V Use of estimates and critical accounting judgements

In the application of the Group’s material accounting policies, which are described in section VI, the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.

Critical judgements in applying the Group’s accounting policies

The critical judgements, apart from those involving estimations (which are presented separately below), that the Board of Management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements are presented below.

Definition of cash generating units (‘CGU’)

A significant part of the Group’s capital is invested in property, plant and equipment and intangible assets (including goodwill). Determining whether these assets are impaired requires an estimation of value in use or fair value less cost of disposal of the CGU to which the asset relates. A CGU is the smallest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups of assets. The identification of CGUs involves significant judgement. Key factors in determining CGU’s are operational interdependence of the integrated production chain and alignment with internal management reporting. The definition of CGUs is reassessed when there is a significant change in the way the business is managed or in the structure of operations. For the Group CGUs are usually taken to be individual businesses or legal entities, although these are combined or split into base entities, where deemed appropriate to reflect the specific economic risks or operational inter-dependence of locations and operations based on the governance structure and lines of reporting. This process of defining CGUs requires the exercise of significant judgement.

Key sources of estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting period end that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below. This includes assumptions in respect of the transition to a low carbon economy, which may impact critical judgements and key estimates, disclosure, recognition or derecognition of assets and liabilities and measurement of such assets and liabilities.

If the support from the Dutch government would not be as expected, then there would be a material impact on the valuation of property, plant and equipment. This could also have a significant impact on how the current decarbonization plans could be realized. Furthermore, the ability to retain critical permits and the timing and availability of permits required to realize decarbonization plans are considered key sources of estimation uncertainty.

1) Provisions

Estimates in calculating provisions for environmental remediation, legal claims and employee benefits are based on previous experience and third-party advice and are reassessed on a regular basis. Judgement is required in assessing the costs and the timing of these costs. Further details on the Group’s provisions can be found in Note 18.

A provision is recognised when the Group has a present obligation, legal or constructive, as result of a past event and it is probable that the outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. They include provisions on restructuring and rationalisation, legal claims, environmental provisions and employee benefits are based on previous experience and third-party advice and are reassessed on a regular basis. Judgement is required in assessing the costs and the timing of these costs. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates.

2) Recognition and valuation of deferred tax assets

The recognition and valuation of deferred tax assets is subject to estimations of the future available taxable profits that the directors consider to be more likely than not to occur, based on the Group’s annual plans and future forecasts. Further information can be found in Note 11.

3) Post-retirement benefits

The Group’s retirement benefit obligations are assessed by selecting key assumptions. The selection of inflation, salary growth, and mortality rates are key sources of estimation uncertainty which could lead to a material adjustment in the defined benefit obligations within the next financial year. The Group sets these judgements with close reference to market conditions and third-party actuarial advice.

The Group’s defined benefit obligations are discounted at a rate set by reference to market yields at the end of the reporting period on high quality corporate bonds. The most significant criteria considered for the selection of bonds include the issue size of the corporate bonds, quality of the bonds and the identification of outliers which are excluded.

4) Impairment of non-current assets

Value in use and fair value less cost of disposal calculations requires an estimation of future cash flows expected to arise from the CGU and a suitable discount rate to calculate present value. The present value is sensitive to changes in the discount rate used in the value in use models, the forecast profitability of the Group in the third year of the Group’s Annual Plan, and the expected impact of decarbonisation on the Group. Further details on the Group’s impairment review, key assumptions, and sensitivity analyses are set out in Note 9.

In respect of impairment of investments in the Company accounts, judgement is required around the relevant enterprise value of the TSN Group. The detailed accounting policies for each of these areas, are outlined in section VI below.

5) Property, plant, and equipment

TSN continues to develop its assessment of the potential impacts of climate change and decarbonisation strategy and has considered such impacts when preparing its consolidated financial statements.

TSN has a public commitment to achieve net-zero CO₂ emissions for Scope 1 and 2 by 2045. The Company is committed to transitioning in a phased manner out of blast furnace operations to steel making using direct reduced iron technology and electric smelting, with an eventual transition to Green Hydrogen depending on availability and economics. It is currently engaged with multiple technology and engineering partners to complete detailed evaluation and engineering, implementation planning and costing of the project.

TSN is also undertaking a comprehensive project to reduce dust and other emissions from its plant to make it future ready. The Roadmap program took a big step forward with the completion of the Windbreaker around raw material storage to reduce dust emissions. Also, significant progress has been made on the DeNOX installation at the Pellet Plant. The DeNOx installation aims to reduce nitrogen oxide emissions by capturing NOx compounds at the Pellet Plant.

Assumptions in respect of climate- and regulatory change and the transition to a low carbon economy may impact the Company’s key estimates and result in changes to estimated useful lives. Climate-related risks, in particular those arising from transitioning to a lower-carbon economy, are considered when estimating the useful lives of the assets affected. Further details can be found in Note 8.