SECURITAS AB Annual Report 2011

86 Annual Report
Notes and comments to the consolidated financial statements
Note 4. Critical estimates and judgments
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.
Acquisition of subsidiaries / operations and contingent
considerations including acquisition related option liabilities
The valuation of identifiable assets and liabilities in connection with the
acquisition of subsidiaries or operations 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. For a personnel intensive company like Securitas,
employee related items such as accrued salaries, accrued social benefits,
holiday pay, long-term employee benefits and post-employment benefits
are significant items in the balance sheet that can be difficult to value.
Accounts receivable is another example of a significant balance sheet item
where it can be difficult to value the amount of bad debt and thus to what
extent they will be collected. 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 in connection with for example litigations. The valuation
of identifiable assets and liabilities is also dependent on the accounting environment
that the acquired company/operations has been active in. This is
true for example for the basis of preparation for the financial reporting and
consequently the extent of adjustments that are necessary in order to
follow the Group’s accounting principles, the frequency for which closings
have been prepared and the availability of different types of data that can be
necessary in order to value identifiable assets and liabilities. All balance
sheet items are thus subject to estimates and judgments. This also means
that the initial accounting may have to be provisionally determined and
subsequently adjusted. All acquisition calculations are finalized no later than
one year after the acquisition is made. Considering the above description,
Securitas has chosen not to state the reasons to why the initial accounting
of the business combination is provisional nor which assets and liabilities
for which the initial accounting is provisional for each individual business
combination unless it is a material adjustment.
All payments to acquire a subsidiary/operation are recorded at fair value
at the acquisition date, including debt related to contingent considerations
and acquisition related option liabilities (deferred considerations). This debt
is measured at fair value in subsequent periods with re-measurement
through the statement of income. The final outcome of deferred considerations
often depends on one or more events which only will be confirmed
by a future development such as the future profitability development for an
agreed period. The final outcome can therefore either be lower or higher
than the initially recognized amount. Deferred considerations, which
amount to MSEK 606.1 (297.5 and 294.1), are thus subject to critical
estimates and judgments.
further information regarding acquisitions is provided in note 16 and
regarding revaluation of deferred considerations in note 11.
Impairment testing of goodwill, other acquisition related
intangible assets and shares in associated companies
In connection with the impairment testing of goodwill, other acquisition
related intangible assets and shares in associated companies, 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 com-
Securitas Annual Report 2011
pared 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 14 727.4 (13 338.8 and 13 558.3),
acquisition related intangible assets, which amounts to MSEK 1 574.1
(1 096.5 and 894.9) and shares in associated companies, which amounts
to MSEK 108.2 (125.6 and 132.1) 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 10 965.0 (9 724.1 and
9 363.3), is one of the most significant balance sheet items. Accounts receivable
are accounted for at nominal value net after provisions for probable bad
debt. The provision for bad debt losses, which amounts to MSEK -419.3
(-344.7 and -377.9), is thus subject to critical estimates and judgments.
As stated above accounts receivable is often an important item in relation to
the acquisition of subsidiaries/operations. 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. All in all,
the balance sheet item pension balances for defined benefit plans, which
amounts to MSEK 0.0 (0.0 and 36.2) and which is stated under other longterm
receivables (note 23), and the balance sheet item provisions for pensions
and similar commitments, which amounts to MSEK 1 453.5 (1 151.2
and 1 186.3), 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 31.
Actuarial calculations regarding claims reserves
and timing of outflows
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. Claims reserves comprise a large number of individual insurance
cases where some cases are compensated with a lump-sum payment and
others are paid over a longer period of time. It is thus not possible to disclose
any detailed information regarding the timing of outflows from claims reserves.
All in all, this means that the balance sheet items short-term liability
insurance-related claims reserves, which amounts to MSEK 662.8 (526.2
and 503.6) and is included in short-term provisions (note 35) and liability
insurance-related claims reserves, which amounts to MSEK 410.5 (461.3
and 526.5) and is included in other long-term provisions (note 32), are
subject to critical estimates and judgments.