Atlas Copco - Annual Report 1999

NOTES TO THE FINANCIAL STATEMENTS
U.S. and International
Accounting Standards
The Group prepares its financial statements in accordance with
generally accepted accounting principles in Sweden (Swedish
GAAP). Swedish GAAP differs in certain significant respects
from accounting principles generally accepted in the United
States (US GAAP) and International Accounting Standards
(IAS) adopted by the International Accounting Standards
Committee. The following sections include information of certain
significant differences for standards currently in effect between
US GAAP and Swedish GAAP, and IAS and Swedish
GAAP, which management believes is relevant to the Group.
US GAAP
Capitalization of interest
According to Swedish GAAP, the interest on external financing
of assets constructed or otherwise produced for own use may
be expensed. US GAAP requires that interest must be capitalized
for certain qualifying assets if certain conditions are met
as part of the historical cost of acquiring and making ready for
their intended use.
Foreign currency transactions
The Group uses forward exchange contracts to hedge certain future
transactions based on budgeted volume. For Swedish GAAP
purposes, 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.
Under US GAAP, gains and losses on forward exchange contacts
can be deferred only to the extent that the forward exchange
contract is designated and is effective as a hedge of a firm commitment.
Forward exchange contracts that exceed the amount of
or that are not designated as hedges of firm commitments are
marked to market under US GAAP and unrealized gains and
losses are recorded in the income statement.
Pensions
Both Swedish and U.S. standards have the same objective which
is the accruing for the projected cost of providing such pensions.
There are certain differences with US GAAP being generally
more prescriptive, requiring the use of the projected unit credit
method; whereas under Swedish GAAP, the accrued benefit
obligation is calculated. Other areas of differences include the
actuarial assumptions, the treatment of actuarial gains and losses
and plan changes. Provisions for pensions and related expenses
for Atlas Copco’s U.S. subsidiaries have been reported in the
consolidated accounts in accordance with US GAAP.
Business combinations
Under Swedish GAAP, there are a number of criteria which
34 ATLAS COPCO 1999
determine whether a combination should be accounted for as a
merger (pooling of interests). The criteria are designed to determine
whether the business combination meets the conceptual
definition of a merger.
The US GAAP criteria, although similar, are more prescriptive
than those under Swedish GAAP. One of the criteria
in US GAAP is that none of the merging companies may be a
subsidiary of another company during the two years preceding
the merger.
Income taxes
Atlas Copco reports deferred taxes on certain differences
between financial reporting values and tax values. According
to US GAAP, income taxes are accounted comprehensively
under the liability method with deferred tax assets and liabilities
being recognized on significantly all temporary differences
between the bases of assets and liabilities as measured by tax
and those reported in the financial statements. Valuation
allowances are recognized for deferred tax assets if it is considered
more likely than not that all or some portion of the
deferred tax asset will not be recognized.
Goodwill and other intangibles
Generally Atlas Copco accounts for subsidiaries acquired by use
of the purchase method which requires that goodwill arising on
consolidation is capitalized and amortized on a straight-line basis
over periods up to 40 years. Intangible assets are subject to a permanent
impairment test.
Under US GAAP, all long-lived assets including goodwill
are subject to a specific impairment test using undiscounted
cash flows.
Debt and marketable equity securities
Atlas Copco accounts for financial and other investments held
for trading purposes at the lower of cost or market. Financial and
other investments, that are to be held to maturity, are valued at
amortised cost.
US GAAP requires that all debt and marketable equity
securities be classified within one of the three following categories:
“held-to-maturity”, “trading”, or “available for
sale”. Debt securities which management has the positive
intent and ability to hold to maturity are classified as held-tomaturity
and reported at amortized cost. Securities bought
and held principally for the purpose of selling them in the
near future are classified as trading securities and measured at
fair value with the unrealized gains and losses included in net
profit. Debt and marketable equity securities not classified as
either held-to-maturity or trading are classified as available