when the transaction is carried out (settlement date accounting), while derivative instruments are reported when the agreement has been entered into (trade date accounting). A financial asset and a financial liability are offset and reported in the balance sheet as a net amount only when there is a legal right to set off the amount and an intention to adjust the items with a net amount or, at the same time, realise the asset and settle the liability. Financial instruments are reported initially at an acquisition value corresponding to the fair value of the instrument plus transaction expenses for all financial instruments, except those instruments categorised as financial assets reported at their fair value in the income statement, which are reported at their fair value excluding transaction expenses. The financial instruments are classified in the first accounts according to the purpose of the acquisition of the financial instrument. The fair value of listed financial assets corresponds to the asset’s listed bid price on the balance sheet date. The fair price of unlisted financial assets is established by applying valuation techniques such as recently completed transactions, prices of similar instruments and discounted cash flow. Accounts receivable and other current and long-term receivables Receivables, that are not derivatives, with payments that can be scheduled, and that are not listed on an active market, are reported at the accrued acquisition value according to the effective interest method. Accounts receivable and other current receivables that normally have a remaining duration of less than twelve months are reported at nominal value. A receivable is individually assessed with regard to its estimated loss risk and is entered at the amount it is expected to generate. Impairments are made where necessary and are reported in the income statement. Financial investments Financial investments and derivatives are categorised as financial assets valued at fair value in the income statement. This category has two subgroups: financial assets held for trading and other financial assets that the Company initially chose to include in this category. A financial asset is classified as being held for trading if it was acquired for the purpose of being sold in the short term. To the second subgroup, the company has chosen to attribute financial assets which, according to the management’s risk management and investment strategy, are administered and evaluated based on the fair value. These assets include financial investments in equity instruments and interest-bearing securities. Financial investments are valued continuously at fair value, with changes in value being reported in the income statement in net financial items. Derivative instruments Derivative instruments include forward exchange contracts and currency options to cover risks associated with changes in exchange rates. Derivatives are also contractual terms that are embedded in other agreements. Embedded derivatives are recognised separately if they are not closely related to the host contract. Value changes in derivative instruments, standalone
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OEM ANNUAL REPORT 2006 ❚ FINANCIAL REPORTING
and embedded, are reported in the income statement. The Group does not use derivatives for hedging purposes. Value changes in derivative instruments are reported as income and expenses in the operating income or in net financial items, based on the intended use of the derivative instrument and how this use is related to an operating item or a financial item. Liquid funds Liquid funds are cash and immediately available credit in banks and similar institutions, plus current liquid investments with a term of less than three months, from the date of acquisition, which are only exposed to insignificant risk for fluctuations in value. The cash and bank balance is reported at accrued acquisition value. The definition of liquid funds in the cash flow statement corresponds with liquid funds in the balance sheet. Interest-bearing liabilities Loans are reported continuously at accrued acquisition value, which means that the value is adjusted through discounts, where applicable, or premiums when the loan is taken and costs when borrowing is spread over the expected term of the loan. The scheduling is calculated on the basis of the initial interest rate of the loan. Gain and loss arising when the loan is settled are reported in the income statement. Accounts payable and other operating liabilities Liabilities are reported at the accrued acquisition value which is determined from the effective interest that was calculated at the time of acquisition which normally implies nominal value. TANGIBLE FIXED ASSETS Owned assets Tangible fixed assets are reported as assets in the balance sheet if it is likely that future economic benefits shall accrue to the Company and the acquisition value of the asset can be calculated in a reliable way. Tangible fixed assets are reported at acquisition value after deductions for accumulated depreciation and impairment costs. The acquisition price includes the purchase price including expenses directly attributable to putting the asset into place and condition to be used as intended by the acquisition. Directly attributable costs, which are included in the acquisition value, are the cost of delivery and handling, installation, title deeds, consultancy services and legal services. Loan expenses are not included in the acquisition value for fixed assets produced by the Company. The accounting principles for impairment are described below. The carrying amount of a tangible fixed asset is removed from the balance sheet on the disposal or retirement of the asset, or when no future economic benefits are expected from its use or disposal/retirement. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset, less direct sales costs. The gain or loss is recognised in other operating income/cost. Leased assets Leasing is classified in the consolidated financial statements either as capital or operating lease. In a capital lease, the financial risks and benefits
associated with the ownership are essentially transferred to the lessee, otherwise it is an operating lease. Assets leased under a capital lease have been reported as assets in the Group balance sheet. The obligation to pay future lease fees has been reported as long-term and current liabilities. The leased assets are depreciated according to plan, and the leasing payments are reported as interest and depreciation of liabilities. With an operating lease, the lease fee is entered as an expense during the leasing period starting from the date of utilisation, which may differ from what has actually been paid as a lease fee during the year. Subsequent expenditure Subsequent expenditure is added to the acquisition value only if it is likely that the future economic benefits associated with the asset will flow to the enterprise and the acquisition value can be calculated in a reliable manner. All other subsequent expenditure is reported as an expense in the period it is incurred. When determining whether subsequent expenditure should be added to the acquisition value, it is crucial to know if the expense is intended for the replacement of identified components, or parts thereof, in which case such expenses are set up as assets. Even in those cases when a new component has been constructed, the expense is added to the acquisition value. Any undepreciated values reported for replaced components, or parts of components, are discarded and charged to expenses when the component is replaced. Repairs are charged to expenses as incurred. Depreciation principles Straight-line depreciation is applied over the estimated utilisation period of the assets. Land is not depreciated. The Group applies component depreciation, meaning that the estimated useful life of components forms the basis for depreciation. Estimates of useful life: • buildings, business property see below • land improvements 20 years • machinery & other technical facilities 5-10 years • equipment, tools & installations 3-10 years Business property consists of a number of components with different useful lives. The main group is buildings and land. Land is not depreciated as its useful life is considered to be indefinite. The buildings consist of a number of components with different useful lives. These components have estimated useful lives of between 20 and 100 years. The following main groups of components have been identified and form the basis for depreciation of buildings: • Frame 100 years • Frame extensions, interior walls, etc. 30 years • Installations, heating, electricity, water & sanitation facilities, ventilation, etc. 20-32 years • External surfaces, walls, roof, etc. 20-50 years The depreciation methods and residual value of the assets and useful life are reviewed at the close of every year.