs)

The exercise price of SARs is generally equal to the market price of Sonova Holding AG shares on the SIX Swiss Exchange at grant date. Upon exercise of SARs, an employee shall be paid, an amount in cash equal to the number of shares for which the employee exercised SARs, multiplied by any surplus, of the per share market price at the date of exercise versus the per share exercise price (determined at the date of grant of SARs). The initial fair value of the SARs is in line with the valuation of the options of the respective period and recorded as an expense over the corresponding vesting period. Assumptions are made regarding the forfeiture rate which is adjusted during the vesting period (including adjustments due to re-assessments of the likely ROCE targets achievements for performance options granted to the members of the MB) to ensure that only a charge for vested amounts occur. Until the liability is settled, it is revalued at each reporting date recognizing changes in fair value in the income statement. The SARs may be sold after the vesting date, until they expire, except for the SARs granted to members of the MB in the financial year 2019/20, which include a restriction period of 5 years.

Changes in outstanding SARs:

 

2019/20

 

2018/19

 

 

 

Number of SARs

 

Weighted average exercise price (CHF)

 

Number of SARs

 

Weighted average exercise price (CHF)

 

Outstanding SARs at April 1

 

113,024

 

148.27

 

102,369

 

132.90

 

Granted

 

25,838

 

241.80

 

34,378

 

182.40

 

Exercised/sold

 

(22,168)

 

128.22

 

(8,522)

 

124.84

 

Forfeited

 

(8,728)

 

159.37

 

(15,201)

 

135.08

 

Outstanding SARs at March 31 1)

 

107,966

 

173.87

 

113,024

 

148.27

 

Exercisable at March 31 2)

 

19,861

 

128.61

 

22,423

 

123.17

 

1) The carrying amount of the liability relating to the SARs at March 31, 2020 is CHF 3.6 million (previous year CHF 4.0 million).

2) The intrinsic value of the SARs exercisable at March 31, 2020 amounts to CHF 0.9 million (previous year CHF 1.7 million).

Performance share units (PSUs)

In 2020, as well as in the previous year, grants made to the members of the Management Board under the EEAP consist of PSUs. The PSUs are measured on relative TSR (rTSR) against the constituents of a recognized index. The fair value of a PSU at grant date was based on a “Monte-Carlo valuation”. PSUs entitle the holder up to two shares per PSU, subject to the achievement of the performance criterion. PSUs granted in 2020 are subject to a restriction period, which was considered in the fair value of the PSU at grant date. Upon vesting of the PSUs, the respective shares are either created out of the conditional share capital or treasury shares are used. The cost of the PSUs granted is expensed over their vesting period. Assumptions are made regarding the forfeiture rate which is adjusted during the vesting period, including adjustments due to re-assessments of the likely achievements of the rTSR targets for performance of PSUs granted to CEO and the other members of the MB, to ensure that only vested amounts are expensed.

Assumptions for valuation at grant date

 

PSU 2020

 

PSU 2019

Valuation date

 

1.2.2020

 

1.2.2019

Date of grant

 

1.2.2020

 

1.2.2019

Share price on grant date

 

CHF 241.80

 

CHF 182.40

Fair value

 

CHF 266.80

 

CHF 224.38

End of restriction period

 

20 months

 

none

Performance conditions

 

Total shareholder return (TSR)

 

Total shareholder return (TSR)

TSR performance period

 

1.2.2020 – 31.3.2023

 

1.2.2019 – 31.3.2022

TSR comparator group

 

Swiss Leader Index (SLI)

 

Swiss Leader Index (SLI)

Restricted share units (RSUs)

Under the EEAP grants 2014 to 2020, entitled employees have been granted RSUs. The value of an RSU is equal to the market price of Sonova Holding AG shares on the SIX Swiss Exchange on the grant date, adjusted for the fair value of expected dividends, as RSUs are not entitled to dividends. RSUs entitle the holder to one share per RSU after the vesting period. In the case of RSUs granted to the CEO (2014 to 2018) and the other members of the MB (EEAP 2014 to 2017), vesting of these shares is dependent on the fulfillment of the performance criteria which remains the achievement of a pre-defined minimum return on capital employed (ROCE) target. Upon vesting of the RSUs, the respective shares are either created out of the conditional share capital or treasury shares are used. The cost of the RSUs granted is expensed over their vesting period. Assumptions are made regarding the forfeiture rate which is adjusted during the vesting period to ensure that only vested amounts are expensed.

Restricted shares

In addition to the PSUs granted in respect to the EEAP 2020, restricted shares have been granted to the Chairman of the Board of Directors as well as to the other members of the Board of Directors in the financial year 2019/20 and 2018/19. These shares are entitled to dividends and are restricted for a period of 64 months (Chairman), respectively 52 months (other members of the Board of Directors).

