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, 2021. 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 shall 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 is prepared in XHTML and consolidated financial statements prepared in accordance with IFRS shall be marked up using XBRL tags.

Essity applies the ESEF regulation as of January 1, 2021.

New or amended accounting standards 2021

A number of amended accounting standards published by the IASB are effective from January 1, 2021 following endorsement by the EU. Essity has applied these amendments, most of which have no impact on the Group’s financial statements and are therefore not commented on. The amendments to standards that have had some impacts on Essity relates to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 linked to the Interest Rate Benchmark Reform.

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 implementation of the changes is dependent on the development of changes in the transition from Interbank Offered Rates (IBORs) to alternative benchmark interest rates. The changes had no material impact on the Group’s earnings or financial position.

New or amended accounting standards after 2021

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 new 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.

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.

Principles of consolidation

The Group’s consolidated financial statements include the Parent company and its Group companies, which comprise of 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 Investments in associates and joint ventures 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.

Translation of foreign currency

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 consolidated 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 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 incurred. 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.

Annual and Sustainability Report 2021