I. GENERAL INFORMATION ON THE GROUP

KSB Aktiengesellschaft, Frankenthal/Pfalz, Germany (hereinafter referred to as KSB AG), is a capital market-oriented public limited company [Aktiengesellschaft] under the law of the Federal Republic of Germany. The company is registered with the Handelsregister [Commercial Register] of the Amtsgericht [Local Court] Ludwigshafen am Rhein, registration No. HRB 21016, and has its registered office in Frankenthal/Pfalz, Germany.

In the previous year, KSB AG and its subsidiaries were included in the consolidated financial statements of Klein Pumpen GmbH, Frankenthal. Klein Pumpen GmbH, Frankenthal, is the parent company which prepares the consolidated financial statements for the largest group of companies. The consolidated financial statements are published in the Bundesanzeiger [German Federal Gazette].

The KSB Group is a global supplier of high-quality pumps, valves and related systems and also provides a wide range of services to users of these products. The Group’s operations are divided into three segments: Pumps, Valves and Service.

Basis of preparation of the consolidated financial statements

The accompanying consolidated financial statements of KSB AG were prepared in accordance with the International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the additional requirements of German commercial law under section 315a(1) of the HGB [Handelsgesetzbuch – German Commercial Code]. We applied the Framework, and all Standards applicable at the reporting date and adopted by the European Commission for use in the EU that are of relevance to the KSB Group, as well as the Interpretations issued by the IFRS Interpretations Committee. For the purposes of this document, the term IFRSs includes applicable International Accounting Standards (IASs). The consolidated financial statements of KSB AG therefore meet the requirements of IFRS as applicable in the EU.

The consolidated financial statements were prepared on a going concern basis in accordance with IAS 1.25. They were prepared using the historical cost convention, with the exception of measurement at market value for available-for-sale financial assets and measurement at fair value through profit and loss for financial assets and liabilities (including derivatives). Our investments in joint ventures and associates are measured using the equity method.

The financial year of the companies consolidated is the calendar year.

The income statement as part of the statement of comprehensive income has been prepared using the nature of expense method.

All material items of the balance sheet and the income statement are presented separately and explained in these Notes.

The main accounting policies used to prepare the consolidated financial statements are presented below. The policies described were applied consistently for the reporting periods presented unless stated otherwise.

The consolidated financial statements and the group management report, as well as the annual financial statements and management report of the Group’s parent company, are submitted to and published in the Bundesanzeiger [German Federal Gazette].

The present consolidated financial statements were approved for issue by the Board of Management on 17 March 2016 and are expected to be approved by the Supervisory Board on 23 March 2016.

New accounting principles

a) Accounting principles applied for the first time in financial year 2015

The following new and revised Standards issued by the International Accounting Standards Board (IASB) and the new Interpretation issued by the IFRS Interpretations Committee ­(IFRIC) were required to be applied for the first time in financial year 2015:

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IFRS announcement

Adoption

Publication in EU Official Journal

First-time application in the EU

IFRIC 21 Levies

13 June 2014

14 June 2014

17 June 2014

Improvements to the International Financial Reporting Standards (2011 to 2013)

18 Dec. 2014

19 Dec. 2014

1 Jan. 2015

IFRIC 21 Levies provides guidance on the accounting treatment of levies, clarifying in particular when to recognise a liability or provision for such payment obligations.

There was no impact on the consolidated financial statements from the application of this Interpretation and the annual improvements to IFRS (2011 to 2013).

b) Accounting principles that have been published but that are not yet mandatory

The following Standards and revised Standards were not yet mandatory and were not ­applied in the 2015 financial year:

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IFRS announcement

Adoption

Publication in EU Official Journal

First-time application in the EU

IAS 19 Employee Benefits

17 Dec. 2014

9 Jan. 2015

1 Feb. 2015

Improvements to the International Financial Reporting Standards (2010 to 2012)

17 Dec. 2014

9 Jan. 2015

1 Feb. 2015

Improvements to the International Financial Reporting Standards (2012 to 2014)

15 Dec. 2015

16 Dec. 2015

1 Jan. 2016

IAS 1 Presentation of Financial Statements

18 Dec. 2014

19 Dec. 2015

1 Jan. 2016

IAS 28 Investments in Associates and Joint Ventures and IFRS 10 Consolidated Financial Statements

11 Sept. 2014

Open

Open

IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures

18 Dec. 2014

exp. in Q2 / 2016

1 Jan. 2016

IFRS 11 Joint Arrangements

24 Nov. 2015

25 Nov. 2015

1 Jan. 2016

IFRS 14 Regulatory Deferral Accounts

30 Jan. 2014

Open

1 Jan. 2016

IAS 16 Property, Plant and Equipment, and IAS 38 Intangible Assets

2 Dec. 2015

3 Dec. 2015

1 Jan. 2016

IAS 27 Separate Financial Statements

18 Dec. 2015

23 Dec. 2015

1 Jan. 2016

IAS 16 Property, Plant and Equipment, and IAS 41 Agriculture

23 Nov. 2015

24 Nov. 2015

1 Jan. 2016

IAS 12 Income Taxes

19 Jan. 2016

exp. in Q4 / 2016

1 Jan. 2017

IAS 7 Statement of Cash Flows

29 Jan. 2016

exp. in Q4 / 2016

1 Jan. 2017

IFRS 15 Revenue from Contracts with Customers

11 Sept. 2015

exp. in Q2 / 2016

1 Jan. 2018

IFRS 9 Financial Instruments

24 July 2014

exp. in H2 / 2016

1 Jan. 2018

IFRS 16 Leases

13 Jan. 2016

Open

1 Jan. 2019

The adjustments to IAS 19 Employee Benefits introduce a new option into the standard in relation to the accounting method used for defined benefit pension commitments to which employees (or third parties) contribute via compulsory contributions.

The aim of the amendment to IAS 1 Presentation of Financial Statements is to remove immaterial information from the IFRS financial statements, thereby emphasising the concept of materiality.

The amendments to IAS 28 Investments in Associates and Joint Ventures and IFRS 10 Con-solidated Financial Statements remove an inconsistency between the rules laid down in the standards for dealing with assets being sold to an associate or joint venture and/or the con-tribution of assets in an associate or joint venture. In future, any gain or loss arising from the loss of control over a subsidiary that is being incorporated into a joint venture or associate must be recognised in the full amount by the investor if the transaction relates to a business as defined in IFRS 3 Business Combinations. If, in contrast, the assets do not form a business, the gain/loss may only be recognised pro rata.

The Investment Entities – Applying the Consolidation Exception standard amending IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Interests in Associates and Joint Ventures clarifies the fact that exemption from the obligation to prepare consolidated financial statements also applies to parent companies that are themselves a subsidiary of an investment entity.

The amendment to IFRS 11 Joint Arrangements clarifies that the acquisition of interests and of additional interests in joint operations that represent a business as defined in IFRS 3 are to be accounted for in accordance with the principles for the reporting of business combinations in accordance with IFRS 3 and other applicable IFRS, provided that this does not contradict the provisions of IFRS 11.

The provisions of IFRS 14 Regulatory Deferral Accounts will enable entities that are pre-paring IFRS financial statements for the first time to retain deferred amounts relating to price-regulated activities in their IFRS financial statements.

The aim of the amendments to IAS 16 Property, Plant and Equipment and to IAS 38 Intangible Assets is to provide further guidelines for defining an acceptable method for the depre­ciation of property, plant and equipment. Under the standards, revenue-based depreciation methods are not permitted for property, plant and equipment at all and for intangible assets only in certain exceptional cases.

As a result of the amendments to IAS 27 Separate Financial Statements, investments in subsidiaries, joint ventures and associates may be accounted for using the equity method in future separate financial statements prepared in accordance with IFRS.

The amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture change the reporting for what are referred to as bearer plants.

The amendment to IAS 12 Income Taxes clarifies that write-downs to a lower market value of debt instruments measured at fair value arising from a change in market interest rates can give rise to deductible temporary differences. For clarification, rules and examples were added to indicate how future taxable income needs to be calculated in order to capitalise deferred tax assets.

The goal of the amendment to IAS 7 Statement of Cash Flows is to improve the information on the changes in the entity’s debt.

The aim of IFRS 15 Revenue from Contracts with Customers is to define principles on the basis of which companies should report on the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Revenue is no longer realised upon the transfer of the material opportunities and risks but, in future, is realised once the customer has acquired control over the agreed goods and services and can derive benefits from these. The rules and definitions of IFRS 15 will in future replace the content of IAS 18 Revenue and of IAS 11 Construction Contracts.

IFRS 9 Financial Instruments contains revised guidelines on classifying and measuring financial instruments. Depending on their cash flow characteristics and the business model used to manage them, financial assets are measured either at amortised cost, or at fair value directly in equity or at fair value through profit or loss. When recognising impairments, IFRS 9 considers expected losses, and not, as under the previous rules, incurred losses, in order to ensure adequate risk provisioning. There are also new rules on the presentation of capitalised hedges to improve the presentation of an entity’s risk management activities.

IFRS 16 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases in the financial statements of IFRS reporters.

As a matter of principle, we have not voluntarily applied the above-mentioned new or revised Standards prior to their effective dates. The effects of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases on the net assets, financial position and results of operations, as well as on the disclosures in the Notes, are currently being reviewed within the KSB Group.

Adjustment under IAS 8

Adjustments (recognised directly in equity)

As a result of written put options, shareholders of KSB Mörck AB, Gothenburg (Sweden) have the right to tender their non-controlling interests to KSB AG, i.e. KSB AG is under the contractual obligation to buy own equity instruments for cash in the event of this right being exercised. Pursuant to IAS 32.23, a financial (synthetic) liability must be recognised. This has not been reported in the balance sheet previously. At the time of the put option being written, and also currently, the IFRSs do not clearly stipulate which part of equity capital is to be taken into consideration at the time the liability from written put options is recognised. Irrespective of the specific arrangement of the options, one approach is to present them under the assumption of a completed (fictitious) acquisition of the non-controlling interests by the holder of the controlling interest (anticipated acquisition method). No non-controlling interests are reported for the equity components covered by the option. KSB AG uses the anticipated acquisition method.

In the course of financial year 2015 the KSB Group carried out a review of the provisions for employee benefits, which led to material adjustments for two companies. The first-time appli-cation of the revised IAS 19 in financial year 2013 led to a retroactive recognition of actuarial gains / losses directly in equity. In accordance with local legislation, our Indian company KSB Pumps Limited continued to recognise these in the income statement without an adjustment under IAS 19 (revised). This led to a retroactive reclassification in equity between “Remeasurement of defined benefit pension plans” and “Other revenue reserves”, as well as a correction of the income statement. The detailed audit of the pension plan of our French company KSB S.A.S. revealed that it is to be categorised as a defined benefit plan under IAS 19. The accounting option applicable in France for provisions for employee benefits is not permissible under the revised IAS 19. While the calculation parameters selected under local law resulted in a congruence between plan assets and obligations, a recalculation with the parameters pursuant to the revised IAS 19 revealed excess liability. This was recognised retroactively in the provisions for pensions and similar obligations and, in addition, a reclassification was made in equity, for the first-time recognition of the cumulated actuarial gains / losses under “Remeasurement of defined benefit plans”.

Reclassifications

In this context, we have voluntarily implemented some reclassifications in the presentation of the balance sheet, primarily to improve the transparency of our financial statements. They are discussed in detail below. The previous years’ figures have been adjusted accordingly to ensure comparability.

In these consolidated financial statements, the “Receivables and other current assets” balance sheet item and the associated disclosures in the Notes were classified for the first time into trade receivables and PoC, other financial assets and other non-financial assets. In addition, the liabilities shown in the balance sheet and the associated disclosures in the Notes were classified for the first time into financial liabilities, trade payables, other financial liabilities, other non-financial liabilities and income tax liabilities. These adjustments did not impact the balance sheet total.

In the overview of the composition of provisions (Notes No. 9), the following adjustments were made as at 31 December 2014:

  • Warranty obligations and contractual penalties totalling € 15,121 thousand, previously reported as non-current provisions, were reclassified as current provisions.
  • Accumulated compensated absence and holiday pay entitlements of € 23,201 thousand were reclassified from current “Other employee benefits” to current “Social security and liabilities to employees” (Other non-financial liabilities).
  • Due to the first-time separate presentation of income tax liabilities, current income tax pro-visions were reclassified to current income tax liabilities in the amount of € 3,304 thousand. The other tax provisions of € 854 thousand were incorporated under other provisions.

Some of the cash and cash equivalents previously reported under “Cash and cash equivalents” exceeded a maturity of three months. They (€ 154,121 thousand) were reclassified as “Other financial assets”.

The following table shows all the adjustments described above. Furthermore, they are identified by footnotes in the remainder of the text:

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ASSETS

Published 1 Jan. 2014

Pensions

Purchase price liability

Reclassifications

Adjusted 1 Jan. 2014

Non-current assets

630,845

630,845

Intangible assets

111,302

111,302

Property, plant and equipment

442,861

442,861

Non-current financial assets

10,432

10,432

Investments accounted for using the equity method

26,617

26,617

Deferred tax assets

39,633

39,633

 

Current assets

1,520,615

1,520,615

Inventories

423,848

423,848

Trade receivables and PoC

577,349

577,349

Other financial assets

35,601

138,246

173,847

Other non-financial assets

31,194

31,194

Cash and cash equivalents

451,438

– 138,246

313,192

Assets held for sale

1,185

1,185

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EQUITY AND LIABILITIES

Published 1 Jan. 2014

Pensions

Purchase price liability

Reclassifications

Adjusted 1 Jan. 2014

Equity

844,494

– 4,232

– 3,257

837,005

Equity attributable to shareholders of KSB AG

730,254

– 3,647

– 789

725,818

Non-controlling interests

114,240

– 585

– 2,468

111,187

 

Non-current liabilities

648,753

4,664

– 14,390

639,027

Deferred tax liabilities

15,499

– 2,212

13,287

Provisions for employee benefits

412,870

6,876

419,746

Other provisions

15,402

– 14,390

1,012

Financial liabilities

204,982

204,982

 

Current liabilities

658,213

– 432

3,257

14,390

675,428

Provisions for employee benefits

109,285

– 392

– 22,875

86,018

Other provisions

70,010

11,038

81,048

Financial liabilities

61,773

61,773

Trade payables

204,766

204,766

Other financial liabilities

84,526

– 40

3,257

87,743

Other non-financial liabilities

127,853

22,875

150,728

Income tax liabilities

3,352

3,352

Liabilities held for sale

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ASSETS

Published 31 Dec. 2014

Pensions

Purchase price liability

Reclassifications

Adjusted 31 Dec. 2014

Non-current assets

709,229

194

709,423

Intangible assets

111,441

111,441

Property, plant and equipment

475,808

475,808

Non-current financial assets

7,320

7,320

Investments accounted for using the equity method

28,001

28,001

Deferred tax assets

86,659

194

86,853

 

Current assets

1,568,482

1,568,482

Inventories

449,826

449,826

Trade receivables and PoC

614,201

614,201

Other financial assets

36,039

154,121

190,160

Other non-financial assets

33,509

33,509

Cash and cash equivalents

432,673

– 154,121

278,552

Assets held for sale

2,234

2,234

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EQUITY AND LIABILITIES

Published 31 Dec. 2014

Pensions

Purchase price liability

Reclassifications

Adjusted 31 Dec. 2014

Equity

829,208

– 6,176

– 3,328

819,704

Equity attributable to shareholders of KSB AG

696,489

– 5,412

– 1,124

689,953

Non-controlling interests

132,719

– 764

– 2,204

129,751

 

Non-current liabilities

720,265

6,878

– 15,121

712,022

Deferred tax liabilities

15,058

– 3,034

12,024

Provisions for employee benefits

529,526

9,912

539,438

Other provisions

16,254

– 15,121

1,133

Financial liabilities

159,427

159,427

 

Current liabilities

728,238

– 508

3,328

15,121

746,179

Provisions for employee benefits

99,060

– 468

– 23,201

75,391

Other provisions

84,846

11,817

96,663

Financial liabilities

93,524

93,524

Trade payables

211,723

211,723

Other financial liabilities

97,141

– 40

3,328

100,429

Other non-financial liabilities

141,735

23,201

164,936

Income tax liabilities

3,304

3,304

Liabilities held for sale

209

209

As at 1 January 2014, adjustments were recognised in other comprehensive income in equity, amounting to € – 3,551 thousand in relation to the remeasurement of defined benefit plans and € – 23 thousand in relation to currency translation differences. Other revenue reserves accounted for € – 862 thousand. The change in other comprehensive income attributable to non-controlling interests as at 1 January 2014 amounted to € – 3,053 thousand.

As at 31 December 2014, the effects of these adjustments on earnings after taxes totalled € + 131 thousand (of which staff costs € + 629 thousand, financial expenses € – 387 thousand, and income taxes € – 111 thousand). The effect on earnings after taxes attributable to non-controlling interests totalled € – 270 thousand, with an effect of € + 401 thousand attributable to KSB AG shareholders.

Diluted and basic earnings per ordinary share were adjusted to € 21.97 (published figure: € 21.74), and the diluted and basic earnings per preference share to € 22.23 (published figure: € 22.00).

