A1. General accounting principles and new accounting rules
General accounting principles AP and new accounting rules are presented below Other accounting principles considered material by SCA are presented in conjunction with the respective notes. The same principles are usually applied in both the Parent Company and the Group. In some cases, the Parent Company applies principles other than those used by the Group and, in such cases, these principles are specified under the respective note in the section about the Parent Company.
Key assessments and assumptions KAA are presented under the respective notes; see application of assessments below.
Amounts that are reconcilable to the balance sheet, income statement, cash flow statement and the operating cash flow statement are marked with the following symbols:
BS Balance sheet
IS Income statement
CF Cash flow statement
OCF Operating cash flow statement
Tx:x Reference to table in note
BASIS FOR PREPARATION
The SCA Group’s financial statements are prepared in accordance with the Annual Accounts Act and International Financial Reporting Standards (IFRS)/International Accounting Standards (IAS), as adopted within the EU, and the Swedish Financial Reporting Board, Recommendation RFR 1 Supplementary Accounting Rules for Groups.
The Parent Company’s financial statements are prepared in accordance with the Swedish Financial Reporting Board’s recommendation RFR 2, Reporting by Legal Entities, and the Annual Accounts Act. The accounts for both the Group and the Parent Company relate to the fiscal year that ended on December 31, 2016. SCA applies the historical cost method for measurement of assets and liabilities except for biological assets (standing timber), available-for-sale financial assets and financial assets and liabilities, including derivative instruments, measured at fair value through profit or loss, which are measured at fair value either in profit or loss or in other comprehensive income. In the Parent Company, biological assets or financial assets and liabilities are not measured at fair value.
New or amended accounting standards 2016
As of January 1, 2016, SCA applies the following new or amended IFRSs:
- Amendments to IAS 1: Disclosure Initiative
- Annual Improvements to IFRSs 2012-2014 Cycle
- Amendments to IAS 27: Equity Method in Separate Financial Statements
- Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization
- Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations
None of the above standards are deemed to have a material impact on the earnings or financial position of the Group or the Parent Company.
New or amended accounting standards after 2016
No new standards will be implemented in 2017. However, a number amendments to existing standards will be introduced. See below:
- Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses.
- Amendments to IAS 7: Disclosure Initiative
These amendments are not expected to have a material impact on the Group.
The material standards to be applied from their effective date are described below. No prospective application is planned.
IFRS 9 Financial instruments
IFRS 9 Financial Instruments was issued in July 2014 and is a new standard that will replace IAS 39. The standard is divided into three areas: Classification and measurement of financial assets and liabilities, impairment and hedging. The standard will become mandatory on January 1, 2018 with prospective application permitted.
The company’s business model for managing the asset and the nature of the asset’s contractual cash flows comprise the basis for classification and measurement, in which the financial assets are classified in one of the following three categories: 1) financial assets measured at amortized cost 2) financial assets measured at fair value through other comprehensive income and 3) financial assets measured at fair value through profit or loss. The new standard entails essentially unchanged recognition of financial liabilities.
The standard introduces a new model for impairment of financial assets based on expected losses and not as previously under IAS 39 until the loss event has already occurred. Under the model, provisions are established for credit losses that may arise within the next 12 months for assets with low credit risk. In other cases where the credit risk has increased significantly since initial recognition and where the credit risk is not low, provisions are established for credit losses that are expected to occur during the full lifetime of the asset.
A simplified model has been developed for trade receivables and lease receivables, whereby anticipated losses are recognized over the estimated remaining term of the receivable.
The new standard focuses to a great extent on reflecting the company’s risk management strategies in hedge accounting and allowing more hedging strategies to qualify for hedge accounting.
SCA has evaluated the new rules for hedge accounting and has concluded that these will provide SCA with greater scope to apply hedge accounting and will facilitate the Group’s documentation of hedge accounting. With respect to impairment, trade receivables are the main item affected for SCA and the quantitative effects are deemed relatively small. SCA does not intend to prospectively apply IFRS 9.
IFRS 15 Revenue from contracts with customers
IFRS 15 Revenue from contracts with customers establishes a new regulatory framework for the manner in which a company should recognize revenue. The new standard will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC (International Financial Reporting Interpretations Committee) 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC (Standing Interpretation Committee of the IASC, predecessor to the IFRIC) 31 Revenue – Barter Transactions Involving Advertising Services. The date on which the standard will become effective has been postponed one year to January 1, 2018. During the year, IFRS 15 Clarification was issued, providing further guidance on when goods or services are to be recognized separately or jointly with other goods and services.
