Akastor ASA
Annual Report 2018

Plain-text annual report

2018 ANNUAL REPORT 2 KEY FIGURES (CONTINUING OPERATIONS) 2018 2017 Results and orders (NOK million) Revenue and other income EBITDA EBITDA margin (percent) Net profit (loss) Net profit (loss) incl discontinued operations Net debt Equity ratio (percent) Order intake Order backlog Share (NOK) Share price December 31 Basic/ Diluted earnings per share Employees (Full time equivalents) Employees including hired-ins Health and Safety Lost time incident frequency (per million worked hours) Total recordable incident frequency (per million worked hours) Sick leave rate (percent of worked hours) 3 800 290 7.6 (194) (322) 403 48 4 481 2 692 3 606 116 3.2 (706) (58) 2 364 51 3 818 1 948 13.1 (1.19) 16.4 (0.21) 1 775 1 835 1.6 2.2 2.6 0.8 1.1 3.2 Net capital employed NOK million Revenue NOK million EBITDA NOK million Other 1 357 AKOFS Offshore 1 086 MHWirth 2 113 1200 1000 895 881 873 1 090 955 800 600 400 200 0 87 78 63 63 100 96 80 60 40 20 0 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Annual Report 20183 TABLE OF CONTENTS 01. BOARD OF DIRECTORS' REPORT 02. DECLARATION BY THE BOARD OF DIRECTORS AND CEO 03. CORPORATE GOVERNANCE STATEMENT 04. FINANCIALS AND NOTES a. Akastor Group b. Akastor ASA 05. AUDITOR'S REPORT 4 11 12 21 21 84 96 06. ALTERNATIVE PERFORMANCE MEASURES 101 07. BOARD OF DIRECTORS 08. MANAGEMENT 09. COMPANY INFORMATION 103 106 107 Annual Report 2018 4 01. BOARD OF DIRECTORS' REPORT Akastor ASA (hereinafter referred to as Akastor) is an investment company based in Norway with a portfolio of companies in the oilfield services sector, with a flexible mandate for active ownership and long-term value creation. The shares of Akastor are traded on the Oslo Stock Exchange under the ticker AKA. The Akastor portfolio of companies had a total net capital employed of NOK 4.6 billion at the end of 2018. Highlights 2018 due to a slow recovery of the oil service market, and thus stronger order intake for all of the portfolio companies. Company Overview The largest shareholder of Akastor is Aker Kværner Holding AS with a shareholding of 40.27 percent, which is 70 percent owned by Aker ASA and 30 percent by the Norwegian government. Aker ASA also has a direct shareholding in Akastor of 8.52 percent. important operational milestones were In 2018, several achieved and the portfolio of investments was strengthened through strategic transactions. Akastor is primarily focused on the oilfield services sector. The portfolio in 2018 covers a range of industrial holdings in this sector, including: On January 1, the vessel Aker Wayfarer started operations under the 5+5 year contract with Petrobras. The vessel will provide subsea well installation and other types of offshore installation work offshore Brazil. In April, MHWirth signed the first contract in more than three years for a complete drilling equipment package to a newbuild drilling rig. The contract was signed with Keppel Fels for a harsh environment midwater semi-submersible rig, with Awilco Drilling as the ultimate client. In May, an investment of USD 75 million was made in a preferred equity instrument in Odfjell Drilling, yielding 10 percent annual interest plus a warrant structure for up to 5,925,000 shares in Odfjell Drilling. In June, an agreement to sell 50 percent of the shares in AKOFS Offshore for USD 142.5 million to Mitsui & Co. Ltd (Mitsui) and Mitsui O.S.K. Lines Ltd (MOL) was signed. The transaction was completed in September. Later in June, a five year contract was signed with Equinor, for provision of year-round light well intervention (LWI) services on shelf, with planned the Norwegian continental commencement in the first half of 2020. Finally, in December Akastor entered into an agreement with Silverfleet Capital and two banks to merge AGR Bidco AS (AGR) with First Geo. Akastor will hold 100 percent of the shares and 55 percent of the economic interest in the combined company. The merged company will be a world leading provider of well management-, reservoir- and subsurface services, ranging from consultancy services to fully outsourced well and rig management projects. The merger is expected to be completed in the first half of 2019. Akastor’s total revenue from continuing operations was NOK 3.8 billion in 2018, an increase of 22 percent from 2017 (adjusted for certain special items in 2017). The increase was ŸŸ MHWirth, which provides drilling systems and lifecycle services. Ownership interest 100 percent. ŸŸ AKOFS Offshore, a subsea well installation and inter- vention services provider. Ownership interest 50 per- cent. ŸŸ Step Oiltools, a drilling waste management company. Ownership interest 100 percent ŸŸ First Geo, which delivers subsurface advice and prod- ucts to E&P companies. Ownership interest 100 per- cent. Expecting to merge First Geo with AGR in 2019. ŸŸ Cool Sorption, a supplier of vapour recovery units and systems. Ownership interest 100 percent. ŸŸ DOF Deepwater, owns and operates five offshore ves- sels. Ownership interest 50 percent. ŸŸ NES Global Talent, a technical and engineering staffing company. Economic interest 17.7 percent. Each Akastor portfolio company is organized as an independent business with its own dedicated management team, which together with the company’s board, is fully responsible for all aspects of its operations. All portfolio companies have separate boards of directors, which consist of dedicated Akastor investment managers, and in some of the boards, external board representatives and employee representatives. This lays the foundation for close cooperation between Akastor, the portfolio companies and their employees. In addition, Akastor has several financial investments, including: ŸŸ Preferred equity instrument of USD 77.2 million in Odfjell Drilling plus a warrant structure of up to 5.9 million shares. ŸŸ Shares in Awilco Drilling. Ownership interest 5.5 percent. Annual Report 2018 | Board of Directors' ReportBoard of Directors’ Report5 The Akastor corporate organization is based in Norway, at Fornebu, with a team of 17 employees, working closely with the boards and management of its portfolio companies. position them for growth in current and new markets, and ensure financial capacity for potential business opportunities. Akastor has a total of 1 775 employees with presence in approximately 20 countries at year end 2018. Strategy Akastor is an investment company, advocating an independent approach for each portfolio company to optimize its development potential. Akastor aims to create long-term value for its shareholders through active development of its portfolio companies as stand-alone businesses, while maintaining the flexibility to be opportunistic. Akastor works closely with each portfolio company’s management to make decisions on business development, acquisitions and divestments to maximize the value of the company. Each portfolio company develops and executes independent value creation plans in close cooperation with the Akastor investment team. As an owner, Akastor emphasizes understanding the portfolio companies’ markets and challenges in depth, in order to evaluate current valuation versus future potential. Akastor seeks to maximize value by combining strategic, operational and financial measures. The business models of the portfolio companies are decentralized, but as part of the Akastor portfolio, all companies share a common foundation based on Akastor’s values, governing documents and compliance structure. With regards to the financial holdings, focus is to generate an acceptable return on the investments as such. In addition, financial investments may be made in assets or companies in order to strengthen the portfolio companies of the group. Market Outlook Akastor’s portfolio companies operate mainly in the oilfield services industry. During 2018, the market fundamentals have improved somewhat, based on stronger cash generation and higher investment levels of the oil companies. However, there is still high over-capacity in certain market segments, such as offshore drilling, offshore vessels, and subsea well intervention. This is expected to continue to impact the activities of several of the portfolio companies in 2019, with regards to both new orders for equipment and service activities. Since the downturn started in 2014, a lot of focus has been on reducing costs and developing more efficient technological solutions. In 2018, MHWirth has successfully installed its digital solutions on several drilling rigs, optimizing the operations of the drilling equipment. Further, new business models for services have been implemented, aligning incentives for MHWirth and its clients. As an active owner, Akastor will continue to work closely with the portfolio companies to Group Financial Performance Akastor presents its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. All amounts below refer to the consolidated financial statements for the group, unless otherwise stated. the Income Statement Revenue and other income for 2018 increased by 5 percent to NOK 3 800 million. Adjusted by NOK 500 million from a settlement agreement in MHWirth in 2017, the revenue has increased by 22 percent. Operating profit before interest, tax, depreciation and amortization (EBITDA) increased by NOK 175 million to NOK 290 million, while EBITDA in 2017 was impacted by several negative special items. Depreciation and amortization was NOK 181 million in 2018, compared to NOK 278 million in the previous year. There has been no impairment recognized on fixed assets for continuing operations in 2018. Net financial expenses were NOK 200 million in 2018 compared to NOK 406 million in the previous year. The net financial expenses include Akastor’s share of net loss of NOK 157 million from the equity-accounted investees DOF Deepwater and AKOFS Offshore, dividend income of NOK 71 million from equity investment, as well as unrealized loss of NOK 71 million in fair value changes of financial investments. The pre-tax loss for the year was NOK 91 million, compared to a loss of NOK 686 million the previous year. The income tax expenses for 2018 were NOK 103 million, compared to a tax expense of NOK 20 million in 2017. The effective tax rate is negatively impacted by several items, such as impairment of deferred tax assets, non-tax deductible items, mix of revenue generated in various jurisdictions, as well as change in tax rate in Norway. Net loss from continuing operations was NOK 194 million, while net loss from discontinued operations was NOK 128 million. The net loss from discontinued operations was mainly related to operating losses from AKOFS Offshore, gain from the divestment of AKOFS Offshore and provision as a result of negative arbitration award related to previously divested Managed Pressure Operations Ltd (MPO). The group had an operating loss of NOK 322 million for the year. Earnings per share were negative NOK 1.19 in 2018, compared with negative NOK 0.21 a year earlier. The board of directors has resolved to propose to the annual general meeting that no dividend is distributed for 2018. Annual Report 2018 | Board of Directors' Report6 Financial Position Total assets of Akastor amounted to NOK 9.0 billion as of December 31, 2018, compared with NOK 10.3 billion at year- end 2017. The decrease reflects reductions in non-current assets of NOK 2.1 billion mainly related to divestment of 50 percent shares in AKOFS Offshore, offset by equity investment in Odfjell Drilling and Awilco Drilling. Gross debt decreased by NOK 1.9 billion as a result of the divestment of 50 percent shares of AKOFS Offshore as well increased cash flows from operating activities. Total equity amounted to NOK 4.3 billion at year-end 2018, compared to NOK 5.3 billion the year before. The equity ratio was 48 percent as of December 31, 2018, decreased from 51 percent in 2017. Cash Flow As of December 31, 2018, Akastor had cash of NOK 198 million, compared to NOK 168 million in 2017. The net cash flow from operating activities was positive NOK 315 million, compared to negative operating cash flow of NOK 673 million in the previous year. The positive cash flow from operating activities comprises of net cash inflow from operating activities of NOK 625 million offset by payments of NOK 311 million for income tax and interest costs including finance leases before the divestment of AKOFS Offshore. Net cash flow from investing activities was NOK 247 million compared to NOK 737 million in 2017. The cash flow from investing activities was mainly related to the proceeds from the divestment of 50 percent shares in AKOFS Offshore as well as payment for investment in Odfjell Drilling and Awilco Drilling. Capex investments were NOK 131 million compared to NOK 97 million in 2017. Net cash flow from financing activities amounted to negative NOK 481 million and reflected reduced borrowings in 2018. The net cash flow from financing activities in 2017 was negative NOK 391 million. Going Concern The board of directors confirms that the going concern assumption, on which the consolidated financial statements have been prepared, is appropriate. The Akastor Portfolio MHWirth MHWirth is a global provider of drilling solutions, engineering, projects, equipment and services. MHWirth has activities on five continents with presence in 14 countries. At year-end 2018, the company employs 1 424 people; 54 percent of the workforce is employed in Norway. The company’s business is divided in four core areas: Large Projects, Drilling Equipment, Drilling Lifecycle Services and Engineering Services. MHWirth is the largest portfolio company by both sales and employees. Key Figures Amounts in NOK million Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA Net capital employed Order intake Order backlog Employees (FTE) 2018 3 055 281 156 58 405 2 113 3 544 2 282 1 424 2017 3 030 118 (189) 46 995 2 783 3 212 1 718 1 456 The revenue for 2018 of NOK 3 055 million was up 1 percent from 2017. Adjusted for revenues from a settlement agreement in 2017 of NOK 500 million, revenues were up 21 percent from 2017 to 2018. The Drilling Lifecycle Services business had revenues of NOK 1 699 million, an increase of 1 percent from 2017. The number of active rigs with complete drilling package from MHWirth increased slightly to 52 rigs in 2018. The EBITDA increased from NOK 118 million in 2017 to NOK 281 million in 2018, however the 2017 EBITDA included several negative special items. The offshore drilling market has improved somewhat during 2018, but is still suffering from over capacity of offshore drilling rigs. In April, MHWirth signed the first contract for a complete drilling package to an offshore floater in several years. The equipment will be delivered to Keppel Fels, for construction of a midwater semi-submersible with Awilco Drilling as the ultimate client. The order intake from single equipment contract improved somewhat in 2018, both from oil and non-oil segments. Total order intake in MHWirth ended on NOK 3.5 billion, compared with NOK 3.2 billion in 2017. The order backlog increased from NOK 1.7 billion to NOK 2.3 billion during 2018. After several years with cost reductions adjusting the cost base to a new activity level, the situation stabilized in 2018. During the year, the workforce decreased slightly from 1 456 to 1 424 employees. Focus will still be to reduce the costs of the products, more lean operations, and more cost efficient service models. Since the downturn started in 2014, there has been a lot of focus from the customers on making the drilling equipment more efficient, reducing the costs of drilling a well, as well as reducing the service costs of the equipment. Condition-based rather than time-based lifecycle service is an example of this. An important response to this market trend has been the development of digital technologies, in order to automate the operations of the drilling equipment. Currently, six clients have signed contracts for ten rigs, to implement the DEAL (Drilling Equipment Automation Layer) interface and several software solutions for automation of several of the operations onboard the rigs. Akastor aims to develop MHWirth business going forward both through organic growth and M&A adapted to the Annual Report 2018 | Board of Directors' Report7 development of the company’s core market, the offshore drilling market. AKOFS Offshore AKOFS Offshore is a provider of vessel-based subsea well installation and intervention services to the oil and gas industry. The company operates three specialized offshore vessels, Skandi Santos, Aker Wayfarer and AKOFS Seafarer, and employs 202 people at the end of 2018. Other Holdings Other Holdings mainly include 100 percent ownership of First Geo, 100 percent ownership of Cool Sorption, 100 percent ownership of Step Oiltools, 50 percent ownership of DOF Deepwater AS which is a joint venture with DOF ASA, 17.7 percent economic interest of NES Global Talent, 5.5 percent shareholding in Awilco Drilling, and a preferred equity instrument of USD 77.2 million in Odfjell Drilling. In addition, this segment includes corporate functions and several long- term office lease contracts that remained in Akastor after the demerger from Aker Solutions in 2014. Key Figures 1) Amounts in NOK million Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA Net capital employed Order intake Order backlog Employees (FTE) 2018 1 107 471 (127) 188 180 4 915 2 949 6 244 202 Key Figures 2017 Amounts in NOK million 2018 2017 778 213 (121) 40 186 Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA 4 154 Net capital employed 22 Order intake 4 917 180 Order backlog Employees (FTE) 749 (18) (74) 8 (30) 1 357 943 408 351 596 (38) (127) 9 (138) 628 626 231 379 1) The figures are presented at 100 percent basis. The company’s revenue increased 42 percent to NOK 1 107 million, and EBITDA increased by NOK 258 million to NOK 471 million in 2018. The increase is due to the commencement of the five-year contract for the vessel Aker Wayfarer with Petrobras in Brazil. Both of the vessels Skandi Santos and Aker Wayfarer operate on contracts with Petrobras in Brazil for subsea equipment installation work. The vessels have operated at close to full utilization and continue to build on its strong track record in Brazil. In June, AKOFS Offshore signed a five-year contract with Equinor for Light Well Intervention services in the North Sea, which will be performed from the AKOFS Seafarer vessel. The vessel and the subsea workover system will be upgraded during 2019, with expected commencement of the contract in the first half of 2020. An impairment loss of NOK 322 million was recognized on AKOFS Seafarer due to changes in cash flows projections. In September, 50 percent of the shares of AKOFS Offshore were sold to Mitsui and MOL. Following the transaction, AKOFS Offshore was restructured to consolidate 100 percent ownership interest in Avium Subsea AS, an existing joint venture between Akastor, Mitsui and MOL. Akastor, Mitsui and MOL hold 50 percent, 25 percent and 25 percent of the shares in AKOFS Offshore, respectively. AKOFS Offshore is classified as a joint venture and consolidated using the equity method in the consolidated financial statements. EBITDA for Other Holdings for the year was a loss of NOK 18 million. The three businesses Step Oiltools, First Geo and Cool Sorption delivered an EBITDA of NOK 47 million in 2018, up from negative NOK 1 million in 2017. The remaining negative EBITDA in this segment is mainly related to corporate overhead costs, as well as some legacy costs. Parent Company and Allocation of Net Loss The parent company Akastor ASA is the ultimate parent company in the Akastor group and its business is the ownership and management of all subsidiaries. Akastor ASA has outsourced all management functions to other companies within the group, mainly Akastor AS. However, assets and liabilities related to the Akastor Treasury function are held by Akastor ASA. Akastor ASA has a net loss of NOK 300 million in 2018, including impairment of shares in subsidiaries of NOK 276 million. The parent company’s dividend policy states that Akastor's shareholders shall receive a competitive return on their investment either through cash dividends or increases in the share price, or both. The company does not intend to distribute regular or annual dividends, but will consider dividends on an ongoing basis taking into consideration the company’s M&A activities, expected cash flow, capital expenditure plans, financing requirements and appropriate financial flexibility. The board thereby proposes the following allocation of net loss (amounts in NOK million): Dividends: From other equity: Total allocated: 0 300 300 Annual Report 2018 | Board of Directors' Report8 Risk Management Akastor and its portfolio companies are exposed to various forms of market, operational and financial risks that may affect the companies’ performance, their ability to meet strategic goals and the companies’ reputations. its shareholders’ Akastor’s risk management model is designed on the basis that Akastor is an investment company with an overall objective of securing investments and developing the group’s assets in order to provide the shareholders with a solid return. Akastor’s current investment portfolio is focused on the oilfield services industry. This focus is mainly driven by the company’s experience, expertise and track-record within this industry. Although Akastor has a flexible mandate, it has traditionally not sought to spread risk by investing in different industries. Instead, Akastor has focused on mitigating its vulnerability to the risk environment inherent to the oilfield services industry through sound risk management systems. It has been a volatile year in the oil market, as the oil price has fluctuated throughout the year, with high average prices mid- year, however ending lower than in the beginning of the year. The market situation for the oilfield services industry has remained challenging, with modest level of activity and capital spending, but market statistics reflect that oil companies’ capacity to spend is growing, and there has been some increased activity in the subsea market and increased rig demand. Akastor will continue to watch the fundamental drivers in the market. If the market developments continue to remain challenging, it may lead to further cost adjustments and changes in the valuation of the Akastor portfolio’s assets and liabilities (which could include further restructuring costs, onerous leases, impairments etc. and increased credit risk impacting the valuation of trade and interest-bearing receivables). Akastor’s main strategy for mitigating adverse effects of potential challenging market conditions is continuous monitoring and focus on rightsizing with a view to maintaining a robust balance sheet with headroom for contingencies (see also the description of financial risks below). On the operational side, sound project execution by the portfolio companies without cost overruns as well as securing new orders are key factors affecting the companies’ financial performance. Results also depend on costs, both the portfolio companies’ own costs and those charged by suppliers. Akastor and its portfolio companies are also exposed to financial risk under performance guarantees and financial guarantees issued, and financial market risks as further detailed below. In addition, the portfolio companies, through their business activities within their respective sectors and countries, are also exposed to legal/compliance and regulatory/political risks, e.g. political decisions on international sanctions that impact supply and demand of the services offered by the portfolio companies, as well as environmental regulations. As an investment company, Akastor and its portfolio companies from time to time engage in mergers and acquisitions and other transactions that could expose the companies to financial and other non-operational risks, such as warranty and indemnity claims and price adjustment mechanisms. To manage and mitigate risks within Akastor, risk evaluation is an integral part of all business activities. As an owner, Akastor actively supervises risk management in its portfolio companies through participation on the board of directors of each portfolio company, and by defining a clear set of risk management and mitigation processes and procedures that all portfolio companies must adhere to. The current and revised governing documents defined by Akastor were rolled out during the first half of 2016 and are reviewed annually. The overall responsibility for ensuring sound internal control and an appropriate framework for risk management in Akastor lies with its board of directors. A risk review is presented to and reviewed by the audit committee and the board of directors of Akastor on an annual basis. Financial Risks Akastor is exposed to a variety of financial market risks such as currency risk, interest rate risk, tax risk, price risk, credit and counterparty risk, liquidity risk and capital risk as well as risks associated with access to and terms of financing. The financial risks affect the group’s income and the value of any financial instruments held. The objective of financial risk management is to manage and control financial risk exposures and thereby increase the predictability of earnings and minimize potential adverse effects on Akastor’s financial performance. Akastor and its portfolio companies use financial derivative instruments to hedge certain risk exposures and aim to apply hedge accounting whenever possible in order to reduce the volatility resulting from the periodic market-to-market revaluation of income statement. Risk financial the management is the responsibility of the project managers, in cooperation with Akastor Treasury, to identify, evaluate and hedge financial risks under policies approved by the board of directors. Akastor has well-established principles for overall risk management, as well as policies for the use of derivatives and financial instruments. in every project. is performed instruments in It Integrity Risks All Akastor portfolio companies use education and awareness training to manage and mitigate integrity risks. All employees must complete a yearly Code of Conduct training program. In addition, all Akastor managers and office-based staff are required to conduct integrity e-learning training and participate in classroom courses. For employees in specific functions, where chance of facing integrity risk is considered higher than normal, additional training has been tailored for their role and responsibilities. Hired-ins in high risk roles are also required to undertake integrity training, just as third party representatives receive integrity training specially prepared for them. The requirement for all portfolio companies is to complete and report on the training within six months from employment or publication of a new training session. Annual Report 2018 | Board of Directors' ReportAkastor has established a whistleblowing system in line with the company’s Governance Policy. The whistleblowing channel is open for all external and internal stakeholders who wish to report a breach of the Code of Conduct, other internal guidelines or governing policies. Akastor employees are required to report breaches of the Code of Conduct, and Akastor encourages reporting of any concerns pertaining to compliance with law or ethical standards. Corporate Responsibility responsibility risks and expectations Akastor’s operating model reflects the fact that the portfolio companies are independent companies which operate different business models and therefore face different corporate from stakeholders. As a holding company, Akastor is responsible for setting the overall corporate responsibility priorities and providing the appropriate risk management framework and policies applicable for the portfolio. In turn, each portfolio company is responsible for defining their own corporate responsibility strategy with relevant activities and, where necessary, supporting policies. Akastor also focuses on maintenance and development of industrial relations and collaboration with unions. Historically, good industrial relations have played an important role, and maintaining these strong relations have proven to be one of the success criteria in developing the company over the years. Within the corporate responsibility efforts, Akastor is focused on the environmental, social and governance areas that build financial and non-financial value in the portfolio companies. Akastor’s corporate responsibility strategy is based on four main priorities: working against corruption, respecting human rights, caring for health and safety and minimizing adverse impact on the environment. All the portfolio companies are responsible for working systematically with these priorities and defining their own corporate responsibility strategies encompassing these priorities. Akastor is continuously monitoring the implementation and integration of the priorities of the corporate responsibility strategy, Code of Conduct and Integrity Policy across all the portfolio companies. For in-depth reporting on each portfolio company’s corporate responsibility work, including their HSE work, refer to the Akastor Corporate Responsibility Report for 2018. The full report is available on our website www.akastor.com. 9 People and Teams is committed to equal opportunity and non- Akastor discrimination. This commitment is described in Akastor’s Code of Conduct, as well as Akastor’s policies and agreements, and builds on a frame agreement signed with national and international trade unions in 2008. This agreement was renewed in 2012 and sets out fundamental labour rights and standards for general employment terms and employee relations, with specific focus on non-discrimination. Equal opportunities are fundamental for Akastor and its portfolio companies. Akastor and the portfolio companies had a total of 1 775 employees (FTE) as of December 31, 2018. The male/female ratio (excluding hired-ins) in the major portfolio company and Akastor Group were as follows: Female Male MHWirth Akastor Group 18% 82% 19% 81% All portfolio companies regularly assess whether they live up to the principle of equal pay for equal work and no significant differences have been identified. Each portfolio company promotes equal opportunities by setting specific requirements for diversity in recruitment and people development, and by supporting programs dedicated to equal opportunity. Akastor ASA fulfils the requirements of the Norwegian Companies Act with regards to gender representation on the board of directors, as three out of five shareholder elected directors are women. Aggregated sick leave in Akastor was 2.6 percent in 2018. There were no fatal injuries in any of the portfolio companies. The total recordable incident frequency was low, and Akastor has thoroughly analyzed all incidents and taken actions to avoid similar situations going forward. Caring for employee’s health and safety is an integrated part of the group’s culture. See figures below for details. Lost time incident Frequency (LTIF) * Total Recordable Incident Frequency * Fatalities incl subcontractors MHWirth Akastor Group 2.0 2.7 - 3.1 1.6 2.2 - 2.6 Research, Innovation and Technology Development Sick leave (percent) * Per million hours worked. Includes subcontractors NOK 36 million was capitalized in 2018, compared to NOK 27 million in 2017, related to development activities. In addition, research and development costs of NOK 32 million were expensed during the year because the criteria for capitalization were not met (NOK 16 million in 2017). All research, initiatives are innovation and development performed by the Akastor portfolio companies. Akastor ASA and Akastor AS performed no such activity in 2018. Annual Report 2018 | Board of Directors' Report10 Corporate governance Corporate governance is a framework of values, responsibilities and governing documents to control the business and ensure sustainable value creation for shareholders over time. It is the responsibility of the board of directors of Akastor to ensure that the company implements sound corporate governance. The audit committee supports the board in safeguarding that the company has internal procedures and systems in place to ensure that corporate governance processes are effective. Akastor’s corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance and are designed to secure the shareholders’ investment through value creation and to ensure good control with the portfolio companies. The corporate governance principles are included in this annual report and available on the company’s website www.akastor.com. Fornebu, March 14, 2019 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2018 | Board of Directors' Report11 02. DECLARATION BY THE BOARD OF DIRECTORS AND CEO The board and CEO have today considered and approved the annual report and financial statements for the Akastor group and its parent company Akastor ASA for the year ended on December 31, 2018. The board has based this declaration on reports and statements from the group’s CEO and/or on the results of the group’s activities, as well as other information that is essential to assess the group’s position which has been provided to the board of directors. To the best of our knowledge: ŸŸ The financial statements for 2018 for Akastor group and its parent company have been prepared in accordance with all applicable accounting standards. ŸŸ The information provided in the financial statements gives a true and fair portrayal of the group and its parent company’s assets, liabilities, profit and overall financial position as of December 31, 2018. ŸŸ The annual report provides a true and fair overview of the development, profit and financial position of Akastor group and its parent company, as well as the most significant risks and uncertainties facing the group and the parent company. Fornebu, March 14, 2019 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2018 | Declaration by the Board of Directors and CEODeclaration by the Board of Directors and CEO12 03. CORPORATE GOVERNANCE STATEMENT – AKASTOR ASA Corporate governance is a framework of values, responsibilities and governing documents to control the business and ensure sustainable value creation for shareholders over time. Sound corporate governance shall ensure that appropriate goals and strategies are adopted, that the strategies are implemented in a good manner and that the results achieved are subject to measurement and follow-up. 1. The Corporate Governance Report Basis for this Report The corporate governance principles of the group are laid down by the board of directors of Akastor ASA. The principles are based on the Norwegian Code of Practice for Corporate Governance dated October 17, 2018 (the «Code of Practice»), the regulations set out in the Continuing Obligations of stock exchange listed companies from Oslo Børs (the stock exchange in Oslo) and the relevant Norwegian background law such as the Norwegian Accounting Act and the Norwegian Public Limited Liability Companies Act. The Code of Practice may be found at www.nues.no and the Continuing Obligations of stock exchange listed companies may be found at www.oslobors.no. Norwegian laws and regulations are available at www.lovdata.no. This report outlines how Akastor has implemented the Code of Practice. Deviations from the Code of Practice are addressed under the relevant sections. In general, the Akastor board only approves deviations that the board believes contributes to value creation for its stakeholders. In addition to the Code of Practice, the Norwegian Accounting Act section 3-3b stipulates that companies must provide a report on their policies and practices for corporate governance either in the annual report or in a document referred to in the annual report. Such report is integrated in the below corporate governance statement.1) Governance Structure Akastor is an oilfield services investment company with a portfolio of industrial holdings and other investments. The company has a flexible mandate for active ownership and long- term value creation. Completed transactions in 2018 include the sale of 50 percent of the shares in AKOFS Offshore to Mitsui & Co. Ltd, and Mitsui O.S.K Lines, increased ownership in STEP Oiltools to become fully owned by Akastor, and investments of USD 75 million in preferred equity in Odfjell Drilling and USD 10 million for 5.5 percent ownership of Awilco Drilling. Akastor currently has an active investment portfolio within the oilfield services industry consisting of MHWirth, STEP Oiltools, Cool Sorption, First Geo, 50 percent of the shares in AKOFS Offshore, 50 percent of the shares in DOF Deepwater, a 17.7 percent economic ownership in NES Global Talent, in addition to other holdings and investments (see below), with a total net capital employed of approximately NOK 4.6 billion. MHWirth is a global provider of drilling solutions, engineering, projects, equipment and services. AKOFS Offshore is a provider of subsea well installation and intervention services. NES Global Talent is a global technical and engineering staff provider. STEP Oiltools is a global provider of solids control and drilling waste management services. First Geo is an operation and wellsite geology services company. Cool 1) Below, the items in respect of which information must be disclosed according to section 3-3b of the Norwegian Accounting Act are specified, together with references to where such required information may be found: 1. “A statement of the recommendations and regulations concerning corporate governance that the enterprise is subject to or otherwise chooses to comply with” can be found in the introduction section of this corporate governance statement. 2. “Information on where the recommendations and regulations mentioned in no. 1 are available to the public” can be found in the introduction section of this corporate governance statement. 3. “The reason for any non-conformance with recommendations and regulations mentioned in no. 1”. The non-conformances are described in the relevant section where there are non-conformances, which are sections 6 and 14 respectively. 4. “A description of the main elements in the enterprise’s, and for entities that prepare consolidated financial statements, if relevant also the Group’s internal control and risk management systems linked to the financial reporting process” can be found in Section 10 of this corporate governance statement. 5. “Articles of Association which entirely or partly expand or depart from provisions of Chapter 5 of the Public Limited Liability Companies Act” can be found in Section 6 of this corporate governance statement. 6. “The composition of the board of directors, the corporate assembly, the committee of shareholders’ representatives and the control committee and any working committees related to these bodies, as well as a description of the main instructions and guidelines that apply to the work of the bodies and any committees” can be found in Section 8 and 9 of this corporate governance statement. 7. “Articles of Association governing the appointment and replacement of directors” can be found in Section 8 of this corporate governance statement. 