NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2023
Notes to the consolidated financial statements
as of March 31, 2023
1. Basis for preparation
1. Basis for preparation
1.1 Corporate information
The Sonova Group (the “Group”) is a global leader in innovative hearing care solutions: from personal audio devices and wireless communication systems to audiological care services, hearing aids and cochlear implants. The Groupʼs globally diversified sales and distribution channels serve an ever growing consumer base in more than 100 countries. The ultimate parent company is Sonova Holding AG, a limited liability company incorporated in Switzerland. Sonova Holding AGʼs 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) 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 10, 2023 and are subject to approval by the Annual General Shareholdersʼ Meeting on June 12, 2023.
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 7.7.
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-recurring 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:
1.4 Changes in accounting policies
In 2022/23 the Group adopted the following amendments to existing standards and interpretations, without having a significant impact on the Groupʼs result and financial position:
- Reference to the Conceptual Framework – Amendments to IFRS 3
- Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16
- Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37
- Annual Improvements to IFRS Standards 2018 – 2020
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, 2023 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. 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.
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 Groupʼs chief operating decision maker (Chief Executive Officer). The financial information that is provided to the Groupʼs chief operating decision maker, which is used to allocate resources and to assess the performance, is primarily based on sales analysis as well as consolidated income statements and other key financial metrics for the two segments. The Group uses EBITA as a 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, as well as wireless headsets, speech-enhanced hearables and audiophile headphones. 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 – with technologically advanced production processes being performed in Switzerland and standard product assembly being located in Asia -, whereas the production of consumer hearing devices is based in Germany, Ireland, Romania and the USA. 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 for hearing instruments and through 21 sales subsidiaries and long-established trading partners for consumer hearing products. 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.
Entity-wide disclosures
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 audio devices, 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 Groupʼs 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 liabilities relate to advance consideration received from customers for the Groupʼs 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 sheet.
Significant changes in the contract liabilities during the period are as follows:
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 control 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 control 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
In the 2022/23 financial year, the net result of other income and expense amounts to CHF 0.6 million (previous year: CHF – 11.5 million).
In the prior year, the expense primarily related to costs in relation to a settlement agreement in principle with the US Department of Justice and ongoing patent litigation in the Cochlear Implants segment. For further information refer to Note 3.9 “Contingent assets and liabilities”.
2.5 Earnings per share
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 awards from share participation plans will be exercised. For the option plans, the weighted average number of shares is adjusted for all dilutive options issued under the stock option plans which have been granted in 2016 through to 2023 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. Operating assets and liabilities
3.1 Trade receivables
As is common in this industry, the Sonova Group has a large number of customers. There is no significant concentration of credit risk.
For further information on the aging of the trade receivables and related allowances, please refer to Note 4.7.
During 2022/23, the Group utilized CHF 1.7 million (previous year CHF 3.1 million) of the loss allowance for doubtful receivables to write-off receivables.
The carrying amounts of trade receivables are denominated in the following currencies:
Accounting policies
Trade receivables are initially recorded at the transaction price 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
The “cost of sales” corresponding to the carrying value of inventory (which excludes freight, packaging, logistics as well as certain overhead cost) amounted in 2022/23 to CHF 887.7 million (previous year CHF 736.2 million). The Group recognized write-downs of CHF 18.0 million (previous year CHF 25.9 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
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 does 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
The maturity analysis of lease liabilities is disclosed in Note 4.7
The total cash outflow for leases in the financial year 2022/23 amounted to CHF 105.1 million (prior year CHF 84.9 million).
The Group has various lease contracts that as of March 31, 2023 have not yet commenced. The future lease payments for these non-cancellable lease contracts amount to CHF 3.0 million (prior year CHF 1.7 million). The future lease payments relating to variable lease payments amount to CHF 6.8 million (prior year CHF 5.7 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 3.4 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 Groupʼs incremental borrowing rate if the interest rate implicit in the lease is not readily determinable. 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
Based on the impairment tests performed, there was no need for the recognition of any impairment of goodwill for the 2022/23 and 2021/22 financial years.
