Carlsberg Breweries Group Annual Report 2017

As approved on the Company’s Annual General Meeting on / 2018

Carlsberg Breweries A/S ______Ny Carlsberg Vej 100 1799 Copenhagen V Monica Gregers Smith Denmark Chairwoman of the meeting CVR no. 25508343 In brief

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 2 MANAGEMENT FINANCIAL REVIEW STATEMENTS

MANAGEMENT REVIEW CONSOLIDATED FINANCIAL STATEMENTS A good year for the Group ...... 3 Statements ...... 19 Financial review ...... 5 Notes ...... 24 Five-year summary ...... 7 Earnings expectations ...... 8 PARENT COMPANY SAIL’22 ...... 9 Statements ...... 89 Risk management...... 14 Notes ...... 93 Corporate governance ...... 16 Supervisory and Executive Board ...... 106

REPORTS Management statement ...... 107 Auditor’s report ...... 108

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 3

A GOOD YEAR FOR THE GROUP

ACTIVITIES OF THE GROUP adjust the expected net benefits to around DKK Examples of action in relation to the Group’s The Group is now two years into the journey The Carlsberg Breweries Group comprise the 2.3bn. portfolio include the further support of the craft and the results so far make us confident that beverage activities in the Carlsberg Group. & speciality portfolio, which achieved overall SAIL’22 will generate organic top- and bot- Carlsberg Breweries’ activities are focused on This level of benefits means that more than volume growth of 29%. A key enabler for pre- tom-line growth going forward. the markets where the Group has the expertise half of the benefits is expected to improve op- miumisation efforts in Western Europe is the and the right products to secure a leading posi- erating profit by the end of 2018, while the re- Group’s proprietary draught system Draught- For more information on SAIL’22 initiatives in tion. Due to the variation of the markets, the mainder is being invested in supporting the Master™, and during the year the Group accel- 2017, please read pages 9-13. contribution to growth, earnings and develop- SAIL’22 priorities. In 2017, Funding the Journey erated the roll-out of the system. In Asia, the ment within the Group differs, both at present enabled SAIL’22 investments of around DKK Group continued the support of Tuborg, which and in the longer-term projections. 500m. once again proved its popularity with consum- ers, delivering 6% volume growth in the region The Parent Company's main activities are in- Funding the Journey as a specific programme in spite of a highly challenging Indian market. vestments in national and international brew- will reach its conclusion by the end of 2018. eries as well as license and export business. However, the focus on efficiency and costs is Within capabilities, the Group introduced a new The Parent Company has retail bonds listed at here to stay and is being embedded as a way segmentation methodology, which is now be- the Luxembourg Stock Exchange. of living across the Group. ing embedded across the markets, and in- creased professionalism within value manage- HIGHLIGHTS 2017 PROGRESS ON SAIL’22 ment. The overriding priorities for 2017 were the exe- SAIL’22 is progressing according to plan. The cution of Funding the Journey and our SAIL’22 strategy was designed to get the Group back to The Group is making good progress in develop- strategy. In particular, delivering on Funding growth by taking action in relation to our ing a performance-driven culture, supported by the Journey was very important for enabling portfolio, capabilities and culture. The strat- the implementation of systematic and critical investments in our strategic priorities, thereby egy has been well embraced by everyone in the management reviews, aligning Company tar- fuelling the future growth of the Group. Group, and during the year many activities gets with incentives across the Group and im- were carried out in support of our well-defined proving management development. As a result of the good progress of the pro- strategic priorities. gramme, the Group has been able to upwardly

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 4 SIGNIFICANT DELEVERAGING

70 10 20 9 62 2015 2016 2017 2.5 9 6 16 2.0 54 8 3 12 46 1.5 7 0 8 1.0 38 6 -3 0.5 30 5 -6 4 2015 2016 2017 2015 2016 2017 2015 2016 2017 0.0 0 2015 2016 2017 Incl. goodwill Excl. goodwill

61.8bn 9.0bn 1.3bn 7.9 1.34x NET REVENUE OPERATING PROFIT NET PROFIT ROIC NET DEBT/EBITDA DKK DKK DKK % Net revenue grew organically by Operating profit grew organically Net profit was mainly impacted Return on invested capital (ROIC) Net interest-bearing debt 1% as a result of strong price/mix by 8.7%. All three regions con- by the impairment of the Baltika increased by 120bp. ROIC exclud- amounted to DKK 18.3bn, a de- of 3%, driven by strong perfor- tributed positively to the growth. brand due to changed market dy- ing goodwill was 17.3%, up cline of DKK 6.2bn compared with mance in Asia and Eastern Eu- namics following the PET downsiz- 350bp. end of 2016. rope. The growth was driven by ing, our increased focus on local the strong price/mix and and regional brands and updated The improvement in ROIC The significant reduction in net In reported terms, net revenue good progress of Funding assumptions on interest rates. Net was mainly a result of the strong debt was driven by the strong free declined by 1%, impacted by dis- the Journey, including value financials were positively impacted operating profit after tax. cash flow of DKK 8.9bn. posals. management. by the lower net debt and foreign exchange gains. All three regions delivered ROIC Consequently, financial leverage, The strong price/mix offset the In reported terms, operating improvement, with particular measured as net debt/EBITDA, organic volume decline of 2%, profit was up 8.0%. The small strong growth in Asia. declined to 1.34x. which was impacted by lower vol- positive currency impact was off- umes in Russia due to the PET set by the negative impact from downsizing. disposals.

Our results

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 5 FINANCIAL REVIEW STRONG SET OF RESULTS

INCOME STATEMENT administrative expenses amounted to DKK were significantly impacted by an impairment Tax totalled DKK -1,485m against DKK Reported net revenue was DKK 61,808m 4,825m (2016: DKK 5,172m). In total, oper- of the Baltika brand in Russia of DKK 4.8bn. -2,402m in 2016. The effective tax rate was (2016: DKK 62,614m), a decline of 1% due ating expenses declined by 3%, driven The impairment was made as a result of 41.6%. Adjusted for the brand impairment, the to the net acquisition impact, mainly related by good progress of Funding the Journey initi- changed market dynamics following the PET effective tax would have been 29.1%. to the divestment of the German wholesaler atives. downsizing, our increased focus in Russia on Nordic Getränke in 2017, the divestment of local and regional brands and, lastly, changed Non-controlling interests were DKK 806m Carlsberg Malawi in 2016 and divestments of Other operating activities, net, were DKK interest rate assumptions. More details can be (2016: DKK 371m). The significant increase entities in China in both years. In organic terms, 178m, a decline of DKK 73m compared with found in section 2.3 of the consolidated fi- versus 2016 was mainly due to Chongqing net revenue grew by 1%, driven by a positive 2016. Share of profit after tax in associates nancial statements. Special items were posi- Brewery, which grew earnings and in 2016 was price/mix of 3%. and joint ventures was DKK 231m, a decline tively impacted by gains on disposals. A speci- impacted by impairment and restructuring. of DKK 48m compared with 2016. The decline fication of special items is included in section Cost of sales amounted to DKK 30,325m was mainly due to lower income in our busi- 3.1 of the consolidated financial statements. The Carlsberg Breweries Group’s share of con- (2016: DKK 31,195m). Cost of sales per hl in- ness in Cambodia. solidated profit was DKK 1,282m against DKK creased by 1%. In organic terms, cost of Financial items, net, amounted to DKK -774m 4,554m in 2016. The significant decline was sales per hl increased by approximately. 3%, Operating profit before special items was against DKK -1,237m in 2016. Financial in- due to the impairment of the Baltika brand. mainly due to overall cost inflation, product DKK 8,962m (2016: DKK 8,301m). The 8.0% come amounted to DKK 809m (2016: DKK mix and the volume decline in Eastern Europe. growth was driven by organic growth of 8.7% 925m), mainly impacted by foreign exchange STATEMENT OF FINANCIAL POSITION Reported gross profit was DKK 31,483m and a positive currency impact of 0.7%. The gains, net, of DKK 485m. Financial expenses (2016: DKK 31,419m). The reported gross negative impact from disposals was -1.4%. amounted to DKK -1,583m (2016: DKK ASSETS margin improved by 70bp to 50.9% as a result All three regions delivered positive organic op- -2,162m), primarily impacted by interest Total assets amounted to DKK 103.4bn at 31 of the positive price/mix and efficiency im- erating growth. The reported operating margin expenses of DKK -775m and fair value ad- December 2017 (2016: DKK 115.9), a de- provements. was up 120bp to 14.5% (2016: 13.3%). The or- justments of financial instruments, net, crease of DKK 12.5bn. ganic growth in operating profit was higher of DKK -292m. Excluding currency gains and Marketing expenses as a percentage of net than expected in last year’s Annual Report. fair value adjustments, financial expenses, net, Intangible assets amounted to DKK 56.6bn at revenue were 9.7%, broadly in line with 2016. amounted to DKK 967m (2016: DKK 1,652m), 31 December 2017, compared to DKK 65.5bn Total sales and distribution expenses amounted Net special items (pre-tax) amounted to DKK positively impacted by the lower net interest- at 31 December 2016. The lower amount was to DKK 18,105m (2016: DKK 18,476m), and -4,615m (2016: DKK +263m). Special items bearing debt. due to the depreciation of the Russian rouble

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 6

and the DKK 4.8bn impairment of the Baltika The change in equity of DKK 4.6bn was mainly stronger earnings and a positive contribution disposal of non-core assets, although at a brand in Russia. caused by the consolidated profit of DKK 2.1bn from working capital. much lower level than in 2016. and retirement benefit obligations of DKK Property, plant and equipment decreased to +1.3bn, offset by foreign exchange losses of Operating profit before depreciation, amorti- FINANCING DKK 23.9bn against DKK 25.6bn at 31 De- DKK 3.8bn and dividend payments of DKK sation and impairment losses thus amounted to At 31 December 2017, total borrowings cember 2016, mainly driven by depreciation of 2.3bn. DKK 13,657m (2016: DKK 13,054m). amounted to DKK 24.3bn and net interest- DKK 3.8bn and foreign exchange losses of DKK bearing debt to DKK 18.3bn. The difference of 1.2bn, offset by additions of assets of DKK Liabilities amounted to DKK 64.1bn (DKK The change in trade working capital was DKK DKK 6.0bn comprised other interest-bearing 3.6bn. 72.5bn at 31 December 2016). The decline +756m (2016: DKK 1,043m). Average trade assets of DKK 2.5bn, and cash and cash equiv- was mainly due to lower borrowings (DKK working capital to net revenue improved further alents of DKK 3.5bn. Current assets declined by DKK 1.3bn to DKK -6.1bn) and deferred tax and retirement bene- and was -13.7% for 2017 compared to -12.5% 16.6bn, mainly impacted by decreases in in- fit obligations (DKK -2.2bn). for 2016. The change in other working capital The net interest-bearing debt to operating ventories and trade receivables of DKK 1.0bn, was DKK +381m (2016: DKK -961m, im- profit before depreciation and amortisation due in part to less stocking at distributors in Current liabilities decreased to DKK 25.2bn at pacted by pension obligations and a reclassi- (EBITDA) ratio declined to 1.34x (1.88x at Russia following the Trade Law implementa- 31 December 2017 versus DKK 34.2bn at 31 fication). year-end 2016). tion as of 1 January 2017 and the disposal of December 2016. The decline of DKK 9.0bn was Nordic Getränke. predominantly due to lower short-term bor- Restructuring costs paid amounted to DKK Of the total borrowings, 96% (DKK 23.3bn) rowings of DKK 8.3bn. -364m (2016: DKK -407m). Net interest etc. were long term, i.e. with maturity of more than LIABILITIES paid amounted to DKK -403m (2016: DKK one year from 31 December 2017. In Sep- Total equity amounted to DKK 39.3bn (DKK CASH FLOW -988m). The significant decline was due to tember, we successfully issued a 6-year EUR 43.4bn at 31 December 2016). DKK 36.7bn Free cash flow amounted to DKK 8,881m lower interest-bearing debt, repayment in No- 500m bond with a coupon of 0.5%, the pro- can be attributed to the shareholder in Carls- (2016: DKK 8,805m), driven by a strong cash vember 2016 of the GBP 300m 7.25% coupon ceeds of which were used for general corporate berg Breweries A/S and DKK 2.6bn to non- flow from operating activities of DKK 11,855m bond and in October 2017 of the purposes, including repayment of the EUR 1bn controlling interests. against DKK 9,601m in 2016, an increase of EUR 1bn 3.375% coupon bond, as well as the bond that matured on 13 October 2017. DKK 2,254m. This increase was due to settlement of financial instruments. Of the net financial debt, 93% was denomi- Corporation tax paid amounted to DKK nated in EUR and DKK (after swaps) and 96% Group financial performance -1,937m (2016: DKK -1,847m). The in- of the gross debt was at fixed interest (fixed- Change Change crease was mainly due to higher earnings and interest period exceeding one year). The in- Pro rata (million hl) 2016 Organic Acq., net FX 2017 Reported withholding tax paid. terest rate risk is measured by the duration of Beer 116.9 -3% -1% - 112.4 -4% the net financial debt, for which our target is Other beverages 21.9 2% -6% - 20.9 -4% Cash flow from investing activities was DKK between two and five years. At 31 December Total volume 138.8 -2% -2% - 133.3 -4% -2,974m against DKK -796m in 2016. Op- 2017, the duration was 4.6 years, which was erational investments totalled DKK -3,648m 0.9 higher than in 2016 (3.7). The increase was DKK million (2016: DKK -3,548m), including capital ex- mainly due to the EUR bond issue in Septem- Net revenue 62,614 1% -2% 0% 61,808 -1% penditures of DKK 3.8bn. Total financial in- ber. Operating profit, before special vestments amounted to DKK +674m (2016: items 8,301 8.7% -1.4% 0.7% 8,962 8.0% DKK +2,752m). Once again in 2017, financial Operating margin (%) 13.3 14.5 120bp

investments were positively impacted by the

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 7 FIVE-YEAR SUMMARY

2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 Sales volumes, pro rata (million hl) Statement of cash flows Beer 112.4 116.9 120.3 122.8 119.7 Cash flow from operating activities 11,855 9,601 9,943 7,452 8,397 Other beverages 20.9 21.9 21.5 21.0 19.7 Cash flow from investing activities -2,974 -796 -3,200 -6,696 -7,985 Free cash flow 8,881 8,805 6,743 756 411 DKK million Income statement Investments Net revenue 61,808 62,614 65,354 64,506 64,350 Acquisition and disposal of Gross profit 31,483 31,419 31,925 31,781 32,930 property, plant and equipment and intangible assets, net -3,688 -3,591 -3,486 -5,614 -4,621 Operating profit before amortisation, depreciation and impairment losses 13,657 13,054 13,354 13,723 13,963 Operating profit before special items 8,962 8,301 8,606 9,345 9,862 Financial ratios Special items, net -4,615 263 -8,455 -1,245 -442 Operating margin % 14.5 13.3 13.2 14.5 15.3 Financial items, net -774 -1,237 -1,513 -1,169 -1,486 Return on invested capital (ROIC) % 7.9 6.7 6.4 7.3 7.6 Profit before tax 3,573 7,327 -1,362 6,931 7,934 Return on invested capital exclud- Corporation tax -1,485 -2,402 -917 -1,883 -2,025 ing goodwill (ROIC excl. goodwill) % 17.3 13.8 12.2 12.2 12.0 Consolidated profit 2,088 4,925 -2,279 5,048 5,909 Equity ratio % 35.5 35.0 29.2 33.3 40.6 Debt/equity ratio (financial gear- ing) x0.47 0.57 0.82 0.78 0.55 Attributable to Interest cover x11.58 6.71 5.69 8.00 6.64 Non-controlling interests 806 371 344 524 478 Dividend per share (proposed) DKK 4,872 3,045 2,741 2,741 2,435 Shareholder in Carlsberg Breweries A/S 1,282 4,554 -2,623 4,524 5,431 Payout ratio % 190 33 nm 30 22

Statement of financial position Employees Total assets 103,361 115,913 113,501 125,756 140,519 Invested capital 72,464 84,410 83,465 96,410 98,495 Full-time employees (average) 41,349 41,985 47,382 46,738 38,611 Invested capital excluding goodwill 30,173 39,752 41,401 52,070 49,535 Interest-bearing debt, net 18,347 24,569 30,272 35,261 33,407 Equity, shareholder in Carlsberg Breweries A/S 36,672 40,580 33,145 41,828 57,063

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 8 EARNINGS EXPECTATIONS GUIDING FOR ORGANIC GROWTH

In 2016 and 2017, the key focus was the de- Other relevant assumptions are: livery of Funding the Journey to create the fi- nancial flexibility to invest in the business. In Financial expenses, excluding currency losses 2018, we will strengthen the focus on revenue or gains and fair value adjustments, are ex- growth while maintaining a sharp focus on pected to be around DKK 800m. costs and delivering on the remaining Funding the Journey benefits. We will also continue to The effective tax rate is expected to be below exercise strict cash flow discipline. 29%.

At regional level, we have the following priori- Capital expenditures at constant currencies are ties for 2018: continued improvement expected to be around DKK 4.5bn. in margins and operating profit in Western Eu- rope; accelerating organic growth in Asia through premiumisation; and rebalancing the focus towards top-line growth in Eastern Eu- rope.

Based on these priorities, for 2018 the Group expects to deliver:

Mid-single-digit percentage organic growth in operating profit.

Due to the recent strength of DKK against most currencies, we assume a negative trans- lation impact of around DKK -450m for 2018 (based on the spot rates at 6 February).

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 9 SAIL’22 EXECUTION OF OUR STRATEGY

2017 was the second year of The key strategic choices of SAIL’22 are become relevant. The following are examples Our primary focus is on the 40 strongest local SAIL’22. The focus for the year grouped under the headings “Strengthen the of some of the activities during 2017. brands, i.e. the largest in terms of volume, was to deliver on Funding the core”, “Position for growth” and “Create a win- market share and awareness, as we believe ning culture”. Delivering on these choices will in STRENGTHEN THE CORE these brands offer the best growth potential. Journey, enabling investments turn enable us to deliver enhanced value for In order to strengthen our core business, ac- Consequently, in 2017 we undertook work to in our strategic priorities and im- our shareholder. A thorough description of tions taken during the year covered areas such strengthen some of our local power brands. proving the capital allocation. SAIL’22 can be found in the 2016 Annual Re- as segmentation, local power brands, digital port. and sales execution, as well as the cost and ef- In Serbia, we sharpened the purpose of our SAIL’22 was launched in 2016 with the ambi- ficiency actions under the Funding the Journey power brand LAV and developed a new visual tion to make the Carlsberg Breweries Group a SAIL’22 will evolve during the strategy period, programme. identity in order to strengthen the brand and successful, professional and attractive and actions and initiatives within the strategic improve the connection with Serbian consumers. GLOBAL DEMAND SPACES brewer in our markets. priorities will be taken or developed as they A very important activity was the development In Switzerland, we launched three crafty line of a new segmentation approach – the Global extensions of the Feldschlösschen brand, Demand Space model – to embrace a con- providing affordable crafty propositions that sumer-driven mindset. The new approach will tap into the increased consumer interest for guide our category and portfolio strategy as craft & speciality beers and consumer willing- well as our innovation pipeline. ness to pay a premium for these products. The

consumer response has been very positive. In 2017, we rolled out the Global Demand

Space model across our markets, determining In Sweden, we launched a new look and com- STRENGTHEN POSITION DELIVER VALUE the portfolio role of our brands and how to ac- munication concept to reposition our local THE CORE FOR GROWTH FOR THE SHAREHOLDER tivate the model in our commercial planning power brand Falcon in order to improve the cycle. By the end of 2018, we expect demand relevance of the brand for consumers. The ini- Leverage our strongholds Win in growing categories Organic growth in operating profit spaces to be fully embedded in all pillars of our tial results of the relaunch are encouraging. Excel in execution Target big cities ROIC improvement commercial strategies. Funding the Journey Grow in Asia Optimal capital allocation

In 2018, we will continue the overall support of LOCAL POWER BRANDS our power brand portfolio and revamp more Our local power brands enjoy a high level of Team-based performance local power brands. We continuously collect awareness and a close relationship with con- CREATE A Contribute to a better society WINNING CULTURE Compass (applying our codes and policies) sumers based on their heritage and history.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 10

and share learnings and best practices across DraughtMaster™ allows outlets to have a all markets to identify common areas of growth greater variety of beer on tap. Results from the STRENGTHEN THE CORE potential and create synergies in areas such as pilot markets of Italy and Greece show high positioning, brand experience, innovation and customer and consumer satisfaction with the KPIs & RESULTS activation. system.

TUBORG In 2017, we began the full conversion of on-

In 2017, we kicked off a new global campaign trade customers in Denmark. In 2018, we will to sharpen the focus on Tuborg’s legacy of continue the roll-out of the system in other inspiring cultural discovery since 1880. Western European markets, such as Norway, +3% +4% 2.3bn Sweden, Germany and the UK. The campaign encompassed a refreshed visual identity and an exciting cooperation with global DIGITAL GROSS CONTRIBUTION OPERATING PROFIT FUNDING THE JOURNEY music trio Major Lazer. Our digital journey is just beginning. In 2017, FROM CORE BEER IN RUSSIA we took the first steps, developing a compre- As ambassadors of the Tuborg open music hensive digital vision for the Group. The vision Improving gross core beer Growing organically Well on track platform promoting global music collaborations is not about technology but about developing brand contribution and supporting young upcoming performers, the right digital mindset across the Group and We measure our success in re- In 2017, China became our Funding the Journey was a Major Lazer created a special Tuborg beat creating a guideline for what we can and vitalising core beer by our largest single market, meas- key focus of the Group in which, at the time of publication of this report, should do with digital. ability to grow the gross brand ured in volume terms. Meas- 2016 and 2017. The pro- has been shared with artists in China, Russia, contribution from core beer. ured in operating profit, gramme progressed very well, India, Italy, Serbia, Montenegro, Bosnia and Our digital vision has four key focus areas though, Russia remains our and we now expect it to de- Iceland. aimed at creating better experiences for con- Gross brand contribution grew biggest market, and trans- liver around DKK 2.3bn in net sumers and shoppers, empowering our cus- by 3% as a result of successful forming our Russian business benefits with full impact in Global Tuborg volumes grew by 3% in 2017. tomers, driving smarter supply chain manage- value management efforts and is an explicit priority of 2018. Less than half will be ment and having more focus on digital business the launch of premium line SAIL’22. reinvested in support of the DRAUGHTMASTER™ impacts and innovations. extensions, positively impact- SAIL’22 priorities, while more Our proprietary keg system DraughtMaster™ is ing price/mix. Growing gross We measure our success in than half will improve organic a key enabler for our premiumisation effort and Our work on digital will accelerate in 2018 and brand contribution was Russia by our ability to grow operating profit. for regaining on-trade momentum in Western beyond. achieved despite volumes be- operating profit organically. In Europe. ing negatively impacted by the 2017, we achieved +4% or- In 2017, the programme de- FUNDING THE JOURNEY PET downsizing in Russia and ganic growth in operating livered benefits of around DKK The system offers several advantages over tra- In 2017, Funding the Journey achieved strong bad summer weather in parts profit due to strong price/mix 1.2bn and around DKK 500m ditional draught systems, including signifi- results and we are able to adjust the expected of Western Europe. and rigid efficiency and cost was reinvested in the SAIL’22 cantly longer shelf life, simplicity and ease of net benefits to around DKK 2.3bn (previously control, offsetting the negative priorities. handling, and an improved beer experience for around DKK 2bn). volume impact. the consumer. 2018 marks the final year of Funding the Journey. However, the focus on efficiency and

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 11

costs will remain throughout the organisation, end of 2017, Grimbergen was present in 51 and the processes and methodologies are being markets. Brooklyn continued its growth in embedded as a way of living across the Group. Carlsberg Group markets in 2017, delivering POSITION FOR GROWTH 29% volume growth. We now sell this leading POSITION FOR GROWTH international craft beer brand in 17 markets, KPIs & RESULTS As part of SAIL’22, the Group defined three with plans to launch into more markets in distinct priorities that it will pursue to drive top- 2018. and bottom-line growth. Our growth priorities reflect: During the year, we took steps to strengthen 1. The upsurge in the craft & speciality and our position within the local authentic craft alcohol-free beer categories. segment in cooperation with our US partner 2. The global urbanisation megatrend and Brooklyn Brewery by acquiring the London +29% +15% +8% the recognition of the high degree of con- Fields Brewery portfolio, building a craft brew- solidation in the beer industry in most ery in Lithuania and launching the innovative markets around the world. craft beer brand HK YAU in Hong Kong. 3. The Group’s strong presence in Asia, which WIN IN CRAFT & WIN IN ALCOHOL-FREE GROW IN ASIA has delivered strong growth rates in recent ALCOHOL-FREE BREWS SPECIALITY BREWS years. Our alcohol-free brews (AFB) delivered strong growth of 15% in Western Europe, well ahead Strong volume growth Solid progress in Continued value growth CRAFT & SPECIALITY of the estimated category growth of 6-7% Western Europe Our craft & speciality portfolio grew by 29% in Within alcohol-free brews, our 2017 priorities Our craft & speciality portfolio Alcohol-free brews is Our Asian business became 2017, accounting for 8% of beer net revenue. included the launch of alcohol-free line ex- delivered strong volume an attractive beverage cate- even more important in 2017, tensions of local power brands, improving our growth of 29% and net reve- gory, benefiting from the accounting for 31% of Group Our international speciality brands Grimbergen AFB brand packs and brews, and continuous nue growth of 29%. Our craft growing global health and volumes and 28% of Group and 1664 Blanc delivered strong growth of 15% development of our innovation pipeline. & speciality brands increased wellness trend among con- operating profit. and 46% respectively. their share of Group beer vol- sumers. The category is grow- In markets such as Greece and Russia, we umes by 1 percentage point ing and offers excellent mar- Organic net revenue growth We launched new 1664 Blanc variants as well launched alcohol-free line extensions of ex- and of beer net revenue by 2 gin opportunities. was 5% and organic growth in as a new and distinct visual identity emphasis- isting local power brands with great success. percentage points. operating profit 8.1%. Good ing the brand’s blue colour and French heritage. Examples include FIX ANEY in Greece and Our alcohol-free brews deliv- growth of our international Four of the brand’s top five markets are in Baltika 0 Wheat in Russia. Particularly strong volume ered positive results, growing brands as well as a positive Asia, and in 2017 we experienced particu- growth was achieved by our volumes in Western Europe by development in local power larly strong sales in China, where the brand In other markets, we successfully developed a international speciality brands 15%. This was ahead of the brands contributed to both grew by 44%. clear and positive variant communication and 1664 Blanc and Grimbergen, market growth of 6-7%. top- and bottom-line growth. expanded the brew range. In Switzerland, but craft brands such as In 2016, Grimbergen passed the milestone of Feldschlösschen Alkoholfrei was launched with Brooklyn and E.C. Dahls also . annual sales of 1 million hl, representing a a new look and feel in lager and wheat vari- delivered strong results. 400% increase since 2008, when the Carlsberg ants. The relaunch was well received by con- Breweries Group acquired the brand. By the sumers, with Feldschlösschen Alkoholfrei

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 12

growing by 5%. In Lithuania, the relaunch of China was an important contributor to these This framework was rolled out across the The Carlsberg Group Sustainability Švyturys Go delivered strong growth of 30%, growth rates, positively impacting the price/ Group and is an integral part of our key people Report is available at supporting our market share increase in the mix of 5% in the country. Our international pre- activities, such as onboarding, performance as- www.carlsberggroup.com/sustainability/ AFB category from 51% to 64%. mium brands now account for 24% of volumes sessment, training and development, and ca- download and 40% of net revenue in China. reer planning. In addition, the One Carlsberg In future-proofing our AFB business, we have performance culture was integrated in our re- ZERO investments will help make our business driven innovation into a strong pipeline of alco- India is another market of particular focus muneration policies. more resilient in the future, contributing to both hol-free brew streams and propositions in Asia. Tuborg is our largest brand in the short- and long-term success. to be launched in 2018 and beyond. country, accounting for 86% of volumes and During 2017, the ongoing SAIL’22 communica- 81% of net revenue. As expected, the Indian tion improved the engagement and alignment Reporting BIG CITIES market was volatile in 2017 due to the high- across the organisation, as shown by improved Our 2017 Sustainability Report contains more Our ambition within the big cities growth prior- way ban and the implementation of GST, scores in the annual employee survey in areas information on Together Towards ZERO, in- ity is to conquer competitive premium market (goods and services tax) but our market share such as overall employee engagement and ac- cluding our performance against our sustain- positions in selected cities outside our current continued to strengthen. In late 2017, we fi- ceptance, and acknowledgement of change ability KPIs. The report carries an assurance geographic footprint by 2022. nalised the building of our eighth brewery, lo- management agenda. statement by PwC on selected indicators. cated in Karnataka. During the year, we tested different approaches In 2016 and 2017, our people were focused on The report serves as our annual Communica- and set-ups in a couple of test cities. Incorpor- WINNING CULTURE delivering on Funding the Journey. The next tion on Progress to the United Nations Global ating the learnings from these pilot cities, we A critical enabler for being successful and de- step will be to deliver on the SAIL’22 growth Compact and enables us to live up to our legal will be expanding into more cities in 2018. livering on our SAIL’22 priorities is to create priorities and KPIs, and remuneration will be responsibility for CSR disclosure under section a winning culture. changed accordingly to reflect this. 99a of the Danish Financial Statements Act. GROW IN ASIA

Asia is an important volume and value growth For us, a winning culture is team-based, per- CONTRIBUTING TO A BETTER SOCIETY LIVE BY OUR COMPASS contributor for the Group, accounting for 28% formance-driven and characterised by Our winning culture demands a high degree of Together Towards ZERO of Group operating profit in 2017. This com- a high level of integrity. In addition, our win- integrity, honesty and ethical business conduct, In 2017, we launched a new and ambitious pares with 9% in 2010. ning culture sets high standards within sustain- and these are core values of the Carlsberg sustainability programme – Together Towards ability, including health & safety and responsi- Group. ZERO. Together Towards ZERO consists of four The increased importance of Asia is the result ble drinking. major ambitions: a ZERO carbon footprint, of steady growth in recent years. From 2010 to In 2017, we embedded our Code of Ethics 2017, average annual organic growth in beer TEAM-BASED PERFORMANCE CULTURE ZERO water waste, ZERO irresponsible drinking and Conduct through eLearning training volumes was 5%, while average annual organic Driving a team-based performance culture is and a ZERO accidents culture. Each ambition is offered to all employees. We also revised our growth in net revenue and operating profit was an ongoing journey. underpinned by individual and measurable tar- policy framework, which now encompasses 28 11% and 15% respectively. gets for 2022 and 2030. policies supported by detailed manuals. The Our triple A concept (alignment, accountability framework aims to both mitigate company risk During the year, we continued to support our and action) defines how we collaborate and is The programme will help ensure that we re- and drive ethical business conduct by focusing premium portfolio, with particular emphasis on the cornerstone of our team-based One Carls- duce risks and strengthen our business. The on individual employee behaviour. Our policy Tuborg, 1664 Blanc and Carlsberg. In 2017, berg performance culture. cost of utilities such as water is set to rise in the framework has been designed first and fore- Tuborg volumes grew by 6%, 1664 Blanc by future, while the price of renewable energy is most to guide our employees in what the 38% and Carlsberg by 3%. falling. With this in mind, Together Towards Group considers to be the right direction.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 13

In 2017, we also introduced and improved DELIVER VALUE FOR THE SHAREHOLDER our Speak Up programme, which enables em- Achieving strong results within the strategic ployees to report misconduct. In addition choices of SAIL’22 will enable us to deliver en- to a more user-friendly Speak Up web and hanced value for our shareholder. phone system, in January we established an Integrity Committee to oversee the follow-up We measure our ability to increase value for of material Speak Up investigations. shareholder by focusing on two key metrics: organic growth in operating profit and ROIC. Looking ahead, we will further strengthen the compliance governance structure, improve our In addition, when launching SAIL’22 in March monitoring and reporting, support a safe and 2016, we also communicated a clear target of protected environment for people to speak up, reducing leverage and increasing the dividend DELIVER VALUE FOR THE and develop a new platform that provides all payout ratio. SHAREHOLDER employees with easy access to our codes, poli- cies and manuals. Our results against these key metrics and KPIs & RESULTS

targets were strong in 2017, with 8.7% organic 15 9 growth in operating profit, 120bp improvement 10 8 in ROIC and a recommended increase in the 5 dividend per share, equal to a payout ratio of 7 0 190%. -5 6 -10 5 2015 2016 2017 2015 2016 2017

ORGANIC GROWTH IN OPERATING ROIC TOGETHER PROFIT (%) IMPROVEMENT (%)

TOWARDS ZERO Consistent organic growth in operating In order to drive a positive development in In June 2017, we set industry-leading profit is testament to our ability to deliver shareholder returns, we want to grow the targets when launching our new sustainability top-line growth and margin improvement. return on invested capital by improving programme Together Towards ZERO, which fo- earnings and reducing invested capital. cuses on carbon footprint, water waste, irrespon- In 2016 and 2017, Funding the Journey sible drinking and health & safety. Together To- was the driver of organic operating profit In 2017, ROIC was 7.9% (+120bp). The wards ZERO expresses our vision for a better to- growth. improvement was the result of lower capi- morrow and our firm belief that our business can thrive while at the same time contributing to a tal employed and improved profitability. better society. Read more in the 2017 Sustaina- Due to excellent and rapid progress of bility Report. Funding the Journey, organic operating profit growth in 2017 was 8.7%.

CONTRIBUTE TO A BETTER SOCIETY

Governance

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 14 RISK MANAGEMENT MANAGING RISKS TO REDUCE UNCERTAINTIES

We seek to manage risks in such Risks are assessed according to a two-di- Risk reporting is incorporated in regular busi- a way that we minimise their mensional heat map rating system that esti- ness reviews and Group Risk Management is mates the impact of the risk on operating profit responsible for facilitating and following up on IDENTIFIED RISKS threats while making the best use or brand/image and the likelihood of the risk risk action plans for the most significant risks in of their potential. materialising. the Group. FOR 2018

GOVERNANCE STRUCTURE Based on this assessment, ExCom identifies HIGH RISKS IDENTIFIED FOR 2018 RISKS WITH HIGHEST POTENTIAL The Supervisory Board is ultimately responsible the high-risk issues for the coming year. Ex- The identified risks for 2018 are shown in IMPACT AND PROBABILITY • Commodity & foreign exchange impact for risk management, but it has appointed the Com assigns risk owners, who are then respon- the box to the right. The high-impact risks • Industry consolidation Audit Committee to act on its behalf in mon- sible for mitigating the risks through are described in the following. • Partnerships itoring the effectiveness of the Group’s a programme of risk management activities. • Political & economic instability risk management. COMMODITY AND FOREIGN EXCHANGE Local entities and Group functions are re- IMPACT Monitoring is mainly performed in connection sponsible for the identification, evaluation, OTHER IDENTIFIED RISKS Description with the half-year reviews, although recurring qualification, recording and reporting to • Talent management Adverse foreign exchange movements and in- • Regulatory changes, incl. duties financial risks are evaluated on a quarterly ba- management of business risks at local level. creasing commodity prices negatively affect the • Pensions sis. Local and functional risk assessment follows • Cyber & IT security prices of raw materials and other inputs, the same principles and methodology as • Legal & regulatory compliance thereby affecting the competitiveness of the The Audit Committee adopts guidelines for Group-level risk assessment. • Strategy execution business and the delivery of results. key areas of risk, monitors developments • Corporate tax risk • Financial flexibility and ensures that plans are in place for the The responsibility for the local review lies Competition in most markets is generally fierce • Funding the Journey management of individual risks, including com- with the risk officer, typically the local head • Quality design & execution and trade term pressure from our customers mercial and financial risks. of Finance, to ensure that risk management remains strong, leading to a challenging pricing is incorporated into management meetings, environment. The Executive Committee (ExCom) is re- business reviews and key decision-making. sponsible for reviewing the overall risk expo- Foreign exchange risk and commodity risk are sure associated with the Group’s activities. Following the risk identification, local risk own- described in more detail in section 1.4 in the ers are appointed and given responsibility for notes to the consolidated financial statements. mitigating the risks through a programme of

risk management activities.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 15

Mitigation In addition, we will seek to further develop Political and economic instability may lead to Nevertheless, we will further embed our value- our partnerships with suppliers and create al- adverse exchange rate fluctuations, increased based approach across all markets, driving a ternative sourcing solutions. credit risk, insolvency of suppliers, goodwill im- positive price/mix while applying the Golden pairment, operational restrictions and possibly Triangle to ensure a balanced approach to PARTNERSHIPS nationalisation of assets. market share, gross profit margin after logistics and operating profit. Description Mitigation The Group cooperates with partners in a num- We closely monitor our markets in order to INDUSTRY CONSOLIDATION ber of markets, particularly the global soft be able to respond in a timely manner to any drinks manufacturers in the Nordic countries adverse developments. Mitigating activities also Description and some Asian markets as well as local part- include hedging and maintaining variability in Industry consolidation was a high risk for ners in some Asian and European markets. the cost base. 2017 and is expected to remain so for 2018.

Consolidation within the beer industry con- The strength of the relationship with our differ- SAIL’22 also provides mitigation by further tinues, creating bigger players with increased ent partners may affect our ability to manage strengthening our core business in mature, sta- scale. In addition, consolidation is also taking the growth of our business. ble markets, premiumising our portfolio place among our customers and suppliers. and expanding our geographic footprint.