8. “Articles of Association and authorizations empowering the board of directors to decide that the enterprise is to buy back or issue its own shares or equity certificates” can be found in Section 3 of this corporate governance statement. Annual Report 2018 | Corporate Governance StatementCorporate Governance Statement 13 Sorption is a provider of vapour recovery units and systems. DOF Deepwater operates five offshore vessels. Other investments mainly include investments in Odfjell Drilling and Awilco Drilling, a subletting portfolio through Akastor Real Estate and an investment in Aker Pensjonskasse. It is the responsibility of the board of directors of Akastor ASA to ensure that Akastor and its portfolio of companies implement sound corporate governance. The board of directors evaluates this corporate governance statement on an annual basis. The board’s audit committee also evaluates the corporate governance statement as well as other key policies and procedures pertaining to compliance and governance. Compliance with, and implementation of these corporate governance guidelines are continuously evaluated by the board and said committee; inter alia by way of the board being the decisive body for the company’s defined management and reporting structure, which include regular reporting. Policies and Procedures Akastor has a total of ten corporate policies providing business practice guidance within a number of key areas, all of which were revised and re-issued during the first half of 2015 and updated on an annual basis. These policy documents express the overall position of the group with regard to for instance compliance, integrity and governance. The policies provide instructions and guidelines that apply to the portfolio companies and to individual employees in order to ensure that the group’s operations are in compliance with internal and external regulatory framework. In addition, the portfolio companies are requested to implement their own policies specific to their business within areas like project execution, HSE and tendering. Values and Code of Conduct Akastor aims to develop and refine its portfolio of companies as stand-alone enterprises, with the goal of maximizing the value potential of each entity. The company works to develop the business models of the portfolio companies, capitalize on their market positions and promote aftersales services for the equipment and systems delivered. The current investments are within the oilfield services sector, but the company has a flexible mandate for active ownership and long-term value creation. Akastor has an opportunistic approach and will continue to own the portfolio companies as long as Akastor creates more value than alternative owners. Akastor wishes to contribute to sustainable social development through responsible business practices. The company’s Code of Conduct is a handbook that applies to all employees and provides guiding on what Akastor considers to be responsible ethical conduct. The Code of Conduct provides a framework of core corporate values which reflects Akastor’s prudent business practice and shall be reflected in every aspect of our operations. The ethical guidelines and other governing documents of the group have been drafted on the basis of these core corporate values. 2. Business The objectives of the company, as defined in its articles of association, are «to own or carry out industrial and other associated businesses, management of capital, and other functions for the group, and to participate in or acquire other businesses». The articles of association are available at www. akastor.com. The principal strategies of the group are presented in the annual report. To ensure value creation for its shareholders, the board of directors annually performs a designated strategy process where it sets objectives and targets for the company, assesses risk, evaluates the existing strategy and approves any significant changes. Information concerning the financial position and principal strategies of the company, and any changes thereto is disclosed to the market in the context of the company’s quarterly reporting and in designated market presentations as well as at www.akastor.com. Corporate Responsibility Akastor takes an active approach to corporate responsibility. Corporate responsibility in Akastor is about making prudent business decisions, with minimum risk to reputation, brand and the future sustainability of our business. The main focus of corporate responsibility activities in Akastor, defined in our group-wide integrity policy, is to work against corruption, to respect human rights and to care for health, safety and the environment. Akastor’s primary stakeholders are the shareholders (existing and potential), customers of its portfolio companies and employees of the Akastor group. All our portfolio companies are expected to ensure integration of stakeholder engagement, a strong corporate responsibility in their operations and we believe our approach to corporate responsibility supports several of the UN Sustainable Development Goals. Akastor is committed to follow the Global Framework Agreement (GFA) entered into by Aker with the trade unions Fellesforbundet, IndustriALL Global Union, NITO and Tekna on December 17, 2012. The GFA builds on and continues the commitment from the previous framework agreements signed in 2008 and 2010, and outlines key responsibilities in relation to human and trade union rights. The parties commit themselves to achieving continuous improvements within the areas of working conditions, industrial relations with the employees of the Aker group of companies, health and safety standards at the workplace and environmental performance. Akastor also aligns with the principles of the UN Global Compact, the United Nations Convention against Corruption, the Universal Declaration of Human Rights, the UN Guiding Principles for Business and Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work. These international principles guide our Code of Conduct and Integrity Policy and provide the overall framework for the corporate responsibility efforts in the Akastor group. Annual Report 2018 | Corporate Governance Statement14 information Further in respect of the corporate social responsibility work of Akastor and its portfolio of companies can be found in the separate Corporate Responsibility report published simultaneously as the company’s annual report for 2018. 3. Equity and Dividends Equity The management and the board regularly monitor that the group’s equity and liquidity are appropriate for its objectives, strategy and risk profile. The book equity of the group as per December 31, 2018 is NOK 4 317 million, which represents an equity ratio of 48 percent. The management of financial risk is further described in the annual report. Dividend Policy The board proposes the level of dividend payment to the general meeting who in turn is the decisive corporate body for dividend decisions. Over time, the aim is that Akastor’s shareholders shall receive a competitive return on their investment either through cash dividends or increase in the share price, or both. The company does not intend to distribute regular or annual dividends, but will consider dividends on an ongoing basis taking into consideration the company’s M&A activities, expected cash flow, capital expenditure plans, financing requirements and appropriate financial flexibility. Authorizations for the Board of Directors Proposals from the board of directors for future authorizations for share capital increases, share buy-backs or similar shall be for defined purposes, such as share purchase programs and acquisitions of companies, and shall remain in effect until the next annual general meeting. The company’s annual general meeting on April 6, 2018 resolved to authorize the board to purchase treasury shares for three purposes for utilization, all of which were subject to separate voting under the general meeting: (i) purchase of treasury shares to be used as transaction currency in connection with acquisitions, mergers, demergers and other transactions, (ii) purchase of treasury shares to be sold and/or transferred to employees and directors under share purchase programs and (iii) purchase of treasury shares for the purpose of investment or for subsequent sale or deletion of such shares. The authorizations were all limited to ten percent of the share capital. The board’s authorizations to purchase treasury shares are valid for the period until the date of the annual general meeting of 2019. No shares were bought by the company in 2018 pursuant to the authorizations to the board of directors. As of December 31, 2018, the company holds 2 776 376 own shares. set out in the Public Limited Liability Companies Act § 8-2, second paragraph. The mandate is valid for the period until the date of the annual general meeting of 2019. There are no current provisions in the articles of association of the company or power of attorney from the general meeting which grant the board of directors the mandate to issue or buy back of shares in the company for the purposes of capital increases. Share Purchase Programs Share purchase programs in Akastor include Akastor ASA and Akastor AS (and not the portfolio companies). The company has not carried out any share purchase programs for employees of Akastor ASA or Akastor AS in 2018. In December 2018, the board of directors of Akastor ASA made use of its authorization mandate to approve a share purchase program, which is to be carried out in 2019. 4. Equal Treatment of Shareholders and Transactions with Related Parties The company has only one class of shares, and all shares carry equal rights. Existing shareholders shall have pre-emptive rights to subscribe for shares in the event of share capital increases, unless otherwise indicated by special circumstances. If the pre-emptive rights of existing shareholders are waived in respect of a share capital increase, the reasons for such waiver shall be explained by the board of directors. Transactions in own shares are effected via Oslo Børs. As of December 31, 2018, Aker ASA holds 70 percent of the shares of Aker Kværner Holding AS which holds 40.27 percent of the shares of Akastor. As of the same date, Aker ASA directly held 23 331 762 shares of Akastor, equivalent to ~8.5 percent of the shares. Proposition No. 88 (2006–2007) to Stortinget (the Norwegian Parliament) contains more detailed information concerning the establishment of Aker Kværner Holding AS and the agreement between Aker ASA and the other shareholder of Aker Kværner Holding AS. The board of directors is of the view that it is positive for Akastor that Aker ASA assumes the role of an active owner and is actively involved in matters of importance to Akastor and to all shareholders. The cooperation with Aker ASA offers Akastor access to special know-how and resources within strategy, transactions and funding. Moreover, Aker ASA offers network and negotiation resources from which Akastor benefits in various contexts. This complements and strengthens Akastor without curtailing the autonomy of the group. It may be necessary to offer Aker ASA special access to commercial information in connection with such cooperation. Any information disclosed to Aker ASA’s representatives in such a context is subject to confidentiality undertakings and disclosure regulations in compliance with applicable laws. In addition, the annual general meeting in 2018 granted the board of directors the mandate to approve the distribution of dividends based on the company’s annual accounts for 2017 as Applicable accounting standards and regulations require Aker ASA to prepare its consolidated financial statements to include Annual Report 2018 | Corporate Governance Statement15 IFRS 10. Akastor accounting information of Akastor. As of January 1, 2014, Aker ASA is deemed to have control of Akastor pursuant to the is thus revised accounting standard consolidated as a subsidiary in Aker ASA’s accounts from this date. Subsequently, Aker Solutions ASA and Kværner ASA are deemed as related parties to Akastor for accounting purposes. In order to comply with these accounting standards, Aker ASA has in the past received, and will going forward receive, information of Akastor. Such unpublished accounting distribution of unpublished accounting information from Akastor to Aker ASA is executed under strict confidentiality and in accordance with applicable regulations on handling of inside information. Aker ASA, Kværner ASA and Aker Solutions ASA (or their subsidiaries) are however not deemed, within the meaning of the Public Limited Liability Companies Act, to be a related party of Akastor. The board of directors and the executive management team of Akastor are nevertheless conscious that all relations with these companies shall be premised on commercial terms and structured in line with arm’s length principles. In the event of any material transactions between the company and shareholders, directors, senior executives, or related parties thereof, which do not form part of the ordinary course of the company’s business, the board of directors shall arrange for an independent assessment. The same shall, generally speaking, apply to the relationship between Akastor and Aker ASA related companies. In respect of the above, the «Related parties» note to the consolidated financial statements contains information on the most significant transactions between Akastor and companies within the Aker ASA group. 5. Freely Negotiable Shares The shares are listed on the Oslo Børs and are freely transferable. No transferability restrictions are laid down in the articles of association. There are no restrictions on the party’s ability to own, trade or vote for shares in the company. 6. General Meetings Attendance, Agenda and Voting The company encourages shareholders to attend the general meetings. It is also the intention to have representatives of the board of directors as well as the chairman of the nomination committee and the company’s auditor to attend the general meetings. Notices convening general meetings, including comprehensive documentation relating to the items on the agenda, including the recommendation of the nomination committee, shall be sought made available on the company’s website no later than 21 days prior to the general meeting. The articles of association of the company stipulate that documents pertaining to matters to be deliberated by the general meeting shall only be made available on the company’s website, and not normally be sent physically by post to the shareholders unless required by statute. The following matters are typically decided at the annual general meeting, in accordance with the articles of association of Akastor ASA and Norwegian background law: ŸŸ Election of the nomination committee and stipulation of the nomination committee's fees; ŸŸ ŸŸ ŸŸ ŸŸ election of shareholder representatives to the board of directors as well as stipulation of fees to the board of directors; election of the external auditor and approval of the auditor’s fee; approval of the annual accounts and the board of directors’ report, including distribution of dividend; and other matters which, by law or under the articles of association, are the business of the annual general meeting. The deadline for registering intended attendance is as close to the general meeting as possible, but not shorter than two days before the meeting. Shareholders who are unable to attend may vote by proxy. Moreover, information concerning both the registration procedure and the filing of proxies is included in the notice convening the general meeting and on the registration form. The company also aims to structure, to the extent practicable, the proxy form such as to enable the shareholders to vote on each individual item on the agenda. Chairman The articles of association stipulate that the general meetings shall be chaired by the chairman of the board of directors or a person appointed by said chairman. According to the Code of Practice the board should however «make arrangements to ensure an independent chairman for the general meeting». Thus, the articles of Akastor ASA deviate from the Code of Practice in this respect. This has its background in a long- lasting tradition in Akastor. Having the chairman of the board chairing the general meeting also simplifies the preparations for the general meetings significantly. Election of Directors It is a priority for the nomination committee that the board of directors shall work in the best possible manner as a team, and that the background and competence of the directors shall complement each other. As a consequence, the nomination committee will propose that the shareholders are invited to vote on the full board composition proposed by the nomination committee as a group, and not on each director separately. Hence, Akastor deviates from the Code of Practice stipulating that one should make «appropriate arrangements for the general meeting to vote separately on each candidate nominated for election to the company’s corporate bodies». Annual Report 2018 | Corporate Governance Statement16 Physical Attendance and Electronic Voting It is a priority for the general meeting to be conducted in a sound manner, with all shareholder votes to be cast, to the extent possible, on the basis of the same information. The company has thus far not deemed it advisable to recommend the introduction of an electronic attendance, i.e. arranging for general meetings to be held as physical meetings with online coverage allowing for shareholders to participate via web. The company will contemplate the introduction of such arrangements on an on-going basis in view of, inter alia, the security and ease of use offered by available systems. Shareholders will have the opportunity to cast votes electronically in advance of general meetings (however, not during the meeting). Minutes Minutes of general meetings will be published as soon as practicable on the announcement system of Oslo Børs, www.newsweb.no (ticker: AKA), and at www.akastor.com. 7. Nomination Committee The articles of association stipulate that the company shall have a nomination committee. The nomination committee shall have no less than three members, who shall normally serve for a term of two years. The current members of the nomination committee are Leif-Arne Langøy (chairman), Gerhard Heiberg, Arild S. Frick and Georg Fr. Rabl. Gerhard Heiberg is elected up until the annual general meeting 2020, while Leif-Arne Langøy, Arild S. Frick and Georg Fr. Rabl are up for electionat the annual general meeting 2019. Langøy is deputy chairman of the board in TRG Holding AS and The Resource Group TRG AS, as well as chairman of the board of Kværner ASA. Arild S. Frick is General Counsel of Aker ASA and managing director of Aker Kværner Holding AS. No members of the nomination committee are employed by, or directors of, Akastor. The majority of the members of the nomination committee are independent of both Akastor’s board of directors and the executive management of the company. The committee’s recommendations (relating to particularly the board of directors and their remuneration) shall address how the new board candidates will attend to the interests of the shareholders in general and fill the requirements of the company, including with respect to competence, capacity and independence. The composition of the nomination committee shall reflect the interests of all shareholders and ensure independence from the board of directors and the executive management. The members and the chairman of the nomination committee are appointed by the general meeting, which also determines the remuneration of the committee. The annual general meeting in 2010 adopted guidelines governing the duties of the nomination committee. According to these guidelines, the committee shall emphasize that candidates for the board have the necessary experience, competence, and capacity to perform their duties in a satisfactory manner. A reasonable representation with regard to gender and background should also be emphasized. The chairman of the nomination committee has the overall responsibility for the work of the committee. In the exercise of its duties, the nomination committee may contact, among others, shareholders, the board, management, and external advisors. The nomination committee shall also ensure that its recommendations are endorsed by the largest shareholders. Information concerning the nomination committee and deadlines for making suggestions or proposing candidates for directorships will be made available on the company’s website, www.akastor.com when there are candidates up for election. 8. Composition and Independence of the Board of Directors Composition It has been agreed with the employees that the company shall have no corporate assembly. Hence, the board appoints its own chairman, cf. the Public Limited Liability Companies Act section 6-1(2), unless the chairman is appointed by the general meeting. The proposal of the nomination committee will normally include a proposed candidate for appointment as chairman of the board of directors. The board of directors appoints its own deputy chairman. According to the Public Limited Liability Companies Act, the directors are appointed for a term of two years at a time unless otherwise stated in the company’s articles of association. The articles of association of Akastor ASA stipulate that directors may be elected for a period of one to three years. The right of the employees to be represented and participate in decision making is safeguarded through expanded employee representation on the board of directors of both Akastor ASA and in a number of the group’s portfolio companies. The articles of association stipulate that the board of directors shall comprise six to twelve persons, one third of whom shall be elected by and amongst the employees of the group. In addition, up to three shareholder-appointed alternates may be appointed. As per December 31, 2018, the board of directors comprised eight directors, five of whom were elected by the shareholders and three of whom were elected by and amongst the employees. The company encourages the directors to hold shares in the company. The shareholdings of the directors as of December 31, 2018 will be set out in the «Management remunerations» note to the consolidated financial statements in the annual report for 2018. In addition to Øyvind Eriksen’s indirect ownership of shares in the company through Aker ASA, also the chairman Kristian Monsen Røkke and the directors Lone Fønss Schrøder, Kathryn M. Baker and Sarah Ryan are currently shareholders in Akastor ASA. The board information about the directors’ composition, including Annual Report 2018 | Corporate Governance Statement17 background and expertise will be detailed in the annual report for 2018. step down from participating in the discussion of the matter at hand. The appointment of employee representatives to the board of directors is conducted as prescribed by the Public Limited Liability Companies Act and the Representation Regulations. The board of directors has appointed a designated election committee charged with implementing the appointment of such employee representatives. Independence A majority of the directors elected by the shareholders are independent of the executive personnel and important business associates of Akastor ASA. None of the executive personnel of the company are members of the board of directors. The composition of the board of directors aims to ensure that the interests of all shareholders are attended to, and that the company has the know-how, resources, and diversity it needs at its disposal. Among the five shareholder-elected directors, the majority are deemed independent from the company’s largest indirect shareholder, Aker ASA. 9. The Work of the Board of Directors Procedures For each calendar year, the board plans for its work and meetings. Furthermore, there are rules of procedure for the board of directors and Chief Executive Officer, which govern areas of responsibility, duties and the distribution of roles between the board of directors, the chairman of the board of directors and the Chief Executive Officer. The rules of procedure for the board of directors also include provisions on convening and chairing board meetings, decision making, the duty and right of the Chief Executive Officer to disclose information to the board of directors, the duty of confidentiality, etc. According to the company’s articles of association, each of the directors elected by the shareholders will serve for a period of one to three years pursuant to further decision by the general meeting. This to provide the nomination committee with the flexibility to propose varying terms of service for the candidates. Akastor has prepared guidelines as part of its rules of procedure for the Chief Executive Officer and board of directors ensuring that directors and the Chief Executive Officer notify the board of directors if they have any material direct or indirect personal interest in any agreement concluded by the group. The guidelines stipulate that the directors and the Chief Executive Officer shall not participate in the preparation, deliberation, or resolution of any matters that are of such special importance to themselves, or any of their related parties, so that the person in question must be deemed to have a prominent personal or financial interest in such matters. The relevant board member or the Chief Executive Officer shall raise the issue of his or her competence whenever there may be cause to question it, and each director is the primary responsible for adopting the correct decision as to whether he or she should In general, as further stipulated in Akastor’s principles for related party transactions, directors of Akastor should be cautious in participating in the consideration of issues where a potential conflict of interest or conflict of role may arise, undermining the confidence in the decision process. Such person may not participate in board discussions of more than one company that is part of the same agreement, unless the companies have common interests. These assessments will be carried out on a case-by-case basis; in most events, and as a starting point, by the relevant directors themselves, but often also in cooperation with internal and/or external legal counsel. The above principles will normally also be applied if Akastor contracts with other companies in which said board members hold direct or indirect ownership interests that exceed, in relative terms, their ownership interests in Akastor. If grounds for legal incapacity are established, the relevant board member will, as a ground rule, not be granted access to any documentation prepared to the board of directors for the deliberation of the agenda item in question. In general, Akastor applies a strict norm as far as competence assessments are concerned. In cases where the chairman of the board of directors does not participate in the deliberations, the deputy chairman of the board of directors chairs the meeting. As far as the other officers and employees of Akastor are concerned, transactions with related parties and conflicts of interest are comprehensively addressed and regulated in the group’s Code of Conduct. Meetings The board of directors will hold board meetings whenever needed, but normally six to twelve times a year. The need for extraordinary board meetings may typically arise because the internal authorization structure of the company requires the board of directors to deliberate and approve material tenders to be submitted by the company or in relation to M&A transactions. Whilst the deadlines for such submission often change, it is difficult to fit this into the calendar of ordinary board meetings. The board of directors held eight ordinary board meetings in 2018. The aggregate attendance rate at the board meetings was 90.6 percent. The Matters Discussed by the Board of Directors The Chief Executive Officer prepares cases for deliberation by the board of directors in cooperation with the chairman of the board. Endeavours are made to prepare and present matters in such a way that the board of directors is provided with an adequate basis for its deliberations. The board of directors has overall responsibility for the management of Akastor and shall, Annual Report 2018 | Corporate Governance Statement18 through the Chief Executive Officer, ensure that its activities are organized in a sound manner. The board of directors shall adopt plans and budgets for the business, and keep itself informed of the financial position of, and development within, the company. This encompasses the annual planning process of Akastor, with the adoption of overall goals and strategic choices for the group, as well as financial plans, budgets, and forecasts for the group and the portfolio companies. The board of directors performs annual evaluations of its work and its know-how. Audit Committee Akastor will have an audit committee comprising two to four of the directors. The audit committee currently comprises the directors Lone Fønss Schrøder (chairman), Kathryn M. Baker and Henning Jensen. The audit committee is independent from the management. At least one of the members of the audit committee shall have either formal qualifications within accounting or auditing, or relevant experience and skills within the same. Both members Fønss Schrøder and Baker have such relevant experience and skills. The audit committee has a mandate and a working method that complies with statutory requirements. The audit committee mandate forms an integrated part of the rules of procedures for the board of directors. The committee will participate, on behalf of the board of directors, in the quality assurance of guidelines, policies, and other governing instruments in Akastor. The audit committee performs a qualitative review of the quarterly and annual reports of Akastor. Significant judgment calls (uncertain estimates) made in the financial statements in the quarter are reviewed by the audit committee. The audit committee further supports the board of directors in safeguarding that the company has sound risk management and internal controls. The audit committee reviews the status on internal controls on an annual basis. In order to safeguard appropriate processes and assessments, the board’s audit committee shall also review major M&A transactions as well as related party transactions which are not part of the company’s ordinary course of business, unless such related party transactions are immaterial. Akastor currently has no remuneration committee as the experiences from having such showed more merit in discussing matters comprised by this committee’s mandate with all directors present. As of December 31, 2018, there are no other board committees than the audit committee. The board does not envisage appointing any further board committees in 2019. The board evaluate its performance and qualification annually. A summary of the evaluation was made available to the nomination committee. 10. Risk Management and Internal Control appropriate in relation to the extent and nature of the company’s activities. The audit committee supports the board of directors in safeguarding that the company has internal procedures and systems that ensure good corporate governance, stakeholder engagement, effective internal controls and proper risk management, particularly in relation to financial reporting. The Chief Financial Officer reports directly to the audit committee on matters relating to financial reporting, financial risks and internal controls. Akastor has implemented an internal system for reporting serious matters such as breaches of ethical guidelines and violations of the law, which is also available to external parties at www.akastor.com. Risk Management Akastor and its portfolio companies are exposed to a variety of market, operational and financial risks. The board of directors carries out an annual review of the company’s most important areas of exposure to risk and its internal control arrangements. Being an investment company, the main objective of Akastor is to create value for its shareholders. Potential impacts on the net asset value, share price or predictability of earnings are therefore key parameters in the board’s risk evaluation. Sound risk management throughout the organization is recognized by Akastor as an invaluable tool in the process of achieving strategic, financial and operational goals while at the same time ensuring compliance with regulatory requirements and adherence to high integrity standards. Risk evaluation is an integral part of all business activities and Akastor employs a decentralized model for allocating managerial responsibility under which the portfolio companies are required to establish their own risk management and internal control systems. Akastor’s representatives on boards of directors in the portfolio companies seek to ensure that the portfolio companies follow the principles of sound corporate governance. Akastor manages risk through an internal framework both on a corporate and portfolio company level comprising guidelines, policies and procedures intended to ensure good business operations and provide unified and reliable financial reporting. The board of directors has adopted an authorization matrix that forms part of its governing documents where authority is delegated to the Akastor Chief Executive Officer. Furthermore, authorization matrices are adopted for each of the portfolio companies, pursuant to which the Akastor Chief Executive Officer delegates authority to the boards and Chief Executive Officers of the respective portfolio companies, which again adopts authorization matrices for the portfolio organizations. Special expenditure approval procedures have also been developed. Governing Principles The board of directors shall ensure that Akastor has sound internal control and systems for risk management that are The board receives and reviews risk reports prepared by the management. The management’s risk reporting is based on the total level of insight obtained through regular reporting Annual Report 2018 | Corporate Governance Statement19 and the close cooperation that Akastor has with the portfolio companies, including from Akastor’s investment directors and board representatives. Management of operational risk primarily rests with the underlying portfolio companies, although Akastor acts as an active driver through its involvement on the boards and through support and follow-up by the various Akastor corporate functions towards relevant functions in the portfolio companies. Akastor’s management holds review meetings with the management of the different portfolio companies. The purpose of the meetings is to conduct an in-depth review of the development of each portfolio company, focusing on operations, the competitive situation and strategic issues. These meetings provide a solid foundation for Akastor’s assessment of its overall financial and operational risk. risk management, market conditions, A key risk in one of the smaller portfolio companies may still be negligible on the group level, whereas important risks in the largest portfolio companies may have a serious impact on the group as a whole. Akastor’s decentralized approach to operational risk management, as described above, raises a need for management to process and calibrate the insight obtained through various interfaces with the portfolio companies prior to the board’s annual risk review. The objective of such exercise is to ensure that risks are reported in a format that allows the board to acquire a true and fair view of the overall risk environment of the Akastor group in an efficient manner and to focus its attention on risks that are material on an aggregated group level. Prior to the board’s review of risk reporting, the audit committee reviews the reported risks and associated risk- reducing measures. The audit committee also reviews the company’s in-house reporting systems and internal control and risk management, and prepares the board’s review of financial reporting. Financial Reporting The Akastor financial reporting division reports to the Chief Financial Officer and is responsible for the external reporting process and the internal management financial reporting process. This also includes assessing financial reporting risks and internal controls over financial reporting in the group. The consolidated external financial statements are prepared in accordance with IFRS and IAS standards as approved by the EU. The existing policies and standards governing the annual and quarterly financial reporting in the group, including the Akastor accounting principles, are available on the Akastor intranet for Akastor employees. Clearing meetings are held with the management teams of the portfolio companies in connection with the annual closing of accounts and may also be held in connection with quarterly financial reporting. For the 2018 financial year, clearing meetings with the portfolio companies were held in October 2018 and January 2019. The main purpose is to ensure high- quality financial reporting. Such meetings focus on important items involving estimation and judgment, non-balance-sheet items, accounting for significant transactions, new or modified accounting principles and other topics relevant to the respective portfolio companies. The external auditor is present in the clearing meetings. Other Reporting In addition to the abovementioned financial reporting, there are regular business review and board meetings in the portfolio companies which ensure timely and high-quality reporting from the portfolio companies to the corporate management. Regular reports for Akastor ASA and the portfolio companies are submitted to the board of directors. The quarterly business update contains key financial numbers, M&A updates, financing, status of value creation plans, compliance, risk management and share price information for the Akastor group. Further, it contains key financial numbers, key operational topics, status on value drivers as well as key market information for the main portfolio companies. The monthly business update contains high level financial and operational information for the Akastor group, as well as key highlights for the main portfolio companies. 11. Remuneration of the Board of Directors The remuneration of the board of directors will reflect its responsibilities, know-how and time commitment, as well as the complexity of the business. The remuneration will be proposed by the nomination committee, and is not performance-related or linked to options in Akastor. More detailed information about the remuneration of individual directors will be provided in the «Management remunerations» note to the consolidated financial statements for the group in the annual report for 2018. Neither the directors, nor companies with whom they are affiliated, should accept specific paid duties for Akastor beyond their directorships. If they nevertheless do so, the board of directors shall be informed and the remuneration shall be approved by the board of directors. No remuneration shall be accepted from anyone other than the company or the relevant group company in connection with such duties. 12. Remuneration of Executive Personnel The board of directors has adopted designated guidelines for the remuneration of executive management pursuant to the provisions of Section 6-16a of the Public Limited Liability Companies Act. The guidelines were adopted by the general meeting April 6, 2018. The board of directors’ statement on the remuneration of executive personnel for 2019 will be a separate item on the agenda for the annual general meeting on April 9, 2019. Akastor has no option schemes or option programs for the allotment of shares to employees. The Chief Executive Officer Annual Report 2018 | Corporate Governance Statement20 determines the remuneration of executive management on the basis of the guidelines laid down by the board of directors. All performance-related remuneration within the group will be made subject to a cap. 13. Information and Communication The company has adopted a designated communications and investor relations policy which covers, among other things, guidelines for the company’s contact with shareholders other than through general meetings. The company’s reporting of financial and other information is based on openness and the equal treatment of all securities market players. The long-term purpose of the investor relations function is to ensure access for the company to capital on competitive terms, whilst at the same time ensuring that the shareholders are provided with the most correct pricing of the shares that can be achieved. This shall take place through correct and timely distribution of price-sensitive information, whilst ensuring, at the same time, that the company is in compliance with applicable rules and market practices. Reference is also made to the above discussion concerning the flow of information between Akastor and Aker ASA in connection with their cooperation within, inter alia, strategy, transactions, and funding. All stock exchange announcements and press releases are made available on the company’s website, and stock exchange announcements are also available at www.newsweb.no. The company holds open presentations in connection with the reporting of financial performance, either by a physical meeting or by a conference call and webcast, and these presentations are broadcasted on the internet. The financial calendar of the company is available at www.akastor.com. 14. Take-overs The overriding principle for Akastor is equal treatment of shareholders. In a bid situation, the board of directors and management have an independent responsibility to help ensure that shareholders are treated equally, and that the company’s business activities are not disrupted unnecessarily. In a take-over situation, the board will have a particular responsibility to ensure that shareholders are given sufficient information and time to form a view of the offer. The board of directors has not deemed it appropriate to adopt specific guidelines for take-over situations as long as the ownership cooperation context within Aker Kværner Holding AS remains intact and this company continues to be the dominant shareholder of Akastor ASA. This represents a deviation from the Code of Practice. 