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1. cont.
Leased assets
In the case of leased assets, IAS 17 applies. Leasing of fixed assets, whereby the Group is essentially subject to the same risks and benefits as with direct ownership, is classified as financial lease. However, the Group has entered into certain financial leasing agreements related to company cars, photocopiers, etc. that, based on materiality criteria, are reported as operating leases. Leasing of assets where the lessor essentially retains ownership of the assets are classified as operating leases. Lease charges are expensed straight-line over the lease period.
Intangible assets
(i) Goodwill
Goodwill comprises the difference between the acquisition value of acquired operations and the fair value of the acquired assets, assumed liabilities and any contingent liabilities.
For goodwill in acquisitions made before January 1, 2004, the Group has, with the transition to IFRS, not applied IFRS retroactively, but rather the value reported on this date continues to be the Group’s acquisition value, following impairment testing, see Note 10.
Goodwill is valued at acquisition value less any accumulated impairments. Goodwill is divided among cash-generating units and is no longer amortized, but is instead tested annually, or upon indication, for impairment. Goodwill that has arisen from the acquisition of associated companies is included in the carrying amount for participations in associated companies.
(ii) Research and development
Research costs for obtaining new technical expertise are expensed continuously as they arise. Development costs in the case of which the research or other knowledge are applied in order to achieve new or improved products or processes are reported as an asset in the balance sheet, provided the product or process is technically and commercially usable. Other costs are reported in the income statement as they arise.
(iii) Other intangible assets
Other intangible assets acquired by the Group are reported at acquisition value less accumulated amortization and impairments.
(iv) Amortization
Amortization is reported in the income statement straight-line over the estimated useful life of the intangible assets, unless the useful life is indefinite. Goodwill and intangible assets with an indefinite useful life are tested for impairment requirements annually or as soon as indications arise that point toward a decline in the value of the asset. Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life periods are normally:
– trademarks 10–20 years
– capitalized development expenditures 5–7 years
Tangible assets
Tangible assets are reported in the Group at their acquisition value less accumulated depreciation and impairments if applicable. The acquisition value includes the purchase price and costs directly attributable to the asset in order to transport it to its place of use in the appropriate condition for being used in accordance with the purpose of the acquisition.
Borrowing costs are not included in the acquisition value of internally produced fixed assets.
Depreciation
Depreciation is applied straight-line over the asset’s estimated useful life, land is not depreciated.
Estimated useful life of:  
– buildings, owner-occupied properties 40 year
– machinery and other technical plant 5–12 years
– equipment, tools and fixtures 5–10 years
– major components 3–5 years

