Net working capital

Average net working capital in DKK million 2,396
Net working capital as % of sales 19.2%
Deferred income related to The BioAg Alliance released as revenue in 2018 in DKK million 169

DKK million	Note	2018	2017
Inventories	4.1	2,820	2,586
Trade receivables	4.2	2,606	2,554
Contract assets	4.2	279
Other receivables	4.3	253	249
Deferred income	4.5	(50)	(542)
Trade payables		(1,418)	(1,341)
Contract liabilities, excl. deferred income	4.4	(374)
Other liabilities	4.6	(1,348)	(1,483)
Net working capital		2,768	2,023
Average net working capital		2,396	2,056

4.1 Inventories

DKK million		2018	2017
Raw materials and consumables		372	308
Work in progress		828	727
Finished goods		1,620	1,551
Inventories at December 31	B/S	2,820	2,586

Cost of materials, included under Cost of goods sold		3,411	3,451
Write-downs expensed during the year		117	111
Reversal of write-downs during the year*		33	45
* Part of the reversal of write-downs can be attributed to written-down inventory being reused in production.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Work in progress and Finished goods are measured at cost, including indirect production costs. The indirect production costs capitalized under inventories amounted to DKK 938 million at the end of 2018 (2017: DKK 862 million). The indirect production costs are assessed on an ongoing basis to ensure reliable measurement of employee costs, capacity utilization, cost drivers and other relevant factors. Changes in these parameters may have an impact on the gross margin and the overall valuation of Work in progress and Finished goods.

ACCOUNTING POLICIES

Inventories are measured at cost determined on a first-in first-out basis or net realizable value where this is lower.

The cost of Work in progress and Finished goods comprises direct production costs such as raw materials and consumables, energy and labor directly attributable to production as well as indirect production costs such as employee costs, maintenance and depreciation of plants, etc.

If the expected sales price less any completion costs and costs to execute sales (net realizable value) of inventories is lower than the carrying amount, the inventories are written down to net realizable value.

Novozymes has entered into a few agreements where Novozymes supplies goods to a customer’s premises but retains title to the inventory until the goods are consumed in the customer’s production. Such goods are derecognized from inventories in the period that they are consumed in the customer's production.

4.2 Trade receivables and contract assets

DKK million		2018	2017
Trade receivables, gross		2,768	2,780
Allowances		(162)	(226)
Trade receivables at December 31	B/S	2,606	2,554

Aging of trade receivables, gross:
Up to 30 days		2,613	2,521
Between 30 and 90 days		35	57
More than 90 days		120	202
Trade receivables, gross, at December 31		2,768	2,780

Changes in allowances for trade receivables:
At January 1		226	179
Allowances during the year		48	128
Write-offs during the year		(90)	(13)
Reversed allowances		(22)	(68)
Allowances at December 31		162	226

As of December 31, 2018, DKK 272 million from Trade receivables and DKK 7 million from Other receivables has been recognized as Contract assets. Refer to Note 1 for a description of the impact of the implementation of IFRS 15.

Trade receivables

In 2018, allowances have been recognized according to the lifetime expected credit loss method, whereas the allowances in 2017 were recognized according to the incurred loss method.

The transition to lifetime expected credit losses has had only an insignificant impact on allowances as of January 1, 2018.

In 2018, the allowances for trade receivables include a write-off related to the unrecoverable part of our receivable related to Beta Renewables S.p.A. The write-off is a consequence of the financial restructuring of part of the M&G Group.

In 2017, the aging of trade receivables that were past due but not impaired up to 30 days amounted to DKK 141 million, between 30 and 90 days DKK 33 million and more than 90 days DKK 21 million.

Novozymes has collateral held as security for trade receivables in selected countries of DKK 68 million (2017: DKK 64 million).

Contract assets

Contract assets amounted to DKK 279 million at the end of 2018, and are mainly related to the estimated profit split arising from partnerships that Novozymes has entered.

The contract assets are initially recognized as revenue when goods are delivered to the other contracting party. When the realized profit split is invoiced, the contract assets are reclassified to trade receivables.