15. Auditors The external auditor presents a plan for the performance of the audit work to the audit committee annually. In addition, the auditor provides the audit committee with an annual written confirmation to the effect that the independence requirement is met. The auditor attends all audit committee meetings, and the auditor has reviewed any material changes to the accounting principles of the company, or to the internal controls of the company, with the audit committee. The external auditor also attends the board meeting where the annual financial statements are reviewed and approved, normally in March. The board of directors holds a minimum of one annual meeting with the auditor without any executive personnel being in attendance. The board’s audit committee stipulates guidelines on the scope for using the auditor for services other than auditing, and makes recommendations to the board of directors concerning the appointment of the external auditor and the approval of the auditor’s fees. Fees payable to the auditor, separated into those relating to auditing and those relating to other services, are specified in the «Other operating expenses» note to the consolidated financial statements for the group and are also reported to the general meeting. The auditor’s fees relating to auditing are subject to approval by the general meeting. Annual Report 2018 | Corporate Governance Statement21 a.04. FINANCIALS AND NOTES AKASTOR GROUP Akastor Group | Consolidated income statement Akastor Group | Consolidated statement of comprehensive income Akastor Group | Consolidated statement of financial position Akastor Group | Consolidated statement of changes in equity Akastor Group | Consolidated statement of cash flow General Note 1 Note 2 Note 3 Note 4 | Corporate information | Basis for preparation | Significant accounting principles | Significant accounting estimates and judgements Performance of the year | Discontinued operations | Operating segments | Revenue and other income | Salaries, wages and social security costs | Other operating expenses Note 5 Note 6 Note 7 Note 8 Note 9 Note 10 | Net finance expenses | Income tax Note 11 Note 12 | Earnings per share Assets Note 13 | Property, plant and equipment Note 14 | Intangible assets Note 15 | Impairment testing of goodwill Note 16 | Equity-accounted investees Note 17 | Other non-current assets Note 18 | Other investments Note 19 | Current interest-bearing receivables Note 20 | Inventories Note 21 | Trade and other receivables Note 22 | Cash and cash equivalents Equity and liabilities Note 23 | Capital and reserves Note 24 | Borrowings Note 25 | Other non-current liabilities Note 26 | Employee benefits - pension Note 27 | Provisions Note 28 | Trade and other payables Financial risk management Note 29 | Capital management Note 30 | Financial risk management and exposures Note 31 | Derivative financial instruments Note 32 | Financial instruments Other Note 33 | Operating leases Note 34 | Group companies Note 35 | Related parties Note 36 | Management remunerations Annual Report 2018 | Financials and Notes | Akastor GroupFinancials and Notes | Akastor Group 22 Akastor Group | Consolidated income statement For the year ended December 31 Amounts in NOK million Revenue and other income Materials, goods and services Salaries, wages and social security costs Other operating expenses Operating expenses Operating profit before depreciation, amortization and impairment Depreciation and amortization Impairment Operating profit (loss) Finance income Finance expenses Profit (loss) on foreign currency forward contracts Profit (loss) from equity-accounted investees Impairment loss on external receivables Net finance expenses Profit (loss) before tax Income tax benefit (expense) Profit (loss) from continuing operations Profit (loss) from discontinued operations (net of income tax) Profit (loss) for the period Profit (loss) for the period attributable to: Equity holders of the parent company Basic / diluted earnings (loss) per share (NOK) Basic / diluted earnings (loss) per share continuing operations (NOK) 1) See note 5 Discontinued operations Note 6,7 8 9 13,14 13,14 16 10 11 5 12 12 2018 2017 Restated 1) 3 800 3 606 (1 513) (1 424) (572) (3 509) 290 (181) - 109 185 (202) (2) (157) (24) (200) (1 461) (1 561) (468) (3 490) 116 (278) (118) (280) 115 (179) (121) (212) (9) (406) (91) (686) (103) (194) (128) (322) (20) (706) 648 (58) (322) (58) (1.19) (0.71) (0.21) (2.60) Annual Report 2018 | Financials and Notes | Akastor Group Akastor Group | Consolidated statement of comprehensive income For the year ended December 31 Amounts in NOK million Profit (loss) for the period Other comprehensive income Cash flow hedges, effective portion of changes in fair value Deferred tax of cash flow hedges, effective portion of changes in fair value Cash flow hedges, reclassification to income statement Deferred tax of cash flow hedges, reclassification to income statement Total change in hedging reserve, net of tax Total change in fair value reserve, net of tax Currency translation differences - foreign operations Currency translation differences, reclassification to income statement upon disposal Deferred tax of currency translation differences – foreign operations Share of OCI from equity-accounted investees Total change in currency translation reserve, net of tax Total items that may be reclassified subsequently to profit or loss, net of tax Remeasurement gain (loss) net defined benefit liability Deferred tax of remeasurement gain (loss) net defined benefit liability Total items that will not be reclassified to profit or loss, net of tax Total other comprehensive income, net of tax Total comprehensive income (loss) for the period, net of tax Attributable to: Equity holders of the parent company Note 5 26 23 2018 (322) (80) 15 (43) 7 (101) (37) 51 (442) 7 (44) (428) (565) (4) - (4) 2017 (58) 71 (17) 15 (5) 64 9 (60) (227) (13) - (300) (228) (7) (11) (17) (569) (245) (891) (303) (891) (303) Annual Report 2018 | Financials and Notes | Akastor Group 24 Akastor Group | Consolidated statement of financial position For the year ended December 31 Amounts in NOK million Assets Deferred tax assets Property, plant and equipment Intangible assets Other non-current assets Equity-accounted investees Other investments Non-current interest-bearing receivables Total non-current assets Current tax assets Inventories Trade and other receivables Derivative financial instruments Current interest-bearing receivables Other current assets Cash and cash equivalents Total current assets Total assets Equity and liabilities Issued capital Treasury shares Other capital paid in Reserves Retained earnings Total equity attributable to the equity holders of the parent company Total equity Non-current borrowings Employee benefit obligations Deferred tax liabilities Other non-current liabilities Provisions, non-current Total non-current liabilities Current borrowings Current tax liabilities Provisions, current Trade and other payables Derivative financial instruments Total current liabilities Total liabilities Total equity and liabilities Note 2018 2017 11 13 14 17 16 18 20 21 31 19 22 23 23 24 26 11 25 27 24 27 28 31 374 825 1 260 62 1 088 1 469 - 5 077 4 548 2 801 117 257 - 198 3 927 9 005 162 (2) 1 534 253 2 369 4 317 4 317 588 332 9 390 166 1 485 14 8 236 2 734 210 3 203 4 687 9 005 661 4 419 1 435 100 10 536 1 7 163 21 569 2 263 94 - 51 168 3 165 10 328 162 (2) 1 534 862 2 271 5 277 5 277 2 133 349 10 110 221 2 823 399 23 293 1 493 20 2 228 5 051 10 328 Fornebu, March 14, 2019 | Board of Directors of Akastor ASA Kristian Røkke I Chairman Lone Fønss Schrøder I Deputy Chairman Øyvind Eriksen I Director Kathryn M. Baker I Director Sarah Ryan I Director Henning Jensen I Director Asle Christian Halvorsen I Director Stian Sjølund I Director Karl Erik Kjelstad I CEO Annual Report 2018 | Financials and Notes | Akastor Group 25 Akastor Group | Consolidated statement of changes in equity Share capital Treasury shares Other capital paid in Hedging reserve 1) Fair value reserve 1) Currency translation reserve 1) Retained earnings Total parent company equity holders Total equity Amounts in NOK million 2017 Equity as of January 1, 2017 162 (2) 1 534 Profit (loss) for the period Other comprehensive income Total comprehensive income - - - - - - - - - Equity as of December 31, 2017 162 (2) 1 534 2018 Adjustment on initial application of IFRS 9 and IFRS 15, net of tax 2) Equity as of January 1, 2018 Profit (loss) for the period Other comprehensive income Total comprehensive income - 162 - - - - - (2) 1 534 - - - - - - Equity as of December 31, 2018 162 (2) 1 534 15 - 64 64 79 (43) 36 - (101) (101) (65) - - 9 9 9 - 9 - (37) (37) (28) 1 075 - (300) (300) 775 - 775 - (428) (428) 346 2 796 5 580 5 580 (58) (17) (75) (58) (245) (303) (58) (245) (303) 2 721 5 277 5 277 (26) (69) (69) 2 695 (322) 5 208 5 208 (322) (322) (4) (569) (569) (326) 2 369 (891) (891) 4 317 4 317 1) See Note 23 Capital and reserves. 2) See Note 2 Basis for preparation. Annual Report 2018 | Financials and Notes | Akastor Group26 Akastor Group | Consolidated statement of cash flow For the year ended December 31 Amounts in NOK million Note 2018 2017 Cash flow from operating activities Profit (loss) for the period - continuing operations Profit (loss) for the period - discontinued operations Profit (loss) for the period Adjustments for: Income tax expense (benefit) Net interest cost and unrealized currency (income) loss (Profit) loss on foreign currency forward contracts Depreciation, amortization and impairment (Gain) loss on disposal of subsidiaries (Gain) loss on disposal of assets (Profit) loss from equity-accounted investees Other non-cash effects Profit (loss) for the period after adjustments Changes in operating assets Cash generated from operating activities Interest paid Interest received Income taxes paid Net cash from operating activities Cash flow from investing activities Acquisition of property, plant and equipment Payments for capitalized development Proceeds from sale of subsidiaries, net of cash Proceeds from sale of property, plant and equipment Increase in receivables from/capital contribution to equity-accounted investees Acquisition of other investments Net cash from investing activities Cash flow from financing activities Proceeds from borrowings Repayment of borrowings Payment of finance lease liabilities Net cash from financing activities Effect of exchange rate changes on cash and bank deposits Net increase (decrease) in cash and bank deposits Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Of which is restricted cash The statement included cash flows from discontinued operations prior to the disposal. 5 (194) (128) (706) 648 (322) (58) 136 (74) 295 394 2 111 13, 14 665 752 5 16 13 14 5 (280) (1 088) (60) (11) 130 176 (86) (69) 479 134 146 (376) 625 (242) (299) (410) 34 38 (45) (59) 315 (673) (95) (70) (36) (27) 1 103 868 94 4 (177) (28) (642) (9) 247 737 924 647 (1 335) (942) (70) (481) (95) (391) 24 (50) (45) 30 (371) 168 540 22 198 - 168 8 Annual Report 2018 | Financials and Notes | Akastor Group 27 Note 1 | Corporate information Akastor ASA is a limited liability company incorporated and domiciled in Functional and presentation currency Norway and whose shares are publicly traded. The registered office is The consolidated financial statements are presented in NOK, which is located at Oksenøyveien 10, Bærum, Norway. The largest shareholder Akastor ASA’s functional currency. All financial information presented in is Aker Kværner Holding AS and the ultimate parent company is The NOK has been rounded to the nearest million (NOK million), except when Resource Group TRG AS. otherwise stated. The subtotals and totals in some of the tables in these consolidated financial statements may not equal the sum of the amounts The consolidated financial statements of Akastor ASA and its subsidiaries shown due to rounding. (collectively referred as Akastor or the group, and separately as group companies) for the year ended December 31, 2018 were approved by the When the functional currency in a reporting unit is changed, the effect of board of directors and CEO on March 14, 2019. The consolidated financial the change is accounted for prospectively. statements will be authorized by the Annual General Meeting on April 9, 2019. Use of estimates and judgements The group is an oilfield services investment company with a portfolio management to make judgements, estimates and assumptions that affect of industrial holdings and other investments. Akastor is listed on the the application of policies and reported amounts of assets and liabilities, Oslo Stock Exchange under the ticker AKA. Information on the group’s income and expenses. Although management believes these assumptions structure is provided in Note 34 Group companies. Information on other to be reasonable, given historical experience, actual amounts and results related party relationships of the group is provided in Note 35 Related could differ from these estimates. The items involving a higher degree of The preparation of financial statements in conformity with IFRS requires parties. Note 2 | Basis for preparation Basis of accounting judgement or complexity, and items where assumptions and estimates are material to the consolidated financial statements, are disclosed in Note 4 Significant accounting estimates and judgements. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in The consolidated financial statements have been prepared in accordance which the estimate is revised and in any future periods affected. with International Financial Reporting Standards as adopted by the European Union (IFRS), their interpretations adopted by the International Changes in significant accounting policies Accounting Standards Board (IASB) and the additional requirements of Akastor has initially adopted IFRS 15 Revenue from Contracts with the Norwegian Accounting Act as of December 31, 2018. Customers and IFRS 9 Financial Instruments from January 1, 2018. The effects of initially applying these standards are described below. Going concern basis of accounting The consolidated financial statements have been prepared on a going IFRS 15 Revenue from Contracts with Customers concern basis, which assumes that the group will be able to meet the mandatory terms and conditions of the banking facilities as disclosed in IFRS 15 replaces IAS 18 Revenue, IAS 11 Construction contracts and the Note 29 Capital management. related interpretations. The standard introduces a new five-step model that applies to revenue arising from contracts with customers. Basis of measurement The consolidated financial statements have been prepared on the historical On transition to IFRS 15, the group has applied the new standard cost basis except for the following material items, which are measured on retrospectively with the cumulative effect of initial application recognized an alternative basis on each reporting date: as an adjustment to the opening balance of retained earnings as of January ŸŸ ŸŸ Derivative financial instruments are measured at fair value retrospectively only to contracts that were not completed by January 1, 1, 2018. Under this transition method, the standard has been applied 2018, and the comparable information presented for 2017 has not been Non-derivative financial instruments at Fair Value through Profit restated. or Loss (FVTPL) are measured at fair value. ŸŸ Debt instrument at Fair Value through Other Comprehensive Income (FVOCI) are measured at fair value. ŸŸ Contingent considerations assumed in business disposals are measured at fair value. ŸŸ Net defined benefit (asset) liability is recognized at fair value of plan assets less the present value of the defined benefit obligation. Annual Report 2018 | Financials and Notes | Akastor Group28 The following table summarizes the impact of transition to IFRS 15 on the group's retained earnings as of January 1, 2018. Amounts in NOK million Deferred tax assets Trade and other receivables Total assets Retained earnings Total equity Impact of adopting IFRS 15 at January 1, 2018 8 (34) (26) (26) (26) The following tables summarize the impact of adopting IFRS 15 on the group's financial statements as of December 31, 2018. There was no material impact on the group's statement of cash flows. Impact on the consolidated statement of profit or loss and OCI Amounts in NOK million Revenue Operating expenses Profit (loss) before tax Profit (loss) from continuing operations Profit (loss) for the period Total comprehensive income for the period Impact on the consolidated statement of financial position Amounts in NOK million Deferred tax assets Trade and other receivables Others Total assets Total equity Trade and other payables Others Total equity and liabilities As reported Adjustments Amounts without adoption of IFRS 15 3 800 (3 509) 109 (194) (322) (891) (14) 13 (1) (1) (1) (1) 3 786 (3 496) 108 (195) (323) (892) As reported Adjustments Amounts without adoption of IFRS 15 374 2 801 5 830 9 005 4 317 2 734 1 954 9 005 (8) (593) - (601) 25 (626) - (601) 366 2 208 5 830 8 404 4 342 2 108 1 954 8 404 Annual Report 2018 | Financials and Notes | Akastor Group29 The details of the new significant accounting policies and the nature of significant changes to previous accounting policies for each of the major customer contract and revenue types are set out below. Type of contract/revenue Nature of performance obligations Significant accounting policies Construction revenue Under construction contracts, specialized products are built to a customer's specifications and the assets have no alternative use to the group. If a construction contract is terminated by the customer, the group has an enforceable right to payment for the work complet- ed to date. The contracts usually establish a milestone payment schedule. The group has assessed that these performance obligations are satisfied over time. Each of the construction contracts normally includes a single, combined output for the customer, such as an integrated drilling equipment package. One single performance obligation is usually identified in each contract. Assurance-type warranty for a period of 12-30 months is normally included in construction contracts. Under IFRS 15, revenue from these construction performance obligations is recognized according to progress. The progress is measured using an input method that best depicts the group's performance. The input method used to measure progress is determined by reference to the costs incurred to date relative to the total estimated contract costs. Revenue in excess of costs is not recognized until the outcome of the performance obligation can be measured reliably, usually at 15-20 percent of completion. Variable considerations, such as incentive bonus or penalties, are included in construction revenue when it is highly probable that a significant revenue reversal will not occur. Potential penalty for Liquidated Damages is recognized as a reduction of the transaction price unless it is highly probable that it will not be incurred. Disputed amounts and claims are only recognized when negotiations have reached an advanced stage, customer acceptance is highly likely and the amounts can be measured reliably. Contract modifications, usually in form of variation orders, are only accounted for when they are approved by the customers. Changes in progress measurement from IAS 11 were identified for some construction contracts due to the implementation of input method under IFRS 15. The implementation impacts of these changes are shown in the tables above. Sale of standard products This revenue type involves sale of products or equip- ment that are of a standard nature, not made to the customer's specifications. Customers obtain control of these products usually when the goods are delivered to the customers according to the contract terms. Invoices are usually generated when the products are delivered. The group has assessed that these performance obliga- tions are satisfied at a point of time. Under IFRS 15, revenue from these performance obligations is recognized when the customers obtain control of the goods, which is essentially similar to the timing when the goods are delivered to the customers. The group has not identified any implementation effect or significant impact on accounting policies related to these revenues. Service revenue Assurance-type warranty for a period of 12-18 months is normally included in these contracts. Service revenue is generated from rendering of services to customers. The customers simultaneously receive and consume the benefits provided by these services. The invoicing is usually based on the service provided at regular basis. Under some service contracts, the in- voices are based on hours or days performed at agreed rates. The group has assessed that these performance obligations are satisfied over time. Under IFRS 15, service revenue is recognized over time as the services are provided. The revenue is recognized according to progress, or using the invoiced amounts when the invoiced amounts directly correspond with the value of the services that are transferred to the customers. The progress is normally measured using an input method, by the reference of costs incurred to date relative to the total estimated costs. The group has not identified any implementation effect or significant impact on accounting policies related to these revenues. IFRS 9 Financial Instruments IFRS 9 replaces IAS 39 Financial Instruments Recognition and Measurement. The standard includes revised guidance on classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. Annual Report 2018 | Financials and Notes | Akastor Group30 The following table summarizes the impact of transition to IFRS 9 on the group's retained earnings as of January 1, 2018. Amounts in NOK million Deferred tax assets Derivative financial assets Total assets Hedge reserves Total equity Impact of adopting IFRS 9 at January 1, 2018 14 (58) (43) (43) (43) The details of the new significant accounting policies and the nature of categories: measured at Amortized cost, Fair value to Other Comprehensive significant changes to previous accounting policies are set out below. Income (FVOCI) and Fair value to Profit and Loss (FVTPL). ŸŸ Classification and measurement of financial assets The following table explains the original classification categories under IAS 39 and the new classification and measurement categories under IFRS 9 IFRS 9 largely retains the requirements in IAS 39 for the classification for each class of the group's financial assets as of January 1, 2018. The and measurement of financial liabilities. However, the standard contains effect of adopting IFRS 9 on the carrying amounts of financial assets at a new classification and measurement approach for financial assets that January 1, 2018 relates solely to the new hedging accounting requirements, reflects the business model in which assets are managed and their cash as described further below. Please refer to Note 32 Financial instruments flow characteristics. The standard contains three principal classification for more description of these financial assets. Original classification under IAS 39 New classification under IFRS 9 Original carrying amount under IAS 39 New carrying amount under IFRS 9 Amounts in NOK million Cash and cash equivalents Trade and other receivables Loans and receivables Amortized cost Loans and receivables Amortized cost Non-current interest-bearing receivables Loans and receivables Amortized cost Other investments – equity instrument Other investments - debt instrument Mutual fund Derivative financial instruments Available for sale Available for sale Available for sale FVTPL FVOCI FVTPL Fair value - hedging instruments Fair value - hedging instruments Deferred and contingent considerations Fair value through P&L FVTPL 168 1 451 1 144 392 12 94 105 168 1 451 1 144 392 12 36 105 Total financial assets 2 368 2 310 The following accounting policies apply to the initial and subsequent measurement of financial assets in the group. Financial assets at amortized cost Financial assets at FVTPL Financial assets at FVOCI These financial assets are initially recognized at fair value plus attributable transaction costs, except for trade and other receivables that are measured at the transaction price. Subsequently are these financial assets measured at amortized cost using the effective interest method less any impairment losses. Interest income, foreign exchange gains and losses and impairment losses are recognized in profit or loss. These financial assets are initially and subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss. These financial assets are initially and subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and im- pairment losses are recognized in profit or loss. Other net gains and losses are recognized in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss. ŸŸ Impairment – Financial assets and contract assets - 12-month ECLs: these are ECLs that result from possible default IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward- events within the 12 months after the reporting dates; looking “expected credit loss” (ECL) model. The new impairment model applies to financial assets measured at amortized cost, - life time ECLs: these are ECLs that result from all possible FVOCI and contract assets. default events over the expected life of a financial instrument. " Under IFRS 9, loss allowance is measured based on either ECLs are a probability-weighted estimate of credit losses. Credit “12-month ECLs” or “lifetime ECLs”: losses are measured as the present value of all cash shortfalls, Annual Report 2018 | Financials and Notes | Akastor Group31 discounted at the effective interest rate of the financial asset. Standards issued but not yet effective The group has elected to apply the simplified approach and apply At the date of authorization of the group’s consolidated financial "lifetime ECLs" for all trade receivables and contract assets. statements, a number of new standards and interpretations were issued Based on its assessment, the group has not identified significant amended standards for the financial statements as of December 31, 2018. impact on the consolidated financial statements from the Of those standards that are not yet effective, IFRS 16 is expected to have a adoption of the new impairment model. material impact on the group’s financial statements in the period of initial but not yet effective. The group has not early adopted any new or ŸŸ Hedge accounting application. The group has elected to adopt the new general hedge IFRS 16 Leases (effective from January 1, 2019) accounting model in IFRS 9. The new hedge accounting rules The standard replaces IAS 17 Leases and the related interpretations. The will align the accounting for hedging instruments more closely new standard introduces a single, on-balance sheet lease accounting model with the group’s risk management practices. The group has for lessees, with optional exemptions for short-term leases and leases of concluded that all hedge relationships designated under IAS 39 low value items. A lessee recognizes a right-of-use asset representing as of December 31, 2017 met the criteria for hedge accounting its right to use the underlying asset and a lease liability representing its under IFRS 9 as of January 1, 2018 and therefore regarded as obligation to make lease payments. With regards to lessor accounting, the continuing hedging relationships. requirements remain similar to the current standard. The group uses forward foreign exchange contracts to hedge the The group has assessed the estimated impact that initial application of variability in cash flows arising from changes in foreign exchange IFRS 16 will have on its consolidated financial statements, as described rates relating to foreign currency borrowings, receivables, sales below. The actual implementation effects may differ from the estimate. and inventory purchases. Under IAS 39, for all cash flow hedges, the amounts accumulated in the cash flow hedge reserve are ŸŸ Leases in which the group is a lessee reclassified to profit or loss as a reclassification adjustment in Currently, the group recognizes operating lease expense on the same period as the hedged transaction occurs and affects a straight-line basis over the term of the lease, mainly related profit or loss. Under IFRS 9, for cash flow hedges associated to office property leases, see Note 33 Operating leases. Upon with forecast transactions that subsequently result in recognition initial application of IFRS 16, the group will recognize right-of- of a non-financial asset, the amounts accumulated in the cash use (ROU) assets and lease liabilities for its operating leases. flow hedge reserve and the cost of hedging reserve are instead The nature of expenses related to those leases will change from included directly in the initial cost of the non-financial asset when operating expenses to depreciation charge for right-of-use recognized. assets and interest expense on lease liabilities. This change has resulted in a reduction of the carrying amounts In addition, the group will no longer recognize provisions for of Hedge reserve and Derivative financial assets related to these operating leases that it assesses to be onerous as described in cash flow hedges, as shown in the table above. Note 27 Provisions. Instead, the group will include the payments due under the lease in its lease liability. ŸŸ Transition The group has adopted the exemption allowing it not to restate Based on the information currently available, the group estimates comparative information for prior periods with respect to that it will recognize additional lease liabilities of NOK 674 million classification and measurement changes, including impairment as of January 1, 2019. The adoption of IFRS 16 will not impact measurement. Therefore, comparative periods are not restated loan covenants as described in Note 29 Capital management. and accordingly, the information presented for 2017 reflects the requirements of IAS 39. IFRS 9 is not applied to financial assets ŸŸ Leases in which the group is a lessor or financial liabilities that have been derecognized at the initial The group has reassessed the classification of sub-leases in application on January 1, 2018. which the group is a lessor. Based on the information currently available, the group expects that it will reclassify several sub- The new hedge accounting requirements are applied leases as finance leases, resulting in recognition of a finance lease prospectively. The impacts from the adoption of IFRS 9 are receivable of NOK 55 million as of January 1, 2019. recognized as an adjustment to the opening balance of the equity as of January 1, 2018. No significant impact is expected for other leases in which the group is a lessor. ŸŸ Transition The group plans to apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings at January 1, 2019, with no restatement of comparative information. Annual Report 2018 | Financials and Notes | Akastor Group32 The group plans to apply the following practical expedients on Other standards transition to IFRS 16: The following amended standards and interpretations are not expected to have a significant impact on the group’s consolidated financial statements. - Rely on assessment of whether leases are onerous applying IAS 37 on December 31, 2018 as an alternative to performing an impairment review of right-of-use assets for all its leases on January 1, 2019. The group expects to reduce the right-of-use ŸŸ ŸŸ IFRIC 23 Uncertainty over Tax Treatments. Prepayment Features with Negative Compensation (Amendments assets at January 1, 2019 by NOK 113 million of the onerous lease to IFRS 9). provisions recognized as of December 31, 2018. ŸŸ Long-term Interests in Associates and Joint Ventures - Apply the short term lease practical expedient to leases ending (Amendments to IAS 28). within 2019. ŸŸ Plan Amendment, Curtailment or Settlement (Amendments to - Exclude initial direct costs from measurement of right-of-use IAS 19). assets at the date of initial application. The summary of estimated impact of adopting IFRS 16 as of January 1, 2019 various standards. is as follows: Amounts in NOK million January 1, 2019 Standards. ŸŸ Amendments to References to Conceptual Framework in IFRS ŸŸ Annual Improvements to IFRS Standards 2015–2017 Cycle – Right of Use assets Finance lease receivables Prepaid expenses Total assets Equity Lease liabilities Onerous lease provision Total equity and liabilities ŸŸ IFRS 17 Insurance Contracts. 520 55 (21) 554 (7) 674 (113) 554 Annual Report 2018 | Financials and Notes | Akastor Group33 Note 3 | Significant accounting policies Summary of significant accounting policies A joint venture is an arrangement in which the group has joint control, The principal accounting policies applied in the preparation of these whereby the group has rights to the net assets of the arrangement, rather consolidated financial statements are set out below. These policies have to its assets and obligations for its liabilities. Joint control is established been consistently applied to all the years presented, unless otherwise by contractual agreement requiring unanimous consent of the ventures stated. Basis of consolidation Subsidiaries for strategic, financial and operating decisions. An associate is an entity in which the group has significant influence, but not control or joint control, over the financial and operating policies. Subsidiaries are entities controlled by the group. The group controls Interests in joint ventures and associates are accounted for using the an entity when it is exposed to, or has rights to, variable returns from equity method. They are initially recognized at cost, which includes its involvement with the entity and has the ability affect those returns transaction costs. Subsequent to initial recognition, the consolidated through its power over the entity. The financial statements of subsidiaries financial statements include the group’s share of the profit and loss and are included in the consolidated financial statements from the date on other comprehensive income of the equity-accounted investees. The which control commences until the date of which control ceases. group’s investment includes goodwill identified on acquisition, net of Business combinations any accumulated impairment losses. When the group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount Business combinations are accounted for using the acquisition method of that interest, including any long-term investments, is reduced to zero, as of the acquisition date, which is the date when control is transferred and further losses are not recognized except to the extent that the group to the group. The consideration transferred in the acquisition is generally incurs legal or constructive obligations or has made payments on behalf measured at fair value, as are the identifiable net assets acquired. Any of the investee. goodwill that arises is tested annually for impairment. Transaction costs, other than those associated with the issue of debt or share of profit and loss of the equity-accounted investee in the income equity securities incurred in connection with a business combination are statement. When the entity is established to share risk in executing a The purpose of the investment determines the presentation of the group’s expensed as incurred. project or is closely related to Akastor’s operating activities, the share of profit or loss is reported as part of Other income in Operating Profit. Share Any contingent consideration payable is measured at fair value at the of the profit or loss of a financial investment is reported as part of Net acquisition date. Changes in the fair value of the contingent consideration finance expenses. from acquisition of a subsidiary or non-controlling interest for transactions will be recognized in Other income as gain or loss, except for the obligation Transactions eliminated on consolidation that is classified as equity. Intra-group balances and transactions, and any unrealized gains and losses or income and expenses arising from intra-group transactions, are When the group has entered into put options with non-controlling eliminated in preparing the consolidated financial statements. Unrealized shareholders on their shares in that subsidiary, the anticipated acquisition gains arising from transactions with associates and joint ventures are method is used. The agreement is accounted for as if the put option had eliminated to the extent of the group’s interest in the entity. Unrealized already been exercised. If the put option expires unexercised, then the losses are eliminated in the same way as unrealized gains, but only to the liability is derecognized and the non-controlling interest is recognized. extent that there is no evidence of impairment. Loss of control Assets held for sale On the loss of control, the group derecognizes the assets and liabilities of Non-current assets, or disposal groups comprising assets and liabilities, the subsidiary, any non-controlling interests and the other components of that are expected to be recovered primarily through sale rather than equity. Any resulting gain or loss is recognized in the income statement. through continuing use, are classified as held for sale. This condition is Any interest retained in the former subsidiary is measured at fair value regarded as met only when the sale is highly probable and the asset or when control is lost. Subsequently it is accounted for as an equity- disposal group is available for immediate sale in its present condition. accounted investee or as an available-for-sale financial asset depending Management must be committed to the sale, which should be expected to on the level of influence retained. qualify for recognition as a completed sale within one year from the date Any contingent consideration receivable is measured at fair value at the of classification. disposal date. Changes in the fair value of the contingent consideration Non-current assets and disposal groups classified as held for sale are from divestment of a subsidiary for transactions will be recognized in measured at the lower of their carrying amount and fair value less costs to Other income as gain or loss. sell. Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortized, but are considered in the Investments in joint ventures and associates overall impairment testing of the disposal group. The group’s interests in equity-accounted investees comprise interests in joint ventures and associates. No reclassifications are made for years prior to the year when non-current assets or disposal groups are classified as a held for sale. Annual Report 2018 | Financials and Notes | Akastor Group34 Discontinued operations Current/non-current classification A discontinued operation is a component of the group’s business that An asset is classified as current when it is expected to be realized or is represents a separate major line of business or geographical area of intended for sale or consumption in the group’s normal operating cycle, it operations that has been disposed of or is held for sale, or is a subsidiary is held primarily for the purpose of being traded, or it is expected/due to acquired exclusively with a view to resale. Classification as a discontinued be realized or settled within twelve months after the reporting date. Other operation occurs upon disposal or when the operation meets the criteria assets are classified as non-current. to be classified as held for sale, if earlier. In the consolidated income statement, income and expenses from group’s normal operating cycle, is held primarily for the purpose of being discontinued operations are reported separately from income and traded, the liability is due to be settled within twelve months after the expenses from continuing operations, down to the level of profit after reporting period, or if the group does not have an unconditional right taxes. When an operation is classified as a discontinued operation, the to defer settlement of the liability for at least twelve months after the comparative income statement is restated as if the operation had been reporting period. All other liabilities are classified as non-current. A liability is classified as current when it is expected to be settled in the discontinued from the start of the comparative year. Financial assets, financial liabilities and equity The statement of cash flow includes the cash flow from discontinued The group has initially adopted IFRS 9 from January 1, 2018. Significant operations prior to the disposal. Cash flows attributable to the operating, changes in the group’s accounting policies relating to financial instruments investing and financing activities of discontinued operations are presented are described in Note 2 Basis for preparation. in the notes to the extent these represent cash flows with third parties. Foreign currency On initial recognition, a financial asset is classified as measured at amortized costs, FVOCI or FVTPL. The classification depends on the group’s business Foreign currency transactions and balances model for managing the financial assets and the contractual terms of the Transactions in foreign currencies are translated at the exchange rate at cash flows. the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional ŸŸ A financial asset is measured at amortized costs if the business currency at the exchange rate on that date. Foreign exchange differences model is to hold the asset to collect contractual cash flows, and arising on translation are recognized in the income statement. Non- the contractual cash flows are solely payments of principal and monetary assets and liabilities measured in terms of historical cost in a interests (SPPI criterion). foreign currency are translated using the exchange rate on the date of the transaction. Non-monetary assets and liabilities denominated in foreign ŸŸ A debt instrument is classified at FVOCI if the business model currencies that are measured at fair value are translated to the functional is both collecting contractual cash flows and selling the financial currency at the exchange rates on the date the fair value is determined. asset, and it meets the SPPI criterion. Investments in foreign operations ŸŸ All financial assets not classified as measured at amortized cost Items included in the financial statements of each of the group’s entities or FVOCI are measured at FVTPL. are measured using the currency of the primary economic environment in which the entity operates. The results and financial positions of all the Financial assets are not reclassified subsequent to their initial recognition group entities that have a functional currency different from the group’s unless the group changes its business model for managing financial assets. presentation currency are translated into the presentation currency as follows: Other investments ŸŸ ŸŸ Assets and liabilities, including goodwill and fair value adjustments, where the group has neither control nor significant influence, usually are translated at the closing exchange rate at the reporting date. represented by less than 20 percent of the voting power. The investments Income statements are translated at average exchange rate for recognized at fair value at the reporting date. Subsequent to initial the year, calculated on the basis of 12 monthly end rates. recognition, changes in financial assets measured at FVOCI, other than are categorized as financial assets measured at FVTPL or FVOCI and Other investments include equity and debt investments in companies Exchange differences arising from the translation of the net investment presented as part of fair value reserve. When financial assets measured in foreign operations, and of related hedges, are included in other at FVOCI is derecognized, the gain or loss accumulated in other comprehensive income as currency translation reserve. These translation comprehensive income is reclassified to profit and loss. impairment losses, are recognized in other comprehensive income and differences are reclassified to the income statement upon disposal of the related operations or when settlement is likely to occur in the near future. Trade and other receivables Monetary items that are receivable from or payable to a foreign operation less loss allowance made for credit losses. Trade and other receivables are considered as part of the net investment in that foreign operation, are valued at amortized cost using the effective interest rate method. The when the settlement is neither planned nor likely to occur in the interest rate element is disregarded if insignificant, which is the case for foreseeable future. Exchange differences arising from these monetary the majority of the group’s trade receivables. Trade and other receivables are recognized at the original invoiced amount, items are recognized in other comprehensive income. Annual Report 2018 | Financials and Notes | Akastor Group35 Interest-bearing receivables other comprehensive income until the hedged cash flow is recognized Interest-bearing receivables include loans to related parties. Such financial in income statement. For cash flow hedges associated with forecast assets are recognized initially at fair value and subsequent measurement transactions that subsequently result in recognition of a non-financial at amortized cost using the effective interest method, less any impairment asset, the amounts accumulated in the cash flow hedge reserve and the losses. cost of hedging reserve are included directly in the initial cost of the non- Cash and cash equivalents Cash and cash equivalents include cash on hand, demand deposits held Net investment hedge financial asset when recognized. at banks and other short-term highly liquid investments with original Hedge of net investment in a foreign operation is accounted for similarly maturity of three months or less. Trade and other payables to cash flow hedges. Gains or losses arising from the hedging instruments relating to the effective portions of the net investment hedge are recognized in other comprehensive income as currency translation Trade payables are recognized at the original invoiced amount. Other reserves. These translation reserves are reclassified to the income payables are recognized initially at fair value. Trade and other payables statement upon disposal of the hedged net investments, offsetting the are valued at amortized cost using the effective interest rate method. The translation differences from these net investments. Any ineffective portion interest rate element is disregarded if it is insignificant, which is the case is recognized immediately in the income statement as finance income or for the majority of the group’s trade payables. expenses. Gains and losses accumulated in other comprehensive income are reclassified to the income statement when the foreign operation is Interest-bearing borrowings partially disposed of or sold. Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- Embedded derivatives bearing borrowings are measured at amortized cost with any difference Embedded derivatives are derivatives that are embedded in other between cost and redemption value being recognized in the income financial instruments or other non-financial host contracts. Under certain statement over the period of the borrowings on an effective interest basis. conditions, the embedded derivative must be separated from its host Share capital contract and the derivative is then to be recognized and measured as any other derivative in the financial statements. Embedded derivatives Ordinary shares are classified as equity. Repurchase of share capital is must be separated when the settlement for a commercial contract is recognized as a reduction in equity and is classified as treasury shares. denominated in a currency different from any of the major contract Derivative financial instruments considered to be commonly used for the relevant economic environment The group uses derivative financial instruments such as currency forward defined as the countries involved in the cross-border transaction. Changes contracts and currency swaps to hedge its exposure to foreign exchange in the fair value of separated embedded derivatives are recognized risks arising from operational, financial and investment activities. These immediately in the income statement. All foreign currency exposure is derivative financial instruments are accounted for as cash flow hedges hedged, so the hedging instrument to the embedded derivative will also since highly probable future cash flows are hedged (rather than committed have corresponding opposite fair value changes in the income statement. parties’ own functional currency, or that the contract currency is not revenues and expenses). The group also has embedded foreign exchange derivatives which have been separated from their ordinary commercial Finance income and expense contracts. Derivative financial instruments are recognized initially at fair Finance income and expense include interest income and expense, value. Derivatives are subsequently measured at fair value, and changes in foreign exchange gains and losses, dividend income, gains and losses on fair value are accounted for as described below. derivatives, as well as change in fair value of financial assets measured Cash flow hedge at FVTPL. Interest income and expenses include calculated interest using the effective interest method, in addition to discounting effects from Hedging of the exposure to variability in cash flows that is attributable to assets and liabilities measured at fair value. Gains and losses on derivatives a particular risk or a highly probable future cash flow is defined as a cash include effects from derivatives that do not qualify for hedge accounting flow hedge. The effective portion of changes in the fair value is recognized and embedded derivatives, in addition to the ineffective portion of in other comprehensive income as a hedge reserve. All foreign exchange qualifying hedges. exposure is hedged. Any gain or loss relating to the ineffective portion of derivative hedging instruments is recognized immediately in the income Revenue recognition statement as finance income or expense. Revenue from contract with customers Hedge accounting is discontinued when the hedge no longer qualifies for implementation effects and the group’s significant accounting policies hedge accounting. Disqualification occurs when the hedging instrument relating to contracts with customers are decribed in Note 2 Basis for The group has initially adopted IFRS 15 from January 1, 2018. The expires, is sold, terminated or exercised, or when a forecast transaction preparation. is no longer expected or the hedge is no longer effective. When a hedge is disqualified, the cumulative gain or loss that was recognized in the Lease revenue hedge reserve is recognized immediately in the income statement unless Lease revenue from operating leases, mainly related to office leases, is it relates to a future cash flow that is likely to occur, but don’t qualify for recognized on a straight-line basis over the term of the relevant lease. hedge accounting, in which the accumulated hedge reserve remains in Annual Report 2018 | Financials and Notes | Akastor Group36 Other income Deferred tax assets are recognized for unused tax losses, tax credits and Gains and losses resulting from acquisition and disposal of businesses deductible temporary differences, to the extent that it is probable that which do not represent discontinued operations are included in Other future taxable profits will be available against which they can be utilized. income. Such gains may result from the remeasurement of a previously Measurement of deferred tax assets are reviewed at each reporting date. held interest in the acquired entity. Changes in the fair value of the contingent consideration from acquisition or disposal of a subsidiary are Inventories recognized as part of Other income. Inventories are stated at the lower of cost or net realizable value. Net Expenses Construction contracts realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Contract costs include costs that relate directly to the specific contract The cost of inventories is based on the first-in first-out principle and and allocated costs that are attributable to general contract activity. includes expenditures incurred in acquiring the inventories and bringing Contract costs are generally expensed as incurred. See Note 4 Significant them to their present location and condition. In the case of manufactured accounting estimates and judgements for further description of cost inventories and work in progress, cost includes an appropriate share of estimate in a construction contract. overheads based on normal operating capacity. Lease payments Impairment Lease payments made under operating leases are recognized in the Trade receivables and contract assets income statement on a straight-line basis over the lease term. Any lease Loss allowance is recognized in profit or loss and measured at life time incentives received are recognized as an integral part of the total lease ECLs. ECLs are a probability-weighted estimate of credit losses. Life time expense, over the lease term. Income tax ECLs are the ECLs that result from all possible default events over the expected life of a financial asset. The group considers a financial asset to be in default when the group is unlikely to receive its outstanding Income tax recognized in the income statement comprises current and contractual amount in full, or the contractual payments are more than 90 deferred tax. Income tax is recognized in the income statement except days past due. When estimating ECLs, the group considers reasonable and to the extent that it relates to items recognized directly in equity or other supportable information that is relevant and available without undue cost comprehensive income. or effort, based on the group’s historical experience including forward- looking information. The loss allowance is recognized in financial items to Current tax is the expected tax payable or receivable on the taxable income the extent that impairment is caused by the insolvency of the customer. or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous The gross carrying amount of trade receivable is written off when the years. Current tax payable also includes any tax liability arising from the group has no reasonable expectations of recovering a trade receivable declaration of dividends, recognized at the same time as the liability to pay in its entirety or a portion thereof. The group individually makes an the related dividend. assessment with respect to the timing and amount of write-off based on whether there is a reasonable expectation of recovery. Trade receivables Deferred tax is recognized in respect of temporary differences between that are written off could still be subject to enforcement activities in order the carrying amounts of assets and liabilities for financial reporting and the to comply with the group’s procedures for recovery of amounts due. amounts used for taxation purposes. Deferred tax is not recognized for: ŸŸ ŸŸ ŸŸ Goodwill not deductible for tax purposes Debt instruments measured at amortized cost or at FVOCI are considered The initial recognition of assets or liabilities that affects neither borrower or it is probable that the borrower will enter bankruptcy or other accounting nor taxable profit financial reorganization. The loss allowance is charged to profit and loss. to be “credit-impaired” when there is significant financial difficulty of the Debt instruments measured at amortized cost or at FVOCI Temporary differences relating to investments in subsidiaries to Non-financial assets the extent that they will not reverse in the foreseeable future. The carrying amounts of the group’s non-financial assets (other than employee benefit assets, inventories and deferred tax assets) are reviewed Deferred tax is measured at the tax rates that are expected to be applied at the end of each reporting period to determine whether there is any to temporary differences when they reverse, based on the tax rates that indication of impairment. If an indication of impairment exists, the asset’s have been enacted or substantively enacted at the reporting date. recoverable amount is estimated. Cash-generating units (CGU) containing goodwill, intangible assets with an indefinite useful life and intangible Deferred tax assets and liabilities are offset if there is a legally enforceable assets that are not yet available for use are tested for impairment annually. right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on The recoverable amount is the greater of fair value less costs to sell and different taxable entities which intend either to settle current tax liabilities value in use. In assessing value in use, the estimated future cash flows and assets on a net basis, or to realize the tax assets and settle the are discounted to their present value using a pre-tax discount rate that liabilities simultaneously. reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely Annual Report 2018 | Financials and Notes | Akastor Group37 independent cash inflows, the recoverable amount is determined for the and removing the assets and restoring the site on which they are CGU to which the asset belongs. located. An impairment loss is recognized whenever the carrying amount of an If the components of property, plant and equipment have different useful asset or a CGU exceeds its recoverable amount. Impairment losses are lives, they are accounted for as separate components. recognized in the income statement. Subsequent costs An impairment loss recognized in respect of a CGU (or a group of CGUs) The group capitalizes the cost of a replacement part or a component of containing goodwill is allocated first to goodwill and then to the other property, plant and equipment when that cost is incurred if it is probable assets in the CGU(s) on a pro rata basis. that the future economic benefits embodied with the item will flow to the group and the cost of the item can be measured reliably. All other costs An impairment loss on goodwill is not reversed. An impairment loss on are expensed as incurred. other assets is reversed if there has been a change in the estimates used to determine the recoverable amount, and the change can be objectively Depreciation related to an event occurring after the impairment is recognized. An Depreciation is normally recognized on a straight-line basis over the impairment loss is reversed only to the extent that the asset’s carrying estimated useful lives of property, plant and equipment. amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had Intangible assets been recognized. Provisions Goodwill Goodwill that arises from the acquisition of subsidiaries is presented as intangible asset. For the measurement of goodwill at initial recognition, A provision is recognized when the group has a present obligation as a see Business combinations. result of a past event that can be estimated reliably and it is probable that the group will be required to settle the obligation. If the effect is material, Goodwill is measured at cost less accumulated impairment losses. In provisions are determined by discounting the expected future cash flows respect of equity-accounted investees, the carrying amount of goodwill at a market based pre-tax rate that reflects current market assessments of is included in the carrying amount of the investment, and any impairment the time value of money and, where appropriate, the liability-specific risks. loss is allocated to the carrying amount of the equity-accounted investee The unwinding of the discount is recognized as finance expense. as a whole. Warranties When the group disposes of an operation within a CGU or group of CGUs Provision for warranties is recognized when the underlying products or to which goodwill has been allocated, a portion of the goodwill is included services are sold. The provision is based on historical warranty data and a in the carrying amount of the operation when determining the gain or loss weighting of all possible outcomes against their associated probabilities. on disposal. The portion of the goodwill allocated is measured based on Onerous contracts the relative values of the operation disposed of and the portion of the CGU retained at the date of partial disposal, unless it can be demonstrated Provision for onerous contracts is recognized when the expected benefits that another method better reflects the goodwill associated with the to be derived by the group from a contract are lower than the unavoidable operation disposed of. The same principle is used for allocation of goodwill costs of meeting the obligations under the contract. The provision is when the group reorganizes its businesses. measured at the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a Research and development provision is recognized, the group recognizes any impairment loss on the Expenditures on research activities undertaken with the prospect of assets associated with the contract. obtaining new scientific or technical knowledge and understanding is recognized in the income statement as incurred. Restructuring A restructuring provision is recognized when the group has developed a Development activities involve a plan or design for the production of detailed formal plan for the restructuring and has raised a valid expectation new or substantially improved products or processes. Development in those affected that the entity will carry out the restructuring by starting expenditure is capitalized only if development costs can be measured to implement the plan or announcing its main features to those affected by reliably, the product or process is technically and commercially feasible, it. The measurement of a restructuring provision includes only the direct future economic benefits are probable and the group intends to and expenditures arising from the restructuring, which are those amounts that has sufficient resources to complete development and to use or sell are both necessarily entailed by the restructuring and not associated with the asset. The capitalized expenditure includes cost of materials, direct the ongoing activities of the entity. labour overhead costs that are directly attributable to preparing the asset Property, plant and equipment for it intended use and capitalized interest on qualifying assets. Other development expenditures are recognized in the income statement as an Property, plant and equipment are measured at cost less accumulated expense as incurred. depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour, borrowing costs on qualifying Capitalized development expenditure is measured at cost less accumulated assets, production overheads and the estimated costs of dismantling amortization and accumulated impairment losses. Annual Report 2018 | Financials and Notes | Akastor Group38 Other intangible assets immediately in other comprehensive income. The group determines the Acquired intangible assets are measured at cost less accumulated net interest expense (income) on the net defined benefit liability (asset) amortization and impairment losses. for the period by applying the discount rate used to measure the defined Subsequent expenditures benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net Subsequent expenditures on intangible assets are capitalized only when defined benefit liability (asset) during the period as a result of contributions they increase the future economic benefits embodied in the specific asset and benefit payments. Net interest expense and other expenses related to to which they relate. All other expenditures are expensed as incurred. defined benefit plans are recognized in the income statement. Amortization When the benefits of a plan are changed or when a plan is curtailed, the Amortization is recognized in the income statement on a straight-line resulting change in benefit that relates to past service or the gain or loss basis over the estimated useful lives of intangible assets unless such useful on curtailment is recognized immediately in the income statement. The lives are indefinite. Intangible assets are amortized from the date they are group recognizes gains and losses on the settlement of a defined benefit available for use. plan when the settlement occurs. Employee benefits Defined contribution plans Fair value measurement When available, the group measures the fair value of a financial instrument Obligations for contributions to defined contribution pension plans are using the quoted price in an active market for that instrument. If there is no recognized as an expense in the income statement as incurred. quoted price in an active market, then the group uses valuation techniques Defined benefit plans that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all The group’s net obligation in respect of defined benefit pension plans is of the factors that market participants would take into account in pricing calculated separately for each plan by estimating the amount of future a transaction. benefit that employees have earned in the current and prior periods; discounting that amount and deducting the fair value of any plan assets. The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price. If the group determines that The calculation of defined benefit obligations is performed annually by the fair value on initial recognition differs from the transaction price and a qualified actuary using the projected unit credit method. The discount the fair value is evidenced neither by a quoted price in an active market rate is the yield at the reporting date on government bonds or high- for an identical asset or liability nor based on a valuation technique that quality corporate bonds with maturities consistent with the terms of the uses only data from observable markets, the financial instrument is initially obligations. measured at fair value, and the difference between the fair value on initial recognition and the transaction price is recognized as a deferred gain or Remeasurement of the net defined benefit liability, which comprises loss. Subsequently, the deferred gain or loss is recognized in profit or loss actuarial gains and losses, the return on plan assets (excluding interest) on an appropriate basis over the life of the instrument. and the effect of the asset ceiling (if any, excluding interest), are recognized Annual Report 2018 | Financials and Notes | Akastor Group39 Note 4 | Significant accounting estimates and judgements Estimates and judgements are continually reviewed and are based on Warranties historical experiences and expectations of future events. The resulting A provision is made for expected warranty expenditures. The warranty accounting estimates will, by definition, seldom accurately match actual period is normally 12-30 months as one operating cycle. Based on results, but are based on the best estimate at the time. Estimates and experience, the provision is often estimated at one percent of the contract assumptions that have a significant risk of causing material adjustments to value, but can also be a higher or lower amount following a specific the carrying amounts of assets and liabilities within the next financial year evaluation of the actual circumstances for each contract. Both the general are discussed below. Revenue recognition one percent provision and the evaluation of project specific circumstances are based on experience from earlier projects. Factors that could affect the estimated warranty cost include the group’s quality initiatives and project Revenue from performance obligations satisfied over time, typically in execution model. Reference is made to Note 27 Provisions for further construction contracts and service contracts, are recognized according information about provisions for warranty expenditures on delivered to progress. This requires estimates of the final revenue and costs of the projects. performance obligations, as well as measurement of progress achieved to date as a proportion of the total work to be performed. Deferred and contingent considerations The main uncertainty when assessing contract revenue is related to combinations and disposals are measured at fair value at transaction date. recoverable amounts from variation orders, claims and incentive payments When a deferred and contingent consideration meets the definition of a which are recognized when, in the group’s judgement, it is highly probable financial asset or liability, it is subsequently remeasured at fair value at the that they will not result in a significant reversal of revenue. This assessment reporting date. The determination of fair value is based on discounted cash is adjusted by management’s evaluation of liquidated damages to be flows. Key assumptions made by the management include the probability imposed by customers, typically relating to contractual delivery terms. In of meeting each performance target and the discount factor. Deferred and contingent considerations resulting from business many contracts, there are frequent changes in scope of work resulting in a number of variation orders. The contracts with customers normally Impairment of non-financial assets include procedures for issuing and approval of variation orders. There Property, plant and equipment and intangible assets can be unapproved variation orders and claims included in the contract The group has significant non-current assets recognized in the revenue where recovery is assessed as highly probable and other criteria consolidated statement of financial position related to Property, plant and are met. Even though management has extensive experience in assessing equipment and intangible assts. The value in use of some of these assets the outcome of such negotiations, uncertainties exist. can be significantly impacted by changes of market conditions. The group considers whether there are indications of impairment on the carrying One of the key uncertainties related to revenue recognition arises in the amounts of such non-current assets. If such indications exist, an impairment final stages of the completion of long term contracts which can involve test is performed to assess whether or not the assets should be impaired. renegotiations with customers. The estimates of the likely outcome of The valuations, often determined by value in use calculations, will often these renegotiations are based on management’s assessments subject to be performed based on estimates of future cash flows discounted by an complex interpretations of contractual, engineering, design and project appropriate discount rate. Significant estimates and judgments are made execution issues. There can be a wide range of reasonably possible by the management, including determining appropriated cash-generating outcomes from such renegotiations and the estimates made require a high units and discount rate, projections for future cash flows and assumptions degree of judgment. of future market conditions. References are made to Note 13 Property, plant and equipment and Note 14 Intangible assets. Estimate of the remaining contract costs depends on productivity factors and the cost of inputs. Weather conditions, the performance of Goodwill subcontractors and others with an impact on schedules, commodity prices The group performs impairment testing of goodwill annually or more and currency rates can affect cost estimates. Experience, systematic use frequently if any impairment indicators are identified. The recoverable of the project execution model and focus on core competencies reduce, amounts of cash-generating units to which goodwill is allocated have but do not eliminate, the risk that estimates may change significantly. A been determined based on value-in-use calculations. These calculations risk contingency is included in estimated contract costs based on the risk require management to estimate future cash flows expected to arise from register for identified significant risks. these cash-generating units and an appropriate discount rate to reflect the time value of the money. Key assumptions made by the management Progress measurement based on costs incurred has an inherent risk related include also assumptions for future market conditions, which require a to the cost estimate as described above. The estimation uncertainty high degree of judgment. Further details about goodwill allocation and during the early stages of a contract is mitigated by a policy of normally impairment testing are included in Note 15 Impairment testing of goodwill. not recognizing revenue in excess of costs on large lump sum projects before the contract reaches 20 percent of completion. Earlier recognition Income taxes can be made on a project-by-project basis if cost estimates are certain, The group is subject to income taxes in numerous jurisdictions. Significant typically in situations of repeat projects, proven technology or proven judgement is required to determine the worldwide provision for income execution model. taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Annual Report 2018 | Financials and Notes | Akastor Group40 Provisions for anticipated tax audit issues are based on estimates of Pension benefits eventual additional taxes. The present value of the pension obligations depends on a number of factors determined on the basis of actuarial assumptions. These Income tax expense is calculated based on reported income in the different assumptions include financial factors such as the discount rate, expected legal entities. Deferred income tax expense is calculated based on the salary growth, inflation and return on assets as well as demographical temporary differences between the assets’ carrying amount for financial factors concerning mortality, employee turnover, disability and early reporting purposes and their respective tax basis. The total amount retirement. Assumptions about all these factors are based on the of income tax expense and allocation between current and deferred situation at the time the assessment is made. However, it is reasonably income tax requires management’s interpretation of complex tax laws and certain that such factors will change over the very long periods for which regulations in the many tax jurisdictions where the group operates. pension calculations are made. Any changes in these assumptions will Valuation of deferred tax assets is dependent on management’s assessment other comprehensive income. Further information about the pension of future recoverability of the deferred tax benefit. Expected recoverability obligations and the assumptions used are included in Note 26 Employee affect the calculated pension obligations with immediate recognition in may result from expected taxable income in the near future, planned benefits - pension. transactions or planned tax optimizing measures. Economic conditions may change and lead to a different conclusion regarding recoverability, Fair value measurement and such change may affect the results for each future reporting period. The group has invested in significant financial assets that require the measurement of fair value. If there is no quoted price in an active market, Tax authorities in different jurisdictions may challenge calculation of then the group uses valuation techniques that maximize the use of income taxes from prior periods. Such processes may lead to changes to relevant observable inputs and minimize the use of unobservable inputs. prior periods’ taxable income, resulting in changes to income tax expense. The chosen valuation technique incorporates all of the factors that market When tax authorities challenge income tax calculations, management is participants would take into account in pricing a transaction. The fair value required to make estimates of the probability and amount of possible measurement requires a high degree of judgment. Judgements include tax adjustments. Such estimates may change as additional information considerations of inputs such as cash flow projection, discount rate and becomes known. Further details about income taxes are included in Note volatility. Further information about the fair value measurement using level 11 Income tax. Onerous contracts 3 inputs is included in Note 32 Financial Instruments. Legal disputes and contingent liabilities The group has entered into several non-cancellable lease contracts Given the scope of the group’s worldwide operations, group companies for office premises which may result in vacant leased space. The group are inevitably involved in legal disputes in the course of their business recognizes a provision for such lease contracts when the leased property activities. In addition, as an investment company, Akastor and its portfolio is or will be vacant during the non-cancellable lease period. The provision companies from time to time engage in mergers, acquisitions and other is made for the discounted future lease payments, net of expected transactions that could expose the companies to financial and other sublease income, if any. Key assumptions in determining the provisions are non-operational risks, such as indemnity claims and price adjustment primarily related to expected sublease income, length of vacancy periods mechanisms resulting in recognition of deferred settlement obligations. and appropriate discount rates. Further information about provision for onerous contracts is included in Note 27 Provisions. Provisions have been made to cover the expected outcome of the legal claims and disputes to the extent negative outcomes are likely and reliable estimates can be made. However, the final outcomes of these cases are subject to uncertainties, and resulting liabilities may exceed provisions recognized. The group follows the development of these disputes on case-by-case basis and makes assessment based on all available evidence as at the reporting date. Annual Report 2018 | Financials and Notes | Akastor Group41 Note 5 | Discontinued operations Disposal of AKOFS Offshore Following the transaction, AKOFS Offshore was restructured to On September 26, 2018, Akastor completed the transaction to divest 50 consolidate 100 percent ownership interest in Avium Subsea AS. Akastor, percent of its shares in AKOFS Offshore to MITSUI & CO., Ltd. ("Mitsui") Mitsui and MOL hold 50%, 25% and 25% of the shares in AKOFS Offshore, and Mitsui O.S.K. Lines, Ltd. ("MOL") for a total consideration of USD 142.5 respectively. AKOFS Offshore is classified as a joint venture to the group million with interest 4% from the locked box date on December 31, 2017. In and consolidated using the equity method. See Note 16 Equity-accounted addition, there are certain preferential rights in respect of the operations investees for more information. of AKOFS Seafarer, including guaranteed return to Mitsui and MOL and earn-out payments to Akastor in the first six years of operations. The The AKOFS Offshore operations, exclusive Avium Subsea AS, are transaction does not include the existing joint venture, Avium Subsea AS, classified as discontinued operations and the comparative consolidated between Akastor, Mitsui and MOL,. income statement has been restated to show the discontinued operations separately from continuing operations. Results of discontinued operations Amounts in NOK million Revenue Expenses Net financial items Profit (loss) before tax Income tax Profit (loss) from operating activities, net of tax Gain (loss) on sale of discontinued operations 1) Income tax on gain (loss) on sale of discontinued operations Net profit (loss) from discontinued operations Basic/diluted earnings (loss) per share from discontinued operations (NOK) 2018 2017 821 (1 021) (176) (376) (33) (409) 280 - (128) (0.47) 957 (1 122) (368) (533) 112 (420) 1 088 (19) 648 2.39 1) Includes currency translation differences of NOK 442 million that were reclassified from Other Comprehensive Income to the income statement as part of gain from the disposal in 2018 (NOK 227 million in 2017). Gain before tax from the disposal in 2018 includes gain of NOK 471 million In 2017, gain before tax from the disposal included NOK 383 million for for AKOFS Offshore and provision of NOK 224 million for potential loss as Frontica Advantage and NOK 728 million for KOP Surface Products. In a result of negative arbitration award for Managed Pressure Operations addition, the net gain before tax was negatively affected by lower earn-out Ltd.