| Summary of significant accounting policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Unaudited Interim Condensed Consolidated Financial
Statements
The accompanying unaudited interim condensed consolidated financial
statements of the Company and its subsidiaries (collectively the
“Group”) have been prepared in accordance with U.S.
generally accepted accounting principles (“U.S. GAAP”)
for interim financial information using accounting policies that
are consistent with those used in the preparation of the
Company’s audited consolidated financial statements for the
year ended December 31, 2014 (Note 3). Accordingly, these
unaudited interim condensed consolidated financial statements do
not include all of the information and footnotes required by U.S.
GAAP for annual financial statements.
In the opinion of the Company’s management, the unaudited
interim condensed consolidated financial statements, which comprise
the condensed consolidated balance sheet of the Company as of
March 31, 2015, the condensed consolidated statements of
comprehensive income (loss), cash flows and changes in
stockholders’ equity for the three months ended
March 31, 2014 and 2015, reflect all adjustments, consisting
of normal and recurring adjustments, necessary to present fairly
the Company’s consolidated financial position as of
March 31, 2015, the Company’s consolidated results of
operations, cash flows and changes in stockholders’ equity
for the three months ended March 31, 2014 and 2015. Interim
period results are not necessarily indicative of results of
operations or cash flows for a full-year due to the reverse
acquisition described in Note 3 or any subsequent interim period.
These unaudited interim condensed consolidated financial statements
and the notes thereto should be read in conjunction with the
consolidated financial statements of Q CELLS included in the
Company’s Amendment No. 1 to the Registration Statement on
Form F-3 filed on June 5, 2015, and the Company’s audited
consolidated financial statements included in its Annual Report on
Form 20-F dated April 17, 2015 for the year ended
December 31, 2014.
Principles of consolidation
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and
transactions between the Company and its subsidiaries have been
eliminated upon consolidation.
Use of Estimates
The preparation of unaudited interim condensed consolidated
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period.
Areas where management uses subjective judgments include, but not
limited to, the allocation of the purchase price to the assets
acquired and liabilities assumed in the business combinations,
provision for doubtful debts, provision for advance to suppliers,
inventory write-down, impairment of property, plant and equipment
and intangible assets , valuation allowances of deferred tax
assets, fair value of derivative contracts, the useful lives and
valuation of tangible and intangible assets, warranty provisions,
and contingent liabilities arising from litigation. Management
bases estimates on historical experience and on various other
assumptions that are believed to be reasonable, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities. Changes in facts and circumstances may
result in revised estimates. Actual results could differ from these
estimates, and as such, differences may be material to the
financial statements.
Foreign Currency translation
The functional currencies of the operating subsidiaries are
generally their local currencies, as determined based on the
criteria of ASC 830, Foreign Currency Translation
Comparative Information
Certain items in the consolidated balance sheet as of
December 31, 2014 have been reclassified to conform to current
period’s presentation to facilitate comparison.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2015-03, Interest—Imputation of
Interest | (2) Summary of significant accounting
policies
a) Principles of
consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
b) Use of estimates
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Significant items subject to such estimates and assumptions include
the useful lives and valuation of tangible and intangible assets,
warranty provisions, and contingent liabilities arising from
litigation. Changes in facts and circumstances may result in
revised estimates. Actual results could differ from these
estimates, and as such, differences may be material to the
financial statements.
c) Cash and cash
equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less at the date of purchase
to be cash equivalents.
d) Restricted cash
Restricted cash represents amounts held by a bank as security for
guarantees and performance bonds and, therefore, are not available
for the Group’s use. Changes in restricted cash are
classified within cash flows from operating activities. The Group
had $2.4 million and $6.6 million in restricted cash, all for
security of performance bonds as of December 31, 2014 and
2013, respectively. The restriction on cash is expected to be
released during 2015.
e) Accounts and other
receivable
Accounts receivable are recorded at original invoice amount. The
Company maintains allowances for doubtful accounts to reduce the
Company’s receivables to their estimated net realizable
value. The Company analyzes specific accounts receivable,
historical bad debts, and current economic conditions when
evaluating the adequacy of the allowance for doubtful accounts.