The cash flow projections used for impairment testing, were based on the most recent business plan. The business plan was projected over a five year period.
Hearing instruments
As of March 31, 2023, the carrying amount of goodwill, expressed in various currencies, amounted to an equivalent of CHF 2,106.5 million (prior year CHF 2,000.7 million) and for intangible assets with indefinite useful lives to CHF 102.7 million (prior year: CHF 100.6 million). The intangible assets with indefinite useful lives relates to the brand value that was acquired as part of the acquisition of the Consumer Division from Sennheiser in financial year 2021/22 as disclosed in Note 6.1. It has been determined to have an indefinite useful life as there is no intention to abandon the brand name. It has existed for many years and the Group has the ability to maintain its brand value for an indefinite period of time. Thus, the brand is not amortized but is assessed for impairment annually.
Cash flows beyond the projection period were extrapolated with a long-term growth rate of 1.9% (prior year 2.0%) which represents the projected inflation rate. For the calculation, a pre-tax weighted average discount rate of 10.8% (prior year 9.4%) 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, 2023, the carrying amount of the goodwill, expressed in various currencies, amounted to an equivalent of CHF 294.8 million (prior year CHF 297.7 million).
Cash flows beyond the projection period were extrapolated with a long-term growth rate of 2.0% (prior year 2.1%) which represents the projected inflation rate. For the calculation, a pre-tax weighted average discount rate of 11.7% (prior year 10.2%) 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 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 (except for the Sennheiser brand name as disclosed above). 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.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable.
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 of 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
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
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 audio devices, 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 costs of warranty claims and returns.
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 provisions for product liabilities consider 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.
The provision for product liabilities are reassessed on a regular and systematic basis and follow a financial model which is consistently applied. The calculation of the provision is based on past experience regarding the number and cost of current and future claims. In the 2022/23 financial year, changes in the assessment of the expected number and cost of current and future claims led to reversals of CHF 0.5 million (previous year reversals of CHF 0.3 million). The impact of the reassessment of the legal provisions are considered in the income statement in the lines “Other income” or “Other expenses”. As per March 31, 2023 the provision for product liabilities amount to CHF 58.5 million (previous year CHF 94.4 million). The timing of future cash outflows is uncertain since it will largely depend on the outcome of administrative and legal proceedings. In the case of the voluntary recall of AB products in 2006, considering periods of limitation, claims will have until 2026 to be filed 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 the provision for product liabilities to occur within the next 6 years.
Other provisions
Other provisions include provisions for specific business risks such as litigation CHF 5.7 million (prior year CHF 21.2 million) and restructuring costs CHF 5.0 million (prior year CHF 11.3 million) which arose during the normal course of business. While the timing of the cash outflow from the restructuring provisions is expected to take place within the next 12 months, the cash outflows for the remainder of 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 managementʼs 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 payables include amounts to be remitted for withholding taxes, value added taxes, social security payments and employeesʼ 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.
3.9 Contingent assets and liabilities
Guarantees
At March 31, 2023 and 2022, there were no pledges given to third parties other than in relation to bank loans and mortgages.
Deposits in the amount of CHF 1.6 million (previous year CHF 1.6 million) were pledged in relation to bank guarantees. Open purchase orders as of March 31, 2023 and 2022, were related to recurring business activities.