(MPO), which was sold in 2016. See Note 28 Trade and other payables expectations on divestments from prior years. for more information about the deferred settlement obligation related to MPO. Cash flows from (used in) discontinued operations Amounts in NOK million Net cash from operating activities Net cash from investing activities Net cash flow from discontinued operations 2018 8 1 043 1 051 2017 (365) 876 512 Annual Report 2018 | Financials and Notes | Akastor Group42 Effect of disposal on the financial position of the group Amounts in NOK million Deferred tax assets Property, plant and equipment Intangible assets Other investments Inventories Trade and other receivables Cash and cash equivalents Other current assets Deferred tax liabilities Pension liabilities Finance lease liability,non-current Finance lease liability, current Trade and other payables Current interest-bearing liabilities Other current liabilities Currency translation reserve Net assets and liabilities 1) Total consideration at fair value 2) Portion of consideration received in cash, net of transaction costs 3) Cash and cash equivalents disposed of Cash inflows from disposal, net of cash disposed of 4) 2018 2017 (247) (2 984) (164) (2) - (296) (68) - 18 4 1 083 324 29 104 53 442 (1 704) 2 175 1 201 (68) 1 133 (54) (90) (193) - (103) (165) (86) (46) 29 23 - - 62 - 148 227 (250) 1 362 984 (86) 898 1) After the disposal of 50 percent shares of AKOFS Offshore, the company is classified as a joint venture to the group and consolidated using the equity method. Net assets and liabilities in AKOFS Offshore are derecognized at 100% basis upon disposal. 2) Total consideration at fair value from disposal of AKOFS Offshore is measured at 100% basis based on the cash consideration received for 50% shares of AKOFS Offshore, reduced by provision for contingent considerations for guaranteed return to Mitsui and MOL. Accordingly, gain from the divestment is calculated at 100 percent basis. 3) Represents the cash consideration received for the 50 percent shares of AKOFS Offshore. 4) Net cash flows from disposal in 2018 excluded the net cash outflow of NOK 30 million related to divestments made in prior years (NOK 30 million in 2017). Annual Report 2018 | Financials and Notes | Akastor Group43 Note 6 | Operating segments Basis for segmentation Measurement of segment performance As of December 31, 2018, Akastor has two reportable segments which Segment performance is measured by operating profit before depreciation, are the strategic business units of the group. The strategic business units amortization and impairment (EBITDA) which is reviewed by the group’s are managed separately and offer different products and services due Executive Management Group (the chief operating decision maker). to different market segments and different strategies for their projects, Segment profit, together with key financial information as described below, products and services: gives the Executive Management Group relevant information in evaluating the results of the operating segments and is relevant in evaluating the ŸŸ MHWirth is a supplier of drilling systems and drilling lifecycle results of the segments relative to other entities operating within these services globally. The company offers a full range of drilling industries. Inter-segment pricing is determined on an arm’s length basis. equipment, drilling riser solutions and related products and services for the drilling market, primarily the offshore sector. The accounting policies of the reportable segments are the same as ŸŸ AKOFS Offshore is a global provider of vessel-based subsea well principles, except for hedge accounting. When contract revenues and construction and intervention services to the oil and gas industry, contract costs are denominated in a foreign currency, the subsidiary may covering all phases from conceptual development to project hedge the exposure against the central treasury department (Akastor execution and offshore operations. Treasury) and hedge accounting is applied independently of whether described in Note 2 Basis of preparation and Note 3 Significant accounting As a result of divestment of 50 percent ownership in AKOFS Offshore correction of the non-qualifying hedges to secure that the consolidated in September 2018, AKOFS Offshore is classified as a joint venture and financial statements are in accordance with IFRS is made as an adjustment consolidated using the equity method. See Note 5 Discontinued operations at corporate level. This means that the group’s segment reporting reflects for more information about the transaction and Note 16 Equity-accounted all hedges as qualifying even though they may not qualify in accordance investees. with IFRS. the hedge qualify for hedge accounting in accordance with IFRS. The Further, Akastor holds 100 percent ownership in Step Oiltools, 50 percent Hedge transactions not qualifying for hedge accounting represent an in DOF Deepwater AS, 100 percent in First Geo AS and Cool Sorption, 17.7 accounting loss of NOK 0 million to EBITDA (loss of NOK 5 million in 2017) percent economic interest in NES Global Talent and 93 percent of Aker and a loss under financial items of NOK 2 million (loss of NOK 121 million Pensjonskasse, as well as equity instruments in Odfjell Drilling and Awilco in 2017). This is recognized as group adjustment under Other holdings. Drilling. These are included in “Other holdings”. Annual Report 2018 | Financials and Notes | Akastor Group44 Information about reportable segments Amounts in NOK million Note MHWirth AKOFS Offshore Other holdings Total operating segments Adjust- ment of AKOFS Offshore Elimina- tions Total Akastor 2018 Income statement External revenue and other income Inter-segment revenue Total revenue and other income Operating profit before depreciation, amortization and impairment (EBITDA) Depreciation and amortization Impairment Operating profit (loss) (EBIT) 13,14 13,14 3 031 24 3 055 281 (125) - 156 1 107 - 1 107 471 (275) (322) (127) 741 8 749 (18) (56) - (74) 4 879 (1 080) 32 - 4 911 (1 080) - (32) (32) 3 800 - 3 800 733 (456) (322) (45) (443) 275 322 154 Assets Current operating assets Non-current operating assets Segment assets Liabilities Current operating liabilities Non-current operating liabilities Segment liabilities Net current operating assets Net capital employed Capital expenditure and R&D capitalization 3 008 1 972 4 979 282 4 741 5 023 347 2 020 2 367 3 636 8 733 12 369 (282) (3 655) (3 937) 2 602 264 2 866 405 2 113 58 102 377 6 633 108 1 010 180 4 915 188 (30) 1 357 8 3 081 903 3 984 555 8 385 255 (102) (6) (108) (180) (3 829) (124) - - - - - - - - - - - - - 290 (181) - 109 3 354 5 078 8 432 2 979 897 3 876 375 4 556 131 Amounts in NOK million Note MHWirth AKOFS Offshore Other holdings Total operating segments Adjust- ment of AKOFS Offshore Elimina- tions Total Akastor 2017 Income statement External revenue and other income Inter-segment revenue Total revenue and other income Operating profit before depreciation, amortization and impairment (EBITDA) Depreciation and amortization Impairment Operating profit (loss) (EBIT) 13, 14 13, 14 Assets Current operating assets Non-current operating assets Segment assets Liabilities Current operating liabilities Non-current operating liabilities Segment liabilities Net current operating assets (continuing operations) Net capital employed Capital expenditure and R&D capitalization 3 000 30 3 030 118 (189) (118) (189) 2 238 2 093 4 332 1 244 304 1 548 995 2 783 46 778 - 778 213 (334) - (121) 301 3 986 4 287 115 18 133 186 4 154 40 570 26 596 (38) (89) - (127) 4 348 56 4 348 293 (612) (118) (438) 315 1 133 1 448 2 854 7 213 10 067 452 367 819 (138) 628 9 1 811 690 2 501 1 043 7 566 95 (742) - (742) (177) 334 - 158 - - - - - - (186) - - - (56) (56) - - - - - - - - - - - - - 3 606 - 3 606 116 (278) (118) (280) 2 854 7 213 10 067 1 811 690 2 501 857 7 566 95 Annual Report 2018 | Financials and Notes | Akastor Group Reconciliations of information on reportable segments to IFRS measures Amounts in NOK million Assets Total segment assets Derivative financial instruments Cash and cash equivalents Current interest-bearing receivables Non-current interest-bearing receivables Elimination of intra-group assets Consolidated assets Liabilities Total segment liabilities Derivative financial instruments Current borrowings Non-current borrowings Elimination of intra-group liabilities Consolidated liabilities Geographical information 45 Note 2018 2017 31 22 19 31 24 24 8 432 10 067 117 198 257 - - 94 168 - 1 (2) 9 005 10 328 3 876 210 14 588 - 4 687 2 501 20 399 2 133 (2) 5 051 Geographical revenue is presented on the basis of geographical location assets and capital expenditures are based on the geographical location of of the group companies selling to the customers. Non-current segment the assets. Amounts in NOK million Norway Germany United States Brazil Singapore Other Asia Other Europe Middle East Other countries Total Revenue and other income Non-current assets excluding deferred tax assets and financial instruments 2018 1 980 492 215 108 106 359 282 158 100 2017 Restated 1 855 299 263 137 316 330 188 110 107 2018 1 647 719 255 323 45 83 68 18 17 2017 4 195 751 289 366 61 84 64 25 31 3 800 3 606 3 174 5 865 Annual Report 2018 | Financials and Notes | Akastor Group 46 Note 7 | Revenue and other income The effect of initially applying IFRS 15 on the group’s revenue from Due to the transition method chosen in applying IFRS 15, comparative contracts with customers is described in Note 2 Basis for preparation. information has not been restated to reflect the new requirements. Revenue types Amounts in NOK million Revenue from contracts with customers Other revenue and income Lease revenue Other revenue Gain (loss) on disposal of subsidiaries Profit (loss) from equity-accounted investees Gain on disposals of assets Total revenue and other income Note 16 2018 3 464 233 20 (1) 28 56 2017 Restated 3 281 277 45 5 36 11 3 800 3 606 Disaggregation of revenue from contracts with customers and timing of revenue recognition. The table also includes a reconciliation Revenue from contracts with customer in the scope of IFRS 15 is of the disaggregated revenue with revenue information as shown in Note disaggregated in the following table by major contract and revenue types 6 Operating segments. MHWirth AKOFS Offshore Other holdings Adjustment of AKOFS Offshore Total Akastor Amounts in NOK million 2018 Major contract/revenue types Construction revenue Sale of standard products Service revenue Total Revenue from contracts with customers Timing of revenue recognition Transferred over time Transferred at point in time Total Revenue from contracts with customers Other revenue and income Total external revenue and other income in segment reporting 2017 Major contract/revenue types Construction revenue Sale of standard products Service revenue 942 812 1 195 2 950 2 137 812 2 950 81 3 031 1 158 666 1 111 - - 343 343 343 - 343 764 1 107 - - 45 169 300 514 345 169 514 227 741 18 107 208 221 Total Revenue from contracts with customers 2 936 208 346 Timing of revenue recognition Transferred over time Transferred at point in time 2 269 666 208 - 239 107 Total Revenue from contracts with customers 2 936 208 346 Other revenue and income 64 Total external revenue and other income in segment reporting 3 000 570 778 224 570 - - (343) (343) (343) - (343) (737) (1 080) - - (208) (208) (208) - (208) (534) (742) 987 981 1 495 3 464 2 482 981 3 464 336 3 800 1 176 773 1 332 3 281 2 508 773 3 281 324 3 606 Annual Report 2018 | Financials and Notes | Akastor Group 47 Contract balances The following table provides information about receivables, contract assets and contract liabilities from contracts with customers. Amounts in NOK million Receivables, which are included in “trade and other receivables” Contract assets Contract liabilities Note 21 28 2018 1 365 824 632 January 1, 2018 1 248 736 425 Contract assets relate to the group’s rights to consideration for work Contract liabilities relate to advance consideration received from customer completed, but not yet invoiced at the reporting date. The contract for work not yet performed. Revenue recognized in 2018 that was included assets are transferred to receivables when the rights to payment become in contract liabilities in the beginning of the year is NOK 41 million. unconditional, which usually occurs when invoices are issued to the customers. There was a reduction of NOK 51 million of the contract assets The amount of revenue recognized in 2018 from performance obligation as of January 1, 2018 due to disposal of subsidiaries. No impairment has satisfied (or partially satisfied) in previous period is NOK 85 million. This been recognized on contract assets in 2018. is mainly due to changes in the estimates of progress measurement for performance obligations satisfied over time and changes in estimates relating to the constraining of revenues. Transaction price allocated to the remaining performance obligations The following table includes revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of December 31, 2018. Amounts in NOK million Transaction price allocated 2019 1 271 Later 1 611 Total 2 882 The amounts disclosed above do not include variable consideration obligation when revenue is recognized in the amount to which the group which is constrained. The group applies the practical expedient under has right to invoice. IFRS 15 and does not disclose information about remaining performance Note 8 | Salaries, wages and social security costs Amounts in NOK million Salaries and wages including holiday allowance Social security tax/ national insurance contribution Pension cost Other employee costs Salaries, wages and social security costs Note 26 2018 1 163 150 63 48 1 424 2017 Restated 1 280 164 70 47 1 561 Annual Report 2018 | Financials and Notes | Akastor Group 48 Note 9 | Other operating expenses Amounts in NOK million Rental and other costs for buildings and premises External consultants and hired-ins inclusive audit fees Office supplies Travel expenses Insurance Other Total other operating expenses Fees to the auditors 2018 2017 Restated 217 158 209 167 36 32 50 53 11 13 49 44 572 468 The table below summarizes audit fees, as well as fees for audit related services, tax services and other services incurred by the group during 2018 and 2017. Amounts in NOK million 2018 2017 2018 2017 2018 2017 Akastor ASA Subsidiaries Total Audit Other assurance services Total 3 - 3 3 - 3 7 2 10 7 4 11 10 2 12 10 4 14 Note 10 | Net finance expenses Amounts in NOK million Profit (loss) on foreign currency forward contracts Profit (loss) from equity-accounted investees Interest income on bank deposits measured at amortized cost Interest income on debt instruments at FVOCI Net foreign exchange gain Dividend income from equity instrument Gain on sale of financial assets Other finance income Finance income Interest expense on financial liabilities measured at amortized cost Interest expense on financial liabilities measured at fair value Net foreign exchange loss Net change in fair value of financial assets at FVTPL Impairment loss on external receivables 1) Other financial expenses Financial expenses Net finance expenses recognized in profit and loss 1) Impairment loss on external receivables was triggered by insolvency of certain customers. See Note 32 Financial instruments for information of the finance income and expense generating items. Note 2018 2017 Restated 16 (2) (157) 6 61 - 71 - 47 185 (81) (9) (2) (71) (24) (39) (225) (200) (121) (212) 15 48 23 8 21 1 115 (122) (22) - - (9) (35) (188) (406) Annual Report 2018 | Financials and Notes | Akastor Group49 Foreign currency forward contracts Profit (loss) on foreign currency forward contracts reflects fair value on Some foreign exchange hedge transactions do not qualify for hedge hedge contracts that don't qualify for hedge accounting. The losses in accounting under IFRS, primarily because a large number of internal hedge 2018 and 2017 were mainly related to hedge contracts in MHWirth. transactions are grouped and netted before external hedge transactions are established. These derivatives are mainly foreign exchange forward The exposure from foreign currency embedded derivatives is economically contracts. The corresponding contracts to the derivatives are calculated hedged, but cannot qualify for hedge accounting and is therefore included to have an equal, but opposite effect, and both the derivatives and the in net foreign exchange gain/loss. Hedge accounting and embedded hedged items are reported as financial items. The net amount therefore derivatives are explained in Note 31 Derivative financial instruments. reflects the difference in timing between the non-qualifying hedging instrument and the future transaction (economically hedged item). Note 11 | Income tax Income tax expense Amounts in NOK million Current tax expense Current year Adjustments for prior years Total current tax expense Deferred tax expense Origination and reversal of temporary differences Change in tax rate Write down of tax loss and deferred tax assets Total deferred tax income (expense) Total tax income (expense) Effective tax rate 2018 2017 Restated (27) 1 (26) 8 (10) (75) (77) (103) (56) 13 (43) 176 (6) (148) 23 (20) The table below reconciles the reported income tax expense to the expected income tax expense according to the corporate income tax rate in Norway. Amounts in NOK million 2018 Profit (loss) before tax, continuing operations Tax income (expense) using the company's domestic tax rate Tax effects of: Difference between local tax rate and Norwegian tax rate Permanent differences 1) Prior year adjustments (current tax) Prior year adjustments (deferred tax) Write down of tax loss or deferred tax assets 2) Change in tax rates 3) Other Total tax income (expenses) (91) 21 10 (22) 1 2 (75) (10) (30) 23.0 % 10.7% (24.0%) 0.6% 2.3% (82.4%) (11.0%) (32.6%) (103) (113.5%) 2017 Restated (686) 165 36 (54) 13 2 (148) (6) (28) (20) 24.0 % 5.3% (7.8%) 1.9% 0.2% (21.5%) (0.9%) (4.1%) (2.9%) 1) Relates mainly to net profit and loss after tax from equity-accounted investees and profit and loss recognized on various tax-exempted investments.. 2) The impairment relates mainly to tax losses in the MHWirth entities in USA and Brazil, Step Oiltools as well as deferred tax assets related to deferred gain in Avium Subsea AS. 3) Relates mainly to changes in corporate income tax rate in Norway. The tax rate is changed from 23 percent to 22 percent effective as of January 1, 2019. In 2017, the tax rate was changed from 24 percent to 23 percent effective as of January 1, 2018. Annual Report 2018 | Financials and Notes | Akastor Group50 Recognized deferred tax assets and liabilities Amounts in NOK million 2018 2017 2018 2017 2018 2017 Assets Liabilities Net Property, plant and equipment Intangible assets Projects under construction Pensions Provisions Derivatives Other items Tax loss carry-forwards Total before set offs Set-off of tax Total deferred tax assets(liabilities) 46 1 - 72 56 18 131 352 677 (303) 374 55 1 - 76 73 10 182 672 1 070 (409) 661 (6) (12) (248) - - (38) (9) - (312) 303 (9) (109) (19) (212) - - (64) (16) - (421) 409 (10) 40 (10) (248) 72 56 (19) 122 352 365 - 365 (54) (17) (212) 76 73 (54) 166 672 650 - 650 Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available, against which the deductible temporary difference can be utilized. The deferred tax assets recognized for tax loss carry-forward are mainly related to the entities in Norway and Germany where tax losses can be carried forward without expiration. The group has made an evaluation of taxable profit in these entities for the next five years based on management’s projection. The estimates indicate that it is probable that future tax profit will be available for which such tax losses can be utilized. The amount of deferred tax assets recognized in these Norwegian and German entities is NOK 353 million as of December 31, 2018. Change in net recognized deferred tax assets (liabilities) Amounts in NOK million Property, plant and equipment Intan- gible assets Projects under construction Pensions Provisions Derivatives Other items Tax loss carry- forwards Total Balance as of January 1, 2017 (72) (41) (326) Disposal of subsidiaries as of January 1, 2017 Recognized in profit and loss (restated) Recognized in other comprehen- sive income Discontinued operations Effect of group contribution Currency translation differences Balance as of December 31, 2017 Disposal of subsidiaries as of January 1, 2018 Recognized in profit and loss Recognized in other comprehen- sive income Recognized in equity Currency translation differences 9 - (77) 20 - 80 - 5 (54) 100 (7) - - 1 - 4 - (1) (17) 3 4 - - - - 115 - - - (1) (212) - (47) - 8 3 Balance as of December 31, 2018 40 (10) (248) 95 (4) (5) (11) - - 2 76 (1) (4) - - 1 72 158 (6) (83) - 4 - - 73 (4) (13) - - (1) 56 (70) - 61 - 782 586 (21) (22) 43 54 (45) 23 (36) 10 - (1) - 2 53 (4) - 28 (53) (19) (46) 128 - (19) (54) 166 672 650 (10) 2 2 (45) (345) (254) 34 (77) 30 13 - - - - (9) 30 21 (5) (19) 122 352 365 Annual Report 2018 | Financials and Notes | Akastor Group51 Tax loss carry-forwards and deductible temporary differences for which no deferred tax assets are recognized Deferred tax assets have not been recognized in respect of tax loss carry-forwards or deductible temporary differences when the group evaluates that it is not probable that future taxable profit will be available against which the group can utilize these benefits based on forecasts and realistic expectations. Expiry date of unrecognized tax loss carry-forwards Amounts in NOK million Expiry in 2021 Expiry in 2022 and later Indefinite Total 2018 74 481 1 856 2 411 2017 - 541 1 228 1 768 Unrecognized other deductible temporary differences are NOK 459 million in 2018 (NOK 338 million in 2017). Note 12 | Earnings per share Akastor ASA holds 2 776 376 treasury shares at year end 2018 (2 776 376 in 2017). Treasury shares are not included in the weighted average number of ordinary shares. Amounts in NOK million Profit (loss) attributable to ordinary shares Profit (loss) attributable to ordinary shares from continuing operations 2018 (322) (194) 2017 Restated (58) (706) Basic/ diluted earnings per share The calculation of basic/diluted earnings per share is based on the profit (loss) attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding Issued ordinary shares as of January 1 Weighted average number of issued ordinary shares for the year adjusted for treasury shares Basic/ diluted earnings (loss) per share (NOK) Basic/ diluted earnings (loss) per share for continuing operations (NOK) 2018 2017 274 000 000 274 000 000 271 223 624 271 223 624 (1.19) (0.71) (0.21) (2.60) Annual Report 2018 | Financials and Notes | Akastor Group52 Note 13 | Property, plant and equipment The table below includes discontinued operations until these met the criteria to be classified as held for sale. Amounts in NOK million Balance as of January 1, 2017 Additions 1) Reclassifications Transfer from assets under construction Disposals and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2017 Additions 1) Transfer from assets under construction Disposals and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Accumulated depreciation and impairment Balance as of January 1, 2017 Reclassifications Depreciation for the year 2) Impairment Disposals and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2017 Depreciation for the year 2) Impairment 3) Disposals and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Book value as of December 31, 2017 Book value as of December 31, 2018 Of which finance lease as of December 31, 2017 Of which finance lease as of December 31, 2018 Note Buildings and land Vessels Machinery, equipment, software Under construction Total 1 042 7 384 2 202 105 10 733 1 - 12 57 70 20 (62) 4 40 41 - - 39 (83) - (57) (427) (396) (3) - (48) (5) (77) - (350) - (36) (321) (35) (3) 951 7 040 - - - 38 (148) 85 1 861 70 9 922 26 69 95 3 (440) (42) - - (503) 5 (4) (7 063) (103) (63) (7 233) (57) (101) 30 (1) 743 - 1 377 33 (128) 2 153 5 5 (494) (3 562) (1 463) (16) (5 535) - 43 (43) - - (27) (303) (174) - (505) - - 2 - 40 - (47) - (47) 46 5 298 - 54 337 21 155 17 - 194 (458) (3 668) (1 366) (11) (5 502) (22) (142) - (322) 124 (85) 4 4 164 25 (328) 53 - 493 3 373 416 - - - 1 448 - (114) - (278) - - (322) 431 81 - - (22) - 470 4 249 56 (990) (11) (1 328) 495 387 59 4 419 22 825 - - - 1 448 - - 1) Includes additions of NOK 63 million related to discontinued operations in 2018 (NOK 36 million in 2017). 2) Includes depreciation of NOK 153 million from discontinued operations in 2018 (NOK 335 million in 2017). 3) Includes impairment of NOK 322 million from discontinued operations in 2018. Depreciation generating unit AKOFS Seafarer in the discontinued operations of AKOFS Estimates for useful life, depreciation method and residual values are Offshore. AKOFS Seafarer was impaired to its recoverable amount of NOK reviewed annually. Assets are mainly depreciated on a straight-line basis 1.4 billion based on value in use (discount rate of 9.7%). The recoverable over their expected economic lives as follows: amount analysis was made on the assumption that the vessel is employed Machinery, equipment and software Vessels Buildings Land Impairment 3–15 years 20–25 years 8–30 years No depreciation on the specific rates until the expiry of the current firm contract including options, and that rate and utilization levels thereafter are based on expected market levels. In 2017, an impairment loss of NOK 47 million was recognized mainly related to the testing facilities in Germany that is not expected to be utilized in full capacity. The recoverable amount of NOK 11 million was The impairment loss of NOK 332 million in 2018 was related to the cash- determined based on value in use. Annual Report 2018 | Financials and Notes | Akastor Group Note 14 | Intangible assets Amounts in NOK million Note Development costs Goodwill Other Total 53 Historical cost Balance as of January 1, 2017 Reclassification Capitalized development 1) Disposal and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2017 Reclassification Capitalized development 1) Disposal and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Accumulated amortization and impairment Balance as of January 1, 2017 Amortization for the year 2) Impairment for the year Disposal and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2017 Amortization for the year 2) Disposal and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 5 5 618 1 718 (7) 27 (64) (117) - - - (100) 235 7 - - - - 29 6 456 1 646 (5) 35 (47) (2) 1 - - - (452) 1 36 248 5 (17) (113) 18 1 437 1 211 127 (304) (388) (147) (100) - (29) (62) - (8) 64 73 (2) - - - - (6) (6) 2 570 - 27 (64) (218) 35 2 351 - (64) (567) 20 1 775 (839) (129) (70) 64 73 (14) (331) (394) (190) (915) (41) 47 - (1) - - 307 (24) 16 96 (64) 64 403 - (2) (3) (325) (87) (104) (515) Book value as of December 31, 2017 Book value as of December 31, 2018 125 1 252 112 1 125 58 22 1 435 1 260 1) Includes capitalized development costs of NOK 1 million from discontinued operations (NOK 6 million in 2017). 2) Includes amortization of NOK 9 million from discontinued operations in 2018 (NOK 21 million in 2017). Impairment loss of other intangible assets than goodwill related to development activities. In addition, research and development In 2017, an impairment loss of NOK 70 million was recognized mainly costs of NOK 32 million were expensed during the year because the related to intangible assets that were no longer expected to be utilized criteria for capitalization are not met (NOK 16 million in 2017). in MHWirth. Amortization Research and development costs Intangible assets all have finite useful lives and are amortized over the NOK 36 million has been capitalized in 2018 (NOK 27 million in 2017) expected economic life, ranging between 5-10 years. Annual Report 2018 | Financials and Notes | Akastor Group54 Note 15 | Impairment testing of goodwill Goodwill originates from a number of acquisitions. For the purpose of impairment testing, goodwill has been allocated to the group’s cash-generating units (portfolio companies) as shown in the table below, which represents the lowest level at which goodwill is monitored in management reporting. Amounts in NOK million MHWirth First Geo 1) AKOFS Offshore 2) Total goodwill 1) The portfolio company is included in Other Holdings in segment reporting. 2) The portfolio company is deconsolidated and becomes a joint venture in 2018. 2018 2017 1 107 1 089 18 18 - 145 1 125 1 252 Impairment testing for cash-generating units containing significant main markets. Assumptions are made regarding revenue growth, gross goodwill margins and other cost components based on historical experience as The recoverable amounts of cash-generating units (portfolio companies) well as assessment of future market development and conditions. These are determined based on value-in-use calculations. Discounted cash assumptions require a high degree of judgement, given the significant flow models are applied to determine the value in use for the portfolio degree of uncertainty regarding oilfield service activities in the forecast companies with goodwill. The management has made cash flow period. projections based on budget and strategic forecast for the periods 2019- 2023. Beyond the explicit forecast period of five years, the cash flows are Terminal value growth rate The group uses a constant growth rate not extrapolated using a constant growth rate. exceeding 2% (including inflation) for periods beyond the management’s forecast period of five years. The growth rates used do not exceed the Key assumptions used in the calculation of value in use are discussed growth rates for the industry in which the portfolio company operates. below. The values assigned to the key assumptions represent management's assessment of future trends in the relevant industries Discount rates are estimated based on Weighted Average Cost of Capital as well as management’s expectations regarding margin, and have been (WACC) for the industry in which the portfolio company operates. The based on historical data from both external and internal sources. risk-free interest rates used in the discount rates are based on the 10 year EBITDA used in the value-in-use calculations represents the operating debt leverage is estimated for each portfolio company. The discount rates earnings before depreciation and amortization and is estimated based are further adjusted to reflect any additional short to medium term market on the expected future performance of the existing businesses in their risk considering current industry conditions. state treasury bond rate at the time of the impairment testing. Optimal Discount rate assumptions used in impairment testing MHWirth Discount rate after tax Discount rate pre tax 2018 10.0% 2017 9.3% 2018 12.2% 2017 11.2% Sensitivity to changes in assumptions possible change in key assumptions that could cause the carrying amount For the portfolio companies containing goodwill, the recoverable amounts to exceed the recoverable amount. In MHWirth, the group believes that are higher than the carrying amounts based on the value in use analysis no reasonably possible change in any of the key assumptions used for and consequently no impairment loss of goodwill was recognized in 2018. impairment testing would cause the carrying amount of the portfolio The group has performed sensitivity calculations to identify any reasonably company to exceed its recoverable amount. Annual Report 2018 | Financials and Notes | Akastor Group55 Note 16 | Equity-accounted investees Equity-accounted investees include joint ventures and associates. Such investments are defined as related parties to Akastor. See Note 35 Related parties for overview of transactions and balances with joint ventures and associates, and any guarantees provided on behalf of or from such entities. Amounts in NOK million DOF Deepwater AS AKOFS Offshore Electrical Subsea & Drilling AS Total 2018 Business office Percentage of voting rights and ownership Share of profit (loss) reported in Other income Share of profit (loss) reported in Financial items Carrying amount of investments Storebø, Norway Oslo, Norway Straume, Norway 50% - (102) - 50% 28 (48) 1 086 20% - (8) 2 Amounts in NOK million DOF Deepwater AS Avium Subsea AS Electrical Subsea & Drilling AS 2017 Business office Percentage of voting rights and ownership Share of profit (loss) reported in Other income Share of profit (loss) reported in Financial items Carrying amount of investments Storebø, Norway Oslo, Norway Straume, Norway 50% - (212) - 50% 36 - - 20% - - 10 28 (157) 1 088 Total 36 (212) 10 DOF Deepwater AS classified as a joint venture to the group and consolidated using the equity DOF Deepwater AS is a joint venture with DOF ASA, which owns and method. See note 5 Discontinued operations for more information about operates five anchor handling tug supply (AHTS) vessels. the transaction. AKOFS Offshore (Avium Subsea AS) Electrical Subsea & Drilling AS In September 26, 2018, Akastor completed the transaction to divest 50 In September 2017, MHWirth became a shareholder in Electrical Subsea percent of its shares in AKOFS Offshore to MITSUI & CO., Ltd. ("Mitsui") & Drilling AS (ESD) with 20% ownership by transferring certain work-in- and Mitsui O.S.K. Lines, Ltd. ("MOL"). Following the transaction, Avium progress technologies for new well barrier for BOP. ESD is a privately Subsea AS, the existing joint venture between Akastor, Mitsui and MOL, owned Norwegian company and working on the development and became a wholly owned subsidiary of AKOFS Offshore. Akastor, Mitsui qualification of two drilling technologies; all electric control of Blow Out and MOL hold 50%, 25% and 25% of the shares in AKOFS Offshore, Preventers (BOP) and a Rotating Control Device for Managed Pressure respectively, and have joint control over the company. AKOFS Offshore is Drilling. Annual Report 2018 | Financials and Notes | Akastor Group56 Summary of financial information for significant equity-accounted investee (100 percent basis) Amounts in NOK million Current assets – Cash and cash equivalents Non-current assets Current liabilities – Current financial liabilities (excluding trade and other payables and provisions) Non-current liabilities – Non-current financial liabilities (excluding trade and other payables and provisions) Net assets (100%) Akastor's share of net assets (50%) Recognized against non-current receivables and liabilities 2) Goodwill Elimination of unrealized gain on downstream sales 3) Akastor's carrying amount of the investment Revenue Depreciation, amortization and impairment Interest expense Income tax expense Profit (loss) for the year Other comprehensive income (loss) Total comprehensive income (loss) (100%) Total comprehensive income (loss) (50%) Elimination of unrealized gain on downstream sales Akastor's share of total comprehensive income (loss) DOF Deepwater AS 2018 2017 128 38 719 (104) (30) (1 046) (1 046) (303) (152) 152 - - - 146 (142) (51) - (203) - (203) (102) - (102) 147 47 857 (117) (29) (987) (987) (100) (50) 50 - - - 149 (403) (49) 3 (424) - (424) (212) - (212) AKOFS Offshore1) Avium Subsea AS 2018 2017 447 52 160 49 4 741 1 475 (861) (163) (760) (141) (2 098) (1 060) (2 092) (1 060) 2 229 1 115 - 125 (154) 1 086 304 152 - - (152) - 448 241 (144) (83) (150) (91) (96) (5) (62) 55 (88) - (150) 55 (75) 11 (64) 28 8 36 1) Includes the results from Avium Subsea AS for the period from January 1 to September 26, 2018 and from AKOFS Offshore for the period from September 27 to December 31, 2018. 2) Akastor’s share of losses from DOF Deepwater AS is recognized against the carrying amount of its interest including non-current receivables. Further losses are recognized as a liability as the group has provided guarantees for the funding of the vessels in the company. See also Note 25 Other non-current liabilities and Note 35 Related parties. 3) In 2016, Akastor sold the Skandi Santos topside equipment to Avium Subsea AS. 50% of the accounting gain from the sale was eliminated upon consolidation, reducing Akastor’s carrying amount of the investment. The gain elimination in excess of Akastor’s share of net assets was recognized as a liability, see also Note 25 Other non- current liabilities. For information about guarantees provided on behalf of equity-accounted investees, see note 35 Related parties. Note 17 | Other non-current assets Amounts in NOK million Deferred and contingent considerations Other assets Total other non-current assets Note 2018 2017 32 59 99 3 1 62 100 Deferred and contingent considerations relate to contingent considerations arising from divestments of subsidiaries and are measured at fair value. Annual Report 2018 | Financials and Notes | Akastor GroupNote 18 | Other investments Amounts in NOK million Aker Pensjonskasse NES Talent investment 1) Awilco Drilling investment 2) Odfjell Drilling investment 3) Other equity securities Total other investments 57 Note 2018 2017 158 128 530 76 705 405 - - - 2 32 1 469 536 1) Akastor holds 17.7% economic ownership interest in NES Global Talent, a global oil and gas manpower provider. 2) Akastor holds 5.5% of the common shares in Awilco Drilling, which is listed on the Oslo Stock Exchange. 