A1. General accounting principles, new accounting rules and basis of 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, 2020. 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. Changes in assets and liabilities measured at fair value through profit or loss are recognized either in profit or loss or other comprehensive income.

In December 2018, the EU adopted a directive to complement the Transparency Directive entailing that listed companies in the EU whose securities are admitted to trading on a regulated market must issue a digital annual financial report in an electronic format called ESEF (European Single Electronic Format), which was developed by the European Securities and Markets Authority (ESMA). The regulation requires that the annual financial report be prepared in xHTML and consolidated financial statements prepared in accordance with IFRS must be marked up using XBRL tags.

Originally, the directive was to come into force for fiscal years beginning January 1, 2020 or later. However, on December 11, 2020, the EU approved an amendment that will be made to the Transparency Directive permitting the member states to postpone the introduction by one year. Accordingly, on January 21, 2021, the Swedish government decided to propose a legislative change that enabled deferral of the application of the requirements in the directive by one year. It is proposed that the legislative change come into force on March 15, 2021, but be applied from January 1, 2021.

Essity has chosen to defer the application of the ESEF directive by one year in accordance with the proposed legislative change.

New or amended accounting standards 2020

In this Annual and Sustainability Report, the Group applies the amended accounting standards that came into effect from January 1, 2020. The changes did not have any impact on the Group’s financial statements and are not expected to have any material impact moving forward.

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. At present, the reform primarily impacts Essity’s fair value hedges on loans. As a result of the reform, uncertainty regarding the measurement of effectiveness has been eliminated and these hedges are expected to remain effective in the future. For further information concerning derivatives and hedge accounting, see Note E6 Derivatives and hedge accounting.

New or amended accounting standards after 2020

A number of new and amended accounting standards have not yet come into effect and have not been applied in advance in the preparation of the Group’s and the Parent company’s financial statements. The Group intends to comply with these new and amended standards when they come into force. These standards and amendments to standards published by IASB are not expected to have any impact on the Group’s or the Parent company’s financial statements.

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform

The amendments address issues that may arise when an existing interest rate benchmark is replaced with an alternative benchmark interest rate and aims to facilitate the transition. The changes also include disclosures related to the transition. Essity is monitoring all changes concerning the development of interest rate benchmarks. The effects on the financial statements are continuously evaluated. The EU approved the change on January 13, 2021 and it came into effect on January 1, 2021. The implementation of the changes is dependent on the development of changes in the transition from Interbank Offered Rates (IBORs) to alternative benchmark interest rates.

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.

Uncertainty and risks have arisen as a result of the COVID-19 pandemic that may affect Essity’s sales, earnings and financial position.

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

Provision for doubtful receivables, E3 Trade receivables

Leases, G2 Leases

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

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 of Group companies and other operations. Intra-Group transactions have been eliminated.

Functional currency and translation of foreign Group companies to the presentation 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. Essity’s Parent company has Swedish kronor (SEK) as its functional currency. The financial statements of Group companies are translated to the Group’s presentation currency, which is also SEK. 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 from their functional currency to the presentation currency in the same way as the net assets in the company are translated.

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 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.