Assessment of an asset’s residual value and useful life is performed annually.
Biological assets
The Group has forest plantations to secure its raw material needs for match manufacturing. Trees under cultivation owned by the Group are valued at fair value after deductions for estimated selling expenses. Changes in fair value are included in the Group’s earnings for the period during which they arise. The fair value of the trees is based on estimated market value.
Inventory
Inventory is valued at the lesser of acquisition cost and net realizable value.
The acquisition value for cut timber amounts to the fair value with deductions for estimated selling expenses at the time of felling, determined in accordance with the accounting principles for biological assets.
The acquisition value of other inventory is calculated by applying the first-in, first-out method (FIFO) and includes expenses arising from the acquisition of inventory items and the transport of them to their present location and condition.
Assets held for sale
Fixed assets and disposal groups held for sale are reported at the lower of their previous carrying amount or their fair value less costs to sell.
Impairments
The carrying amounts for the Group’s assets, with the exception of biological assets, assets held for sale and disposal groups reported in accordance with IFRS 5, inventories, plan assets used for the financing of employee benefits and deferred tax assets, are tested on each reporting date to evaluate whether there is an indication of an impairment. Should such an indication exist, the asset’s recoverable amount is calculated.
For goodwill and other intangible assets with an indefinite useful life and intangible assets that are not yet ready for use, their recoverable amount is calculated annually, or when an impairment is indicated. An impairment charged against the income statement is made when the carrying amount exceeds the recoverable amount.
Provisions
A provision is reported in the balance sheet when the Group has an existing legal or informal obligation as a result of an event that has occurred, it is probable that expenditure will be required to regulate the obligation and that a reliable estimate of the amount can be made.
Share capital
Buybacks of own shares are reported directly in equity.
Employee benefits
Within the Group there are a number of defined contribution and defined benefit pension plans, some of them with plan assets in special foundations or similar institutions. The pension plans are financed by payments from the Group company concerned and its employees. Independent actuaries compute the size of the commitments attached to each plan and reevaluate the pension-plan assumptions each year.
Obligations regarding fees for defined contribution plans are reported as an expense in the income statement when they occur. Pension costs for defined benefit plans are calculated according to the Projected Unit Credit Method in a manner that distributes the cost over the employee’s remaining active working life. These assumptions are valued at the present value of the expected future disbursements using a discount rate that corresponds to the interest rate on first-class corporate bonds or government bonds with a remaining maturity that approximates the particular commitments. In Swedish Match’s consolidated balance sheet, the pension commitments for funded plans are reported net after deductions for the fair value of plan assets. Funded plans with net assets, that is, assets in excess of obligations, are reported as non-current receivables. When the calculation leads to an asset for the Group, the carrying value of the asset is limited to the net amount of non-reported actuarial losses and non-reported costs for service during prior periods and the present value of future repayments from the plan or reduced future payments to the plan.
The corridor rule is applied for actuarial gains and losses. In accordance with the corridor rule, the proportion of accumulated actuarial gains and losses that exceeds 10 percent of the larger of the present value of the obligations and the fair value of plan assets is reported in the income statement over the anticipated average remaining periods of employment for employees covered by the plan. Actuarial gains and losses are otherwise not recognized.
1. cont.
When there is a difference between how pension costs are determined for a legal entity and the Group, a provision or claim pertaining to a special employer’s salary tax based on this difference is recorded. The provision or claim is not computed at net present value.
Share-based payments
Under an option program, certain executives are entitled to purchase shares in the Company. The fair value of the allotted options is reported as a personnel cost with a corresponding amount reported as an increase in equity. The fair value is expensed during the year the options are earned, because the right to receive the options is irrevocable that year assuming that the employee is still employed at the end of the year.
Social fees attributable to share-based instruments allotted to employees in lieu of purchased services are expensed during the year of vesting. With respect to foreign employees, the amount for social security fees is corrected continuously to take into account the fair value trend of the options.
Taxes
Income taxes consist of current tax and deferred tax. Income tax is reported in the income statement except when the underlying transactions are reported directly in equity, in which case the related tax effect is also reported in equity.
Current tax is tax that shall be paid or is received for the current year, with application of tax rates, that are enacted on the reporting date. Adjustments of current tax attributable to earlier periods are also reported here.
Deferred tax is computed using the balance sheet method, using temporary differences between reported and taxable values of assets and liabilities as the starting point. The following temporary differences are not taken into account: temporary differences arising during the first reporting of goodwill, the first reporting of assets and liabilities that are not the result of business combinations and which, at the time of the transaction, do not affect either the reported or the taxable earnings, or temporary differences attributable to shares in subsidiaries and associated companies that are not expected to be reversed in the foreseeable future. Valuation of deferred tax is based on how the carrying amounts for assets or liabilities are expected to be realized or regulated. Deferred tax is calculated by applying tax rates or tax regulations that are enacted on the reporting date.
