In accordance with the generally accepted accounting principles, calculation of the carrying amount of certain assets and liabilities requires estimates and judgments to be made of future events. Estimates and judgments are based on historical experiences and other factors which Management considers reasonable and relevant. These assumptions may be incomplete or inaccurate, and unexpected events may occur, as a result of which the estimates and judgments made are subject to a certain degree of natural uncertainty.
In the case of acquisition of a new enterprise, the cost of the acquisition is allocated to the enterprise's assets, liabilities, and contingent liabilities, with any residual value recognized as goodwill. In particular, there is often no active market for intangible assets, as a result of which calculation of the fair value of these assets is based on an independent measurement and Management estimate. Further information on acquisitions will be found in Note 34 in the consolidated financial statements.
Annual impairment testing of goodwill is based on the value in use of the individual cash flow-generating unit, using the discounted cash flow method. The calculation is based on budgets approved by Management. Cash flows after the budget period are extrapolated using individual growth rates. The discount factor used for the calculation does not contain possible impacts of future risks, as these are included in future cash flows. The cash flows and growth rates take account of previous experiences, and represent Management's best estimate of future development. In combination with the discount factor, however, these judgments may have a significant impact on the calculated values and therefore on the impairment of goodwill. Further information will be found in Note 10.
Deferred tax assets and liabilities are recognized in the financial statements. Determining the value of these assets and liabilities also requires a judgment by Management.
Allowances for doubtful trade receivables are based on a country-specific credit rating by external rating agencies. However, the allowances also reflect Management's judgment and review of the individual receivables based on individual customer creditworthiness and current economic trends.
Provisions are Management’s best estimate of the amount with which liabilities are expected to be settled. Further information will be found in Note 21.
Calculation of cash-settled stock option programs is based on the Black–Scholes model. The input variables for this model include assumptions about the stock option's expected volatility and term to maturity. These input variables are based on estimates, and can impact the recognized employee costs and employee costs payable. Further information on stock options can be found in Note 24.
See also section on Risk factors.