IFRS 3, acquisition for shares, estimates regarding fair values, gain on prior holding

Vestas Wind Systems A/S – Annual report – 31 December 2020

Industry: manufacturing

6.4 Business combinations

Vestas accounting policies

Newly acquired or newly founded subsidiaries are recognised from the date of obtaining control. Upon acquisition of subsidiaries, the acquisition method is applied.

Cost is stated as the fair value of the assets transferred, obligations undertaken and shares issued. Cost includes the fair value of any earn-outs. Expenses related to the acquisition are recognised in the income statement in the period in which they are incurred. Identifiable assets, liabilities and contingent liabilities (net assets) relating to the entity acquired are recognised at the fair value at the date of acquisition calculated in accordance with Vestas accounting policies.

In connection with every acquisition, goodwill and a non-controlling interest (minority) are recognised according to one of the following methods:

1) Goodwill relating to the entity acquired comprises a positive difference, if any, between the total fair value of the entity acquired and the fair value of the total net assets for accounting purposes. The non-controlling interest is recognised at the share of the total fair value of the entity acquired (full goodwill).

2) Goodwill relating to the entity acquired comprises a positive difference, if any, between the cost and the fair value of Vestas’ share of the net assets for accounting purposes of the acquired enterprise at the date of acquisition. The non-controlling interest is recognised at the proportionate share of the net assets acquired (proportionate goodwill).

Goodwill is recognised in intangible assets. It is not amortised, but reviewed for impairment once a year and also if events or changes in circumstances indicate that the carrying value may be impaired. If impairment is established, the goodwill is written down to its lower recoverable amount.

Sold or liquidated entities are recognised up to the date of disposal. Any gain or loss compared to the carrying amount at the date of disposal is recognised in the income statement to the extent the control of the subsidiary is also transferred.

Acquisition of MHI Vestas Offshore Wind A/S

On 29 October 2020, Vestas Wind Systems A/S (Vestas), and Mitsubishi Heavy Industries, Ltd. (MHI), signed an agreement that Vestas would acquire MHI’s 50 percent shares in MHI Vestas Offshore Wind (MVOW) joint venture, against MHI acquiring 2.5 percent shares in Vestas, where after Vestas has obtained 100 percent of the shares in MVOW. Through this strengthened partnership, Vestas made an emphatic long-term move in offshore wind energy to become a leading player in offshore wind by 2025 and to expand the two companies’ overall leadership in sustainable energy.

The transaction between Vestas and MHI was subject to regulatory approvals by the competition authorities which were received on 27 November 2020. Following the approval and finalisation of the transaction, Vestas obtained control of MVOW on 14 December 2020.

Consideration transferred

The consideration transferred for the shares in MVOW has been made in Vestas equity instruments by offering a total of 5,049,337 shares in Vestas that were issued at closing of the transaction, corresponding to 2.5 percent of Vestas nominal share capital after the capital increase. The transaction has a value of approx. EUR 861m, based on the acquisition date share closing price of DKK 1,268.50 (EUR 170.5) quoted on Nasdaq Copenhagen. Upon closing MVOW effectively settled payable amounts of EUR 59m towards Vestas adjusted in net assets acquired and in consideration transferred, whereafter the consideration transferred amounted to EUR 920m. The cash impact from the transaction amount to EUR 218m obtained as part of the net assets acquired. No cash has been transferred to MHI.

Strategic rationale and synergies

The goodwill of EUR 896m arising from the acquisition is attributable to acceleration of MVOWs and Vestas’ growth by integrating onshore and offshore platforms and leveraging Vestas’ strengths in both segments. Specifically, this entails a stronger integration between onshore and offshore technology and modular frameworks. A new offshore wind turbine platform is expected to be introduced to improve efficiency and drive the levelized cost of energy further down. Furthermore, synergies are expected in sales, technology, manufacturing footprint and procurement.

None of the goodwill acquired is expected to be deductible for income tax purposes.

Transaction costs

Acquisition-related costs of EUR 1m have been charged to administration costs in the consolidated income statement for the year and less than a million have been recognised in Equity in relation to issuance of shares to settle the acquisition.

Earnings impact

Since the closing on 14 December 2020, MVOW has contributed with revenue of EUR 100m but no significant profit. Had the business been consolidated with Vestas’ financial statements from 1 January 2020, Vestas consolidated income statement would have been impacted with additional revenue of EUR 1,279m and a loss after tax of additional EUR 46m. MVOWs total loss after tax amounts to EUR 92m in 2020.

Remeasurement of shares held before the acquisition of 50 percent shares

The carrying value of the 50 percent equity interest in MVOW as of 14th of December amounted to EUR 53m and the fair value has been assessed to EUR 461m. Based on the remeasurement of the existing 50 percent interest to fair value at the closing date and including reclassification of the exchange rate and hedge reserve in equity related to MVOW, a total gain of EUR 383m has been recognised as part of profit and loss from investments in joint ventures and associates.