Deferred tax assets related to deductible temporary differences and loss carry-forwards are only reported to the extent that it is likely that they will be utilized. The value of deferred tax assets is reduced when it is no longer deemed likely that they can be utilized.
Contingent liabilities
A contingent liability is reported when there is a potential commitment that stems from previous events and whose occurrence is confirmed only by one or more uncertain future events or when there is a commitment that is not reported, as a liability or provision, because it is unlikely that an outflow of resources will be required.
Earnings per share
The computation of earnings per share is based on net profit for the year attributable to the shareholders of the Parent Company and on the weighted number of shares outstanding during the year. When computing diluted earnings per share, the number of shares is adjusted for the potential dilution of shares due to options issued to management and certain key employees. Dilution only takes place if the exercise price of the options is lower than the market price of the share. This dilution increases with increased difference between the exercise price and the market price of the share.
Recently issued accounting interpretations by IFRIC
A number of new accounting interpretations are applicable from fiscal year 2007 and have not been applied in this financial report.
IFRIC 7 Applying the Restatement Approach under IAS 29 Reporting in Hyperinflationary Economies deals with the application of IAS 29 when an economy is classified as hyperinflationary for the first time and particularly the accounting of deferred tax. IFRIC is applicable for fiscal year 2007 and is not expected to have an impact on the financial reports of the Group.
IFRIC 8 Scope of IFRS 2 Share-based Payment deals with the accounting of share- based payments when the goods or services received by the company cannot be specifically identified. IFRIC 8 shall be applied retrospectively in the financial reports of the Group from 2007. The impact of the accounting interpretation is not expected to be material.
IFRIC 9 Reassessment of Embedded Derivatives stipulates that a reassessment of whether an embedded derivative should be separated from the host contract can be done only if there is a change in the host contract. IFRIC 9 applies from fiscal year 2007 but is not expected to have a material impact on the financial reports of the Group.
IFRIC 10 Interim Financial Reporting and Impairment stipulates that an entity shall not reverse an impairment loss recognized in a previous interim period in respect of goodwill or an investment in an equity instrument or a financial asset carried at cost. The interpretation is to be applied prospectively from the date of application of the impairment rules in IAS 36 and the valuation rules in IAS 39, which is from January 1, 2004 for goodwill and January 1, 2005 for financial instruments. As no such reversals have taken place, this interpretation will not have an impact on the financial reports of the Group.
Parent Company accounting principles
The Annual Report of the Parent Company has been prepared in accordance with the Annual Accounts Act (1995:1554) and the Swedish Financial Accounting Standards Council’s recommendation RR 32:05 Accounting for Legal Entities. RR 32:05 states that in the Annual Report for the legal entity, the Parent Company shall apply all IFRS standards and statements approved by the EU as far as this is possible within the framework of the Annual Accounts Act and with respect to the connection between accounting and taxation.The recommendation states which exceptions and additions may be made in relation to IFRS. The differences in the accounting principles between the Parent Company and the Group are described below.
Changed accounting principles
From January 1, 2006 the Company values financial instruments at fair value according to the rules of the Annual Accounts Act chapter 4 paragraph 14 a-e. This is a change of accounting principles. Prior year has been restated.
Employee benefits
The Parent Company applies different principles for computing defined benefit plans than those specified in IAS 19. The Parent Company follows the provisions of the Pension Security Act and the regulations of the Swedish Financial Supervisory Authority, since that is a prerequisite for tax deductibility. The key differences compared with the regulations in IAS 19 are how the discount rate is determined, that computation of the defined benefit obligations occurs according to current salary levels without assumptions regarding future wage increases, and that all actuarial gains and losses are reported in the income statement as they are incurred.
Taxes
In the Parent Company, untaxed reserves are reported including deferred tax liabilities. In consolidated accounts, however, untaxed reserves are divided into deferred tax liabilities and equity.
Group and shareholder contributions for legal entities
The company reports Group and shareholder contributions in accordance with the opinion from the Swedish Financial Accounting Standards Council’s Emerging Issues Task Force. Shareholder contributions are transferred directly to the recipient’s equity and are capitalized in shares and participations by the donor, to the extent that an impairment loss is not required. Group contributions are reported in accordance with their economic implication. This means that a Group contribution provided with the aim of reducing the Group’s total tax is reported directly as retained earnings after a deduction for its current tax effect.
A Group contribution that is equivalent to a dividend is reported as a dividend. This means that a received Group contribution and its current tax effect are reported in the income statement. The Group contribution granted and its current tax effect are reported directly in retained earnings.
A Group contribution that is equivalent to a shareholder contribution is reported directly in the recipient’s retained earnings, taking account of the current tax effect. The donor reports the Group contributions and its current tax effect as an investment in participations in Group companies, to the effect that an impairment loss is not required.

