Electrolux 2005 Annual Report Download - page 57

Notes
Electrolux Annual Report 2005 53
Note 1 continued
the vesting period. The provision is periodically revalued based on the
fair value of the instruments at each closing date. For details of the
share-based compensation programs, please refer to Note 22 on
page 68.
Cash flow
The cash-flow statement has been prepared according to the indirect
method.
New accounting principles as from 2005
Financial instruments
On January 1, 2005, the Group implemented the new accounting
standard IAS 32, Financial Instruments: Disclosure and Presentation
as endorsed by the EU. The introduction did not result in any recon-
ciling items. On January 1, 2005, the Group implemented the new
accounting standard IAS 39, Financial Instruments Recognition and
Measurement as endorsed by the EU. The opening retained earnings
at January 1, 2005, were adjusted and no restatement of compara-
tive figures for 2004 has been made. No calculation of possible
effects of IAS 39 on the 2004 financial statements has been made. If
IAS 39 had been applied in 2004, the volatility in income, net borrow-
ings, and equity would most probably have been higher. The main
adjustments required to arrive at restatement of the comparative fig-
ures should have been the following:
• Derivatives recognized at fair value instead of at the lower of cost
or market.
• Financial assets held for trading recognized at fair value instead of
at the lowest of cost or market.
• Financial liabilities which are hedged recognized at fair value
instead of at amortized cost.
Under IAS 39, all financial assets and liabilities including ordinary and
embedded derivatives are recognized in the balance sheet. Financial
instruments are classified in the following categories:
• Financial assets at fair value through profit or loss
• Loans and receivables
• Held-to-maturity investments
• Available-for-sale financial assets
• Other liabilities
Based on the classification of the financial instruments, different valu-
ation rules apply. The valuation principles to be applied for the differ-
ent categories of financial instruments are described in detail above.
Financial assets are classified as current assets if they are held for
trading or expected to be realized within 12 months of the balance
sheet date.
Derivatives and hedge accounting
The standard stipulates that all financial derivative instruments shall
be classified as assets or liabilities at fair value through profit or loss
and be recognized at fair value in the balance sheet. Changes in the
fair value of derivative instruments shall be recognized in the income
statement unless hedge accounting is applied, The standard allows
for hedge accounting only if certain criteria are met, e.g., documenta-
tion, linking with exposure and effectiveness testing. In connection
with cash flow and hedging of net-investment hedge accounting,
changes in the fair value of the effective portion of derivative instru-
ments are reported in equity until the hedged item is recognized in the
income statement.
The standard defines three types of hedging relationships:
• Fair-value hedge, a hedge entered into to mitigate changes in an
asset’s or liabilities fair value.
• Cash-flow hedge, a hedge entered into to mitigate the risk of vari-
ability in the cash flows of a recognized asset or liability, or a highly
probable forecast.
• Net-investment hedge, a hedge entered into to mitigate the
changes in fair value from foreign-exchange volatility of the value
of the net investment in a foreign entity.
Previously, fair value accounting of derivative instruments was not
permitted and there was limited guidance on hedge accounting. Con-
sequently, under previous rules the company deferred unrealized fair
value gains and losses on its derivative instruments during the period
of the hedge and recognized the effect at the time that the hedged
transaction occurred. However, derivative instruments not held for
hedging purposes were recognized at the lower of cost or market.
On January 1, 2005, the Group recorded the fair value of all deriva-
tives on the balance sheet with the net value affecting equity, SEK 445m
was recorded as derivatives in current assets and SEK 447m was
recorded as derivatives in financial liability. The net effect on equity
was SEK –2m. The implementation of IAS 39 will introduce higher
volatility in income, net borrowings and of the Group’s equity. This
volatility cannot be predicted with certainty, but it is the target for the
Group to achieve hedge accounting and limit the volatility of the
income statement as far as possible to a justifiable cost.
IFRS transition effects on the consolidated
opening balance, January 1, 2005
Closing Opening
balance balance
after after
SEKm transition IAS 39 transition
Non-current assets 25,623 — 25,623
Current assets 49,473 445 49,918
Total assets 75,096 445 75,541
Equity 23,636 –2 23,634
Provisions 14,012 — 14,012
Financial liabilities 9,843 447 10,290
Operating liabilities 27,605 — 27,605
Total equity and liabilities 75,096 445 75,541
New accounting principles
The IASB has during 2005 issued a number of new standards, amend-
ments to standards and interpretations that affect the Group in differ-
ent degrees. While the Group has not yet evaluated the complete
effect of the implementation of the new standards, the Group does
not expect them to have any material impact in the financial position.
The following new standards and interpretations could be applica-
ble for the Group:
IFRS 7 Financial Instruments: Disclosures. This standard super-
sedes IAS 30, Disclosures in the Financial Statements of Banks and
Similar Financial Institutions, and states principles for recognizing,
measuring, and presenting financial assets and liabilities that comple-
ment those included in IAS 32, Financial Instruments: Presentation