The costs for the restricted shares granted to the members of the Board of Directors have been fully expensed in the 2019/20 financial year as these shares have no vesting period.

Changes in outstanding PSUs/RSUs/Restricted shares:

 

2019/20

 

2018/19

 

 

Number of PSUs

 

Number of RSUs

 

Number of restricted shares

 

Total

 

Number of PSUs

 

Number of RSUs

 

Number of restricted shares

 

Total

Balance April 1

 

25,877

 

305,436

 

68,574

 

399,887

 

18,001

 

344,990

 

72,515

 

435,506

Granted

 

8,284

 

63,075

 

6,157

 

77,516

 

7,876

 

83,326

 

10,960

 

102,162

Released

 

 

 

(87,669)

 

(14,473)

 

(102,142)

 

 

 

(94,899)

 

(14,901)

 

(109,800)

Forfeited

 

(2,472)

 

(21,777)

 

 

 

(24,249)

 

 

 

(27,981)

 

 

 

(27,981)

Balance March 31

 

31,689

 

259,065

 

60,258

 

351,012

 

25,877

 

305,436

 

68,574

 

399,887

Accounting policies

The Board of Directors of Sonova Holding AG, the Management Board, and certain management and senior employees of other Group companies participate in equity compensation plans. The fair value of all equity compensation awards granted to employees is determined at the grant date and recorded as an expense over the vesting period. The expense for equity compensation awards is charged to the appropriate income statement heading within the operating result and an equivalent increase in equity (for equity-settled compensation) or financial liability (for cash-settled compensation) is recorded. In the case of cash-settled compensation, until the liability is settled, it is revalued at each reporting date, recognizing changes in the fair value in the income statement.

7.5 Events after the balance sheet date

On April 6, 2020, the Group issued a CHF 330 million two year fixed-rate bond with interest rate of 0.55% and maturity date of April 6, 2022. The bond was issued at 100.084% for the first tranche of CHF 260 million and at 100.139% for the second tranche of CHF 70 million.

On April 29, 2020, the Group reached an agreement on terms with three of its relationship banks for a CHF 300 million revolving bridge facility. This will be committed for a period of 12 months after closing, with an option to extend by further 4 months, i.e. a maximum of 16 months.

The global health and economic crisis resulting from the COVID-19 pandemic is severely affecting the hearing care market and with it the Group’s business activities. Audiology stores, the primary consumer channel for hearing care products and services, are either closed or operating with much reduced hours. The Cochlear Implants business is also affected, as the majority of healthcare providers have decided to defer all non-essential surgery. In this context, Sonova has implemented strict cost-reduction programs, which includes government-subsidized work time reductions in a number of countries.

7.6 List of significant companies

Company name

 

Activity

 

Domicile (country)

 

Share/paid-in capital 1) Local currency 1,000

 

Shares held

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

 

 

 

 

 

 

 

 

 

Sonova Holding AG

 

A

 

Stäfa

 

CHF

 

3,220

 

 

Sonova AG

 

A, B, C, D

 

Stäfa

 

CHF

 

2,500

 

100%

Advanced Bionics AG

 

A, B

 

Stäfa

 

CHF

 

4,350

 

100%

Sonova Retail Holding AG

 

A

 

Zug

 

CHF

 

1,000

 

100%

 

 

 

 

 

 

 

 

 

 

 

EMEA (excluding Switzerland)

 

 

 

 

 

 

 

 

 

 

Sonova Audiological Care Austria GmbH

 

B

 

Wals-Himmelreich (AT)

 

EUR

 

450

 

100%

Sonova Retail Belgium NV

 

B

 

Groot-Bijgaarden (BE)

 

EUR

 

3,686

 

100%

Sonova Deutschland GmbH

 

B

 

Fellbach-Oeffingen (DE)

 

EUR

 

41

 

100%

Vitakustik GmbH

 

B

 

Dortmund (DE)

 

EUR

 

500

 

100%

Sonova Retail Deutschland GmbH

 

B

 

Dortmund (DE)

 

EUR

 

1,000

 

100%

Sonova Retail Denmark ApS

 

B

 

Klampenborg (DK)

 

DKK

 

1,621

 

100%

Sonova Ibérica S.A.U.

 

B

 

Alicante (ES)

 

EUR

 

7,000

 

100%

Sonova Audiological Care France SAS

 

B

 

Cahors (FR)

 

EUR

 

58,800

 

100%

SOD Invest SAS

 

B

 

Cahors (FR)

 

EUR

 

58,600

 

100%

Sonova France S.A.S.