Lawsuits and disputes
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 products launched in 2018. While the ultimate outcome of the dispute remains open, Advanced Bionics continues to believe the complaint has no merit and is vigorously defending its position and intellectual property. In a very recent opinion the US court has granted a summary judgment of non-infringement of the asserted MED-EL patents. On March 8, 2022, the Regional Court of Mannheim in Germany has reached a judgment in the first instance in a patent infringement lawsuit brought by MED-EL Elektromedizinische Geräte GmbH (“Med-El”) against its German subsidiary Advanced Bionics GmbH and Swiss subsidiary Advanced Bionics AG (“AB”) based on the German part of a respective EP patent of MED-EL. AB believes the complaint has no merit and has therefore appealed the judgment with the Higher Regional Court of Karlsruhe. The first instance Mannheim judgment included an injunction. Med-El enforced the injunction, thus prevented further sales of the HiRes Ultra 3D cochlear implant in and from Germany. On September 29, 2022 the Technical Board of Appeal at the European Patent Office ruled that Med-Elʼs European patent is maintained only in a very restricted version. The Higher Regional Court of Karlsruhe then suspended the enforcement until its decision on ABʼs appeal. A hearing in the appeal proceedings is not yet scheduled. In related proceedings in the Netherlands, the non-infringement of Med-Elʼs narrowed patent has been confirmed by the first instance court and is now under appeal. In the UK, MED-ELʼs UK part of the EP patent has been revoked and is now also under appeal.
Advanced Bionics LLC (“AB”) entered into settlement agreements (“Agreements”) with the U.S. Department of Justice in December 2022 and with various state Medicare agencies in March 2023. AB also entered into a Corporate Integrity Agreement (“CIA”) with the Office of the Inspector General at the U.S. Department of Health and Human Services (the “HHS-OIG”). The Agreements, pursuant to which AB agreed to pay USD 12.6 million, and the CIA concluded the government investigation, which began with a January 2020 HHS-OIG subpoena and stemmed from a False Claims Act (“FCA”) action filed by a former employee. The FCA action was dismissed in March 2023 by the court as part of the settlement. AB has denied the allegations made in the FCA action and investigation.
4. Capital structure and financial management
4. Capital structure and financial management
4.1 Cash and cash equivalents
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
Other financial income includes primarily fair value adjustments of financial instruments of CHF 10.9 million (previous year: none). Other financial expenses includes foreign exchange gains and losses from the management of foreign currencies as well as net losses from the hedging of foreign exchange exposures of CHF 20.3 million (previous year CHF 1.4 million) and valuation adjustments on financial instruments of CHF 5.2 million (previous year CHF 13.4 million).
4.3 Dividend per share
The Board of Directors of Sonova Holding AG proposes to the Annual General Shareholdersʼ Meeting, to be held on June 12, 2023, that a dividend of CHF 4.60 per share shall be distributed (previous year CHF 4.40).
4.4 Other financial assets
Other current financial assets
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
The loans are primarily denominated in CAD, CHF, EUR, GBP, JPY, PLN and USD. Loans to third parties consist mainly of loans to customers. As of March 31, 2023, 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 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 Groupʼs 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 has not elected to account for equity instruments in this category.
4.5 Financial liabilities
As of March 31, 2023, the Group has the following bonds/US Private Placement outstanding:
The Group maintains uncommitted credit facilities from various lenders. The credit facilities are denominated in CHF and can be cancelled at short notice. As of March 31, 2023 the Group did not make use of these credit facilities.
Current financial liabilities
Non-current financial liabilities
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
Reconciliation of liabilities arising from financing activities
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
Share buyback program
On March 29, 2022, Sonova Holding AG announced that its Board of Directors approved a share buyback program of up to CHF 1.5 billion. The program started in April 2022 and is expected to run over a period of up to 36 months. During financial year 2022/23, 1,532,910 treasury shares were bought under the share buyback program and are intended to be cancelled (proposal to the Annual Shareholdersʼ Meeting June 12, 2023).
In the financial year 2022/23, transaction costs related to the share buyback program in the amount of CHF 1.7 million (prior year CHF 3.5 million) were deducted from equity.
