News; Feb 23, 2005 CET

New rules for financial reporting

Effective January 1, 2005, all exchange-listed European companies began applying a new standard for financial reporting. Swedish Match has been prepared for this for a considerable time at Group level, and the practical work involved had already been initiated a year ago. “It has been an enormous task and taken a large amount of time, but the positive result is that in future there will be better comparability between European listed companies when we are all using the same standard,” comments Joakim Tilly, Group Finance.

It was slightly more than two years ago that the European Commission stipulated in a regulation that all companies listed on any of the European exchanges should switch to the new International Financial Reporting Standards (IFRS) in their financial reporting as of the beginning of 2005. A total of about 7,000 European companies are affected by the new rules, which in practice will apply as of January 1, 2004, since a new version of the year-end report for 2004 must be produced in order to ensure that comparable figures are available for at least one year retroactively from the date when the IFRS rules come into effect.

In practice, the changes have not been particularly dramatic for Swedish Match. This is because Swedish Match has already been following the Swedish Financial Accounting Standards Council’s recommendations in its consolidated accounts. In its work, the Council has continuously endeavored to ensure that the Swedish accounting rules resemble IFRS as closely as possible.

One of the major changes for Swedish Match in complying with the new rules is that goodwill is no longer amortized according to plan, as was the practice before. Instead, it will now be mandatory to test at least once each year whether there is a write-down need. The effect of excluding goodwill amortization in year-end figures for 2004 recalculated in accordance with IFRS is to increase Swedish Match’s operating income by 175 MSEK.

IFRS also stipulates changes in how company acquisitions are to be reported. In future, a comprehensive analysis and documentation of acquired intangible assets will be required, with the assets divided into separate types with individual depreciation periods.

Swedish Match is also affected by new rules for the valuation of financial instruments and of biological assets such as growing crops. Such assets must be reported at their fair value on each reporting occasion. The fair value can then be affected by physical changes or changes in the market price of a raw material or a financial instrument. Swedish Match’s biological assets primarily comprise the forest holdings of the match operations in Brazil, but also include the tobacco plantations of the cigar operations.

“One effect of the market valuations could be that we experience greater fluctuations in earnings from quarter to quarter, although I do not believe it will have a significant impact in our case,” says Joakim Tilly. According to the IFRS rules, the book value of growing crops was 98 MSEK, compared with 76 MSEK according to the old accounting principles.

The IFRS rules also impose far-reaching requirements for providing information, primarily in the form of notes, in the future.

“In the Annual Report for 2004, we have also devoted considerable effort to explaining the differences, and these were also clarified in the year-end report,” notes Joakim Tilly.

In one area - employee benefits - Swedish Match has already been applying the IFRS rules since January 1, 2004. Since then, compensation and pensions paid to employees have been reported in accordance with the Swedish Financial Accounting Standards Council’s recommendation RR29, which in turn was an adaptation to IFRS. The result of the switchover was an increase of 257 MSEK in the level of debt in the consolidated balance sheet.