E3. Trade receivables

AP Accounting principles

Trade receivables are recognized at amortized cost after a provision is made for doubtful receivables. As of 2018, provisions for doubtful receivables are made using the simplified impairment method that can be selected according to the expected loss model in IFRS 9 for trade receivables with an amount that corresponds to the expected credit losses for the remaining terms of all outstanding trade receivables as per the balance sheet date. The calculation of the impairment requirement for doubtful receivables is based on a combination of a collective and individual assessment. A collective assessment is based on experience from the historical confirmed total credit loss level in relation to total sales in the most recent five-year period adjusted for changes in credit risk based on current and forward-looking information regarding macroeconomic factors that can impact the payment capacity of customers. The collective assessment is therefore adjusted when necessary to take into account changed credit risk due to material changes in financial stability, GDP and employment in the countries where Essity conducts the majority of its sales. Individual assessment of the need to impair doubtful receivables is made in cases when it has been determined that the customer is experiencing financial problems, when no payment has been received for receivables that have long fallen due or because of other significant changes, such as financial crises or natural disasters.

At the beginning of 2018, confirmed credit losses on trade receivables for the years 2014–2017 averaged 0.03% of net sales. In conjunction with the implementation of IFRS 9, Essity has, on the basis of this loss level, recognized a non-recurring effect in the opening balance for 2018 and reduced trade receivables by SEK 9m and equity by SEK 7m after deferred tax on account of the changed accounting principles.

Previously, the impairment of trade receivables was based on the incurred loss model, according to which individual provisions were made for trade receivables that were not expected to be received due to known financial problems of the customer or when payment had not been received for older, overdue trade receivables despite several reminders and overdue notices. The major difference compared with the earlier principle is that Essity now also makes a provision for expected credit losses on trade receivables that have not fallen due or have fallen due for less than 90 days.

An impairment of trade receivables due to a possible credit loss impacts Essity’s operating profit as a selling cost in profit or loss and as a reduction of trade receivables by increasing the reserve for doubtful receivables in the balance sheet. When the credit loss has been confirmed, the trade receivable is written off against the provision to reserves for doubtful receivables. A credit loss is regarded as confirmed when it has been determined that the customer is unable to fulfill the legal obligation to pay Essity, when debt-collection measures are no longer cost efficient, the customer’s operations have ceased or the customer has been declared bankrupt and this process has ended.

Essity’s trade receivables are generally current and are not discounted. Note G5 Changes due to new accounting rules describes the transition method and effects of the transition to IFRS 9 for estimation of credit losses on trade receivables.

Essity’s customer structure is dispersed, with customers in many different areas of business. In 2018, Essity’s ten largest customers accounted for 23.6% (22.9; 26.6) of Essity’s sales. The single largest customer accounted for 4.4% (3.6; 4.0) of sales.

Including confirmed credit losses in 2018, the average confirmed credit losses on trade receivables over the past five years has declined from 0.03% to 0.02% of net sales. This, combined with Essity’s overall assessment that the credit risk in the countries where Essity conducts the majority of its sales has not changed materially in 2018, has meant that only a minor adjustment has been made to the collective assessment (see accounting principles above) regarding the expected impairment requirement for doubtful receivables.

In total, the Group has collateral mainly in the form of credit insurance taken out amounting to SEK 939m (1,329; 867). Of this amount, SEK 107m (203; 59) relates to the category trade receivables overdue but not impaired.

The expense for the period for doubtful receivables amounted to SEK –28m (–55; –80).