3) In May 2018, Akastor made an investment of USD 75 million in preferred equity in Odfjell Drilling, which generates 5% p.a. cash dividend and 5% p.a. payment-in-kind (PIK) dividend for the first six years, with step-up cash dividend after 6 years. In addition, Akastor has acquired warrants for 5 925 000 common shares in Odfjell Drilling, divided by six exercisable tranches until May 30, 2024. Odfjell Drilling is listed on the Oslo Stock Exchange. Other investments are measured at fair value. Note 19 | Current interest-bearing receivables Amounts in NOK million Receivable from AKOFS Offshore Total current interest-bearing receivables Note 20 | Inventories Amounts in NOK million Stock of raw materials Goods under production Finished goods Total inventories Inventories expensed in the period Write-down of inventories in the period Reversal of write-down in the period The reversal of write down of inventory is due to change in estimate of the net realizable value. Note 2018 2017 35 257 257 - - 2018 2017 103 104 342 548 (1 416) (33) 23 178 95 296 569 (1 347) (336) - Annual Report 2018 | Financials and Notes | Akastor Group 58 Note 21 | Trade and other receivables Amounts in NOK million Trade receivables 1) Less provision for impairment Trade receivables, net of provision Other receivables Trade and other receivables Advances to suppliers Contract assets Amount due from customers for construction work Accrued revenue Prepaid expenses Public duty and tax refund Contingent considerations Total Note 32 7 32 2018 1 459 (49) 1 410 64 1 474 74 824 - - 347 76 7 2017 1 319 (71) 1 248 204 1 451 81 - 246 147 218 113 6 2 801 2 263 1) Trade receivables are financial instruments and an impairment loss of NOK 32 million was recognized in the income statement in 2018 (NOK 5 million in 2017). Book value of trade and other receivables is approximately equal to fair value. Aging of trade receivables Amounts in NOK million Not overdue Past due 0-30 days Past due 31-90 days Past due more than 90 days Total trade receivables 2018 2017 698 97 99 565 485 79 54 700 1 459 1 319 A majority of the trade receivables past due is related to major customers. These outstanding receivables are monitored regularly and impairment analysis is performed on an individual basis for major customers. As of December 31, 2018, trade receivables of an initial value of NOK 49 million (NOK 71 million in 2017) were impaired. See below for the movements in the provision for impairment of receivables. Amounts in NOK million Balance as of January 1 New provisions Utilized Unused amounts reversed Disposal of subsidiaries Currency translation differences Balance as of December 31 2018 2017 71 32 (43) (10) - (2) 49 107 5 (3) (3) (33) (2) 71 Annual Report 2018 | Financials and Notes | Akastor GroupNote 22 | Cash and cash equivalents Amounts in NOK million Restricted cash Interest-bearing deposits Total cash and cash equivalents 59 2018 2017 - 198 198 8 160 168 Additional undrawn committed current bank revolving credit facilities amount to NOK 2.0 billion, that together with cash and cash equivalents gives a total liquidity reserve of NOK 2.2 billion as of December 31, 2018. See also Note 24 Borrowings. Note 23 | Capital and reserves Share capital Fair value reserve Akastor ASA has one class of shares, ordinary shares, with equal rights The fair value reserve comprises the cumulative net changes in the fair for all shares. The holders of ordinary shares are entitled to receive value of financial assets classified as Fair Value to OCI (FVOCI) until these dividends and are entitled to one vote per share at General Meetings. Total assets are impaired or derecognized. outstanding shares are 274 000 000 at par value NOK 0.592 per share (NOK 0.592 in 2017). All issued shares are fully paid. Currency translation reserve Treasury shares The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations, At the Annual General Meeting in 2014, authorization was given to as well as the effective portion of any foreign currency differences from repurchase up to 27.4 million shares, representing 10 percent of the share hedges of net investments in foreign operations. capital of Akastor ASA. The group purchases treasury shares to meet the obligation under employee share purchase programs. No programs were The currency translation reserve includes exchange differences arising initiated in 2018 or 2017 and there is no purchase or sale of treasury shares from the translation of the net investments in foreign operations, and in 2018 or 2017. As of December 31, 2018, Akastor ASA holds 2 776 376 foreign exchange gain or loss on loans defined as net investment hedge treasury shares (2 776 376 treasury shares in 2017), representing 1.01 or part of net investments in foreign operations. Upon the disposal of percent of total outstanding shares. investments in foreign operations during 2018 and 2017, the accumulated The Board of Directors has proposed no dividends for 2018 or 2017. reclassified from the currency translation reserve to the income statement currency translation differences related to the disposed entities were in profit (loss) from discontinued operations. Hedging reserve The hedging reserve relates to cash flow hedges of future revenues and Net investments in foreign operations have been hedged with a loss of expenses against exchange rate fluctuations. The income statement NOK 16 million in 2018 (NOK 0 million in 2017). Accumulated gain on net effects of such instruments are recognized in accordance with the investment hedges as of 2018 is a loss of NOK 5 million (gain of NOK progress of the underlying construction contract as part of revenues or 11 million in 2017). The net investment hedge as of December 31, 2018 expenses as appropriate. The hedging reserve represents the value of such relates to investments in the United States, Netherlands and Cyprus. hedging instruments that is not yet recognized in the income statement. The underlying nature of a hedge is that a positive value on a hedging instrument exists to cover a negative value on the hedged position, see Note 10 Net finance expenses and Note 31 Derivative financial instruments. Annual Report 2018 | Financials and Notes | Akastor Group 60 Note 24 | Borrowings Below are contractual terms of the group’s interest-bearing loans and borrowings which are measured at amortized cost. For more information about the group’s exposure to interest rates, foreign currency and liquidity risk, see Note 30 Financial risk management and exposures. Amounts in million Currency Nominal currency value Carrying amount (NOK) Interest rate Interest margin Interest coupon Maturity Interest terms 2018 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Overdraft facility Total borrowings Current borrowings Non-current borrowings Total borrowings 2017 Revolving credit facility (NOK 1 005 million) Revolving credit facility (USD 147 million) BNDES loan (Brazil) Finance lease obligation Overdraft facility Total borrowings Current borrowings Non-current borrowings Total borrowings NOK 600 588 1.18% 2.25% 3.43% Dec 2021 NIBOR + margin 2,25% Dec 2021 USD LIBOR + margin USD - - 13 601 14 588 601 NOK 350 348 0.76% 2.25% 3.01% July 20192) NIBOR + margin 1) 1.49% 6.75% 2.25% 1.40% 3.74% July 20192) 8.15% May 2022 USD LIBOR + margin 1) TJLP + fixed margin 3) USD BRL USD 58 74 478 183 1 494 30 2 533 399 2 133 2 533 1) The margin applicable to the facilities is decided by a price grid based on the leverage ratio and level of utilization. Commitment fee is 35 percent of the margin (2017: 40 percent). 2) The maturity date reflects maturity date as defined in the loan agreements 3) The loan in Brazil is allocated into three sub-credits. Interest terms disclosed above is for the sub-credit representing more than 90 percent of the total loan in Brazil. TJLP is the Brazilian Federal long term interest rate. Bank debt (Norway) All facilities are provided by a bank syndicate consisting of high quality Nordic and international banks. The terms and conditions include restrictions which are customary for these kinds of facilities, including inter alia negative pledge provisions and restrictions on acquisitions, disposals and mergers, dividend distribution and change of control provisions. For information about financial covenants, see Note 29 Capital management. Annual Report 2018 | Financials and Notes | Akastor Group 61 Reconciliation of liabilities arising from financing activities Amounts in NOK million Revolving credit facilities BNDES loan (Brazil) Finance lease obligation Overdraft facility Total liabilities arising from financing activities Balance as of December 31, 2017 Foreign exchange movements Capitalized borrowing costs Cash flows Accrued interest Disposal of business Balance as of December 31, 2018 826 183 1 494 30 2 533 (230) (166) (70) (15) (481) 2 (17) (15) 2 (32) (9) - - (9) (1) - - - - - (1 409) (1) (1 409) 588 - - 14 601 Note 25 | Other non-current liabilities Amounts in NOK million Note 2018 2017 Deferred gain Deferred settlement obligations Guarantee obligation related to joint venture Other liabilities Total other non-current liabilities 32 16, 32 32 112 129 117 32 390 14 9 39 48 110 Deferred gain Deferred settlement obligations In May 2018, Akastor invested in preferred equity and warrants in Odfjell Deferred settlement obligations represent contingent considerations Drilling. On initial recognition, the investment in the financial assets is resulting from disposal of subsidiaries. The obligations in 2018 are mainly recognized at fair value and the difference between the fair value and the related to provision for guaranteed preferred return to Mitsui and MOL in transaction price, NOK 117 million, was recognized as “Deferred gain”. The connection with the divestment of 50 percent shares in AKOFS Offshore. deferred gain is subsequently amortized and recognized to profit and loss See also Note 35 Related parties for more information. at straight-line basis over six years. See also Note 18 Other investments for more information about the investment. Guarantee obligation related to joint venture Akastor’s share of losses from DOF Deepwater AS in excess of the carrying In 2016, Akastor sold the Skandi Santos topside equipment to Avium amount of Akastor’s investment interest in the joint venture is recognized Subsea AS, a joint venture with 50 percent ownership. The sale resulted as a liability as the group has provided guarantees for the funding of the in an accounting gain of NOK 172 million, after elimination of 50% of the vessels in the company. See also Note 16 Equity-accounted investees and total gain on sale. The elimination of the gain in excess of the carrying Note 35 Related parties for more information. amount of the joint venture was presented as “Deferred gain” in 2017. The deferred gain was reduced to zero by Akastor’s share of net profit from Other liabilities Avium Subsea AS in 2018. Other liabilities relate mainly to liabilities related to leasehold improvements and welfare fund. Annual Report 2018 | Financials and Notes | Akastor Group62 Note 26 | Employee benefits – pension Akastor’s pension costs represent the future pension entitlement earned Compensation plan by employees in the financial year. In a defined contribution plan the To ensure that the employees were treated fairly on the change over company is responsible for paying an agreed contribution to the employee’s to the new plan, the company has introduced a compensation plan. The pension assets. In such a plan this annual contribution is also the cost. basis for deciding the compensation amount is the difference between In a defined benefit plan it is the company’s responsibility to provide a calculated pension capital in the defined benefit plan and the value of the certain pension. The measurement of the cost and the pension liability defined benefit plan at the age of 67 years. The compensation amount will for such arrangements is subject to actuarial valuations. Akastor has over be adjusted annually in accordance with the adjustment of the employees’ a long time period gradually moved from defined benefit arrangements pensionable income, and accrued interest according to market interest. If to defined contribution plans. Consequently, the impact of the remaining the employee leaves the company voluntarily before the age of 67 years, defined benefit plans is gradually reduced. the compensation amount will be reduced. Pension plans in Norway AFP – early retirement arrangement The main pension arrangement in Norway is a general pension plan AFP is an early retirement arrangement organized by Norwegian organized by the Norwegian Government. This arrangement provides employers, the main Labor Union organization in Norway (LO) and the the main general pension entitlement of all Norwegians. All pension Norwegian Government. The AFP plan is providing additional lifelong arrangements by employers consequently represent limited additional pensions to employees that retire before the general retirement age, to pension entitlements. compensate for the reduction of the ordinary pension entitlements. The employees are given a choice of retirement age, with lower pension at Norwegian employers are obliged to provide an employment pension earlier retirement. plan, which can be organized as a defined benefit plan or as a defined contribution plan. The Norwegian companies in Akastor have closed The Norwegian Accounting Standards Board has issued a comment the earlier defined benefit plans in 2008 and are now providing defined concluding that the AFP plan is a multi-employer defined benefit plan. The contribution plans for all of their employees under 61 years of age. AFP plan exposes the participating entities to actuarial risk associated Defined contribution plan with employees of other entities with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and costs to The annual contribution expensed for the new defined contribution plan individual participating entities. Sufficient information is not available to for continuing operations was NOK 39 million (NOK 42 million in 2017). use defined benefit accounting and the AFP plan is accounted for as a The estimated contributions expected to be paid in 2019 amount to NOK defined contribution plan. 41 million. Defined benefit plan The annual contribution expensed for the AFP plan was NOK 11 million (2017: NOK 14 million). The estimated contributions expected to be paid Employees who were 58 years or older in 2008, when the change took in 2019 amount to NOK 12 million. place, are still in the defined benefit plan. This is a funded plan and represents most of the funded pension liability reported in the tables Pension plans outside Norway below. The estimated contributions expected to be paid to the Norwegian Pension plans outside Norway are predominately defined contribution plan during 2019 amount to NOK 7 million. plans. Pension cost Amounts in NOK million Defined benefit plans Defined contribution plans including AFP Total pension cost Net employee defined benefit obligations Amounts in NOK million Defined benefit plans Norway Defined benefit plans Germany Defined benefit plans US Defined benefit plans other countries Total employee benefit obligations Note 2018 9 54 63 8 2017 Restated 11 59 70 2018 2017 179 106 45 2 332 187 113 47 2 349 Annual Report 2018 | Financials and Notes | Akastor Group63 Movement in net defined benefit (asset) liability Amounts in NOK million Balance as of January 1 Adjustment for discontinued operations as of January 1 Pension obligation 2018 2017 Pension asset Net pension obligation 2018 2017 2018 2017 623 (4) 669 (18) (275) - (288) - 349 (4) 380 (18) Included in profit or loss Service cost Interest cost (income) Included in OCI Remeasurements (loss) gain: Actuarial loss (gain) arising from: - demographic assumptions - financial assumptions - experience adjustments Return on plan assets excluding interest income Changes in asset ceiling Effect of movements in exchange rates Other Benefits paid by the plan Contributions paid into the plan Balance as of December 31 Plan assets Amounts in NOK million Plan assets at fair value Norwegian plan Equity securities Government Finance Private and Government enterprise Municipalities Bonds Fund/private equity Total plan assets Norway at fair value Equity securities Debt securities Total plan assets US at fair value Total plan assets Germany at fair value Total plan assets at fair value 9 10 19 6 (16) (5) - - 11 (4) (48) - (48) 587 11 10 22 5 12 (3) - - 5 20 (69) - (69) 623 - (3) (3) - (3) - 19 3 (6) 13 - (3) (3) - (2) - (7) 2 3 (5) 28 (18) 10 (255) 45 (23) 22 (275) 9 6 16 6 (19) (5) 19 3 6 9 (20) (18) (38) 332 11 7 19 5 10 (3) (7) 2 8 15 (24) (23) (47) 349 2018 2017 - 1 18 29 51 99 37 136 38 54 92 27 255 4 1 19 33 73 127 20 150 42 56 98 27 275 The equity portfolio is invested globally. The fair value of the equities is The investment in fund/private equity is mainly funds that invests in listed based on their quoted prices at the reporting date without any deduction securities and where the fund value is based on quoted prices. for estimated future selling cost. The investments in bonds are done in the Norwegian market and most of The group’s most significant defined benefit plans are in Norway, Germany the bonds are not listed on any exchange. The market value as at year end and USA. The followings are the principal actuarial assumptions at the is based on official prices provided by the Norwegian Securities Dealers reporting date for the plans in these countries. Defined benefit obligation – actuarial assumptions Association. The Bond investments have on average a high credit rating. Most of the investments are in Norwegian municipalities with a credit rating of AA. Annual Report 2018 | Financials and Notes | Akastor Group 64 Norway Germany USA Discount rate Asset return Salary progression Pension indexation 2018 2017 2018 2017 2.80% 2.80% 2.75% 2.40% 2.40% 2.50% 0 -2.25% 0-2.25% 3.21% 3.21% n/a 1.75% 3.68% 3.68% n/a 1.75% Mortality table K2013 K2013 RT 2018 G RT 2005 G 2018 3.90% 3.90% n/a n/a 2017 3.29% 3.29% n/a n/a RP-2014 Adjusted to 2006 Total Dataset with Scale MP-2018 RP-2014 Adjusted to 2006 Total Dataset with Scale MP-2017 The information below relates only to Norwegian plans as these represent Assumptions regarding future mortality have been based on published the majority of the plans. statistics and mortality tables. The current life expectancy underlying the values of the defined benefit obligation at the reporting date is shown The discount rates and other assumptions in 2018 and 2017 are based below. on the Norwegian high quality corporate bond rate and recommendations from the Norwegian Accounting Standards Board. It should be expected that fluctuations in the discount rates would also lead to fluctuations in the pension indexations. The total effect of fluctuations in economic assumptions is consequently unlikely to be very significant. Years Life expectancy of male pensioners Life expectancy of female pensioners 2018 2017 22.2 25.5 22.2 25.5 As of December 31, 2018, the weighted-average duration of the defined benefit obligation was 10.4 years. Sensitivity analysis Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation as of December 31, 2018 by the amounts shown below. Amounts in NOK million Discount rate (1% movement) Future salary growth (1% movement) Future pension growth (1% movement) Increase Decrease (12) 1 10 10 (1) (12) The change in discount rate assumptions would affect plan assets in the income statement in next period as it would change the estimated asset return, but have no effect on pension assets as of year-end. Annual Report 2018 | Financials and Notes | Akastor GroupNote 27 | Provisions Amounts in NOK million Provision, current Provision, non-current Total provisions Development of significant provisions Amounts in NOK million Balance as of January 1, 2018 New provisions Provisions utilized Provisions reversed Unwind of discount Currency translation differences Balance as of December 31, 2018 Expected timing of payment Within the next twelve months After the next twelve months Total 65 2018 2017 236 166 403 293 221 514 Warranties Restructuring Onerous lease provision Other Total 86 8 (6) (5) - (1) 82 82 - 82 77 - (33) (2) - (1) 41 19 22 41 269 - (67) (2) 11 - 212 78 134 212 81 13 (23) (3) - - 68 57 11 68 514 22 (130) (13) 11 (1) 403 236 166 403 Warranties reorganization in MHWirth due to the challenging rig market. The The provision for warranties relates mainly to the possibility that Akastor, provision includes provision for vacant office premises after the workforce based on contractual agreements, needs to perform guarantee work reduction and is estimated based on the detailed restructuring plans for related to products and services delivered to customers. Warranty the businesses and locations affected. provision is presented as current as it is expected to be settled in the group’s normal operating cycle. See Note 4 Significant accounting Onerous lease provision estimates and judgments for further descriptions. Provision for onerous leases represents provision for vacant properties where the group has committed to future lease payments under operating Restructuring lease contracts. Restructuring mainly relates to significant workforce reduction and Note 28 | Trade and other payables Amounts in NOK million Trade creditors 1) Accrued expenses Trade and other payables Public duty and tax payables Contract liabilities Amount due to customers for construction work and advances Deferred settlement obligations Other Total trade and other payables 1) Trade creditors are due within one year. Note 32 7 32 2018 236 1 502 1 738 86 632 - 279 - 2017 239 334 573 77 - 738 75 30 2 734 1 493 Deferred settlement obligations in 2018 include provision of NOK 250 place in 2014. In 2016, MPO was sold to AFGlobal Corporation (AFGlobal), million for potential loss as a result of negative arbitration award for pursuant to which Akastor remains responsible towards AFGlobal in Managed Pressure Operations Ltd.(MPO). MPO, a former Akastor owned respect of the financial outcome resulting from the arbitration matter. company, has received an arbitration award from the London Court of International Arbitration (LCIA) whereby MPO is found liable under a Book value of trade creditors and other current liabilities is approximately project originally initiated in 2012 and where delivery was agreed to take equal to fair value. Annual Report 2018 | Financials and Notes | Akastor Group66 Note 29 | Capital management Akastor’s capital management is designed to ensure that the group Funding cost has sufficient financial flexibility, short-term and long-term. One main Akastor aims to have a diversified selection of funding sources in order objective is to maintain a financial structure that, through solidity and cash to reach the lowest possible cost of capital. These funding sources might flow, secures the group’s strong long-term creditworthiness, as well as include: maximize value creation for its shareholders through: ŸŸ Investing in projects and business areas which will increase the company’s Return On Capital Employed (ROCE) over time. ŸŸ Optimizing the company’s capital structure to ensure both sufficient and timely funding over time to finance its activities at the lowest cost. Investment policy ŸŸ ŸŸ ŸŸ The use of banks based on syndicated credit facilities. The issue of debt instruments in the Norwegian capital market. The issue of debt instruments in foreign capital markets. Ratios used in monitoring of capital/Covenants Akastor monitors capital on the basis of a gearing ratio (net debt/equity) and interest coverage ratio (ICR) based on EBITDA/net interest costs. Akastor’s capital management is based on a rigorous investment selection These ratios are similar to covenants as defined in loan agreements for the process which considers not only Akastor’s weighted average cost of revolving credit facilities which are shown below. See Note 24 Borrowings capital and strategic orientation but also external factors such as market for details about these loans. expectations. Funding policy Liquidity planning ŸŸ The company’s gearing ratio shall not exceed 1.0 times and is calculated from the consolidated total borrowings to the consolidated Equity. Akastor has a strong focus on its liquidity situation in order to meet its short term working capital needs and to ensure solvency for its financial ŸŸ The ICR shall not be lower than 3.0, calculated from the obligations. Akastor had a liquidity reserve per year end 2018 of NOK 2.2 consolidated EBITDA to consolidated Net Finance Cost when billion, composed of an undrawn committed credit facility of NOK 2.0 gearing ratio is below 0.5 billion and cash and cash equivalents of NOK 0.2 billion. Funding of operations ŸŸ The ICR shall not be lower than 4.0, calculated from the consolidated EBITDA to consolidated Net Finance Cost when Akastor’s group funding policy is that all operations shall meet their gearing ratio exceeds 0.5 funding needs directly via the central treasury department (Akastor Treasury). This ensures optimal availability and transfer of cash within the ŸŸ Minimum liquidity amount shall exceed NOK 500 million on group and better control of the company’s overall debt as well as cheaper consolidated level. funding for its operations. Funding duration The ratios are calculated based on net debt including cash and borrowings as shown in Note 32 Financial instruments, adjusted EBITDA (earnings Akastor emphasizes financial flexibility and steers its capital structure before interest, tax, depreciation, amortization and adjusted for certain accordingly to limit its liquidity and refinancing risks. In this perspective, items as defined in the loan agreement) and net interest costs. Covenants loans and other external borrowings are to be renegotiated well in advance ratios are based on accounting principles as of December 31, 2018. of their due date and generally for periods of 3 to 5 years. The covenants are monitored on a regular basis by the Akastor Treasury department to ensure compliance with the loan agreements, and are tested and reported on a quarterly basis. Akastor was in compliance with its covenants as of December 31, 2018, and on the basis of the covenants and its forecasts, management believes that the risk of covenant being breached is low and that the group will continue as a going concern for the foreseeable future. Annual Report 2018 | Financials and Notes | Akastor Group67 Note 30 | Financial risk management and exposures The group is exposed to a variety of financial risks: currency risk, interest derivative designated in each hedging relationship is expected to be and rate risk, price risk, credit risk, liquidity risk and capital risk. The capital has been effective in offsetting changes in cash flows of the hedged item market risk affects the value of financial instruments held. The objective of using the hypothetical derivative method. In these hedge relationships, the financial risk management is to manage and control financial risk exposures main sources of ineffectiveness can arise from: and thereby increase the predictability of earnings and minimize potential adverse effects on the group’s financial performance. Akastor group ŸŸ Changes to the forecasted amount of cash flows of hedged items uses financial derivative instruments to hedge certain risk exposures and and hedging instruments applies hedge accounting in order to reduce the profit or loss volatility. Risk management is present in every project. It is the responsibility of movements of the hedging instruments and hedged items the project managers, in cooperation with Akastor Treasury, to identify, evaluate and hedge financial risks under policies approved by the Board Currency exposures from investments in foreign currencies are only of Directors. The group has well-established principles for overall risk hedged when specifically instructed by management. As of December management, as well as policies for the use of derivatives and financial 31, 2018, Akastor has one net investment hedge related to its subsidiary investments. There have not been any changes in these policies during Zoetermeer Process BV. ŸŸ The counterparties’ credit risk differently impacting the fair value the year. Currency risk The change in hedge reserve in 2018 is related to hedges of forecast sales and purchases, except negative NOK 7 million net of tax that relates to a The group operates internationally and is exposed to currency risk net investment hedge. on commercial transactions, recognized assets and liabilities and net investments in foreign operations. Commercial transactions and recognized Exposure to currency risk assets and liabilities are subject to currency risk when payments are Estimated forecasted receipts and payments in the table below are denominated in a currency other than the respective functional currency calculated based on the group’s hedge transactions, adjusted for hedged of the group company. The group’s exposure to currency risk is primarily balance sheet items. These are considered to be the best estimate of to USD, EUR and BRL, but also other currencies. the currency exposure, given that all currency exposure is hedged in accordance with the group’s policy. The net exposure is managed by Akastor’s policy requires business units to mitigate currency exposure Akastor Treasury. in any project. Akastor manages exposures by entering into forward contracts or currency options with the financial market place. Akastor has Changes in currency rates change the values of hedging derivatives, a large number of contracts involving foreign currency exposures and the embedded derivatives, borrowings, receivables and cash balances. Hedges currency risk policy has been well-established for many years. that qualify for hedge accounting are reported in the profit and loss according to progress of projects, and deferred value of cash flow hedges The group determines the existence of an economic relationship between is reported as hedging reserve in equity. Any changes to currency rates will the hedging instrument and hedged item based on the currency and therefore affect equity. amount of their respective cash flows. The group assesses whether the Amounts in million Bank Intercompany loans External loans Deferred settlement assets and obligations Balance sheet exposure Estimated forecast receipts from customers Estimated forecast payments to vendors Cash flow exposure Forward exchange contracts Net exposure USD (128) 17 176 (39) 26 198 (28) 170 (252) (57) 2018 EUR (20) 31 (1) - 10 - (22) (22) (25) (36) BRL - - 86 - 86 - - - - 86 USD (151) 200 - (3) 46 177 (126) 51 (108) (11) 2017 EUR BRL (35) 33 (6) - (8) (6) - (6) 15 2 - 114 86 - 200 - - - - 200 Annual Report 2018 | Financials and Notes | Akastor Group68 Sensitivity analysis to be reasonably possible at the end of the reporting period. The analysis A strengthening of EUR, USD and BRL against NOK as of December assumes that all other variables, in particular interest rates, remain 31 would have affected the measurement of financial instruments constant and ignores any impact of forecast sales and purchases. Figures denominated in a foreign currency and increased (decreased) equity and in the table below only include the effect in income statement and equity income statement by the amounts shown below. This analysis is based for change in currency regarding financial instruments and do not include on foreign currency exchange rate variances that the group considered effect from operating cost and revenue. Effect of weakening of NOK against significant currencies: Amounts in NOK million USD (10%) EUR (7%) BRL (15%) 2018 Profit (loss) after tax Equity Increase (decrease) (38) 15 22 (165) 30 22 USD (15%) EUR (15%) BRL (15%) 2017 Profit (loss) before tax Equity Increase (decrease) (17) 2 57 (16) 16 57 A strengthening of the NOK against the above currencies as of December borrowings and interest-bearing receivables. Borrowings and receivables 31 would have had the equal but opposite effect on the above amounts, on issued at variable rates as well as cash expose the group to cash flow the basis that all other variables remain constant. The sensitivity analysis interest rate risk. Borrowings and receivables issued at fixed rates expose does not include effects on the consolidated result and equity from the group to fair value interest rate risk. However, as these borrowings are changed exchange rates used for consolidation of foreign subsidiaries. measured at amortized cost, interest rate variations do not affect profit and loss when held to maturity. The primary currency-related risk is the risk of reduced competitiveness abroad in the case of a strengthened NOK. This risk relates to future An increase of 100 basis points in interest rates during 2018 would have commercial contracts and is not included in the sensitivity analysis above. increased (decreased) equity and profit and loss by the amounts shown on Interest rate risk the table below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the The group’s interest rate risk arises from cash balances, interest-bearing same basis as for 2017. Effect of increase of 100 basis points in interest rates on profit (loss) before tax Amounts in NOK million Cash and cash equivalents Current interest-bearing receivables Borrowings Net 2018 2017 2 1 (10) (7) 3 - (15) (12) A decrease of 100 basis points in interest rates during 2018 would have ŸŸ Financial guarantees including counter guarantees for bank/ had the equal but opposite effect on the above amounts, on the basis that surety bonds and guarantees for pension obligations to all other variables remain constant. There are no effects on equity as there employees are NOK 1 billion (NOK 1 billion in 2017). are no interest swaps. Guarantee obligations Although guarantees are financial instruments, they are considered contingent obligations and the notional amounts are not included in the The group has provided the following guarantees on behalf of subsidiaries financial statements. See more information about guarantees for related and related parties as of December 31, 2018 (all obligations are per date parties in Note 35 Related parties. of issue): Price risk ŸŸ ŸŸ Performance guarantees on behalf of group companies are NOK The group is exposed to fluctuations in market prices in the operational 50 million (NOK 0 million in 2017). areas related to contracts, including changes in market prices for raw materials, equipment and development in wages. These risks are to the Parent company indemnity guarantees for fulfillment of lease extent possible managed in bid processes by locking in committed prices obligations and finance obligations are NOK 4.7 billion (NOK 4.7 from vendors as a basis for offers to customer or through escalation billion in 2017). clauses with customers. Annual Report 2018 | Financials and Notes | Akastor Group69 Credit risk The group evaluates that significant credit risk concentrations are related Credit risk is the risk of financial losses to the group if customer to trade receivables from major corporate customers. The maximum or counterparty to financial investments/instruments fails to meet exposure to credit risk at the reporting date equals the carrying amounts contractual obligations, and arise principally from investment securities of financial assets (see Note 32 Financial instruments) and contract and receivables. assets (see Note 7 Revenue and other income). The group does not hold Derivatives are only traded against approved banks. All approved banks have investment grade ratings. Credit risk related to investment securities Liquidity risk collateral as security. and derivatives is therefore considered to be insignificant. Liquidity risk is the risk that the group will encounter difficulty in meeting Assessment of credit risk related to customers and subcontractors is its liquidity to ensure that it will always have sufficient liquidity reserves to the obligations associated with its financial liabilities. The group manages an important requirement in the bid phase and throughout the contract meet its liabilities when due. period. Such assessments are based on credit ratings, income statement and balance sheet reviews and using credit assessment tools available (e.g. Prudent liquidity risk management includes maintaining sufficient cash, Dun & Bradstreet and Credit Watch). Sales to customers are settled in the availability of funding from an adequate amount of committed credit cash. facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, Akastor Treasury maintains flexibility Revenues are mainly related to large and long term projects closely in funding by maintaining availability under committed credit lines. followed up in terms of payments up front and in accordance with agreed milestones. Normally, lack of payments is due to disagreements related to The group policy for the purpose of optimizing availability and flexibility project deliveries and is solved together with the customer or escalated of cash within the group is to operate a centrally managed cash pooling to the local authority. arrangement. An important condition for the participants (business units) in such cash pooling arrangements is that the group as an owner of such Based on estimates of incurred losses in respect of trade receivables pools is financially viable and is able to prove its capability to service its and contract assets, the group establishes a provision for impairment obligations concerning repayment of any net deposits made by business losses. Provisions for loss on debtors are based on individual assessments. units. Management monitors rolling weekly and monthly forecasts of the Provisions for loss on receivables were NOK 49 million in 2018 (NOK 71 group’s liquidity reserve on the basis of expected cash flow. million in 2017). Financial liabilities and the period in which they mature The following is the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include contractual interest payments and exclude the impact of netting agreements. Amounts in NOK million 2018 Borrowings excl financial lease 2) Other non-current liabilities Derivative financial instruments Deferred settlement obligations Trade and other payables Total financial liabilities Financial guarantees 3 ) 2017 Borrowings excl. finance lease Finance lease Other non-current liabilities Derivative financial instruments Deferred settlement obligations Trade and other payables Total financial liabilities Financial guarantees 3) Note 24 25 31 25, 28 28 24 24 25 31 25, 28 28 Book value Total cash flow 1) 6 months and less 6–12 months 1–2 years 2–5 years More than 5 years 601 149 210 408 1 738 3 106 1 039 1 494 87 20 84 573 3 296 675 149 210 408 1 738 3 180 5 815 1 112 3 072 87 20 84 573 4 947 5 626 24 16 200 257 1 363 1 858 287 73 163 12 17 61 489 815 244 10 17 5 4 376 412 418 40 163 12 3 - 84 302 52 21 37 5 88 - 151 497 890 328 37 - 23 - 1 278 403 621 74 - 58 - 753 66 109 793 20 - - - 922 1 141 - 6 - - - 6 4 548 - 1 625 7 - - - 1 631 3 786 1) Nominal currency value including interest. 2) The interest costs are calculated using the last fixing rate known by year end (plus applicable margin). 