No allowance for expected credit losses has been made for contract assets at the end of 2018.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The allowance for expected credit losses for trade receivables and contract assets is based on historical credit loss experience combined with forward-looking information on macroeconomic factors affecting the credit risk. The expected loss rates are updated at every reporting date.

ACCOUNTING POLICIES

Trade receivables and contract assets are measured at amortized cost less allowance for lifetime expected credit losses.

To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. Furthermore, an allowance for lifetime expected credit losses for trade receivables is recognized on initial recognition.

As the contract assets relate to the partnerships, the credit risk is based on an individual assessment.

Trade receivables and contract assets are written off when all possible options have been exhausted and there is no reasonable expectation of recovery.

The cost of allowances for expected credit losses and write-offs for trade receivables and contract assets are included in Sales and distribution costs.

4.3 Other receivables

DKK million		2018	2017
Deposits		24	27
Prepaid expenses		100	97
Other		129	125
Other receivables at December 31		253	249

Recognized in the balance sheet as follows:
Non-current	B/S	34	35
Current	B/S	219	214
Other receivables at December 31		253	249

4.4 Contract liabilities

DKK million		2018
The BioAg Alliance		311
Other contract liabilities		63
Contract liabilities at December 31		374

Recognized in the balance sheet as follows:
Non-current	B/S	199
Current	B/S	175
Contract liabilities at December 31		374

Expected to be recognized in the income statement:
Within 1 year		175
Between 1 and 5 years		199
After 5 years		-
Deferred income at December 31		374
* In 2017, deferred income related to The BioAg Alliance was included in Note 4.5.

As of December 31, 2018, DKK 311 million from Deferred income has been recognized as Contract liabilities. Refer to Note 1 for a description of the impact of the implementation of IFRS 15.

Contract liabilities relate mainly to payments from Monsanto in connection with the formation of The BioAg Alliance in 2014. The planned recognition of deferred income in the income statement is based on an assessment of the earnings process and the underlying deliverables, which are reassessed annually.

The reassessment in 2018 has not changed the planned recognition of deferred income.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Assessing the earnings process and the underlying deliverables for The BioAg Alliance requires judgment and is based on estimates of the future. These estimates are by nature subject to a high degree of uncertainty, and changes in such estimates may impact the timing of revenue recognition in future periods.

4.5 Deferred income

DKK million		Amortization ends (year)	2018	2017
The BioAg Alliance	2023		16	519
Other	Up to 2027		34	23
Deferred income at December 31			50	542

Recognized in the balance sheet as follows:
Non-current		B/S	37	337
Current		B/S	13	205
Deferred income at December 31			50	542

Expected to be recognized in the income statement:
Within 1 year			13	205
Between 1 and 5 years			32	283
After 5 years			5	54
Deferred income at December 31			50	542
* In 2018, deferred income related to The BioAg Alliance is included in Note 4.4.

As of December 31, 2018, DKK 311 million from Deferred income has been recognized as Contract liabilities. Refer to Note 1 for a description of the impact of the implementation of IFRS 15.

At December 31, 2017, deferred income amounted to DKK 542 million. This related mainly to payments from Monsanto in connection with the formation of The BioAg Alliance in 2014. The planned recognition of deferred income in the income statement is based on an assessment of the earnings process and the underlying deliverables, which are reassessed annually. The reassessment in 2017 did not change the planned recognition of deferred income.

ACCOUNTING POLICIES

Deferred income reflects the portion of payments received that relates to future periods and deliverables, and for which the criteria for revenue recognition are not yet met. Deferred income is measured at nominal value.

4.6 Other liabilities

DKK million		2018	2017
Employee costs payable		712	671
Stock-based payment settled in cash		11	29
Other payables		625	783
Other liabilities at December 31	B/S	1,348	1,483

As of December 31, 2018, DKK 20 million from Other payables has been recognized as Contract liabilities. Refer to Note 1 for a description of the impact of the implementation of IFRS 15.