Atlas Copco - Annual Report 1999

Goodwill
The Group applies an amortization period of 40 years for goodwill
arising from the acquisitions of the U.S. companies Milwaukee
Electric Tool Corporation in 1995 (approximately USD 440 m.),
Prime Service, Inc. in 1997 (approximately USD 870 m.) and
Rental Service Corporation in 1999 (approximately USD 860 m.).
This provides the most accurate picture of the strategic acquisitions’
impact on the Atlas Copco Group’s earnings and financial
position.
In taking this position, Atlas Copco deviated from that part
of the present recommendations of the Swedish Financial
Accounting Standards Council, which prescribes amortization
of goodwill over a maximum of 20 years. This does, however, not
conflict with the legislation now in effect. Neither does this deviation
represent a breach of the registration contract with the
Stockholm Stock Exchange.
During 1996, the Swedish Financial Accounting Standards
Council implemented a general review of its recommendation
and published a new version, which became effective on January
1, 1997. However, with regard to the maximum amortization
period for goodwill, the Council has elected to delay its recommendation
pending the position to be adopted by the International
Accounting Standards Committee (IASC). IASC has
agreed on a standard, effective as from January 1, 2000, whereby
goodwill is to be amortized over its economic life. This means
that the amortization period can exceed 20 years. The Swedish
Financial Accounting Standards Council has in November 1999
issued a draft standard on amortization of goodwill in accordance
with IASC’s standard. The standard is intended to be effective
as from January 1, 2001.
Atlas Copco’s recent strategic acquisitions involve three large
American groups with operations and sales mainly in the United
States. The companies generate large operating cash flows and
derive ongoing operating benefits from very strong brand names
NOTES TO THE FINANCIAL STATEMENTS
and extensive customer lists. In these cases there are strong reasons
for the choice of an amortization period longer than 20 years. One
reason being that it provides the most accurate picture of the
acquisition to the financial markets. Another important reason for
applying a longer amortization period is attributable to competitive
factors. Atlas Copco needs to be in the same position as other
parties in calculating the economic consequences of the purchase
price and in the subsequent financial reporting of the acquisition.
Currently, profitable companies command a price on the market,
which to a very large extent exceeds reported shareholders’equity.
Consequently, the accounting for goodwill becomes significant.
Since Atlas Copco is an international group with 97 percent
of its sales outside Sweden – a country where there are no
comparable competitors to the acquired companies – it is of
major importance that the financial statements is internationally
comparable. It is therefore necessary that the Swedish
companies can apply rules equivalent to those of foreign competitors.
These rules permit amortization of goodwill over
periods of up to 40 years.
For purposes of comparison, the impact on earnings resulting
from the application of goodwill amortization over periods
of 20 and 40 years is shown below:
Condensed Income Statement 1999 SEK m.
Amortization period 20 years 40 years
Revenues 36,234 36,234
Operating expense –32,121 –31,764
Operating profit 4,113 4,470
– as percentage of revenues 11.4 12.3
Profit after financial items 3,055 3,412
– as percentage of revenues 8.4 9.4
Profit for the year 1,890 2,247
Earnings per share, SEK 9.68 11.50
Equity/assets ratio, percent 38.2 39.3
ATLAS COPCO 1999 29