3) Financial guarantees are not recognized on the consolidated balance sheet. The undiscounted cash flows potentially payable under financial guarantees are classified on the basis of expiry date Annual Report 2018 | Financials and Notes | Akastor Group70 Note 31 | Derivative financial instruments The group uses derivative financial instruments such as currency forward from ordinary commercial contracts. Further information regarding risk contracts and currency options to hedge its exposure to foreign exchange management policies in the group is available in Note 30 Financial risk arising from operational, financial and investment activities. In addition, management and exposures. Derivative financial instruments are classified there are embedded foreign exchange forward derivatives separated as current assets or liabilities as they are a part of the operating cycle. The group is holding the following foreign exchange forward contracts: Amounts in NOK million 2018 Foreign exchange forward contracts (highly probable forecast sales) Notional amounts USD Average forward rate (USD/NOK) Average forward rate (EUR/USD) Foreign exchange forward contracts (highly probable forecast purchases) Notional amounts USD Average forward rate (USD/NOK) Notional amounts EUR Average forward rate (EUR/NOK) 2017 Foreign exchange forward contracts (highly probable forecast sales) Notional amounts USD Average forward rate (USD/NOK) Average forward rate (EUR/USD) Foreign exchange forward contracts (highly probable forecast purchases) Notional amounts USD Average forward rate (USD/NOK) Notional amounts EUR Average forward rate (EUR/NOK) Maturity Total 6 months and less 6-12 months 1-2 years 286 34 28 51 109 11 248 7.92 1.15 34 8.01 27 9.71 51 7.93 1.18 99 8.10 11 9.58 14 8.24 1.20 - - 1 9.73 - - - 10 6.12 - - 24 8.30 - - - - - - - - - - - - Annual Report 2018 | Financials and Notes | Akastor Group71 Fair value of derivative instruments with maturity The table below presents the fair value of the derivative financial instruments and a maturity analysis of the derivatives cash flows. Amounts in NOK million Assets Cash flow hedges Fair value adjustments to hedged assets Total forward foreign exchange contracts, assets Liabilities Cash flow hedges Net investment hedge Embedded derivatives in ordinary commercial contracts Fair value adjustments to hedged liabilities Total forward foreign exchange contracts, liabilities 2017 Assets Cash flow hedges Embedded derivatives in ordinary commercial contracts Not hedge accounted Fair value adjustments to hedged assets Total forward foreign exchange contracts, assets Liabilities Cash flow hedges Not hedge accounted Fair value adjustments to hedged liabilities Total forward foreign exchange contracts, liabilities Instruments at fair value Total cash flow 1) 6 months or less 6–12 months 1–2 years 2) 69 48 117 (151) (9) (40) (10) (210) 12 29 19 35 94 (7) (20) 6 (20) 69 48 117 (151) (9) (40) (10) (210) 12 29 19 35 94 (7) (20) 6 (20) 69 48 117 (141) (9) (40) (10) (200) 12 6 19 35 71 (7) (17) 6 (17) - - - (5) - - - (5) - 23 - - 23 - (3) - (3) - - - (5) - - - (5) - - - - - - - - 1) Cash flows from matured derivatives are translated to NOK using the exchange rates on the balance sheet date. 2) No derivatives with maturity later than 2 years. Foreign exchange derivatives classified in the same way as their hedging derivatives, they will have an Akastor entities hedge the group’s future transactions in foreign currencies almost equal, opposite effect to profit and loss. In the table above, the with external banks. The exposure to foreign exchange variations in future derivatives hedging the embedded derivatives are included in Forward cash flows is hedged back-to-back in order to meet the requirements for foreign exchange contracts - not hedge accounted. hedge accounting. The foreign exchange derivatives are either subject to hedge accounting or separated embedded derivatives. Hedges qualifying The hedged transactions in foreign currency that are subject to cash flow for hedge accounting are classified as cash flow hedges (hedges of highly hedge accounting are highly probable future transactions expected to probable future revenues and/or expenses). occur at various dates during the next one to four years, depending on Embedded derivatives are foreign exchange derivatives separated from contracts are recognized in other comprehensive income and reported construction contracts. The reason for separation is that the agreed as hedging reserve in equity until they are recognized in the income payment is in a currency different from any of the major contract parties’ statement in the period or periods during which the hedged transactions own functional currency, or that the contract currency is not considered affect the income statement. If the forward foreign exchange contract is to be commonly used for the relevant economic environment defined as rolled due to change in timing of the forecasted cash flow, the settlement the countries involved in the cross-border transaction. The embedded effect is included in Contract assets or Contract liabilities. progress in the projects. Gains and losses on forward foreign exchange derivatives represent currency exposures, which is hedged against external banks. Since the embedded derivatives are measured and Annual Report 2018 | Financials and Notes | Akastor Group 72 Unsettled cash flow hedges’ impact on profit and loss and equity (not adjusted for tax) Amounts in NOK million Fair value of all hedging instruments Recognized in profit and loss Deferred in equity (the hedge reserve) 2018 (82) (17) (65) 2017 5 2 3 The purpose of the hedging instrument is to secure a situation where of the forward contracts have already affected the income statement the hedged item and the hedging instrument together represent a indirectly as revenues and expenses are recognized based on updated predetermined value independent of fluctuations of exchange rates. forecasts and progress. The negative NOK 65 million (NOK 3 million in Revenue and expense on the underlying construction contracts are 2017) that are currently recorded directly in the hedging reserve, will be recognized in the income statement in accordance with progress. reclassified to income statement over the next years. Consequently, negative NOK 17 million (NOK 2 million in 2017) of the value Annual Report 2018 | Financials and Notes | Akastor Group73 Note 32 | Financial instruments The effect of initially applying IFRS 9 on the group’s financial instruments Level 1 - fair values are based on prices quoted in an active market for is described in Note 2 Basis for preparation. Due to the transition method identical assets or liabilities. chosen, comparative information has not been restated to reflect the new requirements. Level 2 - fair values are based on price inputs other than quoted prices derived from observable market transactions in an active market for Accounting classifications and fair values identical assets or liabilities. Level 2 includes currency or interest The table below lists the group’s financial instruments, both assets and derivatives and interest bonds, typically when the group uses forward liabilities. Financial instruments measured at fair value are classified by prices on foreign exchange rates or interest rates as inputs to valuation the levels in the fair value hierarchy. All other financial instruments are models. classified by the main group of instruments as defined in IFRS 9. It does not include fair value information for financial assets and financial liabilities Level 3 - Fair values are based on unobservable inputs, mainly based on not measured at fair value if the carrying amounts are a reasonable internal assumptions used in the absence of quoted prices from an active approximation of fair value. For financial instruments measured at fair market or other observable price inputs. value, the levels in the fair value hierarchy are as shown below. Amounts in NOK million 2018 Financial assets measured at fair value Fair value – hedging instruments Derivative financial instruments Fair value through P&L (mandatorily at FVTPL) Equity securities Equity securities 1) Warrants Contingent considerations Fair value through Other comprehensive income Debt instruments 1) Financial assets not measured at fair value Financial assets at amortized cost Cash and cash equivalents Current interest-bearing receivables Trade and other receivables Financial assets Financial liabilities not measured at fair value Financial liabilities at amortized cost Borrowings 2) Other financial liabilities Other non-current liabilities Trade and other payables Financial liabilities measured at fair value Fair value – hedging instruments Derivative financial instruments Fair value to profit & loss Deferred settlement obligations Financial liabilities Note Book value Financial instruments measured at fair value Level in fair value hierarchy 31 18 18 18 17, 21 18 22 19 21 24 25 28 117 Level 2 76 849 33 65 Level 1 Level 3 Level 3 Level 3 512 Level 3 117 76 849 33 65 512 198 257 1 474 3 581 (601) (613) Level 2 (149) (1 738) 31 (210) (210) Level 2 25, 28 (408) (3 106) (408) Level 3 Annual Report 2018 | Financials and Notes | Akastor Group74 Amounts in NOK million 2017 Loans and receivables Cash and cash equivalents Trade and other receivables Non-current interest-bearing receivables Available for sale Other investments 1) Mutual fund Fair value - hedging instruments Derivative financial instruments Fair value through P&L Financial assets Other financial liabilities Borrowings 2) Other non-current liabilities Trade and other payables Fair value - hedging instruments Derivative financial instruments Fair value through P&L Deferred settlement obligations Financial liabilities Deferred and contingent considerations 17, 21 Note Book value Financial instruments measured at fair value Level in fair value hierarchy 22 21 18 31 24 25 28 31 168 1 451 1 536 12 94 105 2 368 (2 533) (87) (573) 536 12 Level 3 Level 1 94 Level 2 105 Level 3 (2 537) Level 2 (20) (20) Level 2 25, 28 (84) (3 296) (84) Level 3 1) Investments in level 3 in the hierarchy relate to equity securities and debt securities with no active market. These investments are measured at the best estimate of fair value. 2) For credit facilities and other loans with floating interest, notional amounts are used as approximation of fair values. Annual Report 2018 | Financials and Notes | Akastor Group Reconciliation of Level 3 financial assets and financial liabilities Amounts in NOK million Balance as of January 1, 2017 Additions Settlements Net gain (loss) in the income statement 1) Fair value through OCI Currency translation difference Balance as of December 31, 2017 Additions Settlements Sale of business Net gain (loss) in the income statement 1) Fair value to OCI Currency translation difference Balance as of December 31, 2018 75 Assets Liabilities 229 411 - 9 6 (14) 641 756 (19) (2) 45 (34) 72 1 458 (116) (30) 60 - 2 (84) (120) 31 - (224) - (10) (408) 1) Negative NOK 224 million in discontinued operations and NOK 45 million in financial items (2017: negative NOK 50 NOK 59 million, respectively). Measurement of fair values at level 3 Debt instruments at FVOCI model assumed to follow a Geometric Brownian Motion. The key Financial assets measured at FVOCI are related to debt instruments in inputs to the valuation model consist of the stock price of Odfjell NES Global Talent. The valuation model considers the present value of Drilling (listed on the Oslo Stock Exchange under ticket ODL) at the expected cash flows from the ultimate disposal of the investments the valuation date, as well as assumption of future volatility based weighted with different probabilities. The expected disposal value is on the share’s historical prices. The estimated fair value is mostly determined by forecast EBITDA at the time of disposal and market sensitive to the ODL share price and would increase (decrease) if multiples, adjusted by forecast net debt of the investee. The estimated fair the ODL share price were higher (lower). value would increase (decrease) if: ŸŸ ŸŸ ŸŸ The forecast EBITDA were higher (lower); These assets and liabilities relate to contingent considerations and obligations from business acquisitions and disposals. Final amounts The market multiples applied were higher (lower); or to be paid or received depend on future earnings in the acquired and disposed companies or outcome of indemnity claims and price adjustment The net debt of the investees at the date of disposal were lower mechanisms. Contingent considerations and deferred settlement obligations (higher). Financial assets at FVTPL ŸŸ Assets and liabilities depending on future earnings: The recognized amounts are determined based on recent forecasts Financial assets measured using Level 3 inputs relate mainly to preferred and strategy figures for these entities, thus the final realized equity and warrant investment in Odfjell Drilling. values are sensitive to the above inputs as driven by market ŸŸ Preferred equity: The valuation model considers the present conditions. value of the expected future payments, discounted using a risk- ŸŸ Assets and liabilities depending of outcome of indemnity claims adjusted discount rate of 10%. The estimated fair value would and price adjustment mechanisms: Provisions are made based on increase (decrease) if the risk-adjusted discount rate were lower all available evidence as at the reporting date. (higher). ŸŸ Warrants: The valuation is obtained from external valuation recognized and the credit risk is not considered to be significant due to The credit exposure on the Level 3 asset is limited to the amount experts, using a Monte Carlo simulation model where the the nature of the arrangement. simulated stock prices are based on a lognormal stock price Annual Report 2018 | Financials and Notes | Akastor Group76 Note 33 | Operating leases Group as lessee Future minimum commitments under non-cancellable operating leases Amounts in NOK million Due within one year Due in one to five years Due in more than five years Total 2018 240 445 253 937 2017 516 892 324 1 732 Minimum sublease income to be received in the future amounts to NOK 37 million (NOK 6 million in 2017) and relates mainly to sublease of office buildings. Lease and sublease payments recognized in the income statement Amounts in NOK million Minimum lease payments Sublease income Total 2018 258 (10) 248 2017 Restated 246 (9) 236 The group has operating lease costs for buildings on a number of locations costs related to cars and machinery. These leases have an average lease worldwide. The leases typically run for a period of 3-10 years, with an period of 2-3 years with no renewal options included in the contracts. option to renew at market conditions. The group has also operating lease Group as lessor Future minimum lease income commitments under non-cancellable operating leases Amounts in NOK million Due within one year Due in one to five years Due in more than five years Total 2018 2017 116 54 15 185 902 3 862 36 4 801 The lease income commitment in 2017 included lease revenue related joint venture for the group. See Note 5 Discontinued operations for more to the vessels in AKOFS Offshore. In 2018, Akastor divested 50 percent information about the divestment. of the ownership in AKOFS Offshore and the company is classified as a Annual Report 2018 | Financials and Notes | Akastor Group77 Note 34 | Group companies This note gives an overview of subsidiaries of Akastor ASA. For information about other investments in the group, refer to note 16 Equity-accounted investees and note 18 Other investments. If not stated otherwise, ownership equals share of voting rights. Group companies as of December 31 Company Akastor ASA MHWirth Location Country 2018 2017 Ownership (%) Fornebu Norway MHWirth Pty Ltd MHWirth do Brasil Equipamentos Ltda MHWirth Canada Inc Argenton Rio de Janeiro Newfoundland MHWirth Offshore Petroleum Engineering (Shanghai) Co Ltd Shanghai MHWirth GmbH MHWirth (India) Pvt Ltd MHWirth Sdn Bhd Drilltech AS Maritime Promeco AS MHWirth AS MHWirth 1 AS MHWirth Singapore Engineering Management Pte Ltd MHWirth (Singapore) Pte Ltd MHWirth UK Ltd MHWirth Inc MHWirth FZE MHWirth Gas & Oil- Field Equipment & Services LLC Step Oiltools Step Oiltools (Australia) Pty Ltd Step Oiltools GmbH PT Step Oiltools Step Oiltools LLP Step Oiltools (M) Sdn Bhd Step Oiltools (Myanmar) Ltd 1) Step Oiltools BV Step Oiltools AS Step Oiltools Services LLC Step Oiltools LLC Step Oiltools Pte Ltd Step Oiltools (Thailand) Ltd Step Oiltools (UK) Ltd 4) Step Oiltools FZE Australia Brazil Canada China Germany India Erkelenz Mumbai Kuala Lumpur Malaysia Kristiansand Kristiansand Kristiansand Kristiansand Singapore Singapore Aberdeen Houston Dubai Abu Dhabi Norway Norway Norway Norway Singapore Singapore UK USA UAE UAE Perth Australia Bad Fallingbostel Germany Jakarta Aktau Kuala Lumpur Yangon Amsterdam Stavanger Muscat Moscow Singapore Bangkok Aberdeen Dubai Indonesia Kazakhstan Malaysia Myanmar Netherlands Norway Oman Russia Singapore Thailand UK UAE 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 76 76 76 76 76 76 76 76 51 76 76 76 76 76 Annual Report 2018 | Financials and Notes | Akastor Group78 Other companies Zoetermeer Process Belgium NV/SA Aker Cool Sorption (Beijing) Technology Co Ltd Frontica Global Employment Ltd Cool Sorption A/S Zoetermeer Process BV Well Systems Servicing Ltd AKA SPH AS Akastor AS Akastor Real Estate AS BTA Technology AS 2) First Geo AS Fjords Processing AS Frontica Group AS 2) KOP Surface Products Singapore Pte Ltd Aker Cool Sorption Siam Ltd Frontica Business Solutions Ltd 4) AK Pharmaceuticals LLC AK Wilfab Inc AKOFS 2 Services AS 2) AKOFS Offshore AS 2) AKOFS 4 AS 2) AKOFS Angola Limited Disposed Entities 3) AK Operações do Brasil Ltda AKOFS Brazil Operations AS AKOFS 1 AS AKOFS 2 AS AKOFS 3 AS AKOFS Offshore Operations AS 1) Liquidated in 2018 2) Merged into Akastor AS in 2018 Antwerp Beijing Limassol Glostrup Zoetermeer Ikoyi - Lagos Fornebu Fornebu Fornebu Fornebu Stavanger Fornebu Fornebu Singapore Rayong London Houston Williamsport Oslo Oslo Oslo Luanda Belgium China Cyprus Denmark Netherlands Nigeria Norway Norway Norway Norway Norway Norway Norway Singapore Thailand UK USA USA Norway Norway Norway Angola Rio de Janeiro Oslo Oslo Oslo Oslo Oslo Brazil Norway Norway Norway Norway Norway 100 100 100 100 100 100 100 100 100 - 100 100 - 100 100 100 100 100 - - - 100 - - - - - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 3) Entities are referred to by company names before the disposals 4) STEP Oiltools (UK) Ltd. (registered number SC412738) and Frontica Business Solutions Ltd (registered number 4962691) are exempted from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of section 479A of the Companies Act 2006, UK. Annual Report 2018 | Financials and Notes | Akastor Group79 Note 35 | Related parties Related party relationships are those involving control (either direct or Remunerations and transactions with directors and executive officers are indirect), joint control or significant influence. Related parties are in a summarized in Note 36 Management remunerations. position to enter into transactions with the company that would not be undertaken between unrelated parties. All transactions with related parties The largest shareholder of Akastor, Aker Kværner Holding AS, is controlled to Akastor have been based on arm’s length terms. by Aker ASA (70 percent) which in turn is controlled by Kjell Inge Røkke through TRG Holding AS and The Resource Group TRG AS. Aker ASA also Akastor ASA is a parent company with control of around 45 companies holds 8.5 percent of the shares in Akastor ASA directly. All subsidiaries and around the world. These subsidiaries are listed in Note 34 Group companies. associates of Aker ASA, including Kvaerner, Aker Solutions and Aker BP, Any transactions between the parent company and the subsidiaries are are considered related parties to Akastor, referred as “Aker entities” in the shown line by line in the separate financial statements of the parent table below. The entities controlled directly by Kjell Inge Røkke through company, and are eliminated in the consolidated financial statements. TRG Holding AS and The Resource Group TRG AS, are referred as “Related parties to Aker ASA”. Joint ventures and associates are consolidated using the equity method, see Note 16 Equity-accounted investees. Transactions between the group and these entities are shown in the table below. Summary of transactions and balances with significant related parties Amounts in NOK million Income statement Operating revenues Operating costs Net financial items Included in Net profit from discontinued operations 1) – Operating revenues – Operating costs – Net financial items Assets (liabilities) Trade receivables Prepaid expenses Current Interest-bearing receivables PPE under finance lease ( Aker Wayfarer) Trade payables Finance lease liability (Aker Wayfarer) 1) See Note 5 for information about discontinued operations 2018 2017 Aker entities Joint ventures Total Aker entities Joint ventures Total 163 (41) - - - (171) 28 - - - - - - - 2 2 - - 6 - 257 - - - 163 (41) 2 2 - (171) 33 - 257 - - - 136 (50) - 4 (5) (265) 29 - - 1 448 (45) (1 494) - - 2 3 (241) - 1 21 - - - - 136 (50) 2 7 (246) (265) 29 21 - 1 448 (45) (1 494) Below are descriptions of significant related party agreements. Solutions in 2014. Aker Solutions is liable to indemnity Akastor for any rightful claim such parent company guarantees and to pay a Related party transactions with Aker entities guarantee commission to Akastor. Aker Solutions Akastor has entered into a number of agreements and arrangements with ŸŸ Several of the agreements addressing various separation issues Aker Solutions, including: between Akastor and Aker Solutions are still valid after the demerger in 2014, including secondary joint liability for obligations ŸŸ Various lease agreements from Akastor Real Estate AS and other existing in Aker Solutions at the time of the demerger, yet limited Akastor companies to subsidiaries of Aker Solutions. in amount to the net value allocated to Akastor in the demerger. ŸŸ Some parent company guarantees issued on behalf of Aker Aker BP Solutions entities by Akastor (as their previous parent company) In 2017, Akastor Real Estate AS entered into agreement to sublease offices were not transferred in connection with the demerger of Aker in Stavanger, Norway, to Aker BP. Annual Report 2018 | Financials and Notes | Akastor Group80 Kværner 4.6%/6.1% p.a.), with maturity in September 2019. Akastor is obliged to Akastor Real Estate AS and Kvaerner have entered into lease agreement provide financing to AKOFS Offshore until an external bank financing related to offices in Trondheim, Norway. agreement is in place, no later than September 2019. Agreements with related parties to Aker ASA As part of the joint venture shareholders agreement, the other two The Resource Group TRG AS investors, Mitsui and MOL, are entitled to a guaranteed preferred equity MHWirth AS, a wholly owned subsidiary of Akastor, entered into long-term return, in respect of the operations of AKOFS Seafarer, amounting to a lease agreements in 2015 with subsidiaries of The Resource Group TRG total of USD 46 million over a 6 year’s period. The payment of preferred AS, for properties in Kristiansand in Norway. The annual lease payment return will be settled firstly by ordinary dividend from AKOFS Offshore, is approximately NOK 22 million for a lease period of 19 years starting yet any shortfall is guaranteed by Akastor. Akastor ASA has issued a bank October 1, 2015, with options for renewal. guarantee for payment of preferred return for a total amount of NOK 333 AK Wilfab Inc, a wholly owned subsidiary of Akastor, is together with Aker million. Solutions Inc and The Resource Group TRG AS sponsoring the US pension Akastor AS has issued a financial parent company indemnity guarantee plan named the Kvaerner Consolidated Retirement Plan. Akastor holds of NOK 296 million and a financial guarantee of NOK 134 million in favor one third of the liability of the sponsors for the underfunded element of of finance institutions for fulfillment of lease obligations related to Avium the plan and The Resource Group TRG AS holds two thirds of the ultimate Subsea AS. In addition, a financial parent company indemnity guarantee of liability. Aker ASA guarantees for The Resource Group TRG AS’ liability NOK 2.4 billion is issued in favor of OCY Wayfarer Limited for fulfillment and covers for all its expenses related to the pension plan. of lease obligations related to AKOFS 3 AS. Both Avium Subsea AS and AKOFS 3 AS are wholly owned subsidiaries of AKOFS Offshore. Fornebuporten Næring 3 AS Akastor leases its headquarter offices at Fornebu from Fornebuporten Other related parties Næring 3 AS, an associated company of The Resource Group TRG AS. The Aker Pensjonskasse contract term is 10 years starting August 31, 2015, with two additional five- Aker Pensjonskasse was established by Aker ASA to manage the year options. retirement plan for employees and retirees in Akastor as well as related Aker companies. Akastor holds 93.4 percent of the paid-in capital in Aker Related party transactions with joint ventures Pensjonskasse and Akastor’s share of paid-in equity was NOK 158 million DOF Deepwater AS at the end of 2018 (NOK 128 million in 2017). Akastor’s premium paid to During 2018, the shareholder's loan to DOF Deepwater AS was increased Aker Pensjonskasse amounts to NOK 8 million in 2018 (NOK 8 million in by NOK 24 million. As of December 31, 2018, the balance of the 2017). shareholder’s loan from Akastor to DOF Deepwater AS is NOK 35 million (NIBOR 6 months+ 3.6 percent). The carrying amount of the receivable is Even though Akastor owns 93.4 percent in Aker Pensjonskasse, the reduced to zero due to recognition of Akastor’s share of losses in 2018. ownership does not constitute control since Akastor does not have the power to govern the financial and operating policies so as to obtain Akastor ASA has issued financial guarantees in favor of banks related to benefits from the activities in this entity. financing of the five vessels in DOF Deepwater. The liability is capped at 50 percent of drawn amount. The guarantee is NOK 507 million as of Grants to employee representative’s collective fund December 31, 2018 (NOK 502 million in 2017). Aker ASA has signed an agreement with employee representatives AKOFS Offshore that regulate use of grants from Akastor ASA for activities related to professional development. The grant in 2018 was NOK 510 000 (NOK As of December 31, 2018, Akastor ASA has interest-bearing receivables 510 000 in 2017). against AKOFS Offshore amounting to NOK 257 million (interest rate at Annual Report 2018 | Financials and Notes | Akastor Group81 Note 36 | Management remunerations Board of directors The board of directors did not receive any other fees than those listed The fees in the table below represent expenses recognized in the income in the table below, except for employee representatives who has market statement based on assumptions about fees to be approved at the general based salaries. The members of the board of directors have no agreements assembly rather than actual payments made in the year. that entitle them to any extraordinary remuneration. Amounts in NOK Frank Ove Reite Kristian Monsen Røkke Øyvind Eriksen Lone Fønss Schrøder Kathryn Baker Sarah Ryan 1) Stian Sjølund Henning Jensen Asle Christian Halvorsen Jannicke Sommer-Ekelund Asbjørn Michailoff Pettersen Total 2018 2017 Audit Committee Board fees Audit Committee Board fees - - - 205 000 115 000 - - 115 000 - - - - 600 000 340 000 527 500 340 000 421 426 170 000 170 000 170 000 - - 435 000 2 738 926 - - - 205 000 115 000 - - 57 500 - - 57 500 435 000 600 000 - 340 000 440 000 340 000 432 536 170 000 85 000 85 000 85 000 85 000 2 662 536 1) Board fees include an allowance of NOK 12 500 per meeting per physical attendance for board members residing outside the Nordic countries According to policy in Aker, fees to directors employed in Aker companies contracts and standard terms and conditions regarding notice period and are paid to the Aker companies, not to the directors in person. Therefore, severance pay for the Akastor management. Karl Erik Kjelstad and Leif board fees for Frank O. Reite, Kristian Monsen Røkke and Øyvind Eriksen Borge both have a six months’ notice period as part of their employment were paid to Aker ASA. contracts, while Paal E. Johnsen has a three months’ notice period. Audit Committee The main purpose of the executive remuneration is to encourage a strong Akastor has an audit committee comprising three of the directors, which and sustainable performance-based culture, which supports growth held 7 meetings in 2018. As of December 31, 2018, the audit committee in shareholder value. Compensation to the executive management comprises Lone Fønss Schrøder (chairperson), Kathryn M. Baker and has a fixed element which includes a base salary which pursuant to the Henning Jensen. company’s benchmarking is competitive with other investment companies. In addition, the executive management has variable remuneration, as Guidelines for remuneration to the members of the executive further described below. All variable pay shall be subject to a cap. management of Akastor As of December 31, 2018, the executive management of Akastor comprised The salary figures for the remuneration for the executive management the company’s CEO Karl Erik Kjelstad, CFO Leif Borge and Investment represent what has been expensed in the year. Director Paal E. Johnsen. The company practices standard employment Annual Report 2018 | Financials and Notes | Akastor Group 82 Amounts in NOK 2018 Karl Erik Kjelstad Leif Borge Paal E. Johnsen Total 2017 Kristian Monsen Røkke Leif Borge Karl Erik Kjelstad Paal E. Johnsen Total Job title Base salary Variable pay 1) Other benefits 2) Total taxable remuneration Pension benefit earned/ cost to company 3) CEO CFO 3 664 895 4 649 849 2 040 378 1 642 653 1 350 117 Investment director 3 007 080 23 236 17 997 17 213 6 713 463 5 325 544 4 374 410 11 321 824 5 033 148 58 446 16 413 418 CEO CFO 3 715 309 2 669 856 9 625 6 394 790 3 617 375 3 151 128 32 191 6 800 694 Investment director 3 757 822 3 273 929 40 541 7 072 293 Investment director 2 971 861 2 595 046 17 922 5 584 829 14 062 368 11 689 959 100 279 25 852 605 247 849 257 006 179 791 684 646 88 280 149 515 142 411 89 489 469 695 1) See below for further description of principles for performance based remuneration. 2) Other benefits include insurance agreements, such as membership in the standard employee scheme and an additional executive group life and disability insurance. 3) Pension benefits include the standard employee pension scheme, a disability pension scheme and certain management pension rights related to the wound up schemes and early retirement schemes. Benefits Since the variable pay program for the executive management is partly The executive management participates in the standard employee, linked to the development of the Akastor ASA share price, it requires pension and insurance plan applicable to all employees in the company. approval by the general meeting and the guidelines will thereafter be No executive personnel in Akastor has performance based pension plans binding. and there are no current loans, prepayments or other forms of credit from the company to its executive management. No members of the executive Further, the executive management may be offered additional variable pay management are part of any option- or incentive programs other than arrangements going forward which differs from the ordinary variable pay what is described in this statement. program described above. The variable pay arrangements offered to the executive management may in its entirety be linked to the development Performance based remuneration of the company’s share price. The executive management may from time In addition to the fixed compensation set out above, the executive to time be granted a discretionary variable pay. There was no discretionary management (as well as other members of the corporate organization) pay paid out for 2017 or 2018. participates in a variable pay program. The objective of the program is to incentivize the management to contribute to sound financial results for the The CEO and CFO also participate in a long-term incentive bonus plan, company, recruit and retain key personnel as well as executing leadership under which the maximum bonus amount is capped at two times of in accordance with the company’s values and business ethics. The potential annual salary. Payments under the bonus scheme are determined based payment under the variable pay program is set individually, with 100 on delivery of certain key strategic targets for the company and/or percent of the annual base salary as the maximum. development of Akastor ASA’s share price for a time period of four years. The payments under the variable pay program are determined based on Share purchase program for Akastor’s executive management team three components: The company had no regular share purchase program in 2018. Should the board of directors decide to launch a share purchase program in 2019, the ŸŸ ŸŸ Development of Akastor ASA’s share price executive management will be invited to participate. Shares purchased under any such programs will be subject to a three year lock-up period Delivery of certain key financial, operational and strategic targets during which the acquired shares may not be sold or otherwise disposed of. for Akastor ŸŸ Delivery of personal performance objectives during the year Annual Report 2018 | Financials and Notes | Akastor Group 83 Directors’ and executive management’s shareholding The following number of shares is owned by the directors and the members of the executive management (and their related parties) as of December 31: Karl Erik Kjelstad Leif Borge Kristian Monsen Røkke Frank O. Reite Lone Fønss Schrøder Kathryn Baker Sarah Ryan Job title CEO CFO Chairman Chairman (2017) Deputy chairman Director Director 2018 2017 123 074 250 000 200 000 200 000 4 400 45 683 5 000 123 074 250 000 200 000 200 000 4 400 45 683 5 000 The overview includes only direct ownership of Akastor shares and does not include Frank O. Reite and Øyvind Eriksen’s indirect ownership through ownership in Aker ASA. Annual Report 2018 | Financials and Notes | Akastor Group84 04.b. FINANCIALS AND NOTES AKASTOR ASA Akastor ASA | Income statement Akastor ASA | Statement of financial position Akastor ASA | Statement of cash flow | Accounting principles | Operating revenue and expenses | Net financial items Note 1 Note 2 Note 3 Note 4 | Tax Note 5 Note 6 Note 7 Note 8 Note 9 Note 10 | Financial risk management and financial instruments Note 11 | Related parties Note 12 | Shareholders | Investments in group companies | Shareholders’ equity | Receivables and borrowings from group companies | Borrowings | Guarantees 78 79 80 81 82 82 83 83 83 84 85 86 86 87 88 Annual Report 2018 | Financials and Notes | Akastor ASAFinancials and Notes | Akastor ASA Akastor ASA | Income statement For the year ended December 31 Amounts in NOK million Operating revenue Operating expenses Operating profit (loss) Net financial items Profit (loss) before tax Income tax benefit (expense) Profit (loss) for the period Profit (loss) for the period distributed as follows Other equity Profit (loss) for the period 85 Note 2018 2017 2 2 3 4 8 27 (37) (47) (29) (21) (277) 726 (306) 706 6 (42) (300) 664 (300) 664 (300) 664 Annual Report 2018 | Financials and Notes | Akastor ASA 86 Akastor ASA | Statement of financial position For the year ended December 31 Amounts in NOK million Assets Investments in group companies Non-current interest-bearing receivables on group companies Other non-current interest-bearing receivables Total non-current assets Current interest-bearing receivables on group companies Current interest-bearing receivables on related parties Other receivables on group companies Derivative financial instruments, assets Other current receivables Total current assets Total assets Equity and liabilities Issued capital Treasury shares Share premium Other paid in capital Other equity Total equity Non-current borrowings, external Deferred tax liability Total non-current liabilities Current borrowings, external Current borrowings from group companies Current tax liabilities Other liabilities to group companies Derivative financial instruments Other current liabilities Total current liabilities Total liabilities Total equity and liabilities Note 2018 2017 5 7 7 7 5 022 5 298 830 3 156 2 2 5 855 8 456 - 81 257 - 243 800 10 9 76 - 14 510 971 6 365 9 427 162 162 (2) (2) 2 000 2 000 2 003 2 003 231 531 4 395 4 695 588 824 14 19 602 843 14 32 1 306 3 698 1 18 6 8 4 8 7 7 10 - 45 9 68 39 28 1 368 3 889 1 970 4 733 6 365 9 427 Fornebu, March 14, 2019 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2018 | Financials and Notes | Akastor ASA Akastor ASA | Statement of cash flow For the year ended December 31 Amounts in NOK million Profit (loss) before tax Adjustments for non-cash effects Impairment of receivables and shares Group contribution Changes in other net operating assets Net cash from operating activities Payment related to increase in interest-bearing receivables Net cash from investing activities Proceeds from borrowings Repayment of borrowings Changes in borrowings from group companies Changes in borrowings to group companies Change in overdraft cash pool Payment of group contribution Net cash from financing activities Effect of exchange rate changes on cash and cash deposits Net increase (decrease) in cash and bank deposits Cash in cash pool system at the beginning of the period Cash in cash pool system at the end of the period 1) 1) Unused credit facilities amounted to NOK 2.0 billion as of December 31, 2018 (NOK 1.4 billion in 2017). 87 Note 2018 (306) 2017 706 3 301 195 - (800) 37 31 - 101 (154) - (154) - 924 620 (1 154) (901) (106) (1 899) 1 999 52 (2 303) 931 800 1 000 160 (197) (38) (40) - (135) - 135 7 - - Annual Report 2018 | Financials and Notes | Akastor ASA 88 Note 1 | Accounting principles Akastor ASA (the parent company) is a company domiciled in Norway. Cash in cash pool system The financial statements are presented in conformity with Norwegian Akastor ASA has a cash pool that includes the parent company’s cash as Accounting Act and Norwegian generally accepted accounting principles well as net deposits from subsidiaries in the group cash pooling system (NGAAP). owned by the parent company. Correspondingly, Akastor ASA’s current debt to group companies will include their net deposit in the group’s cash Revenue recognition pool system. Operating revenue mainly comprise parent company guarantees (PCG) recharged to entities within the group. The revenue is recognized over the Share capital guarantee period. Investments in subsidiaries Costs for purchase of own shares including transaction costs are accounted for directly against equity. Sales of own shares are performed according to stock-exchange quotations at the time of award and accounted for as Investments in subsidiaries are measured at cost in the parent company increase in equity. accounts, less any impairment losses. The investments are impaired to fair value if the impairment is not considered temporary. Impairment losses Cash flow statement are reversed if the basis for the impairment loss is no longer present. The statement of cash flow is prepared according to the indirect method. Investments in subsidiaries and associates are reviewed for impairment Cash and cash equivalents include cash, bank deposits and other short- whenever events or changes in circumstances indicate that the carrying term liquid investments. amount may exceed the fair value of the investment. Dividends, group contributions and other distributions from subsidiaries The parent company’s financial statements are presented in NOK, which are recognized as income the same year as they are recognized in the is Akastor ASA’s functional currency. All financial information presented in financial statement of the provider. If the dividends or group contributions NOK has been rounded to the nearest million (NOK million), except when exceeds withheld profits after the acquisition date, the excess amount otherwise stated. The subtotals and totals in some of the tables in these represents repayment of invested capital, and is recognized as a reduction financial statements may not equal the sum of the amounts shown due of carrying value of the investment. to rounding. Functional currency and presentation currency Classification Foreign currency Current assets and current liabilities include items due within one year or Transactions in foreign currencies are translated at the exchange rate items that are part of the operating cycle. Other balance sheet items are applicable at the date of the transaction. Monetary items in a foreign classified as non-current assets/debts. currency are translated to NOK using the exchange rate applicable on the balance sheet date. Foreign exchange differences arising on translation are Non-current borrowings are presented as current if a loan covenant recognized in the income statement as they occur. breach exists at balance date. If a covenant waiver is approved subsequent to year-end and before the approval of the financial statements, the Derivative financial instruments liability is presented as non-current debt to the extent maturity date is All financial assets and liabilities related to foreign exchange contracts are beyond one year. remeasured at fair value in respect to exchange rates at reporting date. Measurement of borrowings and receivables Tax Financial assets and liabilities consist of investments in other companies, Tax income (expense) in the income statement comprises current tax, trade and other receivables, interest-bearing receivables, cash and cash withholding tax and changes in deferred tax. Deferred tax is calculated as equivalents, trade and other payables and interest-bearing borrowing. 