Authorized capital
The 2022 Annual General Shareholdersʼ Meeting authorized the Board of Directors to increase the share capital at any time until June 15, 2024 by a maximum amount of CHF 305,798.59 by issuing a maximum of 6,115,971 registered shares that are to be fully paid up, each with a nominal value of CHF 0.05. Increases in partial amounts shall be permissible. The Board of Directors did not make use of this authorized capital in financial year 2022/23.
Conditional capital
At the Annual General Shareholdersʼ 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, 2023. These shares are reserved for long-term incentive plans (2,021,013 shares) as well as for initiatives to increase the companyʼs 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 companiesʼ 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 risk mitigation progress is reviewed by the Audit Committee on a quarterly basis. The Board of Directors discusses and analyzes the Groupʼs risks at least once a year in the context of a strategy meeting.
Financial risk management
Due to Sonova Groupʼs 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 Groupʼs 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 Groupʼs 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 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.
Positive replacement values from forward contract hedges 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, 2023, the Group engaged in forward currency contracts amounting to CHF 422.9 million (previous year CHF 296.6 million). The open contracts on March 31, 2023 as well as on March 31, 2022 were all due within one year.
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 2022/23 financial year of CHF 317.1 million (previous year CHF 1,298.7 million). If interest rates during the 2022/23 financial year had been 1% higher, the positive impact on income before taxes would have been CHF 2.0 million. If interest rates had been 1% lower, the income before taxes would have been negatively impacted by CHF 2.0 million. The Groupʼs long-term financial liabilities are fixed rate instruments and thus not subject to interest rate risk.
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 Groupʼs 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 Sonovaʼs 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, 2023, the largest balance with a single counterparty amounted to 17% (previous year 29%) of total cash and cash equivalents.
The Group performs frequent credit checks on its receivables. Due to 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 January 2023.
Impairment of financial assets
Impairment losses on financial assets are calculated based on the expected credit loss (ECL) model of IFRS 9. The Groupʼs 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:
The closing loss allowance for trade receivables as at March 31, 2022 reconciles to the closing loss allowance as at March 31, 2023 as follows:
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.
Liquidity risk
Group finance is responsible for centrally managing the net cash/debt position and to ensure that the Groupʼs 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 majority of bank accounts is provided by central treasury organization. Cash pools are automated and daily SWIFT balance tracking is applied where feasible.
The following table summarizes the Groupʼs financial liabilities as of March 31, 2023 and 2022 based on contractual undiscounted payments. Bonds include the notional amount as well as interest payments.
Capital management
It is the Groupʼs policy to maintain a strong equity base and to secure a continuous “investment grade” rating. The Groupʼs 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.
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.
The following table presents the changes in level 3 financial instruments for the year ended March 31, 2023 and 2022:
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, 2023 and 2022, the maximum potential payments under contingent considerations do not differ significantly from the amounts provided.
The increase in contingent considerations in the financial year 2021/22 mainly related to a license agreement for the Sennheiser brand for which a liability was recognized for the expected future licensing payments (refer to Note 6.1). The amount of the liability is determined based on a discounted cash flow calculation over a licensing period of 15 years considering five possible payment scenarios. Significant unobservable inputs used in the fair value measurement include the probability of each scenario, projected revenues, the brand licensing fee and the discount rate.
As of March 31, 2023 the fair value of the license liability amounts to CHF 64.2 million. The valuation model remained unchanged to the prior year. Significant unobservable inputs were updated based on the latest strategic plan. For the calculation a licensing fee of 2.5% for the first 8 years, 1.3% for the subsequent years and a discount rate of 2.9% was used. The gain on the fair value change of the financial liability is considered in the income statement in line “Financial income”. The Group performed a sensitivity analysis, which shows that a decrease in the discount rate of 1% would increase the licence liability as of March 31, 2023 and negatively impact income before taxes by CHF 4.0 million.
