Annual Report 2008 - Securitas

78 Annual report
Notes and comments to the consolidated financial statements
Note 4. Critical estimates and judgments
and items affecting comparability
The preparation of financial reports requires the Board of Directors and Group
Management to make estimates and judgments using certain assumptions.
Estimates and judgments will impact both the statement of income and the
balance sheet as well as disclosures such as contingent liabilities. Actual
results may differ from these estimates and judgments under different
assumptions and conditions.
Valuation of identifiable assets and liabilities in
connection with the acquisition of subsidiaries/operations
The valuation of identifiable assets and liabilities in connection with the acquisition
of subsidiaries or operations as part of the purchase price allocation
involves that items in the acquired company’s balance sheet as well as items
that have not been recognized in the acquired company’s balance sheet
such as customer relations should be valued at fair value. In normal circumstances,
as quoted market prices are not available for the assets and liabilities
that are to be valued, different valuation methods have to be used. These
valuation methods are based on a number of assumptions. Other items that
can be difficult both to identify as well as to value are contingent liabilities
that could have arisen in the acquired company such as litigation related
items. All balance sheet items are thus subject to estimates and judgments.
Further information is provided in Note 16.
Impairment testing of goodwill and
other acquisition related intangible assets
In connection with the impairment testing of goodwill and other acquisition
related intangible assets, the book value is compared with the recoverable
value. The recoverable value is determined by the higher of an asset’s net
realizable value and its value in use. Since under normal circumstances no
quoted market prices are available to assess an asset’s net realizable value,
the book value is normally compared with the value in use. The calculation
of the value in use is based on assumptions and judgments. The most important
assumptions are the organic sales growth, the development of the
operating margin, the operating working capital requirements and the relevant
WACC, which is used to discount future cash flows. All in all, this means
that the valuation of the balance sheet items Goodwill, which amounts to
MSEK 14,104.3 (13,793.5 and 14,031.6) and Acquisition related intangible
assets, which amounts to MSEK 751.3 (624.0 and 464.2), are subject to
critical estimates and judgments. A sensitivity analysis regarding the organic
sales growth, the operating margin and the wAcc is provided in Note 16.
Valuation of accounts receivable
and the provision for bad debt losses
Accounts receivable, which amounts to MSEK 9,962.6 (9,889.4 and
8,855.6), is one of the most significant balance sheet items. Accounts
receivable are accounted net after provisions for probable bad debt. The
provision for bad debt losses, which amounts to MSEK –354.4 (–324.3 and
–297.0), is thus subject to critical estimates and judgments. Further information
regarding the credit risk in accounts receivable is provided in Note 6.
Information regarding the development of the provision for bad debt losses
during the year is provided in Note 25.
Actuarial calculations regarding employee benefits
such as pensions and medical benefits
Employee benefits are normally an area where estimates and judgments are
not critical. However for defined benefit plans relating to benefits particularly
for pensions and medical benefits and where the payment to the
employee is several years into the future, actuarial calculations are required.
These calculations are based on assumptions regarding economic variables
such as the discount rate, the expected return on plan assets, salary increases,
inflation rate, pension increases and the inflation rate for medical
benefits, but also on demographic variables such as the expected life span.
Securitas Annual report 2008
All in all, the balance sheet item pension balances for defined benefit plans,
which amounts to MSEK 8.4 (17.9 and 7.0) and which is stated under other
long-term receivables, and the balance sheet item provisions for pensions
and similar commitments, which amounts to MSEK 1,250.1 (946.1 and
1,055.9), are subject to critical estimates and judgments. The Group’s
opinion is that the most important assumptions are the discount rate, the
inflation rate and the expected life span. A sensitivity analysis regarding
these three variables is provided in Note 32.
Actuarial calculations regarding claims reserves
The Group is exposed to various types of risks in the day-to-day running of
the business. The operational risks can result in the need to recognize reserves
for damages resulting from property claims, personal injuries as well as
workers’ compensation claims relating to the Group’s employees. claims
reserves are calculated based on a combination of case reserves and incurred
but not reported reserves. Actuarial calculations are performed on a quarterly
basis to assess the adequacy of the reserves based on open claims and
historical data for incurred but not reported claims. Actuarial calculations are
based on several assumptions. All in all, this means that the balance sheet
items short-term Liability insurance-related claims reserves, which amounts
to MSEK 652.5 (694.6 and 819.0) and is included in Other short-term
provisions (Note 36) and Liability insurance-related claims reserves, which
amounts to MSEK 603.3 (724.3 and 595.7) and is included in Other provisions
(Note 33), are subject to critical estimates and judgments.
The impact on the Group’s financial position of ongoing
litigation and the valuation of contingent liabilities
Over the years the Group has made a number of acquisitions in different
countries. As a result of such acquisitions certain contingent liabilities of the
businesses acquired have been assumed. companies within the Group are
also involved in a number of other legal proceedings and tax audits arising
out of the operations. Further information is provided in Note 38.
Items affecting comparability
Items affecting comparability amounted to MSEK –29.3 (–78.1 and –549.1).
The items affecting comparability that are described below constitute
the most material individual transactions that demand that the management
make judgments that can be deemed reasonable under the prevailing
circumstances, taking into consideration the information that is available on
the balance sheet date. The items that involve the largest elements of
judgement are:
USA – Globe/Federal Aviation Admininstration
Prior to the Aviation and Transportation Security Act (Aviation Security Act),
which was passed in November 2001, the air carriers were responsible
under federal law for providing pre-board screening of passengers. In most
cases, the air carriers contracted with private security companies for these
services. Under the Aviation Security Act, pre-board screening services
were federalized in two steps. The first step consisted of a transition period
where the Federal Aviation Administration (FAA) became the party responsible
for pre-board screening and contracted with private security
companies for these services (the FAA’s responsibilities were later transitioned
to the Transportation Security Administration (TSA)). The second step,
which occurred in November 2002, consisted of the TSA directly providing
these services by federal government employees. Globe had been requested
to provide pre-board screening services during the initial transition
period and, following extended negotiations, Globe entered into an agreement
with the FAA in February 2002 to provide such services during the
transition period. Based on the performance of Globe during this transition
period, in April 2002 Globe contracted with the FAA/TSA to service additional
airports. During the transition period, the FAA/TSA compensated Globe
based on the governing contract and the invoices submitted.