Within the statement of comprehensive income, retroactive adjustments were made for 2014 in other comprehensive income. These amounted to € – 3,273 thousand in relation to the remeasurement of defined benefit plans and to € 1,127 thousand in relation to the corresponding income taxes. The resulting effect on comprehensive income is € – 2,015 thousand. The effect on comprehensive income attributable to non-controlling interests totalled € – 310 thousand, with an effect of € – 1,705 thousand attributable to KSB AG shareholders.

II. BASIS OF CONSOLIDATION

Consolidated Group

In addition to KSB AG, 9 German and 80 foreign companies (previous year: 10 German and 86 foreign companies) were fully consolidated. We hold a majority interest, either directly or indirectly, in the voting power of these subsidiaries which the KSB Group has the option to control under IFRS 10.

The Thai company KSB Pumps Co. Ltd., Bangkok, and the Indian company KSB Pumps Limited, Pimpri (Pune), are included in the group of fully consolidated affiliates despite the fact that we hold less than 50 % of the voting rights. We do, however, have the power to determine their business and financial policies and thus the level of variable returns.

Companies that were not consolidated due to there being no material impact are reported under financial assets – other investments.

The following table shows the subsidiaries with non-controlling interests that are material subsidiaries of the KSB Group. “Seat” refers to the country in which the main activity is performed.

MATERIAL SUBSIDIARIES WITH NON-CONTROLLING INTERESTS
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Name and seat Non-­controlling interest in capital Earnings after income taxes attributable to non-controlling interests Accumulated non-controlling interests
(€ thousands) 2015 / 2014 31 Dec. 2015 31 Dec. 2014* 31 Dec. 2015 31 Dec. 2014*
GIW Industries, Inc., USA 49.0 % 2,780 1,427 23,738 17,982
KSB Pumps Limited, India 59.5 % 4,939 4,707* 49,856 43,337*
KSB America Corporation, USA 49.0 % 175 42 22,348 19,705
KSB Shanghai Pump Co. Ltd., China 20.0 % – 347 – 2,218 12,085 11,645
Individually immaterial fully consolidated subsidiaries with non-controlling interests 5,338 3,646* 41,596 37,082*
Total amount of non-controlling interests 12,885 7,604* 149,623 129,751*
*
Adjustment under IAS 8

The summarised financial information regarding the KSB Group’s material subsidiaries with non-controlling interests is provided below. This information corresponds to the amounts given in the subsidiaries’ financial statements prepared in accordance with IFRS prior to intercompany eliminations.

SUMMARISED BALANCE SHEET
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GIW
Industries, Inc.
KSB
Pumps Limited
KSB
America Corporation
KSB
Shanghai Pump Co. Ltd.
(€ thousands) / 31 Dec. 2015 2014 2015 2014* 2015 2014 2015 2014
Non-current assets 55,351 38,888 33,981 29,778* 35,652 33,205 33,719 30,467
Current assets 79,303 54,899 93,248 84,859 55,279 42,578 133,166 134,177
Non-current liabilities – 6,812 – 4,769 – 2,473 – 2,417* – 518
Current liabilities – 60,001 – 32,928 – 42,092 – 40,635* – 32,378 – 25,997 – 108,966 – 108,488
Net assets 67,841 56,090 82,664 71,585* 58,553 49,786 57,919 55,638
*
Adjustment under IAS 8
SUMMARISED STATEMENT OF COMPREHENSIVE INCOME
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GIW Industries, Inc. KSB Pumps Limited KSB America Corporation KSB Shanghai Pump Co. Ltd.
(€ thousands) 2015 2014 2015 2014* 2015 2014 2015 2014
Sales revenue 139,127 117,425 113,399 97,271 134,734 115,588
Earnings after income taxes 5,673 2,912 9,391 8,668* 2,975 2,511 – 1,399 – 10,754
Other comprehensive income 6,079 6,203 4,377 6,074* 5,792 5,865 3,680 5,466
Comprehensive income 11,752 9,115 13,768 14,742* 8,767 8,376 2,281 – 5,288
Other comprehensive income attribut­able to non-controlling interests 2,979 3,039 2,603 3,612* 2,838 2,874 736 1,093
Comprehensive income attributable
to non-controlling interests
5,758 4,466 8,186 8,766* 4,296 4,104 456 – 1,058
Dividends paid to non-controlling ­interests – 1,599 – 1,149
*
Adjustment under IAS 8
CONDENSED STATEMENT OF CASH FLOWS
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GIW Industries, Inc. KSB Pumps Limited KSB America Corporation KSB Shanghai Pump
Co. Ltd.
(€ thousands) 2015 2014 2015 2014 2015 2014 2015 2014
Cash flows from operating activities – 3,562 10,522 15,749 4,341 3,534 2,789 5,005 – 1,709
Cash flows from investing activities – 14,594 – 18,131 – 2,082 – 2,114 – 3,375 – 1,391
Cash flows from financing activities 18,020 7,525 – 6,698 78 – 12,556 – 9,895 – 8,619 2,019
Changes in cash and
cash equivalents
– 136 – 84 6,969 2,305 – 9,022 – 7,106 – 6,989 – 1,081
Cash and cash equivalents at
beginning of period
1,173 1,114 23,299 18,750 28,832 32,231 11,430 11,377
Effects of exchange rate changes 132 143 1,439 2,244 3,146 3,707 860 1,134
Cash and cash equivalents at
end of period
1,169 1,173 31,707 23,299 22,956 28,832 5,301 11,430

As at 1 January 2015 Mäntän Pumppauspalvelu Oy, Mänttä-Vilppula, was merged with KSB Finland Oy, Kerava. Both Finnish companies were already fully consolidated. As at 1 January 2015 a merger also took place in Norway between WM Teknikk AS, Ski, and KSB Norge AS, Ski. The Belgian company KSB SERVICE VRS SA, Feluy, and the Dutch company Nederlandse Pompservice (N.P.S.) B.V., Velsen-Noord, were deconsolidated due to operations being closed down. The resulting impact on these consolidated financial statements was not material.

Also on 1 January 2015, KSB increased its share in T. Smedegaard A/S, Glostrup (Denmark), from 80 % to 100 % at a purchase price of a good € 1 million. The corresponding purchase price liability was offset accordingly.

The KSB Group relinquished control of B & C Pumpenvertrieb Köln GmbH, Cologne, in Feb­ruary 2015 through the sale of shares. The resulting effects are shown in the changes to “Assets held for sale” and “Liabilities held for sale” in the balance sheet. The impact on the results of operations, expenses and earnings is not material.

With effect from 1 January 2015, formerly fully consolidated KSB AMVI, S.A., Madrid, and KSB Service Suciba, S.L.U., Loiu-Bizkaia, were merged with KSB ITUR Spain S.A., which has its head office in Zarautz, Spain, and is also fully consolidated.

Our French subsidiary KSB SERVICE COTUMER, which has its head office in Déville lès Rouen, acquired a business in the Service segment in February 2015. The assets and liabilities acquired have been included in the consolidated balance sheet at the following fair values:

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(€ thousands) Fair value at the date of acquisition
Non-current assets 751
Intangible assets 539
Property, plant and equipment 212
 
Current assets 250
Inventories 250
1,001
 
Current liabilities 1,001
Trade payables 502
Other non-financial liabilities 499
1,001

The purchase price amounts to € 0.4 million. The fair value of the intangible assets includes € 40 thousand for concessions and licences. The fair value of property, plant and equipment includes € 134 thousand for land and buildings and € 78 thousand for plant and machinery. The goodwill arising from the transaction amounts to € 499 thousand.

From the date of acquisition, KSB SERVICE COTUMER contributed about € 12 million of sales revenue to the Group’s consolidated sales revenue. For the full financial year it would have reported some € 13 million of sales revenue. The contribution to consolidated earnings for the period of consolidation was € – 0.4 million; for the full financial year it would also have been some € – 0.4 million.

Business combination costs incurred by the KSB Group amounted to less than € 0.1 million (primarily relating to fees for legal advice). They are reported in the income statement under “Other expenses – Administrative expenses”.

A full list of the shareholdings held by the KSB Group is provided at the end of these Notes to the Consolidated Financial Statements.

Consolidation methods

For the purposes of consolidation, the effects of any intercompany transactions are elimi­nated in full. Any receivables and liabilities between the consolidated companies are offset against each other, and any unrealised gains and losses recognised in fixed assets and inventories are eliminated. Any revenues from intercompany sales are offset against the corresponding expenses.

Capital consolidation uses the purchase method of accounting pursuant to IFRS 3. This means that the acquisition cost of the parent’s shares in the subsidiaries is eliminated against the remeasured equity attributable to the parent at the date of acquisition.

Any goodwill created from the application of the purchase method denominated in a currency other than the functional currency of the KSB Group is measured at the relevant current closing rate. Goodwill is reported under intangible assets and tested for impairment at least once a year. If an impairment is identified, an impairment loss is recognised. Any excess of our interest in the fair values of net assets acquired over cost remaining after reassessment is recognised in profit or loss in the year it occurred.

Those shares of subsidiaries’ equity not attributable to KSB AG are reported as non-controlling interests.

Currency translation

The consolidated financial statements have been prepared in euros (€). Amounts in this report are presented in thousands of euros (€ thousands) using standard commercial rounding rules.

Currency translation is effected on the basis of the functional currency of the consolidated companies. As in the previous year, the functional currency is exclusively the local currency of the company consolidated, as it operates as a financially, economically and organisationally independent entity.

Transactions denominated in foreign currencies are translated at the individual companies at the rate prevailing when the transaction is initially recognised. Monetary assets and liabilities are subsequently measured at the closing rate. Measurement effects are recognised in the income statement.

When translating financial statements of consolidated companies that are not prepared in euro, assets and liabilities are translated at the closing rate; the income statement accounts are translated at average exchange rates (modified closing rate method). Gains and losses from the translation of items of assets and liabilities compared with their translation in the previous year are taken directly to equity in other comprehensive income and reported under currency translation differences. They amount to € – 69,994 thousand (previous year: € – 71,152 thousand). The effect of currency translation adjustments taken directly to equity on intangible assets, property, plant and equipment, and financial assets was a gain of € 4,935 thousand (previous year: gain of € 19,639 thousand).

The exchange rates of our most important currencies to one euro are:

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Closing rate Average rate
31 Dec. 2015 31 Dec. 2014 2015 2014
US dollar 1.0887 1.2141 1.1099 1.3289
Brazilian real 4.3117 3.2207 3.6934 3.1235
Indian rupee 72.0215 76.7190 71.1886 81.0825
Chinese yuan 7.0608 7.5358 6.9748 8.1890
III. ACCOUNTING POLICIES

Acquisition and production costs

In addition to the purchase price, acquisition cost includes attributable incidental costs (except for costs associated with the acquisition of a company) and subsequent expenditure. Purchase price reductions are deducted from cost.

In addition to direct material and labour costs, production cost includes production-related administrative expenses. General administrative expenses and selling expenses are not capitalised.

Borrowing costs as defined in IAS 23 that can be directly allocated to the acquisition or production of qualifying assets are capitalised from 2009. As in the previous year no such borrowing costs were incurred.

Fair value

Fair value is the price that independent market participants would, under standard market conditions, receive when selling an asset or pay when transferring a liability at the measurement date. This applies irrespectively of whether the price is directly observable or has been esti-mated using a measurement method.

The KSB Group defined a monitoring framework concept for determining fair value. This includes a measurement team with general responsibility for monitoring all key measurements at fair value and notifying management and, if necessary, the Audit Committee of any major issues. For the purposes of calculating fair value, we make use wherever possible of estimates from market participants or estimates derived from these. In a first step we regularly review the extent to which there are current prices on active markets for identical transactions. If no quoted market prices are available, our preference is to use the market-based approach (deriving the fair value from the market or transaction prices of comparable assets, for example multipliers) or the income-based approach (calculation of fair value as a future value by discounting future cash surpluses).

Based upon the input factors used in the measurement methods, fair values are assigned to different levels of the fair value hierarchy.

  • Level 1: Quoted prices (unadjusted) on active markets for identical assets and liabilities.
  • Level 2: Measurement parameters that are not the quoted prices taken into account for level 1, but that are observable for the asset or the liability either directly as a price or indirectly derived from prices.
  • Level 3: Measurement parameters for assets or liabilities that are not based on observable market data.

If input factors categorised into different levels are included in the fair value measurement, the measurement must be categorised in its entirety in the level of the lowest level input factor that is material for the entire measurement.

We record reclassifications between different levels in the fair value hierarchy at the end of the reporting period during which the change has occurred. There were no reclassifications carried out in the year under review.

Financial instruments

A financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise.

Financial assets and financial liabilities are recognised in the consolidated balance sheet at the time when KSB becomes a party to a financial instrument. When the contractual right to payments from financial assets expires, these are derecognised. Financial liabilities are derecognised at the time when the contractual obligations are settled or cancelled or have expired. Regular way purchases and sales of financial instruments are recognised at their value at the settlement date; only derivatives are recognised at their value at the trade date. This applies to primary ­financial instruments such as trade receivables and monetary receivables, as well as to trade payables and financial liabilities (from or to third parties as well as affiliates and equity in­vestments).

a) Primary financial instruments

Within the KBS Group, primary financial instruments are allocated to the following categories as financial assets or liabilities:

  • Loans and receivables (LaR)
    Loans and financial assets not quoted in an active market
  • Financial liabilities measured at amortised cost (FLAC) Liabilities that are not quoted in an active market, such as trade payables
  • Available-for-sale (AfS) financial assets
    Non-derivative financial instruments that are not allocated to any other measurement category, such as investments in non-consolidated subsidiaries or securities

None of our financial instruments are classified as “held-to-maturity investments”.

Financial instruments are carried at fair value on initial recognition, while LaR and FLAC take into account the transaction costs. Subsequent measurement is based on fair value for category AfS and on amortised cost for categories LaR and FLAC. Subsequent measurement of loans and receivables is based on amortised cost using the effective interest method. We do not currently make use of the fair value option. The fair values of the current and non-current financial instruments are based on prices quoted in active markets on the reporting date.

Primary financial instruments classified as “available-for-sale financial instruments” are recognised directly in equity in other comprehensive income and reported under “Changes in the fair ­value of financial instruments”. They are recognised in profit or loss when the assets are sold or deemed to be other-than-temporarily impaired. If an asset is derecognised, the accumulated other comprehensive income is reclassified to the income statement.

As in the previous year, we did not make any reclassifications between the individual measurement categories.

b) Derivative financial instruments

We only use derivatives for hedging purposes. We hedge both future cash flows and existing recognised underlyings against foreign currency and interest rate risks (cash flow hedges). The hedging instruments used are exclusively currency forwards, currency options and interest rate derivatives entered into with prime-rated banks. We hedge currency risks primarily for transactions in US dollars (USD). Interest rate risks are minimised for long-term borrowings at floating rates of interest. Group guidelines govern the use of these instruments. These transactions are also subject to continuous risk monitoring.

In the case of cash flow hedges, changes in the fair value of the effective portions of the currency derivatives are recognised under other comprehensive income and reported under “Changes in the fair value of financial instruments” in equity for as long as the underlying transaction is not recognised in the income statement.

Changes in the market value of interest rate derivatives used to hedge against interest rate risks in liabilities are recognised under other comprehensive income and reported under “Changes in the fair value of financial instruments” in equity.

The carrying amounts equal fair value and are determined on the basis of input factors observable either directly (as a price) or indirectly (derived from prices). Fair values may be positive or negative. Fair value is the amount that we would receive or have to pay at the reporting date to settle the financial instrument. This amount is determined using the relevant exchange rates, interest rates and counterparty credit ratings at the reporting date. All our information is obtained from recognised external sources.

Currency forwards and interest rate swaps are reported under other receivables and other current assets, and under miscellaneous other liabilities.

The maturities of the currency derivatives used are, as in the previous year, mostly between one and two years, and those of interest rate derivatives are two years. The maturities of the hedging instruments are matched to the period in which the forecast transactions are expected to occur. In the year under review, almost all hedged forecast transactions occurred as expected.

Intangible assets

Intangible assets are carried at (acquisition or production) cost and reduced by straight-line amortisation. Depreciation/amortisation is reported under “Depreciation and amortisation expense” in the income statement. The underlying useful lives of intangible assets (excluding goodwill) is between two and five years. If the reasons for an impairment loss in a previous period no longer apply, it is reversed (write-up) up to a maximum of amortised cost.

We test goodwill for impairment once a year. This relates to cash-generating units (CGU), which at KSB are generally the legal entities. Occasionally a group of cash-generating units may also serve as the basis, provided these units reflect the lowest level on which we monitor goodwill. The goodwill (and, if necessary, other assets) is reduced by the difference in value if the recoverable amount – the higher of the fair value less costs to sell and the value in use – is lower than the carrying amount of the CGU. Reversal of an impairment loss from an earlier period is not possible. In addition, a review of impairment is always carried out when events or circumstances (“trigger events”) suggest that the value could be impaired.

