Note 1. Basic information

Description of the company and its business activities

Lenzing Aktiengesellschaft (Lenzing AG), which maintains its registered headquarters in 4860 Lenzing, Werkstrasse 2, Austria, is the parent company of the Lenzing Group (the “Group”). The shares of Lenzing AG are listed in the Prime Market Segment (since April 18, 2011) and in the ATX benchmark index (since September 19, 2011) of the Vienna Stock Exchange in Vienna, Austria.

The core shareholder of Lenzing AG as at December 31, 2022 is the B&C Group, which directly and indirectly holds an investment of 52.25 percent (December 31, 2021: 50 percent plus two shares) in the share capital of Lenzing AG. The direct majority shareholder of Lenzing AG is B&C KB Holding GmbH, Vienna. The indirect majority shareholder of Lenzing AG, which prepares and publishes consolidated financial statements that include the Lenzing Group, is B&C Holding Österreich GmbH, Vienna. The ultimate parent company of the B&C Group, and therefore also of Lenzing AG, is B&C Privatstiftung, Vienna.

The core business of the Lenzing Group is the production and marketing of wood-based cellulosic fibers. The pulp required for production is manufactured for the most part in the Group’s own plants and is supplemented by external purchases.

Basis of Reporting

The consolidated financial statements for the period from January 1 to December 31, 2022 were prepared in accordance with the International Financial Reporting Standards (IFRSs) and interpretations which were endorsed in the EU and required mandatory application as of the reporting date. The additional requirements of Section 245a Para. 1 of the Austrian Commercial Code (“Unternehmensgesetzbuch”) were also met.

The reporting currency is the euro (EUR), which is also the functional currency of Lenzing AG. The functional currency of the majority of the subsidiaries is the euro (EUR) or US-Dollar (USD). The figures shown in these consolidated financial statements and notes were rounded to the next thousand, unless indicated otherwise (“EUR ‘000”). The use of automatic data processing tools can lead to rounding differences in the addition of rounded amounts and percentage rates.

Measurement

Assets and liabilities are principally measured at amortized or depreciated cost. In contrast, other measurement methods are used for the following material positions:

• Biological assets are measured at their fair value.
• Provisions are measured at the present value of the expected settlement amount.
• Deferred tax assets and deferred tax liabilities are recognized at their nominal value. They are measured on the basis of the temporary differences existing as at the reporting date and the effective tax rate expected when the differences are realized.
• Derivative financial instruments and financial assets measured at fair value through profit or loss and at fair value through other comprehensive income are measured at their fair value.
• Puttable non-controlling interests are measured at fair value through other comprehensive income.

Estimation uncertainty and judgments

The Managing Board of Lenzing AG uses estimates, assumptions and judgments in preparing the IFRS consolidated financial statements. These estimates, assumptions and judgments are based on the circumstances assumed as at the reporting date and can have a significant effect on the presentation of the Group’s financial position and financial performance. They involve the recognition and measurement of assets and liabilities, contingent receivables and liabilities, the reporting of cash flows and income and expenses (including other comprehensive income) as well as the presentation of disclosures in the notes.

Assumptions and estimates

The following future-oriented assumptions and other major sources of estimation uncertainty at the reporting date could have significant effects on these consolidated financial statements of the Lenzing Group:

• Intangible assets, property, plant and equipment and right-of-use assets (see note 11): determination of the recoverable amount in connection with impairment testing as defined in IAS 36 (impairment).
• Property, plant and equipment (see note 19): Assessment of the time at which newly constructed production sites are available in working condition for their intended use.
• Biological assets (see note 20): determination of fair value less costs to sell.
• Receivables under factoring agreements (see note 36, section “Transfer of financial assets (sale of receivables/factoring)”): assessment of the requirements for derecognition as defined in IFRS 9.
• Cash and cash equivalents (see note 36): Assessing the classification of money market funds as cash equivalents.
• Financial instruments (see note 36 and 38): determination of fair values and expected credit losses.
• Provisions (see note 31): determination of the expected settlement amount and the net liability of the defined benefit pension and severance payment plans.
• Puttable non-controlling interests (see note 36): determination of fair value less costs to sell.
• Deferred taxes and receivables from current taxes (see note 30): assessment of the extent to which deferred tax assets (in particular, from loss carryforwards) can be utilized and assessment of the recoverability of receivables from current taxes.
• Research and development expenses (see note 18): assessment of capitalization and impairment of development expenses.

Assumptions and estimates are based on experience and other factors that are considered relevant by the Managing Board. However, the amounts actually realized can deviate from these assumptions and estimates if general conditions develop in a different way than the expectations as at the reporting date.

Judgments when applying accounting policies

The application of accounting policies by the Lenzing Group included the following major judgments, which had a material influence on the amounts reported in the consolidated financial statements:

• Liabilities within the scope of reverse factoring agreements (see note 32): assessment of the requirements for derecognition as defined in IFRS 9 (financial instruments).
• Full consolidation and equity method (see note 3, note 36, and note 42): assessment of the existence of control over subsidiaries and assessment of the existence of joint control or significant influence. Application of the present access method to puttable non-controlling interests.
• Receivables from the sale of and measurement of investments accounted for using the equity method (see note 22): Assessment of the valuation of the receivables from the partial disposal and the interest in EQUI-Fibres Beteiligungsgesellschaft mbH (EFB), Kelheim, Germany.
• Evidence of impairment (see note 11): evaluation of indications of impairment resp. for impaired cash-generating units evaluation of the occurrence of material changes in comparison with the previous year.

