Atlas Copco - Annual Report 1999

NOTES TO THE FINANCIAL STATEMENTS
from the translation of the accounts for these companies have
been included in the Income Statement.
Classification of foreign subsidiaries
In one respect the SFASC’s standard require that the user choose
translation procedures based on each specific situation. This
applies to the classification of the foreign subsidiaries as either
independent or integrated companies. This classification leads
directly to the choice of translation method. The accounts of
independent companies are translated according to the currentrate
method, and integrated companies according to the monetary
method.
Based on the criteria defined for classification of companies,
the majority of Atlas Copco’s subsidiaries have been defined as
independent companies. Companies in high-inflation countries,
primarily Latin America are translated according to the monetary
method. The operational currency of these companies is the
USD, and is therefore translated in two stages.
In the first stage, translation is made to USD in accordance
with the monetary method, whereby translation differences
arising are charged to consolidated income. In the second stage,
the company’s balance sheet items are translated to SEK using
the year-end rate and the income statement items are translated
at the average rate for the year. The resulting translation differences
are transferred directly to shareholders’ equity.
Inventories
Inventories are valued at the lower of cost or market, in accordance
with the FIFO principle and the net sales value. Group
inventories are reported net of deductions for obsolescence and
for internal profits arising in connection with deliveries from the
production companies to the sales companies. Transfer pricing
between the companies is based on market prices.
Receivables and liabilities in foreign currencies
Receivables and liabilities in foreign currencies are translated at
the year-end rate.
In case of currency exchange through a swap agreement, the
loan is valued at the year-end rate for the swapped currency. If
the swapped loan, translated at the year-end rate for the original
currency, exceeds the booked liability, the difference is included
in contingent liabilities.
Exchange rates for major currencies used in the year-end
accounts are shown on page 33.
Financial investments
Financial and other investments that are to be held to maturity
are valued at amortised cost.
Investments intended for trading are valued at the lower of
cost or market.
Derivative instruments
When calculating the value of the forward contracts, options
and swaps outstanding, provision is made for unrealized losses
to the extent these exceed unrealized gains. Unrealized gains that
exceed unrealized losses are not recognized as revenue.
Hedging of net investments
Prior to 1998 forward contracts and currency swaps in foreign
currencies have been entered into in order to hedge the Group’s
16 ATLAS COPCO 1999
net assets in foreign subsidiaries (see page 32). In the Group
accounts the valuation is based on market value and current
rates. Foreign exchange gains and losses on such contracts, less
current and deferred tax, are not included in income for the year,
but are offset against translation differences arising in connection
with the translation of the foreign subsidiaries’ net assets.
Premium and discounts are amortized straight-line over
the life of the contracts and reported in interest income and
expense.
Hedging of commercial flows
The Group uses forward exchange contracts to hedge certain
future transactions based on budgeted volume, so called commercial
flow hedges. Unrealized gains and losses on such forward
exchange contracts are deferred and recognized in the
income statement in the same period that the hedged transaction
is recognized.
Product development costs and warranty costs
Research and development costs are expensed as incurred.
Estimated costs of product warranties are charged against
cost of goods sold at the time the products are sold.
Depreciation
Depreciation according to plan is calculated based on the original
cost using the straight-line method over the estimated useful life
of the asset.
The following economic lives are used for depreciation:
Years
Goodwill and other intangible assets 5–40
Buildings 25–50
Machinery, technical plant and equipment 3–10
Vehicles 4–5
Computer hardware and software 3–4
Rental equipment 3–10
Depreciation is also recorded for tax purposes as permitted by
legislation in the respective tax jurisdictions. In the financial statements
of the individual subsidiaries, this additional tax depreciation
is reported in the balance sheet as untaxed reserves and as
appropriations in the income statement. Untaxed reserves and
appropriations are eliminated in consolidation.
Leasing
Leases are classified in the consolidated financial statement as
either finance leases or operating leases. A finance lease entails
the transfer to the lessee, to a material extent, of the economic
risks and benefits associated with ownership. If this is not the
case, the lease is accounted for as an operating lease. Finance
leasing implies that the fixed asset in question is reported as an
asset in the balance sheet and that a corresponding liability is
recorded on the liabilities side. Fixed assets under financial leases
are depreciated according to plan while the lease payments are
reported as interest and amortization of the lease liability. An
operating lease implies that there are no asset or liability entries
to report in the Balance Sheet. In the Income Statement, the
costs of operating leases are distributed over a number of years
based on use, which can differ from the actual amount of leasing
fees paid in any particular year.