IFRS Reporting for Battery Storage – A Burgeoning Industry

IFRS Reporting for Battery Storage – A Burgeoning Industry

Batteries have been around a long time, and have evolved in various forms through history, but today they are looking to play an imperative role in the energy transition and towards a low carbon economy.

Total investments in battery storage production are projected to exceed USD150 billion by 2023, which corresponds to USD20 for every person on the planet. Over the past decade battery prices have declined 83%, which is making Electrical Vehicles (EVs) and energy storage commercially viable for the first time in history.

What is important in IFRS Reporting for Battery Storage?

Research and Development

Costs associated with research are recognized as an expense as incurred. Costs that are identifiable, controllable and directly attributable to development projects are recognized as intangible asset when the following criteria are met:

• It is technically feasible to complete the development project so that it will be available for use;
• Management intends to complete the development project for its own use or selling;
• There is an ability to use or sell the development project;
• It can be demonstrated how the development project will generate probable future economic benefits;
• Adequate technical, financial resources and other resources to complete the development and to use or sell the development project are available; and
• The expenditure attributable to the development project during its development can be reliably measured.

Generally, internally generated development projects have the following stages; formulation and selection of a project, verification of idea and technology, development and testing, decision of commercialization, test of final application. Expenditures can be capitalized as intangible assets only after the decision of commercialization. Expenditures incurred in other stages are recognized as expenses on the research phase.

Internally generated development projects in the Life Sciences business have the following stages; formulation of potential candidates, pre-clinical research, clinical researches such as phase 1, 2 and 3 trials, approval of regulatory body and new product launch.

Expenditures incurred from new drug development project are recognized as expensed on the research phase. However, expenditures incurred during clinical phase 1~3 trials from development projects for generic drugs or bio-similars are recognized as intangible assets depending on the nature of the products, Expenditures incurred from technology license agreement with the third parties are recognized as intangible assets.

Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs that are recognized as intangible assets are amortized using the straight-line method over their estimated useful lives when the assets are available for use and are tested for impairment.

Intangible assets (other than goodwill)

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired.

The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.

Industrial proprietary rights

Industrial proprietary rights are stated at cost less any impairment losses and are amortised on the straight-line basis over their estimated useful lives of two to ten years.

Know-how

Know-how is stated at cost less any impairment losses and is amortised on the straight-line basis over its estimated useful life of five years.

Software

Software is stated at cost less any impairment losses and is amortised on the straight-line basis over its estimated useful life of five years.

TRANSFERS OF FINANCIAL ASSETS

Financial assets that are not derecognised in their entirety

At 31 December 2020, the Group endorsed certain bills receivable accepted by banks in Mainland China (the “Endorsed Bills”) with a carrying amount of RMB5,751,000 (2019: RMB9,348,000) to certain of its suppliers in order to settle trade payables due to such suppliers (the “Endorsement”). In the opinion of the directors, the Group has retained substantial risks and rewards, which include default risks relating to such Endorsed Bills, and accordingly, the Group continued to recognise the full carrying amounts of the Endorsed Bills and the associated trade payables settled.

Subsequent to the Endorsement, the Group did not retain any rights on the use of the Endorsed Bills, including the sale, transfer or pledge of the Endorsed Bills to any other third parties. The aggregate carrying amount of the trade payables settled by the Endorsed Bills during the year to which the suppliers have recourse was RMB5,751,000 (2019: RMB9,348,000) as at 31 December 2020.

Financial assets that are derecognised in their entirety

In 2020, the Group conducted certain bill discounting with several banks in China (the “Discounted Bills”) with a carrying amount of RMB12,378,432,000 (31 December 2019: RMB4,287,360,000). In the opinion of the directors, the Group has transferred substantially all risks and rewards relating to the Discounted Bills at the time of discounting, which meets the conditions of derecognition of financial assets, and therefore fully derecognised the Discounted Bills at their carrying amount on the discounting date.

However, the Group continue to be exposed to the risks of repurchasing such bills at their carrying amount since the banks are entitled to recourse against the Group if the bills are rejected by the acceptors when falling due (“Continuing Involvement”). In the opinion of the directors, the fair value of the Continuing Involvement is insignificant. During the year, the Group did not recognise any profit or loss from the transfer of Discounted Bills or from the Continuing Involvement.

At 31 December 2020, the Group endorsed certain bills receivable accepted by banks in Mainland China (the “Derecognised Bills”) to certain of its suppliers in order to settle trade payables due to these suppliers with a carrying amount of RMB6,585,688,000 (31 December 2019: RMB6,673,147,000). The Derecognised Bills had a maturity of one to twelve months at the end of the reporting period.

In accordance with the Law of Negotiable Instruments in the PRC, the holders of the Derecognised Bills have a right of recourse against the Group if the guarantor banks default (the “Continuing Involvement”). In the opinion of the directors, the Group has transferred substantially all risks and rewards relating to the Derecognised Bills.

Accordingly, the Group has derecognised the full carrying amounts of the Derecognised Bills and the associated trade payables. The maximum exposure to loss from the Group’s Continuing Involvement in the Derecognised Bills and the undiscounted cash flows to repurchase these Derecognised Bills is equal to their carrying amounts.