Page 46


1. cont.
Leased assets
In the case of leased assets, IAS 17 applies. Leasing of fixed assets, whereby the Group is essentially subject to the same risks and benefits as with direct ownership, is classified as financial lease. However, the Group has entered into certain financial leasing agreements related to company cars, photocopiers, etc. that, based on materiality criteria, are reported as operating leases. Leasing of assets where the lessor essentially retains ownership of the assets are classified as operating leases. Lease charges are expensed straight-line over the lease period.
 
Intangible assets
(i) Goodwill
Goodwill comprises the difference between the acquisition value of acquired operations and the fair value of the acquired assets, assumed liabilities and any contingent liabilities.
For goodwill in acquisitions made before January 1, 2004, the Group has, with the transition to IFRS, not applied IFRS retroactively, but rather the value reported on this date continues to be the Group’s acquisition value, following impairment testing, see Note 10.
Goodwill is valued at acquisition value less any accumulated impairments. Goodwill is divided among cash-generating units and is no longer amortized, but is instead tested annually, or upon indication, for impairment. Goodwill that has arisen from the acquisition of associated companies is included in the carrying amount for participations in associated companies.
 
(ii) Research and development
Research costs for obtaining new technical expertise are expensed continuously as they arise. Development costs in the case of which the research or other knowledge are applied in order to achieve new or improved products or processes are reported as an asset in the balance sheet, provided the product or process is technically and commercially usable. Other costs are reported in the income statement as they arise.
 
(iii) Other intangible assets
Other intangible assets acquired by the Group are reported at acquisition value less accumulated amortization and impairments.
 
(iv) Amortization
Amortization is reported in the income statement straight-line over the estimated useful life of the intangible assets, unless the useful life is indefinite. Goodwill and intangible assets with an indefinite useful life are tested for impairment requirements annually or as soon as indications arise that point toward a decline in the value of the asset. Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life periods are normally:
– trademarks 10–20 years
– capitalized development expenditures 5–7 years
 
Tangible assets
Tangible assets are reported in the Group at their acquisition value less accumulated depreciation and impairments if applicable. The acquisition value includes the purchase price and costs directly attributable to the asset in order to transport it to its place of use in the appropriate condition for being used in accordance with the purpose of the acquisition.
Borrowing costs are not included in the acquisition value of internally produced fixed assets.
 
Depreciation
Depreciation is applied straight-line over the asset’s estimated useful life, land is not depreciated.
Estimated useful life of:  
– buildings, owner-occupied properties 40 year
– machinery and other technical plant 5–12 years
– equipment, tools and fixtures 5–10 years
– major components 3–5 years

Assessment of an asset’s residual value and useful life is performed annually.
 
Biological assets
The Group has forest plantations to secure its raw material needs for match manufacturing. Trees under cultivation owned by the Group are valued at fair value after deductions for estimated selling expenses. Changes in fair value are included in the Group’s earnings for the period during which they arise. The fair value of the trees is based on estimated market value.
 
Inventory
Inventory is valued at the lesser of acquisition cost and net realizable value.
The acquisition value for cut timber amounts to the fair value with deductions for estimated selling expenses at the time of felling, determined in accordance with the accounting principles for biological assets.
The acquisition value of other inventory is calculated by applying the first-in, first-out method (FIFO) and includes expenses arising from the acquisition of inventory items and the transport of them to their present location and condition.
 
Assets held for sale
Fixed assets and disposal groups held for sale are reported at the lower of their previous carrying amount or their fair value less costs to sell.
 
Impairments
The carrying amounts for the Group’s assets, with the exception of biological assets, assets held for sale and disposal groups reported in accordance with IFRS 5, inventories, plan assets used for the financing of employee benefits and deferred tax assets, are tested on each reporting date to evaluate whether there is an indication of an impairment. Should such an indication exist, the asset’s recoverable amount is calculated.
For goodwill and other intangible assets with an indefinite useful life and intangible assets that are not yet ready for use, their recoverable amount is calculated annually, or when an impairment is indicated. An impairment charged against the income statement is made when the carrying amount exceeds the recoverable amount.
 