4.9 Exchange rates
The following main exchange rates were used for currency translation:
Accounting policies
The consolidated financial statements are expressed in Swiss francs (“CHF”), which is the Groupʼs 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. Taxes
5.1 Taxes
The Groupʼs expected average tax rate is the rate obtained by applying the expected tax rate for each jurisdiction to its respective result before taxes, adjusted for significant one-time effects. The expected tax rate might vary on a year-over-year basis depending on changes in tax regulations and where the results are achieved.
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:
Tax loss carryforwards, which have not been capitalized also include tax losses from acquired entities with limitation of use and losses that do not qualify for capitalization. The inherent uncertainty regarding the level and use of the tax losses and changes in tax regulations and laws can impact the annual assessment of these unused tax loss carryforwards.
Tax reforms
On January 1, 2020 the Federal Act on Tax Reform and AHV Financing (TRAF) entered into force. The tax reform abolished the tax regimes for holding, domiciliary and mixed companies and introduced new tax incentives with a focus to promote innovation as well as transition measures in line with the OECD principles.
In the framework of the OECDʼs BEPS 2.0 initiatives, over 135 jurisdictions agreed in October 2021 to implement Global Anti-Base Erosion Rules (GloBE – Pillar 2) that aim to achieve that large multinational enterprises pay at least 15% income tax in each jurisdiction they operate. In December 2021, the OECD released the respective GloBE Model Rules that provide for a coordinated system to ensure that the 15% tax on the basis of a globally harmonized tax base, considered taxes as well as a system to levy top-up tax, if required. Enactment is expected on 1 January 2024. Sonova analyzes and prepares for the additional layer of compliance.
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 the use of certain estimates and assumptions. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and outcome is uncertain. Management establishes provisions, where appropriate, on the basis of amounts expected to be at risk 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 non-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 112.9 million (previous year CHF 114.1 million) related to deductible differences and, in certain cases, tax loss carry forwards, provided that their utilization is considered 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 138.0 million (previous year: CHF 128.8 million) related to tax reforms 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. Whenever circumstances have changed or there is new information that affects these judgements, the estimates will be reassessed.
6. Changes in Group structure
6. Changes in Group structure
6.1 Acquisitions/disposals of subsidiaries
Acquisitions financial year 2022/23
On December 5, 2022, Sonova Holding AG completed the acquisition of 100% of Hubei Hysound Health Technology Corp. Ltd, Wuhan (China) and Shanghai Chengting Technology Corp. Ltd, Shanghai (China) (HYSOUND Group). The HYSOUND Group is one of the leading nationwide chains of audiological care clinics in China with around 200 clinics in over 20 provinces and more than 70 cities across China.
In addition to the acquisition above, during the financial year 2022/23 several small businesses were acquired in EMEA, USA, Americas and Asia/Pacific. 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.
Acquisitions/disposals financial year 2021/22
On March 1, 2022, Sonova Holding AG completed the acquisition of 100% of the Consumer Division from Sennheiser electronic GmbH & Co. KG, Wedemark (Germany). The Sennheiser Consumer division concentrates on the business of headphones and hearables for private customers and operates with around 600 employees worldwide through a broad online and in-store distribution network. As part of the acquisition, Sonova secured a perpetual license for the Sennheiser brand, under which both existing and new consumer hearing devices will be marketed.
On March 1, 2022, Sonova Holding AG completed the acquisition of 100% of Alpaca Group Holdings LLC, Delaware (USA). Alpaca Audiology is one of the largest independent networks of audiological clinics in the US. The company has over 500 employees and operates around 220 clinics across the country.
In addition to the acquisitions above, during the financial year 2021/22 several small businesses were acquired in EMEA, North America and Asia/Pacific and one small business was divested in Asia.
Assets and liabilities resulting from the acquisitions are as follows:
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 13.2 million and deferred payments amount to CHF 0.5 million. Contingent considerations are dependent on the future performance of the acquired companies as well as contractual obligations and milestone achievements. 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 reductions in administrative and corporate functions as well as 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 50.5 million for the acquisitions in the current financial year relate to customer relationships (CHF 47.4 million) and trademarks (CHF 3.1 million). The assigned lifetime range is between 10 and 15 years for customer relationships and 3 years for trademarks. On these intangibles deferred taxes have been considered.