Mitigation Although strong local market positions are In order to minimise the potential risk of part- HIGH RISKS FOR 2017 key to creating value, consolidation creates nerships, we seek to have an ongoing dialogue In addition to industry consolidation and politi- stronger competitors with increased financial with our partners to identify any issues at an cal and economic instability, Funding strength and bargaining power, potentially im- early stage. the Journey and talent management were pacting on the Carlsberg Breweries Group's deemed high risks for 2017. ability to compete. Consolidation among cus- The relevant members of ExCom are actively tomers and suppliers also leads to increased involved in partner relationships, participating As 2018 is the third and final year of the pro- dependency, pricing pressure and the risk of in the ongoing dialogues to ensure constructive gramme, delivering on the ambitions of Fund- margin pressure. negotiations and proper and fast resolutions of ing the Journey is no longer considered potential issues. a high risk. The programme is expected to de- Mitigation liver around DKK 2.3bn by the end of 2018 The priorities and initiatives of SAIL’22 seek to POLITICAL AND ECONOMIC INSTABILITY compared with initial expectations in November position the Group in such a way that we are 2015 of DKK 1.5-2.0bn. able to act upon and mitigate the impact of in- Description dustry consolidation. This includes improving The risk of political and economic instability Talent management continues to be considered our core beer business and driving craft & was also a high risk for 2017. Adverse eco- a risk, although slightly less compared with speciality and alcohol-free brews, becoming a nomic conditions may result in reduced con- 2016. During the year, we strengthened our valued partner of our customers and offering sumer demand and a higher degree of development centres and took further action to the preferred beer of our consumers. price sensitivity on the part of consumers, build a succession pipeline and talent pool for while major social or political changes may disrupt sales and operations. key positions across the Group.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 16 CORPORATE GOVERNANCE SUPPORTING GOOD CORPORATE GOVERNANCE

Our governance framework aims Company's Articles of Association and other In 2017, the Audit Committee had, in addition INTERNAL CONTROL AND RISK to ensure active and accountable rules. A comprehensive description of to its statutory duties, particular focus on a MANAGEMENT RELATED TO THE business management across the the Group’s corporate governance position is number of other areas such as: FINANCIAL REPORTING PROCESS available on www.carlsberggroup.com/who- Group. we-are/corporate-governance/#Statutory • Heading the tender process of audit services OVERALL CONTROL ENVIRONMENT Reports. and making a recommendation to the Super- The Supervisory Board and the Executive The Carlsberg Breweries Group operates on the visory Board to propose to the AGM Board have overall responsibility for the same governance framework as the Carlsberg DIVERSITY the appointment of PricewaterhouseCoopers Carlsberg Group’s control environment. The Group. We refer to the description in the consoli- (PwC) as auditor for the Carlsberg Group. Audit Committee is responsible for monitoring dated financial statements of Carlsberg A/S. • Monitoring the effectiveness of the control the effectiveness of the internal control and risk The Carlsberg Group seeks to develop and environment and overseeing the progress on management systems related to the financial maintain a positive and constructive relation- THE AUDIT COMMITTEE developing a new reporting system on the ef- reporting process on an ongoing basis. ship with all of its stakeholders. For this rea- The Audit Committee is identical to the com- fectiveness of the controls over financial re- son, and also in order to reduce risk and mittee of Carlsberg A/S. In 2017, the Audit porting. The Group has a number of policies and pro- promote good governance in the Carlsberg Committee consisted of three members. The • Overseeing the target measurement of the cedures in key areas of financial reporting, in- Group, the Group has formulated policies for a Audit Committee is appointed for one year at Funding the Journey programme. cluding the Finance Policy, the Finance Man- number of key areas, such as communications, a time. All members of the Committee qualify • Reviewing that an adequate Group Internal ual, the Use of Auditors Policy, the Controller human resources, environment, business ethics, as being independent of the Company and all Audit function is in place. Manual, the Chart of Authority, the Risk Man- competition law, marketing communication, possess the relevant financial expertise. • Financial risk management. agement Policy, the Financial Risk Manage- and responsibility to customers and society in • Reviewing the risk management process. ment Policy, the Information Security and Ac- general. One of the Supervisory Board’s tasks The Audit Committee works according to Terms ceptable Use Policy, and the Code of Ethics is to oversee compliance with and regular ad- of Reference and a detailed annual meeting AUDITING and Conduct. The policies and procedures ap- justment of the policies to reflect develop- plan, which are reviewed and approved by the To safeguard the interests of the shareholder ply to all subsidiaries, and similar requirements ments both inside and outside the Group. Supervisory Board prior to the beginning of and the general public, an independent auditor are set out in collaboration with the partners in each financial year. The Supervisory Board ap- is appointed at the Annual General Meeting joint ventures. The basis of the Company’s corporate gov- proved the Audit Committee meeting plan for following a proposal from the Supervisory ernance includes the Danish Companies Act, 2018 and the current Terms of Reference Board, which is based on a recommendation The internal control and risk management sys- the Danish Financial Statements Act, IFRS, the at the Supervisory Board meeting in December from the Audit Committee. tems are designed to mitigate rather than EU Market Abuse Regulation, Nasdaq Copen- 2017. The Terms of Reference are available on eliminate the risks identified in the financial re- hagen A/S' rules for issuers of shares, the the Company’s website. porting process. Internal controls related to the

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 17

financial reporting process are established to line items that include significant accounting INFORMATION AND COMMUNICATION detect, mitigate and correct material mis- estimates, including goodwill and special items, The Group has established information and statements in the consolidated financial state- and the sales and purchase processes. communication systems to ensure that ac- ments. counting and internal control compliance is es- CONTROL ACTIVITIES tablished. The monitoring of risk and internal controls The Group has implemented a formalised fi- in relation to the financial reporting process nancial reporting process for the strategy pro- MONITORING are anchored by the reporting of the maturity cess, budget process, estimates and monthly The Audit Committee’s monitoring covers both level of the control environment using the reporting on actual performance. the internal control environment and business Company’s financial control framework. risk. Monitoring of the internal control environ- The accounting information reported by all ment is covered by the Group’s financial control In 2018, a new financial control framework Group companies is reviewed both by con- framework. The business risk is assessed and will be implemented across the Group. The trollers with regional or functional in-depth reviewed at multiple levels in the Group, in- new framework will be designed to mitigate fi- knowledge of the individual companies/ cluding monthly performance review meetings nancial risks identified and ensure reliable in- functions and by technical accounting special- at ExCom level, periodic review of control doc- ternal and external financial reporting, and it ists. umentation, controller visits and audits per- will focus on implementing more preventative formed by Group Internal Audit. automated controls instead of compensating In addition, significant Group companies detective manual controls. Additionally, the have controllers with extensive commercial project will drive control standardisation wher- and/or supply chain knowledge and insight. ever possible. The new framework will be im- plemented in all entities controlled by Carls- The entities in the Group are dependent on berg A/S. IT systems. Any weaknesses in the system controls or IT environment are compensated RISK ASSESSMENT for by manual controls in order to mitigate The risk assessment process in relation to the any significant risk relating to the financial re- financial reporting process is assessed annually porting. and approved by the Audit Committee. The outsourcing of key processes was The risk related to each accounting process initiated in 2016, and the first part of the im- and line item in the consolidated financial plementation took place in 2017. During statements is assessed based on quantitative the implementation period, the Group had and qualitative factors. The associated compensating procedures and controls in financial reporting risks are identified based place to ensure timely reporting of the on the evaluation of the likelihood of them required quality for internal and external re- materialising and their potential impact. porting purposes.

The identified areas are divided into areas with high, medium or low risk. High-risk areas are

Consolidated financial statements

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 18 CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS SECTION 1 SECTION 4 SECTION 7 OPERATING ACTIVITIES FINANCING COSTS, CAPITAL STRUC- STAFF COSTS AND REMUNERATION Income statement ...... 19 1.1 Business developments ...... 25 TURE AND EQUITY 7.1 Staff costs ...... 70 1.2 Revenue and segmentation of 4.1 Financial income and expenses...... 52 7.2 Remuneration ...... 71 Statement of comprehensive operations ...... 26 4.2 Net interest-bearing debt ...... 53 7.3 Share-based payments ...... 72 income ...... 19 1.3 Operating expenses, inventories 4.3 Capital structure ...... 53 7.4 Retirement benefit obligations and deposit liabilities ...... 27 4.4 Borrowings and cash ...... 55 and similar obligations ...... 75 Statement of financial position ...... 20 1.4 Foreign exchange risk related to 4.5 Foreign exchange risk related to earnings ...... 30 net investments and financing SECTION 8 Statement of changes in equity ...... 21 1.5 Cash flow from operating activ- activities ...... 56 OTHER DISCLOSURE REQUIREMENTS ities ...... 31 4.6 Interest rate risk ...... 58 8.1 Related party disclosures ...... 78 Statement of cash flows ...... 23 1.6 Trade receivables and on-trade 4.7 Liquidity risk ...... 59 8.2 Fees to auditors ...... 78 loans ...... 32 4.8 derivative Financial instruments ...... 60 8.3 Events after the reporting period ...... 78 Notes ...... 24 SECTION 2 SECTION 5 SECTION 9 ASSET BASE AND RETURNS ACQUISITIONS, DISPOSALS, ASSOCI- BASIS FOR ATES AND JOINT VENTURES PREPARATION 2.1 Return on invested capital ...... 35 5.1 Investment model and risks ...... 62 9.1 Significant accounting estimates 2.2 Segmentation of assets ...... 36 5.2 Acquisitions and disposals ...... 63 and judgements ...... 79 2.3 Impairment ...... 37 5.3 Cash flow effect from acquisi- 9.2 General accounting policies ...... 79 2.4 Intangible assets and property, tions and disposals...... 64 9.3 Change in accounting policies ...... 82 plant and equipment ...... 44 5.4 Non-controlling interests ...... 64 9.4 New legislation ...... 83 5.5 Associates and joint ventures ...... 65 9.5 Impact from changes in account- SECTION 3 SPECIAL ITEMS AND PROVISIONS 5.6 Assets and liabilities held for ing policies and classification ...... 84 3.1 Special items ...... 48 sale ...... 66 3.2 Provisions ...... 50 SECTION 10 3.3 Contingent liabilities ...... 50 SECTION 6 GROUP COMPANIES TAX 6.1 Corporation tax ...... 67 6.2 Deferred tax ...... 68

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 19

INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME

DKK million Section 2017 2016 DKK million Section 2017 2016 Revenue 86,942 86,957 Consolidated profit 2,088 4,925 Excise duties on beer and soft drinks etc. -25,134 -24,343 Net revenue 1.2 61,808 62,614 Other comprehensive income Cost of sales 1.3.1 -30,325 -31,195 Retirement benefit obligations 7.4 1,263 -954 Gross profit 31,483 31,419 Share of other comprehensive income in associates and joint ventures 5.5 -12 - Sales and distribution expenses 1.3.3 -18,105 -18,476 Corporation tax 6.1 -140 54 Administrative expenses -4,825 -5,172 Items that will not be reclassified to the income statement 1,111 -900 Other operating activities, net 1.3.4 178 251 Foreign exchange adjustments of foreign entities 4.1-3,842 5,843 Share of profit after tax of associates and joint ventures 5.5 231 279 Value adjustments of hedging instruments 4.1 -305 141 Operating profit before special items 8,962 8,301 Corporation tax 6.1 25 -34 Special items, net 3.1 -4,615 263 Items that may be reclassified to the income statement -4,122 5,950 Financial income 4.1 809 925 Other comprehensive income -3,011 5,050 Financial expenses 4.1 -1,583 -2,162 Total comprehensive income -923 9,975 Profit before tax 3,573 7,327

Corporation tax 6.1 -1,485 -2,402 Attributable to Consolidated profit 2,088 4,925 Non-controlling interests 499 393 Shareholder in Carlsberg Breweries A/S -1,422 9,582 Attributable to

Non-controlling interests 5.4 806 371

Shareholder in Carlsberg Breweries A/S 1,282 4,554

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 20

STATEMENT OF FINANCIAL POSITION

DKK million Section 31 Dec. 2017 31 Dec. 2016 DKK million Section 31 Dec. 2017 31 Dec. 2016

ASSETS EQUITY AND LIABILITIES

Non-current assets Equity Intangible assets 2.3, 2.4 56,579 65,521 Share capital 4.3.2 501 501 Property, plant and equipment 2.3, 2.4 23,941 25,615 Reserves -33,483 -29,370 Investments in associates and joint ventures 5.5 3,784 4,250 Retained earnings 69,654 69,449 Receivables 1.6 951 1,060 Equity, shareholder in Carlsberg Breweries A/S 36,672 40,580 Deferred tax assets 6.21,509 1,459 Non-controlling interests 2,595 2,839 Total non-current assets 86,764 97,905 Total equity 39,267 43,419

Current assets Non-current liabilities Inventories 1.3.1 3,834 3,963 Borrowings 4.2, 4.4 23,340 21,137 Trade receivables 1.6 4,624 5,493 Retirement benefit obligations and similar obligations 7.4 3,317 4,837 Tax receivables 168 278 Deferred tax liabilities 6.2 4,941 5,585 Other receivables 1.6 3,483 3,511 Provisions 3.2 3,553 3,532 Prepayments 1,026 1,136 Other liabilities 3,758 3,197 Cash and cash equivalents 4.4.2 3,462 3,502 Total non-current liabilities 38,909 38,288 Total current assets 16,597 17,883 Assets held for sale - 125 Current liabilities Total assets 103,361 115,913 Borrowings 4.2, 4.4 931 9,198

Trade payables 13,451 13,543

Deposits on returnable packaging 1.3.21,576 1,681

Provisions 3.2 534 639 Corporation tax 913 912 Other liabilities etc. 7,780 8,218 Total current liabilities 25,185 34,191 Liabilities associated with assets held for sale - 15 Total liabilities 64,094 72,494 Total equity and liabilities 103,361 115,913

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 21

STATEMENT OF CHANGES IN EQUITY

DKK million Shareholder in Carlsberg Breweries A/S Equity, shareholder in Carlsberg Non-control- Share Currency Hedging Total Retained Breweries ling Total 2017 capital translation reserves reserves earnings A/S interests equity Equity at 1 January 501 -29,080 -611 -29,691 69,770 40,580 2,839 43,419 Consolidated profit - - - - 1,282 1,282 806 2,088

Other comprehensive income Foreign exchange adjustments of foreign entities - -3,511 - -3,511 - -3,511 -331 -3,842 Value adjustments of hedging instruments - -352 46 -306 - -306 1 -305 Retirement benefit obligations - - - - 1,240 1,240 23 1,263 Share of other comprehensive income in associates and joint ventures - - - - -12 -12 - -12 Corporation tax - 41 -16 25 -140 -115 - -115 Foreign exchange adjustments of foreign entities are Other comprehensive income - -3,822 30 -3,792 1,088 -2,704 -307 -3,011 further described in section 4.1, retirement benefit obli- gations in section 7.4, corporation tax in section 6.1 and Total comprehensive income for the year - -3,822 30 -3,792 2,370 -1,422 499 -923 non-controlling interests in section 5.4. Refund to parent company for exercise of share options - - - - -36 -36 - -36 The proposed dividend of DKK 4,872 per share, in Change in expected future refunds for exercise total DKK 2,441m (2016: DKK 3,045 per share, in of share options - - - - -158 -158 - -158 total DKK 1,526m), is included in retained earnings at Share-based payments - - - - 24 24 - 24 31 December 2017.

Dividends paid to shareholders - - - - -1,526 -1,526 -738 -2,264 Dividend paid out in 2017 for 2016 amount to DKK Non-controlling interests - - - - -790 -790 -2 -792 1,526m (paid out in 2016 for 2015: DKK 1,373m), Disposal of entities ------3 -3 which is DKK 3,045 per share (2016: DKK 2,741 per Total changes in equity - -3,822 30 -3,792 -116 -3,908 -244 -4,152 share). Dividend paid out to the shareholder of Carlsberg Breweries A/S does not impact taxable income in Carls- Equity at 31 December 501 -32,902 -581 -33,483 69,654 36,672 2,595 39,267 berg Breweries A/S.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 22

STATEMENT OF CHANGES IN EQUITY

DKK million Shareholder in Carlsberg Breweries A/S Equity, shareholder in Carlsberg Share Currency Hedging Total Retained Breweries Non-control- Total 2016 capital translation reserves reserves earnings A/S ling interests equity Equity at 1 January 501 -34,910 -727 -35,637 68,281 33,145 3,742 36,887 Consolidated profit - - - - 4,554 4,554 371 4,925

Other comprehensive income Foreign exchange adjustments of foreign entities - 5,835 - 5,835 - 5,835 8 5,843 Value adjustments of hedging instruments - 12 129 141 - 141 - 141 Retirement benefit obligations - - - - -968 -968 14 -954 Corporation tax - -17 -13 -30 50 20 - 20 Other comprehensive income - 5,830 116 5,946 -918 5,028 22 5,050 Total comprehensive income for the year - 5,830 116 5,946 3,636 9,582 393 9,975 Capital increase ------1 1 Refund to parent company for exercise of share options - - - - -45 -45 - -45 Change in expected future refunds for exercise of share options - - - - 28 28 - 28 Share-based payments - - - - 50 50 - 50 Dividends paid to shareholders - - - - -1,373 -1,373 -617 -1,990 Non-controlling interests - - - - -807 -807 -597 -1,404 Disposal of entities ------83 -83 Total changes in equity - 5,830 116 5,946 1,489 7,435 -903 6,532 Equity at 31 December 501 -29,080 -611 -29,691 69,770 40,580 2,839 43,419

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 23

STATEMENT OF CASH FLOWS

DKK million Section 2017 2016 Operating profit before special items 8,962 8,301 Adjustment for depreciation and amortisation 4,569 4,734 Adjustment for impairment losses1 126 19 Operating profit before depreciation, amortisation and impairment losses 13,657 13,054 Adjustment for other non-cash items 1.5 -235 -293 Change in trade working capital 1.5 756 1,043 Change in other working capital 1.5 381 -961 Restructuring costs paid -364 -407 Interest etc. received 162 196 Interest etc. paid -565 -1,184 Corporation tax paid -1,937 -1,847 Cash flow from operating activities 11,855 9,601 Acquisition of property, plant and equipment and intangible assets -3,848 -3,814 Disposal of property, plant and equipment and intangible assets 160 223 Change in on-trade loans 1.5 40 43 Total operational investments -3,648 -3,548 Free operating cash flow 8,207 6,053 Acquisition and disposal of subsidiaries, net 5.3 268 1,969 Acquisition and disposal of associates and joint ventures, net 5.3 242 642 Acquisition and disposal of financial assets, net 10 4 Change in financial receivables 1.5 -54 -78 Dividends received 208 215 Total financial investments 674 2,752 Cash flow from investing activities -2,974 -796 Free cash flow 8,881 8,805 Shareholder in Carlsberg Breweries A/S 4.3.2 -1,526 -1,373 Non-controlling interests 4.3.2 -740 -1,015 External financing 4.4.1-5,595 -6,972 Cash flow from financing activities -7,861 -9,360 Net cash flow 1,020 -555 Cash and cash equivalents at 1 January2 2,348 2,985 Foreign exchange adjustment of cash and cash equivalents -248 -82 1 Impairment losses excluding those reported in special items, cf. section 3.1. 2 Cash and cash equivalents at 31 December2 4.4.2 3,120 2,348 Cash and cash equivalents less bank overdrafts.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 24 SECTION 1 OPERATING

ACTIVITIES

Operating profit* is a measure of our ability to enhance opera- 61.8bn 9.0bn 8.9bn tional performance through top- NET REVENUE (DKK) OPERATING PROFIT (DKK) FREE CASH FLOW (DKK) line growth while containing or Organic net revenue growth of 1%. Reported Organic operating profit growth of 8.7%, with Positively impacted by a significant working reducing costs by working more net revenue declined by 1%, impacted by dis- all three regions delivering very solid perfor- capital improvement and higher operating effectively and efficiently. posals. mances. profit before amortisation and depreciation.

A strong free cash flow allows us to return value to the share- holder, pay down debt and rein- vest in our business.

Net revenue growth (% ) Operating profit growth (%) Free cash flow (DKKbn)

10 66

0.7% 8.7% -1.4% 9 10 1% -2% 64 8

8 0% 62 6

7

4

60 6 2

58 5 0

Free operating cash flow * Operating profit is defined in section 9.2 Free cash flow

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 25

SECTION 1.1 Group financial performance Change Change BUSINESS DEVELOPMENTS Pro rata (million hl) 2016 Organic Acq., net FX 2017 Reported Beer 116.9 -3% -1% - 112.4 -4% Other beverages 21.9 2% -6% - 20.9 -4% Beer volumes declined organically by 3%, Total volume 138.8 -2% -2% - 133.3 -4% mainly impacted by the lower volumes in Rus- sia. Other beverages grew organically by 2%, DKK million driven by growth in the Nordics and Asia. Total Net revenue 62,614 1% -2% 0% 61,808 -1% volumes declined by 2% organically and 4% in Operating profit, before special items 8,301 8.7% -1.4% 0.7% 8,962 8.0% reported terms. Operating margin (%) 13.3 14.5 120bp

Reported net revenue was DKK 61,808m (2016: DKK 62,614m), a decline of 1% due to the net acquisition impact, mainly related to Operating profit increased organically by 8.7%, amortisation and impairment losses growth of ACCOUNTING POLICIES the divestment of the German wholesaler Nor- with all three regions delivering very solid per- 5%, a significant working capital improvement dic Getränke in 2017, the divestment of Carls- formance. Reported operating profit was DKK and lower interest payments. Reported figures represent the combined effect of the following three elements: organic growth, net berg Malawi in 2016 and divestments of enti- 8,962m, corresponding to a growth rate of acquisitions and foreign exchange effects. The net ties in China in both years. In organic terms, 8.0%. The minor, positive currency impact was Free cash flow amounted to DKK 8,881m acquisition effect is calculated as the effect of acqui- net revenue grew by 1%, driven by a positive more than offset by the negative impact from (2016: DKK 8,805m), driven by the strong cash sitions and divestments, including any share obtained price/mix of 3%. divestments. flow from operating activities of DKK 11,855m from increased/decreased ownership of associates and joint ventures, for a 12-month period from the against DKK 9,601m in 2016, an increase of acquisition/divestment date. The foreign exchange Cost of sales per hl increased organically by The operating margin improved by 120bp to DKK 2,254m. This increase was due to effect is the difference between the figures from the approximately 3%, mainly due to overall cost 14.5% in reported terms. stronger earnings and a positive contribution current reporting period translated at the exchange inflation and the volume decline in Eastern Eu- from working capital. rates applying to the previous reporting period and rope. the figures from the current reporting period. Organic The Group’s share of reported consolidated growth is the remaining growth that is not related to profit was DKK 1,282m (2016: DKK 4,554m). acquisitions, divestments or foreign exchange effects. Reported gross profit was DKK 31,483m Reported net profit was negatively impacted by (2016: DKK 31,419m). The solid price/mix and special items of DKK -4.6bn, mainly as a result efficiency improvements meant that the gross of the DKK 4.8bn impairment of the Baltika margin improved by 70bp to 50.9%. brand in Russia due to changed market dy- namics following the PET downsizing due to a Funding the Journey positively impacted oper- ban on individual PET bottles larger than 1.5 ating expenses, which were down 2% organi- litres, our increased focus on local and regional cally. As a percentage of net revenue, reported brands and updated assumptions on interest operating expenses declined by 70bp to 37.1%. rates. Marketing expenses as a percentage of net revenue were 9.7%, broadly in line with 2016. Free operating cash flow improved by 36%, driven by operating profit before depreciation,

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 26

SECTION 1.2 Segmentation of income statement REVENUE AND DKK million SEGMENTATION OF Carlsberg Western Eastern Not Breweries OPERATIONS 2017 Europe Europe Asia allocated Group, total Total net revenue 36,306 10,878 14,554 70 61,808 The segmentation was changed as of 1 Janu- Total cost -31,344 -8,658 -11,698 -1,377 -53,077 ary 2017, as Carlsberg Supply Company was Share of profit after tax of associates and joint ventures 182 - 49 - 231 moved from the Not allocated segment to the Operating profit before special items 5,144 2,220 2,905 -1,307 8,962 Western Europe segment because the company Special items, net -4,615 is operationally focused on this region. Central Financial items, net -774 costs not managed by Western Europe remain Profit before tax 3,573 in the Not allocated segment. Comparative fig- Corporation tax -1,485 ures have been restated accordingly. Consolidated profit 2,088 Operating margin 14.2% 20.4% 20.0% 14.5%

Not allocated net revenue, DKK 70m (2016: Carlsberg DKK 146m), consisted of DKK 1,438m (2016: Western Eastern Not Breweries DKK 1,484m) net revenue from other compa- 2016 Europe Europe Asia allocated Group, total nies and activities and DKK -1,368m (2016: Total net revenue 37,597 10,205 14,666 146 62,614 DKK -1,338m) from eliminations of sales be- Total cost -32,880 -8,383 -12,008 -1,321 -54,592 tween these other companies and the geo- Share of profit after tax of associates and joint ventures 141 10 144 -16 279 graphical segments. Operating profit before special items 4,858 1,832 2,802 -1,191 8,301 Special items, net 263 Not allocated operating profit before special Financial items, net -1,237 items, DKK -1,307m (2016: DKK -1,191m), Profit before tax 7,327 consisted of DKK -1,242m (2016: DKK Corporation tax -2,402 -981m) from other companies and activities Consolidated profit 4,925 Operating margin 12.9% 18.0% 19.1% 13.3% and DKK -65m (2016: DKK -210m) from eliminations. The increase was mainly related Geographical allocation of net revenue The DKK value of revenue in Russia was impacted by Intra-segment revenue to investments in SAIL’22 and one-off costs. the increase in the average RUB/DKK rate in 2017, while the revenue in China was impacted by the adverse DKK million 2017 2016 currency developments. DKK million 2017 2016 Denmark (Carlsberg Western Europe 50 54 Breweries A/S domi- Eastern Europe 50 40 cile) 4,400 4,445

Russia 8,052 7,755

China 7,111 7,002

Other countries 42,245 43,412 Total 61,808 62,614

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 27

SECTION 1.2 (CONTINUED) ACCOUNTING paid as a lump sum, discounts for meeting all or cer- SECTION 1.3 POLICIES tain sales targets or for exceeding targets, or pro- gressive discounts offered in step with increasing sales OPERATING REVENUE AND Revenue is generated mainly by sales of goods, roy- to a customer. alty income, porterage income, rental income from SEGMENTATION OF EXPENSES, non-stationary equipment, service fees and sales of Other discounts include listing fees, i.e. fees for listing by-products. OPERATIONS on certain shelves or in certain coolers or payment for INVENTORIES AND

a favourable store location, as such specific promo- Revenue from the sale of own-produced finished ACCOUNTING ESTIMATES tions are closely related to the volumes sold. DEPOSIT LIABILITIES goods, goods for resale (third-party products) and AND JUDGEMENTS by-products is recognised in the income statement Discounts are estimated and recognised monthly 1.3.1 COST OF SALES AND INVENTORIES The classification of duties, taxes and fees paid to lo- when all significant risks and rewards have been based on experience and expectations for sales to an cal authorities or brewery organisations etc. and of transferred to the customer and when the income can Cost of sales decreased by 3% due to continued individual customer or groups of customers. discounts and marketing-related activities requires be reliably measured and is expected to be received. production efficiency improvements, the brew- accounting estimates to be made by management. For the majority of sales transactions, the risks and Segment information ery closures in Asia and disposal of Nordic rewards are transferred to the customer on delivery. The Group’s beverage activities are segmented ac- Locally imposed duties, taxes and fees are typically Getränke as well as the organic decline in sales cording to the three geographical regions where pro- based on product type, alcohol content, consumption Royalty and licence fees are recognised when earned volume of 2%. Organically, cost of sales per hl duction takes place. These regions make up the of certain raw materials, such as glue, plastic or according to the terms of the licence agreements. Group’s reportable segments. increased by approximately 3%, mainly due to metal in caps, and energy consumption. Duties and overall cost inflation, product mix and the vol- fees are classified as either sales-related duties, Revenue is measured at the fair value of the consid- The segmentation reflects the geographical and stra- which are deducted from revenue, or as taxes and eration received. Amounts disclosed as revenue in- ume decline in Eastern Europe. tegic management, decision and reporting structure fees related to the input/use of goods in production, clude excise duties on beer and soft drinks and ex- applied by the Executive Committee for internal con- transportation, distribution etc., which are recognised clude discounts, VAT and other duties. trol and monitoring of the Group’s strategic and fi- Cost of sales as an expense in the relevant line item. The type of nancial targets. Segments are managed based on authority or organisation imposing the duty, tax or Discounts business performance measured as operating profit DKK million 2017 2016 fee as well as their objective are a key factor for the Sales reductions in the form of discounts and fees are before special items. classification. widely used in the beverage industry. Furthermore, Cost of materials 16,147 16,178

the Group grants or pays various discounts and fees Direct staff costs 1,357 1,364 Not allocated comprises income and expenses in- Customer discounts are recognised in the same period depending on the nature of the customer and busi- Machinery costs 832 873 curred for ongoing support of the Group’s overall op- as the related sales and deducted from revenue. ness. erations, strategic development and driving efficiency Amortisation and de-

programmes. The expenses include costs of running preciation 3,263 3,267 Customer discounts are based on expected accumu- Discounts comprise off-invoice discounts, volume- central functions and central marketing, including Indirect production lated sales volumes over a period of time using his- and activity-related discounts, including specific pro- global sponsorships. overheads 3,331 3,448 torical and year-to-date sales figures and other cur- motion prices offered, and other discounts. Further- Purchased finished rent information about trading with the customer. more, discounts include the difference between the The geographical allocation is made based on the goods and other costs 5,395 6,065 These calculations are performed by local manage- present value and the nominal amount of on-trade selling entities’ domicile and comprises countries indi- Total 30,325 31,195 ment in cooperation with sales managers. loans to customers and any repayment of those vidually accounting for more than 10% of the Group’s through discounts, c.f. section 1.6. consolidated net revenue as well as the domicile Management assesses the agreements with, services country. provided by and payments made to customers and to Off-invoice discounts arise from sales transactions their customers to determine the substance and where the customer immediately receives a reduction Decisions on restructurings, acquisition and divest- thereby the classification as either discounts or trade in the sales price. This also includes cash discounts ment of entities included in special items and on fi- marketing expenses. Expenses incurred for activities and incentives for early payments. nancing (interest income and expenses) and tax plan- closely related to volumes sold are classified as dis- ning (income tax) are made based on information for counts, while costs related to more general market Volume- and activity-related discounts is a broad the Group as a whole and therefore not segmented. activities are classified as trade marketing expenses. term covering incentives for customers to sustain

business with the Group over a longer time and can be related to a current campaign or a sales target measured in volumes. Examples include discounts

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 28

SECTION 1.3 (CONTINUED) The most common form of hedging is fixed- ACCOUNTING ESTIMATES ACCOUNTING AND JUDGEMENTS POLICIES OPERATING price purchase agreements in local currencies with suppliers. At least once a year, local management assesses Cost of sales comprises mainly cost of materials, whether the standard cost of inventories is a close including malt (barley), hops, glass, cans, other EXPENSES, approximation of the actual cost. The standard cost is packaging materials, and indirect production costs. INVENTORIES AND It is Group policy to fix the prices of at least revised if, during the year, it deviates by more than Purchased finished goods include cost of point-of- 70% of malt (barley) purchases for a given year 5% from the actual cost of the individual product. sale materials and third-party products sold to DEPOSIT LIABILITIES no later than at the end of the third quarter of customers. Management also assesses the impact of government the previous year. The main part of the expo- and other grants received to fund operating activities Own-produced finished goods and work in progress Inventories decreased by 3% compared with sure for the Group for 2017 was therefore on the standard cost. This includes accessing the are measured at standard cost comprising the cost of 2016. Raw materials and consumables de- hedged through fixed-price purchase agree- terms and conditions of grants received and the risk raw materials, consumables, direct labour and indir- creased by 5% as an effect of lower purchase ments entered into during 2016. Likewise, the of any repayment. ect production overheads. Indirect production over- price of grain in 2017 and higher stocks of heads comprise indirect supplies, wages and salaries, majority of the exposure for 2018 was hedged Funding and grants are recognised in the income amortisation of brands and software, as well as packaging materials in Russia in 2016. during 2017. The percentage that is hedged or statement in the same period as the activities to maintenance and depreciation of machinery, plant price-fixed is higher for Western Europe and which they relate. and equipment used for production, and costs of pro- Inventories Eastern Europe than for Asia. duction, administration and management. Indirect production overheads are calculated on the basis of relevant assumptions as to capacity utilisa- The cost of purchased finished goods, raw and pack- DKK million 2017 2016 To hedge the risk of volatile aluminium prices tion, production time and other factors pertaining to aging materials and point-of-sale materials includes Raw materials and associated with the purchase of cans, the the individual product. any costs that are directly related to bringing inven- consumables 1,625 1,716 Group’s purchase price in the majority of pur- tories to the relevant place of sale and getting them Work in progress 269 282 The calculation of the net realisable value of invento- ready for sale, for example purchase cost, insurance, Finished goods 1,940 1,965 chase agreements is variable and based on the ries is mainly relevant to packaging materials, point- freight, duties and similar costs. Total 3,834 3,963 global market price of aluminium (London of-sale materials and spare parts. The net realisable Metal Exchange, LME). The Group is thereby value is normally not calculated for beer and soft Inventories are measured at the lower of standard drinks because their limited shelf-life means that cost (own-produced finished goods) and weighted able to hedge the underlying aluminium price slow-moving goods must be scrapped instead. The average cost (other inventories), or net realisable risk. Raw and packaging material risks are associ- individual entities impacted by the current macro- value. The net realisable value of inventories is calcu- economic situation in Eastern Europe have paid spe- lated as the selling price less costs of completion and ated in particular with purchasing of cans (alu- In 2017, the majority of the aluminium price cial attention to inventory turnover and the remaining costs necessary to make the sale and is determined minium), malt (barley) and energy. The man- shelf-life when determining the net realisable value taking into account marketability, obsolescence and risk was hedged for Western Europe and East- agement of raw and packaging material risks is and scrapping. developments in expected selling price. ern Europe. The same has been done for 2018. coordinated centrally and aimed at achieving The total volume of aluminium purchased via The cost of scrapped/impaired goods is expensed stable and predictable raw and packaging ma- financial instruments was 66,424 tonnes at the within the function (line item) responsible for the loss, terial prices in the medium term and avoiding i.e. losses during distribution are included in the cost end of 2017 (2016: 66,284 tonnes). Based on capital and liquidity being tied up unneces- of distribution, while the scrapping of products due this volume, and assuming 100% efficiency, a sarily. to sales not meeting forecasts is included in sales 10% increase (decrease) in aluminium prices expenses.

would impact equity positively (negatively) by As the underlying markets for the specified DKK 93m (2016: DKK 79m). The fair values of categories of raw and packaging materials the financial instruments are specified in section vary, so does the way in which they are 4.8. hedged against price increases.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 29

SECTION 1.3 (CONTINUED) ACCOUNTING ESTIMATES 1.3.3 SALES AND DISTRIBUTION 1.3.4 OTHER OPERATING ACTIVITIES, AND JUDGEMENTS OPERATING EXPENSES NET Management assesses the local business model, con- Sales and distribution expenses declined by 2% Other operating activities are secondary to the tracts and agreements, the level of control over the EXPENSES, in reported terms and organically by 1%. The principal activities of the Group and include in- returnable packaging material and the return rate to INVENTORIES AND determine the accounting treatment of the packaging reported figure was negatively impacted by the come and expenses relating to rental proper- material as either property, plant and equipment or foreign currency translation, a decrease in lo- ties, restaurants, on-trade loans, research ac- DEPOSIT LIABILITIES inventories. gistics costs of approximately 4%, which was tivities, and gains and losses on the disposal of

driven by the disposal of entities in 2017, and intangible assets and property, plant and The deposit liability provided for is estimated based 1.3.2 DEPOSIT LIABILITIES on movements during the year in recognised deposit lower brand marketing expenses than in 2016, equipment. ON RETURNABLE PACKAGING liabilities and on historical information about return which included the UEFA EURO sponsorship. In a number of countries, the local entities have rates and loss of returnable packaging in the market Other operating activities, net as well as planned changes in packaging types. a legal or constructive obligation to take back Sales and distribution expenses returnable packaging from the market. When DKK million 2017 2016 invoicing customers, the entity adds a deposit DKK million 2017 2016 Gains and losses on dis- ACCOUNTING posal of property, plant and to the sales price and recognises a deposit lia- POLICIES Marketing expenses 5,980 6,211 equipment and intangible bility. The deposit is paid out upon return of Sales expenses 5,645 5,525 The obligation to refund deposits on returnable pack- assets 4 -59 Distribution expenses 6,480 6,740 bottles, cans etc. aging is measured on the basis of deposit price as On-trade loans, net 31 96 Total 18,105 18,476 well as an estimate of the number of bottles, kegs, Real estate, net 5 17 The deposit liabilities amounted to DKK cans and crates in circulation and expected return Research centres, net -50 -48 1,576m (2016: DKK 1,681m), while the value rates. Other, net 188 245

Total 178 251 of returnable packaging materials amounted to The accounting policy for returnable packaging capi- ACCOUNTING POLICIES DKK 1,855m (2016: DKK 2,288m). talised as property, plant and equipment is described in section 2.4. Marketing expenses consist of expenses for brand

The value of returnable packaging materials marketing and trade marketing. Brand marketing is ACCOUNTING an investment in the Group’s brands and consists of declined during 2017 as a consequence of POLICIES brand-specific investments in the development of tighter management of returnable packaging communication vehicles and the use of these to drive Gains and losses on the disposal of intangible assets and write-down of bottles following SKU re- the sale of branded products and services. and property, plant and equipment are determined as ductions. the sales price less selling costs and the carrying Brand marketing activities comprise sales campaigns, amount at the disposal date. sponsorships, advertising and in-store displays. The capitalised value of returnable packaging On-trade loans, net, comprise the effective interest materials exceeds the deposit liability because Trade marketing is promotional activities directed to- on the loans calculated on the basis of amortised cost less impairment of on-trade loans. each of the returnable packaging items circu- wards customers, such as the supply of point-of-sale materials, promotional materials and trade offers. lates a number of times in the market and the Expenses relating to research activities comprise deposit value in some markets is legally set Sales and distribution expenses comprise costs relat- research in France less grants received to fund re- lower than the cost of the returnable packag- ing to general sales activities, write-downs for bad search. The funding and grants are recognised in the income statement in the same period as the activities ing. debt losses, sales staff as well as depreciation and impairment of sales equipment and costs incurred in to which they relate. Development costs are included distributing goods sold during the year. in cost of sales.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 30

SECTION 1.4 currencies vis-à-vis EUR and USD has a posi- Net revenue by functional currency (%) FOREIGN EXCHANGE tive impact on operating profit, while deprecia- tion has a negative effect. The Group has cho- RISK RELATED TO sen not to systematically hedge the transaction EARNINGS risk in Eastern Europe to the same degree as in Western Europe due to the significant cost of A significant part of the Group’s activities takes hedging these currencies over a longer period place outside Denmark and in currencies other of time. For 2018 the Group has chosen to than DKK. Foreign exchange risk is therefore a hedge a portion of Baltika Breweries’ expenses principal financial risk for the Group and, as in USD. The volatility of the Eastern European such, exchange rate fluctuations can have a currencies will continue to affect operating significant impact on the income statement. profit measured in both DKK and local cur- 2017 2016 rency. EUR 20% RUB 13% CNY 12% EUR 21% RUB 12% CNY 11% TRANSACTION RISKS ON PURCHASES AND DKK 10% GBP 6% CHF 6% DKK 11% GBP 7% CHF 6% SALES Asia NOK 6% SEK 4% LAK 4% NOK 5% SEK 4% LAK 4% Other 19% The Group is exposed to transaction risks on The transaction risk is considered to be less Other 19% purchases and sales in currencies other than significant compared with the risk in the other the functional currency of the local entities. It regions because of the lower sales and pur- earnings in foreign currencies, but some of the Functional Change in average FX is therefore the Group’s intention to hedge 70- chases in currencies other than the functional Group’s debt is denominated in currencies in Entities in currency rate 2016 to 2017 90% of future cash flows in currencies other currencies as well as the high correlation be- which the Group generates significant earnings Countries in the than the functional currency of the entities on a tween USD and most of the Asian currencies. eurozone EUR -0.08% and cash flow. 12-month rolling basis. Russia RUB +11.30%

