E3. Trade receivables

AP Accounting principles

Trade receivables are measured at amortized cost after a provision is made for doubtful receivables. Provisions for doubtful receivables are made using the simplified impairment method in IFRS 9 Financial Instruments for trade receivables meaning the provision is measured at an amount that corresponds to the expected credit losses for the remaining terms of all outstanding trade receivables as per the balance sheet date.

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.

KAA Key assessments and assumptions

The measurement of the provision for doubtful receivables is based on a combination of a collective and individual assessment. The collective assessment is based on the historical confirmed credit loss level in relation to net 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. These adjustments are made 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 events, such as financial crises or natural disasters.

Credit risk in trade receivables and provisions for doubtful receivables

Essity’s customer structure is dispersed, with customers in many different areas of business. In 2020, Essity’s ten largest customers accounted for 22.5% (23.7; 23.6) of Essity’s sales. The single largest customer accounted for 2.7% (4.4; 4.4) of sales. Confirmed credit losses on trade receivables in 2020 amounted to 0.02% (0.01; 0.01) of net sales. Of the outstanding trade receivables on the balance sheet date 2020, the ten largest customers accounted for 23.9% (23.2; 24.5). Confirmed credit losses on trade receivables over the past five years amounted to an average of 0.02% (0.02; 0.02) of net sales. Essity’s overall assessment, despite the ongoing COVID-19 pandemic, is that the credit risk within the customer segments in the countries where Essity conducts the majority of its sales has not changed materially during 2020; recognized bad debt losses remain at a low level. However, Essity continues to monitor development of GDP, financial stability and unemployment and will increase its provision for doubtful receivables if the situation deteriorates. Only one minor adjustment was therefore made in the collective assessment (see accounting principles and key assessment and assumptions above) regarding the expected impairment requirement for doubtful receivables in the 2020 year-end accounts.

In total, the Group has collateral mainly in the form of credit insurance taken out amounting to SEK 723m (1,251; 939). Of this amount, SEK 8m (13; 107) relates to the category trade receivables overdue.

The expense for the period for doubtful receivables amounted to SEK –7m (–40; –28).