In 2018, impairment losses of DKK 59 million on two specific assets were recognized and included in Cost of goods sold and Research and development costs at DKK 46 million and DKK 13 million respectively.
The impairment losses were the result of impairment tests performed on assets where indications of impairment had been identified due to reduced sales projections for the assets in question. The cash flow used for the impairment test of one of the assets was based on business plans for the period 2019-2023, and the terminal value used is based on the expected lifetime and cash flow over that period. For the other impaired asset, the cash flow is expected to cease in 2019.
A WACC of 7% was used to calculate the discounted cash flows.
Impairment test of goodwill
Since 2016, Management has identified two cash-generating units (CGUs): Novozymes’ main activities and the Biopharma CGU. With the Albumedix divestment in late December 2017, the activity in the Biopharma CGU – previously the Albumedix CGU – has been reduced to sales-based royalty agreements.
The market value of Novozymes is significantly higher than its equity, thus no further key assumptions are used in determining whether impairment of goodwill exists for Novozymes’ main activities (2017: no impairment).
The recoverable amount of the Biopharma CGU has been determined based on a value-in-use calculation. The expected future cash flows are based on a forecasting period of five years, reflecting the term of the royalty agreements. The key assumptions used in testing for impairment are based on Management’s expectations of future royalty payments, which are partly based on experience, as well as input from external experts. A WACC of 11% (2017: 10%) has been used to calculate the discounted cash flows for the Biopharma CGU.
As the value in use for the Biopharma CGU is greater than its carrying amount, no impairment has been identified (2017: no impairment).
In 2017, an impairment loss of DKK 27 million on abandoned patents was recognized and included in Cost of goods sold and Research and development costs at DKK 15 million and DKK 12 million respectively.
Capitalized interest and pledges
Interest of DKK 29 million (2017: DKK 10 million) has been capitalized under Additions during the year above and included as Investing activities in the statement of cash flows. Capitalization rate: 2.98% (2017: 2.05%).
Land and buildings with a carrying amount of DKK 355 million (2017: DKK 377 million) have been pledged as security to credit institutions. The mortgage loan expires in 2029.
In 2018, an impairment loss of DKK 18 million on a building was recognized and included in Sales and distribution costs (2017: no impairment losses).
Dismantling and restoration
Dismantling and restoration relates to estimated future costs of environmental restoration – Novozymes aims for its production sites to have no negative environmental impact – and restoration of leased premises when terminating the lease and vacating the premises. These liabilities relate to established circumstances, and the costs are expected to be incurred either when concrete measures are implemented or when the sites are vacated. The expected costs and timing are by nature uncertain.
Amounts with regard to restoration of leased premises are considered uncertain, as the final settlements will depend on thorough inspection of the premises and negotiations with the lessor at the time of vacating. The costs are expected to be incurred in a minimum of 1 year to a maximum of 15 years.
Legal and other obligations
Novozymes is involved in a number of ongoing legal disputes, and provision is made for the estimated costs of these based on the current evaluation of the outcomes. The cases are expected to be finalized in 2019-2020. In Management's opinion, the outcome of these cases is not expected to give rise to any significant loss beyond the amounts provided for at December 31, 2018.
Other obligations includes other long-term employee benefits and other contractual obligations. Other long-term employee benefits account for only a minor amount, as the majority of Novozymes' pension plans are defined contribution plans, covering approximately 99% of employees. These obligations are mainly expected to be incurred over a long period.