both market expansion and product development. Photocure classifies for this reason the regulatory function into the following two categories:
Regulatory work and services related to new products or product development based on new clinical trials up to and including phase 3, are classified as R&D costs.
Regulatory work and services for new markets based on existing clinical data are classified as marketing costs.
E. Investment in subsidiary companies
Shares and investments with the aim of long-term ownership are booked in the balance sheet as long-term investments and are valued at the lower of cost and fair value. Write-downs for permanent declines in value are made on the basis of individual evaluations. Any realized and unrealized profits/losses and any write-downs related to these investments will be booked in the income statement as financial items.
F. Inventories
Raw materials are valued at the lower of cost and net sales value in accordance with the first-in, first-out principle (FIFO). Semi-finished and finished goods are valued at production cost including a mark-up for their share of the indirect production costs based on the FIFO principle.
G. Financial assets and liabilities
All financial assets not classified as measured at amortized cost or fair Value over comprehensive income are subsequently measured at fair value through profit and loss. Photocure\u2019 s investments in money market funds are measured at fair value through profit and loss.
The earnout liability is measured at fair value at the date of acquisition and remeasured at fair value at each reporting date and subsequent changes in the fair value are recognized in profit or loss.
Interest bearing liabilities are recognized at fair value at the time of recognition. In subsequent periods, interest-bearing liabilities are booked at amortized cost according to the effective interest rate method.
Financial income consists of interest income on bank balances and money market fund as well as exchange rate gains from currency items. Financial expense consists of interest expense on borrowing and exchange rate losses from currency items.
ImpairmentThe Group recognizes loss allowances for expected credit losses (ECLs) on financial assets measured at amortized cost.
The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:
debt securities that are determined to have low credit risk at the reporting date; and
other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.
The Group assumes that the credit risk on a financial asset has increased if it is more than 60 days past due.
Loss allowances for trade receivables and contract assets are always measured at an amount equal to lifetime ECLs. The Group uses an allowance matrix based on historical losses adjusted for forward-looking information.
H. Revenue recognition
The main revenue stream in the company is the sale of pharmaceutical products. The revenue is recognized on the date of delivery, when both control and risk essentially have been transferred to the customer. For the general supply of products, Photocure satisfies the contractual performance obligation upon delivery according to the agreed terms.This includes clarifications of normal delivery conditions, which are typically ExWorks unless otherwise specified. For deliveries made through distributors who subsequently deliver the products to an end customer, revenue is recognized when control is considered transferred. This means that Photocure assesses whether the performance obligation is fulfilled when the goods are delivered to the distributor, or only when the distributor ships the goods onward to the end customer, depending on the contractual terms and transfer-of-control indicators in each arrangement. The license agreements that give the right to a signing fee or achieved milestones are recognized as revenue when the contractual conditions are met. Royalty revenue is booked as Sales revenue in line with the licensee\u2019s sale of licensed products.
The core principle in IFRS 15 is revenue should be recognized dependent on the transfer of promised goods or services to the customer for an amount that reflects the consideration which should be received in exchange for those goods or services. The objective is to provide a five-step approach to revenue recognition that includes identifying contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction prices to performance obligations, and recognizing revenue when or as performance obligations are satisfied.
In Photocure\u2019 s customer contracts which are regarded to be within the