G5. Changes due to new accounting rules

The new standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers came into effect on January 1, 2018. This Note presents the effects of the transition to these standards.

IFRS 9

Essity applies IFRS 9 prospectively from January 1, 2018. Comparative information has not been restated and is instead recognized according to IAS 39 for 2017 and 2016.

The new standard contains new principles regarding the recognition and measurement of financial assets. The decisive factors are the company’s objective and the contractual cash flows of the financial assets. The principles for financial liabilities are largely unchanged.

A review of the Group’s financial assets and liabilities according to the new IFRS 9 criteria did not result in any significant changes to Essity’s reporting. A non-current financial asset of SEK 87m that was previously classified as available-for-sale financial assets has been classified in the measurement category of fair value through other comprehensive income. No other changes to the measurement of assets and liabilities have been made.

The new impairment model called expected credit loss (ECL) model has the largest impact on trade receivables for Essity. Essity has decided to apply the simplified model whereby loss allowances are made for the full lifetime of the assets. In the first quarter of 2018, Essity recognized a non-recurring effect of SEK 7m after tax in equity due to the changed calculation model for expected credit losses on trade receivables.

On the introduction of IFRS 9, there is the option of continuing to apply IAS 39 to the area of hedge accounting. Essity has decided not to make use of this option and instead also applies IFRS 9 to hedge accounting. All hedging documentation has been updated in accordance with the new rules. The transition to the new hedging rules did not impact amounts recognized in the balance sheet or income statement.

The table below shows the changes in measurement due to the change in measurement class.

The table below shows changes in equity due to reclassification upon the transition to IFRS 9 and the introduction of the expected credit loss model.

IFRS 15

Essity applies IFRS 15 prospectively from January 1, 2018. Comparative information for 2017 and 2016 has not been restated and instead 2017 and 2016 are recognized according to the previous rules, mainly IAS 18, which IFRS 15 replaced (refer to the New and amended accounting standards section under A1 General accounting principles and new accounting rules). A review of the Group’s reporting of revenue from contracts with customers under new IFRS 15 criteria did not result in any changes to Essity’s reporting in either the income statement or balance sheet. IFRS 15 contains more disclosure requirements than IAS 18, which are presented in a new Note B1 Net sales – Revenue from contracts with customers, where Essity’s accounting principles for revenue recognition are also outlined. Application of IAS 18 in 2018 would not have resulted in any change in outcomes in either the income statement or balance sheet.