Trade receivables are insured against the risk of default and the
insurance covers 90% of loss in the event of default by the
customer. Accounts receivable are written off when no future
collection is expected.
f) Inventories
Inventories are stated at the lower of cost or market value. Cost
is determined using the moving average method for all inventories.
Raw material cost is based on purchase costs while work-in-progress
and finished goods include materials, labor and manufacturing
overhead. Capitalization of costs into inventory is based on normal
utilization. Indirect manufacturing costs resulting from abnormal
utilization are expensed as incurred.
At the end of each reporting period, the Company compares the cost
of inventories to the market value, taking into consideration the
inventories’ current cost of replacement, net realizable
value, and normal profit margins of those inventories upon sales.
Those inventories for which cost exceeds market value is written
down to their market value. This market value subsequently forms
the new cost basis for such inventories.
The Group also assesses any obsolescence of inventories based on
the most recent date of movement. Inventories without receipt and
shipment for a predetermined period of time are deemed to be
obsolete and are thus written down to a zero value.
g) Property, plant, and
equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation and amortization. Cost includes the price paid to
acquire or construct the assets, required installation costs,
interest capitalized during the construction period, and any
expenditure that substantially adds to the value, of or
substantially extends the useful life of, an existing asset.
Borrowing costs are accounted for on an accrual basis and are
charged to the consolidated statements of operations in the year
incurred, except for interest costs on borrowings to finance
certain qualifying assets. Such costs to finance qualifying assets
are capitalized during the period of time that is required to
complete and prepare the assets for their intended use, as part of
the cost of the assets. All other borrowing costs are expensed as
incurred.
The capitalization rate used to determine the amount of interest to
be capitalized is the weighted average interest rate applicable to
the Group’s outstanding borrowings during the year. Where
funds are borrowed specifically for the acquisition, construction
or production of assets, the amount of borrowing costs eligible for
capitalization on the respective assets is determined as the actual
borrowing costs are incurred on that borrowing during the
respective periods.
Property, plant, and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets as follows:
Buildings: 33 to 38 years
Technical equipment and machinery: 6 to 13 years
Other equipment, operating and office equipment 3 to 18 years
Plant and equipment held under capital leases are amortized on a
straight-line
Repair and maintenance costs are expensed as incurred. For the
periods ended December 31, 2014, 2013, and 2012, the Group
incurred $4.6 million, $5.7 million, and $1.3 million in repair and
maintenance costs, respectively.
h) Intangible assets
Intangible assets are carried at cost less accumulated
amortization. Amortization is recognized on a straight-line basis
over the estimated useful life of the respective asset. The Company
evaluates intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value of such
assets may not be recoverable. Impairment is recognized based on
the difference between the fair value of the asset and its carrying
value.
i) Impairment of long-lived
assets
Long-lived long-lived long-lived
In the year ended December 31, 2014, the Group performed
impairment tests on the buildings, machinery, and equipment in
light of the restructuring of Hanwha Q CELLS GmbH’s
operations. The results of this impairment test indicated that the
restructuring was a non-adjusting event and a recognition of
impairment loss was not necessary.
Separately, the Group also conducted impairment tests on
non-corporate assets outside of the cash generating unit
(“CGU”) that were potentially not recoverable.
Indicators for potential impairment existed for these assets
independently from the restructuring. Assets subject to review
included buildings that were left vacant for an extended period of
time and softwares for which no future use could be identified.
Based on this impairment assessment performed, the Group concluded
the carrying amounts of some of these long-lived assets are not
recoverable and recognized an impairment charge of $2.4 million as
other expense, net in the statement of operations for the period
ended December 31, 2014. Of this amount, approximately $0.8
million resulted from the impairment of softwares and other
intangible assets.
j) Fair Values of Financial
Instruments
The Company’s cash and cash equivalents and foreign currency
contracts are carried at fair value. The fair value of the
Company’s accounts receivable, accounts payable approximates
the carrying amount due to their short duration.
k) Foreign Currency
Contracts
The Company operates internationally and is exposed to potentially
adverse movements in currency exchange rates. The Company enters
into hedges in the form of foreign currency forward contracts to
reduce its exposure to foreign currency rate changes on
non-functional currency denominated forecasted transactions
principally arising from sales contracts denominated in Australian
dollar (AUD) and Japanese Yen (JPY). The assets or liabilities
associated with the forward contracts are recorded at fair value as
derivative contracts in the consolidated balance sheet.