TRANSLATION RISK China CNY -3.60% Impact on operating profit Western Europe The Group is exposed to risk from translation United Kingdom GBP -6.90% Developments in exchange rates between DKK Hedging of the transaction risk will effectively of foreign entities into the Group’s presentation Switzerland CHF -1.60% and the functional currencies of foreign entities eliminate a significant part of the currency risk currency, DKK. Despite a decrease in the net Norway NOK -0.80% had a negative impact on operating profits Sweden SEK -2.00% on Western European entities’ operating profit revenue generated on the Russian market, the from Western Europe and Asia measured in Laos LAK -2.60% in local currency. Since a major part of the pur- Group’s single largest volatility-weighted expo- DKK, while the impact from the increase in the chases in foreign currency is in EUR, this will sure continued to be the exposure to RUB. average RUB/DKK rate had a positive impact not constitute a risk at Group level. Therefore, However, Asian currencies, such as CNY and on operating profits measured in DKK. At these hedges are effectively an economic LAK, account for an increasing part of the Group level, the positive net impact was less hedge of (parts of) the net revenue in the rele- Group’s net revenue. than 1%. vant currency, and they are accounted for as cash flow hedges, cf. section 4.8. The exposure to fluctuations in EUR/DKK is considered to be limited due to Denmark’s fixed Eastern Europe exchange rate policy towards EUR. Baltika Breweries and the other markets in Eastern Europe have expenses in both USD and The Group has chosen not to hedge the expo- EUR, and appreciation of the RUB and other sure arising from translation of revenue or

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 31

SECTION 1.5 Free cash flow increased to DKK 8,881m ACCOUNTING Other specifications of cash flow from oper- POLICIES CASH FLOW FROM (2016: DKK 8,805m), driven by the improve- ating activities ment in operating cash flow, which was, how- Cash flow from operating activities is calculated using the indirect method as the operating profit before OPERATING ever, partially offset by lower divestment activ- DKK million 2017 2016 special items adjusted for non-cash operating items, Other non-cash items ACTIVITIES ities in 2017 compared with 2016. Please refer changes in working capital, restructuring costs paid, to section 5 for a detailed description of dis- interest received and paid, and corporation tax paid. Share of profit after tax of associates and joint ven- posal of entities. tures -231 -279 Cash flow from operating activities increased Cash flow from assets held under finance leases is by DKK 2,254m to DKK 11,855m. The signifi- recognised as payment of interest and repayment of Gain on disposal of prop- erty, plant and equipment cant change compared with 2016 was due to debt. and intangible assets, net -4 59 improvement in operating profit before depre- Other items - -73 ciation, amortisation and impairment losses Total -235 -293 and trade working capital, lower cash outflow from financial items as well as the cash flow in Trade working capital 2016 being affected by an extraordinary pay- Inventories -75 -83 ment into the Group’s pension fund in the UK. Trade receivables 467 202 Trade payables, duties pay- able and deposit liabilities 364 924 Average trade working capital as a percentage Total 756 1,043 of net revenue was -13.7% (12-month aver- age), an improvement of 120bp compared with Average trade working capital Cash flow from operating activities and free Other working capital 2016, and was positively impacted by our con- (% of net revenue) cash flow (DKKbn) Other receivables 378 236 tinued efforts to optimise trade working capital. Other payables -109 -585 14 Retirement benefit obliga- The Group continues its efforts to improve cash 15 tions and other liabilities re- flow and continually looks into new initiatives. 10 12 lated to operating profit be- fore special items 137 -716 5 In some major markets, the Group uses receiv- Adjusted for unrealised for- 10 able transfer agreements to sell trade receiva- 0 eign exchange gains/losses -25 104 bles on a non-recourse basis. The cash flow -5 Total 381 -961 8 relating to trade payables was improved due to -10 the Group’s ongoing efforts to achieve better On-trade loans -15 6 Loans provided -710 -676 payment terms with suppliers. -20 Repayments 460 481 4 -25 Amortisation of on-trade -30 loans 290 238 2 -35 Total 40 43

- Financial receivables Loans and other receivables -69 -95 Trade payables incl. deposits and duties Other financial receivables 15 17 Trade working capital incl. deposits and duties Inventories Cash flow from operating activities Total -54 -78

Trade receivables Free cash flow

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 32

SECTION 1.6 ON-TRADE LOANS may have an adverse effect on earnings in the indus- EXPOSURE TO CREDIT RISK Under certain circumstances the Group grants try as a whole and where the effect cannot be allo- In 2017, 89% (2016: 89%) of the total receiva- cated to individual loans. TRADE RECEIVABLES loans to on-trade customers in France, the UK, bles were neither impaired nor past due. To re-

AND ON-TRADE Germany, Switzerland and Sweden. On-trade 1.6.1 CREDIT RISK flect the current economic situation in Eastern LOANS loans are spread across a large number of cus- Exposure to credit risk on receivables is man- Europe and Asia, an additional write-down for tomers/debtors and consist of several types of aged locally, and credit limits are set as bad debt losses was made in 2017. loan, including loans repaid in cash or through Receivables included in the deemed appropriate for the customer taking reduced discounts, and prepaid discounts. The Translated into DKK, the proportionate share statement of financial position into account the current local market condi- operating entities monitor and control these of the Group’s total receivables in Russia de- tions. loans in accordance with Group guidelines. creased to 12% at year-end 2017 (2016: 14%), DKK million 2017 2016 Trade receivables 4,624 5,493 It is Group policy to reduce the credit risk mainly due to volumes being flat and improve- Other receivables 3,483 3,511 On-trade loans recognised in other operating through prepayments or cash payments on de- ments in collection. The share of receivables in activities, net Total current livery, especially for certain categories of cus- Germany decreased to 8% at year-end 2017 receivables 8,107 9,004 tomers in each country. The local entities as- (2016: 10%), mainly due to the sale of Nordic Non-current DKK million 2017 2016 sess the credit risk and whether it is appropriate Getränke. The share of receivables in Poland receivables 951 1,060 Interest and amortisa- increased to 8% at year-end 2017 (2016: 5%), tion of on-trade loans 64 81 and cost-effective to hedge the credit risk by Total 9,058 10,064 due to onboarding of new customers. The Losses and write- way of credit or bank guarantees, credit insur- downs on on-trade ance, conditional sale etc. Such security is change in the remaining countries was not sig- loans -33 15 The Group’s non-current receivables consist taken into account when assessing impairment nificant. On-trade loans, net 31 96 mainly of on-trade loans. Non-current receiv- losses. Security is primarily received from on- ables fall due more than one year from the end trade customers. The impairment losses at 31 December 2017 of the reporting period, with DKK 188m (2016: related to several minor customers that have – The average effective interest rate on loans to DKK 180m) falling due more than five years On-trade loans are usually repaid through dis- in different ways – indicated that they do not the on-trade was 4.1% (2016:4.8%). from the reporting date. counts during the continuing sales relationship expect to be able to pay their outstanding bal-

with the individual customer, which is reflected ances, mainly due to adverse economic devel- ACCOUNTING ESTIMATES opments. Receivables by origin AND JUDGEMENTS in the repayment scheme and the discounting of the loans. Consequently, there are no signif- DKK million 2017 2016 On-trade loan agreements are typically complex and cover several aspects of the relationship between the icant on-trade loans past due. Sale of goods and parties. Management assesses the recognition and services 4,203 5,022 classification of income and expenses for each of On-trade loans 1,251 1,370 The credit risk on on-trade loans is usually re- these agreements, including the allocation of pay- duced through collateral and pledges of on- Other receivables 3,604 3,672 ments from the customer between revenue, dis- Total 9,058 10,064 counts, interest on the loan (other operating activi- trade movables (equipment in bars, cafés etc.).

ties) and repayment of the loan. The fair value of the pledged on-trade mova-

bles cannot be estimated reliably but is as- The carrying amount of receivables approxi- Management also assesses whether developments of sessed to be insignificant, as the movables mates their fair value. For on-trade loans, the importance to the on-trade could indicate impairment of on-trade loans in a market in general. Such devel- cannot readily be used again. fair value is calculated as discounted cash flows opments include changes in local legislation, which using the interest rate at the reporting date.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 33

SECTION 1.6 (CONTINUED) In assessing credit risk, management analyses the Derecognition of groups of receivables, for example in The market interest rate is used as the discount rate, need for impairment for bad debt losses due to cus- business combinations or other structured transac- corresponding to the money market rate based on TRADE RECEIVABLES tomers’ inability to pay. The financial uncertainty as- tions, is based on management’s judgement of con- the maturity of the loan with the addition of a risk sociated with impairment of bad debt losses is usually tractual terms and other factors related to the trans- premium. The effective interest on these loans is rec- AND ON-TRADE considered to be limited. However, if the ability to action. ognised in other operating activities, net. The amorti- pay deteriorates in the future, further impairments sation of the difference between the discount rate LOANS may be necessary. and the effective interest rate is included as a dis- ACCOUNTING count in revenue. Trade receivables and on-trade loans Impairment losses are based on an individual review POLICIES of the need for impairment, taking into consideration Impairment losses are calculated as the difference (broken down by country) Receivables are recognised initially at fair value and the customers’ creditworthiness and expected ability between the carrying amount and the net realisable subsequently measured at amortised cost less im- to pay, customer insolvency or anticipated insolvency, value, including the expected net realisable value of pairment losses 2017 and past due amounts as well as collateral received. any collateral provided.

When no objective indication of individual impairment Trade receivables comprise sale of invoiced goods exists, management assesses the need to recognise and services as well as short-term on-trade loans to the impairment for a portfolio of receivables based on customers. Other receivables comprise VAT receiva- customer segments, historical information on pay- bles, loans to partners, associates and joint ventures, (2016) ment patterns, terms of payment and concentration interest receivables and other financial receivables. maturity, as well as information about the general

economic situation in the markets/countries. The

portfolios are based on on-trade and off-trade cus- Regarding the on-trade loans, any difference be- tomers, and on-trade receivables and loans. tween the present value and the nominal amount at

the loan date is treated as a prepaid discount to the With regard to the on-trade loans, the individual customer, which is recognised in the income state- Group companies manage and control these loans as ment in accordance with the terms of the agreement. well as standard trade credits in accordance with Russia 12% (14%) UK 11% (10%) Group guidelines. France 7% (6%) Switzerland 9% (9%) Germany 8% (10%) Poland 8% (5%) Sweden 4% (4%) China 1% (2%) Other 40% (40%)

ACCOUNTING ESTIMATES AND JUDGEMENTS

Ageing of receivables and on-trade loans Development in impairment losses on receivables

DKK million DKK million 2016 Net carrying Neither Past due Past due Past due Trade On-trade Other 2017 receivables loans receivables Total Total amount impaired less than between 30 more than 2017 at 31 Dec. nor past due 30 days and 90 days 90 days Impairment at 1 January -734 -258 -20 -1,012 -1,043 Sale of goods and services 4,203 3,683 223 99 198 Impairment losses recognised -266 -59 - -325 -290 On-trade loans 1,251 1,189 1 7 54 Realised impairment losses 119 41 - 160 108 Other receivables 3,604 3,207 13 179 205 Reversed impairment losses 42 27 11 80 99 Disposal of entities/transfers 44 12 -2 54 114 Total 9,058 8,079 237 285 457 Impairment at 31 December -795 -237 -11 -1,043 -1,012 Total 2016 10,064 9,001 385 340 338

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 34 SECTION 2 ASSET BASE AND RETURNS

Maximising return on invest- ments is key in delivering sus- -4.8bn 7.9% tainable value to the share- IMPAIRMENT (DKK) ROIC holder. Return on invested capital Further impairment of brands, primarily Bal- Increased by 120bp and continues to be a key (ROIC) analyses all investments tika, as consumer trends in Russia are shifting focus area for the Group. throughout the value chain and is from national brands to local and regional a key measure in ensuring brands, leading to increased strategic focus on the proper basis for decision- other brands in the Baltika Breweries portfolio. making.

The asset base represents the total investment in intangible as- Asset base (DKKm) Return on invested capital (ROIC) sets and property, plant and (%) equipment and accounts for the 9 most significant part of the total 3,469 -4,769 invested capital. 91,136 -4,569 8 -4,747

80,520 7

6

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 35

SECTION 2.1 Return on invested capital (ROIC) increased by The negative impact on total assets from for- As the impairment loss on the Baltika brand RETURN ON 120bp to 7.9% (2016: 6.7%). ROIC excluding eign exchange rates is attributed to Russia, was recognised at year-end, it did not have a goodwill increased by 350bp to 17.3% (2016: DKK 2.6bn, and China, DKK 1.1bn, compared full-year impact on the average invested capi- INVESTED CAPITAL 13.8%). with the DKK value they would have had if tal for 2017 but will have full impact on the they had been translated at the exchange rates average invested capital for 2018. If the im- The calculation of ROIC uses operating profit ROIC was impacted by an increase in operating applied at year-end 2016. pairment had been recognised at 1 January before special items adjusted for tax using the profit before special items adjusted for effective 2017, ROIC would have been 8.4% and ROIC effective tax rate, and invested capital including tax and the lower average invested capital, excluding goodwill would have been 19.7%. assets held for sale and trade receivables sold, both having a positive impact. and excludes contingent considerations and In 2017, goodwill decreased, primarily due to corporation tax. The calculation changed from Invested capital was affected by a decrease in foreign exchange impact, cf. section 2.4. 1 January 2017, and the comparative figures total assets, primarily attributable to changes have been restated accordingly. in foreign exchange rates as well as the DKK 4.8bn impairment of the Baltika brand, cf. sec- tion 2.3.

Invested capital CapEx and amortisation/ depreciation (DKKbn)

DKK million 2017 2016 6 Total assets 103,361 115,913

5 Less Deferred tax assets -1,509 -1,459 Interest receivables, fair value of hedging instruments, receivables sold and financial 4 receivables 11 54 Cash and cash equivalents -3,462 -3,502 3 Assets included 98,401 111,006 Trade payables -13,451 -13,543 2 Deposits on returnable packaging -1,576 -1,681 Provisions, excluding restructurings -3,594 -3,510 1 Deferred income -697 -935 Other liabilities, excluding deferred income, interest payable and fair value of hedging 0 instruments -6,619 -6,927 Liabilities offset -25,937 -26,596 Invested capital 72,464 84,410 CapEx Goodwill -42,291 -44,658 Amortisation and depreciation Invested capital excluding goodwill 30,173 39,752

Invested capital, average 80,068 82,748

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 36

SECTION 2.2 Not allocated comprises entities that are not Goodwill and brands with indefinite useful life SEGMENTATION business segments and eliminations of invest- allocated by segment are specified in section ments in subsidiaries, receivables, loans etc. 2.3. OF ASSETS Non-current segment assets comprise intangi- Geographical allocation The Group’s assets are segmented on the basis ble assets and property, plant and equipment of non-current assets of geographical regions in accordance with the owned by the segment/country, even if the in- management reporting for 2017, cf. section come is also earned outside the segment/ DKK million 2017 2016 1.2. country that owns the asset. Non-current as- sets also comprise non-current financial assets Denmark (Carlsberg Breweries A/S' Invested capital in Eastern Europe and Asia other than financial instruments and deferred domicile) 3,513 4,257 was affected by changes in foreign exchange tax assets. Russia 24,949 32,298 rates and disposal of Chinese entities. All three China 14,466 15,725 regions delivered ROIC improvement, with par- Other countries 41,376 43,106 ticular strong growth in Asia. Total 84,304 95,386

Segmentation of assets etc.

DKK million Carlsberg Western Eastern Not Breweries 2017 Europe Europe Asia allocated Group, total Invested capital, cf. section 2.1 28,638 25,570 19,311 -1,055 72,464 Invested capital excluding goodwill, cf. section 2.1 13,489 11,542 6,197 -1,055 30,173 Acquisition of property, plant and equipment and intangible assets 1,837 716 1,212 83 3,848 Amortisation and depreciation 1,872 761 1,311 625 4,569 Impairment losses 107 4,820 -113 - 4,814 Return on invested capital (ROIC) 12.8% 5.4% 10.3% - 7.9% Return on invested capital excluding goodwill (ROIC excl. goodwill) 26.6% 10.2% 31.2% - 17.3%

2016 Invested capital, cf. section 2.1 29,169 33,460 21,838 -55 84,410 Invested capital excluding goodwill, cf. section 2.1 13,955 18,284 7,568 -55 39,752 Acquisition of property, plant and equipment and intangible assets 1,920 454 1,244 196 3,814 Amortisation and depreciation 1,971 737 1,352 674 4,734 Impairment losses 11 53 1,162 - 1,226 Return on invested capital (ROIC) 11.8% 4.8% 8.6% - 6.7% Return on invested capital excluding goodwill (ROIC excl. goodwill) 23.8% 8.8% 23.2% - 13.8%

Segmentation of assets and invested capital in Carlsberg Breweries Group is different from the beverages, total segment in the Carlsberg Group, due to the goodwill and brands recognised as part of the acquisition of the non-controlling interest in Carlsberg Breweries A/S from Orkla in 2004.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 37

SECTION 2.3 brands are based on an assessment of their losses on brands amounting to DKK 4,847m performance of Baltika Breweries remains IMPAIRMENT value in use. (2016: DKK 867m). solid, although the Baltika brand’s share of volumes sold is expected to decrease slightly. In connection with impairment testing, During the year, impairment losses of DKK The change in brand strategy along with ad- Intangible assets, property, plant and equip- management reassesses the useful life and re- 183m relating to property, plant and equip- justments to the long-term expectations for ment, and investments in associates and joint sidual value of assets with indications of im- ment were recognised as a result of restructur- key macroeconomic assumptions led to a reas- ventures are tested for impairment if an event pairment. ings and other events. sessment of the expected future growth of the or circumstance indicates that the carrying Baltika brand. This resulted in the recoverable amount may not be recoverable. 2.3.1 IMPAIRMENT In addition, the Group recognised reversal of amount being lower than the carrying amount.

In 2017, the impairment tests of goodwill and impairments in Eastern Assets of other intangi- The brand was therefore written down by DKK Tests for impairment of goodwill and brands brands with indefinite useful life were prepared ble assets amounting to DKK 80m and of plant 4,800m to the lower recoverable amount. with indefinite useful life are performed at least at the reporting date. Based on the tests per- and equipment amounting to DKK 136m. annually. The impairment tests of goodwill and formed, the Group recognised impairment The recoverable amount of the brand was de- Total impairment losses, net, recognised in termined based on its value in use. A pre-tax 2017 amounted to DKK 4,814m (2016: DKK discount rate of 11.2% was used in the calcula- 1,226m). tion (2016: 9.8%). The brand had a carrying Impairment of goodwill, brands and other non-current assets amount after impairment of DKK 6,425m as at BALTIKA BREWERIES (RUSSIA) 31 December 2017 (2016: DKK 12,136m). DKK million 2017 2016 In recent years, the Russian beer market has experienced a continuous decline caused by The write-down was the second in three years. Brands and other intangible assets very challenging macroeconomic conditions, The first followed the review of expected future Baltika brand, Baltika Breweries, Russia 4,800 - duty increases and locally imposed market re- growth that took place in the autumn of 2015 Land use rights (reversal of impairment), Eastern Assets, China -80 - strictions. As expected, in 2017 the market and resulted in the brand being written down Brands and land use rights, Chongqing Brewery Group, China - 846 continued the decline primarily as a result of by DKK 4,000m. However, the recent develop- Other brands 47 67 the restrictions imposed on the sale of beer in ment shows a bigger impact on the Baltika Other intangible assets - 7 PET bottles larger than 1.5 litres, which had brand from the PET downsizing and change in Total 4,767 920 previously accounted for more than 20% of consumer trends than was expected in the

market volumes. growth rate applied in the impairment test in Property, plant and equipment 2015. The combined effect of these trends has Plant, machinery and equipment, Aldaris, Latvia 40 - Consumer trends in Russia have indicated a Machinery and equipment, Westen Europe and Asia 124 1 been incorporated into the recent impairment shift away from national and international Plant, machinery and equipment (reversal of impairment), Eastern Assets, China -136 - test. Plant, machinery and equipment, Bihar, India - 160 brands towards local and regional brands re- Plant, machinery and equipment, Chongqing Brewery Group, China - 148 sulting in a loss of market share for Baltika Impairment of property, plant and equipment Plant, machinery and equipment, Xinjiang Wusu Group, China - -15 Breweries among others to local and regional in Russia in 2017 was a consequence of re- Machinery and equipment, Carlsberg UK - 2 market participants. This trend is expected to structuring and process optimisations. Breweries and brewery equipment , Baltika Breweries, Russia 19 10 continue in the long term, which has led to an Total 47 306 adjustment of the Baltika Breweries brand Total impairment losses 4,814 1,226 strategy to increase focus on the local and re- Of which recognised in special items, cf. section 3.1 4,688 1,207 gional brands within the portfolio. The overall

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 38

SECTION 2.3 (CONTINUED) down in 2015. As a result, impairments of DKK ACCOUNTING ESTIMATES The following groups of CGUs are considered signifi- AND JUDGEMENTS 216m were reversed at the end of 2017, cant compared with the total carrying amount of IMPAIRMENT goodwill: Identification of cash-generating units equalling the carrying amount of the assets • Western Europe The Group’s management structure reflects the geo- less subsequent depreciation and amortisation • Eastern Europe CHONGQING BREWERY GROUP (CHINA) graphical segments, cf. section 1.2, and decisions are • China, Malaysia and Singapore In recent years, Chongqing Brewery Group has that would have been recognised, carried out by the regional managements responsible • Indochina for performance, operating investments and growth experienced a significant decline in the volumes initiatives in their respective regions. OTHER IMPAIRMENTS Brands from its local mainstream brands. The decline In 2017, the performance of a local Finnish Cash flows specific to the international and regional was primarily the result of a general decline in There is a significant degree of vertical integration of brands are generated across many CGUs and these brand was significantly below expectations. the production, logistics and sales functions, aimed at Chinese beer volumes, accelerated premi- may not be identical to the groups of CGUs to which The growth expectations were therefore reas- supporting and promoting optimisations across the umisation to the benefit of Tuborg, and closure goodwill is allocated. Cash flows for brands are sep- Group or within regions. The regional integration sessed, resulting in the remaining carrying arately identifiable, and these core assets are tested and disposal of non-essential breweries, which within planning, procurement and sourcing between amount of DKK 47m being written down. individually for impairment. This test is performed in led to a write-down of the brands of DKK countries has increased the volume of intra-group addition to the test for impairment of goodwill. transactions and impacted the allocation of profits. 800m in 2016 (2015: DKK 400m). Properties on the former brewery site in Al- The following brands have been considered significant Assets, other than goodwill and brands with regional daris, Latvia, were impaired by DKK 40m as a compared with the total carrying amount of brands In 2017, the brands performed slightly better and global presence, are allocated to individual cash- result of a decline in their recoverable amount. with indefinite useful life: than projected in 2016 and the expected future generating units (CGUs), being the level at which the • Baltika brand assets generate largely independent cash inflows. As growth also remains slightly better. In 2016, the DKK 160m impairment of prop- the Group primarily operates with local sales and Corporate assets production organisations, the cash inflows are gener- erty, plant and equipment in Carlsberg India The Group has identified capitalised software relating In 2016, six breweries were disposed of or ated mostly on a national basis, and the CGUs are was the consequence of the implementation of to the Group’s ERP systems as corporate assets, and closed, resulting in write-downs of land use therefore usually identified at country level. as such, these are peripheral to the generation of a state-wide ban on the production and sale of rights as well as plant, machinery and equip- cash inflow. The Group’s ERP landscape is closely alcohol in Bihar. In connection with acquisitions and the related pur- ment to their recoverable amounts. In total, linked to the internal management structure, and chase price allocation, cash inflows are assessed and therefore the identified assets are tested for impair- impairment losses of DKK 194m were recog- the determination of CGU allocation is made within SIGNIFICANT AMOUNTS OF GOODWILL ment at the CGU level to which goodwill is allocated. nised in special items. 12 months from the date of acquisition. AND BRANDS

Property, plant and equipment Goodwill and brands with indefinite useful life Goodwill EASTERN ASSETS (CHINA) Property, plant and equipment are tested for impair- related to Baltika Breweries, Kronenbourg, Goodwill does not generate largely independent cash ment when indications of impairment exist. Manage- Two breweries that were impaired in prior inflows on its own and is therefore allocated to the Chongqing Brewery Group and the acquisition ment performs an annual assessment of the assets’ years have been redesignated from only sup- level at which it is monitored for internal manage- of the 40% non-controlling interest in Carlsberg future application, for example in relation to changes ment purposes. This would normally be at regional or plying their local markets to primary producers in production structure, restructurings or closing of Breweries A/S each account for 10% or more sub-regional level, each level consisting of multiple of the international brands supporting the “Big breweries. The impairment test is based on the higher of the total carrying amount of goodwill and CGUs. of fair value less cost to sell, if such a value can be Cities” strategic initiative in China. Investments brands with an indefinite useful life at the re- established, and value in use. Value in use is assessed in new production equipment have been ap- Goodwill allocated to CGUs that are less integrated in porting date. proved and will increase the capacity in 2018. regions or sub-regions is tested as part of those CGUs. However, these CGUs are not considered sig-

nificant compared with the total carrying amount of The change in use of the two breweries is ex- goodwill. pected to generate future cash flows resulting in the recoverable amount exceeding that of the carrying amount of land use rights and plant and equipment had it not been written

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 39

SECTION 2.3 (CONTINUED) adjusted for any risk specific to the asset, if relevant factors relevant for the individual CGU. The es- The region is generally characterised by well- to the applied calculation method. timated cash flows are aggregated at the level established retail structures and a strong tradi- IMPAIRMENT Impairment of goodwill and brands, significant im- of the group of CGUs to which goodwill is allo- tion of beer consumption. The share of on- based on budget and target plan cash flows gener- pairment losses on property, plant and equipment, cated, observing eliminations of intra-group trade varies between markets but the weak ated by the CGU. The assessment is based on the associates and joint ventures, and impairment losses cash flows. macroeconomic environment of recent years arising on significant restructurings of processes and lowest CGU affected by the changes that indicate im- has led to a shift from on-trade to off-trade fundamental structural adjustments are recognised as pairment. The discount rate is a WACC that reflects The key assumptions for projecting the cash consumption. the risk-free interest rate with the addition of a risk special items. Minor impairment losses are recognised premium associated with the particular asset. in the income statement in the relevant line item. flows for the groups of CGUs that are consid- ered significant compared with the total carry- The Group’s focus for Western Europe is on im- Impairment of goodwill is not reversed. Impairment of Associates and joint ventures ing amount of goodwill are forecast as stated proving margins through the initiatives in the Management performs an impairment test of invest- other assets is reversed only to the extent of changes below. The growth rate for the forecast period Funding the Journey programme, which are ments in associates and joint ventures when indica- in the assumptions and estimates underlying the im- tions of impairment exist, for example due to loss- pairment calculation. Impairment is only reversed to is the compound annual growth rate for the now embedded in the business, and on achiev- making activities or major changes in the business the extent that the asset’s new carrying amount does three-year forecast period. ing the SAIL’22 strategic priorities, including not exceed the carrying amount of the asset after environment. The impairment test is based on value value management, supply chain efficiencies in use assessed from budget and target plan cash amortisation/depreciation had the asset not been Key assumptions and operating cost management. flows from the associate or joint venture and related impaired. assets that form an integrated CGU. The discount Forecast Terminal rate reflects the risk-free interest rate with the addi- 2.3.2 IMPAIRMENT TEST OF GOODWILL period period Pre-tax dis- The average growth in cash flow of -5% in the 2017 growth growth count rate tion of a risk premium associated with the particular The carrying amount of goodwill forecast period reflects the significant risk ad- investments. allocated to groups of CGUs justments included in the forecast to account Western for the estimation uncertainty related to the Europe -5% 0.3% 1.2% DKK million 2017 2016 ACCOUNTING Eastern benefits expected from the strategic initiatives POLICIES Western Europe 15,149 15,213 Europe -9% 4.0% 8.1% from SAIL’22. Eastern Europe 14,028 15,175 China, Goodwill and brands with indefinite useful life are China, Malaysia Malaysia and subject to an annual impairment test, carried out ini- EASTERN EUROPE and Singapore 9,014 9,591 Singapore -4% 1.0% 4.4% tially before the end of the year of acquisition. The Group’s two main markets in the region are Indochina 3,531 4,072 Indochina -2% 0.8% 4.3% Russia, which accounts for around 67% of re- The carrying amount of goodwill and brands with Significant groups of gional beer volumes, and Ukraine, which ac- indefinite useful life is tested for impairment at the CGUs 41,722 44,051 WESTERN EUROPE counts for around 21%. The Russian beer mar- level where cash flows are considered to be gener- Other, Asia 569 607 The region primarily comprises mature beer ated largely independently. This is at either CGU level ket has been under significant pressure in the Total 42,291 44,658 markets. While market volumes tend to be flat or as a group of CGUs. All assets are tested for im- past decade, more recently due to challenging pairment if an event or circumstance indicates that or slightly declining, the overall value of the macroeconomic conditions and a ban on indi- the carrying amount may not be recoverable. If an In 2017 and 2016, significant groups of CGUs repre- market has seen a positive, albeit small, devel- asset’s carrying amount exceeds its recoverable vidual PET bottles larger than 1.5 litres. sented 99% of the total carrying amount. opment in recent years. This has been driven amount, an impairment loss is recognised in the in- come statement. The recoverable amount is the by slightly improving beer category dynamics PROJECTIONS OF CASH FLOW higher of the asset’s fair value less costs of disposal because of innovations, increased interest in Cash flows are determined for each individual and its value in use. craft & speciality beers and alcohol-free beer CGU. When market dynamics and macroeco- offerings, and an overall improved category Value in use is measured with reference to the future nomic factors indicate significant changes, cash net cash flows expected to be generated by the CGU perception. flows are assessed and determined based on or group of CGUs and discounted by a discount rate

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 40

SECTION 2.3 (CONTINUED) volatile macroeconomic situation. The growth account for the estimation uncertainty related The risk-free interest rates used in the impairment is projected in nominal terms and therefore to the volatility of emerging markets in the re- tests are based on observed market data. Please refer IMPAIRMENT to the description of discount rates in section 2.3.3. does not translate into cash flow at the same gion and the uncertainty related to the devel- In recent years, the modern off-trade, consist- growth rate in the Group’s presentation cur- opment in beer consumption, in particular in The key assumptions on which management bases its ing of hypermarkets and supermarkets, has rency, DKK. China. The growth is projected in nominal cash flow projections are: • Volumes grown significantly and now accounts for ap- terms and therefore does not translate into • Sales prices proximately 65% of the off-trade in Russia. ASIA cash flow at the same growth rate in the • Input costs Another growing channel is the so-called DIOT The importance of Asia for the Group has in- Group’s presentation currency, DKK. • Operating investments – draught in off-trade – which is estimated to creased significantly over the past decade, dur- • Terminal period growth account for around 10% of the market. ing which the Group has expanded its presence The assumptions are determined at CGU level in the in the region, both organically and through ac- ACCOUNTING ESTIMATES AND JUDGEMENTS budget and target plan process, and are based on The Group’s share of the beer profit pool in quisitions. past experience, external sources of information and Russia significantly exceeds our volume market Goodwill industry-relevant observations for each CGU. Local share of around 35%. The Ukrainian beer mar- The Asian markets are very diverse but offer The impairment test of goodwill is performed for the conditions, such as expected development in macroe- group of CGUs to which goodwill is allocated. The conomic and market conditions specific to the individ- ket has also been in decline due to the severe considerable prospects for value growth, un- group of CGUs is determined based on the manage- ual CGUs, are considered. The assumptions are chal- macroeconomic slowdown. derpinned by young populations, urbanisation, ment structure for regions or sub-regions at the level lenged and verified by management at the regional or rising disposable income levels, growing econ- at which goodwill is monitored. The structure and sub-regional level at which goodwill is tested for im- The focus for Eastern Europe is to mitigate the omies and, in some markets, relatively low per groups of CGUs are reassessed every year. The test pairment. for impairment of goodwill is based on the assess- negative earnings impact from the weakening capita beer consumption. However, as many ment of the recoverable amount calculated as the The budget and target plan process takes into ac- currencies and the continued market decline in Asian markets are emerging markets, develop- value in use. The value in use is the discounted value count events or circumstances that are relevant in or- the region. Actions include a number of ment is subject to volatility. of the expected future risk-adjusted cash flows. der to reliably project the short-term performance of each CGU. Examples include significant campaign ac- changes in our commercial agenda and priori- Key assumptions tivities (for example UEFA EURO), changes in excise ties as well as a meticulous focus on costs and Both the on-trade and off-trade channels are To determine the value in use, the expected cash flow duties etc., which may each have an observable efficiencies. characterised by a strong traditional outlet approach is applied. This involves developing multiple short-term impact but are of a non-recurring nature. segment but with the modern outlet segment probability-weighted scenarios to reflect different Given the short-term nature of such events and cir- cumstances, they are not taken into consideration Management expects the current macroeco- growing in most markets. outcomes in terms of timing and amount of expected future cash flow. The expected future cash flow is when estimating the terminal period growth rate. nomic situation and developments to continue based on the budget and target plans for the next in the short term with inflation stabilising at the The Group’s focus for Asia is to continue the three years. Cash flows beyond the three-year period Volumes current level and, in the medium to long term, growth trajectory in the region. Activities are extrapolated using the terminal period growth Projections are based partly on past experience and partly on external market data, and take into consid- interest rates are expected to decline and then include the continued expansion of our interna- rate. eration planned commercial initiatives, including tional premium brands, in particular Tuborg, stabilise at a level lower than currently ob- The probability weighting applied is based on past spend on marketing and sponsorships, and the ex- served in the market. This will ease the pres- and the strengthening and premiumisation of experience and the uncertainty of the prepared pected impact of such initiatives on consumer de- sure on profitability from input costs denomi- our local power brands in combination with a budget and target plan cash flows. mand. The projections are, if relevant, adjusted for the expected changes in the level of premiumisation. nated in foreign currencies. continued focus on costs and efficiencies. Potential upsides and downsides identified during the No changes in market shares are assumed in the me- budget process and in the daily business are reflected dium or long term. The average growth in cash flow of -9% in the The average growth in cash flow of -3% in the in the future cash flow scenarios for each CGU. forecast period reflects the significant risk ad- forecast period reflects the significant risk ad- justments included in the forecast to account justments included in the projections to The risk-adjusted cash flows are discounted using a discount rate reflecting the risk-free interest rate for for the estimation uncertainty related to the each CGU with the addition of a spread.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 41

SECTION 2.3 (CONTINUED) In the long term, projections follow the level of infla- Key assumptions tion unless long-term contracts are in place. Cash flows for larger individual brands usually The key assumptions on which management has IMPAIRMENT based its cash flow projection include the royalty Operating investments correlate with the overall development in the rate, the expected useful life, revenue growth and a Demographic expectations general to the industry, Projections are based on past experience of the level regions explained in section 2.3.2 on impair- theoretical tax amortisation benefit. such as the development in population, consumption of necessary maintenance of existing production ca- ment of goodwill, but from time to time con- levels, generation-shift patterns, rate of urbanisation pacity, including replacement of parts. This also as well as macroeconomics etc., are also taken into sumer trends or a strategic focus on one brand Expected useful life includes planned production line overhauls and Management has assessed that the value of brands consideration for medium- and long-term projec- improvements to existing equipment. Non-contracted changes relative to a portfolio of brands, as is tions. with indefinite useful life can be maintained for an capacity increases and new equipment are not the case in for example Baltika Breweries and indefinite period, as these are well-established brands included. Events and circumstances can have a short-term im- Chongqing Brewery Group. in their markets, some of which have existed for cen- pact on the timing of volumes entering circulation. turies. The beer industry is characterised as being very Terminal period growth stable with consistent consumer demand and a pre- This can be affected by excessive stocking related to The assessment of cash flows for individual an increase in excise duties, campaign activities and Growth rates are projected to be equal to or below dictable competitive environment, and is expected to brands includes considering expected price de- be profitable for the foreseeable future. Control of the the timing of national festivals, for example Chinese the expected rate of general inflation and assume no velopments, expected developments in market brands is legally established and is enforceable indef- New Year. Such short-term effects are not material nominal growth. The projected growth rates and the to volume projections and therefore do not impact size and consumption as well as how each initely. applied discount rates are compared to ensure a sen- the long-term projections. brand is expected to be utilised as part of a sible correlation between the two. In management’s opinion, the risk of the useful life of portfolio, including considering in which de- these brands becoming finite is minimal, primarily Sales prices mand spaces the brand plays a key role. because of their individual market positions and be- The level of market premiumisation and the locally 2.3.3 IMPAIRMENT TEST OF BRANDS available portfolio are key drivers in identifying price cause current and planned marketing initiatives are expected to sustain the useful life of the brands. points. When planning pricing structures, factors in- cluding price elasticity, local competition and inflation Brands with indefinite useful life ACCOUNTING ESTIMATES Revenue growth expectations can also impact the projection. AND JUDGEMENTS At the time of acquisition of any individual brand, a DKK million 2017 2016 Increases in excise duties are typically passed on to Brands revenue growth curve is forecasted based on a long- Baltika brand 6,425 12,136 the customers with a delay of a few months. Since The test for impairment of brands is performed using term strategic view of the risk and opportunities rele- the increase is a pass-through cost and thereby com- Significant brands 6,425 12,136 the relief from royalty method and is based on the vant to the brand. The curve is forecasted for a 20- pensated for by price increases at the time of imple- expected future cash flows generated from the roy- year horizon. This horizon reliably reflects the lengthy mentation, it does not impact the long-term sales alty payments avoided for the individual brand for the process of implementing brand strategies to support a In 2017, significant brands represented 52% (2016: 66%) price growth and is therefore not taken into consider- next 20 years and projections for subsequent years. brand occupying its intended place in the Group’s of the total carrying amount of brands with indefinite ation in the long-term projections unless circum- portfolio. The forecast period applied is comparable useful life. stances specifically indicate otherwise. No changes to The risk-free cash flows are discounted using a dis- with the common term of the majority of licence count rate reflecting the risk-free interest rate with agreements to which the Group is party. duties in the short or medium term are taken into Other brands comprise a total of 17 brands that are not the addition of the risk premium associated with the consideration unless there is a firm plan to introduce considered individually material compared with the total individual brand. In the local markets, the product portfolio usually changes. carrying amount. consists of local power brands and international pre-

mium brands. When projecting revenue growth for Input costs PROJECTIONS OF CASH FLOW Input costs in the budget and target plans are based Brands are tested for impairment as separate on past experience and on: • Contracted raw and packaging materials CGUs across regions and sub-regions, and cash • Contracted services within sales, marketing, flows are determined for each individual brand Key assumptions production and logistics in the budget. When market dynamics or mac- Average reve- Terminal Pre-tax Post-tax • Planned commercial investments 2017 nue growth period growth discount rate discount rate roeconomic factors indicate significant changes, • Cost optimisations not related to restructurings Baltika brand 3% 4.0% 11.2% 9.8% • Expected inflation cash flows are reassessed based on factors rel- Chongqing Brewery Group brands -2% 2.0% 10.4% 8.1% evant to the individual brand.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 42

SECTION 2.3 (CONTINUED) Royalty rate able to the Group’s investments in the individual mar- point in the real interest rate applied as the long-term Royalties generated by a brand are based on the kets. growth expectation in the impairment test to 2.5%. IMPAIRMENT Group’s total income from the brand and are earned globally, i.e. the income is also earned outside the Interest rates applied in Eastern Europe The impairment test of the Baltika brand is sensitive local brands, in addition to its commercial strength – CGU that owns the brand. If external licence agree- In recent years, the macroeconomic situation deteri- to changes in the real interest rate. Since no expected such as market share and segment position – the ments for the brand already exist, the market terms orated significantly in Eastern Europe, resulting in future long-term real interest rate can be directly ob- forecast takes into consideration the demographics of of such agreements are taken into consideration interest rates and inflation increasing to a level served, the estimate of a real interest rate is subjec- the primary markets, including expected development when assessing the royalty rate that the brand is significantly higher than the Group’s long-term tive and associated with risk. in population, consumption levels, generation-shift expected to generate in a transaction with independ- expectations. patterns, rate of urbanisation, beer market maturity, ent parties. The royalty rate is based on the actual 2.3.4 SENSITIVITY TESTS level of premiumisation, circumstances generally lim- market position of the individual brand in the global, The use of expected future interest rates in lieu of ap- iting the growth opportunities for alcoholic beverages regional and local markets and assumes a 20-year propriate observable interest rates does not impact GOODWILL etc. horizon. This term is common to the beverage indus- the conclusion of the impairment test because the Sensitivity tests have been performed to deter- try when licensing brands. relationship between discount rates and growth rates For brands with global or regional presence, en- (the real interest rate) is expected to be constant. mine the lowest forecast and terminal period hanced investments in product development and For some brands, the share of the total beer market Expectations for the long-term real interest rate re- growth rates and/or highest discount rates that marketing are expected. The expected growth rate for profit exceeds the volume share to an extent that main a key assumption for the impairment testing in can occur in the CGUs, groups of CGUs and these brands is generally higher than for more local- creates significant market entry barriers for compet- general, and for CGUs with exposure to the Russian ised brands, and is usually highest early in the 20- ing brands that justify a higher royalty rate. market in particular. brands with indefinite useful life without lead- year period. ing to any impairment loss.