The new standard is designed according to a control-based five-step model framework. The standard regulates commercial agreements (contracts) with customers in which delivery of goods/services is divided into separately identifiable performance obligations that are recognized independently. In certain cases, the good/service can be integrated with other obligations in the contract, whereby a package of goods/services comprises a joint obligation. The standard establishes rules for calculating the transaction price for delivery of goods and services and the manner in which this can be allocated among the various performance obligations. Revenue is recognized when control has passed to the customer by the customer being able to use or benefit from the good/service, at which point it is deemed to have been transferred. Control may be passed at a given point in time, which is usually the case for sales. In other cases, a performance obligation may be satisfied over time, which is common for services. Three different criteria have been established for determining whether a performance obligation is satisfied over time. Either the customer receives and consumes all of the benefits as the obligation is performed; the company’s performance enhances an asset that the customer controls; or the company’s performance does not create an asset with an alternative use to the company and the company has an enforceable right to payment for performance completed to date. IFRS 15 aims to create more comparable and transparent financial reporting, which will be achieved by separating customer contracts as specified above and by providing significantly expanded disclosures regarding how and when revenue is generated. Disclosures encompass both quantitative and qualitative information to help the users of financial statements to understand the company’s business. Disclosures include information regarding contracts with customers, separation of revenue into geographical regions, categories or similar with settlement against the recognized segment, information regarding balance sheet items and information concerning significant assessments.
In 2016, a project group at SCA analyzed the implications of a switch of revenue standard in 2018. The group’s main task was to introduce and provide training to various parts of the Group in terms of what the standard involves and the implications it will have for SCA. In addition, the Group has produced a questionnaire to determine the various types of contracts that exist in the Group. The questionnaire has been discussed at various levels with the company’s regions. Contact was made with the business development departments for various products, particularly within incontinence and AfH, to identify whether SCA’s product offering encompasses services or whether the future development of new products will encompass services. Furthermore, information was compiled regarding how bonuses and discounts are handled in SCA’s contracts and reporting.
The conclusion can be drawn that SCA’s sales mainly comprise sales of products and, to a very limited extent, services, and thus the assessment has been made that no separate reporting of services is required. Developments in the area will continue to be monitored and in the event of a broadening of the service offering, separate reporting may be introduced.
The new reporting standard has transitioned from a risk and rewards concept to focusing more on when control has been transferred to the customer, which has given cargo clauses a more prominent role. As part of the project, it was found that for some of the shipments, SCA booked the sales revenues before control had been transferred to the customer. However, the extent was considered to be insignificant. Overall, this means that the new standard is not expected to have any significant impact on SCA’s revenue recognition. During 2017, however, SCA intends to ensure that the data is available for the expanded disclosure requirements in 2017.
IFRS 16 Leases
In January 2016, the IASB published a new leases standard that will replace IAS 17 Leasing agreements and associated interpretations IFRIC 4, SIC–15 and SIC–27. The standard requires that all assets and liabilities attributable to all lease agreements, with a few exceptions, be recognized in the balance sheet. This type of recognition is based on the approach that the lessee is entitled to use an asset over a specific period and simultaneously has an obligation to pay for this entitlement. The only exceptions are agreements with a term of less than 12 months or assets with a low value, such as leasing contracts for computers and office furniture. Recognition for the lessor will remain essentially unchanged. The standard is applicable to fiscal years beginning on January 1, 2019 or later. Prospective application is permitted. The standard has not yet been adopted by the EU.
SCA will need to develop an overview of the lease agreements that exist in the Group to assess the measures required and to adapt recognition to the new standard as well as the extent to which SCA is to continue leasing equipment. The cost of operational lease agreements for the 2016 fiscal year amounted to SEK 857m. As of December 31, 2016, the undiscounted amount relating to payment commitments for operational lease agreements totaled approximately SEK 3,500m. However, the application of IFRS 16 would entail that a lower amount would be recognized as a liability and asset given that components of the lease agreements may refer to service and, moreover, the future payment commitments are also to be discounted. For more information about the company’s lease commitments, including the maturity structure, refer to G2.
USE OF ASSESSMENTS
The preparation of financial statements in conformity with IFRS and generally accepted Swedish accounting principles requires assessments and assumptions to be made that affect recognized asset and liability items and income and expense items, respectively, as well as other information disclosed.
These assumptions and estimates are often based on historical experience, but also on other factors, including expectations of future events. With other assumptions and estimates, the result may be different and the actual result will seldom fully concur with the estimated result.
