equity are recognised at acquisition cost including transaction costs. Instruments recognised as financial liabilities are recognised at the net present value of the strike price of the derivative on own shares with the interest charge recognised over the life of the derivative in the line Financing costs of the income statement. They are derecognised when the Group has lost control of the contractual rights of the derivative, with the realised gain or loss recognised in equity. At each statement of financial position date instruments recognised as derivatives are valued at fair value based on quoted market prices, with any unrealised gain or loss recognised in the line Other financial income (expense), net in the income statement. They are derecognised when the Group has lost control of the contractual rights of the derivatives, with any realised gain or loss recognised. 2.24 Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 2.25 Statement of Cash Flows Cash flows from operating activities arise from the principal activities of the Group in the Fragrance & Beauty and Taste & Wellbeing businesses. The indirect method is used whereby the operating income is adjusted for the transactions of a non-cash nature in order to derive the cash generated from operations. It includes income tax paid on all activities. Cash flows from financing activities are primarily the proceeds from the issue and repayment of the debt instruments, the dividend payment to shareholders and interest paid. Cash flows from long-term and short-term borrowings are reported separately of gross cash receipts and gross cash payments. Cash flows from investing activities arise principally from the investments in property, plant and equipment and intangible assets, from the acquisition of subsidiaries, and from the transactions with jointly controlled entities. 2.26 Distribution to the Shareholders Dividend distributions or distributions out of statutory capital reserves from ‘capital contributions – additional paid-in capital’ are recognised in the period in which they are approved by the Group’s shareholders. 3. Critical Accounting Estimates and Judgments The estimates and underlying assumptions are reviewed on an ongoing basis and are based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. 3.1 Critical Accounting Estimates and Assumptions The key assumptions concerning the future, and other key sources of estimation uncertainty at the statement of financial position date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are for the most part related to: – In a business combination, the determination of the fair value of the identifiable assets acquired, particularly intangibles, and the liability requiring estimations which are based on all available information and in some cases on assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. The purchase price is allocated to the underlying acquired assets and liabilities based on their estimated fair value at the time of acquisition. The excess is reported as goodwill. As a result, the purchase price allocation impacts reported assets and liabilities, future net earnings due to the impact on future depreciation and amortisation expense and impairment charges (Note 6); – The impairment of goodwill requiring estimates of the value in use of the cash-generating units to which goodwill is allocated (Note 22); – The impairment of long-lived assets requiring estimates to measure the recoverable amount of an asset or group of assets (Note 21 and 22); – The calculation of the present value of defined benefit obligations requiring financial and demographic assumptions (Note 8); – The determination and provision for income taxes requiring estimated calculations for which the ultimate tax determination is uncertain (Note 16); – The provisions requiring assumptions to determine reliable best estimates (Note 25); and – The contingent liabilities assessment (Note 29). 56 Givaudan — 2021 Governance, Compensation and Financial Report Governance Report Compensation Report Consolidated Financial Report Statutory Financial Report Appendix Notes to the consolidated financial statements