During the year ended December 31, 2014, the Group entered
into cross-currency exchange rate agreements to receive USD in
exchange of AUD and JPY. Changes in the fair value of these
derivative instruments are recognized in the consolidated
statements of operations. These derivative instruments are not
designated and do not qualify as hedges and are adjusted to fair
value through current earnings. The Group had no derivative
transactions in 2013 and 2012.
As of December 31, 2014, the Group had outstanding
cross-currency exchange rate contracts with nominal amounts of $9.2
million. The Group estimates the fair value of its foreign currency
under a pricing model using market observable inputs.
l) Variable interest
entities
The Group establishes or acquires share interest in entities which
may be considered variable interest entities in the process of
initiating and executing its downstream operations. The Group
consolidates such variable interest entities, even if there are
other variable interests in such entities, if the Group is
considered the primary beneficiary of such entities.
The Group analyzes all such entities and classifies them as either
(a) entities that must be consolidated because they are either
not variable interest entities (“VIEs”) and the Group
holds the majority voting interest, or because they are VIEs and
the Group is the primary beneficiary; and (b) entities that do
not need to be consolidated and are accounted for under either the
equity or cost methods of accounting because they are either not
VIEs and the Group holds a minority voting interest, or because
they are VIEs and the Group is not the primary beneficiary.
Entities are considered VIEs if (i) the total equity
investment at risk is not sufficient to permit the entity to
finance its activities without additional financial support;
(ii) as a group, the holders of the equity investment at risk
lack the ability to make certain decisions, the obligation to
absorb expected losses or the right to receive expected residual
returns; or (iii) an equity investor has voting rights that
are disproportionate to its economic interest and substantially all
of the entity’s activities are on behalf of the investor.
The Group is considered the primary beneficiary of and are required
to consolidate a VIE if the Group has the power to direct the
activities that most significantly impact that VIE’s economic
performance, and the obligation to absorb losses or the right to
receive benefits of that VIE that could potentially be significant
to the VIE. If the Group is determined not to have the power to
direct the activities that most significantly impact the entity,
then the Group is not the primary beneficiary of the VIE.
The Group’s downstream activities typically require some form
of equity investments, depending on the structure of the deal and
the markets in which these activites take place. As of the years
ended December 31, 2014, the Group had four entities in which
the Group held an equity interest.
Two of the entities, with registered office in Chile and Turkey,
were not VIEs but was subject to consolidation as the Group held
100% share interst in the entities. The other two entities in the
U.K. were VIEs not subject to consolidation as the Group did
not hold a majority interest in either of those companies and was
not the primary beneficiary. As of December 31, 2014, the two
projects in UK together had a carrying value of $33.6 million,
consisting of $24.2 million of direct material and labor input and
those general and administrative expenses allocable to the projects
and $9.1 million of loans to the project companies compared to $0.3
million in the prior year. These amounts constitute the maximum
risk of loss to the Group as of December 31, 2014 and 2013,
respectively. The Group had no equity interest in VIEs prior to
2013.
The Group accounts for its unconsolidated entities using either the
equity or cost methods of accounting depending upon whether it has
the the ability to exercise significant influence over an entity.
The Group considers its share interest as well as the legal rights
and obligations to the entity when evaluating whether it has the
ability to exercise significant influence; in which case the Group
is required to to apply the equity method of accounting.
m) Revenue
Recognition
The Group’s primary business activity is to produce and sell
PV modules and systems. The Group records module sales revenue if
the criteria set forth in Accounting Standards Codification (ASC)
605-10, Revenue
Recognition: Overall,
Payments received from customers for shipping and handling costs
are included in net revenues. Shipping and handling costs relating
to sales are included in selling expenses while shipping and
handling costs relating to purchases are included within cost of
goods sold.
