Notes for the Group
1. Accounting principles
Compliance with standards and legislation
The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), approved by the European Commission for application within the EU. In addition the Swedish Financial Accounting Standards Council’s recommendation RR 30:06, Supplementary Accounting Regulations for Groups, has been applied.
The Parent Company applies the same accounting principles as the Group, except in those instances described below in the section “Accounting principles for the Parent Company”.
Basis for the preparation of the financial reports for the Parent Company and the Group
The financial reports are presented in SEK. Unless otherwise indicated, all amounts are rounded off to the nearest million. Figures in the reports are based on a consolidation system in SEK thousands. By rounding the numbers in tables, totals may not always equal the sum of the included rounded numbers.
Assets and liabilities are reported at their historical acquisition value, except for certain financial assets and liabilities and biological assets that are reported at fair value. Financial assets and liabilities reported at fair value comprise derivative instruments and financial assets classified as financial assets reported at fair value in the income statement or as financial assets available for sale.
Functional currency and reporting currency
The functional currency of the Parent Company is Swedish kronor which is also the reporting currency of the Group. This means that the reports are presented in Swedish kronor. All amounts, unless otherwise stated, are in million of kronor.
Evaluations and estimates in the financial reports
Preparing financial reports in accordance with IFRS requires that management make evaluations, estimations and assumptions that affect the reported amounts for assets, liabilities, revenues and costs. The estimations and assumptions are based on historical experience and a number of other factors that may be considered relevant under the prevailing conditions. The actual outcome may deviate from these estimations and assumptions.
Evaluations made by management on the implementation of IFRS that have a significant impact on financial reports, and estimations made that could entail material adjustments in subsequent years’ financial reports, are described in greater detail in Note 33, Critical estimates and judgements.
New accounting principles
In 2007 Swedish Match has changed the principle for reporting of actuarial gains and losses in the Group’s various defined benefit plans. These actuarial gains and losses are now recognized directly in equity in the period in which they occur.
The net of plan surpluses and deficits is included in the calculation of net debt. The total cost relating to defined benefit plans which previously was charged to personnel costs is now divided between personnel costs and financial income and expenses. Financial income and expenses are calculated from the net value of each plan at the beginning of the year. For surplus plans financial income is calculated using the expected return on plan assets and for deficit plans financial expenses is calculated using the discount factor decided for each plan. The new method of accounting for actuarial gains and losses is a change of accounting principles and 2006 has been restated. The effect of the restatement on Swedish Match’s opening equity 2006 amounts to a negative 284 MSEK and an increased liability for retirement benefits of 397 MSEK. The effect on the closing equity 2006 compared with previously reported numbers amounts to a negative 250 MSEK and an increased net liability for retirement benefits of 304 MSEK. The restated operating profit for 2006 increases with 50 MSEK, finance net is charged with 44 MSEK and tax is charged with 2 MSEK.
IFRS7 Financial instruments, disclosures requires entities to provide additional disclosures about significant financial instruments and the nature and extent of risks arising from financial instruments. The standard does not involve a change of accounting principle but only pertains to additional disclosures for financial instruments.
New IFRSs and Interpretations which have not yet been applied
A number of new standards, change in standards and interpretations of standards apply from 2008 or later and have not been applied in these financial reports:
IFRS 8 Operating Segments sets out the definition of an operating segment and the requirements for disclosure in the financial reports. The standard will be effective for the Company as of January 1, 2009. Swedish Match is evaluating the standard for its impact on its financial reports.
Changes to IAS 23 Borrowing Costs sets out that borrowing costs directly pertaining to acquisition, construction or production of an asset that take a substantial period of time to complete shall be capitalised. The standard will be effective for the Company as of January 1, 2009. Swedish Match does not expect this change to the standard to have a material impact on its financial reports.
Interpretation according to IFRIC 11 IFRS 2: Group and Treasury Share Transactions is not expected to have a material impact on the financial reports.
Reporting by segment
Swedish Match’s operations comprise of six operating segments: Snuff, Cigars, Chewing tobacco, Pipe tobacco and accessories, Lights and Other operations. The lights segment comprises the matches and lighters operations.
Geographic areas constitute secondary segments and cover the following market regions: the Nordic region, North America and Rest of the world.
Classification etc.
Fixed assets and non-current liabilities in the Parent Company and the Group essentially consist of amounts that are expected to be recovered or paid after more than 12 months, from the reporting date. Current assets and accounts payable essentially consist of amounts that are expected to be recovered or paid within 12 months, from the reporting date.
Consolidation principles
The consolidated financial statements include the Parent Company and all subsidiaries and associated companies. Subsidiaries are defined as companies in which Swedish Match holds shares carrying more than 50 percent of the votes or in which Swedish Match has a decisive influence in some other way. Associated companies are defined as companies in which Swedish Match exercises a significant, long-term influence without the jointly owned company being a subsidiary. This normally means that the Group holds 20–50 percent of total voting rights. Holdings in associated companies and joint ventures are reported in accordance with the equity method.
All acquisitions of companies are reported in accordance with the purchase method. The method means that the acquisition of subsidiaries is considered a transaction through which the Group indirectly acquires the subsidiary’s assets and assumes its liabilities and contingent liabilities. Divested companies are included in the consolidated accounts up through the time of divestment. Companies acquired during the year are included in the consolidated financial statements from the date of acquisition.
Intra-Group receivables and liabilities, revenues and costs and unrealized gains and losses arising from intra-Group transactions are eliminated in their entirety when the consolidated financial statements are prepared.