SCA’s assessments and assumptions are presented in the respective notes.
PRINCIPLES OF CONSOLIDATION
The consolidated accounts are prepared in accordance with the Group’s accounting principles and include the accounts of the Parent Company and all Group companies in accordance with the definitions below. Group companies are consolidated from the date the Group exercises control or influence over the company according to the definitions provided under the respective category of Group company below. Divested Group companies are included in the consolidated accounts until the date the Group ceases to control or exercise influence over the companies. Intra-Group transactions have been eliminated.
The Parent Company recognizes all holdings in Group companies at cost after deduction for any accumulated impairment losses.
All companies over which the Group has control are consolidated as subsidiaries. The definition of control is that SCA has the ability to control the subsidiary, is entitled to a return and has the power to influence the activities that impact return. The consolidated financial statements are prepared in accordance with the purchase method.
SCA classifies its joint arrangements as joint ventures or joint operations. A joint venture entitles the joint owners to the net assets of the investment and is therefore recognized according to the equity method. In joint operations, parties to the agreement have rights to the assets and an obligation for the liabilities associated with the investment, meaning that the operator must account for its share of the assets, liabilities, revenues and costs according to the proportional method.
Associates are companies in which the Group exercises a significant influence without the partly owned company being a subsidiary or a joint arrangement. Normally, this means that the Group owns between 20% and 50% of the votes. Accounting for associates is carried out according to the equity method and they are initially measured at cost.
For further information, see Note F3.
TRANSLATION OF FOREIGN CURRENCY
Functional currency and translation of foreign Group companies to the presentation currency
SCA’s Parent Company has Swedish kronor (SEK) as its functional currency. The functional currency of each SCA Group company is determined on the basis of the primary economic environment in which it operates. The financial statements of Group companies are translated to the Group’s presentation currency, which is SEK in the case of SCA. Assets and liabilities are translated at the closing rate, while income and expenses are translated at the average rate for the respective period. Translation differences on net assets are recognized as translation differences in other comprehensive income, which is a component of equity (translation reserve).
Exchange rate effects arising from financial instruments used to hedge foreign subsidiaries’ net assets are recognized in the same manner in other comprehensive income, which is a component of equity (translation reserve). On divestment, the translation difference on the foreign subsidiary and exchange rate effects on the financial instrument used to currency hedge the net assets in the company are recognized as part of the gain or loss on disposal.
Goodwill and surplus value adjustments arising in connection with the acquisition of a foreign subsidiary are to be translated, in a manner corresponding to the net assets in the company, from their functional currency to the presentation currency.
TRANSACTIONS AND BALANCE SHEET ITEMS IN FOREIGN CURRENCY
Transactions in foreign currency are translated to a functional currency using the rate prevailing on the transaction date. At accounting year-end, monetary assets and liabilities are translated at the closing day rate and any exchange rate effects are recognized in profit or loss. In cases where the exchange rate effect is related to the operations, the effect is recognized net in operating profit. Exchange rate effects pertaining to borrowing and financial investments are recognized as other financial items. Non-monetary assets and liabilities recognized at historical cost are translated at the exchange rate prevailing on the transaction date.
If hedge accounting has been applied, for example, for cash flow hedges or hedging of net investments, the exchange rate effect is recognized in total equity under other comprehensive income.
If a financial instrument has been classified as available-for-sale financial assets, the portion of the value change pertaining to currency is recognized in profit or loss, while any other unrealized change is recognized in equity under other comprehensive income.
Sales revenue, which is synonymous with net sales, refers to the consideration received or receivable for goods and services sold within the Group’s ordinary activities. Revenue is recognized when delivery to the customer has taken place according to the terms of the sale. Other income includes compensation for sales that are not included in the Group’s ordinary activities and includes income from SCA’s transport activities and rental revenue, which is recognized in the period covered by the rental contract, as well as royalties and similar items, which are recognized in accordance with the implied financial effect of the contract. Interest income is recognized in accordance with the effective interest method. Dividends received are recognized when the right to receive a dividend has been established.
Government grants are measured at fair value when there is reasonable assurance the grants will be received and that the Group will comply with the conditions attached to them. Government grants related to acquisition of assets are recognized in the balance sheet by the grant reducing the carrying amount of the asset. Government grants received as compensation for costs are accrued and recognized in profit or loss during the same period as the costs. If the government grant or assistance is neither related to the acquisition of assets nor to compensation for costs, the grant is recognized as other income.