Royalty rates In the ten-year period until 2012, the average long- Depending on the nominal growth expectations for term real interest rate in Russia was negative, as a The risk-free interest rates observable for the brand, the revenue growth in individual years may result of which inflation exceeded the nominal interest be above, equal to or below the forecasted inflation International, premium and rate. The rate has since turned positive and is ex- Western Europe remained relatively low at the level in the markets where the brand is present. speciality beers 3.5-15.0% pected to remain positive in the future. Since 2016, end of 2017. The sensitivity tests calculate the Strong regional and national brands 3.0-5.0% the Bank of Russia has expressed its expectations for impact of higher interest rates and allow for a When preparing budgets, consideration is given to Local and mainstream brands 2.0-3.5% the short-term real interest rate. It expects a positive double-digit percentage-point increase in risk- events or circumstances that are relevant in order to future real interest rate at around 2.5-3.0% in the reliably project the short-term performance of each short term. Due to the current monetary situation in free interest rates. brand. Examples include significant campaign activ- Russia, the short-term interest rate is higher than the ities (for example UEFA EURO), changes in excise Discount rates long-term interest rate and therefore not directly Due to a challenging macroeconomic situation duties etc., which may each have an observable The discount rate is a WACC that reflects the risk- comparable with the real interest rate applied by the in some CGUs and groups of CGUs, the Group short-term impact but are of a non-recurring nature free interest rate with the addition of a risk premium Group. It is the expectation that real interest rates in that is quickly absorbed by the business. Since the relevant to each brand. the future will normalise with short-term interest performed additional sensitivity tests to ensure impact of such events and circumstances is not mate- rates falling to a level below the long-term interest that a potential impairment is not overlooked. rial to the long-term projections, it is not taken into The risk-free interest rates used in the impairment rates. These additional sensitivity tests did not iden- consideration when estimating the long-term and tests were based on observed market data. For coun- tify any potential impairment. terminal period growth rates. Please refer to the de- tries where long-term risk-free interest rates are not The current economic environment in Russia indicates scription of the impact of increases in excise duties in observable or valid due to specific national or macro- that a stable long-term real interest rate lower than section 2.3.2. economic conditions, the interest rate is estimated the current level will be reached within a few years. In based on observations from other markets and/or addition, the latest published expectations from key Tax benefit long-term expectations expressed by international fi- international financial institutions show an increase in The tax rate and amortisation period applied in the nancial institutions considered reliable by the Group. the long-term real interest rate to 2.5%. test are determined based on current legislation. The impairment test applied tax rates in the range of The added credit risk premium (spread) for the risk- In previous years a real interest rate of 1.5% was ap- 15-34% and amortisation periods of 5-10 years. free interest rate was fixed at market price or slightly plied but recent developments in the Russian econ- higher, reflecting the expected long-term market omy and the updated expectations from the financial price. The aggregate interest rate, including spread, institutions have led to an increase of 1 percentage thereby reflected the long-term interest rate applic-

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 43

SECTION 2.3 (CONTINUED) Key assumptions changes in brand strategy and other market (year-on-year) would result in a reduction in IMPAIRMENT The key assumptions relevant to the assess- factors. the recoverable amount of DKK 1.6bn. ment of the recoverable amount are: The test for impairment of goodwill did not • Volume The sensitivity calculated also assumes a Chongqing Brewery Group brands identify any CGUs or groups of CGUs to which • Price straight-line impact despite the fact that The Chongqing Brewery Group brands were goodwill is allocated where a reasonably pos- • Discount rate changes in market dynamics and adjustments written down to their recoverable amount in sible negative change in a key assumption to these will in practice have different impacts 2016, and the recoverable amount at the end would cause the carrying amount to exceed the The assumptions for volume and pricing are in the individual years and might not apply in of 2017 remained close to the carrying recoverable amount. closely linked, which, together with the pres- the long term. amount. As a result, a reasonably possible ence of multiple sub-brands in different geog- negative change in the key assumptions would The goodwill allocated to Eastern Europe was raphies within each brand, makes individual Baltika brand lead to further impairment. primarily recognised when the Group com- sensitivity testing on the basis of these two as- The Baltika brand was written down to its re- pleted the step acquisition of the remaining sumptions very impractical. Instead sensitivity coverable amount at the end of 2017. As a re- The brands are sensitive to developments in the 50% of the Baltic Beverage Holding Group from testing is performed for the overall revenue sult, any negative change in the key assump- mainstream segment in China, where pressure Scottish & Newcastle in 2008. However, the growth rate, both in the forecast period and the tions would lead to further impairment. from premium and upper-mainstream – in impairment test includes 100% of the cash flow terminal period. which the brands are not represented – could generated by Eastern Europe, resulting in the Changes in the market dynamics in Russia can lead to a further drop in market share and recoverable amount significantly exceeding the The sensitivity test for the maximum decline in have a significant negative impact on the re- thereby a further reduction of the recoverable carrying amount. growth rate in the forecast period assumes a coverable amount. Macroeconomic recovery amount. year-on-year decline in the nominal growth could lead to further premiumisation or locali- BRANDS rate, thereby estimating the accumulated effect sation, which could drive consumers towards Similarly, a change in consumer trends towards Following the impairment losses recognised in of a negative change for the full forecast pe- international brands or local/regional brands. the discount segment could have a negative 2016 and 2017 for the Baltika and Chongqing riod. impact on the recoverable amount. Brewery Group brands, a reasonably possible Any increase in the real interest rate from the negative change in a key assumption would The sensitivity tests were completed assuming current 2.5%, either because of a higher interest A 1 percentage point increase in the interest cause the carrying amount to exceed the re- all other assumptions were unchanged, as it is rate or lower inflation, will also significantly re- rate would result in a reduction in the recover- coverable amount. The sensitivity to changes in relevant to assess the sensitivity to, for exam- duce the recoverable amount. Such a change able amount of DKK 0.1bn, and a the assumptions is shown in the table. ple, a decline in the growth rate independently could, for example, be driven by accelerated 1 percentage point decrease in the terminal of changes in the discount rate. This is because economic growth. growth rate would result in a reduction in the the growth rate in itself might be impacted by recoverable amount of less than DKK 0.1bn. A 1 percentage point increase in the interest rate would result in a reduction in the recover- able amount of DKK 0.9bn, and a 1 percentage Sensitivity test point decrease in the terminal growth rate Average Terminal forecast period Risk-free would result in a reduction in the recoverable DKKbn growth rate growth rate interest rate amount of DKK 0.3bn. The combined effect of Δ -1 %-point -1 %-point +1 %-point a 1 percentage point negative change in the in- Baltika brand -0.7 -0.3 -0.9 terest rate, the terminal growth rate and the Chongqing Brewery Group brands -0.1 - -0.1 average growth rate in the forecast period

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 44

SECTION 2.4 INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT

DKK million Intangible assets Property, plant and equipment Fixtures and Other fittings, other intangible as- Land and Plant and plant and 2017 Goodwill Brands sets Total buildings machinery equipment Total

Cost Cost at 1 January 46,441 25,807 5,744 77,992 16,912 28,158 14,303 59,373 Additions 3 54 164 221 244 1,967 1,419 3,630 Disposal of entities -62 -8 -52 -122 -259 -235 -111 -605 Disposals - - -94 -94 -128 -332 -1,677 -2,137 Transfers - - 13 13 337 -609 269 -3 Foreign exchange adjustments etc. -2,475 -1,610 -75 -4,160 -726 -1,167 -573 -2,466 Cost at 31 December 43,907 24,243 5,700 73,850 16,380 27,782 13,630 57,792

Amortisation, depreciation and impairment losses Amortisation, depreciation and impairment losses at 1 January 1,783 7,161 3,527 12,471 7,303 16,877 9,578 33,758 Disposal of entities -62 -8 -51 -121 -173 -216 -82 -471 Disposals - - -46 -46 -86 -254 -1,598 -1,938 Amortisation and depreciation - 24 739 763 487 1,396 1,923 3,806 Impairment losses - 4,847 -80 4,767 -30 -34 111 47 Transfers - - - - 4 26 -87 -57 Foreign exchange adjustments etc. -105 -471 13 -563 -291 -664 -339 -1,294 Amortisation, depreciation and impairment losses at 31 December 1,616 11,553 4,102 17,271 7,214 17,131 9,506 33,851 Carrying amount at 31 December 42,291 12,690 1,598 56,579 9,166 10,651 4,124 23,941 Carrying amount of assets pledged as security for borrowings - - - - - 23 23

Additions to goodwill are described in section 5.4.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 45

SECTION 2.4 (CONTINUED) INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT

DKK million Intangible assets Property, plant and equipment Fixtures and Other fittings, other intangible Land and Plant and plant and 2016 Goodwill Brands assets Total buildings machinery equipment Total

Cost Cost at 1 January 43,916 22,002 5,980 71,898 16,934 27,653 13,710 58,297 Acquisition of entities 255 355 - 610 7 49 5 61 Additions - - 312 312 215 1,814 1,473 3,502 Disposal of entities -124 -3 -350 -477 -441 -608 -270 -1,319 Disposals - - -171 -171 -248 -847 -1,154 -2,249 Transfers - - -27 -27 90 -425 362 27 Foreign exchange adjustments etc. 2,394 3,453 - 5,847 355 522 177 1,054 Cost at 31 December 46,441 25,807 5,744 77,992 16,912 28,158 14,303 59,373

Amortisation, depreciation and impairment losses Amortisation, depreciation and impairment losses at 1 January 1,852 5,300 3,043 10,195 7,010 16,027 8,758 31,795 Disposal of entities - -3 -258 -261 -325 -416 -159 -900 Disposals - - -121 -121 -202 -719 -1,112 -2,033 Amortisation and depreciation - 28 792 820 524 1,430 1,960 3,914 Impairment losses - 867 53 920 148 131 27 306 Transfers - - -2 -2 10 -20 12 2 Foreign exchange adjustments etc. -69 969 20 920 138 444 92 674 Amortisation, depreciation and impairment losses at 31 December 1,783 7,161 3,527 12,471 7,303 16,877 9,578 33,758 Carrying amount at 31 December 44,658 18,646 2,217 65,521 9,609 11,281 4,725 25,615 Carrying amount of assets pledged as security for borrowings - - - 420 - 28 448

Additions to goodwill from acquisition of entities are described in section 5.2 and 5.4.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 46

SECTION 2.4 (CONTINUED) LEASES CAPITAL COMMITMENTS Lease and service agreements Operating lease liabilities totalled DKK 911m The Group has entered into various capital Management considers the substance of the service being rendered to classify the agreement as either a INTANGIBLE ASSETS (2016: DKK 1,333m), with DKK 322m (2016: commitments that will not take effect until af- lease or a service contract. Particular importance is AND PROPERTY, DKK 450m) falling due within one year. Oper- ter the reporting date and have therefore not attached to whether fulfilment of the agreement de- PLANT AND ating leases primarily relate to properties, IT been recognised in the consolidated financial pends on the use of specific assets. The Group as- equipment and transport equipment (cars, statements. Capital commitments amounted to sesses whether contracts are onerous by determining only the direct variable costs and not the costs that trucks and forklifts). These leases contain no DKK 124m (2016: DKK 113m). EQUIPMENT relate to the business as a whole. special purchase rights etc. Property, plant and equipment under construc- For leases, an assessment is made as to whether the tion amounted to DKK 1,172m (2016: DKK Assets held under finance leases with a carry- ACCOUNTING ESTIMATES lease is a finance lease or an operating lease. The AND JUDGEMENTS Group has mainly entered into operating leases for 1,314m) and are included in plant and ing amount of DKK 23m (2016: DKK 28m) standardised assets with a short duration relative to Useful lives and residual value of intangible machinery. have been pledged as security for lease liabili- the life of the assets, and accordingly the leases are assets with finite useful life and property, ties of DKK 19m (2016: DKK 26m). classified as operating leases. plant and equipment Fixtures and fittings, other plant and equipment Useful life and residual value are initially assessed Leases are classified as finance leases if they transfer SERVICE AGREEMENTS both in acquisitions and in business combinations, cf. include transport, office and draught beer substantially all the risks and rewards incident to equipment, coolers and returnable packaging. The Group has entered into service contracts of section 5. The value of the brands acquired and their ownership to the lessee. All other leases are classified expected useful life are assessed based on the brands’ various lengths in respect of sales, logistics and as operating leases. market position and profitability, and expected long- IT. Costs related to the contracts are recog- term developments in the relevant markets. Accounting estimates and judgements related to nised as the services are received. impairment are described in section 2.3. Management assesses brands and property, plant and equipment for changes in useful life. If an indica- tion of a reduction in the value or useful life exists, the asset is tested for impairment and is written down Amortisation, depreciation and impairment losses if necessary, or the amortisation/depreciation period Property, plant is reassessed and if necessary adjusted in line with Intangible assets and equipment the asset’s changed useful life. DKK million 2017 2016 2017 2016 Cost of sales 296 321 2,967 2,946 Reassessment of the expected future use is made in connection with changes in production structure, Sales and distribution expenses 207 228 773 810 restructuring and brewery closures. This may result in Administrative expenses 260 278 192 170 the expected future use and residual values not being Special items 4,767 913 -79 294 realised, which will require reassessment of useful life Total 5,530 1,740 3,853 4,220 and residual value as well as recognition of impair- ment losses or losses on disposal of non-current assets. Gain/loss on disposal of assets When changing the amortisation or depreciation period due to a change in the useful life, the effect on DKK million 2017 2016 amortisation/depreciation is recognised prospectively Gain on disposal of property, plant and equipment and intangible assets, including as a change in accounting estimates. those held for sale, within beverage activities 40 79 Loss on disposal of property, plant and equipment and intangible assets within beverage activities -36 -138 Total 4 -59

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 47

SECTION 2.4 (CONTINUED) CO2 emission rights are measured at cost at the date Amortisation and depreciation are recognised on a of allocation (i.e. normally DKK 0), while acquired straight-line basis over the expected useful life of the Buildings 20-40 years INTANGIBLE ASSETS rights are measured at cost. A liability is recognised assets, taking into account any residual value. The Technical installations 15 years (at fair value) only if actual emissions of CO2 exceed expected useful life and residual value are determined Brewery equipment 15 years AND PROPERTY, allocated levels based on the holding of rights. based on past experience and expectations of the fu- Filling and bottling equipment 8-15 years PLANT AND ture use of assets. Technical installations in The present value of estimated liabilities related warehouses 8 years to dismantling and removing an asset and restoring Depreciation is calculated on the basis of the cost less On-trade and distribution equipment 5 years EQUIPMENT the site on which the asset is located is added to the the residual value and impairment losses.

cost of self-constructed assets if the liabilities are Fixtures and fittings, other plant and equipment 5-8 years ACCOUNTING provided for. Amortisation and depreciation are recognised under POLICIES cost of sales, sales and distribution expenses, and Returnable packaging 3-10 years Hardware 3-5 years Cost Where individual components of an item of property, administrative expenses to the extent that they are Intangible assets and property, plant and equipment plant and equipment have different useful lives, they not included in the cost of self-constructed assets. Land Not depreciated are initially recognised at cost and subsequently are accounted for as separate items. measured at cost less accumulated amortisation or Impairment Operating leases depreciation and impairment losses. The cost of assets held under finance leases is stated Impairment losses of a non-recurring nature are rec- Operating lease payments are recognised in the in- at the lower of fair value of the assets and the pre- ognised under special items. come statement on a straight-line basis over the Cost comprises the purchase price and costs directly sent value of the future minimum lease payments. lease term. attributable to the acquisition until the date when the For the calculation of the net present value, the inter- The expected useful life is as follows: asset is available for use. The cost of self-constructed est rate implicit in the lease or an approximation Government grants and other funding assets comprises direct and indirect costs of materi- thereof is used as the discount rate. Brands with finite Grants and funding received for the acquisition of as- als, components, sub-suppliers, wages and salaries, useful life Normally 20 years sets and development projects are recognised in the and capitalised borrowing costs on specific or general Subsequent costs, for example in connection with re- statement of financial position by deducting the grant borrowing attributable to the construction of the as- placement of components of property, plant and Software etc. Normally 3-5 years. Group- from the carrying amount of the asset. The grant is set and is included in Plant and machinery. equipment, are recognised in the carrying amount of wide systems developed as an recognised in the income statement over the life of the asset if it is probable that the costs will result in integrated part of a major busi- the asset as a reduced depreciation charge. Research costs are recognised in the income state- future economic benefits for the Group. The replaced ness development programme: components are derecognised from the statement of 5-7 years ment as incurred. Development costs are recognised financial position and recognised as an expense in the under other intangible assets if the costs are expected Delivery rights Depending on contract; if no income statement. Costs incurred for ordinary repairs to generate future economic benefits. contract term has been agreed, and maintenance are recognised in the income state- normally not exceeding 5 years For assets acquired in business combinations, includ- ment as incurred. ing brands and property, plant and equipment, cost Customer Depending on contract with the at initial recognition is determined by estimating the Useful life, amortisation, depreciation and impair- agreements/ customer; if no contract exists, ment losses relationships normally not exceeding 20 years fair value of the individual assets in the purchase price Useful life and residual value are determined at the allocation. CO2 rights Depending on production period acquisition date and reassessed annually. If the resid- Goodwill is only acquired in business combinations ual value exceeds the carrying amount, depreciation and is measured in the purchase price allocation. is discontinued. Goodwill is not amortised.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 48 SECTION 3 SPECIAL ITEMS AND PROVISIONS

SECTION 3.1 0.6bn SPECIAL ITEMS SPECIAL ITEMS, INCOME (DKK) During 2017, the Group continued the execu- Special items tion of Funding the Journey, including the focus Impacted by gain on disposal of entities on cost and efficiency initiatives, and disposal DKK million 2017 2016 and reversal of impairment losses. of non-core assets. Special items, income The Group recognised gains and losses on Gain on disposal of entities and activities 402 2,040 the disposal of the subsidiaries Carlsberg Uz- Reversal of impairment losses 216 207 bekistan, Nordic Getränke in Germany and a Gain on disposal of property, plant and equipment impaired in prior years 24 26 -5.3bn number of entities in China. Additionally, the Reversal of provision recognised in a purchase price allocation in prior years - 80 SPECIAL ITEMS, EXPENSES Group disposed of a number of associates, in- Total 642 2,353

(DKK) cluding United Romanian Breweries and Mal- Special items, expenses terie Soufflet. Please refer to section 5 for a Significantly impacted by impairment losses Impairment of brands -4,847 -867 detailed description of disposal of entities. on brands. Restructurings, termination benefits and other impairment losses -258 -1,203 Loss on disposal of entities and activities -102 - The year was also impacted by a write-down Disposal of real estate, including adjustments to gains in prior years -50 -20 of the Baltika brand as a consequence of Total -5,257 -2,090 changed market dynamics following the PET Special items, net -4,615 263 downsizing, our increased focus in Russia on local and regional brands and, lastly, changes If special items had been recognised in operating profit before special items, in interest rate assumptions. Furthermore, a they would have been included in the following line items: minor Finnish brand was written down, result- Cost of sales -4,494 -1,058 Sales and distribution expenses -86 -334 ing in total impairments of DKK 4,847m. Administrative expenses -77 -100 Other operating income 472 2,040 Other operating expenses -430 -285 Special items, net -4,615 263

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 49

SECTION 3.1 (CONTINUED) where the estimated recoverable amount in- In 2017, the Group continued to optimise and ACCOUNTING ESTIMATES AND JUDGEMENTS SPECIAL ITEMS creased due to changes in the expected future standardise business processes across West- use of the assets. ern Europe. The optimisation and standardisa- The use of special items entails management judge- ment in the separation from other items in the tion project is running at a number of entities, In 2016, the accelerated premiumisation in income statement. Management carefully considers In 2017 and 2016, the Group recognised re- including Kronenbourg and local supply com- China in combination with the continued re- such items in order to ensure the correct distinction structuring costs relating to a general restruc- panies. The cost in 2016 mainly comprised re- between operating activities and restructuring of the structuring and disposal of entities in Chong- turing of the business and impairment losses structuring and impairment related to the Group initiated to enhance the Group’s future earnings qing Brewery Group and Eastern Assets im- potential and efficiency. related to closure of breweries in Chinese enti- Group’s logistics activities and back-office pacted the expectations for the Chongqing ties, totalling DKK -13m (2016: DKK functions, and included the transfer of over 300 Brewery Group brands and led to further im- Management reassesses the useful life and residual -317m). roles from the Group’s captive to an external value of non-current assets used in an entity under- pairments of DKK 800m. Additionally, a minor service provider. going restructuring. The extent and amount of oner- brand in Baltika Breweries was impaired. ous contracts as well as employee and other obliga- In 2017, the Group recognised a gain on dis- Please refer to section 2.3 for a detailed de- tions arising in connection with a restructuring are posal of Chinese entities totalling DKK 153m Retirement of members of the Executive scription of impairment of brands. also estimated. Management initially assesses the (2016: DKK 1,036m). Committee relates to severance payments to entire restructuring project and recognises all present

former Executive Vice President, Group HR, costs of the project, but the project is also assessed In 2017, two breweries in Eastern Assets were on an ongoing basis with additional costs possibly As part of the outsourcing of secondary logis- Claudia Schlossberger. In 2016, the retirement redesignated as primary producers of the inter- occurring during the lifetime of the project. tics operations, Carlsberg UK closed and trans- cost included severance payments and the cost national brands in China. Following the change ferred depots to a third party. The logistics ac- of share-based payments related to the retire- in use, the two breweries are expected to gen- ACCOUNTING tivities will continue until the final cutover date ment of former Senior Vice President, Western erate higher future cash flows than forecast POLICIES in early 2018. The comparative figures include Europe, Jørn Tolstrup Rohde and former Exec- when they were written down in 2015. As a Special items include significant income and expenses a provision for an onerous contract as well as a utive Vice President, Group Supply Chain, Peter result, impairment losses of DKK 216m were of a special nature in terms of the Group’s revenue- provision related to the brewery accident in Ernsting. The cost of share-based payments reversed at the end of 2017. Please refer to generating operating activities that cannot be 2016. related to grants made prior to retirement that attributed directly to the Group’s ordinary operating section 2.3 for a detailed description of the re- vest after the date of retirement. activities. Such income and expenses include the cost versal. The reversal of impairments in 2016 re- of extensive restructuring of processes and funda- lated to Carlsberg Uzbekistan, which was dis- mental structural adjustments, as well as any gains posed of in January 2017, and other assets or losses arising from disposal of assets that have a material effect over a given period.

Special items also include significant non-recurring Restructurings, termination benefits and other impairment losses items, including termination benefits related to retire- ment of members of the Executive Committee, impairment of goodwill (including goodwill allocated DKK million 2017 2016 to associates and joint ventures) and brands, gains Carlsberg UK, including onerous contract -70 -395 and losses on the disposal of activities and associates, Carlsberg Deutschland - -152 revaluation of the shareholding in an entity held Optimisation and standardisation in Western Europe -139 -103 immediately before a step acquisition of that entity, Chinese entities -13 -317 and transaction costs in a business combination. Bihar, India - -199 Special items are shown separately from the Group’s Retirement of members of the Executive Committee -15 -39 ordinary operations, as this gives a truer and fairer Other, net -21 2 view of the Group’s operating profit. Total -258 -1,203

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 50

SECTION 3.2 ACCOUNTING A provision for onerous contracts is recognised when Office in Germany issued a decision and im- POLICIES the benefits expected to be derived by the Group from posed a fine of EUR 62m for alleged infringe- PROVISIONS a contract are lower than the unavoidable costs of Provisions, including warranty provisions, are recog- meeting its obligations under the contract. ment of the competition rules in 2007. Man- nised when, as a result of events arising before or at agement does not agree with the conclusions Restructuring provisions relate mainly to termi- the end of the reporting period, the Group has a legal When the Group has a legal obligation to dismantle or a constructive obligation and it is probable that or findings of the Federal Cartel Office and, ac- nation benefits to employees made redundant, or remove an asset or restore the site on which the there may be an outflow of resources embodying cordingly, Carlsberg Deutschland has appealed primarily as a result of the restructuring pro- asset is located, a provision is recognised correspond- economic benefits to settle the obligation. ing to the present value of expected future costs. the decision to the relevant German court. jects accounted for as special items.

Provisions are discounted if the effect is material to SECTION 3.3 In the ordinary course of business the Group is In 2017, restructuring provisions of DKK 493m the measurement of the liability. The Group’s average furthermore party to certain lawsuits, disputes related primarily to Kronenbourg, Carlsberg borrowing rate is used as the discount rate. CONTINGENT etc. of various scopes. The resolution of these UK, Carlsberg Deutschland and local supply Restructuring costs are recognised under liabilities LIABILITIES lawsuits, disputes etc. is associated with uncer- companies, as described in section 3.1. when a detailed, formal restructuring plan has been tainty, as they depend on legal proceedings announced to those affected no later than at the end The Group operates in very competitive mar- such as negotiations between the parties af- Other provisions of DKK 3,143m related pri- of the reporting period. On acquisition of entities, restructuring provisions in the acquiree are only kets where consolidation is taking place within fected, governmental actions and court rulings. marily to profit sharing in France, employee included in the opening balance when the acquiree the industry and among our customers and It is management and legal counsel’s opinion obligations other than retirement benefits, and has a restructuring liability at the acquisition date. suppliers, all of which in different ways influ- that, apart from items recognised in the state- ongoing disputes, lawsuits etc. ences our business. In 2014, the Federal Cartel ment of financial position, the outcome of

these lawsuits, disputes etc. cannot be reliably

ACCOUNTING ESTIMATES estimated in terms of amount or timing. AND JUDGEMENTS Provisions GUARANTEES AND COMMITMENTS In connection with large restructurings, management The Group has issued guarantees for loans etc. assesses the timing of the costs to be incurred, which Onerous influences the classification as current or non-current DKK million Restructurings contracts Other Total raised by third parties (non-consolidated enti- liabilities. Provision for losses on onerous contracts is Provisions at 1 January 2017 661 552 2,958 4,171 ties) of DKK 475m (2016: DKK 431m). Guar- based on agreed terms with the other party and ex- antees issued for loans raised by associates pected fulfilment of the contract, based on the cur- Additional provisions recognised 131 - 605 736 rent estimate of volumes and use of raw materials Disposal of entities -3 -8 -64 -75 and joint ventures are described in section 5.5. etc. Warranty provisions are based on the substance Used during the year -283 -60 -187 -530 of the agreements entered into, including the guaran- Reversal of unused provisions -10 -14 -85 -109 Certain guarantees etc. are issued in connection tees issued covering customers in the on-trade. Transfers 10 -1 -1 8 with disposal of entities and activities etc. Apart Discounting 9 11 61 81 Management assesses provisions, contingent assets from items recognised in the statement of fi- Foreign exchange adjustments etc. -22 -29 -144 -195 and contingent liabilities as well as the likely outcome nancial position or disclosed in the consolidated Provisions at 31 December 2017 493 451 3,143 4,087 of pending or probable lawsuits etc. on an ongoing financial statements, these guarantees etc. will basis. The outcome depends on future events, which not have a material effect on the Group’s fi- are by nature uncertain. In assessing the likely out- Recognised in the statement of come of lawsuits and tax disputes etc., management financial position nancial position. bases its assessment on external legal assistance and Non-current provisions 333 433 2,787 3,553 established precedents. Current provisions 160 18 356 534 Contractual commitments, lease liabilities and Total 493 451 3,143 4,087 service agreements are described in section 2.4.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 51 SECTION 4 FINANCING COSTS, CAPITAL STRUCTURE AND EQUITY

Equity and debt are used to finance investments in assets and -774m 18.3bn 21.2bn operations. NET FINANCIAL ITEMS (DKK) NET INTEREST-BEARING DEBT AVAILABLE CREDIT RE- Improved from DKK -1,237m in 2016. (DKK) SOURCES (DKK) Access to funding from a variety Decreased by DKK 6.2bn in 2017. Up from DKK 13.3bn in 2016. of sources secures future operat- ing income.

Distribution of gross financial Distribution of gross financial Available credit resources are debt – 2017 – Allocation (%) debt – 2016 – Allocation (%) used as a measure of immediate 2.7% access to funding. AVERAGE FUNDING COST (%) Down from 3.0% in 2016. Debt refinanced at historically low rates in 2017, as a EUR 1bn bond with a coupon of 2.5% was repaid and partly financed by a 1.34x new EUR 500m bond issued with DEBT TO OPERATING PROFIT a coupon of 0.5%. BEFORE DEPRECIATION AND Non-current bank borrowing 0% Non-current bank borrowing 4% AMORTISATIONAND IMPAIR- Non-current bonds 92% Non-current bonds 85% MENT LOSSES Non-current mortgages 0% Non-current mortgages 1% An improvement from 1.88x in 2016. Current bank borrowing 3% Current bank borrowing 4% Other current and non-current borrowing 5% Other current and non-current borrowing 6%

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 52

Financial items recognised in the income statement SECTION 4.1 FINANCIAL INCOME DKK million 2017 2016

AND EXPENSES Financial income Interest income 149 158 Financial items, net, improved by DKK 463m, Fair value adjustments of financial instruments, net, cf. section 4.8 - 564 primarily due to lower net interest expenses Foreign exchange gains, net 485 - (DKK 250m) mainly because of the GBP 300m Interest on return on plan assets, defined benefit plans 152 173 bond expiring in November 2016 and a reduc- Other financial income 23 30 tion in the average net debt, as well as lower Total 809 925 other financial expenses. Other financial ex- penses include write-downs of certain financial Financial expenses Interest expenses -775 -1,034 receivables and interest related to the lost tax Capitalised financial expenses 1 3 case in Finland in 2016. This was offset by a Fair value adjustments of financial instruments, net, cf. section 4.8 -292 - lower gain on foreign exchange and fair value Foreign exchange losses, net - -149 adjustments (DKK 193m), DKK 222m lower Interest cost on obligations, defined benefit plans -251 -296 than last year. Other financial expenses -266 -686 Total -1,583 -2,162 The currency translation of foreign entities in Financial items, net, recognised in the income statement -774 -1,237 other comprehensive income at the reporting date, DKK -3,785m, primarily related to the Interest income relates to interest on cash and cash equivalents measured at amortised cost. depreciation of RUB, which had an impact of Financial items recognised in other comprehensive income DKK -2,308m, and depreciation of other East- ern European and Asian currencies. DKK million 2017 2016

Foreign exchange adjustments of foreign entities ACCOUNTING Foreign currency translation of foreign entities -3,785 5,580 POLICIES Recycling of cumulative translation differences of entities Realised and unrealised gains and losses on derivative acquired in step acquisitions or disposed of -57 263 financial instruments that are not designated as Total -3,842 5,843 hedging arrangements and the ineffective portion of those designated as hedging arrangements are in- cluded in financial income and expenses. Value adjustments of hedging instruments Change in fair value of effective portion of cash flow hedges 189 93 Interest, losses and write-downs relating to on-trade Change in fair value of cash flow hedges transferred to the income statement -142 36 loans, which are measured at amortised cost, are in- Change in fair value of net investment hedges -352 12 cluded as income and expenses in other operating Total -305 141 activities, cf. section 1.3.4, as such loans are treated Financial items, net, recognised in other comprehensive income -4,147 5,984 as a prepaid discount to the customer.

Of the net change in fair value of cash flow hedges transferred to the income statement, DKK -146m (2016: DKK 110m) is included in net revenue and cost of sales and DKK 4m (2016: DKK -74m) is included in financial items.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 53

SECTION 4.2 Net interest-bearing debt SECTION 4.3 The Group is rated by Moody’s Investors Ser- NET INTEREST- CAPITAL vice and Fitch Ratings. As an element in strate- DKK million 2017 2016 gic decisions on capital structure, management BEARING DEBT Non-current borrowings 23,340 21,137 STRUCTURE assesses the risk of changes in the Group’s in- Current borrowings 931 9,198 vestment-grade rating. Identification and Net interest-bearing debt to operating profit Gross financial debt 24,271 30,335 4.3.1 CAPITAL STRUCTURE monitoring of risks that could change the rating before depreciation, amortisation and impair- Cash and cash equivalents -3,462 -3,502 Management regularly assesses whether the were carried out on an ongoing basis through- Net financial debt 20,809 26,833 ment losses is the Group’s measure of its fi- Group’s capital structure is in the interests of out the year. Loans to associates, inter- nancial leverage. the Group and its shareholder. The overall est-bearing portion -290 -300 On-trade loans, net -764 -863 objective is to ensure a continued development Of the gross financial debt at year-end, 96% Other receivables, net -1,408 -1,101 and strengthening of the Group’s capital struc- (DKK 23.3bn) was long term, i.e. with maturity Net interest-bearing debt 18,347 24,569 ture, which supports long-term profitable of more than one year. growth and a solid increase in key earnings

and ratios.

This includes assessment of and decisions on the split of financing between share capital and borrowings, which is a long-term strategic decision to be made in connection with signifi- cant investments and other transactions.

The Group targets a leverage ratio below 2.0x. Changes in net interest-bearing debt (DKKm) The leverage ratio is measured as net interest-

bearing debt to operating profit before depreci- 24,569 -11,855 ation, amortisation and impairment losses. At

18,347 the end of 2017, the leverage ratio was 1.34x, 2,264 2 393 and in light of the reduced financial leverage 3,242 -268 there will be an increase in payout to the shareholder.

The Group proposes a dividend of DKK 4,872 per share (2016: DKK 3,045 per share), amounting to DKK 2,441m (2016: DKK 1,526m). The proposed dividend has been included in retained earnings at 31 December 2017.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 54

SECTION 4.3 (CONTINUED) Transactions with Share capital ACCOUNTING POLICIES CAPITAL non-controlling interests (NCI) Total share capital Nominal Proposed dividends STRUCTURE DKK million 2017 2016 Shares of value, DKK Proposed dividends are recognised as a liability at the DKK 1.000 '000 date when they are adopted at the Annual General Dividends paid to NCI -738 -617 1 January 2016 501 501,000 Meeting (declaration date). The dividend recom- 4.3.2 EQUITY Acquisition of NCI -2 -399 mended by the Supervisory Board, and therefore No change in 2016 - - Capital increase - 1 expected to be paid for the year, is disclosed in the 31 December 2016 501 501,000 Transactions with the shareholder Total -740 -1,015 statement of changes in equity. No change in 2017 - - in Carlsberg Breweries A/S 31 December 2017 501 501,000

Dividends paid to non-controlling interests DKK million 2017 2016 primarily related to entities in Asia. Dividend paid to the shareholder -1,526 -1,373 Total -1,526 -1,373

Equity (DKKm)

2,088 -3,842 43,419 1,263 -2,264 -792 -605 39,267

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 55

SECTION 4.3 (CONTINUED) SECTION 4.4 Other borrowings include finance lease liabili- 4.4.2 CASH CAPITAL BORROWINGS ties of DKK 19m (2016: DKK 26m). Cash and cash equivalents include short-term marketable securities with a term of three STRUCTURE AND CASH Change in gross financial debt months or less at the acquisition date that are subject to an insignificant risk of changes in 4.3.3 FINANCIAL RISK MANAGEMENT 4.4.1 BORROWINGS DKK million 2017 value. Short-term bank deposits amounted to The Group’s activities give rise to exposure to a Borrowings decreased in 2017 as a result of Gross financial debt at 1 January 30,335 DKK 578m (2016: DKK 1,014m). The average variety of financial risks, including market risk the strong free cash flow generation. A EUR Proceeds from issue of bonds 3,684 interest rate on these deposits was 6.3% (foreign exchange risk, interest rate risk and 1bn bond was repaid in October 2017, partly Repayment of bonds -7,444 (2016: 5.9%). raw material risk), credit risk and liquidity risk. using proceeds from issuing a EUR 500m bond Instalments on and proceeds from borrowings, long term -1,157 These risks are described in the following sec- maturing in September 2023 and partly using Cash and cash equivalents Repayment of mortgage -420 tions: free cash flow. Bank borrowings also de- Instalments on and proceeds from creased compared with year-end 2016, and a borrowings, short term 147 DKK million 2017 2016 • Foreign exchange risk: sections 1.4 and 4.5 mortgage loan on the brewery in Fredericia, Instalments on and proceeds from inter- Cash and cash equiva- • Interest rate risk: section 4.6 Denmark, was fully repaid. company loans and borrowings -357 lents 3,462 3,502 Bank overdrafts -342 -1,154 • Commodity risk: section 1.3.1 Other -48 Cash and cash • Credit risk: sections 1.6 and 4.4.2 Gross financial debt External financing -5,595 Change in bank overdrafts -812 equivalents, net 3,120 2,348 • Liquidity risk: section 4.7 Intercompany loans 307 DKK million 2017 2016 Other, including foreign exchange adjust- ASSESSMENT OF CREDIT RISK The Group’s financial risks are managed by ments and amortisation 36 Non-current The Group is exposed to credit risk on cash and Group Treasury in accordance with the Finan- Gross financial debt 31 December 24,271 cash equivalents (including fixed deposits), in- cial Risk Management Policy approved by the Issued bonds 22,215 18,489 Mortgages - 420 vestments and derivative financial instruments Supervisory Board and are an integrated part Bank borrowings 21 1,114 with a positive fair value due to uncertainty as of the overall risk management process at Other borrowings 1,104 1,114 ACCOUNTING to whether the counterparty will be able to Carlsberg. The risk management governance POLICIES Total 23,340 21,137 meet its contractual obligations as they fall structure is described in the Management Borrowings mainly comprise bonds, bank borrowings due. review. and finance lease liabilities and are initially recog- Current nised at fair value less transaction costs. In subse- Issued bonds - 7,424 quent periods, borrowings are measured at amortised The Group has established a credit policy under To reduce the exposure to these risks, the Current portion of other cost using the effective interest method. Accordingly, which financial transactions may be entered Group enters into a variety of financial instru- non-current borrowings 36 193 the difference between the fair value less transaction into only with financial institutions with a solid ments and generally seeks to apply hedge ac- Bank borrowings 773 1,443 costs and the nominal value is recognised under fi- credit rating. The credit exposure on financial counting to reduce volatility in the income Other borrowings 122 138 nancial expenses over the term of the loan. institutions is managed by Group Treasury. statement. Total 931 9,198 Total borrowings 24,271 30,335 Fair value 25,922 32,291 Debt instruments and deposits in foreign cur- rency reduce the overall risk, but do not An overview of issued bonds (current and non-current) is achieve the objective of reducing volatility in provided in section 4.6. specific items in the income statement.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 56

SECTION 4.4 (CONTINUED) than the functional currency of the group enti- future cash flows arising from operating activi- 4.5.3 EXCHANGE RATE RISK ON CASH BORROWINGS ties reporting the debt, as well as the risk that ties or specific transactions. AND BORROWINGS arises when net cash inflow is generated in one The main principle for funding of subsidiaries is AND CASH currency and loans are denominated and have The most significant net risk relates to that cash, loans and borrowings should be in to be repaid in another currency. foreign exchange adjustment of net invest- local currency or hedged to local currency to The Group primarily enters into financial in- ments in RUB. avoid foreign exchange risk. However, in some struments and transactions with the Group’s Currency profile of borrowings Group entities debt is denominated in a cur- relationship banks, i.e. banks extending loans Before and after derivative financial instruments Where the fair value adjustments of forward rency other than the local entity’s functional to the Group. exchange contracts do not exceed the fair currency without the foreign exchange risk be-

DKK million value adjustments of the investment, the ad- ing hedged. This applies primarily to a few en- Group Treasury monitors the Group’s gross Original Effect After justments of the financial instruments are rec- tities in Eastern Europe that hold cash and credit exposure to banks and operates with in- 2017 principal of swap swap ognised in other comprehensive income. Fair loans in EUR and USD and in this way obtain dividual limits on banks based on rating and CHF 85 914 999 value adjustments of loans designated as stra- proxy hedging of the foreign exchange risk as- access to netting of assets and liabilities. DKK 105 1,764 1,869 tegic intra-group loans are also recognised in sociated with the purchase of goods in foreign EUR 23,775 -5,749 18,026 other comprehensive income. currency in these markets. RUB - -1,359 -1,359 EXPOSURE TO CREDIT RISK USD - 2,056 2,056 The carrying amount of DKK 3,462m (2016: The fair value of derivatives used as net invest- Other 306 2,374 2,680 DKK 3,502m) represents the maximum credit ment hedges recognised at 31 December 2017 exposure related to cash and cash equivalents. Total 24,271 - 24,271 Total 2016 30,335 - 30,335 amounted to DKK 84m (2016: DKK Of this amount, DKK 2,131m is cash in Asia. –10 4m).