Foreign currencies
(i) Transactions in foreign currencies
Transactions in foreign currencies are translated into the functional currency according to the exchange rates applicable on the transaction date. Monetary assets and liabilities in foreign currencies are translated to the functional currency at the exchange rate applicable on the reporting date. Exchange-rate differences arising from translation are reported in the income statement. Non-monetary assets and liabilities reported at their historical acquisition values are translated at the exchange rate in effect at the transaction date. Non-monetary assets and liabilities reported at their fair value are converted to the functional currency at the applicable rate at the time of the valuation. Exchange rate differences are then reported in the same manner as other changes in value relating to the asset or liability.
(ii) Financial reports of foreign operations
Assets and liabilities in foreign operations, including goodwill and other Group surplus and deficit values, are translated into SEK at the exchange rate on the reporting date. Revenues and expenses from foreign operations are translated to SEK at an average exchange rate for the year. Translation differences arising from currency translation of foreign operations are reported directly in equity as a translation reserve.
Accumulated translation differences are presented as a separate equity category and contain translation differences accumulated since January 1, 2004. Accumulated translation differences prior to January 1, 2004 are allocated to other equity categories and are not reported separately.
The Group’s most significant currencies are shown in the table below:
| |
|
Average exchange rate |
Exchange rate |
| |
|
January–December |
on December 31 |
| Country |
Currency |
2007 |
2006 |
2007 |
2006 |
| USA |
USD |
6.76 |
7.38 |
6.43 |
6.86 |
| Euro zone |
EUR |
9.25 |
9.25 |
9.45 |
9.04 |
| Brazil |
BRL |
3.47 |
3.39 |
3.66 |
3.22 |
| South Africa |
ZAR |
0.96 |
1.10 |
0.94 |
0.98 |
Revenues
Revenue from the sale of goods is recognized when an agreement with the customer is in place, the delivery has occurred and all key risks and benefits have been transferred to the customer.
Financial income and expenses
Financial income and expenses consist of interest income on bank balances, receivables, interest-bearing securities and dividend income, interest expense on loans, exchange rate differences, unrealized and realized gains on financial investments and derivative instruments used in financial activities. Interest income includes accrued amounts of transaction costs and, if applicable, discounts, premiums and other differences between the original value of the receivable and the amount received at maturity. Issue expenses and similar transaction costs for raising loans are accrued over the term of the loan.
Financial instruments
Financial instruments are valued and reported within the Group in accordance with the rules contained in IAS 39 as of January 1, 2005.
Financial instruments reported in the balance sheet include, on the asset side, cash and cash equivalents, other investments, trade receivables, shares and other equity instruments, loans receivable, bonds receivable and derivatives. On the liabilities and equity side are accounts payable, issued liability and equity instruments, loans and derivatives. A financial asset or a financial liability is recognized on the balance sheet when the entity becomes a party to the contractual provisions of the instrument. A financial asset (or a portion of a financial asset) is derecognized from the balance sheet when risk and the right to receive cash flow from the instrument has ceased or been transferred to another party. A financial liability (or a part of a financial liability) is derecognized from the balance sheet when the obligation is settled or discharged. Financial assets and liabilities are recognized and derecognized applying settlement date accounting.
Financial instruments are initially reported at their acquisition value, corresponding to the instruments’ fair value with additions for transaction costs for all financial instruments except for those that belong to the category of financial assets that are reported at their fair value via the income statement. Reporting thereafter depends on how they are classified in accordance with the criteria below.The fair value of listed financial assets corresponds to the assets’ stated purchase price on the reporting date.
The fair value of unlisted financial assets is based on a calculation of the net present value of future cash flows.
IAS 39 classifies financial instruments into categories. The classification depends on the purpose for which the instruments were acquired. Management determines the classification of instruments when they are first acquired. The categories are as follows:
Investments held to maturity
Financial assets that have fixed or determinable payment flows, and with a fixed duration, that the Company has an expressed intention and ability to hold until maturity. Assets in this category are valued at their amortized cost.
Financial assets at fair value at profit and loss
Financial assets in this category which include financial investments reported as other investments or cash equivalents are valued at fair value with changes in value reported in the income statement.
Financial assets available for sale
The financial assets in this category include financial assets that are not classified in any other category or financial assets that the company initially chose to classify in this category. Assets in this category are valued continuously at their fair value with changes in value reported in equity. At the time when the investments are removed from the balance sheet, previously reported accumulated gains or losses in equity are transferred to the income statement.
Other financial liabilities
Financial liabilities not held for trading are valued at amortized cost. Liabilities are classified as other financial liabilities, which means that they are initially reported at the amount received after deductions for transaction costs. After the date of acquisition, loans, if hedge accounting is not applied, are valued at amortized cost in accordance with the effective interest method. Non-current liabilities have an anticipated duration of longer than one year, while current liabilities have a duration of less than one year.
Derivatives used for hedge accounting
All derivatives are reported at their fair value in the balance sheet. Changes in value are transferred to the income statement when the fair value is hedged. Hedge accounting is described in greater detail below.
Non-current receivables and other current receivables
Non-current receivables and other current receivables are receivables that arise when the company provides money without the intention to conduct trade in the receivable. If the expected holding time is longer than one year, they are non-current receivables, and if it is shorter, they are current receivables. These receivables belong to the category loan receivables and trade receivables.
Consolidated Income Statement