Impact of the COVID-19 crisis and the Ukraine crisis on the annual results and on estimation uncertainties and judgments

The war in Ukraine, China’s zero-Covid policy and the rise in inflation in many countries had a significant impact on the global economy in the 2022 financial year. The Lenzing Group recorded significant price increases on both the sales and procurement sides, driven by sharp rises in energy, raw material and logistics costs. The current uncertainties in relation to European natural gas supplies currently affect only one production site to a significant extent. Other sites have natural gas sources independent of Russian production, or already operate largely self-sufficiently in terms of energy. In order to secure supplies of energy and raw materials to the European fiber production sites, both short- and medium-term physical and financial hedges were implemented, and medium- and long-term strategies to switch to alternative energy supplies were initiated. Problems in global supply chains, which have been exacerbated in some cases by the crisis, were countered by targeted measures.

As part of the preparation of the consolidated financial statements, the management is responsible for assessing the company’s ability to continue as a going concern. If material uncertainty exists with regard to events or conditions that may raise significant doubt concerning the company’s ability to continue as a going concern, such uncertainty must be explained. Based on the estimates of the Lenzing Group’s management and considering all available information regarding the future, which covers a minimum of twelve months after the balance sheet date, such uncertainties do not exist. Based on a secured liquidity situation and a continued strong position in the markets relevant for Lenzing, the management has made the assessment that the Group has sufficient resources at the time of the approval of the consolidated financial statements to continue to operate in the foreseeable future. As a consequence, the consolidated financial statements have been prepared on a going concern basis.

Additional information on the effects of the COVID-19 and Ukraine crises and the measures taken by the Lenzing Group can be found in the Group management report.

The COVID-19 crisis and the Ukraine crisis have an impact on the IFRS consolidated financial statements, particularly on assumptions, estimates and judgments. In preparing the consolidated financial statements, the Managing Board has taken into consideration developments in connection with the COVID-19 crisis and the Ukraine crisis. The uncertain supply situation, sharply higher prices on energy and raw material markets, ongoing supply chain disruptions, and changes in interest rates and exchange rates mainly affect the following items of the consolidated financial statements:

• The fair value measurement of assets and liabilities (particularly biological assets, financial instruments and puttable non-controlling interests) (see notes 21 and 36).
• The determination and recognition of currency translation effects in the income statement and in equity (see note 37).
• Impairment testing of cash-generating units (see note 11, section “Impairment tests of intangible assets, property, plant and equipment, right-of-use assets and cash-generating units (CGUs)”).

Impact of climate change on estimation uncertainties and judgments

The textile and apparel industry is resource-intensive. The Lenzing Group is committed to the ecologically responsible production of fibers from the renewable raw material wood and is very concerned about climate protection. The Lenzing Group aims to halve its carbon emissions by 2030 and achieve net zero by 2050. Innovation, sustainability and the circular economy lie at the core of Lenzing’s corporate strategy. The implementation of climate targets in line with the corporate strategy was one of the focus areas of the Lenzing Group’s investment activities in the 2022 financial year. In this context, the Lenzing Group is continuously working on utilizing raw materials more efficiently, improving production processes and developing a process for recycling used textiles. As the implementation of the climate targets is being pursued despite the current negative impact on global economic activity of the war in Ukraine, the European energy crisis and high inflation in large parts of the world, as well as China’s zero-Covid policy, current developments and measures relating to climate change and sustainability do not lead to fundamentally different assumptions and estimates in relation to useful lives or the recoverability of non-current assets. The Managing Board estimates the potential impact of climate-related opportunities and risks on the IFRS consolidated financial statements as follows:

• Useful lives of assets (see note 19): The Lenzing Group has evaluated the extent to which the useful lives of property, plant and equipment could be affected by climate-related risks. In particular, an assessment was made as to whether, on the basis of existing and announced legal and regulatory requirements, the potential pollution from individual industrial plants (for example, by exceeding emission limits) poses a risk for the granting of operating permits. No influence of external or internal obligations on useful lives was derived.
• Impairment of assets (see note 11, section “Impairment tests of intangible assets, property, plant and equipment, right-of-use assets and cash-generating units (CGUs)”): The short- and medium-term financial planning and consequently the impairment tests are based on the sustainable strategy and the sustainable business model. The short- and medium-term financial plans of the individual CGUs take appropriate account of assumptions regarding climate-related factors in capital expenditure programs (CAPEX), technologies and production processes for achieving the Group’s internal climate targets, and the ecologically sustainable product mix based upon these.
• Provisions and contingent liabilities (see notes 31 and 41): In the 2022 financial year, no new obligations arose in the Lenzing Group from the violation of climate protection laws and/or climate regulations that would have required the formation of a provision or the disclosure of a contingent liability.