The credit risk on receivables is described in section 1.6. 4.5.2 HEDGING OF NET INVESTMENTS IN FOREIGN SUBSIDIARIES Net investment hedges The Group holds a number of investments in SECTION 4.5 foreign subsidiaries where the translation of net Hedging of investment, Intra-group loans, Total adjustment to other FOREIGN EXCHANGE assets to DKK is exposed to foreign exchange amount in local currency amount in local currency comprehensive income (DKK) risks. The Group hedges part of this foreign ex- DKK million 2017 2016 2017 2016 2017 2016 RUB - -10,000 - - 34 -133 RISK RELATED TO change exposure by entering into forward ex- CNY -1,250 -1,250 - - -3 -7 change contracts (net investment hedges). This NET INVESTMENTS MYR -336 -336 - - -1 -13 applies to net investments in CHF, CNY, MYR, AND FINANCING HKD - - 1,126 1,345 -138 36 NOK and PLN, with the hedging of the two CHF -260 -330 - - 163 5 ACTIVITIES last-mentioned currencies being established in GBP - - 72 75 -23 -113 2017. The basis for hedging is reviewed at NOK -1,300 - 3,000 3,000 -158 127 4.5.1 CURRENCY PROFILE OF least once a year, and the two parameters, risk SEK - - 8,810 - -219 106 BORROWINGS reduction and cost, are balanced. In economic PLN -135 - - - -4 - SGD - - -67 84 -4 5 The Group is exposed to foreign exchange risk terms, having debt in foreign currency or creat- Other - - - - 1 -1 on borrowings denominated in a currency other ing synthetic debt via forward exchange con- Total - -352 12 tracts constitutes hedging of the DKK value of

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 57

SECTION 4.5 (CONTINUED) primarily incurred in RUB, and the Asian cur- Applied exchange rates FOREIGN EXCHANGE rencies. Closing rate Average rate DKK 2017 2016 2017 2016 RISK RELATED TO SENSITIVITY ANALYSIS Swiss franc (CHF) 6.3621 6.9228 6.7091 6.8166 NET INVESTMENTS An adverse development in the exchange rates Chinese yuan (CNY) 0.9539 1.0156 0.9764 1.0125 would, all other things being unchanged, have Euro (EUR) 7.4449 7.4344 7.4384 7.4442 AND FINANCING had the hypothetical impact on the consoli- Pound sterling (GBP) 8.3912 8.6832 8.4933 9.1182 ACTIVITIES dated income statement for 2017 illustrated in Laotian kip (LAK) 0.0007 0.0009 0.0008 0.0008 the table. The hypothetical impact ignores the Norwegian krone (NOK) 0.7566 0.8182 0.7961 0.8028 Polish zloty (PLN) 1.7824 1.6857 1.7500 1.7080 fact that the subsidiaries’ initial recognition of 4.5.4 IMPACT ON FINANCIAL Russian rouble (RUB) 0.1081 0.1165 0.1134 0.1019 revenue, cost and debt would be similarly ex- STATEMENTS AND SENSITIVITY Swedish krona (SEK) 0.7563 0.7783 0.7712 0.7866 posed to the changes in the exchange rates. ANALYSIS Ukrainian hryvnia (UAH) 0.2223 0.2616 0.2488 0.2632 The calculation is made on the basis of items in

IMPACT ON OPERATING PROFIT the statement of financial position at 31 De- For a description of the currency impact on cember. (RUB: 10% higher) on 31 December 2017, consolidated financial statements are presented operating profit, please refer to section 1.4. other comprehensive income would have been above. Other comprehensive income is affected by DKK 139m lower (2016: DKK 133m lower). IMPACT ON FINANCIAL ITEMS, NET changes in the fair value of currency derivatives The average exchange rate for the year was In 2017, the Group had net gains on foreign designated as cash flow hedges of future pur- APPLIED EXCHANGE RATES calculated using the monthly exchange rates exchange and fair value adjustments of finan- chases and sales. If the foreign exchange rates The DKK exchange rates for the most signifi- weighted according to the phasing of the net cial instruments of DKK 191m (2016: gain of of the currencies hedged had been 5% higher cant currencies applied when preparing the revenue per currency throughout the year. DKK 415m), cf. section 4.1. Exchange rate sensitivity IMPACT ON STATEMENT OF FINANCIAL POSITION DKK million 2016 Fluctuations in foreign exchange rates will af- EUR EUR EUR EUR Gross Net Effect Effect fect the level of debt, as funding is obtained in 2017 receivable payable borrowings cash exposure Derivative exposure % change on P/L on P/L a number of currencies. In 2017, net interest- EUR/GBP 1,065 -617 - 220 668 - 668 5% 33 33 bearing debt increased by DKK 360m (2016: EUR/NOK 129 -573 - -3 -447 - -447 5% -22 -32 decreased by DKK 46m) due to changes in for- EUR/RUB 9 -268 - 363 104 - 104 10% 10 -18 eign exchange rates. EUR/UZS ------24 Total 21 -41

IMPACT ON OTHER COMPREHENSIVE INCOME For 2017, total losses on net investments, 2016 loans granted to subsidiaries as an addition to USD USD USD USD Gross Net Effect Effect 2017 receivable payable borrowings cash exposure Derivative exposure % change on P/L on P/L the net investment and net investment hedges USD/RUB 1 -1 - 188 188 188 10% 19 31 attributable to the shareholder in Carlsberg USD/UAH - -33 - 129 96 - 96 10% 10 13 Breweries A/S amounted to DKK -3,806m Total 29 44 (2016: gains of DKK 5,584m). Losses were

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 58

SECTION 4.6 managed using fixed-rate bonds. No interest of cash and cash equivalents exceeds are measured at amortised cost, there is no INTEREST RATE RISK rate swaps were in effect at 31 December the amount of borrowing at floating rates. It is impact on other comprehensive income or the 2017. estimated that a 1 percentage point interest income statement. rate increase would lead to a decrease in an- The most significant interest rate risk in the The EUR 750m bond maturing on 3 July 2019 nual interest expenses of DKK 27m (2016: in- The sensitivity analysis is based on the financial Group relates to borrowings. As the Group’s net consists of two bond issues of EUR 250m and crease of DKK -64m). The analysis assumes a instruments recognised at the reporting date. debt is primarily in EUR, the interest rate expo- EUR 500m. parallel shift in the relevant yield curves and sure relates to the development in the interest 100% effective hedging of changes in the yield The sensitivity analysis assumes a parallel shift rates for EUR. SENSITIVITY ANALYSIS curve. in interest rates and that all other variables re-

At the reporting date, 113% of the net financial main constant, in particular foreign exchange The interest rate risk is measured by the dura- debt consisted of fixed-rate borrowings with If the market interest rate had been 1 percent- rates and interest rate differentials between the tion of the net financial debt. The target is to interest rates fixed for more than one year age point higher at the reporting different currencies. The analysis was per- have a duration between two and five years. At (2016: 76%). The reason for the high percent- date, it would have led to a financial gain of formed on the same basis as for 2016. The 31 December 2017, the duration was 4.6 years age of net debt at fixed rate is that the amount DKK 962m (2016: DKK 978m), and a similar Group did not enter into new interest rate (2016: 3.7). Interest rate risks are mainly loss had the rate been 1 percentage point swaps in 2017. lower. However, since all fixed-rate borrowings Interest rate risk

DKK million Average effective Net financial debt by currency ¤ Interest interest Carrying Interest rate 2017 rate rate Fixed for amount risk DKK million Interest rate Net financial 2017 debt1 Floating1 Fixed1 Floating2 Fixed2 Issued bonds EUR 17,591 -5,790 23,381 - 100% EUR 750m maturing 3 July 2019 Fixed 2.6% 1-2 years 5,587 Fair value DKK 1,840 1,840 - 100% - EUR 750m maturing 15 November 2022 Fixed 2.7% 4-5 years 5,559 Fair value PLN -123 -123 - 100% - EUR 500m maturing 6 September 2023 Fixed 0.7% >5 years 3,690 Fair value USD 1,606 1,604 2 100% - EUR 1,000m maturing 28 May 2024 Fixed 2.6% >5 years 7,379 Fair value CHF 979 979 - 100% - Total issued bonds 2.3% 22,215 RUB -1,418 -1,418 - 100% - Total issued bonds 2016 2.9% 25,913 Other 334 336 -2 100% -

Total 20,809 -2,572 23,381 -13% 113% Mortgages

Floating-rate Floating - <1 year - Cash flow 2016 Total mortgages - - EUR 18,207 -1,740 19,947 28% 72% Total mortgages 2016 0.7% 420 DKK 7,313 7,311 2 100% - PLN -172 -172 - 100% - Bank borrowings USD 2,922 2,922 - 100% - Floating-rate Floating 3.3% <1 year 933 Cash flow CHF 1,715 1,715 - 100% - Fixed-rate Fixed 0.6% >1 year 1,123 Fair value RUB -2,228 -2,228 - 100% - Total bank borrowings and other borrowings 2,056 Other -924 -1,288 364 139% -39% Total bank borrowings and other borrowings Total 26,833 6,520 20,313 24% 76% 2016 4,002

1 Net financial debt consists of current and non-current items after currency derivatives less cash and cash equivalents. 2 Net financial debt consists of current and non-current items less cash and cash equivalents. CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 59

SECTION 4.7 At 31 December 2017, net financial debt The credit resources available and the access The Group uses cash pools in the day-to-day LIQUIDITY RISK was DKK 20,809m (2016: DKK 26,833m). to unused committed credit facilities are con- liquidity management for most of the entities in sidered reasonable in light of the Group’s cur- Western Europe, as well as intra-group loans At 31 December 2017, the Group had total un- rent needs in terms of financial flexibility. between Group Treasury and subsidiaries. Liquidity risk results from the Group’s potential utilised credit facilities of DKK 20,766m (2016: Eastern Europe and Asia are less integrated in inability to meet the obligations associated DKK 19,388m), of which DKK 18,687m (2016: In addition to efficient working capital manage- terms of cash pools, and liquidity is managed with its financial liabilities, for example settle- DKK 19,029m) were non-current credit facili- ment and credit risk management, the Group via intra-group loans. ment of financial debt and paying suppliers. ties. Credit resources available consist of the mitigates liquidity risk by arranging borrowing The Group’s liquidity is managed by Group unutilised non-current credit facilities and cash facilities with solid financial institutions. Treasury. The aim is to ensure effective li- and cash equivalents of DKK 3,462m (2016: quidity management, which involves DKK 3,502m) less utilisation of current facilities obtaining sufficient committed credit facilities of DKK 931m (2016: DKK 9,198m). to ensure adequate financial resources and, to some extent, tapping a range of funding sources.

CREDIT RESOURCES AVAILABLE Carlsberg uses the term credit resources avail- able to determine the adequacy of access to credit facilities. Committed credit facilities and credit resources available Net financial debt is used internally by Group Treasury to monitor the Group’s credit DKK million 2016 resources available. Net financial debt is the Total Group’s net interest-bearing debt, excluding in- committed Utilised loans and portion of Unutilised Unutilised terest-bearing assets other than cash, as these credit credit credit credit assets are not actively managed in relation to 2017 facilities facilities facilities facilities liquidity risk. <1 year 3,010 931 2,079 359 Total current committed loans and credit facilities 3,010 931 2,079 359

<1 year - - -931 -9,198 Time to maturity for non-current borrowings 1-2 years 6,694 6,694 - 369 2-3 years 17 17 - - DKK million 3-4 years 18,659 -28 18,687 - 2017 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total 4-5 years 5,569 5,569 - 18,660 Issued bonds 5,587 - - 5,559 11,069 22,215 >5 years 11,088 11,088 - - Bank borrowings 20 17 -29 9 4 21 Total non-current committed loans and credit facilities 42,027 23,340 17,756 9,831 Other non-current borrowings 1,087 - 1 1 15 1,104 Cash and cash equivalents 3,462 3,502 Total 6,694 17 -28 5,569 11,088 23,340 Credit resources available (total non-current Total 2016 1,078 6,679 16 12 13,352 21,137 committed loans and credit facilities-net debt) 21,218 13,333

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 60

SECTION 4.7 (CONTINUED) (2016: DKK 172m higher) than the carrying SECTION 4.8 the hedge is still effective. If this is not the LIQUIDITY RISK amount. The difference between the nominal DERIVATIVE case, the accumulated gain/loss on the portion amount and the carrying amount comprises of the hedge that is no longer effective is re- differences between these amounts at initial FINANCIAL classified to the income statement. The table below lists the contractual maturities recognition, which are treated as a cost that is of financial liabilities, including estimated inter- INSTRUMENTS capitalised and amortised over the duration of Of the total ineffective portion of hedges est payments and excluding the impact of net- the borrowings. for 2017, DKK 1m related to the Group’s alu- ting agreements, and thus summarises the Fair value adjustments of fair value hedges, fi- minium-hedging scheme (2016: DKK 65m) gross liquidity risk. nancial derivatives not designated as hedging The interest expense is the contractual cash and DKK -5m to foreign exchange hedges instruments and ineffectiveness regarding flows expected on the gross financial debt (2016: DKK 9m). The ineffective portion re- The risk implied by the values shown in the ta- instruments designated in a hedge relationship existing at 31 December 2017. garding aluminium relates to hedged transac- ble reflects the one-sided scenario of cash out- are recognised in the income statement. In tions that are expected to take place flows only. Trade payables and other financial 2017, fair value adjustments were DKK -292m The cash flow is estimated based on the in 2018. liabilities mainly originate from the financing of (2016: DKK 564m), cf. section 4.1 notional amount of the above-mentioned bor- assets in ongoing operations, such as property, rowings and expected interest rates at year- plant and equipment, and investments in work- The ineffectiveness includes both the ineffective end 2017 and 2016. Interest on debt recog- ing capital, for example inventories and trade portion of hedges and technical ineffectiveness nised at year-end 2017 and 2016, for which receivables. relating to exchange rate instruments and alu- no contractual obligation exists (current bor- minium swaps designated as cash flow hedges. rowing and cash pools), has been included for The nominal amount/contractual cash flow a two-year period. of the financial debt was DKK 163m higher The Group monitors the cash flow hedge rela- tionships on a quarterly basis to assess whether

Maturity of financial liabilities Fair value hedges and financial derivatives not designated as hedging instruments (economic hedges) DKK million Maturity Contractual Maturity >1 year Maturity Carrying DKK million 2017 cash flows <1 year <5 years >5 years amount Fair value adjustment recognised in the

2017 income statement Fair value Derivative financial instruments Exchange rate instruments -292 46 Derivative financial instruments, payables 104 104 - - 113 Other instruments 4 -

Ineffectiveness -4 - Non-derivative financial instruments Total -292 46 Gross financial debt 24,434 931 12,316 11,187 24,271

Interest expenses 2,287 512 1,496 279 N/A 2016 Trade payables and other liabilities 15,027 15,027 - - 15,027 Contingent consideration 3,820 309 3,511 - 3,820 Exchange rate instruments 486 285 Other instruments 4 2 Non-derivative financial instruments 45,568 16,779 17,323 11,466 - Ineffectiveness 74 - Financial liabilities 45,672 16,883 17,323 11,466 - Total 564 287 Financial liabilities 2016 51,978 25,413 12,621 13,944 -

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 61

SECTION 4.8 (CONTINUED) The impact on other comprehensive income ACCOUNTING ESTIMATES positive and negative values are offset only when the AND JUDGEMENTS from exchange rate instruments relates to Group has the right and the intention to settle several financial instruments net. DERIVATIVE When entering into financial instruments, manage- hedges of Group entities’ purchases and sales ment assesses whether the instrument is an effective FINANCIAL in currencies other than their functional cur- Changes in the fair value of a fair value hedge are hedge of recognised assets and liabilities, expected recognised in the income statement. Changes in the rencies. The impact on other comprehensive future cash flows or financial investments. The effec- INSTRUMENTS value of the hedged portion of assets or liabilities are income from other instruments relates to tiveness of recognised hedging instruments is as- also recognised. Except for foreign currency hedges, sessed at least quarterly. hedges of Group entities’ exposure to changes hedging of future cash flows according to a firm The fair value of derivatives classified as a cash in aluminium prices. agreement is treated as a fair value hedge of a rec- flow hedge is presented in the cash flow hedge Fair values of derivative financial instruments are cal- ognised asset or liability. culated on the basis of current market data and gen- section below. Other instruments are primarily DETERMINATION OF FAIR VALUE erally accepted valuation methods. Internally calcu- aluminium hedges, which are not classified as Changes in the effective portion of the fair value of lated values are used, and these are compared with The Group has no financial instruments derivative financial instruments that are designated cash flow hedges. external market quotes on a quarterly basis. For cur- measured at fair value on the basis of level and qualify as a cash flow hedge are recognised in rency and aluminium derivatives, the calculation is as other comprehensive income and accumulated in a 1 input (quoted prices) or level 3 input (non- follows: Cash flow hedges comprise aluminium hedges separate reserve in equity. When the hedged transac- observable data) other than certain put options a) the forward market rate is compared with the tion results in gains or losses, amounts previously where the hedged item is aluminium cans that agreed rate on the derivatives, and the difference cf. section 5.4. recognised in other comprehensive income are trans- will be used in a number of Group entities in in cash flow at the future point in time is calcu- ferred to the same item as the hedged item when the 2018 and currency forwards entered into to lated hedged risk impacts the income statement. If the The methods and assumptions used in deter- b) the amounts are discounted to present value. cover the foreign exchange risk on transactions hedged item is a non-financial asset, the amount mining the fair values of each category of fi- recognised in other comprehensive income is trans- expected to take place in 2018 and 2019. When entering into a contract, management assesses nancial assets and financial liabilities are ferred to the carrying amount of the asset when the whether the contract contains embedded derivatives described in their relevant sections. The carry- non-financial asset is recognised. and whether they meet the criteria for separate clas- The fair value of cash flow hedges recognised ing amount of financial assets and liabilities sification and recognition. The Group currently does at 31 December 2017 includes the ineffective Derivatives designated as and qualifying for recogni- approximates their fair value, except for bor- not have any embedded derivatives that meet the cri- portion of the financial instruments designated tion as a cash flow hedge of financial investments are rowings, cf. section 4.4. teria for separate classification and recognition as cash flow hedges. recognised in other comprehensive income. On com- plete or partial disposal of the financial investment, ACCOUNTING the portion of the hedging instrument that is recog- POLICIES Cash flow hedges nised in other comprehensive income and relates to

Derivative financial instruments are initially recog- that financial investment is recognised in the income DKK million nised at fair value on the trade date and subsequently statement when the gain or loss on disposal is recog- Fair value adjustment remeasured at their fair value at the reporting date. nised. recognised in other Attributable transaction costs are recognised in the 2017 comprehensive income Fair value Expected recognition income statement. For derivative financial instruments that do not qual- Interest rate instruments 1 - N/A ify for hedge accounting, changes in fair value are Exchange rate instruments 64 27 2018-2019 The accounting for subsequent changes in fair value recognised in the income statement as financial in- come or financial expenses. Other instruments -18 65 2018 depends on whether the derivative is designated as one of: fair value hedges - hedges of the fair value of Total 47 92 recognised assets or liabilities; cash flow hedges - Changes in the fair value of derivative financial in- hedges of particular risks associated with the cash struments that are used to hedge net investments in 2016 flow of recognised assets and liabilities; or net invest- foreign subsidiaries, associates and joint ventures and Interest rate instruments 1 - N/A ment hedges – hedges of currency fluctuations in that effectively hedge currency fluctuations in these entities are recognised in other comprehensive income Exchange rate instruments -11 -37 2017-2018 subsidiaries, associates or joint ventures. and accumulated in a separate translation reserve in Other instruments 139 83 2017 The fair values of derivative financial instruments are equity. Total 129 46 presented in other receivables or payables, and

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 62 SECTION 5 ACQUISITIONS, DISPOSALS, ASSOCIATES AND JOINT VENTURES

SECTION 5.1 INVESTMENT MODEL IMPACT ON FINANCIAL STATEMENTS Entering into a partnership can both reduce the Investments in partnerships where the Group 300m INVESTMENT MODEL financial exposure and mitigate the business is the non-controlling shareholder and joint In gains on disposal of entities recognised in AND RISKS risks associated with entering new markets. ventures are consolidated in the financial special items (DKK). The financial exposure, however, varies de- statements using the equity method. The ac- MARKET ACCESS pending on the structure of the partnership. counting risk associated with these In the beer industry, access to the local market governance models is limited to the invest- is very much dependent on establishing good In some markets, the Group enters as a non- ment, the proportionate share of the net result relationships, for example with customers in controlling shareholder, provides a degree of of the business and any specific additional 510m the on- and off-trade market, national distrib- financing and contributes knowledge of the commitments or loans the Group provides to In net cash proceeds from disposal of enti- utors, local suppliers of raw and packaging beer industry, but leaves the controlling influ- the partnership. ties included in cash flow from investments materials and relevant authorities governing ence with the partner. Other investments are (DKK). the beverage industry. Often the most efficient structured as joint ventures where the Group In businesses where the Group exercises man- way of establishing such relations is by engag- and our local partner jointly make the opera- agement control, the full exposure to ing with a local partner that already has the tional decisions and share strategic and tactical the earnings and other financial risks impacts relevant relationships. responsibility. the consolidated financials. From an ac- counting point of view, the Group treats Therefore, when the Group expands its busi- More commonly, the Group structures its part- any put options held by partners in such enti- ness into new markets, it often does so in col- nership such that the Group exercises manage- ties as if they had already been exercised by laboration with a local partner. Such a partner- ment control, usually by way of a majority of the partner, i.e. anticipating that the acquisition ship can have different legal forms and impacts the voting rights, whereby the investment is will occur. The accounting impact is that the the consolidated financial statements to a var- fully consolidated. Such partnerships are just as non-controlling interests are not recognised, ying degree depending on the legal form. important as other types of partnership to be and no part of net profits or equity is attributed successful in the local markets, but the Group to them. Instead the dividends the partner re- has increased financial exposure. Investments ceives from the business – for accounting pur- in businesses in which the Group exercises poses – are classified as interest expenses. management control often involve put and/or call options or a similar structure.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 63

SECTION 5.1 (CONTINUED) SECTION 5.2 DISPOSAL OF ENTITIES Following the completion, the Group holds INVESTMENT MODEL ACQUISITIONS AND In 2017, the Group disposed of the subsidiaries 100% of Xinjiang Wusu Breweries. The gain on Carlsberg Uzbekistan (January) and Nordic disposal of Xinjiang Hops was recognised in AND RISKS DISPOSALS Getränke in Germany (March). The Group also special items, income, while the cost of the ac- disposed of the associates United Romanian quisition of the non-controlling interest was Common to all partnerships is the risk of disa- ACQUISITION OF ENTITIES Breweries (March), Malterie Soufflet in Russia recognised in the statement of equity. The cash greement and, ultimately, dissolution. The Group did not complete any acquisitions (April) and Nya Carnegiebryggeriet in Sweden flows were recognised accordingly and of entities in 2017. (March). The last of these was sold to a sub- amounted to approximately DKK 200m, net. A dissolution will initially impact the accounting sidiary of Sicera, a joint venture of the Group. treatment of an investment and depend on In 2016, the Group gained control of two enti- In 2016, the Group also disposed of its 59% whether the Group or our partner is exiting the ties that individually and collectively were not The restructuring of the Group’s Chinese activi- controlling interest in Carlsberg Malawi (Au- business. In the long term, however, the impact material to the Group. The purchase price allo- ties in Chongqing Brewery Group and Eastern gust), its wholly owned entities Danish Malting can be significant to the operation of the local cation was completed for one of the entities, Assets in 2017 and 2016 resulted in the dis- Group (January) and Carlsberg Vietnam Brew- entity and the collaboration with customers, while the other was recognised at provisional posal of five entities (2016: nine) comprising eries - Vung Tau (July), as well as the associ- distributors, authorities etc. if the partner was values at 31 December 2016. In 2017, the brewing and malting activities. ate Sejet Planteforædling (December) and instrumental in managing these relationships. provisional values were finalised without any Most of the breweries had been closed before other minor entities. There is therefore a risk that the dissolution of changes in goodwill, which amounted to DKK the disposals. a partnership may have a negative impact on 205m. The disposals completed in both 2017 and the underlying business and the financial per- In 2016, as part of an asset swap, the associ- 2016 were part of the structural changes under formance recognised in the consolidated finan- ate Xinjiang Hops was disposed of in June and the Funding the Journey programme, and all cial statements. the Group acquired a 35% non-controlling in- related to non-core assets. terest in Xinjiang Wusu Breweries in exchange.

Entities disposed of ACCOUNTING ESTIMATES AND JUDGEMENTS DKK million 2017 2016 Assessment of control Non-current assets 453 651 The classification of entities where Carlsberg does Current assets 269 995 not control 100% of the voting rights is based on an Assets held for sale 103 - assessment of the contractual and operational rela- Non-current liabilities -321 -156 tionship between the parties. This includes assessing Current liabilities -221 -630 the conditions in shareholder agreements, contracts Net assets of entities disposed of 283 860 etc. Consideration is also given to the extent to which each party can govern the financial and operating Non-controlling interests -3 -83 policies of the entity, how the operation of the entity Net assets of entities disposed of, attributable to shareholder in Carlsberg Breweries A/S 280 777 is designed, and which party possesses the relevant Recycling of cumulative exchange differences -57 263 knowledge and competences to operate the entity. Directly attributable expenses -4 7 Gain on disposal, net, recognised in special items, cf. section 3.1 300 2,040 Another factor relevant to this assessment is the ex- Prepayment received in prior period - -25 tent to which each of the parties can direct the activi- ties and affect the returns, for example by means of Cash consideration received, rights, exclusively reserved matters or casting votes. cf. section 5.2 519 3,062

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 64

SECTION 5.2 (CONTINUED) SECTION 5.3 SECTION 5.4 Except in cases of material error, changes in esti- ACQUISITIONS mates of contingent purchase considerations are re- CASH FLOW EFFECT NON-CONTROLLING cognised in the income statement under special items, AND DISPOSALS unless they qualify for recognition directly in equity. FROM ACQUISITIONS INTERESTS Changes in estimates of contingent purchase consid- AND DISPOSALS ACCOUNTING erations in business combinations completed no later The Group has entities, primarily in Asia, that POLICIES than 31 December 2009 are recognised as an adjust- ment to goodwill. are not wholly owned. For acquisition of new subsidiaries, associates and joint ventures, the acquisition method is used. The Elements of cash consideration paid and re- Disposals Non-controlling interests' share of profit for acquired entities’ identifiable assets, liabilities and Gains or losses on the disposal or winding-up of sub- ceived contingent liabilities are measured at fair value at the the year sidiaries, associates and joint ventures are stated as acquisition date. Identifiable intangible assets are rec- the difference between the sales price and the carry- DKK million 2017 2016 ognised if they are separable or arise from a contrac- DKK million 2017 2016 ing amount of net assets, including goodwill at the Cash consideration tual right. Deferred tax on revaluations is recognised. date of disposal or winding-up, foreign exchange Lao Brewery 304 288 received/paid, associates 242 642 adjustments recognised in other comprehensive Chongqing Brewery Group 230 -164 The acquisition date is the date when the Carlsberg Cash and cash equivalents income, and costs to sell or winding-up expenses. Breweries Group effectively obtains control of an ac- acquired/disposed of -2 -210 Carlsberg Malaysia Group 182 173

Cash consideration Asia, other 79 63 quired subsidiary or significant influence over an as- Partial disposal of investments with loss of control sociate or a joint venture. received/paid, subsidiaries 270 2,179 Other regions 11 11 When the Group loses control of a subsidiary through

a partial disposal of its shareholding or voting rights, Total cash consideration Total 806 371

The cost of a business combination comprises the fair the retained shareholding in the entity is classified as received, net 510 2,611 value of the consideration agreed upon. When a busi- an associate or a security depending on the level of - of which consideration ness combination agreement provides for an adjust- control after the disposal. The shareholding in the received for entities dis- CONTINGENT CONSIDERATIONS ment to the cost of the combination that is contingent associate or the security held after the partial disposal posed 519 3,062 Contingent considerations relate to subsidiaries on future events, the fair value of that adjustment is is measured at fair value at the date of disposal. The included in the cost of the combination. of the Group that are operated in cooperation fair value is recognised as the new cost of the share- with local partners who hold options to sell holding in the associate or the security. The resulting Goodwill and fair value adjustments in connection gain or loss is recognised under special items. their shares to the Group. with the acquisition of a foreign entity with a func- tional currency other than the presentation currency used in the Carlsberg Breweries Group are treated as The contingent consideration primarily relates assets and liabilities belonging to the foreign entity to put options on 49% of the shares in Olympic and translated into the foreign entity’s functional cur- Brewery, Greece, 21% in Brewery Alivaria, Bel- rency at the exchange rate at the transaction date. arus, and 33% in the parent company holding

100% and 90% of the shares in the businesses If uncertainties regarding measurement of acquired identifiable assets, liabilities and contingent liabilities in India and Nepal respectively. The total con- exist at the acquisition date, initial recognition will tingent consideration recognised amounted to take place on the basis of preliminary fair values. If DKK 3,820m at 31 December 2017 (2016: identifiable assets, liabilities and contingent liabilities are subsequently determined to have a different fair DKK 3,027m). value at the acquisition date from that first assumed, goodwill is adjusted up until 12 months after the ac- quisition. The effect of the adjustments is recognised in the opening balance of equity and the comparative figures are restated accordingly if the amount is ma- terial.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 65

SECTION 5.4 (CONTINUED) valuation methods, including discounted cash ACCOUNTING SECTION 5.5 POLICIES NON-CONTROLLING flows and multiples. Estimates are based on ASSOCIATES AND updated information since initial recognition of On acquisition of non-controlling interests (i.e. sub- sequent to the Group obtaining control), acquired net INTERESTS the contingent consideration, including new JOINT VENTURES assets are not measured at fair value. The difference budgets and sales forecasts, discount rates etc. between the cost and the non-controlling interests’ In accordance with the Group’s accounting pol- The determination of the fair value makes use share of the total carrying amount, including good- The total investments in associates and joint icy, shares subject to put options are consoli- of non-observable data (level 3 input) such as will, is transferred from the non-controlling interests’ ventures amounted to DKK 3,784m at 31 De- share of equity to equity attributable to the share- dated as if the shares had already been ac- cember 2017 (2016: DKK 4,250m). entity-specific discount rates and industry- holder in Carlsberg Breweries A/S. The amount de- quired. The ownership percentage at which specific expectations of price developments. ducted cannot exceed the non-controlling interests’ these subsidiaries are consolidated therefore These inputs are identical to the input applied share of equity immediately before the transaction. While none of the investments are individually differs from the legal ownership interest re- in the test for impairment, cf. section 2.3. material, they include the investments in the On disposal of shareholdings to non-controlling businesses in Portugal (44%), Cambodia (50%), tained by the Group. The legal and consoli- interests, the difference between the sales price and dated ownership is stated in section 10. The total fair value adjustment recognised in the share of the total carrying amount, including Myanmar (51%) and five associates in China 2017 amounted to DKK 793m (2016: DKK goodwill acquired by the non-controlling interests, is (each 50%). The total investment in these asso- The carrying amount of contingent considera- 1,011m). Of this, the fair value adjustment of transferred from equity attributable to the share- ciates amounted to DKK 2,611m at 31 De- holder in Carlsberg Breweries A/S to the non-con- cember 2017, while the share of profit after tax tions regarding the expected future exercise of contingent considerations for acquisitions com- trolling interests’ share of equity. put options held by non-controlling interests is pleted before 1 January 2010 amounted to amounted to DKK 166m for 2017. determined in accordance with the terms of the DKK 3m (2016: DKK 6m), which was recog- Fair value adjustment of put options granted to non- controlling interests on or after 1 January 2010 is agreements made with the holders of the op- nised as an adjustment to goodwill. Despite the legal ownership of 51% of Myan- recognised directly in the statement of changes in tions. Therefore, not all are measured at fair equity. Fair value adjustment of put options granted mar Carlsberg, the entity is classified value. For put options measured at fair value in no later than 31 December 2009 is recognised in as an associate due to the shareholders’ agree- accordance with the terms of the agreement, goodwill . ment with the partner. the value is estimated using generally accepted

Transactions with non-controlling interests Key figures for associates and joint ventures

DKK million DKK million Carlsberg Breweries Group share Attributable to the shareholder Attributable to Other com- Total com- Investments in in Carlsberg non-controlling Profit prehensive in- prehensive in- associates and 2017 Breweries A/S interests 2017 after tax come come joint ventures Consideration paid for acquisition of non-controlling interests -2 - Associates 221 -12 209 2,718 Proportionate share of equity acquired from non-controlling interests 2 -2 Joint ventures 10 - 10 1,066 Fair value adjustment of contingent considerations -790 - 231 -12 219 3,784 Recognised in equity -790 -2 2016 -807 -597 2016

Associates 175 - 175 3,049 Transactions with non-controlling interests primarily comprise transactions with shareholdings in: Joint ventures 104 - 104 1,201 2017: Carlsberg South Asia Pte Ltd (holding company of the investments in India and Nepal) and Olympic Brewery SA. 279 - 279 4,250 2016: Xinjiang Wusu Breweries Co., Ltd., Carlsberg South Asia Pte Ltd, and Olympic Brewery SA

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 66

SECTION 5.5 (CONTINUED) ACCOUNTING SECTION 5.6 ACCOUNTING POLICIES POLICIES ASSOCIATES ASSETS AND Investments in associates and joint ventures are Assets held for sale comprise non-current assets and AND JOINT recognised according to the equity method and LIABILITIES HELD disposal groups held for sale. Disposal groups are de- measured at the proportionate share of the entities’ fined as a group of assets to be disposed of, by sale VENTURES net asset values calculated in accordance with the FOR SALE or otherwise, together as a group in a single transac- Group’s accounting policies. The proportionate share tion and those liabilities directly associated with the of unrealised intra-group profits and the carrying assets that will be transferred in the transaction. Investments in associates and joint ventures amount of goodwill are added, whereas the propor- For 2017, assets and liabilities held for sale decreased compared with 2016, primarily due tionate share of unrealised intra-group losses is de- amounted to DKK 0. In 2016, assets held for Assets are classified as held for sale if management to the disposal of the associates United Roma- ducted. sale, DKK 125m, consisted primarily of Carls- has decided to sell the asset or disposal group and taken the necessary steps to carry out the sale such nian Breweries, Malterie Soufflet in Russia and berg Uzbekistan and two associates, which Investments in associates and joint ventures with that the carrying amount will be recovered principally Nya Carnegiebryggeriet in Sweden, as well as negative net asset values are measured at DKK 0. If were all disposed of in 2017. through a sale within 12 months in accordance with a foreign exchange losses. the Group has a legal or constructive obligation to formal plan rather than through continuing use. cover a deficit in the associate or joint venture, the Assets and liabilities held for sale Comparative figures are not restated. deficit is recognised under provisions. Any amounts For associates in which the Group holds an DKK million 2017 2016 owed by associates and joint ventures are written Assets or disposal groups held for sale are measured ownership interest of less than 20%, the Group down to the extent that the amount owed is deemed at the lower of carrying amount or fair value less participates in the management of the com- irrecoverable. Assets costs to sell. Assets are not depreciated or amortised pany and is therefore exercising significant in- Property, plant and from the date when they are reclassified as held equipment - 61 for sale. fluence. Inventories - 15 If a sale is not completed as expected, the asset or Other current assets - 29 The Group also has minor investments in enti- disposal group is reclassified to the items in the state- Total assets in a disposal ment of financial position from which the asset or ties in which the Group is unable to exercise group held for sale - 105 disposal group was originally separated. This reclas- significant influence. Assets held for sale - 20 sification is made at the carrying amount less any Total assets held for sale - 125 depreciation charges that would have been recog- Fair value of investment in listed associates nised if the asset had not been classified as held for sale. Liabilities DKK million 2017 2016 Other liabilities - 15 The Lion Brewery Total liabilities held for sale - 15 Ceylon, Biyagama, Sri Lanka 442 439

In 2016, a reversal of impairment of DKK

105m was recognised in special items prior to None of the associates and joint ventures are the classification as assets held for sale. Except material to the Group. for the reversal of impairment, the classification

CONTINGENT LIABILITIES of assets as held for sale did not impact the in- The Group did not issue any guarantees for come statement or statement of cash flows for loans etc. raised by associates and joint ven- 2016. tures in 2017 or 2016.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 67 SECTION 6 TAX

SECTION 6.1 ACCOUNTING If the Group obtains a tax deduction on computation POLICIES of the taxable income in Denmark or in foreign juris- 1,485m CORPORATION TAX dictions as a result of share-based payment pro- Tax for the year comprises current tax and changes in grammes, the tax effect of the programmes is recog- deferred tax for the year, including changes as a CORPORATION TAX (DKK) nised in tax on the profit/loss for the year. However, The nominal weighted tax rate for the Group is result of a change in the tax rate. The tax expense down from DKK 2,402m in 2016. if the total tax deduction exceeds the total tax ex- relating to the profit/loss for the year is recognised in calculated as domestic tax rates applicable to pense, the tax benefit for the excess deduction is rec- the income statement, while the tax expense relating profits in the entities as a proportion of each ognised directly in equity. to items recognised in other comprehensive income is entity’s share of the Group’s profit before tax. recognised in other comprehensive income.