Acquisition-related transaction costs in the amount of CHF 8.3 million (previous year CHF 9.0 million) were expensed and are included in the line “General and administration”.
Finalization of purchase price allocation Sennheiser Consumer Division
During the financial year 2022/23, the purchase price allocation (PPA) of the acquisition of the Sennheiser Consumer Division was finalized, resulting in some fair value adjustments to the identifiable assets acquired and liabilities assumed. Adjustments compared to the provisional PPA relate to intangible assets and deferred tax liabilities and resulted in a decrease in the goodwill of CHF 14.9 million. As a result of adjusting mechanism in the share purchase agreement, the final purchase price increased by CHF 5.0 million and an additional cash consideration of CHF 5.9 million was made during the financial year 2022/23. Liabilities for contingent considerations include a liability in connection with a license agreement (for further information refer to Note 4.8). As the effect on the financial statements 2021/22 is not material, the prior year information has not been restated.
The final fair values of the net assets acquired are as follows:
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 acquireeʼs 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.
Liabilities for contingent considerations
Contingent considerations are dependent on the future performance of the acquired companies as well as contractual obligations. If the future performance is not achieved or the estimate needs to be revised, the liability is adjusted accordingly, with a resulting change in the income statement. At the end of the 2022/23 financial year, such liabilities contingent on future events amount to CHF 85.9 million (previous year CHF 95.3 million) and are disclosed under other financial liabilities (Note 4.5).
6.2 Investments in associates/joint ventures
The Groupʼs share in the results as well as in assets and liabilities of associates/joint ventures, all unlisted enterprises, is as follows:
In the financial year 2022/23, no associates were acquired/divested.
In the financial year 2021/22, the Group acquired a 27% interest in an associate for a total consideration of CHF 1.6 million. In addition, the Group acquired four associates with interests between 25% and 50% as part of an acquisition in the Asia/Pacific region. All associates are in the business of selling hearing instruments.
Sales to associates in the 2022/23 financial year amounted to CHF 12.2 million (previous year CHF 10.9 million). At March 31, 2023, trade receivables towards associates amounted to CHF 2.8 million (previous year CHF 2.6 million).
At the end of the 2022/23 and 2021/22 financial years, no unrecognized losses existed.
Investments with a net book value of CHF 18.7 million (previous year CHF 22.2 million) have a business year different than the Sonova Group. The latest available information for the respective companies are as per December 2022.
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 no 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 Sonovaʼs share of profit or loss of the associate/joint venture after the acquisition date. When the Groupʼs 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 Groupʼs reporting date.
7. Other disclosures
7. Other disclosures
7.1 Number of employees
On March 31, 2023, the Sonova Group employed the full time equivalent (FTE) of 17,608 people (previous year 16,733). They were engaged in the following regions and activities:
The average number of employees (full time equivalents) of the Sonova Group for the year was 17,191 (previous year 15,114). Total personnel expenses for the 2022/23 financial year amounted to CHF 1,255.4 million (previous year CHF 1,131.9 million).
7.2 Transactions and relations with members of the Management Board and the Board of Directors
The total compensation to the Management Board for the 2022/23 reporting period, as shown above, relates to eight active members (2021/22: nine active members and one former member).
The total compensation to the Board of Directors for the 2022/23 reporting period, as shown above, relates to 10 active members (2021/22: nine active members and two former 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 Note 3.6 of the financial statements of Sonova Holding AG.