The Group recognizes revenue related to long-term solar systems
integration services using the completed contract method in which
income is recognized when a contract is completed or substantially
completed. A contract may be regarded as substantially completed if
remaining costs are not significant in amount. When the Group
determines that total estimated costs will exceed total revenues
under a contract, it records a loss accordingly. The costs incurred
during the contract are capitalized and carried as inventory until
the final sales of the work performed under the contract. Included
in the capitalization are allocated general and administrative
expenses that are directly attributable to the contracts.
Revenue is recognized net of all value-added taxes The Group does
not offer implicit or explicit rights of return, regardless of
whether goods were shipped to the distributors or shipped directly
to the end user, other than due to product defect.
n) Government grants
Government grants received by the Company consist of unrestricted
grants and subsidies. The amount of such government grants are
determined solely at the discretion of the relevant government
authorities and there is no assurance that the Group will continue
to receive these government grants in the future. Government grants
are recognized when all the conditions attached to the grants have
been met and the grants are received. For the government grants
that are of a non-operating nature and with no further conditions
to be met, the amounts are recorded as a nonoperating income by
offsetting to its operating expenses when received; whereas for the
government grants with certain operating conditions, the amounts
are recorded as liabilities when received and will be recorded as
an operating income when the conditions are met.
During the periods ended December 31, 2014, 2013, and 2012,
the Group recorded $2.5 million, $1.2 million, and nil,
respectively, of government subsidies as an offset to its operating
expenses.
o) Research and development
costs
Research and development costs are expensed as incurred. As of
December 31, 2014 and 2013, the Group had balances of $1.5
million and $5.7 million, respectively, of in-process research and
development (“IPR&D”) that have been acquired as a
part of the business combination in 2012.
p) Advertising
expenditures
Advertising costs are expensed as incurred and are included in
“selling and marketing expenses.” The Group incurred
$2.5 million, $1.6 million, and $0.3 million, of advertising
expenses for the periods ended December 31, 2014, 2013 and
2012, respectively.
q) Warranty costs
The Company provides the following warranties on its products to
its customers: a 12 year product warranty in which the Company
warrants that its modules will not show any material defects or
workmanship defects for a period of twelve years after initial
purchase (invoice date). A 25 year performance warranty in which
the Company warrants that 1) its modules will produce a minimum
power output of at least 97% specified in the data sheet in the
first year and performance degradation will be no more than
0.6% per year for the next 25 years, resulting in an output no
less than 83% of the stated output 25 years after the invoice date.
The Company also accrues warranty expenses for BoS (balance of
system) parts used in EPC (Engineering, Procurement, Construction)
projects. Terms of such warranties are the same as the original
manufacturer’s warranty as the Group passes the liabilities
incurred under such warranties to the original manufacturer.
The management measures the future economic outflows associated
with these warranties as follows: 1) the results of technical
analyses, including simulation tests performed on the products by
an industry-recognized external certification body as well as
internally developed testing procedures conducted by the
Company’s engineering team, 2) the Company’s historical
warranty claims experience, and 3) the expected failure rate and
future costs to service failed products.
In case of product defects, the Group may, at its choice, remedy
the defect or supply new products. In case of performance failures,
the Group may, at its choice, replace the modules with low output,
supply additional modules, or repay the purchase price of modules,
or reduce the purchase price of the modules.
Management accrues warranty costs for identified specific issues
based on the estimated cost of the expected remediation efforts to
a specific issue and for the remaining population based on an
expected claims rate of 0.5% of the production costs of PV modules
produced in 2013 or later (or 2.5% for production prior to 2013).