The tax rate in 2017 of 41.6% was negatively 29.1% impacted by the impairment of brands in Rus- TAX RATE (%) sia and Finland, which was recognised in spe- cial items. Excluding impairment of brands Reconciliation of the effective tax rate for the year In 2016, the tax rate of 32.8% was negatively 2017 2016 impacted, mainly by the lost tax case in Fin- % DKK million % DKK million land. The tax expense related to this is non-re- Nominal weighted tax rate 22.5% 804 21.7% 1,592 curring and had no impact on cash flow. Change in tax rate -3.6% -127 -1.1% -81 Adjustments to tax for prior years -0.3% -9 2.3% 170 Valuation allowances on tax losses in 2017 Non-capitalised tax assets, net movements 11.6% 414 7.4% 543 and 2016 also impacted negatively. Non-taxable income -0.9% -32 - - Non-deductible expenses 7.8% 278 3.5% 256 Fair value adjustments of hedging instruments Tax incentives etc. -1.4% -49 -0.8% -56 arise in Denmark, but it is not possible to Special items -1.1% -41 -2.5% -184 Withholding taxes 9.2% 329 3.7% 268 deduct all fair value adjustments due to local Other and tax in associates and thin capitalisation rules. Tax on such adjust- joint ventures -2.2% -82 -1.4% -106 ments therefore fluctuates from year to year. Effective tax rate for the year 41.6% 1,485 32.8% 2,402

Tax on impairment of brands 969 173 Effective tax rate for the year adjusted for impairment of brands 29.1% 2,454 31.4% 2,575

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 68

SECTION 6.1 (CONTINUED) SECTION 6.2 COPORATION TAX DEFERRED TAX

Of the total deferred tax assets recognised, DKK 472m (2016: DKK 609m) related to tax loss carryforwards, the utilisation of which depends on future positive taxable income exceeding the realised deferred tax liabilities. It is management’s opinion that these tax loss Corporation tax carryforwards can be utilised. 2017 2016 Income Other compre- Total compre- Income Other compre- Total compre- Tax assets not recognised of DKK 1,411m DKK million statement hensive income hensive income statement hensive income hensive income (2016: DKK 1,287m) primarily related to tax losses that are not expected to be utilised in Tax for the year can be specified as follows the foreseeable future. Tax losses that will not Current tax 2,301 -36 2,265 2,679 18 2,697 expire amounted to DKK 776m (2016: DKK Change in deferred tax during the year -680 151 -529 -373 -40 -413 462m). Change in deferred tax as a result of change in tax rate -127 - -127 -74 2 -72

Adjustments to tax for prior years -9 - -9 170 - 170 Deferred tax of DKK 115m (2016: DKK 113m) Total 1,485 115 1,600 2,402 -20 2,382 was recognised in respect of earnings in entities in the Eastern Europe region that are intended for distribution in the short term, as tax of 5% is Tax recognised in other comprehensive income payable on distributions. 2017 2016 Recognised Tax Recognised Tax For other subsidiaries where reserves are item income/ item income/ planned to be distributed, any distribution of DKK million before tax expense After tax before tax expense After tax earnings will not trigger a significant tax liabil- Foreign exchange adjustments -3,842 - -3,842 5,843 - 5,843 Hedging instruments -305 25 -280 141 -30 111 ity based on current tax legislation. Retirement benefit obligations 1,263 -137 1,126 -954 54 -900 Share of other comprehensive income in associates and joint ventures -12 - -12 - - - Deferred tax on temporary differences relating Other - -3 -3 - -4 -4 to investments in subsidiaries, associates and Total -2,896 -115 -3,011 5,030 20 5,050 joint ventures amounted to DKK 0m (2016: 0m).

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 69

SECTION 6.2 (CONTINUED) ACCOUNTING If specific dividend plans exist for subsidiaries, associ- Deferred tax is measured according to the tax rules POLICIES ates and joint ventures in countries levying withhold- and at the tax rates applicable in the respective coun- ing tax on distributions, deferred tax is recognised on tries at the end of the reporting period and when the DEFERRED TAX Current tax payable and receivable are recognised in expected dividend payments. deferred tax is expected to crystallise as current tax. the statement of financial position as tax computed The change in deferred tax as a result of changes in ACCOUNTING ESTIMATES on the taxable income for the year, adjusted for tax AND JUDGEMENTS Deferred tax assets, including the tax base of tax loss tax rates is recognised in the income statement. on the taxable income of prior years and for tax paid carryforwards, are recognised under other non-cur- Changes to deferred tax on items recognised in other on account. The Group recognises deferred tax assets, including rent assets at the expected value of their utilisation, comprehensive income are, however, recognised in the expected tax value of tax loss carryforwards, if either as a set-off against tax on future income or as other comprehensive income. management assesses that these tax assets can be Deferred tax on all temporary differences between a set-off against deferred tax liabilities in the same offset against positive taxable income in the foresee- the carrying amount and the tax base of assets and legal tax entity and jurisdiction. able future. This judgement is made annually and liabilities is measured using the balance sheet liability based on budgets and business plans for the coming method. However, deferred tax is not recognised on Deferred tax assets and tax liabilities are offset if the years, including planned commercial initiatives. temporary differences relating to goodwill that is not entity has a legally enforceable right to offset current deductible for tax purposes or on office premises and tax liabilities and tax assets or intends either to settle Carlsberg operates in a large number of tax jurisdic- other items where temporary differences, apart from current tax liabilities and tax assets or to realise the tions where tax legislation is highly complex and sub- business combinations, arise at the acquisition date assets and settle the liabilities simultaneously. De- ject to interpretation. Management makes judge- without affecting either profit/loss for the year or ferred tax assets are subject to annual impairment ments on uncertain tax positions to ensure recogni- taxable income. Where alternative tax rules can be tests and are recognised only to the extent that it is tion and measurement of tax assets and liabilities. applied to determine the tax base, deferred tax is probable that the assets will be utilised. measured based on management’s planned use of Adjustments are made to deferred tax resulting from the asset or settlement of the liability. elimination of unrealised intra-group profits and losses.

Specification of deferred tax

Deferred tax Deferred tax assets Deferred tax liabilities DKK million 2017 2016 2017 2016 DKK million 2017 2016 Intangible assets 1,107 446 4,075 4,411 Deferred tax at 1 January, net 4,126 3,771 Property, plant and equipment 483 349 1,724 1,908 Adjustments to prior years -9 44 Current assets 176 141 30 60 Acquisition and disposal of entities 5 61 Provisions and retirement benefit obligations 1,074 1,248 30 195 Recognised in other comprehensive income 151 -40 Fair value adjustments 144 154 5 10 Recognised in the income statement -680 -373 Tax losses etc. 1,140 1,351 1,692 1,230 Change in tax rate -127 -72 Total before set-off 4,124 3,689 7,556 7,814 Foreign exchange adjustments -34 735 Set-off -2,615 -2,230 -2,615 -2,229 Deferred tax at 31 December, net 3,432 4,126 Deferred tax assets and liabilities at 31 December 1,509 1,459 4,941 5,585

Recognised as follows Expected to be used as follows Deferred tax liabilities 4,941 5,585 Within one year 248 295 1,850 1,149 Deferred tax assets -1,509 -1,459 After more than one year 1,261 1,164 3,091 4,436 Deferred tax at 31 December, net 3,432 4,126 Total 1,509 1,459 4,941 5,585

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 70 SECTION 7 STAFF COSTS AND REMUNERATION

SECTION 7.1 restructuring projects in the UK, France and China Pensions 41,349 STAFF COSTS as well as brewery closures in China also contrib- uted to the reduction of the average headcount Defined benefit obligations decreased due The average number of employees decreased for 2017. to the implementation of risk sharing in Swit- by 636, mainly as a result of disposal of enti- The average number of employees decreased zerland and gains on investments in ties and restructuring projects. during 2017, due to disposal of entities and re- The decrease from the disposals and restructur- plan assets in the UK. structuring projects. The disposal of Carlsberg ings was partially offset by an increase in the Uzbekistan and Nordic Getränke in 2017 and the sales force in Russia, which as a consequence of full-year effect of the disposals in 2016 impacted the new trade law has to be employed by the the average headcount for 2017 by around selling company instead of the distributors. 1,300 employees. In addition, various

Employees By function (%) By region (%) Staff costs

DKK million 2017 2016 2017 2017 Salaries and other remuneration 7,898 7,995 Severance payments 415 505 Social security costs 1,320 1,359 Retirement benefit costs – defined contribution plans 270 269 (2016) (2016) Retirement benefit costs – defined benefit plans 219 310 Share-based payments 24 50 Other employee benefits 98 74 Total 10,244 10,562 Average number of employees 41,349 41,985

Staff costs are included in the following line items in the income statement Cost of sales 2,653 2,689 Sales and distribution expenses 5,391 5,347 Western Europe 31% (33%) Production 32% (35%) Administrative expenses 2,059 2,202 Eastern Europe 29% (25%) Distribution 17% (19%) Other operating activities, net - 1 (36%) Asia 38% (40%) Sales & Marketing 41% Special items (restructurings) 141 323 Other 2% (2%) Administration 10% (10%) Total 10,244 10,562

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 71

SECTION 7.2 For 2017, the potential maximum bonus for KEY MANAGEMENT PERSONNEL ACCOUNTING POLICIES REMUNERATION the CEO and CFO was 100% of fixed salary, Key management personnel comprise the Ex- with a bonus equal to 60% of fixed salary pay- ecutive Committee, excluding the executive di- Staff costs are recognised in the financial year in which the employee renders the related service. The able for on-target performance. A scorecard of rectors. Other management personnel comprise Remuneration of the executive directors and cost of share-based payments, which is expensed Vice Presidents and other key employees in key management personnel is based on a fixed performance measures is used to assess per- over the vesting period of the programme according central functions as well as the management of to the service conditions, is recognised in staff costs salary, cash bonus payments and non-mone- formance. The remuneration of key management person- significant subsidiaries. The key management and provisions or equity, depending on how the pro- tary benefits such as company car, telephone gramme is settled with the employees. nel was lower than in 2016 as a result of the personnel, together with the executive direc- etc. Furthermore, share option programmes tors, are responsible for planning, directing and and incentive schemes have been established Executive Committee having fewer members controlling the Group’s activities. for the executive directors and other manage- and of lower severance payments. ment personnel. These programmes and schemes cover a number of years. In respect of other benefits and bonus schemes, the remuneration of CEOs in subsidiaries is Employment contracts for the executive direc- based on local terms and conditions. tors contain terms and conditions that are con- sidered common to executive board members in Danish listed companies, including terms of notice and non-competition clauses.

Remuneration Executive directors Key management personnel Supervisory Board Cees 't Hart Heine Dalsgaard2 DKK million 2017 2016 2017 2016 2017 2016 2017 2016

Fixed salary 12.0 12.0 7.3 4.2 30.7 35.7 3.35 2.86 Cash bonus 9.3 10.0 5.6 7.3 12.2 11.2 - - Special bonus1 - - 3.1 11.9 - - - - Severance payments - - - - 15.3 29.5 - - Non-monetary benefits 1.3 1.3 0.3 0.2 9.2 5.7 - - Funding the Journey cash plan - - - - 10.9 20.7 - - Share-based payments 20.6 12.8 9.0 1.9 0.7 5.2 - - Total 43.2 36.1 25.3 25.5 79.0 108.0 3.35 2.86

1 Special bonus covering remuneration waived from previous employer, in total DKK 15m, which was paid out equally over the two years

2 The remuneration of Heine Dalsgaard was recognised in the parent company Carlsberg A/S and is therefore not included in the staff cost disclosed in the consolidated financial statements for Carlsberg Breweries Group.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 72

SECTION 7.3 ACCOUNTING ESTIMATES ACCOUNTING The estimated number is subsequently revised for AND JUDGEMENTS POLICIES changes in the number of awards expected to vest. Accordingly, recognition is based on the number of SHARE-BASED For share options granted after 1 January 2015, the The fair value of equity-settled programmes is meas- awards that ultimately vest. PAYMENTS volatility is based on the historical volatility of the ured at the grant date and recognised in the income price of Carlsberg A/S’ class B shares over the previ- statement under staff costs over the vesting period ous eight years. From 1 January 2010 up until 31 with a corresponding increase in equity. The Group has set up share-based incentive December 2014, the volatility was based on presently programmes to attract, retain and motivate the observed data on Bloomberg’s Options Valuation The fair value of granted share options is estimated Group’s executive directors and other levels of Function, while prior to 2010 it was based on the his- using the Black-Scholes call option-pricing model, torical volatility of the price of Carlsberg A/S’ class B taking into account the terms and conditions upon management personnel, and to align their in- shares over the previous two years. For performance which the options were granted. terests with those of the shareholders. No shares, the volatility is based on similar data over the share-based incentive programme has been set previous three years. The share price and the exercise price for share options are calculated as the average price of up for Carlsberg Breweries A/S’ Supervisory The risk-free interest rate is the interest rate on Carlsberg A/S’ class B shares on Nasdaq Copenhagen Board. Danish government bonds of the relevant maturity, during the first five trading days after publication of while the dividend yield is calculated as the expected Carlsberg A/S’ Financial statement following the In 2017, performance share awards were future dividends at the grant date of DKK 9.00 per granting of the options. share (2015: DKK 9.00 per share) divided by the granted to the Executive Board only. share price. The fair value at 31 December 2016 has The fair value of granted performance shares is esti- been calculated by applying an expected dividend of mated using a stochastic (quasi-Monte Carlo) valua- In March 2017, 10,863 regular performance DKK 9.00 per share. tion model and a Black-Scholes call option-pricing shares awarded in 2014 under the long-term model, taking into account the terms and conditions For share options and performance shares granted or upon which the performance shares were granted. incentive programme vested. Immediately after measured after 1 January 2010, the expected life is vesting, they were converted to Carlsberg B based on exercise at the end of the exercise period, On initial recognition of share options and perform- shares and transferred to the eligible employ- whereas for share options granted prior to 2010, it ance shares, an estimate is made of the number of ees. was based on exercise in the middle of the exercise awards expected to vest. period.

General terms and conditions Regular Funding the Journey Share options performance shares performance shares 2017 2016 2017 2016 2017 2016 Granted during the year - 17,650 74,877 25,079 - 37,242 Number of employees - 1 2 2 - 2

DKK million Fair value at grant date - 2 39 13 - 22 Cost of share-based payment granted in the year recognised in the income statement - 1 10 3 - 5 Total cost of share-based payments granted 2014-2017 (2013-2016) 7 7 19 40 8 5 Not recognised in respect of share-based payments expected to vest 4 11 38 34 8 17 Fair value of outstanding options and performance shares at 31 December 63 69 171 195 27 22

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 73

SECTION 7.3 (CONTINUED) Share-based incentive programmes Exercise price Number SHARE-BASED Fixed, Key Other PAYMENTS weighted Executive management management Resigned average directors personnel personnel employees Total Share options Share options outstanding at 31 December 2015 360.10 97,334 14,894 67,700 650,085 830,013 Granted 597.60 17,650 - - - 17,650 Forfeited/expired 516.42 - - -7,433 -55,126 -62,559 Exercised 476.56 - - -37,462 -275,615 -313,077 Transferred 439.48 - -6,200 -1,900 8,100 - Share options outstanding at 31 December 2016 248.66 114,984 8,694 20,905 327,444 472,027 Forfeited/expired 203.50 - - - -1,599 -1,599 Exercised 536.25 - - -9,800 -195,800 -205,600 Transferred 310.43 - -8,694 -4,505 13,199 - Share options outstanding at 31 December 2017 522.85 114,984 - 6,600 143,244 264,828

Regular performance shares Performance shares outstanding at 31 December 2015 - 35,810 198,862 14,654 249,326 Granted 25,079 - - - 25,079 Forfeited/expired/adjusted - -3,471 -20,063 4,369 -19,165 Exercised/settled - -2,396 -18,172 -4,481 -25,049 Transferred - -15,327 1,340 13,987 - Performance shares outstanding at 31 December 2016 25,079 14,616 161,967 28,529 230,191 Granted 74,877 - - - 74,877 Forfeited/expired/adjusted - -4,783 -26,753 -6,830 -38,366 Exercised/settled - -810 -7,926 -2,127 -10,863 Transferred - - -5,713 5,713 - Performance shares outstanding at 31 December 2017 99,956 9,023 121,575 25,285 255,839

Funding the Journey performance shares Performance shares outstanding at 31 December 2015 - - - - - Granted 37,242 - - - 37,242 Performance shares outstanding at 31 December 2016 37,242 - - - 37,242 No changes in 2017 - - - - - Performance shares outstanding at 31 December 2017 37,242 - - - 37,242

The granted number of performance shares included in the specification is the number of performance shares that are expected to vest. The estimated number is revised on a regular basis until vesting. Transferred performance shares comprise performance shares that have been granted to employees who have either moved between management categories or left the Group during the year. Adjusted performance shares comprise the change in the number of performance shares expected to vest, based on an assessment of the extent to hi h th ti diti t d t b t

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 74

SECTION 7.3 (CONTINUED) Key information SHARE-BASED Regular Funding the Journey Share options performance shares performance shares PAYMENTS 2017 2016 2017 2016 2017 2016 Average share price at the exercise date 708 630 - - - Weighted average contractual life for awards outstanding at 31 De- cember 4.9 5.9 0.8 1.1 1.2 2.2 Range of exercise prices for share options outstanding at 31 December 417.34-597.60 203.50-597.60 - - - - Exercisable outstanding share options at 31 December 16,289 128,488 None None None None

Weighted average exercise price for exercisable share options at 31 December 417 482 - - - -

Assumptions Exercise price No grant 597.60 None None No grant None Expected volatility - 26% 22% 24%/23% - - Risk-free interest rate - 0.0% 0.0% 0.0% - - Expected dividend yield - 1.5% 1.6% 1.5%/1.4% - 1.5%/1.4% Expected life of options, years - 8.0 3.0 3.0/2.5 - 3.0/2.5 Fair value at measurement date - 121.89 523.50 523.37/528.36 - 583.61/603.07

Terms and conditions Years granted 2001-2016 Since 2013 Only 2016 Each performance share granted entitles the holder to receive a Each performance share granted number of Carlsberg B shares. entitles the holder to receive a For each grant, the exact number number of Carlsberg B shares. of shares granted is determined The exact number of shares vest- Each share option entitles the after publication of the Annual ing is determined after publica- holder to purchase one class B Report for the last year in the tion of the Annual Report for the Settlement features share in Carlsberg A/S. vesting period. last year in the vesting period. Immediately following the publi- Immediately following the publi- Immediately following the publi- cation of the Annual Report for cation of the Annual Report for cation of the Annual Report for the Carlsberg Group for the prior the Group for the prior reporting the Group for the prior reporting Timing of valuation of award reporting period. period. period. 3 years of service and achieve- ment of 3 KPIs in the vesting pe- riod. The KPIs are total share- 3 years of service and achieve- holder return, adjusted EPS ment of the Funding the Journey Vesting conditions 3 years of service. growth and strategic measures. financial targets. Earliest time of exercise 3 years from grant date. N/A N/A Shares are transferred to the em- Shares are transferred to the em- ployee immediately after they ployee immediately after they Latest time of exercise 8 years from grant date. have vested. have vested.

Upon resignation, a proportion of share options may be exercised within one to three months unless special severance terms have been agreed. Special terms and conditions apply in

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 75

SECTION 7.4 associated with future developments in interest In 2017, the Group’s defined benefit plans de- Swiss law, risks relating to pensions in Switzer- RETIREMENT rates, inflation, mortality and disability etc. creased by DKK 1.5bn compared with 2016. land are typically shared between the employer The decrease mainly relates to the implemen- and the employees. Important aspects of the BENEFIT The majority of the obligations are funded, tation of risk-sharing methodology in Switzer- risk sharing for the pension situation includes OBLIGATIONS with assets placed in independent pension land and gains on plan assets in the UK. employee contributions and future benefits funds mainly in Switzerland, the UK and The pension funds in Switzerland are based on changes, some of which can be undertaken by AND SIMILAR Hong Kong. In some countries, primarily Ger- shared contributions by employer and employ- trustees without the need to make formal plan OBLIGATIONS many, Sweden and China, the obligation is un- ees, which are more similar to a defined contri- amendments. funded. For these unfunded plans, the retire- bution scheme. However, certain guarantees in A number of the Group’s employees are cov- ment benefit obligations amounted to DKK the schemes mean they are accounted for as ered by retirement benefit plans. The nature of 1,786m (2016: DKK 1,882m) or approximately defined benefit schemes under IAS 19. Under the retirement benefit plans varies depending 14% (2016: 13%) of the gross obligation. on labour market conditions in the individual countries. Benefits are generally based on Obligation, net wages and salaries and length of employment. 2017 2016

Retirement benefit obligations cover both pre- Present value Fair value of Obligation, Present value Fair value of Obligation, DKK million of obligation plan assets net of obligation plan assets net sent and future retirees’ entitlement to retire- Obligation at 1 January 14,772 9,935 4,837 14,229 9,034 5,195 ment benefits.

Recognised in the income statement DEFINED CONTRIBUTION PLANS Current service cost 253 - 253 310 - 310 A defined contribution plan is a post-employ- Past service cost -38 - -38 - - - ment benefit plan under which the Group pays Net interest on the net defined benefit liability (asset) 251 152 99 296 173 123 fixed contributions into a separate independent Curtailments and settlements 4 - 4 - - - entity. The Group’s legal or constructive obli- Total 470 152 318 606 173 433 gation is limited to the contributions. Remeasurements Approximately 55% (2016: approximately 46%) Gain/loss from changes in actuarial assumptions -327 1 -328 -84 - -84 of the Group’s retirement benefit costs relates Gain/loss from changes in financial assumptions -377 558 -935 1,561 523 1,038 to defined contribution plans. The cost related Total -704 559 -1,263 1,477 523 954 to these plans amounted to DKK 270m for 2017 (2016: DKK 269m). Other changes Contributions to plans - 209 -209 - 1,232 -1,232 DEFINED BENEFIT PLANS Benefits paid -689 -570 -119 -643 -491 -152 he defined benefit plans typically guarantee Disposals of entities -3 - -3 -46 - -46 employees a certain level of pension benefits Transfers -17 1 -18 80 60 20 for life based on seniority and the salary at the Foreign exchange adjustments etc. -794 -568 -226 -931 -596 -335 Obligation at 31 December 13,035 9,718 3,317 14,772 9,935 4,837 time of retirement. The Group assumes the risk

The total return on plan assets for the year amounted to DKK 711m (2016: DKK 696m).

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 76

SECTION 7.4 (CONTINUED) The actuarial gain and foreign exchange ad- Assumptions applied RETIREMENT justment recognised in other comprehensive in- In 2017, the discount rate used for the pension come for 2017 was DKK1,499m (2016: plans in Western Europe was determined by BENEFIT DKK -619m). The development in the foreign reference to market yields on corporate bonds. OBLIGATIONS exchange rate was mainly affected by the de- In the Asian countries where no deep market in preciation of GBP. high-quality corporate bonds exists, the dis- AND SIMILAR count rate was determined by reference to OBLIGATIONS The accumulated actuarial loss and foreign market yields on government bonds. exchange adjustment recognised at 31 The mortality tables used in Carlsberg UK are Applying risk sharing indicates that a deficit December 2017 was DKK 3,361m (2016: DKK S1PMA/S2PFA tables for post-retirement and may not necessarily be the employer’s sole re- 4,860m), of which actuarial losses, net, to- AMC00/AFC00 for pre-retirement, both with sponsibility and has led to changes in the cal- talled DKK 3,488m (2016: DKK 4,750m). CMI_2016 projections, while the Swiss entities culation of the defined benefit scheme to re- use BVG 2015 GT for valuation of their retire- flect the shared risk. The implementation of The most significant plans are in the UK and ment obligations. risk sharing has impacted the Group’s defined Switzerland, representing 46% and 37% benefit plans by approximately DKK -0.7bn. (2016: 46% and 40%) respectively, whereas the The impact from the UK plan amounted to eurozone countries represented 6% (2016: 5%) DKK -0.6bn. of the gross obligation at 31 December 2017.

The Group expects to contribute DKK 76m (2016: DKK 76m) to the plan assets in 2018. Plan assets do not include shares in or proper- ties used by Group companies.

Assumptions applied

Breakdown of plan assets % 2017 2016 Weighted 2017 CHF UK EUR Other average DKK million % DKK million % Discount rate 0.6% 2.5% 0.8-1.6% 0.5-7.8% 1.8% Growth in wages and salaries 1.0% 2.3% 0.0-2.7% 2.0-10.0% 2.1% Shares 1,241 13% 2,767 28% Bonds and other securities 6,314 65% 4,116 41% Weighted Real estate 2,028 21% 2,095 21% 2016 CHF UK EUR Others average Cash and cash equivalents 135 1% 957 10% Discount rate 0.5% 2.7% 1.1-1.7% 0.5-5.0% 1.5% Total 9,718 100% 9,935 100% Growth in wages and salaries 1.0% 2.5% 2.2-2.3% 2.3-10.0% 1.7%

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 77

SECTION 7.4 (CONTINUED) When calculating the obligation on the basis of ACCOUNTING ESTIMATES employees have earned in return for their service in AND JUDGEMENTS a changed assumption, the same method has the current and prior years. RETIREMENT The value of the Group’s defined benefit plans is been applied as when calculating the defined The costs of a defined benefit plan are recognised in based on valuations from external actuaries. The val- BENEFIT benefit obligation. the income statement and include service costs, net uation is based on a number of actuarial assump- interest based on actuarial estimates and financial tions, including discount rates, expected return on OBLIGATIONS expectations at the beginning of the year. Expected maturity and duration plan assets, expected growth in wages and salaries,

mortality and retirement benefits. AND SIMILAR Defined benefit obligations are primarily ex- Service costs comprise current service cost and past

pected to mature after five years. The expected service cost. Current service cost is the increase in the OBLIGATIONS The actuarial assumptions used to calculate the de- present value of the defined benefit obligation result- duration of the obligations at year-end 2017 fined benefit plans vary from country to country due ing from employee services in the current period. Past was 24 years. The duration is calculated using to local economic and labour market conditions. Sensitivity analysis service cost is the change in the present value of the

The sensitivity analysis is based on a change in a weighted average of the duration divided by obligation regarding employee services in prior years The present value of the net obligation is calculated that arises from a plan amendment or a curtailment. one of the assumptions, while all other as- the obligation. by using the projected unit credit method and dis- Past service costs are recognised immediately, pro- sumptions remain constant. This is highly un- counting the defined benefit plan by a discount rate vided employees have already earned the changed for each country. The discount rate is determined by likely, however, as a change in one assumption benefits. reference to market yields on high-quality corporate would probably affect other assumptions as bonds. Where high-quality corporate bonds are not Realised gains and losses on curtailment or settle- well. available, the market yields on government bonds are ment are recognised under staff costs. used instead.

Interest on retirement benefit obligations and the in- Sensitivity analysis Mortality assumptions are based on the Group en- terest on return on plan assets are recognised as fi- tity’s best estimate of the mortality of plan members nancial income or financial expenses. during and after employment, and include expected DKK million 2017 2016 changes in mortality, for example using estimates of Differences between the development in retirement Reported retirement benefit obligation 13,035 14,772 mortality improvements. Due to the broad range of benefit assets and liabilities and realised amounts at entities comprising the retirement benefit obligation, year-end are designated as actuarial gains or losses several different mortality tables are used to calculate Discount rate and recognised in other comprehensive income. As the future retirement benefit obligation. Discount assumption +0.5% -972 -1,316 they will never be reclassified to the income state- Discount assumption -0.5% 1,155 1,512 ment, they are presented in retained earnings.

ACCOUNTING If a retirement benefit plan constitutes a net asset, Growth in wages and salaries POLICIES the asset is recognised only if it offsets future refunds Wages and salaries assumption +0.5% 141 204 from the plan or will lead to reduced future payments Contributions paid to a defined contribution plan are Wages and salaries assumption -0.5% -110 -194 to the plan. recognised in the income statement in the period

during which services are rendered by employees. Realised gains and losses on the adjustment of retire- Mortality Any contributions outstanding are recognised in the ment benefit obligations as a result of large-scale Mortality assumption +1 year 517 422 statement of financial position as other liabilities. termination of jobs in connection with restructurings Mortality assumption -1 year -484 -425 are recognised under special items. The Group’s net liability recognised in the statement

of financial position in respect of defined benefit plans is the present value of the defined benefit obli- Maturity of pension obligations gation at the reporting date less the fair value of plan assets calculated by a qualified actuary.

DKK million <1 year 1-5 years > 5 years Total The present value is determined separately for each Retirement benefits 418 1,254 3,806 5,477 plan by discounting the estimated future benefits that

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 78 SECTION 8 OTHER DISCLOSURE REQUIREMENTS

SECTION 8.1 soft drinks was formalised to the effect that the Related parties also include the Group’s associ- Fees to auditors appointed by the RELATED PARTY Carlsberg foundations are charged an ordinary ates and joint ventures. Annual General Meeting listing price minus a discount of 25% for Carls- PwC KPMG DISCLOSURES berg products and 15% for third-party prod- The income statement and the statement DKK million 2017 2016 ucts. In 2017, the deliveries amounted to a of financial position include the following RELATED PARTIES EXERCISING CONTROL value of DKK 227 thousand (total sales of transactions Statutory audit 16 21 Carlsberg A/S, Ny Carlsberg Vej 100, DK, goods). Assurance DKK million 2017 2016 engagements 1 1 1799 Copenhagen V, Denmark, holds all the Tax advisory - 3 shares in Carlsberg Breweries A/S. During the It is estimated that the benefit for the Carlsberg Associates and joint ventures Other services 5 9 year, the Group had transactions with the par- Group corresponds to the value of the services ent company. Revenue 59 104 provided to the Carlsberg Foundation, which in Cost of sales -609 -230 SECTION 8.3 turn corresponds to what each party would Loans 290 300 The following transactions took place between have had to invest to have the same delivera- Receivables 239 90 EVENTS AFTER THE the Carlsberg Foundation (as the ultimate Par- bles provided by external parties. Borrowings -22 - REPORTING PERIOD ent Company) and the Carlsberg Breweries Trade payables and other Group in 2017: OTHER RELATED PARTIES liabilities etc. -4 -18

Apart from the events recognised or disclosed Related parties also comprise Carlsberg Brew- A collaboration between Carlsberg foundations in the consolidated financial statements, no eries A/S’ Supervisory Board and Executive events have occurred after the reporting period and the Carlsberg Group to launch a campaign Board, their close family members and compa- SECTION 8.2 at Copenhagen Airport to celebrate Carlsberg’s nies in which these persons have significant in- of importance to the consolidated financial 170-year anniversary. fluence. FEES TO AUDITORS statements.

The Carlsberg Science to Business forum is or- During the year, the Group was not involved Other services delivered by PwC Denmark in In February 2018, the Group acquired the re- ganised by the Carlsberg Foundation and the in any transactions with major shareholders, addition to audit include fees for review ser- maining 49% of the shares in Olympic Brewery, Group. The Carlsberg Foundation pays for pre- members of the Supervisory Board, members vices, issuing comfort letters in connection with Greece. The transaction has no significant im- senters’ costs, which amount to DKK 250-300 of the Executive Board or companies outside prospectuses and agreed-upon procedures re- pact on the consolidated financial statements. thousand. The Group contributes the meeting the Group in which these parties have signifi- garding financial information. room and approximately 30 working hours. cant influence, except for remuneration to the Supervisory Board and the Executive Board as An agreement between the Group and the disclosed in section 7. Carlsberg foundations on delivery of beer and

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 79 SECTION 9 BASIS FOR PREPARATION

SECTION 9.1 SECTION 9.2 vant sections. The carrying amount of other fi- Changes SIGNIFICANT GENERAL nancial assets and liabilities approximates their fair value. ACCOUNTING ACCOUNTING from 2018 ESTIMATES AND POLICIES The accounting policies set out below have CLASSIFICATION OF JUDGEMENTS been used consistently in respect of the finan- REVENUE The Group’s 2017 consolidated financial state- cial year and the comparative figures. ments have been prepared in accordance with Application of the new IFRS revenue stand- In preparing the consolidated financial state- DEFINING MATERIALITY IFRS and additional requirements in the Danish ard changes the classification of certain ments, management makes various accounting Significant items are presented individually in Financial Statements Act. Further, the consoli- marketing activities, which will be recog- estimates and judgements that form the basis the financial statements as required by IAS 1. dated Financial Statements have been prepared nised as revenue as of 1 January 2018. of presentation, recognition and measurement Other items that may not be significant but are in accordance with IFRS as adopted by the EU. of the Group’s assets, liabilities, income and considered relevant to stakeholders and the

expenses. The estimates and judgements made understanding of the Group’s business model, The consolidated financial statements are pre- are based on historical experience and other including research, real estate, geographical di- sented in Danish kroner (DKK), which is the factors that management assesses to be relia- versity etc., are also presented in the financial Parent Company’s functional currency, and all ble, but that, by nature, are associated with statements. values are rounded to the nearest DKK million, uncertainty and unpredictability and may except when otherwise stated. therefore prove incomplete or incorrect. BASIS OF CONSOLIDATION The consolidated financial statements are pre- Areas involving significant estimates and judgements: Assets and liabilities measured or disclosed at pared as a consolidation of the financial state- Impairment testing, useful life and residual value Section 2 fair value are categorised within the fair value ments of the Parent Company, Carlsberg hierarchy. The Group has no financial instru- Restructurings, provisions and contingencies Section 3 Breweries A/S, and its subsidiaries according to ments measured at fair value based on level 1 the Group’s accounting policies. Receivables Section 1 (quoted prices). The methods and assumptions Deferred tax assets Section 6 applied to determine the fair value of derivative The Group controls an investee if it has: financial instruments, loans and borrowings Defined benefit obligations Section 7 and on-trade loans (level 2) and of contingent • Power over the investee (i.e. existing rights Acquisitions and disposals, including contingent Section 5 consideration (level 3) are disclosed in the rele- that give it the current ability to direct the rel- considerations evant activities of the investee)

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 80

SECTION 9.2 (CONTINUED) the same way as unrealised gains to the extent the transaction date and at the date of pay- comprehensive income. Correspondingly, for- GENERAL that impairment has not taken place. ment are recognised as financial income or ex- eign exchange gains and losses on the part of penses. loans and derivative financial instruments that ACCOUNTING On acquisition, investments in subsidiaries are is designated as hedges of investments in for- POLICIES set off against the proportionate share of the Receivables, payables and other monetary eign entities with a functional currency other subsidiaries’ fair value of identifiable net assets, items denominated in foreign currencies are than that of Carlsberg Breweries A/S, and that • Exposure, or rights, to variable returns from including recognised contingent liabilities. translated at the exchange rates at the report- effectively hedges against corresponding for- its involvement with the investee ing date. The difference between the exchange eign exchange gains and losses on the invest- • The ability to use its power over the investee The accounting items of subsidiaries are in- rates at the reporting date and at the date at ment in the entity, are also recognised in other to affect its returns. cluded in full in the consolidated financial which the receivable or payable arose or the comprehensive income and attributed to a sep- statements. Non-controlling interests’ shares exchange rate in the latest consolidated finan- arate translation reserve in equity. Entities over which the Group exercises signifi- of the profit/loss for the year and of the equity cial statements is recognised as financial in- cant influence, but which it does not control, of subsidiaries are included in the Group’s come or financial expenses. On recognition in the consolidated financial are considered associates. Significant influence profit/loss and equity respectively, but are dis- statements of associates and joint ventures is generally obtained by direct or indirect own- closed separately. Entities acquired or formed On recognition in the consolidated financial with a functional currency other than the ership or control of more than 20% but less in the year are recognised in the consolidated statements of entities with a functional cur- presentation currency of Carlsberg Breweries than 50% of the voting rights. For associates in financial statements from the date of acquisi- rency other than the presentation currency of A/S (DKK), the share of profit/loss and other which the Group holds an interest of less than tion or formation. Entities disposed of or Carlsberg Breweries A/S (DKK), the income comprehensive income for the year is trans- 20%, the Group participates in the management wound up are recognised in the consolidated statement and statement of cash flows are lated at average exchange rates and the share of the company and is therefore exercising sig- income statement until the date of disposal or translated at the exchange rates at the trans- of equity, including goodwill, is translated at nificant influence. The assessment of whether winding-up. The comparative figures are not action date, and the statement of financial po- the exchange rates at the reporting date. For- Carlsberg Breweries A/S exercises control or restated for entities acquired or disposed of. sition items are translated at the exchange eign exchange differences arising on the trans- significant influence includes potential voting rates at the reporting date. An average ex- lation of the share of the opening balance of rights exercisable at the reporting date. Entities FOREIGN CURRENCY TRANSLATION change rate for the month is used at the trans- equity of foreign associates and joint ventures that by agreement are managed jointly with A functional currency is determined for each of action date to the extent that this does not sig- at the exchange rates at the reporting date, one or more other parties are considered joint the reporting entities in the Group. The func- nificantly deviate from the exchange rate at the and on translation of the share of profit/loss ventures. Associates and joint ventures are tional currency is the primary currency used for transaction date. Foreign exchange differences and other comprehensive income for the year consolidated using the equity method, cf. sec- the reporting entity’s operations. Transactions arising on translation of the opening balance of from average exchange rates to the exchange tion 5. denominated in currencies other than the func- equity of foreign entities at the exchange rates rates at the reporting date, are recognised in tional currency are considered transactions de- at the reporting date, and on translation of the other comprehensive income and attributed to On consolidation, intra-group income and ex- nominated in foreign currencies. income statement from the exchange rates at a separate translation reserve in equity. penses, shareholdings, intra-group balances the transaction date to the exchange rates at and dividends, and realised and unrealised On initial recognition, transactions denomi- the reporting date, are recognised in other On complete or partial disposal of a foreign gains on intra-group transactions are elimi- nated in foreign currencies are translated to the comprehensive income and attributed to a sep- entity or on repayment of balances that con- nated. Unrealised gains on transactions with functional currency at the exchange rates at arate translation reserve in equity. stitute part of the net investment in the foreign associates and joint ventures are eliminated in the transaction date. Foreign exchange differ- entity, the share of the cumulative amount of proportion to the Group’s ownership share of ences arising between the exchange rates at Foreign exchange adjustment of balances with the exchange differences recognised in other the entity. Unrealised losses are eliminated in foreign entities that are considered part of the comprehensive income relating to that foreign investment in the entity is recognised in other

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 81

SECTION 9.2 (CONTINUED) Group, and therefore may not be comparable Calculation of key figures and financial ratios stated in the Annual Report with other companies’ measures. GENERAL 2 Debt/operating profit before Net interest-bearing debt divided by operating profit before special items depreciation, amortisation and adjusted for depreciation, amortisation and impairment losses. ACCOUNTING The non-IFRS financial measures disclosed in impairment losses the Annual Report are: POLICIES Equity ratio Equity attributable to the shareholder in Carlsberg Breweries A/S at year-end as a percentage of total assets at year-end. • Organic development entity is recognised in the income statement 2 • Pro rata volumes Financial gearing Net interest-bearing debt at year-end divided by total equity at when the gain or loss on disposal is recognised. year-end.