We apply the discounted cash flow model to determine the recoverable amount (value in use). The future earnings (EBIT in accordance with IFRS) applied were taken from a multi-year financial plan (generally covering a maximum of five years), the basis of which was adopted in December taking into account the medium-term strategy approved by management for the respective cash-generating unit. We carried out this planning based on certain assumptions which were drawn from both forecasts from external sources, e.g. current German Engineering Federation (VDMA) publications, and our own experience-based knowledge of markets and competitors. In our calculations we consistently extrapolated the result of the last plan year as a constant, considering that level to be achievable in the long term. We derived growth rates taking account of the rate of inflation and estimates with regard to regional and segment-­specific circumstances.

If the recoverable amount is calculated as the fair value less costs to sell, the costs to sell are, based on past experience, set at a maximum of 2 % of the fair value. For the purposes of cal-culating value, we make use wherever possible of estimates from market participants (Level 1) or estimates derived from these (Level 2). In the absence of any market estimates, we make use of experience-based assumptions of the management (Level 3). In a first step we review the extent to which there are current prices on active markets for identical transactions. If no quoted market prices are available, our preference is to use the market-based approach (deriving the fair value from the market or transaction prices of comparable assets, for example multipliers) or the income-based approach (calculation of fair value as a future value by discounting future cash surpluses).

When acquiring companies we apply purchase price allocations and determine the fair value of the assets and liabilities acquired. In addition to the assets and liabilities already recognised by the selling party, we also assess marketing-related aspects (primarily brands or trademarks and competitive restrictions), customer-related aspects (primarily customer lists, customer relations and orders on hand), contract-related aspects (mainly particularly advantageous service, work, purchasing and employment contracts) as well as technology-related aspects (primarily patents, know-how and databases). To determine values we primarily apply the residual value method, the excess earnings method and cost-oriented procedures.

Development costs are capitalised as internally generated intangible assets at cost where the criteria described in IAS 38 are met and reduced by straight-line amortisation at the time of their capitalisation. Research costs are expensed as incurred. Where research and development costs cannot be reliably distinguished within a project, no costs are capitalised.

Property, plant and equipment

In accordance with IAS 16, property, plant and equipment is carried at cost and reduced by straight-line depreciation over its useful life. If an asset’s recoverable amount is lower than its carrying amount, an impairment loss is recognised. If the reasons for an impairment loss recognised in a previous period no longer apply, the impairment loss is reversed (write-up) up to a maximum of amortised cost.

Government grants relating to property, plant and equipment are transferred to an adjustment item on the liabilities side. This adjustment item is reversed over a defined utilisation period. As far as government grants recognised which are to be held for specific periods of time are concerned, we expect that these periods will be complied with.

Maintenance expenses are recognised as an expense in the period in which they are incurred, unless they lead to the expansion or material improvement of the asset concerned.

The following useful lives are applied:

USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT
Show table
Buildings 10 to 50 years
Plant and machinery 5 to 25 years
Other equipment, operating and office equipment 3 to 25 years

Leases

IAS 17 defines a lease as an arrangement under which a lessor provides a lessee with the right to use an asset for an agreed period of time in exchange for a payment. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership to the lessee. Otherwise, such transactions are classified as operating leases.

Lease payments that are payable under operating leases are recognised as expenses in the period in which they are incurred. In the case of finance leases, the leased asset is recognised at the time of inception of the lease at the lower of fair value and the present value of future minimum lease payments. A liability is recognised in the same amount for the future lease payment. The asset’s carrying amount is reduced by depreciation over its useful life or the shorter lease term.

Non-current financial assets

Equity investments are carried at fair value. Interest-bearing loans and investments in non-consolidated subsidiaries are measured at amortised cost. Financial instruments are carried at their fair values at the reporting date.

Investments accounted for using the equity method

Investments accounted for using the equity method are companies in which the parties exercise joint control (joint venture) or have the power to exercise significant influence over the com-panies’ operating and financial policies (associate); this is usually the case where an entity holds between 20 % and 50 % of the voting power. These assets are recognised at cost at the time of acquisition. If the costs of acquisition exceed the share of the net assets, adjustments are made on the basis of the fair value (pro rata hidden reserves and liabilities). The remaining amount is recorded as goodwill. It forms part of the carrying amount of the joint venture or associate and is not amortised. For subsequent measurement, the carrying amounts are increased / reduced annually by the pro-rata earnings, distributed dividends or other changes in equity of the joint venture or the associate. If local accounting principles differ from the accounting methods used in the Group, we make the necessary adjustments. The share of earnings is reported in the consolidated income statement in a separate line (earnings from investments accounted for using the equity method), and changes such as currency translation effects are taken directly to Group equity. If the losses attributable to the KSB Group correspond to the carrying amount of the company or exceed this, they are not recognised unless KSB has entered into obligations or has made payments for the company. Intercompany gains and losses from transactions between Group companies and investments accounted for using the equity method are offset against the carrying amount in profit or loss. At each reporting date we review whether there are any objective indications of impairment, and calculate the amount of such impairment if required. If the carrying amount exceeds the recoverable amount of an investment, it is written down to the recoverable amount. Any impairments or reversals of impairments are reported in the consolidated income statement under financial income/expense.

Inventories

Pursuant to IAS 2, inventories are carried at the lower of cost and net realisable value as at the reporting date. Cost is measured using the weighted average method. Write-downs to the net realisable value take account of the inventory risks resulting from slow-moving goods or impaired marketability. This also applies if the selling price is lower than production cost plus costs still to be incurred. If the reasons for an impairment loss charged in a previous period no longer apply, the impairment loss is reversed (write-up).

Advance payments made on inventories are also presented here because of the correlation and expected realisation of these advances (through conversion into inventories) within the normal business cycle. Advances received from customers are recognised as current liabilities.

Construction contracts under IAS 11

In the case of construction contracts covered by IAS 11, we apply the percentage of completion (PoC) method. According to this method, a production order is a contract for the customer-specific production of individual items or a number of items that, in terms of their design, technology and function or with regard to their use, are linked to one another or dependent on each other. If the earnings from a production order can be reliably estimated, we recognise the revenue based on the percentage of completion method. The percentage of completion of contracts is determined on the basis of the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs at the reporting date. Contract revenue consists of all contractually agreed revenues, as well as additional claims and incentive payments that are likely to result in revenue and are capable of being reliably measured. Contract revenue may vary from one period to the next, for instance because of cost escalation clauses, variations or penalties. It is measured at the fair value received or receivable. If the earnings from a production order cannot be reliably estimated, revenue will only be recognised in the amount of the contract costs incurred that are likely to be covered and the contract costs recognised as an expense for the period in which they are incurred.

The percentage contract revenue less the related advances received from customers is reported – depending on the balance – in trade receivables and PoC or within other financial liabilities. Effects in the period are recognised in the income statement as part of sales revenue.

Trade receivables and other current assets

Trade receivables and other current assets are subsequently carried at amortised cost. Low-interest or non-interest-bearing receivables are discounted. In addition, we take account of identifiable risks by charging specific write-downs using allowance accounts. If the reasons for an impairment loss charged in a previous period no longer apply, the impairment loss is reversed (write-up).

We hedge part of the credit risk exposure of our receivables (for further explanations, refer to the Financial Risks – Credit Risk section).

The prepaid expenses reported relate to accrued expenditure prior to the reporting date that will only be classified as an expense after the reporting date.

Cash and cash equivalents

Cash (cash and sight deposits) and cash equivalents (short-term, highly liquid financial investments that are readily convertible to defined amounts of cash, and that are subject to only immaterial fluctuations in terms of their value) are recognised at amortised cost.

Assets held for sale

Pursuant to IFRS 5, non-current assets or disposal groups are classified as held for sale if it is highly likely that the carrying amount will be realised primarily by a sales transaction and not through continued use of that asset. It must be assumed that the sale will be completed within one year. If the Group is committed to a sale that involves loss of control of a subsidiary, all assets and liabilities of that subsidiary will be classified as held for sale, provided the above conditions are met. The intangible assets and property, plant and equipment of the held-for-sale assets are no longer amortised/depreciated, but instead are recognised at the lower of the carrying amount and fair value less costs to sell.

Deferred taxes

We account for deferred taxes in accordance with IAS 12 using the balance sheet liability method on the basis of the enacted or substantively enacted local tax rates. This means that deferred tax assets and liabilities generally arise when the tax base of assets and liabilities dif-fers from their carrying amount in the IFRS financial statements, and this leads to future tax expense or income. We also recognise deferred tax assets from tax loss carryforwards in those cases where it is more likely than not that there will be sufficient taxable profit available in the near future against which these tax loss carryforwards can be utilised. Deferred taxes are also recognised for consolidation adjustments. Deferred taxes are not discounted. Deferred tax assets and liabilities are always offset where they relate to the same tax authority. Changes to deferred taxes in the consolidated balance sheet generally result in deferred tax expense or income. If, however, a direct entry is made in other comprehensive income in equity, the change in deferred taxes is also taken directly to equity.

Provisions

a) Provisions for pensions and similar obligations

Provisions for pensions and similar obligations pursuant to IAS 19 are calculated on the basis of actuarial reports. They are based on defined benefit pension plans. They are measured using the projected unit credit method.

Actuarial gains and losses are taken directly to other comprehensive income and reported in equity under “Remeasurement of defined benefit plans”. The actuarial demographic assumptions and the setting of the discount rate (based on senior, fixed-income corporate bonds) and other measurement parameters (for example income and pension trends) are based on best estimates.

Net interest is calculated by multiplying the discount rate with the net liability (pension obligation minus plan assets) or the net asset value that results if the plan assets exceed the pension obligation.

The defined benefit costs include the service cost, which is included in staff costs under pension costs, and the net interest income or expense on the net liability or net realisable value, which is recognised in financial income/expense under interest and similar expenses or under interest and similar income.

KSB companies that use a defined contribution pension plan do not recognise provisions. The premium payments are recognised directly in the income statement as pension costs in the staff costs. Other than an obligation to pay premiums, these companies have no further obligations. Consequently, the insurance risk remains with the insured parties.

b) Other provisions

Provisions are recognised if a past event results in a present legal or constructive external obligation that the company has no realistic alternative to settling, where settlement of this obligation is expected to result in an outflow of resources embodying economic benefits, and the amount of the obligation can be estimated reliably. The amount of the provision corresponds to the best estimate of the settlement amount of the current obligation on the reporting date. Any more or less secure recourse or reimbursement claims are recognised as separate assets.

Provisions for restructurings are recognised only if the criteria set out in IAS 37 are met.

Non-current provisions are discounted if the effects are material.

Financial liabilities

Financial liabilities are recognised with their amortised costs using the effective interest rate method.

Contingent liabilities (contingencies and commitments)

Contingent liabilities, which are not recognised, are possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events. Contingent liabilities may also be present obligations that arise from past events where it is possible but not probable that there will be an outflow of resources embodying economic benefits.

Contingent liabilities correspond to the extent of liability at the reporting date.

Income and expenses

Sales revenue consists of charges for deliveries and services billed to customers. This relates to revenue from the sale of goods and goods purchased and held for resale from the production, sale and trade of machinery, systems and other industrial products, particularly pumps and valves. In addition, sales revenue from services and licence income is reported under sales revenue for the period concerned in accordance with the economic content of the underlying contract. Sales revenue is recognised pursuant to IAS 18 when the deliveries have been effected or the services have been rendered and the significant risks and rewards associated with ownership have thus been transferred to the customer. At the time of revenue recognition, receipt of the consideration must be probable and the amount of sales revenue must be reliably measur-able. A reliable estimation of the associated costs and potential return of the goods must also be possible. We essentially recognise sales revenue from the delivery of standard products upon handover to the carrier. For some international deliveries, the contractual risk transfer takes place when the goods are loaded onto a cargo ship in the port or delivered to the customer in the destination country. In these cases, sales revenue is recognised on the basis of the contractually agreed INCOTERMS. For certain deliveries and services, a declaration of acceptance by the customer is required for the recognition of sales revenue.

In individual cases and under strict conditions, sales revenue is recognised prior to delivery of the goods (so-called bill and hold arrangements).

Sales revenue for customer-specific construction contracts is reported using the percentage of completion method. We use the so-called cost-to-cost method, according to which the proceeds determined at the beginning of the sales order are compared with the estimated costs, and the sales revenue of a period is determined according to the percentage of completion measured on the basis of the costs incurred; see the explanations on “Construction contracts under IAS 11”.

Sales allowances reduce sales revenue.

Interest income and expense are recognised in the period in which they occur.

Dividend income from investments is collected when the legal entitlement to payment is created.

Operating expenses are recognised when they are incurred or when the services are utilised.

Income taxes are calculated in accordance with the statutory tax rules in the countries in which the Group operates. Deferred taxes are accounted for on the basis of the enacted or substantively enacted income tax rates.

Estimates and assumptions

The preparation of consolidated financial statements in accordance with the IFRSs as adopted by the EU requires management to make estimates and assumptions that affect the accounting policies to be applied. When implementing such accounting policies, estimates and assumptions affect the assets, liabilities, income and expenses recognised in the consolidated financial statements, and their presentation. These estimates and assumptions are based on past experience and a variety of other factors deemed appropriate under the circumstances. Actual amounts may differ from these estimates and assumptions. We continuously review the estimates and assumptions that we apply. If more recent information and additional knowledge are available, recognised amounts are adjusted to reflect the new circumstances. Any changes in estimates and assumptions that result in material differences are explained separately.

Impairment tests for goodwill, which are conducted at least once per year, require an estimate of the recoverable amounts for each cash-generating unit (CGU). These correspond to the higher amount from the fair value less costs to sell and value in use. The earnings forecast on the basis of these estimates are affected by various factors, which may include exchange rate fluctuations, progress in Group integration or the expectations for the economic development of these units. Although management believes that the assumptions used to calculate the recoverable amount are appropriate, any unforeseen changes in these assumptions could lead to an impairment loss.

Estimates and assumptions must also be made to review the value of assets. For each asset it must be verified to what extent there are indications of an impairment. When determining the recoverable amount of property, plant and equipment, the estimation of the relevant useful life is subject to uncertainty. The measurement of doubtful receivables is based on forecasts about the creditworthiness of customers. A material change in the assumptions or circumstances can lead in future to additional impairment losses or reversals.

For construction contracts with clients in the project business we recognise sales revenue according to the percentage of completion method. This requires estimates regarding the total contract costs and revenue, contract risks as well as other relevant factors. These estimates are reviewed regularly by those with operative responsibility and adjusted where necessary.

Provisions for employee benefits, especially pensions and similar obligations, are determined according to actuarial principles which are based on statistical and other factors so as to anticipate future events. Material factors are the reported market discount rates and life expectancy. The actuarial assumptions made may differ from actual developments as a result of chang-ing market and economic conditions, and this can have material effects on the amount of provisions and thus on the company’s overall net assets, financial position and results of operations.

Other provisions are reported based on the best possible estimate of the probability of future outflows. The later, actual outflow can, however, differ from the estimate as a result of changed economic, political or legal conditions. This will be reflected in additional expenses or income from reversals.

The global scope of our activities must be taken into account in relation to taxes on income. Based on our operative activities in numerous countries with varying tax laws and administrative interpretation, differentiated assessment is required for determining our tax obligations. Uncertainty may arise due to different interpretations by taxable entities on the one hand and local finance authorities on the other. Uncertain tax assets and liabilities are recognised if their probability of occurrence exceeds 50 %. For the reporting, the best estimate is based on the expected tax payment. Although we believe we have made a reasonable estimate regarding any tax uncertainties, it is possible that the actual tax obligation will differ from our original estimate. With regard to future tax benefits, we assess their realisability as of every reporting date. For this reason, we only recognise deferred tax assets if sufficient taxable income is available in future. In assessing this future taxable income within a planning horizon of normally five years it must be taken into account that expected future business developments are subject to uncertainties and are in some cases excluded from control by company management (for example changes to applicable tax legislation). If we come to the conclusion that previously reported deferred tax assets cannot be realised because of changed assumptions, then the assets will be written down by the appropriate amount.

Maturities

Maturities of up to one year are classified as current.

Assets that can only be realised after more than 12 months, as well as liabilities that only become due after more than 12 months, are also classified as current if they are attributable to the operating cycle defined in IAS 1. An operating cycle of more than 12 months typically applies to made-to-order production (construction contracts).

Assets and liabilities not classified as current are non-current.

IV. BALANCE SHEET DISCLOSURES

1
Intangible assets
STATEMENT OF CHANGES IN INTANGIBLE ASSETS
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(€ thousands) Concessions, industrial property and similar rights and assets, as well as licences in such rights and assets Goodwill Advance payments Intangible assets Total
Historical cost 2015 2014 2015 2014 2015 2014 2015 2014
Balance at 1 January 58,279 56,046 103,019 99,785 8,543 2,733 169,841 158,564
Changes in consolidated Group 2 – 122 524 – 122 526
Currency translation adjustments – 717 1,047 525 2,710 – 192 3,757
Other – 15 – 15 – 11 – 26 – 15
Additions 2,785 1,583 5,527 5,812 8,312 7,395
Addition from business combination 40 22 499 539 22
Disposals 584 248 3,600 2 4,184 250
Reclassifications 1,920 7 – 1,920 7
Reclassification to assets held for sale – 165 – 165
Balance at 31 December 61,708 58,279 103,910 103,019 8,550 8,543 174,168 169,841
 
Accumulated depreciation and amortisation 2015 2014 2015 2014 2015 2014 2015 2014
Balance at 1 January 48,161 43,789 10,239 3,473 58,400 47,262
Currency translation adjustments – 438 580 – 14 12 – 452 592
Other – 8 – 15 – 10 – 18 – 15
Additions 3,838 4,197 10,846 6,754 14,684 10,951
Disposals 521 225 521 225
Reclassifications
Reclassification to assets held for sale – 165 – 165
Balance at 31 December 51,032 48,161 21,061 10,239 72,093 58,400
Carrying amount at 31 December 10,676 10,118 82,849 92,780 8,550 8,543 102,075 111,441

As in the previous year, we did not capitalise any development costs in the year under review because not all of the comprehensive recognition criteria defined in IAS 38 were met. The “Concessions, industrial property and similar rights and assets, as well as licences in such rights and assets” item includes € 9.3 million (previous year: € 8.6 million) of software including software licences valid for a limited period. There are no restrictions on ownership or use.

