Annual Report 2011 - Skanska

Note01Continuedintended manner. Examples of directly attributable expenses are delivery and handlingcosts, installation, ownership documents, consultant fees and legal services.Borrowing costs are included in the cost of self-constructed property, plant andequipment. Impairment losses are applied in compliance with IAS 36.The cost of self-constructed property, plant and equipment includes expendituresfor materials and compensation to employees, plus other applicable manufacturingcosts that are considered attributable to the asset.Further expenditures are added to cost only if it is probable that the Group willenjoy future economic benefits associated with the asset and the cost can be reliablyestimated. All other further expenditures are recognized as expenses in the periodwhen they arise.What is decisive in determining when a further expenditure is added to cost iswhether the expenditure is related to replacement of identified components, or theirparts, at which time such expenditures are capitalized. In cases where a new componentis created, this expenditure is also added to cost. Any undepreciated carryingamounts for replaced components, or their parts, are disposed of and recognized asan expense at the time of replacement. If the cost of the removed component cannotbe determined directly, its cost is estimated as the cost of the new component adjustedby a suitable price index to take into account inflation. Repairs are recognizedas expenses on a continuous basis.Property, plant and equipment that consist of parts with different periods of serviceare treated as separate components of property, plant and equipment. Depreciationoccurs on a straight-line basis during estimated useful life, or based on degree ofuse, taking into account any residual value at the end of the period. Office buildingsare divided into foundation and frame, with a depreciation period of 50 years; installations,depreciation period 35 years; and non-weight-bearing parts, depreciationperiod 15 years. Generally speaking, industrial buildings are depreciated during a20-year period without allocation into different parts. Stone crushing and asphaltplants as well as concrete mixing plants are depreciated over 10 to 25 years dependingon their condition when acquired and without being divided into different parts.For other buildings and equipment, division into different components occurs only ifmajor components with divergent useful lives can be identified. For other machineryand equipment, the depreciation period is normally between 5 and 10 years. Minorequipment is depreciated immediately. Gravel pits and stone quarries are depreciatedas materials are removed. Land is not depreciated. Assessments of an asset’s residualvalue and period of service are performed annually.The carrying amount of a property, plant and equipment item is removed from thestatement of financial position when it is disposed of or divested, or when no furthereconomic benefits are expected from the use or disposal/divestment of the asset.Provisions for the costs of restoring an asset are normally made in the course ofutilization of the asset, because the prerequisites for an allocation at the time ofacquisition rarely exist.IAS 38, “Intangible Assets”This accounting standard deals with intangible assets. Goodwill that arises uponacquisition of companies is recognized in compliance with the rules in IFRS 3.An intangible asset is an identifiable non-monetary asset without physicalsubstance that is used for producing or supplying goods or services or for leasing andadministration. To be recognized as an asset, it is necessary both that it be probablethat future economic advantages that are attributable to the asset will benefit thecompany and that the cost can be reliably calculated. It is especially worth notingthat expenditures recognized in prior annual or interim financial statements may notlater be recognized as an asset.Research expenses are recognized in the income statement when they arise.Development expenses, which are expenses for designing new or improved materials,structures, products, processes, systems and services by applying research findings orother knowledge, are recognized as assets if it is probable that the asset will generatefuture revenue. Other development expenses are expensed directly. Expenses forregular maintenance and modifications of existing products, processes and systemsare not recognized as development expenses. Nor is work performed on behalf of acustomer recognized as development expenses. Intangible assets other than goodwillare recognized at cost minus accumulated amortization and impairment losses.Impairment losses are applied in compliance with IAS 36.Amortization is recognized in the income statement on a straight-line basis, orbased on the degree of use, over the useful life of intangible assets, to the extentsuch a period can be determined. Consideration is given to any residual value at theend of the period. Purchased service agreements are amortized over their remainingcontractual period (in applicable cases 3–6 years). Purchased software (major computersystems) is amortized over a maximum of five years.Further expenditures for capitalized intangible assets are recognized as an assetin the statement of financial position only when they increase the future economicbenefits of the specific asset to which they are attributable.IAS 36, “Impairment of Assets”Assets covered by IAS 36 are tested on every closing day for indications of impairment.The valuation of exempted assets, for example inventories (including current-assetproperties), assets arising when construction contracts are carried out and financialassets included within the scope of IAS 39 is tested according to the respectiveaccounting standard.Impairment losses are determined on the basis of the recoverable amount ofassets, which is the higher of fair value less costs to sell and value in use. In calculatingvalue in use, future cash flows are discounted using a discounting factor that takesinto account risk-free interest and the risk associated with the asset. Estimatedresidual value at the end of the asset’s useful life is included as part of value in use.For an asset that does not generate cash flows that are essentially independent ofother assets, the recoverable amount is estimated for the cash-generating unit towhich the asset belongs. A cash-generating unit is the smallest group of assets thatgenerates cash inflows that are independent of other assets or groups of assets. Forgoodwill, the cash-generating unit is mainly the same as the Group’s business unit orother unit reporting to the Parent Company. Exempted from the main rule are operationsthat are not integrated into the business unit’s other operations. The same businessunit may also contain a number of cash-generating units if it works in more than onebusiness stream.In Construction, recoverable amount of goodwill is based exclusively on value inuse, which is calculated by discounting expected future cash flows. The discountingfactor is the weighted average cost of capital (WACC) applicable to the operation. InResidential Development, the fair values of land parcels, minus selling expenses, arealso taken into account. See Note 18.Impairment of assets attributable to a cash-generating unit is allocated mainlyto goodwill. After that, a proportionate impairment loss is applied to other assetsincluded in the unit.Goodwill impairment is not reversed. A goodwill-related impairment loss recognizedin a previous interim report is not reversed in a later full-year report or interimreport.Impairment losses on other assets are reversed if there has been a change in theassumptions on which the estimate of recoverable amount was based.An impairment loss is reversed only to the extent that the carrying amount of theasset after the reversal does not exceed the carrying amount that the asset wouldhave had if no impairment loss had occurred, taking into account the amortizationthat would then have occurred.IAS 23, “Borrowing Costs”Borrowing costs are capitalized provided that it is probable that they will result infuture economic benefits and the costs can be measured reliably. Generally speaking,capitalization of borrowing costs is limited to assets that take a substantial periodof time for completion, which in the Skanska Group’s case implies that capitalizationmainly covers the construction of current-asset properties and properties forthe Group’s own use (non-current-asset properties). Capitalization occurs whenexpenditures included in cost have arisen and activities to complete the building havebegun. Capitalization ceases when the building is completed. Borrowing costs duringan extended period when work to complete the building is interrupted are not capitalized.If separate borrowing has occurred for the project, the actual borrowing costis used. In other cases, the cost of the loan is calculated on the basis of the Group’sborrowing cost.IAS 12, “Income Taxes”Income taxes consist of current tax and deferred tax. Income taxes are recognized inthe income statement except when the underlying transaction is recognized directlyunder “Other comprehensive income,” in which case the accompanying tax effect isalso recognized there. Current tax is tax to be paid or received that is related to theyear in question, applying the tax rates that have been decided or in practice havebeen decided as of the closing day; this also includes adjustment of current tax that isattributable to earlier periods.Deferred tax is calculated according to the balance sheet method, on the basis oftemporary differences between carrying amounts of assets and liabilities and theirvalues for tax purposes. The amounts are calculated based on how the temporary112 Notes, including accounting and valuation principles Skanska Annual Report 2011