B1. Net sales – revenues from contracts with customers

AP Accounting policies and key estimates and assessments

From January 1, 2018, Essity applies IFRS 15 Revenue from Contracts with Customers that regulates revenue recognition and disclosure requirements for commercial agreements (contracts) with customers. The standard is applied retrospectively from the date of initial application (modified retrospective method) and pertains to commercial agreements with customers in which delivery of goods/services is divided into separately identifiable performance obligations that are recognized independently. No transitional effects arose in connection with the transition to IFRS 15, which is why equity did not need to be adjusted when the new standard was introduced and also no reclassifications were made.

Revenue recognition

Essity primarily generates revenue from the sale of finished products to, for example, the retail sector, companies, industries and the healthcare sector. Revenue from sales of services occurs to a certain extent but nevertheless accounts for a small portion of the Group’s sales. Essity’s operations and sales are divided into various segments that sell different products in several regions. The product portfolio is diversified but the principles for revenue recognition are the same for all segments. For a description of the products, see the section on Essity’s three business areas, Personal Care, Consumer Tissue and Professional Hygiene. Essity’s contracts with customers primarily comprise framework agreements without established minimum volumes, which means that a binding contract according to IFRS 15 criteria does not arise until the customer places an order.

Performance obligations and timing of revenue recognition

Essity’s performance obligations in the contracts involve providing the goods specified in the contracts. The performance obligations are satisfied and the revenue recognized when control of the products is passed to the customer. The timing of when control is passed to the customer is determined by the delivery terms (Incoterms) applied in the contract. For most supply contracts, control is passed when the goods have been delivered to the customer’s warehouse and the customer thereby can control the use and receive the benefits of the goods. Delivery of goods and services is normally invoiced in connection with, or directly after, delivery and recognized at a specific point in time. No revenue is recognized over time. Disclosures regarding remaining performance obligations on the balance sheet date are not provided in accordance with the exemption in IFRS 15 for contracts with customers that have a term of less than one year.

Determination of transaction price

The transaction price primarily comprises the fixed price of the quantity sold less estimated volume discounts. Marketing subsidies and discount coupons exist to only a highly limited extent that reduce Essity’s recognized revenue.

Volume discounts are calculated by assessing the probable discount outcome and making provisions continuously throughout the year every time the accounts are closed and are determined at year-end in accordance with the sales volume to each customer. The provision recognized as a liability is reduced in the subsequent year when the discount is credited to the customer. Marketing subsidies entail that the customer receives a discount for carrying out marketing activities. In certain cases, Essity reimburses customers in the retail sector in accordance with contracts for loss of income due to discount coupons used by consumers. The probable outcome of used discount vouchers and thus discounts provided during the reporting period is assessed and revised every time the accounts are closed. Customers have only limited rights to return products and past volumes of return products are low. Essity essential grants customers no right of return except when the products are faulty. When products are returned, a liability is recognized for the repayment that is expected to be made and an asset is recognized for the right to recover the goods from the customer when the goods are returned. Past experience is used to estimate the share of returns at the time of sale and revenue is only recognized for products that are not expected to be returned. The total transaction price is estimated at the amount that Essity deems will accrue to the company when the contract is signed with respect to volume discounts and any marketing subsidies, discount vouchers and returns. The transaction price is updated if the conditions forming the basis of the estimate have significantly changed.

Trade receivables

Once the goods and services have been delivered and control has been passed to the customer, a trade receivable is recognized since this is the point in time when the consideration becomes unconditional (only the passage of time is required for payment to be made).

Contract liabilities

Contract liabilities pertain to liabilities for volume discounts and advance payments from customers. Both items are recognized under Other current liabilities. Advance payments from customers are normally recognized as revenue in the subsequent fiscal year.

Assets that have arisen from expenses to fulfill contracts with customers

In the Professional Hygiene business area, Essity supplies dispensers to customers to fulfill contracts for delivery of the business area’s other products (refer to the chapter Professional Hygiene). Expenses for these dispensers are recognized as prepaid expenses under Other non-current assets under non-current assets since Essity expects to cover these expenses through the sale of the business area’s other products. The dispensers are depreciated over three years according to the average term of the contract with customers. Recognition takes place in accordance with the rules in IFRS 15 since the expense is directly linked to securing contracts with customers. The rules on Property, Plant and Equipment in IAS 16 and IAS 2 Inventories are not deemed to be applicable since there are no economic benefits associated with the dispenser after it has been delivered to the customer.

The tables below show consolidated net sales broken down by operating segment: Personal Care, Consumer Tissue and Professional Hygiene.

Net sales – sold to, is based on sales to the countries where Essity has its customers, known as its “footprint.”

Trade receivables increased by SEK 1,080m in 2018, of which SEK 160m is primarily attributable to acquisitions within Familia, in which Essity owns a 50% stake, refer to Note F6.