The carrying amounts of the cash-generating units in connection with the impairment testing of goodwill do not contain any items relating to taxes or financing activities.

To determine the discount rate, the weighted average cost of capital (WACC) method is applied in conjunction with the capital asset pricing model (CAPM), taking into account a peer group. Under this method, first the cost of equity is determined using CAPM and the borrowing costs are defined, and then the individual capital components are weighted in accordance with the capital structure taking account of the peer group. The interest rate for risk-free 30-year Bunds was used as a base rate. This rate was 1.5 % in the year under review (previous year: 2.1 %). The market risk premium was set at 5.75 %, which was unchanged on the previous year, with a beta factor of 1.03 (previous year: 1.06). In addition, country-specific tax rates and country risk premiums are taken into account individually for each cash-generating unit (CGU). We applied growth rates of between 0.75 % and 1.25 % (previous year: between 0.50 % and 1.25 %).

DISCOUNT RATES
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Before taxes in % (value in use) 2015 2014
Companies in Germany 9.6 – 9.8 10.7 – 11.0
Companies in the Netherlands 9.3 10.2
Companies in Italy 13.7 – 14.3 14.8 – 15.7
Companies in the USA 10.4 11.8
Companies in South Africa 13.8 14.2
Companies in the rest of Europe 8.9 – 15.4 9.8 – 15.2
 
After taxes in % (fair value less costs to sell) 2015 2014
Companies in South Korea 8.3 9.1
GOODWILL
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Name of CGU / (€ thousands) 31 Dec. 2015 31 Dec. 2014
KSB Seil Co., Ltd., South Korea 27,188 26,285
DP industries B.V., the Netherlands 18,285 18,285
Société de travaux et Ingénierie Industrielle (ST II), France 5,689 5,689
REEL s.r.l., Italy 5,526 9,681
KSB SERVICE MEDIATEC S.A.S., France 3,179
Dynamik-Pumpen GmbH, Germany 3,150 3,150
Uder Elektromechanik GmbH, Germany 2,980 2,980
KSB Service Centre-Est S.A.S., France 2,609
KSB Finland Oy, Finland 2,468 1,764
KSB Pumps (S.A.) (Pty) Ltd., South Africa 1,755 2,120
KSB SERVICE ETC S.A.S., France 1,412 1,412
68,453 77,154
Other 17 (previous year: 21) companies 14,396 15,626
Total 82,849 92,780

The impairment test performed annually resulted in goodwill impairments for the cash-generating units listed below:

IMPAIRMENT LOSS ON GOODWILL
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Name of CGU Segment Discount factor Recoverable amount (€ thousands) Impairment loss (€ thousands)
REEL s.r.l., Italy Pumps 13.9 % 8,367 4,155
KSB SERVICE MEDIATEC S.A.S., France Service 13.4 % 1,058 3,179
KSB Service Centre-Est S.A.S., France Service 11.7 % 1,425 2,609
KSB Service Est S.A.S., France Service 12.1 % 2,546 903
Total 31 Dec. 2015 10,846
KSB Service Est S.A.S., France Service 13.2 % 4,410 647
KSB Italia S.p.A., Italy Pumps 15.7 % 23,452 3,710
KSB Service EITB-SITELEC S.A.S., France Service 10.5 % 2,566 1,944
Metis Levage S.A.S., France Service 13.3 % 488 453
Total 31 Dec. 2014 6,754

The recognised impairments were due to continuing economic difficulties and were reported in the income statement under the “Impairment losses on intangible assets and property, plant and equipment” item.

DETAILED INFORMATION ON KEY GOODWILL ITEMS
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Cash-generating unit Method Carrying amount of goodwill (€ million) Percentage of total goodwill Discount rate Growth rate Underlying assumptions, corporate planning Method for assessing the value of the ­underlying assumption
KSB Seil Co., Ltd. Fair value less costs to sell (costs to sell
of € 250 thousand)
27.2 33 % 8.3 %
after taxes
1.00
  • Improved business cycle expectations in shipbuilding (liquefied gas tankers) resulting in improved market growth rates
  • Little change in exchange rates
Consideration of macro-economic key data and external market research
DP industries B.V. Value in Use 18.3 22 % 9.3 %
before taxes
1.25
  • Greater customer focus
  • Moderate to significant market growth rates
Consideration of macro-economic key data and internal estimates of the relevant purchasing and sales departments
REEL s.r.l. Value in Use 5.5 7 % 13.9 %
before taxes
0.75
  • Greater customer focus
  • Improved energy ­efficiency, resulting in more attractive market growth rates
Consideration of external market data and macro-economic environment

For the annual impairment test, the following assumptions on order intake figures, sales revenue and operating result are made for goodwill considered material:

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Cash-generating unit Order intake Sales revenue EBIT Planning time horizon
KSB Seil Co., Ltd. Strong growth, on average Strong growth, on average Strong growth, on average, as a result of sales revenue and cost planning 7 years
DP industries B.V. Significant growth, on average Significant growth, on average Moderate growth, on average, as a result of sales revenue and cost planning 5 years
REEL s.r.l. Strong growth, on average Strong growth, on average Strong growth, on average, as a result of sales revenue and cost planning 5 years

The business performance of KSB Seil Co., Ltd. is closely linked to the economic development of the long-cycle shipbuilding industry. This is also documented in the market development studies from external sources we used, which contain forecasts for the next seven years. Correspondingly, we have selected a monitoring period of seven years instead of our commonly used five-year period for impairment testing of this cash-generating unit.

For the purposes of calculating the fair value less costs to sell of the South Korean KSB Seil Co., Ltd., the input factors used for the discounted cash flow method are largely based on observ­able market data (base interest rate) or freely accessible information (for example sovereign risk classification, tax rates, procurement prices, sales prices, market studies).

As well as impairment testing, sensitivity analyses are conducted for each cash-generating unit. A 5 % increase in the relevant discount rate or a 0.25 percentage point lower growth rate would require further write-downs of € 0.5 million or € 0.1 million respectively at REEL s.r.l. (Italy). Moreover, the sensitivity analysis regarding the impact of a 10 % fall in sales revenue, with a corresponding reduction in EBIT, would have shown the need for a further write-down of € 3.8 million at REEL s.r.l., Italy.

As in the previous year, we did not recognise any impairment losses on other intangible assets in the reporting year.

2
Property, plant and equipment
STATEMENT OF CHANGES IN PROPERTY, PLANT AND EQUIPMENT
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(€ thousands) Land and buildings Plant and machinery Other equipment, operating and office equipment Advance payments and assets under construction Property, plant and equipment Total
Historical cost 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014
Balance at 1 January 332,531 313,360 528,014 494,511 205,681 193,236 34,359 8,992 1,100,585 1,010,099
Changes in consolidated Group – 104 – 70 67 – 35 146 2 – 209 215
Currency translation adjustments 815 8,384 3,601 13,582 – 163 4,645 2,523 1,620 6,776 28,231
Other – 826 60 – 6 – 20 149 – 33 40 – 716
Additions 7,717 9,436 19,939 19,196 19,170 16,880 27,669 32,157 74,495 77,669
Addition from business combination 134 78 48 212 48
Disposals 12 348 5,242 3,943 13,519 9,515 41 1,079 18,814 14,885
Reclassifications 3,514 2,525 5,496 4,607 1,709 161 – 10,719 – 7,300 – 7
Reclassification to assets held for sale – 122 – 668 – 73 – 69 – 863 – 69
Balance at 31 December 344,473 332,531 551,208 528,014 212,750 205,681 53,791 34,359 1,162,222 1,100,585
 
Accumulated depreciation and amortisation 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014
Balance at 1 January 136,542 125,694 345,201 311,939 143,034 129,605 624,777 567,238
Currency translation adjustments 1,571 3,112 2,876 8,064 – 454 3,116 3,993 14,292
Other – 18 20 – 81 – 13 202 7 103
Additions 8,542 7,797 30,298 28,389 19,321 19,067 58,161 55,253
Disposals 43 4,831 3,430 13,035 8,603 17,866 12,076
Reclassifications – 479 320 479 – 320
Reclassification to assets held for sale – 89 – 531 – 61 – 33 – 681 – 33
Balance at 31 December 146,566 136,542 372,554 345,201 149,271 143,034 668,391 624,777
Carrying amount at 31 December 197,907 195,989 178,654 182,813 63,479 62,647 53,791 34,359 493,831 475,808

Assets resulting from finance leases are recognised as fixed assets in accordance with IAS 17, and corresponding financial liabilities are recognised. The carrying amount of these capitalised assets amounts to € 2,277 thousand (previous year: € 2,644 thousand), of which € 1,260 thousand (previous year: € 1,347 thousand) relate to land and buildings, € 113 thousand (previous year: € 133 thousand) to plant and machinery and € 904 thousand (previous year: € 1,164 thousand) to other equipment, operating and office equipment.

In 2013 it was decided to close down a relatively small production site forming part of the Valves segment in Germany. The real estate there was planned to be sold off in 2014 and, for this reason, it was reported pursuant to IFRS 5 in a separate balance sheet item within current assets (assets held for sale). Due to insufficient market liquidity, a sale was not possible until September 2015 despite various sales activities. The carrying amount was € 1,185 thousand.

The KSB Group gave up control of a German subsidiary (Service segment) in February 2015 through the sale of shares. Accordingly, the assets and liabilities of this subsidiary were presented as a disposal group held for sale as at 31 December 2014. No write-down needed to be carried out on the disposal group as the fair value less costs to sell was not below the carrying amount. Also, no accumulated income and expenses arising in connection with the disposal group were included in other comprehensive income.

Within the scope of our “Streamlining the Group structure” project, we identified a subsidiary in the Service segment whose business operations we sold in February 2016. In accordance with IFRS 5, we therefore treat the relevant assets and liabilities as a disposal group held for sale as at 31 December 2015. No write-down needed to be carried out on the disposal group as the fair value less costs to sell was not below the carrying amount. Also, no accumulated income and expenses arising in connection with the disposal group are included in other comprehensive income.

The held-for-sale assets and liabilities are classified as follows:

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(€ thousands) 31 Dec. 2015 31 Dec. 2014
Property, plant and equipment 182 36
Inventories 199 429
Receivables and other current assets 423 420
Cash and cash equivalents 130 164
Assets held for sale 934 1,049
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(€ thousands) 31 Dec. 2015 31 Dec. 2014
Provisions 105 63
Liabilities 193 146
Liabilities held for sale 298 209

As in the previous year, no property, plant and equipment have been pledged as security for bank loans and other liabilities on the basis of standard terms and conditions. Information on the purchase obligation is provided in Section IX. Other Disclosures of these Notes to the Consolidated Financial Statements.

Disposals of intangible assets and items of property, plant and equipment resulted in book gains of € 2,769 thousand (previous year: € 3,646 thousand) and book losses of € 3,258 thousand (previous year: € 578 thousand). The book gains and losses are reported in the income statement under other income and other expenses.

As in the previous year, we did not recognise any impairment losses on property, plant and equipment.

3
Non-current financial assets
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(€ thousands) 31 Dec. 2015 31 Dec. 2014
Other investments 5,074 3,941
Non-current financial instruments 668 661
Loans 2,219 2,718
7,961 7,320

Other investments are investments in non-consolidated affiliates that were not consolidated due to there being no material impact.

As in the previous year, none of the loans are loans to equity investments.

4
Investments accounted for using the equity method

The following table lists the KSB Group’s material joint ventures. “Seat” refers to the country in which the main activity is performed. All joint ventures and associates are accounted for using the equity method and can also be found in the list of shareholdings in these Notes to the Consolidated Financial Statements. The share of capital corresponds to the share of voting rights.

MATERIAL JOINT VENTURES
Show table
Name and seat Capital share Nature of the entity’s relationship
KSB Pumps Arabia Ltd., Saudi Arabia 50.00 % KSB Pumps Arabia Ltd. in Riyadh, Saudi Arabia, offers a wide range of services and activities for the energy market as well as in water, waste water and building services applications. The portfolio includes business development and marketing, supply chain management, production of pressure booster systems and pump sets, sale of pumps, valves and systems and technical service activities. KSB Pumps Arabia Ltd. is important for the growth of the Group in the Saudi Arabian market.
Shanghai Electric-KSB Nuclear Pumps and Valves Co., Ltd., China 45.00 % Shanghai Electric-KSB Nuclear Pumps and Valves Co., Ltd. in Shanghai, China, produces suitable auxiliary pumps for the secondary coolant circuits and modern reactor coolant pumps for the primary cooling circuits of nuclear power stations. Shanghai Electric-KSB Nuclear Pumps and Valves Co., Ltd. is a strategic partnership on the part of the Group, through which KSB is participating in the expansion of energy capacity in China and other Asian markets.

Neither of the above two joint ventures is listed on a stock market and there is therefore no available active market value.

Summarised financial information on these material joint ventures of the KSB Group is provided below.

SUMMARISED BALANCE SHEET
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KSB Pumps Arabia Ltd. Shanghai Electric-KSB Nuclear Pumps and Valves Co., Ltd.
(€ thousands) 31 Dec. 2015 31 Dec. 2014 31 Dec. 2015 31 Dec. 2014
Non-current assets 3,687 2,824 96,312 92,273
Current assets 38,835 31,805 74,975 50,354
of which cash and cash equivalents 1,149 353 6,771 3,065
Non-current liabilities – 1,976 – 736 – 11,451 – 45,013
of which non-current financial ­liabilities (excluding trade payables and ­provisions) – 942 – 40,693
Current liabilities – 20,185 – 20,278 – 121,574 – 60,583
of which current financial liabilities (excluding trade payables and ­provisions) – 4,439 – 5,905 – 18,867 – 7,914
Net assets 20,361 13,615 38,262 37,031
SUMMARISED STATEMENT OF COMPREHENSIVE INCOME
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KSB Pumps Arabia Ltd. Shanghai Electric-KSB Nuclear Pumps and Valves Co., Ltd.
(€ thousands) 2015 2014 2015 2014
Sales revenue 45,896 39,460 51,856 33,998
Depreciation / amortisation 299 127 3,145 9,519
Interest income 1 3 15 12
Interest expense – 159 – 80 – 3,084 – 1,722
Earnings from continuing operations 7,967 4,378 238 186
Taxes on income – 575 – 1,998 – 1,513 – 70
Earnings after taxes from continuing operations 7,392 2,380 – 1,276 116
Earnings after taxes from
discontinued operations
Other comprehensive income 1,760 1,611 2,507 3,605
Comprehensive income 9,152 3,991 1,231 3,721
Dividends received from
joint ­ventures
1,203 257
RECONCILIATION TO CARRYING AMOUNT OF GROUP SHARE IN JOINT VENTURES
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KSB Pumps Arabia Ltd. Shanghai Electric-KSB Nuclear Pumps and Valves Co., Ltd.
(€ thousands) 2015 2014 2015 2014
Net carrying amount at 1 January 13,615 10,137 37,031 33,310
Earnings after income taxes 7,392 2,380 – 1,276 116
Distribution of dividends – 2,406 – 513
Other comprehensive income 1,760 1,611 2,507 3,605
Net carrying amount at
31 December
20,361 13,615 38,262 37,031
Investment in joint venture
(50 % / 45 %)
10,181 6,807 17,218 16,664
Elimination of intercompany profit and loss – 2,420 – 1,891
Goodwill
Carrying amount at 31 December 10,181 6,807 14,798 14,773
SUMMARISED INFORMATION ON JOINT VENTURES THAT ARE IMMATERIAL INDIVIDUALLY
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(€ thousands) Joint ventures 2015 Associates 2015 Total 2015 Joint ventures 2014 Associates 2014 Total 2014
Group share of earnings from continuing operations 679 525 1,204 132 547 679
Group share of other comprehensive income 305 305 290 290
Group share of comprehensive income 984 525 1,509 422 547 969
Total carrying amounts of Group shares in these companies 3,148 1,108 4,256 5,087 1,334 6,421

On 8 September 2014 the KSB Group acquired 66 % of the shares and voting rights in the Norwegian company WM Teknikk AS, Ski. This meant that the Group’s share of equity rose from 34 % to 100 %, as a result of which the Group gained control of the company. As of this date, WM Teknikk AS has been a fully consolidated subsidiary. Correspondingly, the above table only shows the figures for the period from 1 January to 7 September 2014.

As in the previous year, there are no pro rata losses that have not been recognised from the consolidation at equity.