• Volumes Interest cover1 Operating profit before special items divided by interest expenses, net. INCOME STATEMENT The presentation of the Group’s income state- The Danish Finance Society does not Operating margin1 Operating profit before special items as a percentage of revenue. ment is based on the internal reporting struc- acknowledge use of special items and states 1 that adjustments of tax should be based on the Operating profit Expression used for operating profit before special items in the Manage- ture, as IFRS does not provide a specific disclo- ment review. sure requirement. marginal tax rate. When calculating financial Organic development3 Measure of growth excluding the impact of acquisitions, divestments and measures, the Group uses operating profit be- foreign exchange from year-on-year comparisons. Special items not directly attributable to ordi- fore special items and the effective tax rate for nary operating activities and that are significant measures adjusted for tax. Payout ratio Dividend for the year as a percentage of consolidated profit, excluding non-controlling interests. and non-recurring are shown separately in or- der to give a truer and fairer view of the Other financial ratios are calculated in accord- Pro rata volumes3 The Group’s sale of beverages in consolidated entities, and 100% of the Group’s operating profit. ance with the Danish Finance Society’s online sale of the Group’s international brands in associates and joint ventures and the proportionate share of the sale of local brands in these entities. guidelines on the calculation of financial ratios, CASH FLOW “Recommendations and Financial Ratios”, un- Return on invested capital including Operating profit before special items as a percentage of average invested 1 4 Cash flow is calculated using the indirect less specifically stated. goodwill (ROIC) capital calculated as a 12-month rolling average. method and is based on operating profit before Return on invested capital excluding Operating profit before special items as a percentage of average invested special items adjusted for depreciation, amorti- goodwill (ROIC excl. goodwill)1 capital excluding goodwill4 calculated as a 12-month rolling average. sation and impairment losses. 1 The calculation is based on operating profit before special items, whereas the Danish Finance Society defines the ratio using operating profit. Cash flow cannot be derived directly from the 2 The calculation of net interest-bearing debt is specified in section 4.2. 3 statement of financial position and income This key figure or ratio is not defined by the Danish Finance Society. 4 The calculation of invested capital is specified in section 2.1. statement.

FINANCIAL RATIOS AND NON-IFRS FINANCIAL MEASURES The Group uses certain additional financial measures to provide management, investors and investment analysts with additional measures to evaluate and analyse the Com- pany’s results. These non-IFRS financial measures are defined and calculated by the

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 82

SECTION 9.3 Furthermore, as of 1 January 2017, the Group the activity. Generally, if the purpose of mar- The stages determine how impairment losses CHANGES IN has changed: keting activities is to increase sales with the in- are measured and the effective interest is ap- dividual customer, the activities should be seen plied. For trade receivables, the Group applies ACCOUNTING • The segmentation format, such that Carlsberg as a reduction of the transaction price and the simplified approach, which permits the use POLICIES Supply Company, previously included in “Not therefore classified as a discount. of lifetime ECL. Provision rates are determined allocated”, is now included in “Western Eu- based on grouping of trade receivables sharing 9.3.1 CHANGED ACCOUNTING POLICIES rope”. The effect of the changes from implementing the same credit risk characteristics and days AND CLASSIFICATION IN THE ANNUAL RE- • The calculation of return on invested capital IFRS 15 is shown in section 9.5. past due. PORT 2017 (ROIC). The Annual Report has been prepared using the IFRS 9 “FINANCIAL INSTRUMENTS” Regarding on-trade loans, impairment losses same accounting policies for recognition and The effect of those changes for 2016 is dis- IFRS 9 “Financial Instruments” introduces new will be recognised based on 12-month or life- measurement as those applied to the consoli- closed in the consolidated financial statements hedge-accounting rules and a new impairment time ECL depending on whether a significant dated financial statements for 2016. for 2016, section 9.3. model for financial assets: the expected credit increase in credit risk has arisen since initial loss (ECL) model. recognition. Impairment losses on loans to as- As of 1 January 2017, the following amend- 9.3.2 CHANGES IN ACCOUNTING POLICIES sociates will be recognised based on a 12- ments and improvements became applicable AND CLASSIFICATION FOR 2018 The new hedge-accounting rules imply that it month ECL model. without having any impact on the Group’s ac- IFRS 15 “REVENUE FROM CONTRACTS WITH will generally be easier to apply hedge ac- CUSTOMERS” counting policies, as they cover areas that are counting, as the new rules are more in line with The impact from implementation of IFRS 9 and The implementation of IFRS 15 “Revenue from not relevant for the Group or limit choices of the Group’s risk management practice. Based calculating ECL has only an insignificant impact Contracts with Customers” will impact the accounting policies that have not been used by on an assessment of the Group’s current hedge on provisions and the income statement. Group’s financials and revenue stream, as the the Group: arrangements, primarily aluminium hedges, an standard requires marketing activities with cus- increased portion will qualify for hedge ac- CHANGES IN CLASSIFICATION tomers to be recognised as revenue. For the • Amendments to IAS 7 “Disclosure Initiative” counting, resulting in an increased portion of In addition to the above changes in accounting Group, IFRS 15 results only in changes in clas- • Amendments to IAS 12 “Recognition of De- the fair value adjustment being recognised in policies, the classification of certain costs of the sification and does not have an impact on the ferred Tax Assets for Unrealised Losses” other comprehensive income. The total ineffec- central supply chain and IT functions will timing of revenue recognition. • Part of Annual Improvements to IFRS Stand- tive portion of hedges for 2017, DKK 1m, re- change. These costs will be reclassified from

ards 2014-2016 Cycle lated to the Group’s aluminium hedging. The administrative expenses to the functions they Supporting marketing activities provided for or change in accounting policies applies to all support, primarily production, logistics and organised together with our customers will be The amendments to IAS 7 require disclosure of hedging instruments. sales. The reclassification is aligned with considered a part of the customer relationship changes in liabilities arising from financing ac- changes in the internal reporting, control and and related costs will be recognised as dis- tivities, cf. section 4.4. The new impairment model for financial assets monitoring of the Group’s strategic and finan- counts, not as marketing expenses. requires recognition of impairment losses based cial targets and is a natural step in managing

on expected credit losses (ECL) rather than in- the functional activities under the Group’s new When applying the new policy, judgement is curred losses as is the case under current prac- strategy. required to decide whether supporting an activ- tice. The ECL model involves a three-stage ap- ity with a customer should be classified as a proach under which financial assets move discount or a marketing expense, taking into through the stages as their credit quality account the drivers behind and the purpose of changes.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 83

SECTION 9.3 (CONTINUED) Return on invested capital (ROIC) will remain NEW AND AMENDED IFRS STANDARDS The new and amended Standards and Inter- unchanged. AND INTERPRETATIONS NOT YET pretations are not mandatory for the financial CHANGES IN ADOPTED BY THE EU reporting for 2017. The Group expects to adopt The following new or amended IFRS Standards ACCOUNTING CHANGES TO VOLUME REPORTING the Standards and Interpretations when they and Interpretations of relevance to the Group As of 1 January 2018, the Group has decided become mandatory. POLICIES have been issued but not yet adopted by the to change the definition of volumes to include only the Group’s sales of beverages in consoli- EU: IMPACT FROM CHANGES IN ACCOUNTING The implementation of IFRS 16 “Leases” will dated entities. Compared with 2017, the new POLICIES AND CLASSIFICATION FOR 2018 result in almost all leases being recognised in • Annual Improvements to IFRS Standards The changes in accounting policies and classifi- definition excludes volumes in associates and the statement of financial position, as the dis- 2014-2016 Cycle, effective for financial years cation of central supply chain costs and IT joint ventures. tinction between operating and finance leases beginning on or after 1 January 2018. costs will only impact the classification of reve- is removed. The expected impact for the Group SECTION 9.4 nue and expenses in the consolidated financial is an increase in property, plant and equipment • Annual Improvements to IFRS Standards statements. The impact on administrative ex- and in financial liabilities. Information on cur- NEW LEGISLATION 2015-2017 Cycle, effective for financial years penses will be a reduction of DKK 314m, which rent lease agreements is disclosed in section beginning on or after 1 January 2019. will be reclassified to cost of sales and sales NEW AND AMENDED IFRS STANDARDS 2.4. and distribution expenses. Operating profit be- AND INTERPRETATIONS NOT YET APPLICABLE WITHIN THE EU • IFRIC Interpretation 22 “Foreign Currency fore special items will remain unchanged. Furthermore, an improvement in operating The following new or amended IFRS Standards Transactions and Advance Consideration”, ef- profit before special items is expected, as the and Interpretations of relevance to the Group fective for financial years beginning on or af- The impact from the implementation of IFRS lease cost includes an interest element, which have been issued and adopted by the EU but ter 1 January 2018. 15 on the consolidated financial statements for will be recognised as a financial item. In the are not applicable to the financial reporting 2017 will be a reduction of revenue as a result cash flow statement, the interest element will for 2017: • IFRIC Interpretation 23 “Uncertainty over In- of increased discounts of DKK 1.2bn. be presented in interest etc. paid. come Tax Treatments”.

• IFRS 9 “Financial Instruments”, effective for As a consequence, all regions will see a nega- The implementation of the standard is not ex- financial years beginning on or after 1 Janu- • Amendments to IFRS 2 “Classification and tive impact on net revenue, with Western Eu- pected to have a material impact on the con- ary 2018. Measurement of Share-based Payment rope and Asia experiencing the largest impacts solidated financial statements. Transactions”, effective for financial years be- due to the business models chosen, and on • IFRS 15 “Revenue from Contracts with ginning on or after 1 January 2018. their share of sales to/from retailers and the Customers”, including clarifications and wholesale market. amendments to IFRS 15 “Effective date of • Amendments to IFRS 9 “Prepayment Fea-

IFRS 15”, effective for financial years begin- tures with Negative Compensation”, effective The total impact from the changes in account- ning on or after 1 January 2018. for financial years beginning on or after 1 ing policies and classification will be an in- January 2019. crease in operating margin of 0.2 percentage • IFRS 16 “Leases”, effective for financial years point due to lower net revenue. Average trade beginning on or after 1 January 2019. • Amendments to IAS 28 “Long-term Interests working capital as a percentage of net revenue in Associates and Joint Ventures”, effective for will increase by approximately 0.3 percentage The impact of IFRS 9 and IFRS 15 is described financial years beginning on or after 1 Janu- point. in section 9.3. ary 2019.

Impact from changes in accounting policies and classification - unaudited

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 IMPACT FROM CHANGES IN ACCOUNTING POLICIES AND CLASSIFICATION - UNAUDITED 84

SECTION 9.5 IMPACT FROM Restated net revenue by region Changes to volume reporting Reported Restated volumes volumes CHANGES IN Restated 2017 Excl. Western Europe 35,716 ACCOUNTING associates Eastern Europe 10,925 and joint POLICIES AND Asia 13,944 Pro rata, ventures, CLASSIFICATION Not allocated 70 million hl million hl Carlsberg Breweries Group, total 60,655 2017 Full year Full year The impact from changes in accounting policies Beer sales and classification as described in section 9.3 in Western Europe 47.7 46.1 the consolidated financial statements is shown Eastern Europe 29.8 29.8 in the tables. Operating margin (%) Asia 34.9 31.2 Western Europe 14.4% Total 112.4 107.1 Section 9.5 is not part of the consolidated fi- Eastern Europe 20.3% nancial statements and has not been audited. Asia 20.8% Other beverages Not allocated - Western Europe 15.5 14.5 Impact on the income statement from Carlsberg Breweries Eastern Europe 1.9 1.9 changes in accounting policies and Group, total 14.8% Asia 3.5 2.8 classification Total 20.9 19.2

Total volumes 2017 Western Europe 63.2 60.6 DKK million Reported Restated Eastern Europe 31.7 31.7 Net revenue 61,808 60,655 Asia 38.4 34.0 Cost of sales -30,325 -30,447 Total 133.3 126.3

Gross profit 31,483 30,208

Sales and distribution ex- penses -18,105 -17,144 Administrative expenses -4,825 -4,511 Other operating activities, net 178 178 Share of profit after tax of associates and joint ven- tures 231 231 Operating profit before special items 8,962 8,962

Consolidated financial statements

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 85 SECTION 10 GROUP COMPANIES

Parent Number of Type of direct Consolidated Western Europe Reference subsidiaries investment ownership* ownership**

Carlsberg Danmark A/S, Copenhagen, Denmark O 100% 100% Carlsberg Supply Company Danmark A/S, Copenhagen, Denmark O 100% 100% O Subsidiary Carlsberg Sweden Holding 2 AB, X Associate or joint venture Stockholm, Sweden O 100% 100% Parent direct ownership shows the legal ownership held by the immediate holding company in the Carlsberg Sverige AB, Stockholm, Sweden 2 O 100% 100% * Group. Crossholdings held by fully owned companies of the Group are aggregated. Carlsberg Supply Company Sverige AB, Consolidated ownership shows the share of the result of the entity that is attributed to the shareholder Falkenberg, Sweden O 100% 100% ** of Carlsberg Breweries A/S in the consolidated financial statements. Ringnes Norge AS, Oslo, Norway 7 O 100% 100% A Listed company. Ringnes AS, Oslo, Norway 1 O 100% 100% B Company not audited by PwC. Ringnes Supply Company AS, Oslo, Norway O 100% 100% C Consolidation percentage is higher than the ownership share due to written put options. Oy Sinebrychoff Ab, Kerava, Finland O 100% 100% Sicera AG is legally owned 65% by the Group but recognised as a joint venture, as the shareholders' Sinebrychoff Supply Company Oy, Kerava, D agreement stipulates joint control by the shareholders of the company. Finland O 100% 100% Classification as subsidiary, joint venture or associate and the consolidated ownership of the entity is de- Carlsberg Deutschland Holding GmbH, E termined by the Group's ownership of the entity's parent company. Hamburg, Germany 3 O 100% 100% Chongqing Jianiang Brewery Ltd is owned by Chongqing Brewery Co., Ltd (51%) and Carlsberg Brewery Carlsberg Deutschland GmbH, Hamburg, F Hong Kong Ltd (49%), resulting in a consolidated ownership of 79%. Germany 8 O 100% 100% Lion Brewery (Ceylon) PLC is owned by Carlsberg Brewery Malaysia Berhad (25%) and Ceylon Beverage Carlsberg Supply Company Deutschland Holdings PLC (52%). Carlsberg owns 8% of Ceylon Beverage Holdings PLC and 51% of Carlsberg Brewery GmbH, Hamburg, Germany O 100% 100% G Malaysia Berhad, resulting in a one-line consolidated ownership of 17%. Carlsberg Polska Sp. z o.o., Warsaw, Poland O 100% 100% Maybev Pte Ltd is owned by Carlsberg Singapore Pte Ltd (51%), which is owned by Carlsberg Brewery Carlsberg Supply Company Polska SA, H Malaysia Berhad (51%), resulting in a consolidated ownership of 26%. Warsaw, Poland 1 O 100% 100% The Group own 67% of Carlsberg South Asia Pte Ltd., which is the holding company of South Asian Saku Ölletehase AS, Tallinn, Estonia O 100% 100% Breweries Pte. Ltd., Carlsberg India Pvt. Ltd and Gorkha Brewery Pvt. Ltd. The consolidation percentage Aldaris JSC, Riga, Latvia O 99% 99% I of Carlsberg South Asia Pte Ltd. is 100% due to a written put option. Svyturys-Utenos Alus UAB, Utena, Lithuania O 99% 99% J The Group acquired the remaining 49% of the shares in February 2018.

Consolidated financial statements

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 86

Parent Parent Number of Type of direct Consolidated Number of Type of direct Consolidated Reference subsidiaries investment ownership* ownership** Reference subsidiaries investment ownership* ownership**

Western Europe Eastern Europe

Carlsberg UK Holdings Limited, Baltika Breweries LLC, Saint Petersburg, Northampton, United Kingdom 1 O 100% 100% Russia 5 O 100% 100% Carlsberg UK Limited, Northampton, Carlsberg Azerbaijan, Baku, Azerbaijan O 100% 100% United Kingdom 8 O 100% 100% PJSC Carlsberg Ukraine, Zaporizhzhya, Ukraine 2 O 99% 99% Carlsberg Supply Company UK Limited, OJSC Brewery Alivaria, Minsk, Belarus C O 68% 89% Northampton, United Kingdom O 100% 100% Carlsberg Kazakhstan, Almaty, Kazakhstan 1 O 100% 100% Emeraude S.A.S., Strasbourg, France 11 O 100% 100% Baltic Beverages Holding AB, Stockholm, Kronenbourg S.A.S., Strasbourg, France 7 O 100% 100% Sweden 1 O 100% 100% Kronenbourg Supply Company S.A.S., Strasbourg, France O 100% 100% Asia Feldschlösschen Getränke Holding AG, Rheinfelden, Switzerland 2 O 100% 100% Carlsberg Brewery Hong Kong Ltd, Feldschlösschen Getränke AG, Hong Kong, China 3 O 100% 100% Rheinfelden, Switzerland 1 O 100% 100% Carlsberg Brewery (Guangdong) Ltd, Feldschlösschen Supply Company AG, Huizhou, China O 99% 99% Rheinfelden, Switzerland O 100% 100% Kunming Huashi Brewery Company Limited, Carlsberg Supply Company AG, Kunming, China O 100% 100% Ziegelbrücke, Switzerland 2 O 100% 100% Xinjiang Wusu Breweries Co., Ltd., Urumqi, China 4 O 100% 100% Carlsberg Italia S.p.A., Lainate, Italy 3 O 100% 100% Ningxia Xixia Jianiang Brewery Limited, Xixia, Olympic Brewery SA, Thessaloniki, Greece B, C, J 1 O 51% 100% China O 70% 70% Carlsberg Serbia Ltd., Celarevo, Serbia 2 O 100% 100% Carlsberg (China) Breweries and Trading Com- pany Limited, Dali, China O 100% 100% Carlsberg Croatia d.o.o., Koprivnica, Croatia O 100% 100% Chongqing Brewery Co., Ltd, Chongqing, China A O 60% 60% Carlsberg Bulgaria AD, Mladost, Bulgaria O 100% 100% Chongqing Jianiang Brewery Ltd., Carlsberg Hungary Kft., Budaőrs, Hungary O 100% 100% Chongqing, China F 6 O 51% 79% CTDD Beer Imports Ltd., Montreal, Canada O 100% 100% Carlsberg Beer Enterprise Management (Chong- Carlsberg Canada Inc., Mississauga, Canada O 100% 100% qing) Company Limited, Chongqing, (“Eastern Sicera AG, Glarus, Switzerland D X 65% 65% Assets”), China 2 O 100% 100% Nya Carnegiebryggeriet AB, Stockholm, Tibet Lhasa Brewery Company Limited, Sweden E X 98% 63% Lhasa, China X 50% 50% E. C. Dahls Bryggeri AS, Trondheim, Lanzhou Huanghe Jianiang Brewery Norway E X 100% 65% Company Limited, Lanzhou, China X 50% 50% HK Yau Limited, Hong Kong E X 100% 65% Qinghai Huanghe Jianiang Brewery UAB "Svyturys Brewery", Klaipeda, Company Ltd., Xining, China X 50% 50% Lithuania E X 100% 65% Jiuquan West Brewery Company Limited, London Fields Brewery Opco Ltd., Jiuquan, China X 50% 50% London, United Kingdom E X 100% 65% Tianshui Huanghe Jianiang Brewery Super Bock Group, S.G.P.S., S.A., Company Ltd, Tianshui, China X 50% 50% Leca do Balio, Portugal X 44% 44% Nuuk Imeq A/S, Nuuk, Greenland B X 32% 32%

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 87

Parent Parent Number of Type of direct Consolidated Number of Type of direct Consolidated Reference subsidiaries investment ownership* ownership** Reference subsidiaries investment ownership* ownership**

Asia Not allocated

Carlsberg Brewery Malaysia Berhad, Carlsberg Finans A/S, Selangor Darul Ehsan, Malaysia A O 51% 51% Copenhagen, Denmark O 100% 100% Carlsberg Marketing Sdn BHD, Selangor Darul Carlsberg International A/S, Ehsan, Malaysia E O 100% 51% Copenhagen, Denmark O 100% 100% Euro Distributors Sdn BHD, Selangor Darul Carlsberg Invest A/S, Ehsan, Malaysia E O 100% 51% Copenhagen, Denmark 1 O 100% 100% Lion Brewery (Ceylon) PLC, Biyagama, Carlsberg Global Business Services A/S, Sri Lanka A, B, G X 25% 17% Copenhagen, Denmark O 100% 100% Carlsberg Singapore Pte Ltd, Singapore E O 100% 51% Carlsberg Insurance A/S, Maybev Pte Ltd., Singapore H O 51% 26% Copenhagen, Denmark O 100% 100% Carlsberg South Asia Pte Ltd, Singapore I O 67% 100% Carlsberg Shared Services Sp. z o.o., South Asian Breweries Pte. Ltd., Singapore I O 100% 100% Poznan, Poland O 100% 100% Carlsberg India Pvt. Ltd, New Delhi, India I O 100% 100% Gorkha Brewery Pvt. Ltd., Kathmandu, Nepal I 1 O 90% 90% Carlsberg Vietnam Trading Co. Ltd., Hanoi, Vi- etnam O 100% 100% Carlsberg Vietnam Breweries Ltd., Hue, Vietnam O 100% 100% Hanoi Beer Alcohol and Beverage Joint Stock Corporation, Hanoi, Vietnam B X 17% 17% Lao Brewery Co. Ltd., Vientiane, Laos O 61% 61% Paduak Holding Pte. Ltd., Singapore O 100% 100% Myanmar Carlsberg Co. Ltd, Yangon, Myanmar B X 51% 51% Caretech Limited, Hong Kong, China B X 50% 50% Cambrew Limited, Phnom Penh, Cambodia B, E X 100% 50% Carlsberg Distributors Taiwan Limited, Taipei, Taiwan X 50% 50% CB Distribution Co., Ltd., Bangkok, Thailand O 100% 100% Brewery Invest Pte Ltd, Singapore O 100% 100% Carlsberg Asia Pte Ltd, Singapore 1 O 100% 100%

Parent Company

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 88 PARENT COMPANY

PARENT COMPANY FINANCIAL SECTION 1 SECTION 3 SECTION 6 STATEMENTS INVESTMENTS IN SUBSIDIARIES, ASSO- OPERATING ACTIVITIES GENERAL ACCOUNTING POLICIES CIATES AND JOINT VENTURES 3.1 Operating expenses ...... 99 6 General accounting policies ...... 105 Income statement ...... 89 1.1 Investments in subsidiaries and 3.2 Cash flow from operating activi- joint ventures ...... 93 ties ...... 99 Statement of comprehensive 1.2 Special items ...... 93 3.3 Receivables ...... 99 income ...... 89 1.3 Related parties exercising control ...... 94 SECTION 4 Statement of financial position ...... 90 SECTION 2 STAFF COSTS AND REMUNERATION FINANCING AND SHARE CAPITAL 4.1 Staff costs and remuneration of Statement of changes in equity ...... 91 2.1 Share capital ...... 95 executive directors ...... 100 2.2 Financial income and expenses ...... 95 4.2 Share-based payments ...... 101 Statement of cash flows ...... 92 2.3 Net interest-bearing debt ...... 95 2.4 Borrowings and cash ...... 96 SECTION 5 2.5 Foreign exchange risk ...... 96 OTHER DISCLOSURE REQUIREMENTS 2.6 Interest rate risk ...... 96 5.1 Provisions ...... 103 2.7 Credit risk ...... 97 5.2 Fees to auditors ...... 103 2.8 Liquidity risk ...... 97 5.3 Asset base and leases ...... 103 2.9 Derivative Financial instruments ...... 98 5.4 Tax ...... 103 5.5 Contingent liabilities and other commitments ...... 105 5.6 Events after the reporting period ...... 105

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 89

INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME

DKK million Section 2017 2016 DKK million Section 2017 2016 Consolidated profit 7,773 6,405 Net revenue 2,463 2,650 Cost of sales 3.1 -1,013 -1,037 Other comprehensive income Gross profit 1,450 1,613 Value adjustments of hedging instruments 70 49 Sales and distribution expenses 3.1 -826 -807 Corporation tax 5.4 -19 -11 Administrative expenses -708 -655 Items that may be reclassified to the income statement 51 38 Other operating activities, net 3.1 151 169 Other comprehensive income 51 38 Operating profit before special items 67 320 Total comprehensive income 7,824 6,443 Special items, net 1.3 3,012 1,674 Financial income 2.2 6,517 6,293 Financial expenses 2.2 -1,767 -1,825 Profit before tax 7,829 6,462 Corporation tax 5.4 -56 -57 Profit for the year 7,773 6,405

Attributable to Dividend to shareholder 2,441 1,526 Reserves 5,332 4,879 Profit for the year 7,773 6,405

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 90

STATEMENT OF FINANCIAL POSITION

31 Dec. 31 Dec. 31 Dec. 31 Dec. DKK million Section 2017 2016 DKK million Section 2017 2016

ASSETS EQUITY AND LIABILITIES

Non-current assets Equity Intangible assets 5.3 984 965 Share capital 2.1 501 501 Property, plant and equipment 5.3 20 21 Hedging reserves -257 -308 Investments in subsidiaries 1.1 70,798 78,720 Retained earnings 55,054 48,930 Investments in associates and joint ventures 1.2 2,795 2,798 Total equity 55,298 49,123 Receivables 3.3 11 64 Prepayments 181 169 Non-current liabilities Total non-current assets 74,789 82,737 Borrowings 2.4 22,735 20,453 Deferred tax liabilities 124 19 Current assets Provisions 5.1 312 251 Inventories 5 4 Other liabilities - 41 Trade receivables 3.3 1,165 1,797 Total non-current liabilities 23,171 20,764 Tax receivables 105 122 Other receivables 3.3 21,340 13,306 Current liabilities Prepayments 11 8 Borrowings 2.4 17,502 26,433 Cash and cash equivalents 2.4 105 30 Trade payables 863 740 Total current assets 22,731 15,267 Deposits on returnable packaging 42 51 Total assets 97,520 98,004 Provisions 5.11 1 Other liabilities, etc. 643 892 Total current liabilities 19,051 28,117 Total liabilities 42,222 48,881 Total equity and liabilities 97,520 98,004

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 91

STATEMENT OF CHANGES IN EQUITY

DKK million Shareholder in Carlsberg Breweries A/S DKK million Shareholder in Carlsberg Breweries A/S Share Hedging Retained Total Share Hedging Retained Total 2017 capital reserves earnings equity 2016 capital reserves earnings equity Equity at 1 January 501 -308 48,930 49,123 Equity at 1 January 501 -346 43,886 44,041 Profit for the year - - 7,773 7,773 Profit for the year - - 6,405 6,405

Other comprehensive income Other comprehensive income Value adjustments of hedging instruments - 70 - 70 Value adjustments of hedging instruments - 49 - 49 Corporation tax - -19 - -19 Corporation tax - -11 - -11 Other comprehensive income - 51 - 51 Other comprehensive income - 38 - 38 Total comprehensive income for the year - 51 7,773 7,824 Total comprehensive income for the year - 38 6,405 6,443 Settlement of share-based payments - - -144 -144 Settlement of share-based payments - - -8 -8 Share-based payments - - 21 21 Share-based payments - - 20 20 Dividend paid to shareholder - - -1,526 -1,526 Dividend paid to shareholder - - -1,373 -1,373 Total changes in equity - 51 6,124 6,175 Total changes in equity - 38 5,044 5,082 Equity at 31 December 501 -257 55,054 55,298 Equity at 31 December 501 -308 48,930 49,123

The proposed dividend of DKK 5,872 per share, in total DKK 2,441m (2016: DKK 3,045 per share, in total DKK 1,526m), is included in retained earnings at 31 December 2017.

Dividend paid out in 2017 for 2016 amount to DKK 1,526m (paid out in 2016 for 2015: DKK 1,373m), which is DKK 3,045 per share (2016: DKK 2,741 per share). Dividend paid out to the shareholder of Carlsberg Breweries A/S does not impact taxable income in Carlsberg Breweries A/S.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 92

STATEMENT OF CASH FLOWS

DKK million Section 2017 2016 Operating profit before special items 67 320 Adjustment for depreciation and amortisation and impairment losses 13 13 Operating profit before depreciation, amortisation and impairment losses 80 333 Adjustment for other non-cash items 3.219 21 Change in working capital 3.2 449 11 Restructuring costs paid -15 -67 Interest etc. received 451 403 Interest etc. paid -907 -1,428 Corporation tax paid 60 -211 Cash flow from operating activities 137 -938 Acquisition of property, plant and equipment and intangible assets -35 -17 Disposal of property, plant and equipment and intangible assets - -1 Total operational investments -35 -18 Acquisition and disposal of subsidiaries, net 10,885 2,223 Capital injection in subsidiaries -25 -1,133 Acquisition and disposal of associates and joint ventures, net 159 - Change in financial receivables -30 -81 Dividends received 5,560 5,334 Total financial investments 16,549 6,343 Cash flow from investing activities 16,514 6,325 Free cash flow 16,651 5,387 Shareholder in Carlsberg Breweries A/S 2.1 -1,526 -1,373 External financing 2.4 -14,366 -4,728 Cash flow from financing activities -15,892 -6,101 Net cash flow 759 -714 Cash and cash equivalents at 1 January -684 32 Foreign exchange adjustment of cash and cash equivalents -8 -2 Cash and cash equivalents at 31 December1 2.4 67 -684 1 Cash and cash equivalents less bank overdrafts.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 93 SECTION 1 INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES

SECTION 1.1 Investments in subsidiaries Investments in associates and joint ventures ACCOUNTING POLICIES INVESTMENTS IN DKK million 2017 2016 DKK million 2017 2016 Dividends on investments in subsidiaries are recog- nised as income in the income statement of the Par- SUBSIDIARIES, ent Company in the financial year in which the divi- ASSOCIATES AND Cost Cost dend is declared. Cost at 1 January 85,094 83,667 Cost at 1 January 2,798 2,859 JOINT VENTURES Additions 25 1,875 Additions 7 - Investments in subsidiaries are measured at the lower Transfer to/from assets Disposals -10 -3 of cost and recoverable amount. held for sale - 5 Please see section 10 in the consolidated fi- Transfers - -58 Transfers - 54 SECTION 1.2 nancial statements for a list of companies in Cost at 31 December 2,795 2,798 Disposals -301 -507 SPECIAL ITEMS the Carlsberg Breweries Group. Disposals to group compa- nies -10,843 - Value adjustments The assumptions used for the impairment test Cost at 31 December 73,975 85,094 Value adjustments at 1 DKK million 2017 2016 January - 2 of the Parent Company's investments in sub- Gain on disposal of invest- Other movements - -2 ments in subsidiaries to sidiaries are identical with those used for the Value adjustments Value adjustments group companies 2,947 - Carlsberg Breweries Group's cash-generating Value adjustments at 1 at 31 December - - Gain on external disposal of January 6,374 6,044 units. The assumptions are stated in section 2.3 Carrying amount investments in subsidiaries Disposals to group compa- at 31 December 2,795 2,798 and associates 156 2,168 to the consolidated financial statements. nies -2,947 - Impairment of intangible Impairment in the period -250 329 assets -5 -90

The gain on disposal of investments in subsidi- Transfers - 1 Impairment of investments aries to group companies, DKK 2,947m, re- Value adjustments in subsidiaries - -329 lated to the disposal of the investment in Pripps at 31 December 3,177 6,374 ACCOUNTING ESTIMATES Loss on disposal of invest- AND JUDGEMENTS Ringnes to Carlsberg Sweden Holding 2. Carrying amount ments in subsidiaries -8 - at 31 December 70,798 78,720 Management performs an annual test on investments Other -78 -75 in subsidiaries for indications of impairment. Impair- Special items, net 3,012 1,674 ment tests are conducted in the same way as for goodwill in the Group, cf. section 2.3 in the consoli- dated financial statements. The company recognised gains and losses on the disposal of subsidiaries and associates It is management’s assessment that no indications of mainly relating to United Romanian Breweries impairment existed at year-end 2017. Impairment and Carlsberg Uzbekistan. tests have therefore not been carried out for subsidi-

aries .

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 94

SECTION 1.3 value of DKK 227 thousand (total sales of Related party disclosures Dividends of DKK 118m (2016: DKK 189m) RELATED PARTIES goods). were received from associates and joint ven- DKK million 2017 2016 tures. No losses on loans to or receivables EXERCISING It is estimated that the benefit for the Carlsberg from associates were recognised or provided CONTROL Breweries Group corresponds to the value of Carlsberg A/S for in either 2017 or 2016. the services provided to the Carlsberg Founda- Other operating activities, net 8 12 tion, which in turn corresponds to what each Dividends of DKK 5,442m (2016: DKK Carlsberg A/S, Ny Carlsberg Vej 100, DK, Financial income 6 6 party would have had to invest to have the 5,145m) were received from subsidiaries. 1799 Copenhagen V, Denmark, holds all the Loans 1,374 1,067 shares in Carlsberg Breweries A/S. same deliverables provided by external parties. Receivables from the sale of goods and services 10 5 RELATED PARTIES EXERCISING SIGNIFICANT Trade payables -37 -32 Carlsberg Breweries A/S has paid dividend of INFLUENCE DKK 1,526m (2016: DKK 1,373m) to Carls- Related parties also comprise Carlsberg Brew- Associates and joint ven- berg A/S. eries A/S’ Supervisory Board and Executive tures Board, their close family members and compa- Revenue 41 27 The following transactions took place between nies in which these persons have significant in- Loans 136 115 Borrowings -22 - the Carlsberg Foundation (as the ultimate Par- fluence. ent Company) and Carlsberg Breweries A/S in Receivables from the sale of goods and services 44 43 2017: During the year, the Group was not involved

in any transactions with the shareholder, Subsidiaries A collaboration between Carlsberg foundations members of the Supervisory Board, members Revenue 630 575 and the Carlsberg Breweries Group to launch a of the Executive Board or companies outside Cost of sales -81 -109 campaign at Copenhagen Airport to celebrate the Group in which these parties have signifi- Sales and distribution in- come 13 143 Carlsberg’s 170-year anniversary. cant influence. Administrative expenses -72 -62 The Carlsberg Science to Business forum is or- Other operating activities, net 148 162 ganised by the Carlsberg Foundation and the Interest income 415 343 Group. The Carlsberg Foundation pays for pre- Interest expenses -518 -458 senters’ costs, which amount to DKK 250-300 Loans 20,568 12,494 thousand. The Group contributes the meeting Receivables 997 1,518 room and approximately 30 working hours. Borrowings -18,005 -19,619 Trade payables and other An agreement between the Group and the liabilities etc. -429 -553 Carlsberg foundations on delivery of beer and soft drinks was formalised to the effect that the Remuneration of the Executive Board is disclosed in Carlsberg foundations are charged an ordinary section 4.1 - 4.2. listing price minus a discount of 25% for Carls- berg products and 15% for third-party prod- ucts. In 2017, the deliveries amounted to a

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 95 SECTION 2 FINANCING AND SHARE CAPITAL

SECTION 2.1 SECTION 2.2 SECTION 2.3

SHARE CAPITAL FINANCIAL INCOME Interest income relates to interest from cash NET INTEREST- AND EXPENSES and cash equivalents and intercompany loans BEARING DEBT Nominal and is measured at amortised cost. Shares of value, DKK 1,000 DKK '000 Financial items recognised in the income Interest expenses primarily relate to interest on DKK million 2017 2016 1 January 2016 501 501,000 statement Non-current borrowings 22,735 20,453 borrowings (external and intercompany) meas- No change in 2016 - - Current borrowings 17,502 26,433 DKK million 2017 2016 ured at amortised cost. 31 December 2016 501 501,000 Gross financial debt 40,237 46,886

No change in 2017 - - Cash and cash equivalents -105 -30 Financial income 31 December 2017 501 501,000 Loans to group companies Interest income 438 378 Financial items recognised in other compre- and associated companies -20,704 -12,609 Dividends from subsidiaries hensive income Net interest-bearing debt 19,428 34,247 and associates 5,560 5,333 The share capital amounts to DKK 501m di- Fair value adjustments of vided into shares in denominations of DKK DKK million 2017 2016 financial instruments, net, Changes in net interest- 1,000 and multiples thereof. None of the cf. section 2.9 - 410 bearing debt shares confer any special rights. The share Foreign exchange gains, net 500 - Value adjustments of hedg- Net interest-bearing debt at ing instruments capital is owned by Carlsberg A/S, Copenha- Other financial income 19 127 1 January 34,247 37,800 Change in fair value of ef- gen, Denmark. Total 6,517 6,248 Cash flow from operating fective portion of cash flow activities -137 938

hedges 70 49 Cash flow from investing Dividend paid to the shareholder amounted to Financial expenses Total 70 49 activities, excl. acquisition of DKK 1,526m (2016: DKK 1,373m). Interest expenses 1,256 1,370 Financial items, net, recog- subsidiaries, net -5,629 -4,102 Fair value adjustments of nised in other comprehen- Cash flow from acquisition Carlsberg Breweries A/S proposes a dividend financial instruments, net, sive income 4,820 4,517 of subsidiaries, net -10,885 -2,223 cf. Section 2.9 470 - of DKK 5,872 per share, in total DKK 2,441m Dividend to shareholder 1,526 1,373 Realised foreign exchange Change in interest-bearing (2016: DKK 3,045 per share, in total DKK losses, net - 128 lending -22 151 Foreign exchange adjustments of balances with 1,526m). The proposed dividend is included in Impairment of financial as- Effect of currency transla- retained earnings at 31 December 2017. sets - 243 foreign entities which are considered part of the tion 328 310 Bank and commitment fees 36 32 total net investment in the entity are recog- Total change -14,819 -3,553 Other financial expenses 5 7 nised in the income statement of the Parent Net interest-bearing debt at Total 1,767 1,780 Company. 31 December 19,428 34,247 Financial items, net 4,750 4,468

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 96

SECTION 2.4 External financing Currency profile SECTION 2.6 BORROWINGS AND INTEREST RATE RISK DKK million 2017 2016 DKK CASH Proceeds from issue of million bonds 3,684 - Original Effect After Carlsberg Breweries A/S performs the role of 2017 principal of swap swap DKK million 2017 2016 Repayment of bonds -7,444 -2,620 internal bank in the Carlsberg Breweries Group. CHF 1,138 914 2,052 Borrowings from group Part of this role is to implement the Group’s in- companies -10,628 -2,108 DKK 2,259 1,764 4,023 Non-current borrowings terest rate risk target, which is to have a dura- Borrowings from associates 22 - EUR 28,090 -5,749 22,341 Issued bonds 22,215 18,489 tion of 1 to 5 years. This duration is measured Total -14,366 -4,728 GBP 802 41 843 Bank borrowings -43 641 on the net debt in the Carlsberg Breweries RUB 1,883 -1,723 160 Borrowings from Group Group. USD 176 2,423 2,599 companies 563 1,323 Other 5,889 2,330 8,219 Total 22,735 20,453 The Company’s loan portfolio consists of bilat- Cash and cash equivalents amounts to DKK Total 40,237 - 40,237

105m (2016: DKK 30m) and bank overdrafts Total eral loan agreements, syndicated credit facili- Current borrowings amount to DKK -38m (2016: DKK -714m). 2016 46,886 - 46,886 ties and loans from the shareholder and sub- Issued bonds - short term sidiaries. portion - 7,424 Cash and cash equivalents are not associated Bank overdrafts - cash with any significant credit risks. equivalents 38 714 Interest rate risks are mainly managed using Borrowings from associates 22 - interest rate swaps and bonds with fixed inter- Borrowings from Group SECTION 2.5 est and to a smaller degree loans with fixed in- companies 17,442 18,295 terest rate from subsidiaries. Total 17,502 26,433 FOREIGN EXCHANGE Total non-current and cur- rent borrowings 40,237 46,886 RISK Interest rate risk Fair value 41,888 48,842 Carlsberg Breweries A/S’ main activity is to DKK million own a number of subsidiaries and funding the The fair value of receivables and borrowings in Average capital required for both net investment and effective subsidiaries corresponds to the carrying loans to subsidiaries. As a consequence, Carls- Interest interest Carrying Interest amount in all material respects. 2017 rate rate Fixed for amount rate risk berg Breweries A/S is exposed to foreign ex-

change risk from its borrowing in foreign cur- Borrowings are measured at amortised cost. Issued bonds rency and financial instruments to hedge net EUR 750m maturing 3 July 2019 Fixed 2.6% 1-2 years 5,587 Fair value investments in foreign currency, and interest EUR 750m maturing 15 November 2022 Fixed 2.7% 4-5 years 5,559 Fair value rate risk from its debt and interest rate deriva- EUR 500m maturing 6 September 2023 Fixed 0.7% >5 years 3,690 Fair value tives. EUR 1,000m maturing 28 May 2024 Fixed 2.6% >5 years 7,379 Fair value Total issued bonds 2.3% 22,215 Total issued bonds 2016 2.9% 25,913

Bank borrowings Floating-rate Floating N/A <1 year 38 Cash flow Total bank borrowings 38 Total bank borrowings 2016 714

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 97

SECTION 2.6 (C0NTINUED) SECTION 2.7 SECTION 2.8 risk in Carlsberg Breweries Group with regards INTEREST RATE RISK CREDIT RISK LIQUIDITY RISK to liquidity risk is made.