22 percent of temporary differences between accounting and tax values Trade receivables and other receivables are recognized in the balance assets are recognized only to the extent it is probable that they will be sheet at nominal value less provision for expected losses. utilized against future taxable profits. as well as any tax losses carry-forward at the year end. Net deferred tax Interest-bearing borrowings are initially recorded at transaction value less attributable transaction costs. Subsequent to initial recognition, these borrowings are measured at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings on an effective interest basis. Annual Report 2018 | Financials and Notes | Akastor ASA89 Note 2 | Operating revenue and expenses Operating revenue comprises NOK 8 million in income from parent NOK 3.2 million has been allocated to payable fees to the Board of company guarantees (NOK 25 million in 2017), of which NOK 5 million Directors for 2018 (2017: 3.1 million). Remuneration to and shareholding from related parties (NOK 12 million in 2017). of the Board of directors and CEO is described in note 36 Management remunerations in Akastor’s consolidated financial statements. There are no employees in Akastor ASA and hence no salary or pension related costs and also no loan or guarantees related to the executive Fees to the auditors management team. Group management and corporate staff are employed Fees to KPMG for statutory audit amounted to NOK 2.9 million by other Akastor companies and costs for their services as well as other (2017: 2.5 million). parent company costs are recharged to Akastor ASA. Note 3 | Net financial items Amounts in NOK million Interest income from group companies Interest expense to group companies Net interest group companies Interest income from related parties Net interest related parties Interest income Interest expense Net interest external Income on investment in subsidiary (group contribution) Impairment on receivables to group companies 7 Impairment of shares Other financial expense Foreign exchange gain (loss) Net other financial items Net financial items Note 2018 2017 162 - 162 2 2 12 (96) (84) - (25) (276) (1) (55) (357) (277) 223 (4) 219 - - 12 (117) (105) 800 (98) (98) - 8 612 726 Annual Report 2018 | Financials and Notes | Akastor ASA90 Note 4 | Tax Amounts in NOK million Calculation of taxable income Profit (loss) before tax Write down internal shares Loss on receivables Permanent differences Changes in timing differences Group contribution without tax effect Generated (utilized) tax loss Taxable income Taxable (deductible) temporary differences Unrealized gain (loss) on forward exchange contracts Other temporary differences Tax loss carry-forward 1) Basis for deferred tax Tax rate Deferred tax assets (liability) Tax expense Origination and reversal of temporary differences in income statement Withholding tax Income tax benefit (expense) 2018 2017 (306) 276 (395) (16) 7 - 435 - - (19) 82 63 22% (14) 6 1 6 706 98 98 (1) 8 (800) (107) - 8 (20) 96 84 23% (19) (23) (19) (42) 1) Akastor ASA has unrecognized tax loss carry forwards of NOK 1.4 billion. A significant part of these tax loss carry forwards (NOK 951 million) originates from 2016 and is currently being subject to inquiries from Norwegian Tax Authorities. Note 5 | Investments in group companies Amounts in NOK million Akastor AS AKOFS Offshore AS 1) Total Registered office Share capital Number of shares held Percentage owner- / voting share 2018 2017 Fornebu, Norway Oslo, Norway 1 004 1 100% - 5 022 - 5 022 4 191 1 107 5 298 1) The shareholding of 55.49 percent in AKOFS Offshore AS was transferred to Akastor AS as contribution-in-kind in 2018. An accounting loss of NOK 276 million was recognized in the accounts. Akastor AS financial information 2018 Amounts in NOK million Profit (loss) for the period Equity as of December 31 2018 (239) 5 401 Annual Report 2018 | Financials and Notes | Akastor ASA 91 Note 6 | Shareholders’ equity Amounts in NOK million Equity as of January 1, 2017 Profit (loss) for the period Share capital Treasury shares Share premium Other paid in capital Retained earnings Total 162 (2) 2 000 2 003 (133) 4 031 - - - - 664 664 Equity as of December 31, 2017 162 (2) 2 000 2 003 531 4 695 Profit (loss) for the period - - - - (300) (300) Equity as of December 31, 2018 162 (2) 2 000 2 003 231 4 395 The share capital of Akastor ASA is divided into 274 000 000 shares The number of treasury shares held by the end of 2018 are 2 776 376 with a nominal value of NOK 0.592. The shares can be freely traded. An and are held for the purpose of being used for future awards under any overview of the company's largest shareholders is to be found in note 12 share purchase program for employees, as settlement in future corporate Shareholders. acquisitions or for other purpose as decided by the board of directors. Note 7 | Receivables and borrowings from group companies Amounts in NOK million Group companies deposits in the cash pool system Akastor ASA's net borrowings in the cash pool system Cash in cash pool system Current interest-bearing receivables on group companies Non-current interest-bearing receivables on group companies Current borrowings from group companies 1) Net interest-bearing receivables on group companies Group contribution receivable Other receivables on group companies Other payables to group companies Total other receivables on group companies Current interest-bearing receivables on related parties Total interest-bearing receivables on related parties 1) Include Akastor ASA’s net borrowings in the cash pool system 2018 2017 1 306 (1 306) - 3 592 (3 592) - - 830 81 3 156 (1 306) (3 698) (475) (461) - 800 243 - - (45) 243 755 257 257 - - Interest-bearing receivables on and borrowings from group Cash pool arrangement companies Akastor ASA is the owner of the cash pool system arrangements with DNB. Akastor ASA is the group’s central treasury function (Akastor Treasury) and The cash pool systems cover a majority of the group geographically and enters into borrowings and deposit agreements with group companies. assure good control and access to the group’s cash. Participation in the Deposits and borrowings are done at market terms and are dependent cash pool is vested in the group’s policy and decided by each company’s of the group companies’ credit rating and the duration of the borrowings. board of directors and confirmed by a statement of participation. The In 2018, interest-bearing receivables on MHWirth Do Brasil Equipamentos is therefore important that Akastor as a group is financially viable and can Ltda and Step Oiltools BV were sold to Akastor AS for BRL 96 million and repay deposits and carry out transactions. Any debit balance on a sub USD 32 million respectively related to recapitalization of these entities. account can be set-off against any credit balance. Hence, a debit balance participants in the cash pool system are jointly and severally liable and it represents a claim on Akastor ASA and a credit balance a borrowing from An impairment of NOK 25 million has been recognized related to interest- Akastor ASA. bearing receivables in 2018, mainly related to impairment of the receivable on Step Oiltools BV (NOK 98 million in 2017). The cash pool system has a net overdraft of NOK 13 million as of December 31, 2018 (net overdraft of NOK 30 million in 2017). The amount is reported in Akastor ASA’s accounts as external borrowings. Annual Report 2018 | Financials and Notes | Akastor ASA 92 Note 8 | Borrowings Amounts in million Currency Nominal currency value Carrying amount (NOK) Interest rate Interest margin Interest coupon Maturity Interest terms 2018 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Overdraft facility Total borrowings Current borrowings Non-current borrowings Total 2017 Revolving credit facility (NOK 1 005 million) Revolving credit facility (USD 147 million) Overdraft facility Total borrowings Current borrowings Non-current borrowings Total NOK 588 588 1.18% 2.25% 3.43% Dec 2021 NIBOR + margin 2.25% Dec 2021 USD LIBOR + margin USD - - 13 601 14 588 601 NOK 350 348 0.76% 2.25% 3.01% July 2019 2) NIBOR + margin 1) 1.49% 2.25% 3.74% July 2019 2) USD LIBOR + margin 1) USD 58 478 30 856 32 824 856 1) The margin applicable to the facility is decided by a price grid based on the leverage ratio and level of utilization. Commitment fee is 35 percent of the margin (2017: 40 percent). 2) The maturity date reflects maturity date as defined in the loan agreements. All facilities are provided by a bank syndicate consisting of high quality ŸŸ The ICR shall not be lower than 4.0 when gearing ratio exceeds Nordic and international banks. The terms and conditions include 0.5, calculated from the consolidated EBITDA to consolidated restrictions which are customary for these kinds of facilities, including inter Net Finance Cost. alia negative pledge provisions and restrictions on acquisitions, disposals and mergers and change of control provisions. The facilities include no ŸŸ Minimum liquidity amount shall exceed NOK 500 million on dividend restrictions. consolidated level The financial covenants are a gearing ratio based on net debt/equity, an The covenants are monitored on a regular basis by the Akastor Treasury interest coverage ratio (ICR) based on EBITDA/net interest costs and department to ensure compliance with the loan agreements, and are a minimum liquidity amount. The financial covenants are tested on a tested and reported on a quarterly basis. Akastor was not in breach with quarterly basis. any covenants as of December 31, 2018, and on the basis of the covenants and its forecasts, management believes that the risk of covenant being ŸŸ The company’s gearing ratio shall not exceed 1.0 times and is breached is low and that the group will continue as a going concern for the calculated from the consolidated net total borrowings to the foreseeable future. See more information in note 29 Capital management consolidated equity. in the Akastor Group consolidated accounts. ŸŸ The ICR shall not be lower than 3.0 when gearing ratio is below 0.5, calculated from the consolidated EBITDA to consolidated Net Finance Cost. Annual Report 2018 | Financials and Notes | Akastor ASA 93 Financial liabilities and the period in which they mature Amounts in NOK million 2018 Carrying amount Total undiscounted cash flow 1) 6 months and less 6–12 months 1–2 years 2–5 years 2) Revolving credit facility (NOK 1 250 million) 588 662 11 - 13 - 13 - 13 10 - - 21 621 - - - - 601 675 24 10 21 621 Revolving credit facility (USD 155 million) Overdraft facility Total borrowings 2017 Revolving credit facility (NOK 1 005 million) 348 365 7 5 353 - Revolving credit facility (USD 147 million) 478 Overdraft facility Total borrowings 30 505 30 9 30 9 - 487 - 856 900 46 14 840 - - - 1) The interest costs are calculated using the last fixing rate known by year end (plus applicable margin). 2) Repayment of the loan in the table is according to maturity date of the facility in the loan agreement. Note 9 | Guarantees Akastor has provided the following guarantees on behalf of wholly owned subsidiaries and related parties as of December 31 (all obligations are per date of issue): Amounts in NOK million Parent Company Guarantees to group companies 1) Parent Company Guarantees to related companies 2) Counter guarantees for bank/surety bonds, group companies 3) Counter guarantees for bank/surety bonds, related parties 3) Total guarantee liabilities Maturity of guarantee liabilities: 6 months and less 6–12 months 1–2 years 2–5 years 5 years and more 2018 2017 1 422 3 438 2 894 1 055 5 502 973 - 5 376 4 913 237 418 66 107 4 548 244 52 403 428 3 786 1) Parent Company Guarantees to support subsidiaries in contractual obligations towards clients. 2) Parent Company Guarantees to support related parties in contractual obligations towards clients, mainly AKOFS 1 AS, AKOFS 3 AS and DOF Deepwater AS. 3) Bank guarantees and surety bonds are issued on behalf of Akastor subsidiaries, and counter indemnified by Akastor ASA. Although guarantees are financial instruments, they are considered contingent obligations and the notional amounts are not included in the financial statements. US pension plan AK Wilfab Inc, a wholly owned subsidiary of Akastor, is together The Resource Group TRG AS and Akastor ASA sponsoring the US pension plan named the Kvaerner Consolidated Retirement Plan. Akastor Group holds one third of the liability of the sponsors for the underfunded element of the plan and The Resource Group TRG AS holds two thirds of the ultimate liability. Aker ASA guarantees for The Resource Group TRG AS’ liability and covers for all its expenses related to the pension plan. Annual Report 2018 | Financials and Notes | Akastor ASA94 Note 10 | Financial risk management and financial instruments Currency risk assets and liabilities. Akastor ASA may enter into financial derivative Subsidiaries may enter into financial derivative agreements with the agreements to hedge these potential cash flow exposures. parent company to hedge their foreign exchange exposure. Accordingly, derivatives from external banks are used to mitigate the foreign exchange As of 31 December 2018, Akastor ASA had entered into a limited number exposure from the financial derivative agreements with the subsidiaries. In of forward exchange contracts with subsidiaries, and these are hedged addition, Akastor ASA may have cash flow exposure towards its financial back-to-back with external banks. Amounts in NOK million Forward exchange contracts with group companies Forward exchange contracts with external counterparts Total 2018 2017 Assets Liabilities Assets Liabilities 9 - - (9) 9 (9) 57 (20) 19 (48) 76 (68) Interest rate risk according to a list of approved banks and primarily with banks where the The company is exposed to changes in interest rates because of floating company also have a borrowing relationship. interest rate on loan receivables and loan payables. The company does not hedge transactions exposure in financial markets, and does not have Loss provisions for interest-bearing receivables are made in situations of any fixed interest rate loan receivables nor loan payables. The company is negative equity if the company is not expected to be able to fulfil its loan therefore not exposed to fair value risk on its outstanding loan receivables obligations from future earnings. NOK 25 million was impaired in 2018 or loan payables. Interest bearing loan receivables and loan payables (NOK 98 million in 2017). See note 7 Receivables and borrowings from expose the company to income statement and cash flow interest risk. group companies for more information about receivables. Interest-bearing borrowings to group companies reflect the cost of Liquidity risk external borrowing, reducing the interest risk exposure for Akastor ASA. Liquidity risk relates to the risk that the company will not be able to meet Credit risk its debt and guarantee obligations and is managed through maintaining sufficient cash and available credit facilities. Due to the dynamic nature of Credit risk is the risk of financial losses to the company if a customer the underlying businesses, Akastor Treasury maintains flexibility in funding or counterparty fails to meet contractual obligations. Credit risk relates by maintaining availability under committed credit lines. Development in to loans to subsidiaries and associated companies, hedging contracts, the group’s and thereby Akastor ASA’s available liquidity is continuously guarantees to subsidiaries and associated companies and deposits monitored through weekly and monthly cash flow forecasts, annual with external banks. External deposits and hedging contracts are done budgets and long term planning. Note 11 | Related parties Transactions with subsidiaries and related parties are described in the following notes: Transactions Other services Financial items Cash pool, receivables and borrowings Guarantees Foreign exchange contracts All transactions with related parties are carried out at market terms and in accordance with the arm’s lengths principle Info in note Note 2 Note 3 Note 7 Note 9 Note 10 Annual Report 2018 | Financials and Notes | Akastor ASANote 12 | Shareholders Shareholders with more than 1 percent shareholding Company 2018 Aker Kværner Holding AS Goldman Sachs & Co Aker ASA Morgan Stanley & Co. LLC Euroclear Bank S.A./N.V.('BA') Jefferies LLC SP. RES. A/C FBO CUS ODIN Norge Skandinaviska Enskil SEB STO, SFMA1 Fond Finans Norge Akastor ASA Company 2017 Aker Kværner Holding AS Goldman Sachs & Co Aker ASA Morgan Stanley & Co. LLC Euroclear Bank S.A./N.V.('BA') Jefferies LLC SP. RES. A/C FBO CUS ODIN Norge Skandinaviska Enskil SEB STO, SFMA1 Akastor ASA 95 Note Nominee Number of shares held Ownership 110 333 615 Nominee 39 600 376 Nominee Nominee Nominee 23 331 762 19 535 505 11 444 917 8 765 881 7 840 060 3 115 302 3 000 000 2 776 376 40.27% 14.45% 8.52% 7.13% 4.18% 3.20% 2.86% 1.14% 1.09% 1.01% 6 Note Nominee Number of shares held Ownership 110 333 615 Nominee 44 283 961 Nominee Nominee Nominee 23 331 762 12 000 000 11 685 711 9 693 000 7 840 060 3 227 697 2 776 376 40.27% 16.16% 8.52% 4.38% 4.26% 3.54% 2.86% 1.18% 1.01% 6 Annual Report 2018 | Financials and Notes | Akastor ASA96 05. AUDITOR'S REPORT Annual Report 2018 | Auditor's ReportAuditor's ReportKPMG ASSørkedalsveien 6 Postboks 7000 Majorstuen 0306 Oslo Telephone +47 04063Fax +47 22 60 96 01Internet www.kpmg.noEnterprise 935 174627 MVA To the Annual Shareholders' Meetingof Akastor ASAIndependent auditor’s reportReport on the Audit of the Financial StatementsOpinionWe have audited the financial statements of Akastor ASA. The financial statements comprise:•The financial statements of the parent company Akastor ASA (the "Company"), which comprise the statement of financial position as at 31 December 2018, and the income statement and statement of cash flow for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and•The consolidated financial statements of Akastor ASA and its subsidiaries (the "Group"), which comprise the statement of financial positionas at 31 December 2018, and income statement, statement of comprehensive income,statement of changes in equity and statement ofcash flow for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.In our opinion:•The financial statements are prepared in accordance with the law and regulations.•The accompanying financial statements give a true and fair view of the financial position of the Company as at 31 December 2018, and its financial performance and its cash flows for the year then ended in accordance with the Norwegian Accounting Act and accounting standards and practices generally accepted in Norway("NGAAP").•The accompanying consolidated financial statements give a true and fair view ofthe financial position of the Group as at 31 December 2018, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU("IFRS").Basis for OpinionWe conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including International Standards on Auditing ("ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statementssection of our report. We are independent of the Company and the Groupas required by laws and regulations, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 97 Auditor's Report - 2018 Akastor ASA 1. Valuation of investments Reference is made to Note 3 Significant accounting policies, Note 4 Significant accounting estimates and judgements, Note 18 Other investments, Note 25 Other non-current liabilities, Note 32 Financial instruments, and the Board of Directors Report. The key audit matter In May, the Group made an investment in preferred equity in Odfjell Drilling, yielding 10% annual interest plus a warrant structure for up to 5,925,000 common shares in Odfjell Drilling. At year-end the valuation of the preference shares and warrants, with carrying values of NOK 672 million and NOK 33 million respectively, is considered to be a risk area due to the complexity involved in applying judgements and valuation techniques in determining their fair value. Owing to the unquoted and illiquid nature of the warrants, the valuation has been determined through a Monte Carlo simulation using level 3 inputs, including expected share volatility. The valuation of the warrants is judgmental and dependent on the input variables. How the matter was addressed in our audit Our audit procedures in this area included, among others: • We read the contracts for these transactions and analysed the rights and obligations of the Group in these transaction; • We used KPMG valuation specialists to verify the mathematical and methodological integrity of management's valuation models and to evaluate the valuation technique methodology applied regarding the warrants; • We tested the underlying valuation model of the preference shares and the assumptions used in those models, including verification to observable market inputs, and assessed this model in relation to the terms of contract for this asset; and • We evaluated the adequacy and appropriateness of the disclosures related to these financial instruments. From the audit evidence obtained, we consider management's assessment of the carrying value of the investment in financial instruments issued by Odfjell Drilling Ltd. to be in accordance with the requirements under the relevant accounting standards. 2. Construction contract accounting estimates Reference is made to Note 2 Basis for preparation, Note 3 Significant accounting policies, Note 4 Significant accounting estimates and judgements, and Note 7 Revenue and other income. The key audit matter The majority of the Group's revenues and profits are derived from long-term construction and service contracts. Accounting for such contracts, where revenue from performance obligations are satisfied over time, is considered to be a risk area due to the significant judgement and estimation applied by management as well as the degree of complexity of the contracts currently in the portfolio. How the matter was addressed in our audit For financially significant contracts and any contracts with a reasonable possibility of being in a significant loss-making position, we applied professional scepticism and critically assessed the accounting estimates and judgments against the requirements of IFRS 15. Our audit procedures in this area included, among others: • We assessed the implementation of IFRS 15, including the Group's updated accounting policies, transition impact assessment, application to construction and service contract accounting and disclosures IFRS 15 Revenue from contracts with customers ('IFRS 15') was implemented by the Group on 1 January 2018. This new accounting standard • We challenged management's measure of progress estimate and evaluated management's process for assessing the Annual Report 2018 | Auditor's Report 98 introduces a 'five step model' for revenue recognition and new requirements and guidance relevant to project accounting estimates and judgements. Furthermore, estimating the outcome of disputes and renegotiations on long-term projects is considered to be a risk area due to the significant judgment and estimation applied by management as well as the degree of complexity of the contracts, current market environment and challenges faced by customers. These management estimates and judgments are often complex and involve assumptions regarding future events for which there may be little or no external corroborative evidence available. There are typically a wide range of reasonably possible outcomes, and a high degree of uncertainty on the outcomes of negotiations and disputes linked to complex contract interpretations. As such, these contract accounting estimates also require significant attention during the audit and are subject to a high degree of auditor judgment. Auditor's Report - 2018 Akastor ASA measurement of progress and the method applied; • We updated our understanding of the project performance, changes compared to previous forecasts, sensitivities and risks by reviewing management's project reporting and discussing with relevant management; • We assessed contractual revenue forecasts including corroborating those forecasts with reference to signed contracts and variation orders to assess the contractual basis of estimated future revenues; • We evaluated the calculation of project revenue and cost and contract assets and contract liabilities in relation to the stage of completion and forecasts; • We analysed preliminary rulings or other relevant pronouncements for items in arbitration and historical outcomes of negotiations with customers and other proceedings; • We challenged management on their assessment of probable settlement negotiations regarding liquidated damages and disputes; • We challenged management on the estimate of cost to complete, timing of the cost and the risk assessment related to forecast cost; • We read a selection of correspondence between the Group and the customer and the Group's legal advisors; and • We considered events subsequent to reporting date and challenged management on their impact to the estimates made at year-end. From the audit evidence obtained, we consider construction contract accounting estimates to be consistent with the requirements under the relevant accounting standards. Other information Management is responsible for the other information. The other information comprises information in the Annual Report, except the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, with the exception of our report on Other Legal and Regulatory Requirements below. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Annual Report 2018 | Auditor's Report 99 Auditor's Report - 2018 Akastor ASA Responsibilities of the Board of Directors and the Managing Director for the Financial Statements The Board of Directors and the Managing Director ("management") are responsible for the preparation in accordance with law and regulations, including fair presentation of the financial statements of the Company in accordance with the NGAAP, and for the preparation and fair presentation of the consolidated financial statements of the Group in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern. The financial statements of the Company use the going concern basis of accounting insofar as it is not likely that the enterprise will cease operations. The consolidated financial statements of the Group use the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • • • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. We design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's or the Group's internal control. evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company and the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company and the Group to cease to continue as a going concern. evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial Annual Report 2018 | Auditor's Report 100 Annual Report 2018 | Auditor's Report101 06. ALTERNATIVE PERFORMANCE MEASURES Akastor discloses alternative performance measures as a supplement to Net capital employed - a measure of all assets employed in the the consolidated financial statements prepared in accordance with IFRS. operation of a business. It is calculated by non-current assets (excluding Such performance measures are used to provide an enhanced insight non-current interest bearing receivables) added by net current operating into the operating performance, financing abilities and future prospects assets minus non-current operating liabilities (deferred tax liabilities, of the group. These measures are calculated in a consistent and employee benefit obligations and other non-current liabilities). transparent manner and are intended to provide enhanced comparability of the performance from period to period. It is Akastor's experience that Gross debt - sum of current and non-current borrowings. these measures are frequently used by securities analysts, investors and other interested parties. Net debt - gross interest-bearing debt minus cash and cash equivalents. The definitions of these measures are as follows: Net interest-bearing debt (NIBD) – net debt minus non-current and EBITDA - earnings before interest, tax, depreciation and amortization, corresponding to "Operating profit before depreciation, amortization and Equity ratio - a measure of investment leverage, calculated as total impairment" in the consolidated income statement. equity divided by total assets at the reporting date. current interest bearing receivables. EBIT - earnings before interest and tax, corresponding to "Operating Liquidity reserve - comprises cash and cash equivalents and undrawn profit (loss)" in the consolidated income statement. committed credit facilities. Capex and R&D capitalization - a measure of expenditure on PPE or Order intake – represents the estimated contract value from the intangible assets that qualify for capitalization. contracts or orders that are entered into or committed in the reporting Net current operating assets (NCOA) - a measure of working capital. period. It is calculated by current operating assets minus current operating Order backlog - represents the remaining unearned contract value from liabilities, excluding financial assets or financial liabilities related to the contracts or orders that are already entered into or committed at the hedging activities. reporting date. The tables below show reconciliation of alternative performance measures to the line items in the financial statements according to IFRS. Net current operating assets (NCOA) Amounts in NOK million Current tax assets Inventories Trade and other receivables Current operating assets Current tax liabilities Provisions, current Trade and other payables Current operating liabilities Adjusted by NCOA related to discontinued operations Net current operating assets (NCOA) (Continuing operations) 2018 2017 4 548 2 801 3 354 (8) (236) (2 734) (2 979) - 375 21 569 2 263 2 853 (23) (293) (1 493) (1 809) (186) 857 Annual Report 2018 | Alternative Performance MeasuresAlternative Performance Measures102 Net capital employed (NCE) Amounts in NOK million Total non-current assets Net current operating assets (NCOA) Other current assets Non-current interest-bearing receivables Deferred tax liabilities Employee benefit obligations Other non-current liabilities Non-current provisions Adjusted by NCE related to discontinued operations Net capital employed (NCE) Gross debt/Net debt/NIBD Amounts in NOK million Non-current borrowings Current borrowings Gross debt Cash and cash equivalents Net debt Non-current interest-bearing receivables Current interest-bearing receivables Net interest-bearing debt (NIBD) Equity ratio Amounts in NOK million Total equity Divided by Total assets Equity ratio Liquidity reserve Amounts in NOK million Cash and cash equivalents Undrawn committed credit facilities Liquidity reserve 2018 5 077 375 - - (9) (332) (390) (166) - 4 556 2018 588 14 601 (198) 403 - (257) 146 2018 4 317 9 005 48% 2017 7 163 857 51 1 (10) (349) (110) (221) 184 7 566 2017 2 133 399 2 533 (168) 2 364 (1) - 2 363 2017 5 277 10 328 51% 2018 2017 198 2 000 2 198 168 1 400 1 568 Annual Report 2018 | Alternative Performance Measures103 07. BOARD OF DIRECTORS Kristian M. Røkke | Chairman Kristian Røkke is currently the Chief Investment Officer of Aker ASA and has extensive experience from offshore oil services, shipbuilding and M&A. Mr. Røkke was CEO of Akastor ASA from August 2015 to December 2017. He is a board member of TRG Holding AS, Aker Capital AS and Aker Solutions ASA. Mr. Røkke holds an MBA from The Wharton School, University of Pennsylvania. As of December 31, 2018, Mr. Røkke holds, through a privately owned company, 200 000 shares in Akastor ASA and has no stock options. Mr. Røkke is both a Norwegian and American citizen and has been elected for the period 2018-2020. Lone Fønss Schrøder | Deputy Chairman Lone Fønss Schrøder has experience from CEO and Senior Management positions at the Danish shipping and oil group A.P. Møller-Maersk A/S. She is Executive Director of Geely Financials Denmark, Director and Chairperson for the audit committee at Volvo Cars and Valmet Oy, and Director of Ikea Group. Ms. Fønss Schrøder has a fintech portfolio of her own. Ms. Fønss Schrøder has a law degree from the University of Copenhagen and of economics from Copenhagen Business School. As of December 31, 2018, she holds 4 400 shares in the company and has no stock options. She is a Danish citizen and has been elected for the period 2018-2020. Øyvind Eriksen | Director Øyvind Eriksen joined Aker ASA in January 2009. Mr. Eriksen holds a law degree from the University of Oslo. He joined Norwegian law firm BA-HR in 1990, where he became a partner in 1996 and a director/chairman from 2003. At BA-HR, Mr. Eriksen worked closely with Aker and Aker’s main shareholder, Kjell Inge Røkke. Mr. Eriksen is chairman of Aker BP ASA, Aker Solutions ASA, Cognite AS, Aker Capital AS and Aker Kværner Holding AS, and a director of several companies, including Aker Energy AS, The Resource Group TRG AS, TRG Holding AS and Reitangruppen AS. As of December 31, 2018, Mr. Eriksen holds no shares or stock options in Akastor directly; he has an ownership interest through his holding of 219 027 shares in Aker ASA. He also holds, through a privately owned company, 0.2 percent of the B-shares in TRG Holding AS, the largest shareholder in Aker ASA. Mr. Eriksen is a Norwegian citizen and has been elected for the period 2018-2020. Annual Report 2018 | Board of DirectorsBoard of Directors104 Kathryn M. Baker | Director Kathryn M. Baker has 30 over years of business experience in a broad range of industries and roles. She currently serves on the Executive Board of the Central Bank of Norway (Norges Bank), where she is also a member of the audit and the risk and investment committees. Other current board positions include Chairman of Catena Media Plc, board member of DOF ASA as well as a member of the Investment Committee of Norfund. Ms. Baker also serves on the European Advisory Board of the Tuck School of Business and leads the Ethics Committee of the Norwegian Private Equity and Venture Capital Association (NVCA), where she previously served as Chairman. Ms. Baker was a partner at the Norwegian private equity firm Reiten & Co for 15 years. Prior to that, she was a management consultant at McKinsey & Company in Oslo and a financial analyst at Morgan Stanley in New York. Ms. Baker holds a bachelor degree in Economics from Wellesley College and an MBA from the Amos Tuck School of Business at Dartmouth College. She holds 45 683 shares in the company. Ms. Baker is an American citizen and has been elected for the period 2018-2020. Sarah Ryan | Director Dr. Sarah Ryan has 30 years of experience in the global oil&gas and oilfield services industries. She currently serves as Non-Executive Director of Woodside Petroleum, where she is also a member of the audit and risk and sustainability committees. Other current board positions include Central Petroleum and Kinetic Energy Services, and previous board positions include Aker Solutions and Vautron. Dr Ryan also serves as chair of the Advisory Board of Unearthed Solutions and is a Fellow of the Australian Academy of Technological Sciences and Engineering. Dr. Ryan was energy advisor, Investment director and equity analyst at Earnest Partners, a US- based investment management firm. Prior to that, she held various senior management, technical and operational roles during her 15 years with Schlumberger. Dr. Ryan holds a BSc in Geology from the University of Melbourne, a BSc (Hons) in Geophysics and a PhD in Petroleum Geology and Geophysics from the University of Adelaide. As of December 31, 2018, she held 5 000 shares in the company and had no stock options. Ms. Ryan is an Australian citizen. She has been elected for the period 2018-2020. Henning Jensen | Director Henning Jensen currently works as a specialist engineer in project control department at MHWirth AS. Mr. Jensen joined MHWirth in 2005. He has since then held various positions in the company. Mr. Jensen holds a bachelor degree in Marine Technology and a Master in Industrial Economy and Technology from Agder University College in Grimstad, As of December 31, 2018, Mr. Jensen holds no shares or stock options in the company. Mr. Jensen is a Norwegian citizen and has been elected for the period 2017-2019. Annual Report 2018 | Board of Directors105 Asle Christian Halvorsen | Director Asle Christian Halvorsen currently works as Senior Engineer in Mud Products dept at MHWirth AS. He began his career with the Aker group in 2011 when he joined STEP Offshore. Mr. Halvorsen holds a BS c in mechanical engineering from Sør-Trøndelag University College. As of December 31, 2018, he holds no shares or stock options in the company. Mr. Halvorsen is a Norwegian citizen. He has been elected for the period 2017-2019. Stian Sjølund| Director Stian Sjølund currently works as Performance Optimization Engineer at MHWirth AS. Mr. Sjølund joined the Company in 1998 as an Engineer in Drilling Lifecycle Services department. He has since then held various positions in the company in Norway and abroad. Mr. Sjølund holds a technical college degree in electrical engineering from Grimstad Technical College. As of December 31, 2018, Mr. Sjølund holds no shares or stock options in the company. Mr. Sjølund is a Norwegian citizen and has been elected for the period 2017-2019. Annual Report 2018 | Board of Directors106 08. MANAGEMENT Karl Erik Kjelstad | Chief Executive Officer Karl Erik Kjelstad joined the Aker group in 1998 and has held various CEO and executive positions throughout the Aker group, including EVP of Aker Solutions, Aker ASA and CEO of Aker Yards. Mr. Kjelstad holds an MSc in Marine Engineering from the Norwegian University of Science and Technology (NTNU) and an AMP from Harvard Business School. As of March 14, 2019, he holds, through a privately-owned company, 300 000 shares in the company and had no stock options. Mr. Kjelstad is a Norwegian citizen. Leif Borge | Chief Financial Officer Before joining Akastor, Leif Borge served as CFO of Aker Solutions in 2008-2014. He was CFO of Aker Yards in 2002-2008, CFO of Stento ASA/ Zenitel NV in 1998-2001, CFO of Vitana (a subsidiary of Rieber & Søn ASA in the Czech Republic) in 1994-1997, and prior to that Financial Manager in Union Bank of Norway. Mr. Borge holds an MBA from Pacific Lutheran University in Washington State, and is a Norwegian citizen. As of March 14, 2019, Mr. Borge holds, directly and through a privately owned company, 300 000 shares in the company, and had no stock options. Paal E. Johnsen | Executive Vice President – Investment Director Paal E. Johnsen joined Akastor from a senior position within Investment Banking at DNB Bank ASA. From 2009 to 2014, he was CEO of an investment company and held several board positions in both public and private companies across several industries. From 1996 to 2008, Paal E. Johnsen held several executive positions in Carnegie Investment Banking, both on equity research and investment banking. Mr. Johnsen holds a Master of Science (MSc) in Economics and Business Administration from Norwegian School of Economics. As of March 14, 2019, he holds no shares in the company and had no stock options. Mr. Johnsen is a Norwegian citizen. Annual Report 2018 | ManagementManagement107 09. COMPANY INFORMATION Reports on the Internet Copyright and Legal Notice The half-year and annual reports of Akastor are available on the internet. Akastor encourages its shareholders to subscribe to the company’s annual reports via the electronic delivery system of the Norwegian Central securities Depository (VPS). Please note that VPS services (VPS Investortjenester) are designed primarily for Norwegian shareholders. Subscribers to this service receive annual reports in PDF format by email. VPS distribution takes place at the same time as distribution of the printed version of Akastor’s annual report to shareholders who have requested it. Half-year reports, which are generally only distributed electronically, are available on the company’s website and other sources. Shareholders who are unable to receive the electronic version of interim reports may subscribe to the printed version by contacting Akastor’s investor relations staff. Copyright in all published material including photographs, drawings and images in this publication remains vested in Akastor and third party contributors to this publication as appropriate. Accordingly, neither the whole nor any part of this publication can be reproduced in any form without express prior permission. Articles and opinions appearing in this publication do not necessarily represent the views of Akastor. While all steps have been taken to ensure the accuracy of the published contents, Akastor does not accept any responsibility for any errors or resulting loss or damage whatsoever caused and readers have the responsibility to thoroughly check these aspects for themselves. Enquiries about reproduction of content from this publication should be directed to Akastor ASA. Contact details Akastor ASA Oksenøyveien 10, 1366 Lysaker, Norway PO Box 124, 1325 Lysaker, Norway +47 21 52 58 00 akastor.com First Geo Fjordpiren, Laberget 22, 4020 Stavanger, Norway PO Box 289, 4066 Stavanger, Norway +47 51 81 23 50 first-geo.com MHWirth Butangen 20, 4639 Kristiansand, Norway PO Box 413 Lundsiden, 4604 Kristiansand, Norway +47 38 05 70 00 mhwirth.com Step Oiltools 7500A Beach Road # 16-307/312 The Plaza, Singapore, 199591, Singapore +65 6396 3872 stepoiltools.com AKOFS Offshore Karenslyst Allé 57, 0277 Oslo, Norway PO Box 244, 0213 Oslo, Norway +47 23 08 44 00 akofsoffshore.com Cool Sorption Smedeland 6, DK2600 Glostrup, Denmark +45 43 45 47 45 Coolsorption.com Annual Report 2018 | Company InformationCompany Informationi o n . n o i t a c n u m m o c t l o b • S A n o i t a c n u m m o C i t l o B • 5 6 2 1 7 1 2 

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