In the opinion of the directors, the fair values of the Group’s Continuing Involvement in the Derecognised Bills are not significant. During the year ended 31 December 2020, the Group has not recognised any gain or loss from the transfer of the Derecognised Bills or the Continuing Involvement.

In the ordinary course of business, the Group has factored a small amount of receivables measured at amortised cost to financial institutions without recourse for its short-term financing needs, and has entered into non-recourse receivables factoring agreements with a number of banks to transfer certain receivables to those banks (the “Factored Receivables”).

Under certain receivable factoring agreements, the Group is not required to undertake default risks and the delayed repayment risk from the debtors after the transfer of the Factored Receivables, and all risks and rewards relating to the Factored Receivables are transferred. The condition of derecognition of financial assets is met.

Therefore, the Group derecognised the Factored Receivables at their carrying amounts. As at 31 December 2020, the carrying amount of transferred Factored Receivables amounted to RMB3,813,206,000 (31 December 2019: RMB14,120,159,000), and the loss relating to derecognition amounted to RMB299,523,000 (31 December 2019: RMB519,134,000).

During the year ended 31 December 2020, the Group has an enforceable legal right to offset the recognised amounts of trade receivables and trade payables and the Group has an intention to settle on a net basis. The aggregate carrying amount of the trade receivables and trade payables offset was RMB3,017,666,000 as at 31 December 2020 (31 December 2019: RMB3,508,810,000).

GOODWILL

	RMB’000
At 1 January 2019, 31 December 2019 and 31 December 2020:
Cost	75,585
Accumulated impairment	-9,671
Net carrying amount	65,914

Impairment testing of goodwill

Goodwill acquired through business combinations is allocated to the automobiles and related products cash-generating unit, which is a reportable segment, for impairment testing:

• The recoverable amount of the auto-mobiles and related products cash-generating unit has been determined based on a value-in-use calculation using cash flow projections based on financial budgets covering a five-year period approved by senior management.
• The discount rate applied to the cash flow projections is 13% (2019: 13%).
• The growth rate used to extrapolate the cash flows of the auto-mobiles and related products cash-generating unit beyond the five-year period is 3% (2019: 3%), which is less than the long-term average growth rate of the auto-mobile industry.

The carrying amount of goodwill allocated to the cash-generating unit is as follows:

	Auto-mobiles and related products
	2020	2019
Carrying amount of goodwill	65,914	65,914

Assumptions were used in the value-in-use calculation of the auto-mobiles and related products cash-generating unit for 31 December 2020 and 2019. The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill.

Budgeted gross margins – The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year immediately before the budget year, increased for expected efficiency improvements and expected market development.

Discount rate – The discount rate used is before tax and reflects specific risks relating to the relevant unit.

Raw materials price inflation – The basis used to determine the value assigned to raw materials price inflation is the forecast price index during the budget year.

The values assigned to key assumptions are consistent with external information sources.

NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS

(a) Major non-cash transactions

During the year, the Group had non-cash additions to right-of-use assets and lease liabilities of RMB506,529,000 (2019: RMB730,490,000) and RMB506,529,000 (2019: RMB767,720,000), respectively, in respect of lease arrangements for leasehold land, buildings and machinery and other equipment.

(b) Changes in liabilities arising from financing activities

Amounts in RMB’ 000	Interest-bearing bank and other borrowings	Lease liabilities
At 1 January 2020	75,978,345	767,720
Changes from financing cash flows	-27,738,609	-153,877
New leases	–	344,593
Interest expense	3,067,379	56,422
Interest capitalised	52,788	–
Covid-19-related rent concessions from lessors	–	-3,065
Foreign exchange movement	-89,306	–
At 31 December 2020	51,270,597	1,011,793

Amounts in RMB’ 000	Interest-bearing bank and other borrowings	Lease liabilities	Other liabilities
At 1 January 2019	64,692,802	569,077	1,376,550
Changes from financing cash flows	7,584,878	-167,700	-1,376,550
New leases	–	333,416	–
Interest expense	3,454,480	32,927	–
Interest capitalised	185,631	–	–
Foreign exchange movement	60,554	–	–
At 31 December 2019	75,978,345	767,720	–

(c) Total cash outflow for leases

The total cash outflow for leases included in the consolidated statement of cash flows is as follows:

Amounts in RMB’ 000	2020	2019
Within operating activities	-1,270,066	-1,149,270
Within investing activities	-239,359	-797,080
Within financing activities	-153,877	-167,700

COMMITMENTS

(a) The Group had the following capital commitments at the end of the reporting period:

Amounts in RMB’ 000	2020	2019
Contracted, but not provided for:
– Buildings	673,138	1,139,767
– Plant and machinery	3,051,539	4,608,229
Capital contribution in respect of investments	112,757	81,757
	3,837,434	5,829,753
Authorised but not contracted for	60,946	23,538
	3,898,380	5,853,291

(b) In addition, the Group’s share of joint ventures’ own capital commitments, which are not included in the above, is as follows:

Amounts in RMB’ 000	2020	2019
Capital contribution payable to joint ventures	450,775	543,925

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