 

B

 

Bron-Lyon (FR)

 

EUR

 

1,000

 

100%

Sonova Italia Srl

 

B

 

Milan (IT)

 

EUR

 

1,040

 

100%

AudioNova Italia

 

B

 

Milan (IT)

 

EUR

 

1,166

 

100%

Sonova Audiological Care Nederland B.V.

 

B

 

Dortrecht (NL)

 

EUR

 

19

 

100%

Sonova Audiological Care Polska Sp.z.o.o.

 

B

 

Lodz (PL)

 

PLN

 

678

 

100%

Boots Hearing Care Ltd.

 

B

 

Conwy (UK)

 

GBP

 

0

2)

51%

Sonova UK Ltd.

 

B

 

Warrington (UK)

 

GBP

 

2,500

 

100%

Sonova Service Center UK Limited

 

C

 

Warrington (UK)

 

GBP

 

3,150

 

100%

Sonova Israel Ltd.

 

B

 

Haifa (IL)

 

ILS

 

5,150

 

100%

Activities:

A Holding/Finance: The entity is a holding or finance company.

B Sales: The entity performs sales and marketing activities.

C Production: This entity performs manufacturing for the Group.

D Research: This entity performs research and development activities for the Group.

1) Share/paid-in capital may not reflect the taxable share/paid-in capital amount and does not include any paid-in surplus.

2) GBP 133

Company name

 

Activity

 

Domicile (country)

 

Share/paid-in capital 1) Local currency 1,000

 

Shares held

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

 

 

 

 

 

Sonova do Brasil Produtos Audiológicos Ltda.

 

B

 

Sao Paulo (BR)

 

BRL

 

67,179

 

100%

National Hearing Services Inc.

 

B

 

Victoria BC (CA)

 

CAD

 

0

2)

100%

Sonova Canada Inc.

 

B

 

Mississauga (CA)

 

CAD

 

0

2)

100%

Connect Hearing Inc.

 

B

 

Naperville (US)

 

USD

 

0

3)

100%

Sonova USA, Inc.

 

B

 

Plymouth (US)

 

USD

 

46,608

 

100%

Advanced Bionics Corp.

 

A

 

Valencia (US)

 

USD

 

1

 

100%

Advanced Bionics LLC

 

B, C, D

 

Valencia (US)

 

USD

 

0

2)

100%

Sonova United States Hearing Instruments, LLC

 

A

 

Warrenville (US)

 

USD

 

0

2)

100%

Development Finance Inc.

 

A

 

Wilmington (US)

 

USD

 

0

4)

100%

 

 

 

 

 

 

 

 

 

 

 

Asia/Pacific

 

 

 

 

 

 

 

 

 

 

Hearing Retail Group Pty. Ltd.

 

B

 

McMahons Point (AU)

 

AUD

 

58,000

 

100%

Sonova Australia Pty Ltd

 

B

 

Baulkham Hills (AU)

 

AUD

 

10,475

 

100%

Sonova (Shanghai) Co., Ltd.

 

B

 

Shanghai (CN)

 

CNY

 

20,041

 

100%

Sonova Hearing (Suzhou) Co., Ltd.

 

C

 

Suzhou (CN)

 

CNY

 

46,249

 

100%

Sonova Japan Co., Ltd.

 

B

 

Tokyo (JP)

 

JPY

 

10,000

 

100%

Triton Hearing Ltd.

 

B

 

Auckland (NZ)

 

NZD

 

20,450

 

100%

Sonova Operation Center Vietnam Co., Ltd.

 

C

 

Binh Duong (VN)

 

VND

 

36,156,000

 

100%

Activities:

A Holding/Finance: The entity is a holding or finance company.

B Sales: The entity performs sales and marketing activities.

C Production: This entity performs manufacturing for the Group.

D Research: This entity performs research and development activities for the Group.

1) Share/paid-in capital may not reflect the taxable share/paid-in capital amount and does not include any paid-in surplus.

2) Without par value

3) USD 1

4) USD 10

7.7 Other accounting policies

Investments in subsidiaries

Investments in subsidiaries are fully consolidated. These are entities over which Sonova Holding AG directly or indirectly exercises control. Control exists when the Group is exposed, or has rights, to variable returns from its relationship with an entity and has the power to affect those returns. Control is presumed to exist when the parent owns, directly or in­directly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can clearly demonstrate that such ownership does not constitute control. For the consolidated entities, 100% of assets, liabilities, income, and expenses are included. Non-controlling interests in equity and net income or loss are shown separately in the balance sheet and income statement. Changes in the ownership interest of a subsidiary that do not result in a loss of control will be accounted for as an equity transaction. Hence, neither goodwill nor any gains or losses will result.

Group Companies acquired during the year are included in the consolidation from the date on which control over the company transferred to the Group. Group companies divested during the year are excluded from the consolidation as of the date the Group ceased to have control over the company. Intercompany balances and transactions (including unrealized profit on intercompany inventories) are eliminated in full.

