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Notes to the Consolidated Financial Statements (continued)
4. Determination of fair values
General
Fair value as a result of business combinations
Fair value from normal business
Report of the
Report of the
Financial
Sustainability
Other
Introduction
Executive Board
Supervisory Board
Statements
Review
Information
Heineken N.V. Annual Report 2017
A number of HEINEKEN's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and
liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further
information about the assumptions made in determining fair values or for the purpose of impairment testing is disclosed in the notes specific to
that asset or liability.
(i) Property, plant and equipment
The fair value of P, P E recognised as a result of a business combination is based on depreciated replacement cost, taking into account
economical and functional obsolescence, or market prices for similar items when available. For acquired pub estates, the fair values are based
on the stabilised earnings valuation method.
(ii) Intangible assets
The fair value of brands acquired in a business combination is based on the relief from royalty method or determined using the multi-period excess
earnings method (MEEM). The fair value of customer relationships acquired in a business combination is determined using the multi-period excess
earnings method, taking into account the historical chum rate of the acquired customer base. The valuation of customer relationships and brands
(when using MEEM valuation) takes into account a fair return on all other assets that support the generation of the related cash flows. The fair
value of reacquired rights and other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale
of the assets.
(iii) Inventories
The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business
less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.
(iv) Trade and other receivables
The fair value of trade and other receivables is estimated at the present value of future cash flows, discounted at the market rate of interest at the
reporting date. This fair value is determined for disclosure purposes or when acquired in a business combination.
(v) Provisions
Determining the fair value of acquired claims is subject to significant estimation. The fair value of these claims are recorded based on an estimate
of the likelihood, the expected timing and the amount of a potential cash outflow. Contrary to accounting for provisions under IAS 37, provisions
for civil and labour claims are also recognised for claims with a likelihood of less than probable, but more than remote. For income tax claims
HEINEKEN applies IAS 12, which requires recognition of provisions only when the likelihood of cash outflow is considered probable.
(i) Investments in equity and debt securities
The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is
determined by reference to their quoted closing bid price at the reporting date or, if unquoted, determined using an appropriate valuation
technique. The fair value of held-to-maturity investments is determined for disclosure purposes only. In case the quoted price does not exist at the
date of exchange or in case the quoted price exists at the date of exchange but was not used as the cost, the investments are valued indirectly
based on discounted cash flow models.
(ii) Derivative financial instruments
The fair value of derivative financial instruments is based on their listed market price, if available. If a listed market price is not available, fair value is
in general estimated by discounting the difference between the cash flows based on contractual price and the cash flows based on current price for
the residual maturity of the contact using observable interest yield curves, basis spread and foreign exchange rates.
Fair values include the instrument's credit risk and adjustments to take account of the credit risk of the HEINEKEN entity and counterparty
when appropriate.
(iii) Non-derivative financial instruments
Fair value, which is determined for disclosure purposes or when fair value hedge accounting is applied, is calculated based on the present value
of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases, the market rate of
interest is determined by reference to similar lease agreements.
Fair values include the instrument's credit risk and adjustments to take account of the credit risk of the HEINEKEN entity and counterparty
when appropriate.