5
Inventories
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(€ thousands) 31 Dec. 2015 31 Dec. 2014
Raw materials, consumables and supplies 163,123 161,789
Work in progress 163,716 149,056
Finished goods and goods purchased and held for resale 115,027 115,961
Advance payments 12,545 23,020
454,411 449,826

€ 61,508 thousand (previous year: € 67,990 thousand) of the inventories is carried at net realisable value. The impairment losses recognised as an expense in the reporting period amount to € 7,125 thousand (previous year: € 2,601 thousand). Due to new estimates, we reversed write-downs totalling € 1,905 thousand (previous year: € 4,295 thousand) where the current net realisable value was higher than the prior-period value. Inventories amounting to € 968,817 thousand (previous year: € 875,366 thousand) were recognised as an expense in the reporting period.

6
Trade receivables and PoC as well as other financial and non-financial assets
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(€ thousands) 31 Dec. 2015 31 Dec. 2014*
Trade receivables and PoC 663,740 614,201
Trade receivables 524,610 496,018
Trade receivables from other investments, associates and joint ventures 36,193 30,459
thereof from other investments 8,316 6,820
thereof from associates 330 272
thereof from joint ventures 27,547 23,367
Receivables recognised by PoC 102,937 87,724
Receivables recognised by PoC (excl. advances received from customers PoC) 185,605 166,527
Advances received from customers (PoC) – 82,668 – 78,803
Other financial assets 156,169 190,160*
Receivables from loans to other investments, associates and joint ventures 3,189 2,542
Currency forwards 1,978 2,369
Other receivables and other current assets 151,002 185,249*
Other non-financial assets 25,200 33,509
Other tax assets 18,210 27,013
Deferred income 6,990 6,496

* Adjustment due to the reclassification of cash and cash equivalents with a maturity of more than three months to other financial assets in the amount of € 154,121 thousand

Impairment losses on trade receivables amount to € 35,560 thousand (previous year: € 35,905 thousand) and on trade receivables from other investments to € 3,644 thousand (previous year: € 3,181 thousand). No impairment losses were recognised on receivables from joint ventures, like in the previous year, and on receivables from associates (previous year: € 341 thousand).

Construction contracts under IAS 11 include recognised earnings of € 44,920 thousand (previous year: € 38,253 thousand) and costs of € 140,685 thousand (previous year: € 128,274 thousand). Sales revenue in accordance with IAS 11 amounts to € 498,435 thousand (previous year: € 561,940 thousand).

Other receivables and other current assets include hedges of credit balances prescribed by law for partial retirement arrangements and long-term working time accounts of the German Group companies in the amount of € 15,501 thousand (previous year: € 15,268 thousand).

€ 31,950 thousand (previous year: € 38,592 thousand) of all receivables and other assets is due after more than one year.

7
Cash and cash equivalents

Cash and cash equivalents are term deposits with short maturities and call deposits, and also current account balances. With regard to the adjustment of the previous year’s figures, reference is made to the previous explanations on “Adjustments under IAS 8”.

8
Equity

There was no change in the share capital of KSB AG as against the previous year. In accordance with the Articles of Association, it totals € 44,771,963.82 and, as in the previous year, is composed of 886,615 ordinary shares and 864,712 preference shares. Each no-par-value share represents an equal notional amount of the share capital. The preference shares carry separate cumulative preferred dividend rights and progressive additional dividend rights. All shares are no-par-value bearer shares. The individual shares have no par value.

The capital reserve results from the appropriation of premiums from capital increases in previous years.

In addition to revenue reserves from previous years, the revenue reserves include currency translation adjustments, consolidation effects, remeasurements of defined benefit plans under IAS 19 and changes in the market value of interest rate derivatives taken directly to equity. These effects resulted in deferred tax assets in the amount of € 61,762 thousand (previous year, adjusted: € 68,238 thousand) and no deferred tax liabilities (previous year: € 448 thousand).

A total of € 15,111 thousand (dividend of € 8.50 per ordinary share and € 8.76 per preference share) was paid from equity by resolution of the Annual General Meeting of the Group’s parent company KSB AG, Frankenthal, on 6 May 2015.

Non-controlling interests relate primarily to the interests held by PAB GmbH, Frankenthal, as well as to our companies in India and China. KSB AG holds a 51 % interest in PAB GmbH, while Klein Pumpen GmbH, Frankenthal, holds a 49 % interest.

Details of the changes in equity accounts and non-controlling interests are presented in the Statement of Changes in Equity.

The proposal on the appropriation of the net retained earnings of KSB AG calculated in accordance with HGB is shown at the end of these Notes.

Capital disclosures

Sufficient financial independence is a key requirement for safeguarding KSB’s continued existence in the long term. Obtaining the necessary funds for ongoing business operations is also extremely important for us. A key management parameter for us is the net financial position, which is the balance of financial liabilities and interest-bearing financial assets (current and non-current financial instruments, interest-bearing loans, cash and cash equivalents, and receiv­ables from cash deposits). Our long-term objective is to avoid net debt. We regularly monitor the development of this key performance indicator and manage it through active working capital management and by constantly optimising our financial structure, among other things. In the ­financial year we exceeded our original target of € 180 – 190 million and achieved € 211.3 million, based on successes in working capital management and a focused investment policy. In the pre­vious year, owing to the fall in earnings accompanied by a sharp increase in investment volume, the development of the net financial position, at € 185.5 million, was somewhat weaker than planned twelve months earlier (€ 200 million).

9
Provisions

The provisions disclosed in the balance sheet under current and non-current liabilities can be broken down as follows:

Show table
31 Dec. 2015 31 Dec. 2014
Changes (€ thousands) Total Non-current Current Total Non-current Current
Employee benefits 614,869 541,256 73,613 614,829 1, 2 539,438 1 75,391 2
Pensions and similar obligations 526,033 526,033 524,569 1 524,569 1
Other employee benefits 88,836 15,223 73,613 90,260 2 14,869 75,391 2
Other provisions 100,829 1,379 99,450 97,796 3 1,133 4 96,663 3, 4
Warranty obligations and contractual ­penalties 52,234 52,234 45,360 4 45,360 4
Provisions for restructuring 3,372 3,372 7,893 7,893
Miscellaneous other provisions 45,223 1,379 43,844 44,543 3 1,133 43,410 3
715,698 542,635 173,063 712,625 1, 2, 3 540,571 1, 4 172,054 2, 3, 4
1
Correction under IAS 8: Measurement of the pension obligations in France and India in the amount of € 9,912 thousand
2
Adjustment due to the reclassification of accumulated compensated absence and holiday pay entitlements of € 23,201 thousand to other non-financial liabilities (liabilities relating to social security and liabilities to employees) and correction of the measurement of the pension obligations in India in the amount of € 468 thousand
3
Adjustment due to the reclassification of income tax liabilities to current income tax liabilities in the amount of € 3,304 thousand and the reclassification of other tax liabilities to miscellaneous other provisions in the amount of € 854 thousand
4
Adjustment due to the reclassification of warranty obligations and contractual penalties from non-current to current provisions in the amount of € 15,121 thousand

Individual categories of provisions developed as follows in the 2015 financial year:

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Changes (€ thousands) 1 Jan. 2015 Changes in ­consolidated Group / CTA* / Other Utilisation /
Prepayments
Reversal Additions 31 Dec. 2015
Employee benefits 614,829 1, 2 545 – 81,992 – 22,560 104,047 614,869
Pensions and similar obligations 524,569 1 3,540 – 17,036 – 20,073 35,033 526,033
Other employee benefits 90,260 2 – 2,995 – 64,956 – 2,487 69,014 88,836
Other provisions 97,796 3 381 – 53,719 – 10,283 66,654 100,829
Warranty obligations and
contractual ­penalties
45,360 666 – 24,946 – 3,692 34,846 52,234
Provisions for restructuring 7,893 125 – 1,415 – 3,311 80 3,372
Miscellaneous other provisions 44,543 3 – 410 – 27,358 – 3,280 31,728 45,223
712,625 1, 2, 3 926 – 135,711 – 32,843 170,701 715,698
1
Correction under IAS 8: Measurement of the pension obligations in France and India in the amount of € 9,912 thousand
2
Adjustment due to the reclassification of accumulated compensated absence and holiday pay entitlements of € 23,201 thousand to other non-financial liabilities (liabilities relating to social security and liabilities to employees) and correction of the measurement of the pension obligations in India in the amount of € 468 thousand
3
Adjustment due to the reclassification of income tax liabilities to current income tax liabilities in the amount of € 3,304 thousand and the reclassification of other tax liabilities to miscellaneous other provisions in the amount of € 854 thousand
4
Adjustment due to the reclassification of warranty obligations and contractual penalties from non-current to current provisions in the amount of € 15,121 thousand
*
CTA = Currency translation adjustments
Provisions for pensions and similar obligations

The pension obligations in the KSB Group include defined contribution and defined benefit plans and contain both obligations from current pensions and future pension benefit entitlements.

For employees of Group companies in Germany there is a defined contribution plan under the German statutory pension insurance scheme into which the employer must pay the currently valid pension contribution rate. Contributions to state pension insurance funds recognised in the income statement totalled € 25,866 thousand (previous year: € 26,383 thousand). € 8,546 thousand (previous year: € 7,512 thousand) was spent on defined contribution schemes for employees in other countries in the year under review.

The obligations for defined benefit pension plans for employees of the Group are mainly due to pension obligations in Germany, as well as in France, India, Austria, the United States and Switzerland.

More than 90 % of the defined benefit pension plans are attributable to the German Group companies. These relate to direct commitments by the companies to their employees. The commitments are based on salary and length of service. Contributions from employees themselves are also considered. This pension provision can be broken down into purely company-financed basic provision and the top-up provision from the employer. The latter is based on the amount of own contributions and the generated return on sales before taxes on income. Both components take account of the general pension contribution (the amount of which partially depends on company performance), personal income (the relationship between pensionable income and maximum income threshold) and the annuity conversion factor (based on age). Pension ­benefits are paid in annual instalments of one tenth of the amount. However, under certain conditions it is also possible to make a capital payment or pay a monthly pension instead.

Pension schemes in France are governed by the provisions of the respective collective agreements. The obligations are basically covered by assets that have been paid in to an external fund. At the beginning of the final quarter of each year, an actuarial report is prepared to calculate the current obligation. If there is a shortfall, a compensation payment is made to the fund. Differences in the calculation parameters under local and international law ultimately result in a surplus of obligations in the Group. Upon retirement, the employees concerned receive a one-off payment from the fund.

The defined benefit plans in the Indian companies of the KSB Group encompass benefits for pensions and for severance payments. The obligations from pension plans are limited to heads of department and higher-level employees. A further prerequisite for participation in the scheme is that employees must have been with the company for at least ten years. A stipulated monthly payment is made during retirement based on the level of seniority reached and the number of years served with the company. The severance payment plans are statutory in character and cover all employees. Entitlement to payment is based on employees having been with the company for at least five years. Upon leaving the company, employees receive a one-off payment comprising a certain number of days’ salary per year of employment, depending on the level of seniority and length of service.

In Austria pension commitments to employees are paid on the basis of statutory regulations. The benefits granted are paid on a monthly basis.

The defined benefit pension plans in the United States are closed to new entrants. The pension benefit amount is derived from the average salary and years of service before closure of the plan. The retirement age is 65 years; from this point a monthly payment is made to the beneficiaries. The pension benefits are financed by external funds.

Pension obligations in Switzerland are predominantly based on statutory obligations. This also includes details on a minimum pension which all employees with uninterrupted contributions are entitled to by law. The employer is therefore required to pay in contributions which are high enough for the respective pension fund or insurance company to pay out these minimum amounts. As well as pension benefits, the plans encompass other benefits such as disability or survivors’ benefits. Both employer and employee contributions are paid to the pension fund, with the company having to make contributions that at least match the employee contributions specified in the terms and conditions of the plan. The retirement benefits are paid out in monthly instalments, but all employees have the option to receive a (partial) capital payment.

In addition, employees in other countries are also entitled to a limited extent to retirement and partly to medical care benefits, depending mainly on the length of service and salary.

These defined benefit plans impose actuarial risks on the Group, such as the longevity risk and interest rate risk. The payments linked to pension obligations are paid largely from our liquid assets. Plan assets are also partially available for financing these obligations.

The actuarial valuations of the plan assets and the present value of the defined benefit obligation (and the related current service cost and the past service cost) are measured and calculated ­annually on the basis of actuarial reports using the projected unit credit method (IAS 19).

The 2014 figures presented in this section have been adjusted in line with the correction to the obligations in France and India, where relevant.

The amounts disclosed in the balance sheet for defined benefit plans are as follows:

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(€ thousands) Defined benefit obligations (DBOs) 31 Dec. 2015 Fair value of plan assets 31 Dec. 2015 Net liability from defined benefit plans 31 Dec. 2015 Defined benefit obligations (DBOs) 31 Dec. 2014 Fair value of plan assets 31 Dec. 2014 Net liability from defined benefit plans 31 Dec. 2014
Germany 502,739 502,739 503,349 503,349
France 13,098 6,918 6,180 13,986 6,527 7,459
India 7,979 5,411 2,568 7,063 4,306 2,757
Austria 2,834 2,834 3,057 3,057
USA 15,168 11,293 3,875 13,633 10,582 3,051
Switzerland 17,439 15,740 1,699 14,776 12,792 1,984
Other countries 30,120 23,982 6,138 26,631 23,719 2,912
Balance sheet values 589,377 63,344 526,033 582,495 57,926 524,569

The changes in the present value of the defined benefit obligations are as follows:

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(€ thousands) 2015 2014
Opening balance of the defined benefit obligation ( DBO ) – 1 Jan. 582,495 457,817
Current service cost 16,504 13,524
Interest cost 13,874 16,383
Employee contributions 6,574 5,421
Remeasurements
– / + Gain / loss from the change in demographic assumptions 587 405
– / + Gain / loss from the change in financial assumptions – 16,260 109,434
– / + Experience-based gain / loss – 2,804 – 6,934
Benefit payments – 18,231 – 17,179
Past service cost (incl. effects of settlements and curtailments) – 1,343 – 42
Transfer of assets 397
Currency translation adjustments 3,754 3,684
Changes in consolidated Group / Other 3,830 – 18
Closing balance of the defined benefit obligation ( DBO ) – 31 Dec. 589,377 582,495

The current and past service cost is recognised in staff costs under pension costs, and the interest cost is recognised in financial income/expense under interest and similar expenses.

The expected contributions in the following year are anticipated to amount to € 19,820 thousand (previous year: € 18,386 thousand).

The changes in the fair values of the plan assets are as follows:

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(€ thousands) 2015 2014
Opening balance of the plan assets measured at fair value – 1 Jan. 57,926 52,885
Interest income 2,297 2,375
Remeasurements
+ / – Gain / loss from plan assets excluding amounts already recognised in interest income – 390 1,075
Contributions by the employer 2,485 2,362
Contributions by the beneficiary employees 871 405
Currency translation adjustments 2,945 2,945
Changes in consolidated Group
Paid benefits – 3,259 – 3,623
Other 469 – 498
Closing balance of the plan assets measured at fair value – 31 Dec. 63,344 57,926

Interest income is recognised in financial income net of the DBO interest expense under interest and similar expenses.

The changes in the net liability from defined benefit plans are as follows:

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(€ thousands) 2015 2014
Opening balance of the net liability from defined benefit plans – 1 Jan. 524,569 404,932
Current service cost 16,504 13,524
Interest income – 2,297 – 2,375
Interest cost 13,874 16,383
Employee contributions 5,703 5,016
Contributions by the employer – 2,485 – 2,362
Contributions by the beneficiary employees – 871 – 405
Remeasurements
– / + Gain / loss from plan assets excluding amounts already recognised in interest income 390 – 1,075
– / + Gain / loss from the change in demographic assumptions 587 405
– / + Gain / loss from the change in financial assumptions – 16,260 109,434
– / + Experience-based gain / loss – 2,804 – 6,934
Benefit payments – 14,972 – 13,556
Past service cost (incl. effects of settlements and curtailments) – 1,343 – 42
Transfer of assets 397
Currency translation adjustments 809 739
Changes in consolidated Group / Other 3,361 480
Closing balance of the net liability from defined benefit plans – 31 Dec. 526,033 524,569

Composition of plan assets:

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(€ thousands) Quoted market price in an active market 31 Dec. 2015 No quoted ­market price in an active market 31 Dec. 2015 Total 31 Dec. 2015 Quoted market price in an active market 31 Dec. 2014 No quoted ­market price in an active market 30 Dec. 2014 Total 31 Dec. 2014
Equity instruments (shares) 20,769 20,769 17,043 17,043
Debt instruments (loans) 21,825 21,825 16,080 16,080
Government bonds 8,338 8,338 6,259 6,259
Corporate bonds 13,487 13,487 9,821 9,821
Money market investments 338 338 7,526 7,526
Real estate 843 843 670 670
Insurance contracts 16,409 16,409 13,405 13,405
Bank credit balances 2,253 2,253 2,731 2,731
Other investments 551 356 907 150 321 471
Total 46,579 16,765 63,344 44,200 13,726 57,926

We allocate to the pension funds the amount of money needed to meet statutory minimum requirements.

The actual income from plan assets amounted to € 1,907 thousand (previous year: € 3,450 thousand).