Key accounting estimate

Estimate regarding fair value of shares held

The fair value of the 50 percent shares held before the acquisition is remeasured as the net present value of expected future cash flows. The expected cash flows are based on forecasts for a foreseeable period related to expected orders including firm orders, conditional orders, orders from reoccurring customers and new bids. Furthermore, cash flows from existing service contracts and service contracts from order backlog are forecasted in alignment with the contract terms in addition to projections for subsequent years based on assumptions on probability of the customers renewing the service contracts. The assumptions are based on sales and services coming from MVOW’s current available technology, operating margin and expected future capital expenditures. The current available technology are expected to generate orders to be effectuated within the next five years and service contracts for a period of 30 years. The future cash flows are discounted using a weighted average cost of capital (“WACC”) of 8 percent, as a high degree of the cash flows are related to firm orders and existing service contracts.

The fair value measurement of the 50 percent shares furthermore include a fair value assessment of lost cash flows related to a potential non-compete period, had a third party acquired Vestas’ 50 percent shares in MVOW. The valuation is based on an assessment of cash flows from orders potentially lost to a competitor in a likely non-compete period of two years in which it has been assessed that expected orders of 5,000 MW in the offshore market potentially will be contracted by Vestas subject to the current market conditions. Furthermore, the estimate is based on a high discount rate, as a potential competitor would have assessed the expected cash flow highly uncertain. For this reason the cash flow are discounted using a WACC of 10 percent.

The fair value of the acquired identifiable net assets of EUR 1,381m is provisional pending final valuations of the net assets. The following table summarises the consideration transferred, the fair value of assets acquired and liabilities assumed at the acquisition date.

Key accounting estimate

Estimate regarding fair value assessment of net assets acquired

Material net assets acquired for which estimates have been applied in the fair value assessment, including most significantly intangible assets and warranty provisions, have been recognised using the following valuation techniques.

Intangible assets

Intangible assets include development assets, order backlog and service contracts acquired.

Development assets

Development assets are related to the development of offshore wind turbine platforms . The measurement of the assets is based on a cost replacement approach. I.e. the measurement is based on expected costs to develop similar assets. Development assets of total EUR 239m have been recognised as intangible assets in the opening balance.

Order backlog and service contracts

Order backlog and preferred supplier asset related to the wind turbine business have been measured using a multi-period excess earnings model (MPEE) in which the present value of future expected cash flows from existing and expected contracts have been valued using a WACC of 7 percent. In total the order backlog together with the preferred supplier asset have been valued at EUR 118m based on expected orders of total 4,619 MW in a period of five years. In addition, existing and expected service contracts from orders have been valued at EUR 379m using a WACC of 7 percent and based on expected revenue from the service portfolio of EUR 5,825m over a period of approximately 30 years.

Further main value drivers in the MPEE model assessed include an assessment of the probability of contracting as well as the likelihood of renewal of service contracts. Direct and fixed costs are estimated based on experience within the wind turbine and service business.


The inventory is measured at net realisable value less costs of disposal and a reasonable profit allowance.

Trade receivables

Fair value of trade receivables has been measured at the contractual amount expected to be received. The collectability has been taken into consideration but no significant provision for bad debt has been recognised based on low historical loss rates. The gross receivables have not been discounted as maturity on the receivables is generally very short.

Warranty provisions

The warranty provision of EUR 203m is measured as the amount expected to be paid to settle the obligation. The estimate is based on expectations in relation to both known and unknown warranty cases and include estimates on the costs related to work hours, hourly rate, raw materials as well as the likelihood of future warranty claims being raised. The estimates are based on historical experience from supply and installation of wind turbines.

Lease liabilities and right of use assets

Lease liabilities have been measured at the present value of the remaining lease payments discounted using incremental borrowing rate estimated at the acquisition date. A corresponding amount has been recognised as right-of-use assets.


Deferred tax assets and liabilities are measured at the tax rates expected to apply to the period when the asset is realised or the liability is settled, based on tax rates enacted or substantively enacted at the closing date. Deferred tax assets are recognised to the extent taxable profits are expected to be available to allow the benefit of the deferred tax asset to be utilised. Tax liabilities include provisions made for tax treatments potentially challenged by local tax authorities. The assessment is based on experience with disputes on allocation of profits between different jurisdictions.

Acquisition of SoWiTec in 2019

In 2019, Vestas gained control of SoWiTeC. The fair value of the identifiable assets and liabilities at the acquisition date were provisionally estimated and disclosed in the Annual Report for 2019. In 2020 the provisional values were finalised without any changes.