A1. General accounting principles, new accounting rules and basis of preparation

Reading Instructions

General accounting principles AP and new accounting rules are presented below. Other accounting principles considered material by Essity are presented in conjunction with the respective note.

Key assessments and assumptions KAA are presented under the respective note, see use of assessments below.

Amounts that are reconcilable to the balance sheet, equity, income statement, statement of comprehensive income, cash flow statement and the operating cash flow statement are marked with the following symbols:

BS Balance sheet

EQ Equity

IS Income statement

CI Statement of comprehensive income

CF Cash flow statement

OCF Operating cash flow statement

Tx:x Reference to table in note

Basis For Preparation

Essity’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 accounts for both the Group and the Parent company relate to the fiscal year that ended on December 31, 2019. Essity applies the historical cost method for measurement of assets and liabilities except for 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.

New or amended accounting standards 2019

In this Annual Report, the Group applies the new and amended standards that came into effect from January 1, 2019.

IFRS 16 Leases

Accounting rules relating to leases changed as of January 1, 2019, when the new standard IFRS 16 Leases came into effect. Information regarding the effects of the changed rules for Essity is provided in Note G5 Changes due to new accounting rules. For accounting policies and additional information concerning leases, see Note G2 Leases.

IFRIC 23 Uncertainty over Income Tax Treatments

In 2017, a new interpretation was issued regarding the recognition of taxes, IFRIC 23. The interpretation clarifies how the recognition and measurement of uncertain tax positions is to be conducted. The new interpretation will apply from January 1, 2019. A retrospective approach or a modified retrospective approach is permitted. Essity has chosen the modified retrospective approach, meaning that comparative years are not restated. As a result of the new interpretation, SEK 713m was reclassified from current and non-current provisions to tax liabilities in 2019.

New or amended accounting standards after 2019

A number of new and amended accounting standards have not yet come into effect and have not been applied in advance in preparing the Group’s and the Parent company’s financial statements.

These standards or interpretations published by IASB are not expected to have any impact on the Group’s or the Parent company’s financial statements.

IFRS 9 Financial instruments and IFRS 7 Financial instruments: Disclosures

Amendments to IFRS 9 and IFRS 7 were adopted on January 15, 2020 due to the Interest Rate Benchmark Reform. The amendments provide temporary exemptions from applying specific hedge accounting requirements for hedging relationships directly affected by this reform. The exemptions relate to hedge accounting and are to ensure that companies are not required to discontinue the hedging relationships due to uncertainties concerning the reform. The amendments will apply from January 1, 2020 though early adoption is permitted. Essity has chosen not to apply these changes early. Currently, the reform primarily impacts Essity’s fair value hedges and EUR LIBOR interest rates. However, these hedges are expected to continue to be effective in the future. The implementation is, therefore, not expected to have a material impact on the Group’s financial statements. For further information concerning derivatives and hedge accounting, see Note E6 Derivatives and hedge accounting.

Use of assessments KAA

The preparation of financial statements in accordance with IFRS and generally accepted Swedish accounting principles requires assessments and assumptions to be made that affect recognized assets, liabilities, income and expenses 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.

In Essity’s opinion, the areas that are impacted the most by assumptions and estimates are:

Taxes, B5 Income taxes

Pensions, C4 Remuneration after employment

Goodwill, D1 Intangible assets

Provisions, D6 Other provisions

Leases, G2 Leases

Essity’s assessments and assumptions are presented in the respective notes.

Principles of consolidation

The Group’s financial statements include the Parent Company and its Group companies, which comprise subsidiaries, joint ventures, associates and joint operations. Group companies are consolidated from the date the Group exercises control or influence over the company according to the definitions and accounting policies provided in Notes F1 Group companies, F3 Joint Ventures and Associated companies and F4 Joint Operations . Divested Group companies are included in the consolidated accounts until the date the Group ceases to control or exercise influence over the companies. For additional information about accounting policies regarding acquisitions of Group companies and respective non-controlling interests, see Note F6 Acquisitions and divestments. Intra-Group transactions have been eliminated.

Translation of foreign currency

Functional currency and translation of foreign Group companies to the presentation currency

Essity’s Parent company has Swedish kronor (SEK) as its functional currency. The functional currency of each Essity Group company is determined on the basis of the primary economic environment in which the respective company is active which, with a few exceptions, is the country in which the individual company operates. The financial statements of Group companies are translated to the Group’s presentation currency, which is SEK in the case of Essity. 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 during the period on the Group’s net assets are recognized in other comprehensive income in the translation reserve as a component of equity.

Exchange rate effects arising from financial instruments used to hedge foreign Group companies’ net assets are recognized in the same manner in other comprehensive income in the translation reserve as a component of equity. On divestment, the accumulated translation differences on the foreign Group company and accumulated 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 fair value adjustments arising in connection with the acquisition of a foreign Group company are 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 the balance sheet date, monetary assets and liabilities in foreign currency are translated at the closing 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.

If hedge accounting has been applied, for example, for cash flow hedges or hedging of net investments, the exchange rate effect is recognized in equity in other comprehensive income.

If a financial instrument has been classified as financial assets measured at fair value through comprehensive income, the portion of the value change pertaining to currency is recognized in profit or loss, any other unrealized changes are recognized in equity under other comprehensive income.

Government grants

Government grants are measured at fair value when there is reasonable assurance that the grants will be received and Essity 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.