7.3 Employee benefits
Defined benefit plans
Sonova Groupʼs retirement plans include defined benefit pension plans in Switzerland, Austria, Belgium, Canada, France, Germany and Israel. These plans are both funded and unfunded and governed by local regulations using independent actuarial valuations according to IAS 19. Sonova Groupʼs major defined benefit plan is located in Switzerland, which in total accounts for CHF 438.6 million or 98.6% (previous year CHF 471.0 million or 98.7%) of Sonovaʼs 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 Sonovaʼs 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 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 2022/23 and 2021/22.
As of March 31, 2023, 1,514 employees (previous year 1,476 employees) and 165 beneficiaries (previous year 154 beneficiaries) are insured under the Swiss plan. The defined benefit obligation has a duration of 14.3 years (previous year 15.7 years).
The results of all defined benefit plans are summarized below:
All of the plan assets have quoted market prices. The actual return on plan assets amounted to CHF –24.3 million (previous year CHF 34.6 million). The expected employerʼs contributions for the Swiss retirement benefit plan to be paid in the 2023/24 financial year amount to CHF 17.0 million.
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.
Defined contribution plans
Several of the Groupʼs entities have a defined contribution plan. The employerʼs contributions amounted to CHF 26.4 million in the year ended March 31, 2023 (previous year CHF 22.1 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 Groupʼs 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 high quality corporate bonds, 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 2022/23 financial year amounts to CHF 457.4 million (previous year CHF 492.2 million). This includes CHF 438.6 million (previous year CHF 471.0 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 2022/23 and 2021/22 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 2022/23 and 2021/22 include a performance criterion.
The following share-based payment costs have been recognized in the financial years:
The following table shows the outstanding options and/or SARs, granted as part of the EEAP 2017 to 2023. All of the equity instruments listed below (except for the non-recurring performance options granted to the COO (now CEO) 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 earliest on April 1, 2023, subject to the achievement of the performance criteria.
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:
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 2022/23 and 2021/22 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.
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/SARs 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 2022/23 and 2021/22, which include a restriction period of 5 years.
Performance share units (PSUs)
In 2023, 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 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, to ensure that only vested amounts are expensed.
Restricted share units (RSUs)
Under the EEAP grants 2018 to 2023, 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 2023 and 2022, 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 2022/23 and 2021/22. 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 2022/23 financial year as these shares have no vesting period.
In addition to the plans described above a cash-settled share based payment arrangement exists in relation to an acquisition entered in the financial year 2019/20. A portion of the deferred payments of that transaction can be settled in Sonova shares (number of shares granted 102,421) or in cash at the discretion of the counterparties and represent share-based payments as the payment is linked to employment conditions. The fair value of the shares granted of CHF 21.3 million was calculated at grant date (July 8, 2019) representing the share price on that date and considering that the shares are not entitled to dividends. The associated cost is expensed over the vesting period (four equal tranches vesting equally over four years). Until the liability is settled, it is revalued at each reporting date recognizing changes in the fair value in the income statement. Due to the discretion of the counterparties to request cash payments, the equity plan is classified as a “cash-settled share based payment plan”. For this cash-settled share based payment plan, the corresponding liability is recorded under “Other short-term operating liabilities” in the balance sheet. As per March 31, 2023 the liability amounts to CHF 6.4 million (previous year CHF 15.7 million). The third tranche vested in the financial year 2022/23 and a liability of CHF 8.4 million (previous year CHF 9.0 million) was transferred to equity as the beneficiaries opted for settlement in Sonova shares.
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 Government grants
The Groupʼs result for the financial year 2022/23 includes government support received worldwide in connection with the COVID–19 pandemic in the amount of CHF 1.9 million (prior year: CHF 1.1 million). Most of the government grants relate to compensation of salary costs (furlough) and is recognized as a deduction from the costs in the following functional line items of the consolidated income statement:
Accounting policies
Government grants are recognized when there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. Government grants are presented as a deduction from the relevant functional cost line item in the income statement.
7.6 Events after the balance sheet date
There have been no material events after the balance sheet date.
7.7 List of significant companies
7.8 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.
