Electrolux 2005 Annual Report Download - page 56

Notes
52 Electrolux Annual Report 2005
Amounts in SEKm, unless otherwise stated
Note 1 continued
Restructuring provisions are recognized when the Group has adopted
a detailed formal plan for the restructuring and has, either started the
plan implementation, or communicated its main features to those
affected by the restructuring.
Pensions and other post-employment benefits
Pensions and other post-employment benefit plans are classified as
either defined contribution or defined benefit plans.
Under a defined contribution plan, the company pays fixed contri-
butions into a separate entity and will have no legal obligation to pay
further contributions if the fund does not hold sufficient assets to pay
all employee benefits. Contributions are expensed when they are due.
All other pensions and other post-employment benefit plans are
defined benefit plans. The Projected Unit Credit Method is used to
measure the present value of its obligations and costs. The calcula-
tions are made annually using actuarial assumptions determined
close at the balance sheet date. Changes in the present value of obli-
gations due to revised actuarial assumptions are treated as actuarial
gains or losses and are amortized over the employees’ expected
average remaining working lifetime in accordance with the corridor
approach. Differences between expected and actual return on plan
assets are treated as actuarial gains or losses.
Net provisions for post-employment benefits in the balance sheet
represent the present value of the Group’s obligations at year-end
less market value of plan assets, unrecognized actuarial gains and
losses and unrecognized past-service costs.
Borrowings
The accounting policy for the year ended December 31, 2004, was the
same under Swedish GAAP. Borrowings are initially recognized at fair
value net of transaction costs incurred. After initial recognition, borrow-
ings are valued at amortized cost using the effective interest method.
Accounting for derivative fi nancial instruments and hedging activities
New accounting principles are adopted as from January 1, 2005. Pre-
vious accounting principles are described in New accounting princi-
ples as from 2005, see page 53.
Derivatives are initially recognized at fair value on the date a deriv-
ative contract is entered into and are subsequently remeasured at
their fair value. The method of recognizing the resulting gain or loss
depends on whether the derivative is designated as a hedging instru-
ment, and if so, the nature of the item being hedged. The Group des-
ignates certain derivatives as either: hedges of the fair value of recog-
nized assets or liabilities or a firm commitment (fair-value hedges);
hedges of highly probable forecast transactions (cash-flow hedges);
or hedges of net investments in foreign operations.
The Group documents at the inception of the transaction the rela-
tionship between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various
hedge transactions. The Group also documents its assessment, both
at hedge inception and on an ongoing basis, of whether the deriva-
tives that are used in hedging transactions are highly effective in off-
setting changes in fair values or cash flows of hedged items.
The fair values of various derivative instruments used for hedging
purposes are disclosed in Note 17 on page 63. Movements on the
hedging reserve in shareholder’s equity are shown in the consolidated
statement of changes in equity.
Fair-value hedge
Changes in the fair value of derivatives that are designated and qual-
ify as fair-value hedges are recorded as financial items in the income
statement, together with any changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting,
the adjustment to the carrying amount of a hedged item for which the
effective interest method is used, is amortized to profit or loss over
the period of maturity.
Cash-flow hedge
The effective portion of change in the fair value of derivatives that are
designated and qualify as cash-flow hedges are recognized in equity.
The gain or loss relating to the ineffective portion is recognized imme-
diately in the income statement as financial items.
Amounts accumulated in equity are recycled in the income state-
ment in the periods when the hedged item will affect profit or loss (for
instance when the forecast sale that is hedged takes place). However,
when the forecast transaction that is hedged results in the recognition
of a non-financial asset (for example, inventory) or a liability, the gains
and losses previously deferred in equity are transferred from equity and
included in the initial measurement of the cost of the asset or liability.
Net-investment hedge
Hedges of net investments in foreign operations are accounted for
similarly to cash-flow hedges. Any gain or loss on the hedging instru-
ment relating to the effective portion of the hedge is recognized in
equity; the gain or loss relating to the ineffective portion is recognized
immediately in the income statement as financial items.
Gains and losses accumulated in equity are included in the income
statement when the foreign operation is disposed of, or when a partial
disposal occurs.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting.
Changes in the fair value of any derivative instruments that do not
qualify for hedge accounting are recognized immediately in the income
statement as financial items.
Share-based compensation
IFRS 2 is applied for share-based compensation programs granted
after November 7, 2002, and that had not vested on January 1, 2005.
The instruments granted are either share options or shares, depend-
ing on the program. An estimated cost for the granted instruments,
based on the instruments’ fair value at grant date, and the number of
instruments expected to vest is charged to the income statement
over the vesting period. The fair value of share options is calculated
using a valuation technique, which is consistent with generally
accepted valuation methodologies for pricing financial instruments
and takes into consideration factors that knowledgeable, willing mar-
ket participants would consider in setting the price. The fair value of
shares is the market value at grant date, adjusted for the discounted
value of future dividends. For Electrolux, the share-based compensa-
tion programs are classified as equity-settled transactions, which
mean that the cost of the granted instrument’s fair value at grant date
is recognized over the vesting period (3 years).
In addition, the Group provides for employer contributions
expected to be paid in connection with the share-based compensa-
tion programs. The costs are charged to the income statement over