Saab 2014 Annual Report Download - page 86

FINANCIAL INFORMATION – NOTES
reversed to the income statement. Unrealised decreases in value are recognised
in other comprehensive income unless the decrease in value is significant and
has lasted for a long period, when the value is impaired through the income sta-
tement. If the write-down relates to equity instruments, such as shares, the
write-down is not reversed through the income statement.
• Other financial liabilities:
Liabilities classified as other financial liabilities are initially recognised at the
amount received after deducting transaction expenses. After acquisition, the
loans are carried at amortised cost, according to the effective rate method.
Trade accounts payable are classified in the category other financial liabilities.
Trade accounts payable have a short expected maturity and are carried without
discounting at their nominal amount.
Calculation of recoverable value
The recoverable value of financial assets in the categories held-to-maturity invest-
ments, loans receivable and accounts receivable measured at amortised cost is
calculated using the present value of future cash flows discounted by the effective
interest rate in effect when the asset was initially recognised. Assets with a maturity
of less than one year are not discounted.
Write-down of held-to-maturity investments and loans receivable and accounts
receivable recognised at amortised cost is reversed if a subsequent increase in
recoverable value can objectively be attributed to an event occurring after the
write-down.
Liquid assets
Liquid assets consist of cash and cash equivalents, immediately accessible balan-
ces with banks and similar institutions, and short-term liquid investments with a
maturity from acquisition date of less than three months, which are exposed to no
more than an insignificant risk of fluctuation in value.
Financial investments
Financial investments comprise either financial fixed assets or short-term invest-
ments, depending on the intent of the holding. If the maturity or the anticipated hol-
ding period is longer than one year, they are considered financial fixed assets, and if
it is shorter than one year they are short-term investments.
With recognition at fair value through profit or loss, changes in value are stated in
financial revenue and expenses.
Valuation principles
The fair value of listed financial assets is determined using market prices. Further-
more, Saab applies various valuation methods to determine the fair value of finan-
cial assets that are traded on an inactive market or unlisted holdings. These met-
hods are based on the valuation of similar instruments, discounted cash flows or
customary valuation methods such as Black-Scholes. See note 41.
DERIVATIVES AND HEDGE ACCOUNTING
Derivatives include forward exchange contracts, options and swaps utilised to
cover risks associated with changes in exchange rates and exposure to interest
rate risks. Derivatives are recognised on their acquisition date at cost and subse-
quently at fair value.
Derivatives with positive values are recognised as assets and derivatives with
negative values are recognised as liabilities under the heading derivatives in the
statement of financial position. Gains and losses on a derivative arising due to a
change in fair value are recognised in profit or loss if the derivative is classified
among financial assets and liabilities at fair value through profit or loss.
In hedge accounting, derivatives are classified as fair value hedges or cash flow
hedges. The recognition of these hedging transactions is described below.
Cash flow hedges
Certain forward exchange contracts and currency swaps (hedge instruments)
entered into to hedge future receipts and disbursements against currency risks are
accounted for according to the rules for cash flow hedging. Derivatives that protect
future receipts and disbursements are recognised in the statement of financial
position at fair value. Changes in value are recognised in other comprehensive
income and separately recognised in the hedge reserve in equity until the hedged
cash flow meets the operating profit or loss, at which point the cumulative changes
in value of the hedging instrument are transferred to profit or loss to meet and
match the effects on earnings of the hedged transaction.
Interest rate exposure from future variable-rate liabilities is hedged with interest rate
swaps. In its reporting, Saab applies cash flow hedging, which means that the change
in value of the interest rate swap is recognised in other comprehensive income and
separately recognised in the hedge reserve in equity. The change in value is recognised
in financial revenue and expenses when transferred to profit or loss.
When the hedged future cash flow refers to a transaction that will be capitalised in
the statement of financial position, the net gain or loss on cash flow hedges in
equity is dissolved when the hedged item is recognised in the statement of financial
position. If the hedged item is a non-financial asset or a non-financial liability, the
reversal from the net gain or loss on cash flow hedges in equity is included in the
original cost of the asset or liability. If the hedged item is a financial asset or financial
liability, the net gain or loss on cash flow hedges in equity is gradually reversed
through profit or loss at the same rate that the hedged item affects earnings.
When a hedging instrument expires, is sold or is exercised, or the company revo-
kes the designation as a hedging relationship before the hedged transaction
occurs and the projected transaction is still expected to occur, the recognised
cumulative gain or loss remains in the net gain or loss on cash flow hedges in
equity and is recognised in the same way as above when the transaction occurs.
If the hedged transaction is no longer expected to occur, the hedging
instrument’s cumulative gains and losses are immediately recognised in profit or
loss in accordance with principles described above for derivatives.
Fair value hedges
Certain forward exchange contracts and currency swaps (hedge instruments)
entered into to hedge future receipts and disbursements for currency and interest
rate risk are accounted for according to the rules for fair value hedging. These hed-
ges are recognised at fair value in the statement of financial position with regard
both to the derivative itself and the future receipt or disbursement (hedge item) for
the risk being hedged. The change in fair value of the derivative is recognised in
operating income together with the change in value of the hedged item.
Hedge of currency exposure in assets and liabilities
Currency exposure from an asset or liability is hedged with forward exchange cont-
racts. No hedge accounting is applied, due to which both the hedged item and
hedging instrument are recognised with respect to currency risk at fair value with
changes in value through profit or loss. Changes in the value of operations-related
receivables and liabilities are recognised in operating income, while changes in the
value of financial receivables and liabilities are recognised in financial revenue and
expenses.
INVENTORIES
Inventories are valued at the lower of cost and net realisable value. Net realisable
value is the estimated selling price in continuing operations after deducting estima-
ted expenses for completion and expenses incurred in selling.
Cost is calculated by applying the first-in first-out method (FIFO) or the weighted
average method and includes expenses to acquire inventory assets and bring
them to their present location and condition. For finished and semifinished goods,
cost consists of direct manufacturing expenses and a reasonable share of indirect
manufacturing expenses as well as expenses to customise products for individual
customers. Calculations take into account normal capacity utilisation.
DIVIDENDS
The dividend proposed by the Board of Directors reduces earnings available for
distribution and is recognised as a liability when the Annual General Meeting has
approved the dividend.
EMPLOYEE BENEFITS
The Group has two types of pension plans: defined-contribution and defined-
benefit pension plans.
Defined-contribution plans
In defined-contribution plans, pensions are based on the premiums paid. Obligations
with regard to defined-contribution plans are expensed in the income statement.
Defined-benefit plans
In defined-benefit plans, pensions are based on a percentage of the recipient’s
salary. Saab has around ten different types of defined-benefit plans. The predomi-
nant plan is the ITP plan, which accounts for 91 per cent (90) of the total obligation.
The Group’s net obligation for defined-benefit plans is calculated separately for
each plan by estimating the future compensation that employees have earned
through employment in present and previous periods. This compensation is dis-
counted to present value. Saab has secured main part of the obligation through
provisions to a pension fund, and the fair value of the fund’s assets is offset against
the provision for the pension obligation at present value in the statement of financial
position. The discount rate to calculate the commitment at present value has been
determined based on the interest rate on the closing day for a first-class mortgage
bond with a maturity corresponding to the pension obligation. The calculation is
made by a qualified actuary using the projected unit credit method.
82 – SAAB ANNUAL REPORT 2014