To calculate the pension obligation and the related plan assets, the following key actuarial assumptions were made:

Show table
Discount rate Assumed rate of salary increase Assumed rate of pension increase
in % 31 Dec. 2015 31 Dec. 2014 31 Dec. 2015 31 Dec. 2014 31 Dec. 2015 31 Dec. 2014
Germany 2.3 2.2 2.7 2.7 1.9 2.0
France 2.0 1.5 3.0 3.0
India 8.0 8.0 7.5 7.5 1.0 1.0
Austria 2.0 2.0 2.5 2.5 1.0 1.0
USA 4.1 3.6 2.3 2.3 2.3 2.3
Switzerland 0.7 0.9 1.0 1.0 1.0 1.0
Other countries 0.9 – 9.7 1.3 – 9.0 1.0 – 11.0 1.0 – 8.0 1.0 – 3.0 1.0 – 3.0

A mean fluctuation rate (2.0 %) continues to be applied to staff turnover for the German plans. The biometric assumptions continue to be based on the 2005G mortality tables published by Prof. Klaus Heubeck, and the retirement age used for the calculations is based on the Rentenversicherungs-Altersgrenzenanpassungsgesetz 2007 [RVAGAnpG – German Act Adapting the Standard Retirement Age for the Statutory Pension Insurance System]. Other measurement parameters (e.g. cost trends in the medical care area) are not material.

The discount rate and future mortality were identified as key actuarial assumptions. As in the previous year the basis for the calculation of the sensitivities is the same method which was used for the calculation of the provisions for pensions and similar obligations.

Were the discount factor to increase by 100 basis points, the DBO would fall by € 95 million (previous year: € 97 million). A 100 basis point reduction in the discount factor would increase the DBO by € 126 million (previous year: € 130 million). It should be noted that a change to the discount factor due to particular financial effects (such as compound interest) does not affect the development of the DBO on a straight-line basis. Were life expectancy to increase by 1 year, the DBO would increase by € 22 million (previous year: € 24 million).

Additionally, the individual actuarial assumptions are mutually dependent, but these interdependencies are not taken into account in the sensitivity analysis.

On 31 December 2015 the weighted average term of the DBO was 22 years (previous year: 20 years). The following table shows the pension benefit payments expected over the coming years.

Show table
€ millions at 31 Dec. 2015 2016 2017 2018 2019 2020
Expected payments 20,417 22,284 21,314 21,105 21,151

Show table
€ millions at 31 Dec. 2014 2015 2016 2017 2018 2019
Expected payments 14,442 15,516 16,546 17,836 18,765
Other employee benefits

Provisions for other employee benefits relate primarily to profit-sharing, jubilee payments, partial retirement obligations and severance payments.

Other provisions

The provisions for warranty obligations and contractual penalties cover the statutory and contractual obligations to customers and are based on estimates prepared using historical data for similar products and services.

The provisions for restructuring recognised in the previous year relate to measures designed to improve earnings in Germany. They include costs for the closure of a production site in Saarland and the reduction of our foundry activities at the Pegnitz site.

The miscellaneous other provisions include provisions for anticipated losses from uncompleted transactions and onerous contracts (€ 1,298 thousand for 2015 and € 1,179 thousand for 2014), customer bonuses and environmental protection measures. They also cover risks of litigation and legal proceedings if the recognition criteria for a provision are met (€ 11.1 million; previous year: € 6.7 million). These are usually risks arising from legal disputes in relation to operations or, in rare cases, disputes with government agencies or personnel matters. In order to determine the amount of the provisions, the facts related to each case, the size of the claim, the results of comparable proceedings and independent legal opinions are considered in individual cases along with assumptions regarding the probability of occurrence and the range of potential claims. In addition, there are contingent liabilities resulting from legal disputes in relation to operations in the amount of € 73.6 million (previous year: € 42.9 million). Appropriate insurance policies in the amount of € 11.0 million (previous year: € 13.4 million) are in place to cover claims.

€ 18,790 thousand (previous year: € 16,253 thousand) of the other provisions are expected to become cash-effective after more than one year.

10
Liabilities
NON-CURRENT LIABILITIES
Show table
(€ thousands) 31 Dec. 2015 31 Dec. 2014
Financial liabilities 133,504 159,427
Loan against borrower’s note 122,371 139,766
Bank loans and overdrafts 10,069 18,203
Finance lease liabilities 954 1,185
Other 110 273
Current liabilities

Show table
(€ thousands) 31 Dec. 2015 31 Dec. 2014
Financial liabilities 44,316 93,524
Loan against borrower’s note 35,000
Bank loans and overdrafts 42,739 56,774
Finance lease liabilities 436 525
Liabilities to other investments, associates and joint ventures 1,131 1,215
Other 10 10
 
Trade payables 238,848 211,723
Trade payables to third parties 236,879 209,808
Liabilities to other investments, associates and joint ventures 1,969 1,915
 
Other financial liabilities 85,911 100,429 1, 2
Advances received from customers (PoC) 49,418 46,980
Currency forwards 6,843 11,488
Interest rate swaps 745 888
Miscellaneous other financial liabilities 28,905 41,073 1, 2
 
Other non-financial liabilities 179,139 164,936 3
Advances received from customers 87,173 73,902
Social security and liabilities to employees 54,080 51,907 3
Tax liabilities (excluding income taxes) 19,884 20,837
Prepaid expenses 12,744 12,732
Investment grants and subsidies 5,258 5,558
 
Income tax liabilities 10,082 3,304 4
1
Correction under IAS 8: Measurement of the pension obligations in India in the amount of € 40 thousand
2
Correction under IAS 8: Purchase price liability of € 3,328 thousand in Sweden
3
Adjustment due to the reclassification of accumulated compensated absence and holiday pay entitlements of € 23,201 thousand to other non-financial liabilities (liabilities relating to social security and liabilities to employees)
4
Adjustment due to the reclassification of income tax liabilities to current income tax liabilities in the amount of € 3,304 thousand

In 2012, to safeguard liquidity in the medium term, KSB AG took the precaution of placing a loan against borrower’s note with a total volume of € 175 million. This loan is divided into repayment tranches of 3, 5, 7 and 10 years. As the different repayment tranches have different terms, different rates of interest apply, some of which are fixed and some variable. In the reporting year € 35.0 million was repaid upon maturity and € 17.5 million before maturity.

€ 102 million (previous year: € 155 million) of the liabilities arising from the loan against borrower’s note are classified as bank loans and overdrafts, and € 20 million as other financial liabilities (unchanged).

Assets amounting to € 3,778 thousand (previous year: € 7,804 thousand) have been pledged as security in the KSB Group for bank loans and other liabilities on the basis of standard terms and conditions. Of these, none (as in the previous year) relate to property, plant and equipment, € 180 thousand (previous year: € 3,178 thousand) to inventories, none (as in the previous year) to receivables and € 3,598 thousand (previous year: € 4,626 thousand) to other securities.

€ 93 thousand (previous year: € 2,117 thousand) of the liabilities were secured by land charges or similar rights in the reporting year under review.

The reported investment grants and subsidies largely comprise funding from the European Union and German entities for new buildings and development aid projects.

The weighted average interest rate on bank loans and overdrafts as well as on an open-market credit (loan against borrower’s note) was 3.03 % (previous year: 2.84 %). Interest rate risk exists for the major portion of the loan against borrower’s note mentioned above.

There were no covenant agreements for loans in the year under review, as was the case in the previous year too.

V. INCOME STATEMENT DISCLOSURES

11
Sales revenue
Show table
(€ thousands) 2015 2014
Revenue from the sale of goods and goods purchased and held for resale 2,086,660 1,957,445
Services sales revenue 248,171 224,294
2,334,831 2,181,739

The impact of the percentage of completion method pursuant to IAS 11 and the breakdown of sales revenue by segment (Pumps, Valves and Service) is presented in the segment reporting.

12
Other income
Show table
(€ thousands) 2015 2014
Income from disposal of assets 2,769 3,646
Reversal of impairment losses on receivables 10,032 4,327
Currency translation gains 2,450 2,354
Income from the reversal of provisions 14,222 9,095
Miscellaneous other income 20,479 16,838
49,952 36,260

Miscellaneous other income relates primarily to commission income, rental and lease income, insurance compensation, grants and subsidies. Income from government grants for individual projects (for example, for research activities) amounted to € 2,846 thousand (previous year: € 3,675 thousand).

13
Cost of materials
Show table
(€ thousands) 2015 2014
Cost of raw materials, production supplies and of goods purchased and held
for resale
888,152 816,936
Cost of purchased services 91,379 70,442
979,531 887,378
14
Staff costs
Show table
(€ thousands) 2015 2014*
Wages and salaries 661,374 634,145*
Social security contributions and employee assistance costs 126,876 122,695
Pension costs 31,000 28,002
819,250 784,842*
*
Correction under IAS 8: Measurement of the pension obligations in France and India in the amount of € – 629 thousand

Pension costs are reduced by the interest component of provisions for pensions and similar obligations, which is reported as an interest cost in financial income/expense.

EMPLOYEES
Show table
Average for the year At reporting date
2015 2014 31 Dec. 2015 31 Dec. 2014
Wage earners 7,512 7,634 7,351 7,536
Salaried employees 8,364 8,329 8,415 8,284
15,876 15,963 15,766 15,820
Apprentices 438 489 430 489
16,314 16,452 16,196 16,309

The acquisition of service operations by KSB SERVICE COTUMER led to an increase of 134 in the average number of employees over the year and of 126 in the total number at the reporting date.

15
Other expenses
Show table
(€ thousands) 2015 2014
Losses from asset disposals 3,258 578
Losses from current assets (primarily impairment losses on receivables) 12,798 10,784
Currency translation losses 2,778 4,292
Other staff costs 28,253 36,584
Repairs, maintenance, third-party services 95,546 85,451
Selling expenses 90,658 84,840
Administrative expenses 94,038 94,048
Rents and leases 28,923 27,858
Miscellaneous other expenses 55,215 48,529
411,467 392,964

Miscellaneous other expenses relate primarily to warranties, contractual penalties and additions to provisions.

16
Financial income/expense
Show table
(€ thousands) 2015 2014
Financial income 7,682 6,497
Income from equity investments 14
thereof from other investments (–) (14)
Interest and similar income 7,635 6,434
thereof from other investments (76) (60)
thereof from investments accounted for using the equity method (12) (15)
Other financial income 47 49
Financial expense – 22,360 – 24,668 1, 2
Interest and similar expenses – 19,414 – 22,795 1
thereof to other investments (–) (–)
Write-downs on other investments – 2 – 1,758
Write-downs on investments accounted for using the equity method – 2,700
Expenses from the remeasurement of financial instruments – 178 – 71 2
Other financial expense – 66 – 44
Income/expense from / to investments accounted for using the
equity method
4,373 1,582
Financial income/expense – 10,305 – 16,589 1, 2

1 Correction under IAS 8: Measurement of the pension obligations in France and India in the amount of € – 316 thousand

2 Correction under IAS 8: Purchase price liability of € – 71 thousand in Sweden

Interest and similar expenses include interest cost on pension provisions amounting to € 11,577 thousand (previous year, adjusted: € 14,008 thousand). The change in the financial income/expense is mainly due to higher income from investments accounted for using the equity ­method. Write-downs on investments accounted for using the equity method were attributable to a German joint venture that faced ongoing economic difficulties.

17
Taxes on income

All income-related taxes of the consolidated companies and deferred taxes are reported in this item. Other taxes are reported in the income statement after other expenses.

Show table
(€ thousands) 2015 2014 after adjustment under IAS 8 2014 before adjustment under IAS 8
Effective taxes 43,538 39,279 39,279
Deferred taxes – 2,316 – 12,752 – 12,863
41,222 26,527 26,416

€ 85 thousand (previous year: € 1,556 thousand) of the effective taxes in the year under review related to prior-period tax refunds and € 2,912 thousand (previous year: € 2,104 thousand) to tax arrears.

RECONCILIATION OF DEFERRED TAXES
Show table
(€ thousands) 2015 2014 after adjustment under IAS 8 2014 before adjustment under IAS 8
Change in deferred tax assets 2,493 – 47,220 – 47,026
Change in deferred tax liabilities 1,015 – 1,263 – 441
Change in deferred taxes recognised in balance sheet 3,508 – 48,483 – 47,467
 
Change in deferred taxes taken directly to equity – 5,983 34,857 33,730
Changes in consolidated Group / CTA* / Other 159 874 874
Deferred taxes recognised in income statement – 2,316 – 12,752 – 12,863
*

CTA = Currency translation adjustments

ALLOCATION OF DEFERRED TAXES
Show table
Deferred tax assets Deferred tax liabilities
(€ thousands) 2015 2014 after adjustment under IAS 8 2014 before adjustment under IAS 8 2015 2014 after adjustment under IAS 8 2014 before adjustment under IAS 8
Non-current assets 1,619 2,913 2,913 33,543 34,532 34,532
Intangible assets 1,019 1,977 1,977 484 725 725
Property, plant and equipment 479 845 845 32,932 32,948 32,948
Non-current financial assets 121 91 91 127 859 859
Current assets 59,132 54,330 54,330 54,236 50,848 50,848
Inventories 52,413 47,840 47,840 94 1,144 1,144
Receivables and other current assets 6,719 6,490 6,490 54,142 49,349 49,349
Assets held for sale 355 355
Non-current liabilities 82,244 86,592 83,623 222 182 182
Provisions 82,055 86,259 83,290 183 112 112
Other liabilities 189 333 333 39 70 70
Current liabilities 17,789 20,596 20,337 8,765 8,623 8,623
Provisions 7,929 9,287 11,112 719 782 782
Other liabilities 9,860 11,309 9,225 8,046 7,841 7,841
Tax loss carryforwards 7,303 4,583 4,583
Gross deferred taxes – before offsetting 168,087 169,014 165,786 96,766 94,185 94,185
Offset under IAS 12.74 – 83,727 – 82,161 – 79,127 – 83,727 – 82,161 – 79,127
Net deferred taxes – after offsetting 84,360 86,853 86,659 13,039 12,024 15,058

As at the reporting date, deferred tax assets (after offsetting) of € 66,867 thousand (previous year: € 11,281 thousand) were recognised, arising from companies posting a loss in the financial year or previous year, whose realisation exclusively depends on the creation of future profit. Based on the planning figures available, we expect realisation to take place.

The taxes included under equity can be broken down as follows:

INCOME TAXES INCLUDED UNDER EQUITY
Show table
(€ thousands) 2015 2014 after adjustment under IAS 8 2014 before adjustment under IAS 8
Remeasurement of defined benefit plans 18,087 – 101,841 – 98,568
Taxes on income – 5,454 31,003 29,876
Currency translation differences 1,158 38,834 38,834
Taxes on income
Changes in the fair value of financial instruments 3,077 – 11,534 – 11,534
Taxes on income – 529 3,854 3,854
Other comprehensive income 16,339 – 39,684 – 37,538

As in the previous year, the introduction of new local taxes had no effects in the year under review. Changes in foreign tax rates led to a reduction in the total tax expense of € 591 thousand; they had no material impact on the total tax expense in the previous year.

As far as net income from affiliates and other equity investments is concerned, withholding taxes incurred in connection with distributions and German taxes incurred are recognised as deferred taxes if these gains are expected to be subject to corresponding taxation, or there is no intention of reinvesting them in the long term. No deferred tax liabilities were recognised for temporary differences of € 7,205 thousand (previous year: € 7,370 thousand) in relation to affiliates and associates as it is unlikely that these temporary differences will be reversed in the foreseeable future.

We did not recognise deferred tax assets from loss carryforwards amounting to € 49,641 thousand (previous year: € 43,452 thousand) because it is unlikely that there will be sufficient taxable profit available in the near future against which these deferred tax assets can be utilised. They are largely available for an indefinite period.

Deductible temporary differences for which no deferred tax assets had to be set up amounted to € 9,736 thousand (previous year: none).

RECONCILIATION OF INCOME TAXES
Show table
(€ thousands) 2015 2014 after adjustment under IAS 8 2014 before adjustment under IAS 8
Earnings before income taxes (EBT) 93,392 72,836 72,594
Calculated income taxes on the basis of the applicable
tax rate (30 % as in the previous year)
28,018 21,851 21,778
Differences in tax rates – 331 2,284 2,267
Change in write-downs on deferred taxes on loss carry-
forwards and unused tax loss carryforwards
2,357 882 882
Tax-exempt income – 4,071 – 4,930 – 4,930
Non-deductible expenses 2,211 2,025 2,025
Impairment loss on goodwill 3,535 2,026 2,026
Prior-period taxes 2,827 548 548
Non-deductible foreign income tax 2,851 2,438 2,438
Investments accounted for using the equity method – 306 371 371
Deferred taxes not recognised 2,181
Other 1,950 – 968 – 989
Current taxes on income 41,222 26,527 26,416
Current tax rate 44 % 36 % 36 %

The unchanged applicable tax rate of 30 % is a composite rate resulting from the current German corporation tax, solidarity surcharge and trade tax rates.

18
Earnings after income taxes – Non-controlling interests

The net profit attributable to non-controlling interests amounts to € 13,259 thousand (previous year, adjusted: € 10,322 thousand) and the net loss attributable to non-controlling interests amounts to € 374 thousand (previous year: € 2,718 thousand). They relate primarily to PAB GmbH, Frankenthal, Germany, and the interests it holds, as well as to our companies in India.