Provisions
A provision is reported in the balance sheet when the Group has an existing legal or informal obligation as a result of an event that has occurred, it is probable that expenditure will be required to regulate the obligation and that a reliable estimate of the amount can be made.
 
Share capital
Buybacks of own shares are reported directly in equity.
 
Employee benefits
Within the Group there are a number of defined contribution and defined benefit pension plans, some of them with plan assets in special foundations or similar institutions. The pension plans are financed by payments from the Group company concerned and its employees. Independent actuaries compute the size of the commitments attached to each plan and reevaluate the pension-plan assumptions each year.
Obligations regarding fees for defined contribution plans are reported as an expense in the income statement when they occur. Pension costs for defined benefit plans are calculated according to the Projected Unit Credit Method in a manner that distributes the cost over the employee’s remaining active working life. These assumptions are valued at the present value of the expected future disbursements using a discount rate that corresponds to the interest rate on first-class corporate bonds or government bonds with a remaining maturity that approximates the particular commitments. In Swedish Match’s consolidated balance sheet, the pension commitments for funded plans are reported net after deductions for the fair value of plan assets. Funded plans with net assets, that is, assets in excess of obligations, are reported as non-current receivables. When the calculation leads to an asset for the Group, the carrying value of the asset is limited to the net amount of non-reported actuarial losses and non-reported costs for service during prior periods and the present value of future repayments from the plan or reduced future payments to the plan.
The corridor rule is applied for actuarial gains and losses. In accordance with the corridor rule, the proportion of accumulated actuarial gains and losses that exceeds 10 percent of the larger of the present value of the obligations and the fair value of plan assets is reported in the income statement over the anticipated average remaining periods of employment for employees covered by the plan. Actuarial gains and losses are otherwise not recognized.

Page 47

1. cont.
When there is a difference between how pension costs are determined for a legal entity and the Group, a provision or claim pertaining to a special employer’s salary tax based on this difference is recorded. The provision or claim is not computed at net present value.
 
Share-based payments
Under an option program, certain executives are entitled to purchase shares in the Company. The fair value of the allotted options is reported as a personnel cost with a corresponding amount reported as an increase in equity. The fair value is expensed during the year the options are earned, because the right to receive the options is irrevocable that year assuming that the employee is still employed at the end of the year.
Social fees attributable to share-based instruments allotted to employees in lieu of purchased services are expensed during the year of vesting. With respect to foreign employees, the amount for social security fees is corrected continuously to take into account the fair value trend of the options.
 
Taxes
Income taxes consist of current tax and deferred tax. Income tax is reported in the income statement except when the underlying transactions are reported directly in equity, in which case the related tax effect is also reported in equity.
Current tax is tax that shall be paid or is received for the current year, with application of tax rates, that are enacted on the reporting date. Adjustments of current tax attributable to earlier periods are also reported here.
Deferred tax is computed using the balance sheet method, using temporary differences between reported and taxable values of assets and liabilities as the starting point. The following temporary differences are not taken into account: temporary differences arising during the first reporting of goodwill, the first reporting of assets and liabilities that are not the result of business combinations and which, at the time of the transaction, do not affect either the reported or the taxable earnings, or temporary differences attributable to shares in subsidiaries and associated companies that are not expected to be reversed in the foreseeable future. Valuation of deferred tax is based on how the carrying amounts for assets or liabilities are expected to be realized or regulated. Deferred tax is calculated by applying tax rates or tax regulations that are enacted on the reporting date.
Deferred tax assets related to deductible temporary differences and loss carry-forwards are only reported to the extent that it is likely that they will be utilized. The value of deferred tax assets is reduced when it is no longer deemed likely that they can be utilized.
 
Contingent liabilities
A contingent liability is reported when there is a potential commitment that stems from previous events and whose occurrence is confirmed only by one or more uncertain future events or when there is a commitment that is not reported, as a liability or provision, because it is unlikely that an outflow of resources will be required.
 
Earnings per share
The computation of earnings per share is based on net profit for the year attributable to the shareholders of the Parent Company and on the weighted number of shares outstanding during the year. When computing diluted earnings per share, the number of shares is adjusted for the potential dilution of shares due to options issued to management and certain key employees. Dilution only takes place if the exercise price of the options is lower than the market price of the share. This dilution increases with increased difference between the exercise price and the market price of the share.
 