Related parties

A party is related to an entity if the party directly or indirectly controls, is controlled by, or is under common control with the entity, has an interest in the entity that gives it significant influence over the entity, has joint control over the entity or is an associate or a joint venture of the entity. In addition, members of the Board of Directors and the Management Board or close members of their families are also considered related parties as well as post-employment plan organizations (pension funds) for the benefit of Sonova employees. No related party exercises control over the Group.

7.8 Effect of new accounting standards

IFRS 16 “Leases”

The standard replaces IAS 17 and sets out new principles for recognition, measurement, presentation and disclosure of leases. The standard provides a single lessee accounting model that requires lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.

The main impact for the Group is on the recognition of new assets and liabilities, primarily for its property and car lease agreements. In addition, the nature of the expenses related to those leases changes as IFRS 16 replaces the straight-line operating lease expenses with a depreciation charge for right-of-use assets and interest expenses on lease liabilities. In the consolidated cash flow statement, repayment of lease liabilities is included in financing activities and no longer in cash flow from operating activities.

The Group has adopted IFRS 16 using the modified retrospective approach. Accordingly, the information presented for the prior period has not been restated and is presented as previously reported under IAS 17.

At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate as at April 1, 2019. Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments recognized immediately before the date of initial application.

The reconciliation of payment obligations from operating leases as at March 31, 2019 for initial recognition as at April 1, 2019 is as follows:

in CHF million

 

April 1, 2019

Operating lease commitments as at March 31, 2019 (IAS 17)

 

234.6

Discounting using the incremental borrowing rate as at April 1, 2019

 

(14.0)

Short-term and low value leases recognized on a straight-line basis as expense

 

(4.3)

Adjustments relating to different treatment of contracts and extension and termination options

 

68.7

Lease liabilities as at April 1, 2019

 

285.0

thereof short-term

 

63.1

thereof long-term

 

221.9

The weighted average incremental borrowing rate as at April 1, 2019 was 1.4%.

Impact on consolidated balance sheet and cash flow statement

The following table summarizes the impact of IFRS 16 on the Group’s consolidated balance sheet at April 1, 2019 and on the consolidated cash flow statement for the financial year 2019/20 for each of the line items affected. Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided.

Balance sheet

 

 

 

 

 

 

Assets CHF million

 

1.4.2019 with IFRS 16

 

IFRS 16 effect

 

31.3.2019 without IFRS 16

Right-of-use assets

 

278.1

 

278.1

 

 

Total non-current assets

 

3,258.7

 

278.1

 

2,980.6

Total assets

 

4,570.6

 

278.1

 

4,292.5

 

 

 

 

 

 

 

Liabilities and equity CHF million

 

1.4.2019 with IFRS 16

 

IFRS 16 effect

 

31.3.2019 without IFRS 16

Current lease liabilities

 

63.1

 

63.1

 

 

Short-term provisions

 

128.2

 

(1.0)

 

129.2

Total current liabilities

 

1,092.2

 

62.1

 

1,030.1

Non-current lease liabilities

 

221.9

 

221.9

 

 

Long-term provisions

 

117.0

 

(5.9)

 

122.9

Total non-current liabilities

 

1,102.3

 

216.0

 

886.3

Total liabilities

 

2,194.4

 

278.1

 

1,916.3

Total liabilities and equity

 

4,570.6

 

278.1

 

4,292.5

 

 

 

 

 

 

 

Consolidated cash flow statement

 

 

 

 

 

 

April 1 to March 31, in CHF million

 

2019/20 with IFRS 16

 

IFRS 16 effect

 

2019/20 without IFRS 16

Income before taxes

 

502.4

 

(1.1)

 

503.5

Depreciation and amortization of tangible and intangible assets and right-of-use assets

 

200.1

 

65.9

 

134.2

Increase (decrease) in long-term provisions and long-term contract liabilities

 

22.2

 

(0.5)

 

22.7

Financial expense/(income), net

 

10.0

 

4.0

 

6.0

Cash flow from operating activities

 

843.3

 

68.3

 

775.0

Repayment of lease liabilities

 

(64.3)

 

(64.3)

 

0.0

Interest paid

 

(5.0)

 

(4.0)

 

(1.0)

Cash flow from financing activities

 

(550.4)

 

(68.3)

 

(482.1)

As a result of IFRS 16, the cash flow from operating activities for the financial year 2019/20 increased by CHF 68.3 million and the cash flow from financing activities reduced by the same amount.

For the financial year 2019/20 the adoption of IFRS 16 had a minor positive impact of CHF 2.9 million on the EBITA result and a negative impact of CHF 1.1 million on income after taxes.