19
Earnings per share
Show table
2015 2014*
Earnings after income taxes attributable to KSB AG shareholders € thousands 39,285 38,705*
Additional dividend attributable to preference shareholders
(€ 0.26 per preference share)
€ thousands – 225 – 225
€ thousands 39,060 38,480*
 
Number of ordinary shares 886,615 886,615
Number of preference shares 864,712 864,712
Total number of shares 1,751,327 1,751,327
 
Diluted and basic earnings per ordinary share 22.30 21.97*
Diluted and basic earnings per preference share 22.56 22.23*

* Adjustment under IAS 8

VI. ADDITIONAL DISCLOSURES ON FINANCIAL INSTRUMENTS

Financial instruments – Carrying amounts and fair values by measurement category:

Assets
Show table
Balance sheet item / Class
(€ thousands)
Measurement
category
Initial / subsequent measurement Carrying amount
31 Dec. 2015
Fair value
31 Dec. 2015
Carrying amount
31 Dec. 2014
Fair value
31 Dec. 2014
Non-current assets
Other investments n / a Amortised cost 5,074 3,941
Non-current financial instruments AfS Fair value 668 668 661 661
Loans LaR Fair value /
Amortised cost
2,219 2,219 2,718 2,718
 
Current assets
Trade receivables LaR Fair value /
Amortised cost
524,610 524,610 496,018 496,018
Trade receivables from other investments, associates and joint ventures LaR Fair value /
Amortised cost
36,193 36,193 30,459 30,459
Receivables from loans to other investments, associates and joint ventures LaR Fair value /
Amortised cost
3,189 3,189 2,542 2,542
Receivables recognised by PoC, net LaR Fair value /
Amortised cost
102,937 102,937 87,724 87,724
Currency forwards used as hedges n / a Fair value 1,978 1,978 2,369 2,369
Other receivables and other current assets LaR Fair value /
Amortised cost
151,002 151,002 185,249* 185,249*
Cash and cash equivalents LaR Fair value /
Amortised cost
273,136 273,136 278,552* 278,552*
*
Adjustment due to the reclassification of cash and cash equivalents with a maturity of more than three months to other financial assets in the amount of € 154,121 thousand

EQUITY AND LIABILITIES
Show table
Balance sheet item / Class
(€ thousands)
Measurement
category
Initial / subsequent measurement Carrying amount
31 Dec. 2015
Fair value
31 Dec. 2015
Carrying amount
31 Dec. 2014
Fair value
31 Dec. 2014
Non-current liabilities
Financial liabilities excluding finance lease liabilities FLAC Fair value /
Amortised cost
132,550 130,942 158,242 152,460
Finance lease liabilities n / a In accordance with IAS 17 954 982 1,185 1,201
 
Current liabilities
Financial liabilities excluding finance lease liabilities FLAC Fair value /
Amortised cost
43,880 43,880 92,999 92,999
Finance lease liabilities n / a In accordance with IAS 17 436 446 525 538
Trade payables FLAC Fair value /
Amortised cost
238,848 238,848 211,723 211,723
Advances received from customers (PoC) FLAC Fair value /
Amortised cost
49,418 49,418 46,980 46,980
Interest rate swaps used as hedges n / a Fair value 745 745 888 888
Currency forwards used as hedges n / a Fair value 6,843 6,843 11,488 11,488
Miscellaneous other financial liabilities (purchase price liability) FLAC Fair value /
Amortised cost
3,506 3,506 3,328 1 3,328 1
Miscellaneous other financial liabilities FLAC Fair value /
Amortised cost
25,399 25,399 37,745 2 37,745 2
Thereof aggregated by category in accordance with IAS 39
Loans and receivables LaR Fair value /
Amortised cost
1,093,286 1,093,286 1,083,262 1,083,262
Available-for-sale financial instruments AfS Fair value 668 668 661 661
Financial liabilities measured at
amortised cost
FLAC Fair value /
Amortised cost
493,601 491,993 551,017 1, 2 545,235 1, 2
1
Correction under IAS 8: Purchase price liability of € 3,328 thousand in Sweden
2
Correction under IAS 8: Measurement of the pension obligations in India in the amount of € – 40 thousand

The fair value of the “Loans and receivables” measurement category changed by € 10,024 thousand in the reporting period (previous year: € 18,259 thousand), with the “Financial liabilities” category at amortised cost changing by € – 53,242 thousand (previous year, adjusted: € 3,809 thousand).

The carrying amount of financial assets measured at amortised cost, with the exception of non-current loans, approximates fair value. This is also the case for all financial liabilities shown on the balance sheet, with the exception of non-current financial liabilities. This is mainly due to the short maturities of these financial instruments.

The fair values of non-current financial liabilities are determined as the present value of the cash flows associated with the liabilities. We apply an appropriate yield curve to arrive at this present value.

The fair values of the current and non-current financial instruments presented in the table above are based on prices quoted in active markets (level 1). The fair values of currency forwards and interest rate swaps are determined on the basis of input factors observable indirectly (i.e. derived from prices, level 2). Level 3 includes financial instruments whose fair value is determined on the basis of inputs not based on observable market data. Foreign exchange derivatives are measured using forward exchange rates. For interest rate swaps the fair value is determined through the discount rate of future expected cash flows based on the market interest rates and yield curves that apply to the remaining term of the contracts.

The following table shows the financial assets and liabilities, as well as loans and receivables, measured at fair value on a recurring basis, broken down into measurement categories and the previously described hierarchy levels. There were no reclassifications carried out during the year under review.

PRESENTATION OF HIERARCHY LEVELS 2015
Show table
(€ thousands) Level 1 Level 2 Level 3 Total
Financial assets recognised at fair value
Current financial instruments 668 668
Currency forwards 1,978 1,978
Financial liabilities recognised at fair value
Currency forwards 6,843 6,843
Interest rate swaps 745 745
Loans and receivables
measured at amortised cost
Loans 2,219 2,219
Trade receivables 524,610 524,610
Receivables from other investments, associates and joint ventures 39,382 39,382
Receivables recognised by PoC (inc. advances received from customers PoC) 102,937 102,937
Other receivables and other current assets 151,002 151,002
Cash and cash equivalents 273,136 273,136
Financial liabilities
measured at amortised cost
Financial liabilities excluding finance lease ­liabilities 174,822 174,822
Trade payables 238,848 238,848
Advances received from customers (PoC) 49,418 49,418
Miscellaneous other financial liabilities 25,399 3,506 28,905
presentation of hierarchy levels 2014
Show table
(€ thousands) Level 1 Level 2 Level 3 Total
Financial assets recognised at fair value
Current financial instruments 661 661
Currency forwards 2,369 2,369
Financial liabilities recognised at fair value
Currency forwards 11,488 11,488
Interest rate swaps 888 888
Loans and receivables
measured at amortised cost
Loans 2,718 2,718
Trade receivables 496,018 496,018
Receivables from other investments, associates and joint ventures 33,001 33,001
Receivables recognised by PoC (inc. advances received from customers PoC) 87,724 87,724
Other receivables and other current assets 185,249 1 185,249 1
Cash and cash equivalents 278,552 1 278,552 1
Financial liabilities
measured at amortised cost
Financial liabilities excluding finance lease ­liabilities 245,459 245,459
Trade payables 211,723 211,723
Advances received from customers (PoC) 46,980 46,980
Miscellaneous other financial liabilities 37,745 3 3,328 2 41,073 2, 3
1
Adjustment due to the reclassification of cash and cash equivalents with a maturity of more than three months to other financial assets in the amount of € 154,121 thousand
2
Correction under IAS 8: Purchase price liability of € 3,328 thousand in Sweden
3
Correction under IAS 8: Measurement of the pension obligations in India in the amount of € – 40 thousand

Fair values within level 1 are determined from the capital market quotations.

Fair values within level 2 are determined based on a discounted cash flow method. Future cash flows from currency forwards are estimated on the basis of forward exchange rates (observable rates on the reporting date) and the contracted forward exchange rates, and are discounted with an adequate interest rate. Future cash flows from interest rate swaps are estimated on the basis of forward interest rates (observable interest structure curves on the reporting date) and the contracted interest rates, and are discounted with an adequate interest rate. Specific contractual regulations formed the basis for calculating the Level 3 fair values of other financial liabilities measured at amortised cost.

The net gains and losses from financial instruments, after taking into account the relevant tax effect, are presented in the following table:

NET RESULTS BY MEASUREMENT CATEGORY IN 2015
Show table
(€ thousands) From interest and dividends From subsequent measurement From
disposal
Net results
At fair value Currency translation Impairment losses
LaR 7,635 – 231 – 1,658 – 107 5,639
AfS 18 – 2 16
FLAC – 7,314 – 2,842 – 10,156
339 – 3,073 – 1,660 – 107 – 4,501
NET RESULTS BY MEASUREMENT CATEGORY IN 2014
Show table
(€ thousands) From interest and dividends From subsequent measurement From
disposal
Net results
At fair value Currency translation Impairment losses
LaR 6,434 2,334 – 4,901 3,867
AfS 33 15 – 1,758 – 1,710
FLAC – 8,150 – 161 – 8,311
– 1,683 15 2,173 – 6,659 – 6,154

The interest presented is a component of financial income/expense. The effect from the application of the effective interest rate method is immaterial here as the interest expenses are virtually offset by the resulting interest income. The other gains and losses are partly reported in other income and other expenses.

The AfS measurement category resulted in a remeasurement value of € 0 thousand (previous year: gain of € 15 thousand), which was recognised directly in other comprehensive income and reported under “Change in the fair value of financial instruments” in equity. In the year under review, € 0 thousand (previous year: € 0 thousand) was withdrawn from equity or realised.

The amount of financial assets and liabilities subject to offsetting agreements is not material.

Financial risks

We are exposed to certain financial risks as a consequence of our business activities. These risks can be classified into three areas:

On the one hand, we are exposed to credit risk. We define credit risk as potential default or delays in the receipt of contractually agreed payments. We are also exposed to liquidity risk, which is the risk that an entity will be unable to meet its financial obligations, or will be unable to meet them in full. Finally, we are exposed to market risk. The risk of exchange rate or interest rate changes may adversely affect the economic position of the Group. Risks from fluctuations in the prices of financial instruments are not material for us.

We limit all of these risks through an appropriate risk management system, and define how these risks are addressed through guidelines and work instructions. In addition, we monitor the current risk characteristics continuously and regularly provide the information obtained in this way to the Board of Management and the Supervisory Board in the form of standardised reports and individual analyses.

The three risk areas are described in detail in the following. Additional information is also provided in the group management report, in particular in the Economic Review, Report on Expected Developments, Opportunities and Risks Report sections.

Credit risk

The primary credit risk is that there is a delay in settling a receivable, or that it is not settled either in full or in part. We minimise this risk using a variety of measures. As a matter of principle, we run credit checks on potential and existing counterparties. We only enter into business relationships if the results of this check are positive. Additionally, our European companies in particular take out trade credit insurance policies. As in the previous year, these policies account for around 10 % of the Group’s trade receivables in total. In exceptional cases we accept other securities (collateral) such as guarantees. The insurance policies primarily cover the risk of loss of receivables. Moreover, we also take out cover against political and commercial risks in the case of certain customers in selected countries. For both types of insurance, we have agreed deductibles, which represent significantly less than 50 % of the insured volume. As part of our receivables management system, we continuously monitor outstanding items, perform maturity analyses and establish contact with customers at an early stage if delays in payment occur. In the case of major projects, our terms and conditions provide for prepayments, guarantees and – for export transactions – letters of credit. These also mitigate risk. Impairment losses are recognised for the residual risk remaining in trade receivables. We examine regularly the extent to which individual receivables need to be written down for impairment. Indications of this are significant financial difficulties of the debtor, such as insolvency or bankruptcy. We also cover the credit risk of receivables that are past due by providing for the risk involved on the basis of historical loss experience. Receivables are derecognised if it is reasonably certain that receipt of payment cannot be expected (for example, after completion of insolvency or bankruptcy proceedings).

Impairment losses on trade receivables are the only material impairment losses in the KSB Group. They changed as follows:

Show table
(€ thousands) 2015 2014
Opening balance at 1 January 35,905 30,337
Additions 10,310 8,560
Utilised – 2,197 – 1,821
Reversals – 8,990 – 3,512
Changes in consolidated Group / CTA * / Other 532 2,341
Closing balance at 31 December 35,560 35,905
*
CTA = Currency translation adjustments

The maturity structure of trade receivables is as follows:

Show table
(€ thousands) 31 Dec. 2015 31 Dec. 2014
Receivables that are neither past due nor individually impaired 398,135 384,417
Receivables that are past due but not individually impaired
1 to 30 days 44,810 48,025
31 to 90 days 32,146 32,596
91 to 180 days 10,289 11,297
> 180 days 11,622 11,438
Total 98,867 103,356
Receivables individually determined to be impaired 27,608 8,245
Receivables individually determined to be impaired at their principal amount 63,168 44,150
Specific write-downs 35,560 35,905
Carrying amount (net) 524,610 496,018

With regard to the trade receivables that are neither past due nor individually impaired, there are no indications at the reporting date that our debtors will not meet their payment obligations. The same applies to all other financial instruments.

The maximum default risk, excluding collateral received, corresponds to the carrying amount of the financial assets.

There is no concentration of risk because the diversity of our business means that we supply a considerable number of customers in different sectors.

Liquidity risk

Our liquidity management ensures that we minimise this risk in the Group and that our solvency is ensured at all times. There are no concentrations of risk because we work together with a number of credit institutions, on which we impose strict creditworthiness requirements.

We generate our financial resources primarily from our operating business. We use them to finance investments in non-current assets. We also use them to cover our working capital requirements. To keep these as low as possible, we monitor changes in our receivables, inventories and liabilities regularly using a standardised Group reporting system.

The reporting system additionally ensures, with the help of monthly rolling cash flow planning, that the Group’s centralised financial management is continuously informed about liquidity surpluses and requirements. This enables us to optimally meet the needs of the Group as a whole and of the individual companies. For selected companies we use a cash pooling system to ensure that available cash is deployed optimally within the Group. We also apply a worldwide receivables netting procedure within the KSB Group so as to minimise both the volume of cash flows and the associated fees. In order to be able to provide the necessary collateral in the project business, corresponding guarantee volumes are made available. Adequate proportions are confirmed for a period of more than one year. In addition, we always ensure that credit facilities are sufficient; we identify the need for these on the basis of regular liquidity plans. In this way we can react to fluctuating liquidity requirements at all times. Our approved cash loans and credit lines total approximately € 940 million (previous year: approx. € 958 million), of which € 627.7 million has not yet been utilised (previous year: € 627.8 million).

The following tables show the contractually agreed non-discounted future cash flows of the financial liabilities (primary financial instruments) and derivative financial instruments. Interest payments on fixed-rate liabilities are determined on the basis of the fixed rate. Floating-rate interest payments are based on the last floating interest rates fixed before 31 December. Projec-tions for future new liabilities are not included in the presentation. Based on our current state of knowledge, it is neither expected that the cash flows will take place significantly earlier, nor that the amounts will differ significantly.

CASH FLOWS OF FINANCIAL LIABILITIES 2015
Show table
(€ thousands) Total Up to 1 year 1 – 5 years > 5 years
Financial liabilities 191,227 48,386 118,138 24,703
Trade payables 238,848 238,848
Miscellaneous other financial liabilities 28,905 26,610 2,295
Derivative financial instruments
Outgoing payments
– 1,877 – 1,683 – 194
Derivative financial instruments
Incoming payments
7,487 5,542 1,881 64
464,590 317,703 122,120 24,767
CASH FLOWS OF FINANCIAL LIABILITIES 2014
Show table
(€ thousands) Total Up to 1 year 1 – 5 years > 5 years
Financial liabilities 272,124 99,497 146,580 26,047
Trade payables 211,723 211,559 164
Miscellaneous other financial liabilities 41,073* 40,457* 616
Derivative financial instruments
Outgoing payments
– 2,622 – 2,303 – 319
Derivative financial instruments
Incoming payments
12,687 10,925 1,716 46
534,985* 360,135* 148,757 26,093
*
Correction under IAS 8: Measurement of the pension obligations in India in the amount of € – 40 thousand and purchase price liability of € 3,328 thousand in Sweden
Market price risk

Our global business activities expose us primarily to currency and interest rate risk. Any changes in market prices can affect fair values and future cash flows. We use sensitivity analyses to determine the hypothetical impact of such market price fluctuations on profit and equity. In doing so, we assume that the portfolio at the reporting date is representative for the full year.

We reduce the risks resulting from changes in prices on the procurement side for orders with extended delivery dates by agreeing cost escalation clauses or, in the case of fixed-price contracts, by including the expected rate of cost increases in our sales price.