At year-end 55% of the gross loan portfolio Credit risk is the risk of a counterparty failing to Liquidity risk is the risk of the Carlsberg Brew- consisted of fixed-rate loans with rates fixed meet its contractual obligations and so inflict- eries Group failing to meet its contractual obli- for more than one year (2016: 57%). Carlsberg ing a loss on the Carlsberg Breweries Group. gations due to insufficient liquidity. The Group’s Breweries A/S engages in on-lending to sub- Group policy is that financial transactions may policy is for the management of funding and li- sidiaries. At 31 December 2017 Carlsberg be entered into only with financial institutions quidity to be managed centrally. It is therefore Breweries A/S lent DKK 20,704m to subsidiar- with a solid credit rating. Group Treasury’s task to ensure effective li- ies, Carlsberg A/S and associated companies quidity management, which primarily involves (2016: DKK 12,609m). obtaining sufficient committed credit facilities to ensure adequate financial resources.

Carlsberg Breweries A/S is the main funding vehicle in the Carlsberg Breweries Group. Ac- cordingly, reference to the section on financial

Maturity of financial liabilities

DKK million Maturity Contractual Maturity > 1 year Maturity Carrying 2017 cash flows < 1 year < 5 years > 5 years amount

Derivative financial instruments Derivative financial instruments, payables 157 157 - - 172

Time to maturity for non-current borrowings Non-derivative financial instru- ments DKK million Financial debt gross 40,409 17,513 11,161 11,735 40,237 2017 1-2 years 2-3 years 3-4 years 4-5 years > 5 years Total Interest expense 2,555 646 1,630 279 - Issued bonds 5,587 - - 5,559 11,069 22,215 Trade payables and other liabilities 905 905 - - 905 Bank borrowings - - -43 - - -43 Non-derivate financial instruments Borrowings from Group Companies - - - - 563 563 total 43,869 19,064 12,791 12,014 - Total 5,587 - -43 5,559 11,632 22,735 Financial liabilities 44,026 19,221 12,791 12,014 - Total 2016 705 5,582 - -64 14,230 20,453 Financial liabilities 2016 51,400 28,444 8,169 14,787 -

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 98

SECTION 2.9 Cash flow hedges are primarily used on interest Cash flow hedges DERIVATIVE rate swap where the hedged item is the under- lying (floating rate) borrowing, and on currency DKK million FINANCIAL derivatives where the underlying is sales in for- Fair value adjustment eign currency. Cash flow hedges are also used recognised in other INSTRUMENTS 2017 comprehensive income Fair value Expected recognition on aluminium hedges (where the hedged item Interest rate instruments 1 - N/A is aluminium cans used in a number of entities The fair value of financial instruments is calcu- Exchange rate instruments 69 19 2018-19 lated on the basis of observable market data across the Group). However, for the purpose of Total 70 19 using generally accepted methods. Internally the Carlsberg Breweries A/S’ financial state- ments, the aluminium hedges are not treated calculated fair values based on discounting of 2016 cash flows are used for the mark-to-market of as cash flow hedges. Exchange rate instruments 49 -47 2017-18 financial instruments. The internally calculated Total 49 -47 fair values are tested against external market valuations on a quarterly basis.

Changes in the fair value of financial instru- ments not designated as hedging instruments are recognised in the income statement. These are mainly non-designated foreign exchange instruments, which are classified as net invest- ment hedges in the consolidated account, but for the purpose of the Parent Company finan- cial statements are not designated as such.

2017 2016 Fair value Fair value adjustment adjustment recognised in recognised in income income DKK million statement Fair value statement Fair value Exchange rate instruments -529 129 399 184 Other instruments 60 17 3 1 Ineffectiveness -1 - 8 - Total -470 146 410 185

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 99 SECTION 3 OPERATING ACTIVITIES

SECTION 3.1 SECTION 3.2 SECTION 3.3 OPERATING CASH FLOW FROM RECEIVABLES EXPENSES OPERATING Trade receivables comprise invoiced goods and ACTIVITIES services. Cost of sales

Cash flows Other receivables comprise VAT receivables, DKK million 2017 2016 loans to group companies, associates, interest Purchased finished goods and other costs 1,013 1,037 DKK million 2017 2016 receivables and other financial receivables. Total 1,013 1,037 Other non-cash items Gain on disposal of prop- Receivables included in the statement of fi- erty, plant and equipment nancial position and intangible assets, net - 1 Sales and distribution expenses Share-based payments 21 20 DKK million 2017 2016 Other items -2 - Trade receivables 1,165 1,797 DKK million 2017 2016 Total 19 21 Other receivables 21,340 13,306 Marketing expenses 603 617 Change in working capital Total current receivables 22,505 15,103 Sales expenses 156 109 Receivables 99 27 Non-current receivables 11 64 Distribution expenses 67 81 Trade payables and other Total 826 807 liabilities 369 -144 Total 22,516 15,167 Other provisions 61 115 Adjusted for unrealised for- Receivables by origin eign exchange gains/losses -80 13 Other operating activities, net Total 449 11 DKK million 2017 2016

Receivables from sale of DKK million 2017 2016 goods and services 271 388 Management fee from Receivables from group group companies 193 206 companies 894 1,409 Real estate, net - 5 Loans to group companies 20,568 12,494 Other, net -42 -42 Loans, fair value of hedging Total 151 169 instruments and other receivables 783 876 Total 22,516 15,167

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 100 SECTION 4 STAFF COSTS AND REMUNERATION

SECTION 4.1 Staff costs and remuneration also cover costs Staff cost and remuneration STAFF COSTS AND and remuneration regarding executive directors of the Company who are contractually em- DKK million 2017 2016 REMUNERATION OF ployed by other Group companies where the Salaries and other remuneration 448 424 EXECUTIVE related cost is recognised and payment is made Severance payments - 2 in those companies. Social security costs 2 2 DIRECTORS Retirement benefit costs - defined contribution plans 24 15 Share-based payments 30 22 Remuneration of executive directors and the Other employee benefits - 7 Remuneration of executive directors is based Supervisory Board are specified in section 7 in Total 504 472 on a fixed salary, cash bonus payments and the consolidated financial statements. non-monetary benefits, such as company car, Staff costs are included in the following items in the income statement telephone etc. Furthermore, performance share programmes and incentive schemes have been established for executive directors. These Sales and distribution expenses 161 153 programmes and schemes cover a number Administrative expenses 318 294 Total staff costs recognised by Parent Company 479 447 of years. Remuneration of executive director recognised by Carlsberg A/S 25 25

Total 504 472 Employment contracts for executive directors contain terms and conditions that are consid- ered common to executive board members in Danish listed companies, including terms of notice and non-competition clauses.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 101

SECTION 4.2 FUNDING THE JOURNEY PERFORMANCE shares were granted to 2 employees. The grant its subsidiaries are recognised directly in equity. SHARE-BASED SHARES date fair value of these performance shares Change in expected future refunds based on No Funding the Journey performance shares was DKK 22m. The total cost of performance the fair value of performance shares at year PAYMENTS were granted in 2017. In 2016, the Funding the shares was DKK 5m (2016: DKK 5m), which is end are recognised directly in equity by DKK - Journey performance share programme was recognised in the income statement under staff 17m. SHARE OPTIONS introduced, and a total of 37,242 performance costs. Refunds etc. between Carlsberg A/S and No share options were granted in 2017. In 2016, a total of 17,650 share options were Exercise price Number granted to 1 employee. The grant date fair Fixed, Key Other value of these options was a total of DKK 2m. weighted Executive management management Resigned The total cost of share options was Share options average directors personnel personnel employees Total DKK 7m (2016: DKK 7m), which is recognised Share options outstanding at 31 December 2015 540.07 97,334 6,200 5,275 625,062 733,871 in the income statement under staff costs. Granted 597.60 17,650 - - - 17,650 Refunds etc. between Carlsberg A/S and Forfeited/expired 520.27 - - - -31,796 -31,796 Carlsberg Breweries A/S are recognised di- Exercised 460.59 - - -400 -275,354 -275,754 rectly in equity and total DKK -22m (2016: Transferred 446.26 - -6,200 -1,200 7,400 - DKK -23m). Change in expected future refunds Share options outstanding at 31 December 2016 501.07 114,984 - 3,675 325,312 443,971 based on the fair value of share options at year Exercised 560.66 - - -833 -187,600 -188,433 Transferred 417.34 - - -2,842 2,842 - end are recognised directly in equity by DKK - Share options outstanding at 31 December 2017 485.41 114,984 - - 140,554 255,538 47m (2016: DKK 17m).

Regular performance shares REGULAR PERFORMANCE SHARES In 2017, a total of 74,877 (2016: 25,079) Performance shares outstanding at 31 December 2015 - 11,188 34,023 10,238 55,449 regular performance shares were granted to Granted 25,079 - - - 25,079 2 employees (2016: 2). The grant date fair Forfeited/expired/adjusted - 704 2,943 1,140 4,787 value of these performance shares was DKK Transferred - -569 -3,804 -2,618 -6,991 39m (2016: DKK 13m). The total cost of per- Forfeited/expired/adjusted - -6,840 -3,169 10,009 - formance shares was DKK 9m (2016: DKK Performance shares outstanding at 31 December 2016 25,079 4,483 29,993 18,769 78,324 13m), which is recognised in the income state- Granted 74,877 - - - 74,877 ment under staff costs. Refunds etc. between Forfeited/expired/adjusted - -4,224 -1,941 -4,757 -10,922 Carlsberg A/S and its subsidiaries are recog- Exercised - -259 -1,281 -1,172 -2,712 nised directly in equity and total DKK -2m Transferred - - -2,725 2,725 - (2016: DKK -4m). Change in expected future Performance shares outstanding at 31 December 2017 99,956 - 24,046 15,565 139,567 refunds based on the fair value of performance shares at year end are recognised directly in Funding the Journey performance shares equity by DKK -56m (2016: DKK 2). Share options outstanding at 31 December 2015 - - - - - Granted 37,242 - - - 37,242 Share options outstanding at 31 December 2016 37,242 - - - 37,242 No changes in 2017 - - - - - Performance shares outstanding at 31 December 2017 37,242 - - - 37,242 () () () () () ()

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 102

SECTION 4.2 (CONTINUED) The difference at the end of the reporting period between the fair value of the Parent Company’s SHARE-BASED equity instruments and the exercise price of out- standing share-based incentives is recognised as a PAYMENTS receivable in Carlsberg Breweries A/S and offset di- rectly against investments in subsidiaries. ACCOUNTING POLICIES Share-based incentives granted to the Parent Com- pany’s own employees are recognised and measured The fair value of share-based incentives granted to in accordance with the accounting policies used by employees in the Parent Company’s subsidiaries is the Group. Please refer to the consolidated financial recognised as investments in subsidiaries as the ser- statements for a description of accounting policies. vices rendered in exchange for the granted incentives are received in the subsidiaries and offset directly against equity.

The difference between the purchase price and the sales price for the exercise of share-based incentives by employees in subsidiaries is settled between Carlsberg Breweries A/S and the individual subsidiary and offset directly against investments in subsidiaries.

Regular Funding the Journey Share options performance shares performance shares 2017 2016 2017 2016 2017 2016 Average share price at the exercise date for share options exercised in the year 716 636 - - - - Weighted average contractual life for awards outstanding 31 December 5.1 6.4 1.4 1.4 1.2 2.2 417.34- 203.50- Range of exercise prices for share options outstanding 31 December 597.60 597.60 - - - - Exercisable outstanding share options 31 December 7,000 100,433 None None None None Weighted average exercise price for share options exercisable 31 December 417 467 - - - - The assumptions underlying the calculation of the fair value of share-based payment awards are described in section 7.3 in the consolidated financial statements.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 103 SECTION 5 OTHER DISCLOSURE REQUIREMENTS

SECTION 5.1 Fees for other services amounted to DKK 0m no special purchase rights etc. Future lease SECTION 5.4 PROVISIONS (2016: DKK 3m). payments total DKK 6m (2016: DKK 8m). TAX Neither at the end of the reporting period in 2017 nor 2016 had Carlsberg Breweries A/S DKK million The domestic tax rate in 2017 is 22% (2016: SECTION 5.3 any capital commitments to be made at a later 2017 Other Total 22%). The effective tax rate is 0.7% and the de- date or entered in to any contractual commit- Provisions at 1 January ASSET BASE AND crease in the effective tax rate compared to last 2017 252 252 ments. year (2016: 0.9%) is mainly due to the increase Additional provisions recog- LEASES nised 63 63 in non-capitalised tax assets along with an in- crease of non-taxable dividends 24.7% (2016: Used during the year -2 -2 The carrying amount of intangible assets was 17.8%) and other non-taxable items of -0.5% Provisions at 31 December DKK 984m (2016: DKK 965m), and the carry- 2017 313 313 (2016: 3.4%). ing amount of property, plant and equipment

was DKK 20m (2016: DKK 21m). Intangible Hedging instruments recognised in other com- assets comprise mainly of brands of DKK Provisions relates primarily to ongoing dis- prehensive income before tax amounts to DKK 952m (2016: DKK 965m). putes, lawsuits, restructurings etc. 70m (2016: DKK 49m) with a tax expense of

DKK 19m (2016: DKK 11m). Of DKK 8m (2016: DKK 9m) of amortisation of DKK 1m of total provisions (2016: DKK 1m) intangible assets, DKK 7m (2016: DKK 7m) are falls due within one year and DKK 0m (2016: Deferred tax asset amounts to DKK 261m included in cost of sales. Depreciation of prop- DKK 0m) after more than five years from the (2016: DKK 394m) and comprise mainly provi- erty, plant and equipment of DKK 5m (2016: end of the reporting period. sions of DKK 73m (2016: DKK 151m), loan DKK 4m) are mainly included in sales and dis- costs of DKK 27m (2016: DKK 26m) and tax tribution expenses. loss carry forwards etc. of DKK 156m (2016:

SECTION 5.2 DKK 212m). The utilisation of tax loss carry For accounting policies on impairment of assets forwards depends on future positive taxable in- FEES TO AUDITORS in the Group, please refer to section 2.3 in the come exceeding the realised deferred tax liabil- consolidated financial statements. ities. The audit fee to PwC, which is appointed by the Annual General Meeting to perform the Carlsberg Breweries A/S has entered into op- Deferred tax liabilities amounts to DKK 385m statutory audit, amounted to DKK 2m (2016: erating lease agreements. The lease contains (2016: DKK 414m) and mainly comprise in- DKK 3m). tangible assets of DKK 185m (2016: DKK

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 104

214m) and other liabilities of DKK 200m ACCOUNTING ESTIMATES ACCOUNTING AND JUDGEMENTS POLICIES (2016: DKK 200m). Deferred tax at 31 De- cember, net is a deferred tax liability of DKK Carlsberg Breweries A/S recognises deferred tax as- Carlsberg A/S is the administration company and is sets, including the tax base of tax loss carryforwards, 124m (2016: DKK 19m). subject to the Danish rules on mandatory joint taxa- if management assesses that these tax assets can be tion of the Carlsberg Breweries Group’s Danish com- offset against positive taxable income in the foresee- panies. Carlsberg A/S accordingly pays all income This year’s changes in deferred tax DKK 105m able future. This judgement is made annually and taxes to the tax authorities under the joint taxation (2016: DKK -144m) are due to joint taxation based on budgets and business plans for the coming scheme. years, including planned commercial initiatives. contribution of DKK 54m (2016: DKK 65m), Danish subsidiaries are included in the joint taxation tax recognised in the total comprehensive in- from the date when they are included in the consol- come DKK 19m (2016: DKK 11m) and recog- idated financial statements and up to the date when nised deferred tax in the income statement and they are excluded from the consolidation. The jointly taxed Danish companies are taxed under the on- others DKK 32m (2016: DKK -98m). account tax scheme.

Not recognised tax assets amount to DKK On payment of joint taxation contributions, the cur- 440m (2016: DKK 258m). Of the tax asset rent Danish corporation tax is allocated between the Danish jointly taxed companies in proportion to their DKK 440m (2016: DKK 231m) relate to tax taxable income. Companies with tax losses receive losses on ex-change rates effect of the Danish joint taxation contributions from other companies tax rules for interest ceiling. The tax loss must that have used the tax losses to reduce their own be utilised within 3 years otherwise it will ex- taxable profit (full absorption). pire.

The administration company, Carlsberg A/S, has unlimited and joint legal responsibility with the other companies under the joint taxation scheme for withholding taxes on dividends, in- terest and royalties.

2017 2016 Other Total Other Total Income comprehen- comprehen- Income comprehen- comprehensive DKK million statement sive income sive income statement sive income income Tax for the year can be specified as follows Current tax 23 - 23 224 - 224 Change in deferred tax during the year 33 19 52 -116 11 -105 Adjustments to tax for previous years - - - -51 - -51 Total 56 19 75 57 11 68

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 PARENT COMPANY 105 SECTION 6 GENERAL ACCOUNTING POLICIES

SECTION 5.5 SECTION 5.6 The 2017 financial statements of Carlsberg SIGNIFICANT ACCOUNTING ESTIMATES CONTINGENT EVENTS AFTER THE Breweries A/S have been prepared in accord- AND JUDGEMENTS ance with International Financial Reporting In preparing Carlsberg Breweries A/S’ financial LIABILITIES AND REPORTING PERIOD Standards (IFRS) and additional requirements statements, management makes various ac- OTHER in the Danish Financial Statements Act. counting estimates and judgements that form Apart from the events recognised or disclosed the basis of presentation, recognition and COMMITMENTS in the financial statements, no events have The financial statements are presented in measurement of the Company’s assets and lia- occurred after the reporting date of importance Danish kroner (DKK), which is the functional bilities. Carlsberg Breweries A/S has issued guarantees to the financial statements. currency. for loans etc. raised by subsidiaries and associ- The estimates and judgements made are based ates (non-consolidated share of loan) of DKK In February 2018, the Company acquired the The accounting policies for the Parent Com- on historical experience and other factors that 2,426m (2016: DKK 2,752m) remaining 49% of the shares in Olympic Brew- pany are the same as for the Group, cf. section management assesses to be reliable, but that ery, Greece. The transaction has no significant 9 in the consolidated financial statements and by their very nature are associated with uncer- Carlsberg Breweries A/S is jointly registered for impact on the financial statements. the individual sections. tainty and unpredictability. These estimates Danish VAT and excise duties with Carlsberg and judgements may therefore prove incom- Breweries A/S, Carlsberg Danmark A/S and plete or incorrect, and unexpected events or various other minor Danish subsidiaries, and circumstances may arise. Carlsberg Breweries A/S is jointly and severally liable for payment of VAT and excise duties. The significant accounting estimates and judgements made and accounting policies spe- Carlsberg Breweries A/S is party to certain cific to the Parent Company are presented in lawsuits, disputes etc. of various scopes. In the explanatory notes. management’s opinion, apart from as recog- nised in the statement of financial position or disclosed in the financial statements, the out- come of these lawsuits, disputes etc. will not have a material negative effect on the Com- pany’s financial position.

Financial statements

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 FINANCIAL STATEMENTS 106 SUPERVISORY AND EXECUTIVE BOARD SUPERVISORY AND

EXECUTIVE BOARD

CEES ‘T HART Board function Professional position SUPERVISORY BOARD CEO OF CARLSBERG A/S AND CARLSBERG Employee representative. Consultant, Carlsberg Global Business Services LARS REBIEN SØRENSEN BREWERIES A/S SINCE 2015 A/S. CHAIRMAN SINCE 2015 Prior to joining Carlsberg, Cees was CEO of the Professional position Nationality: Danish Dutch dairy company Royal FrieslandCampina, Director, Carlsberg Breweries A/S. Non-executive functions Year of birth: 1954 a position he had held since 2008. Prior to None. Appointed until: 2017 FrieslandCampina, Cees spent 25 years with Non-executive functions Unilever, holding management positions across None. The Supervisory Board members’ full CVs, in- Professional position Eastern Europe, Western Europe and Asia. His cluding skills and competences, are available Non-executive board director. last position at Unilever was as a member of METTE KRONBORG on www.carlsberggroup.com the Europe Executive Board. Cees is a member Nationality: Danish Non-executive functions of the Supervisory Board of KLM Year of birth: 1976 Member of the board of Thermo Fisher Scien- tific Inc. HEINE DALSGAARD Board function CFO OF CARLSBERG A/S AND CARLSBERG Employee representative. EXECUTIVE BOARD FLEMMING BESENBACHER BREWERIES A/S CEES ‘T HART DEPUTY CHAIRMAN SINCE 2015 Heine joined Carlsberg from ISS, one of the Professional position CEO OF CARLSBERG A/S AND CARLSBERG Nationality: Danish world’s largest facility services companies. He Finance Director, Carlsberg Breweries A/S. BREWERIES A/S Year of birth: 1952 went to ISS in 2013, prior to the company’s Appointed until: 2017 IPO in 2014. Before ISS, he was Group CFO at Non-executive functions HEINE DALSGAARD Grundfos, a leading global pump manufacturer. None. CFO OF CARLSBERG A/S AND CARLSBERG Professional position Heine’s previous experience includes various BREWERIES A/S Professor, D.Sc., h.c. mult, FRSC; Chairman of senior management and financial positions at the Board of Directors of the Carlsberg Foun- companies such as Carpetland, Hewlett Pack- SØREN LETH dation. ard and Arthur Andersen. Nationality: Danish Year of birth: 1979 Non-executive functions EVA VILSTRUP DECKER Member of the boards of the Danish Innovation Nationality: Danish Board function Fund, Unisense, CfL, UNLEASH and the Danish Year of birth: 1964 Employee representative. government’s advisory boards for circular economy and digital growth.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 FINANCIAL STATEMENTS 107 REPORTS

MANAGEMENT STATEMENT

The Supervisory Board and the Executive Further, in our opinion the Management review Executive Board of Carlsberg Breweries A/S Board have today discussed and approved the includes a fair review of the development in the Annual Report of the Carlsberg Breweries Carlsberg Breweries Group’s and the Parent Group and the Parent Company for 2017. Company’s operations and financial matters, of Cees 't Hart Heine Dalsgaard the result for the year, and of the Carlsberg CEO CFO The Annual Report has been prepared in Breweries Group’s and the Parent Company’s accordance with International Financial financial position as well as describing the sig- Reporting Standards and additional require- nificant risks and uncertainties affecting the Supervisory Board of Carlsberg Breweries A/S ments in the Danish Financial Statements Act. Carlsberg Breweries Group and the Parent Company. Lars Rebien Sørensen Flemming Besenbacher In our opinion the consolidated financial state- Chairman Deputy Chairman ments and the Parent Company’s financial We recommend that the Annual General statements give a true and fair view of the Meeting approve the Annual Report. Carlsberg Breweries Group’s and the Parent Cees 't Hart Heine Dalsgaard Company’s assets, liabilities and financial posi- Copenhagen, 15 March 2018 tion at 31 December 2017 and of the results of Eva V. Decker Mette Kronborg the Carlsberg Breweries Group’s and the Parent Company’s operations and cash flows for the financial year 2017. Søren Leth

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 FINANCIAL STATEMENTS 108 REPORTS INDEPENDENT AUDITOR’S REPORT

TO THE SHAREHOLDER OF CARLSBERG What we have audited BASIS FOR OPINION To the best of our knowledge and belief, pro- BREWERIES A/S The Consolidated Financial Statements and We conducted our audit in accordance with In- hibited non-audit services referred to in Article Parent Company Financial Statements of ternational Standards on Auditing (ISAs) and 5(1) of Regulation (EU) No 537/2014 were OUR OPINION Carlsberg Breweries A/S for the financial year the additional requirements applicable in not provided. In our opinion, the Consolidated Financial 1 January to 31 December 2017 comprise in- Denmark. Our responsibilities under those Statements and the Parent Company Financial come statement, statement of comprehensive standards and requirements are further Appointment Statements (pp 18-83 and pp 85-105) give a income, statement of financial position, state- described in the Auditor’s responsibilities for the We were first appointed auditors of Carlsberg true and fair view of the Group’s and the Parent ment of changes in equity, statement of cash audit of the Financial Statements section of our Breweries A/S on 28 April 2017 for the finan- Company’s financial position at 31 December flows and notes, including summary of signifi- report. cial year 2017. 2017 and of the results of the Group’s and the cant accounting policies for the Group as well Parent Company’s operations and cash flows as for the Parent Company. Collectively re- We believe that the audit evidence we have KEY AUDIT MATTERS for the financial year 1 January to 31 Decem- ferred to as the “Financial Statements”. obtained is sufficient and appropriate to provide Key audit matters are those matters that, in ber 2017 in accordance with International Fi- a basis for our opinion. our professional judgement, were of most sig- nancial Reporting Standards as issued by the nificance in our audit of the Financial State- International Accounting Standards Board and Independence ments for 2017. These matters were addressed further requirements in the Danish Financial We are independent of the Group in in the context of our audit of the Financial Statements Act. accordance with the International Ethics Statements as a whole, and in forming our Standards Board for Accountants’ Code of opinion thereon, and we do not provide a Our opinion is consistent with our Auditor’s Ethics for Professional Accountants (IESBA separate opinion on these matters. Long-form Report to the Audit Committee and Code) and the additional requirements the Supervisory Board. applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with the IESBA Code.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 FINANCIAL STATEMENTS 109

KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER REVENUE RECOGNITION RECOVERABILITY OF THE CARRYING AMOUNT OF GOODWILL AND BRANDS

Recognition of the Group’s revenue Our audit procedures included considering the appropriateness of the Group’s The principal risk is in relation to In addressing the risk, we walked through and tested relevant controls de- is complex due to the extent of dif- revenue recognition accounting policies and assessing compliance with appli- Management’s assessment of the signed and operated by the Group relating to the assessment of the carrying ferent revenue streams ranging cable accounting standards. future timing and amount of cash amount of goodwill and brands. from sales of goods, royalty in- flows, which are used to project the come, porterage income and sales We tested the relevant controls, including applicable information systems and recoverability of the carrying We considered the appropriateness of Management’s defined cash-generating of by-products recognised when all Management’s monitoring of controls used to ensure the completeness, accu- amount of goodwill and brands. units (CGUs) within the business. We evaluated whether there were factors re- significant risks and rewards have racy and timing of revenue recognised. There is a specific risk related to quiring Management to change their definition. We examined the methodo- been transferred to the customer or macroeconomic conditions and vol- logy used by Management to assess the carrying amount of goodwill and in terms of the licence agreement. We discussed the key assumptions related to the recognition and classification atile earnings caused by volume brands assigned to CGUs and the process for identifying CGUs that require im- of revenue with Management. Further we performed substantive procedures decline, intensified competition and pairment testing to determine compliance with IFRS. We focused on this area, as there is regarding invoicing, significant contracts, significant transactions (including dis- changed regulations in key markets – conditions that could also result a risk of non-compliance with ac- counts) and locally imposed duties and fees in order to assess the accounting We performed detailed testing for the assets where an impairment review was in Management deciding to change counting policies due to complexity treatment and principles applied. required or indications of impairment were identified. For those assets we ana- brand strategy to drive business originating from different customer lysed the reasonableness of key assumptions in relation to the ongoing opera- behaviour, structures, market con- performance. We applied data analysis in our testing of revenue transaction in order to iden- tion of the assets. ditions and terms in the various tify transactions outside the ordinary transaction flow including journal entry countries. Bearing in mind the generally long- testing and cut-off testing at year-end. We corroborated estimates of future cash flows and challenged whether they lived nature of the Carlsberg are reasonable and supported by the most recent approved Management Group's assets, the most critical Furthermore, the various discounts budgets, including expected future performance of the CGUs, and challenged assumptions are Management’s and locally imposed duties and fees whether these are appropriate in light of future macroeconomic expectations in view of cash-generating units, in regard to revenue recognition in the markets. the Carlsberg Group are complex prices, volumes, discount rates, and introduce an inherent risk to growth rates, royalty rates, ex- We used our internal valuation specialists and evaluated the assumptions used the revenue recognition process. pected useful life and costs, and by Management, including assessment of price and volume forecasts, discount future free cash flows. rates and long-term growth rates, and tested the mathematical accuracy of

The revenue recognition and ac- the relevant value-in-use models prepared by Management. counting treatment are described in We focused on this area, as Mana- section 1.2 “Revenue and segmen- gement is required to exercise con- Further, we assessed the appropriateness of disclosures including sensitivity tation of operations – Accounting siderable judgement because of the analysis prepared for the key assumptions. estimates and judgements” of the inherent complexity in estimating Consolidated Financial Statements. future cash flows.

The key assumptions and account- ting treatment are described in sec- tion 2.3 “Impairment” of the Con- solidated Financial Statements.

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 FINANCIAL STATEMENTS 110

STATEMENT ON THE MANAGEMENT REVIEW MANAGEMENT’S RESPONSIBILITIES FOR THE AUDITOR’S RESPONSIBILITIES FOR THE AUDIT procedures that are appropriate in the cir- Management is responsible for Management’s FINANCIAL STATEMENTS OF THE FINANCIAL STATEMENTS cumstances, but not for the purpose of ex- Review (pp 3-17, pp 84 and pp 106). Management is responsible for the preparation Our objectives are to obtain reasonable assu- pressing an opinion on the effectiveness of of consolidated financial statements and parent rance about whether the Financial Statements the Group’s and the Parent Company’s inter- Our opinion on the Financial Statements does company financial statements that give a true as a whole are free from material misstate- nal control. not cover Management’s Review, and we do and fair view in accordance with International ment, whether due to fraud or error, and to is- not express any form of assurance conclusion Financial Reporting Standards as issued by the sue an auditor’s report that includes our opin- • Evaluate the appropriateness of accounting thereon. International Accounting Standards Board and ion. Reasonable assurance is a high level of as- policies used and the reasonableness of ac- further requirements in the Danish Financial surance, but is not a guarantee that an audit counting estimates and related disclosures In connection with our audit of the Financial Statements Act, and for such internal control conducted in accordance with ISAs and the ad- made by Management. Statements, our responsibility is to read Mana- as Management determines is necessary to ditional requirements applicable in Denmark gement’s Review and, in doing so, consider enable the preparation of financial statements will always detect a material misstatement • Conclude on the appropriateness of Manage- whether Management’s Review is materially that are free from material misstatement, when it exists. Misstatements can arise from ment’s use of the going concern basis of ac- inconsistent with the Financial Statements or whether due to fraud or error. fraud or error and are considered material if, counting and based on the audit evidence ob- our knowledge obtained in the audit, or other- individually or in the aggregate, they could tained, whether a material uncertainty exists wise appears to be materially misstated. In preparing the Financial Statements, Mana- reasonably be expected to influence the eco- related to events or conditions that may cast gement is responsible for assessing the Group’s nomic decisions of users taken on the basis of significant doubt on the Group’s and the Moreover, we considered whether Manage- and the Parent Company’s ability to continue these Financial Statements. Parent Company’s ability to continue as a ment’s Review includes the disclosures required as a going concern, disclosing, as applicable, going concern. If we conclude that a material by the Danish Financial Statements Act. matters related to going concern and using the As part of an audit in accordance with ISAs and uncertainty exists, we are required to draw going concern basis of accounting unless Man- the additional requirements applicable in Den- attention in our auditor’s report to the related Based on the work we have performed, in our agement either intends to liquidate the Group mark, we exercise professional judgement and disclosures in the Financial Statements or, if view, Management’s Review is in accordance or the Parent Company or to cease operations, maintain professional scepticism throughout such disclosures are inadequate, to modify with the Consolidated Financial Statements or has no realistic alternative but to do so. the audit. We also: our opinion. Our conclusions are based on the and the Parent Company Financial Statements • Identify and assess the risks of material mis- audit evidence obtained up to the date of our and has been prepared in accordance with the statement of the Financial Statements, auditor’s report. However, future events or requirements of the Danish Financial State- whether due to fraud or error, design and conditions may cause the Group or the Parent ments Act. We did not identify any material perform audit procedures responsive to those Company to cease to continue as a going misstatement in Management’s Review. risks, and obtain audit evidence that is suffi- concern. cient and appropriate to provide a basis for our opinion. The risk of not detecting a mate- • Evaluate the overall presentation, structure rial misstatement resulting from fraud is and content of the Financial Statements, in- higher than for one resulting from error, as cluding the disclosures, and whether the Fi- fraud may involve collusion, forgery, inten- nancial Statements represent the underlying tional omissions, misrepresentations, or the transactions and events in a manner that override of internal control. achieves fair presentation.

• Obtain an understanding of internal control relevant to the audit in order to design audit

CARLSBERG BREWERIES GROUP ANNUAL REPORT 2017 FINANCIAL STATEMENTS 111

• Obtain sufficient appropriate audit evidence From the matters communicated with those regarding the financial information of the en- charged with governance, we determine those tities or business activities within the Group to matters that were of most significance in the express an opinion on the Consolidated Fi- audit of the Financial Statements of the current nancial Statements. We are responsible for period and are therefore the key audit matters. the direction, supervision and performance of We describe these matters in our auditor’s re- the Group audit. We remain solely responsible port unless law or regulation precludes public for our audit opinion. disclosure about the matter or when, in ex- tremely rare circumstances, we determine that We communicate with those charged with a matter should not be communicated in our governance regarding, among other matters, report because the adverse consequences of the planned scope and timing of the audit and doing so would reasonably be expected to out- significant audit findings, including any signifi- weigh the public interest benefits of such com- cant deficiencies in internal control that we munication. identify during our audit.

We also provide those charged with gover- nance with a statement that we have complied with relevant ethical requirements regarding in- dependence, and to communicate with them all relationships and other matters that may rea- sonably be thought to bear on our indepen- dence, and where applicable, related safe- guards.

Copenhagen, 15 March 2018

PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR no 3377 1231

Mogens Nørgaard Mogensen Gert Fisker Tomczyk State Authorised Public Accountant State Authorised Public Accountant mne21 404 mne9777

Carlsberg Breweries A/S DISCLAIMER This Annual Report contains forward-looking state- Ny Carlsberg Vej 100 ments, including statements about the Group’s sales, 1799 Copenhagen V revenues, earnings, spending, margins, cash flow, inven- Denmark tory, products, actions, plans, strategies, objectives and guidance with respect to the Group’s future operating results. Forward-looking statements include, without Phone +45 3327 3327 limitation, any statement that may predict, forecast, indicate or imply future results, performance or achieve- ments, and may contain the words “believe, anticipate, CVR no. 25508343 expect, estimate, intend, plan, project, will be, will con- tinue, will result, could, may, might”, or any variations of Editor: Carlsberg Group Investor Relations such words or other words with similar meanings. Any such statements are subject to risks and uncertainties Design & layout: Operate & SkabelonDesign that could cause the Group’s actual results to differ Photos: Nana Reimers et al materially from the results discussed in such forward- looking statements. Prospective information is based on management’s then current expectations or forecasts. Such information is subject to the risk that such expect- ations or forecasts, or the assumptions underlying such expectations or forecasts, may change. The Group as- sumes no obligation to update any such forward-look- ing statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Some important risk fac- tors that could cause the Group’s actual results to differ materially from those expressed in its forward-looking statements include, but are not limited to: economic and political uncertainty (including interest rates and exchange rates), financial and regulatory developments, demand for the Group’s products, increasing industry consolidation, competition from other breweries, the availability and pricing of raw materials and packaging materials, cost of energy, production- and distribution- related issues, information technology failures, breach or unexpected termination of contracts, price reductions resulting from market-driven price reductions, market acceptance of new products, changes in consumer pref- erences, launches of rival products, stipulation of fair value in the opening balance sheet of acquired entities, litigation, environmental issues and other unforeseen factors. New risk factors can arise, and it may not be possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on the Group’s business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward- looking statement. Accordingly, forward-looking state- ments should not be relied on as a prediction of actual results.