Recently issued accounting interpretations by IFRIC
A number of new accounting interpretations are applicable from fiscal year 2007 and have not been applied in this financial report.
IFRIC 7 Applying the Restatement Approach under IAS 29 Reporting in Hyperinflationary Economies deals with the application of IAS 29 when an economy is classified as hyperinflationary for the first time and particularly the accounting of deferred tax. IFRIC is applicable for fiscal year 2007 and is not expected to have an impact on the financial reports of the Group.
IFRIC 8 Scope of IFRS 2 Share-based Payment deals with the accounting of share- based payments when the goods or services received by the company cannot be specifically identified. IFRIC 8 shall be applied retrospectively in the financial reports of the Group from 2007. The impact of the accounting interpretation is not expected to be material.
IFRIC 9 Reassessment of Embedded Derivatives stipulates that a reassessment of whether an embedded derivative should be separated from the host contract can be done only if there is a change in the host contract. IFRIC 9 applies from fiscal year 2007 but is not expected to have a material impact on the financial reports of the Group.
IFRIC 10 Interim Financial Reporting and Impairment stipulates that an entity shall not reverse an impairment loss recognized in a previous interim period in respect of goodwill or an investment in an equity instrument or a financial asset carried at cost. The interpretation is to be applied prospectively from the date of application of the impairment rules in IAS 36 and the valuation rules in IAS 39, which is from January 1, 2004 for goodwill and January 1, 2005 for financial instruments. As no such reversals have taken place, this interpretation will not have an impact on the financial reports of the Group.
 
Parent Company accounting principles
The Annual Report of the Parent Company has been prepared in accordance with the Annual Accounts Act (1995:1554) and the Swedish Financial Accounting Standards Council’s recommendation RR 32:05 Accounting for Legal Entities. RR 32:05 states that in the Annual Report for the legal entity, the Parent Company shall apply all IFRS standards and statements approved by the EU as far as this is possible within the framework of the Annual Accounts Act and with respect to the connection between accounting and taxation.The recommendation states which exceptions and additions may be made in relation to IFRS. The differences in the accounting principles between the Parent Company and the Group are described below.
 
Changed accounting principles
From January 1, 2006 the Company values financial instruments at fair value according to the rules of the Annual Accounts Act chapter 4 paragraph 14 a-e. This is a change of accounting principles. Prior year has been restated.
 
Employee benefits
The Parent Company applies different principles for computing defined benefit plans than those specified in IAS 19. The Parent Company follows the provisions of the Pension Security Act and the regulations of the Swedish Financial Supervisory Authority, since that is a prerequisite for tax deductibility. The key differences compared with the regulations in IAS 19 are how the discount rate is determined, that computation of the defined benefit obligations occurs according to current salary levels without assumptions regarding future wage increases, and that all actuarial gains and losses are reported in the income statement as they are incurred.
 
Taxes
In the Parent Company, untaxed reserves are reported including deferred tax liabilities. In consolidated accounts, however, untaxed reserves are divided into deferred tax liabilities and equity.
 
Group and shareholder contributions for legal entities
The company reports Group and shareholder contributions in accordance with the opinion from the Swedish Financial Accounting Standards Council’s Emerging Issues Task Force. Shareholder contributions are transferred directly to the recipient’s equity and are capitalized in shares and participations by the donor, to the extent that an impairment loss is not required. Group contributions are reported in accordance with their economic implication. This means that a Group contribution provided with the aim of reducing the Group’s total tax is reported directly as retained earnings after a deduction for its current tax effect.
A Group contribution that is equivalent to a dividend is reported as a dividend. This means that a received Group contribution and its current tax effect are reported in the income statement. The Group contribution granted and its current tax effect are reported directly in retained earnings.
A Group contribution that is equivalent to a shareholder contribution is reported directly in the recipient’s retained earnings, taking account of the current tax effect. The donor reports the Group contributions and its current tax effect as an investment in participations in Group companies, to the effect that an impairment loss is not required.