Currency risk mainly affects our cash flows from operating activities. It arises when Group companies settle transactions in currencies that are not their functional currency. We minimise this risk using currency forwards and, on rare occasions, options. You will find further information on this in the “Derivative financial instruments” section of the Notes. We use micro hedges with regard to both transactions already recognised and cash flows that are expected in the future with a high degree of probability. The hedging instruments used share the essential terms and conditions with the underlying transactions, i.e. with regard to amount, term and quality. Internal guidelines govern the use of financial instruments. Such transactions are also subject to ongoing risk control measures. The hedging instruments used are exclusively currency forwards entered into with prime-rated banks. In order to measure the effectiveness of our hedges, the market values of the underlying and the hedge transactions are compared. Changes in the market values of the derivatives are offset by changes in the fair values of the cash flows from the underlyings (hypothetical derivative method). As a rule, we do not hedge currency risks from the translation of foreign operations into the Group currency (€).

At the reporting date, the notional volume of all currency forwards was € 253,980 thousand (previous year: € 234,998 thousand), and the notional volume of all interest rate derivatives was € 39,500 thousand (previous year: € 60,579 thousand). The contractual maturities of payments for currency forwards and interest rate derivatives are as follows:

Notional volumes 2015
Show table
(€ thousands) Total Up to 1 year 1 – 5 years > 5 years
Currency forwards 253,980 236,311 17,448 221
Interest rate derivatives 39,500 39,500
293,480 236,311 56,948 221
Notional volumes 2014
Show table
(€ thousands) Total Up to 1 year 1 – 5 years > 5 years
Currency forwards 234,998 214,798 19,864 336
Interest rate derivatives 60,579 21,000 39,579
295,577 235,798 59,443 336

Equity includes changes in the fair value of derivatives used to hedge future cash flows amounting to € – 5,026 thousand (previous year: € – 8,104 thousand). They changed as ­follows:

Show table
(€ thousands) 2015 2014
Opening balance at 1 January – 8,104 3,446
Changes in consolidated Group / CTA * / Other – 32 – 4
Disposals 5,552 – 2,079
Additions – 2,442 – 9,467
Closing balance at 31 December – 5,026 – 8,104
*
CTA = Currency translation adjustments

The main currencies in the KSB Group are the Chinese yuan (CNY) and US dollar (USD). For the currency sensitivity analysis, we simulate the effects based on the notional volume of our existing foreign currency derivatives and our foreign currency receivables and liabilities at the reporting date. For the analysis, we assume a 10 % increase (decrease) in the value of the euro versus the other currencies. In the reporting year, this would have amounted to approximately € 2.7 million for CNY, as in the previous year, and € 2.2 million (previous year: € 1.2 million) for USD.

Show table
CNY 31 Dec. 2015 CNY 31 Dec. 2014 USD 31 Dec. 2015 USD 31 Dec. 2014
Trade receivables € 73.4 million € 69.8 million € 36.1 million € 24.2 million
Trade payables € 46.0 million € 43.2 million € 13.8 million € 12.2 million
Balance € 27.4 million € 26.6 million € 22.3 million € 12.0 million

Based on the measurement of derivatives, at the reporting date, equity and the fair value of the derivatives would have been € 8.5 million lower (higher), with € 6.4 million resulting from USD and € 2.1 million from the other currencies. At the previous year’s reporting date, equity and the fair value of the derivatives would have been € 13.2 million lower (higher), with € 10.6 million resulting from USD and € 2.6 million from the other currencies.

We regularly monitor the interest rate risks associated with our financing activities. To avoid the negative effects of interest rate fluctuations on the international capital markets, we conclude interest rate hedges (interest rate swaps) where necessary, generally for long-term loans. These are used exclusively to hedge floating rate loans against rising interest rates.

As part of our interest rate sensitivity analysis, we simulate a 50 basis point increase (decrease) in market interest rates and analyse the impact on the floating rate financial instruments. In 2015, the net interest balance would have been € 1.8 million (previous year: € 1.9 million) higher (lower). Changes in the fair value of interest rate derivatives used to hedge floating rate liabilities increase (decrease) equity by € 0.3 (0.3) million (previous year: € 0.6 (0.6) million).

VII. STATEMENT OF CASH FLOWS

In the statement of cash flows, cash flows are classified by operating, investing and financing activities. Effects of changes in the consolidated Group and in exchange rates are eliminated in the relevant items. The effect of exchange rate changes (based on annual average rates) and changes in the consolidated Group on cash and cash equivalents is presented separately.

Cash flows from operating activities include a “cash flow” subtotal that merely comprises the net profit for the year; depreciation, amortisation and impairment losses as well as reversals of impairment losses; changes in non-current provisions; and non-cash effects, for example, of the disposal of fixed assets. This subtotal is combined with the changes in the other operating components of assets (including current financial instruments) and liabilities to determine cash flows from operating activities. Only those changes that are recognised in the income statement are taken into account.

Cash flows from investing activities exclusively reflect cash-effective acquisitions and disposals of investments in intangible assets, property, plant and equipment, non-current financial assets, and changes in term deposits with a maturity of more than 3 months.

In addition to cash flows resulting from equity items (capitalisation measures and dividend payments), cash flows from financing activities comprise also cash flows arising from changes in investments in Group companies that are not fully consolidated and in financial liabilities.

If cash and cash equivalents include restricted cash, this is reported separately.

VIII. SEGMENT REPORTING

Segment reporting is prepared in accordance with IFRS 8 based on the management approach and corresponds to our internal organisational and management structure as well as the reporting lines to the Board of Management as the chief operating decision maker. In our matrix organisation, management decisions are primarily taken on the basis of the key performance indicators – order intake, external sales revenue and earnings before interest and taxes (EBIT) – determined for the Pumps, Valves and Service segments, excluding the effects from measuring construction contracts under IAS 11. Reporting the relevant assets, number of employees and inter-segment sales revenue for these segments is not part of our internal reporting. The managers in charge of the segments, which are geared to product groups, have profit and loss responsibility. They identify business opportunities across markets and industries and assess our options based on current and future market requirements. They also proactively encourage the development of new products and improvements to the available range of products. In this context, they work closely with our Sales organisation and Operations.

The Pumps segment includes single- and multistage pumps, submersible pumps and associated control and drive systems. Applications include process engineering, building services, water and waste water transport, energy conversion and solids transport.

The Valves segment covers butterfly, globe, gate, control, diaphragm and ball valves, as well as associated actuators and control systems. Applications primarily include process engineering, building services, energy conversion and solids transport.

The Service segment covers the installation, commissioning, start-up, inspection, servicing, maintenance and repair of pumps, related systems and valves for all applications; as well as modular service concepts and system analyses for complete systems.

Our companies can be allocated to one or more segments based on their business activities.

The amounts disclosed for the individual segments have been established in compliance with the accounting policies of the underlying consolidated financial statements.

Transfer prices for intercompany sales are determined on an arm’s length basis.

There were no discontinued operations in the period under review, as in the comparative period of the previous year.

The order intake by segment presents order intake generated with third parties and non-consolidated Group companies.

The external sales revenue by segment presents sales revenue generated with third parties and non-consolidated Group companies. The effects from measuring construction contracts in accordance with IAS 11 are presented separately as reconciliation effects.

The table shows earnings before interest and taxes (EBIT) and consolidated earnings before income taxes (EBT) including non-controlling interests. The effects from measuring construction contracts in accordance with IAS 11 are presented separately as reconciliation effects.

Show table
Order intake External sales revenue EBIT
(€ thousands) 2015 2014 2015 2014 2015 2014*
Pumps segment 1,452,431 1,524,126 1,513,977 1,437,920 55,389 56,343*
Valves segment 367,965 407,394 384,570 378,839 10,340 16,947
Service segment 440,783 389,702 413,618 373,824 36,157 28,757
Reconciliation 22,666 – 8,844 3,285 – 12,850
Total 2,261,179 2,321,222 2,334,831 2,181,739 105,171 89,197*
Financial income – Interest and similar income 7,635 6,434
Financial expense – Interest and similar expenses – 19,414 – 22,795*
Earnings before income taxes ( EBT ) 93,392 72,836*
*
Adjustment under IAS 8

The EBIT of the Pumps segment includes depreciation and amortisation expense of € 50.9 million (previous year: € 44.7 million), the EBIT of the Valves segment includes depreciation and amortisation expense of € 12.6 million (previous year: € 11.5 million) and the EBIT of the Service segment includes depreciation and amortisation expense of € 12.0 million (previous year: € 11.7 million).

€ 620,238 thousand (previous year: € 604,449 thousand) of the sales revenue presented was generated by the companies based in Germany, € 261,769 thousand (previous year: € 251,267 thousand) was generated by the companies based in France, € 209,959 thousand (previous year: € 164,744 thousand) by the companies based in the USA, and € 1,242,865 thousand (previous year: € 1,161,279 thousand) by the other Group companies.

There were no relationships with individual customers that accounted for a material proportion of Group sales revenue.

At the reporting date, the total non-current assets of the KSB Group amounted to € 513,057 thousand (previous year: € 494,469 thousand), with € 177,596 thousand (previous year: € 182,151 thousand) being attributable to the companies based in Germany and € 335,461 thousand (previous year: € 312,318 thousand) being attributable to the other Group companies. They include intangible assets, property, plant and equipment and investments accounted for using the equity method; non-current financial instruments and deferred tax assets are not included.

IX. OTHER DISCLOSURES

Contingent liabilities (contingencies and commitments)

Contingent Liabilities and Collateral
Show table
(€ thousands) 2015 2014
Liabilities from guarantees 2,739 2,545
Liabilities from warranties 1,239 1,250
Liabilities from the granting of other security for third-party liabilities and
other contingent liabilities
9,444 4,230
13,422 8,025

Other contingent liabilities include € 928 thousand for tax items (previous year: € 607 thousand). At present, there are no indications that any claims will be asserted under these obligations.

The Group has contingent liabilities as a result of its investment in associates and joint ventures of € 5,989 thousand (previous year: € 5,697 thousand). The reported amount is the Group’s share of contingent liabilities from joint ventures. Contingent liabilities relating to other investments total € 1,728 thousand (previous year: € 1,758 thousand). The extent to which these will result in a cash outflow depends on the future business performance of the respective company.

OPERATING LEASES
Show table
Minimum lease payments
(€ thousands) 2015 2014
Due within 1 year 17,832 16,283
Due between 1 and 5 years 32,398 30,045
Due after more than 5 years 7,799 9,005
58,029 55,333

In the year under review, € 16,283 thousand (previous year: € 14,955 thousand) was spent.

Operating leases relate primarily to vehicles and real estate.

FINANCE LEASES
Show table
Minimum lease payments Present values
(€ thousands) 2015 2014 2015 2014
Due within 1 year 446 538 436 526
Due between 1 and 5 years 818 1,028 803 1,015
Due after more than 5 years 164 173 151 169
1,428 1,739 1,390 1,710

Finance leases relate almost entirely to real estate. The term of the contract covers most of the useful life of the asset concerned.

The annual obligations from IT services agreements amount to € 62,276 thousand (previous year: € 22,956 thousand) over a term of one to five years.

As in the previous year, there are no purchase price obligations from acquisitions of companies and no payment obligations from capitalisation measures at Group companies.

The aggregate purchase obligation for investments (principally items of property, plant and equipment) amounts to € 20,029 thousand (previous year: € 17,809 thousand). Almost all of the corresponding payments are due in 2016.

Research and development costs

Research and development costs in the year under review amounted to € 57,987 thousand (previous year: € 48,650 thousand). Some of these costs are contract costs under IAS 11.

Related party disclosures

Related parties as defined in IAS 24 are natural persons and companies that can be influenced by KBS AG or that can exert an influence on KSB AG.

Balances and transactions between KSB AG and its subsidiaries in the form of related parties have been eliminated during the consolidation process and are not explained in further detail. Details regarding transactions between the KSB Group and other related parties are provided below.

Pursuant to section 21(1) of the WpHG [Wertpapierhandelsgesetz – German Securities Trade Act], KSB Stiftung [KSB Foundation], Stuttgart, as the top-level parent company, notified us on 21 May 2008 that its voting interest in KSB AG, Frankenthal/Pfalz exceeded the 75.00 % threshold on 5 May 2008 and amounted to 80.24 % (711,453 voting shares) on this date. 0.54 % of the voting rights (4,782 voting shares) were held directly by KSB Stiftung, Stuttgart, and 79.70 % (706,671 voting shares) were attributable to KSB Stiftung, Stuttgart, pursuant to section 22(1), sentence 1, No. 1 of the WpHG. The voting rights attributed to KSB Stiftung, Stuttgart, were held by Klein Pumpen GmbH, Frankenthal.

Related parties also include the non-consolidated subsidiary companies and joint ventures of Klein Pumpen GmbH, Frankenthal, and Kühborth Stiftung GmbH, Stuttgart, which holds 1 % of the shares in Klein Pumpen GmbH.

The following table shows services provided and used, as well as pending receivables and ­liabilities owed from and to related parties:

Show table
Sales of goods
and services
Purchases of goods
and services
Receivables Liabilities
(€ thousands) 2015 2014 2015 2014 31 Dec. 2015 31 Dec. 2014 31 Dec. 2015 31 Dec. 2014
Top-level parent company
KSB Stiftung [ KSB Foundation]
1
Subsidiaries / associates /
joint ventures of KSB Stiftung
Parent company
Klein Pumpen GmbH
13 11 24 24
Subsidiaries of Klein Pumpen GmbH 3 520 2,374 130 128
Associates / joint ventures of
Klein Pumpen GmbH
410 19 2,226 90 127 213 3
Other related parties 1 16 16

Further information on joint ventures and associates (related party disclosures) can be found in Section IV. Balance Sheet Disclosures – Notes No. 4 “Investments accounted for under the equity method”, 6 “Trade receivables and PoC as well as other financial and non-financial assets” and 10 “Liabilities”, and in Section IX. Other Disclosures – Contingent Liabilities.

The transactions in relation to the parent company Klein Pumpen GmbH are based on a rental and services agreement between KSB AG and Klein Pumpen GmbH.

Transactions with subsidiaries of Klein Pumpen GmbH comprise transactions with Palatina Versicherungsservice GmbH, which provides services in the area of insurance. A rental and services agreement is in place between Palatina Versicherungsservice GmbH and KSB AG. The transactions with associates and joint ventures of Klein Pumpen GmbH basically comprise transactions with Abacus Experten GmbH, which has entered into several contracts for work with KSB AG, and with Abacus Resale GmbH, which trades in products. KSB AG has also agreed service agreements with Abacus alpha GmbH and Abacus Resale GmbH.

All transactions are entered into on an arm’s length basis. Pending balances at the year end are unsecured, do not accrue interest and are settled by means of payments. No guarantees were given or received. The receivables presented here, as in the previous year, are not subject to write-downs and no provisions have been created for this purpose.

Disclosures and information on affiliates and investments accounted for using the equity method provided in other section of these Notes refer to relations covering the supply of products and services on an arm’s length basis, unless stated otherwise.

Pursuant to IAS 24, the remuneration of key management personnel of the Group must be disclosed. The following table contains the relevant figures for the KSB Group with regard to the remuneration paid to members of the Board of Management:

Show table
(€ thousands) 31 Dec. 2015 31 Dec. 2014
Short-term benefits (total remuneration) 1,289 1,427
Post-employment benefits 1,429 2,011
Other long-term benefits
Termination benefits
Share-based payments
Total 2,718 3,438

Based on the relevant legal provisions, the Annual General Meeting on 6 May 2015 resolved not to disclose the remuneration of the Board of Management separately for each member and classified by components. € 4,518 thousand (previous year: € 4,386 thousand) has been provided for pension obligations to current members of the Board of Management, and € 39,387 thousand (previous year: € 41,861 thousand) to former members of the Board of Management and their surviving dependants; total benefits paid to these persons amounted to € 2,246 thousand in the year under review (previous year: € 2,232 thousand).

The short-term benefits (total remuneration) paid to members of the Supervisory Board amount to € 833 thousand for the 2015 financial year (previous year: € 944 thousand).

The members of the Supervisory Board and the Board of Management are listed before the presentation of the proposal on the appropriation of the net retained earnings of KSB AG.

Auditors

PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, based in Frankfurt am Main with an office in Mannheim, were appointed as auditors and group auditors for financial year 2015 at the Annual General Meeting of KSB AG on 6 May 2015; BDO AG Wirtschaftsprüfungsgesellschaft carried out this role in the previous year. The following fees (including expenses) were recognised as expenses.

Show table
(€ thousands) 2015 2014
Audit fees 348 412
Other certification services 10 2
Tax advisory services
Other services 54 36
Total fees 412 450

The audit fees include costs for the audit of the consolidated financial statements and of the statutory annual financial statements of KSB AG and the German subsidiaries included in the consolidated financial statements. The fees for other certification services primarily include attestation services outside of the audit of the annual financial statements. The fees for other services mainly include fees for project-specific consultancy services.

Use of exemption option

KSB Service GmbH, Frankenthal, KSB Service GmbH, Schwedt and Uder Elektromechanik GmbH, Friedrichsthal, have made partial use of the exemption provision under section 264(3) of the HGB.

Events after the reporting period

There were no reportable events after the reporting date.

German Corporate Governance Code

The Board of Management and Supervisory Board of KSB AG issued the current statement of compliance with the recommendations of the Government Commission on the German Corporate Governance Code in accordance with section 161 of the AktG [Aktiengesetz – German Public Companies Act]. The statement of compliance is published on our web site (www.ksb.com) and has thus been made permanently accessible.

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