The basis for the warranty accrual will be reviewed periodically
based on actual experience. The Company does not sell extended
warranty coverage that is separately priced or optional. If our PV
modules fail to perform to the standards of the performance
guarantee, we could incur substantial expenses and substantial cash
outlays to repair, replace or provide refunds for the
under-performing products, which could negatively impact our
overall cash position.
r) Foreign currency
The functional currency of the operating subsidiaries, Hanwha Q
CELLS GmbH, Hanwha Q CELLS Malaysia, and Hanwha Q CELLS
Australia are the the Euro, the Malaysian Ringgit, and Australian
dollar, respectively, as determined based on the criteria of ASC
830, Foreign Currency Translation
s) Income Taxes
Income tax expense comprises current and deferred tax. Current tax
and deferred tax is allocated to the different components of
comprehensive income (loss).
Current tax is the estimated tax payable or receivable on the
taxable income or loss for the year, using tax rates enacted at the
reporting date, and any adjustment to tax payable in respect of
previous years.
Deferred tax is recognized in respect of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation
purposes.
Deferred tax is measured at the tax rates that are expected to be
applied to temporary differences when they reverse, based on the
laws that have been enacted by the reporting date. The effect on
deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
A deferred tax asset is recognized for unused tax losses, tax
credits, and deductible temporary differences, to the extent that
it is more likely than not that future taxable profits will be
available against which they can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced by a valuation
allowance to the extent that it is no longer more likely than not
that the related tax benefit will be realized.
The Group recognizes the effects of income tax positions only if
those positions are more likely than not to be sustained.
Recognized tax positions are measured at the largest amount greater
than 50 percent likely of being realized. Interest and/or
penalties related to an underpayment of income taxes, are
classified, if and when required, as part of “interest
expense” and “other operating expenses”,
respectively, in the consolidated statements of comprehensive
income.
t) Value-added tax
(VAT)
In accordance with the relevant tax laws in the EU, Malaysia,
Australia, Chile, and Turkey, VAT is levied on the invoiced value
of sales and is payable by the purchaser. The Group is required to
remit the VAT it collects to the tax authority, but may deduct the
VAT it has paid on eligible purchases. To the extent the Group
paid more than collected, the difference represents a net VAT
recoverable balance at the balance sheet date. Value added tax is
presented on a net basis and excluded from revenues.
u) Commitments and
Contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines, and penalties and other sources are
recorded when it is probable that a liability has been incurred and
the amount can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
v) Recent accounting
pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09 (“ASU 2014-09”),
Revenue from Contracts with Customers. ASU 2014-09
In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements – Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern”. The
amendments require management to evaluate, for each annual and
interim reporting period, an entity’s ability to continue as
a going concern when relevant conditions and events, considered in
the aggregate, indicate that it is probable that the entity will be
unable to meet its obligations that become due within one year
after the date that the financial statements are issued
(or available to be issued). This ASU is effective for annual
periods and interim reporting periods beginning after
December 15, 2016. The Group does not expect that the adoption
of this update will have an effect on its consolidated financial
statements.
In January 2015, FASB issued ASU 2015-01 Income Statement –
Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of
Extraordinary Items. This Update eliminates from GAAP the concept
of extraordinary items. Subtopic 225-20, Income Statement –
Extraordinary and Unusual Items, required that an entity separately
classify, present, and disclose extraordinary events and
transactions. Presently, an event or transaction is presumed to be
an ordinary and usual activity of the reporting entity unless
evidence clearly supports its classification as an extraordinary
item.
In February 2015, the FASB issued ASU 2015-02, “Consolidation
(Topic 810): Amendments to the Consolidation Analysis”. The
amendments require an entity to consolidate another legal entity in
situations in which the entity’s contractual rights do not
give it the ability to act primarily on its own behalf, the entity
does not hold a majority of the legal entity’s voting rights,
or the reporting entity is not exposed to a majority of the legal
entity’s economic benefits or obligations. Financial
statement users asserted that in certain of those situations in
which consolidation is ultimately required, deconsolidated
financial statements are necessary to better analyze the reporting
entity’s economic and operational results. Previously, the
FASB issued an indefinite deferral for certain entities to
partially address those concerns. However, the amendments in this
update rescind that deferral and address those concerns by making
changes to the consolidation guidance. This ASU is effective for
fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2015. The Group does not expect
that the adoption of this update will have an effect on its
consolidated financial statements. |
