325
CASES
Case 9-1
Sandvik
One of the accounting development patterns
that was introduced in Chapter 2
was the macroeconomic development
model. Under this framework accounting
practices are designed to enhance
national macroeconomic goals. A national
policy advocating stable employment by
avoiding major swings in business cycles
would sanction accounting practices
that smooth income. Similarly, national
policies supporting growth in certain
industries would sanction rapid writeoffs
of fixed assets to encourage capital
formation. Sweden is a good example of
this reporting pattern. Assets may be
revalued upwards if they are deemed to
have enduring value, the tax law permits
shorter asset lives, and ceiling tests for
depreciation charges include the higher
of 130 percent declining balance method
or 20 percent straight line. Companies
are also permitted to allocate a portion of
pre-tax earnings to special tax equalization
reserves which are not available for
dividends until reversed.
Reproduced below are the parent
company financial statements of Sandvik
for the years 2006 and 2007 and selected
notes. Sandvik is a global high technology
company headquartered in Sweden,
with advanced products and well-known
brands. Its core areas of competence
include high speed tools for metal
working, machinery, tools and services
for rock excavation, and specialty steels.
The company states that it applies all
IFRS and IFRIC interpretations approved
by the EU to the extent possible within
the framework of the Swedish Annual
Accounts Act and considering the close
tie between financial reporting and taxation.
Examine the data presented and
answer the following questions.
1.What advantages and disadvantages
arise for firms that chose to
employ the Swedish system of special
reserves?
2.What are the potential benefits of
the system of special reserves to the
Swedish government?
3.In what way does the existence of
the Swedish reserve system affect
the ability of a financial analyst to
evaluate a Swedish firm vis-a-vis a
non-Swedish firm?
4.In what way does the use of
reserves affect Sandviks financial
statements for the year 2007?
How does this compare with the
effect of reserves in the previous
year?
5.Show the accounting entry used to
create the 2007Appropriationsfigure
in the income statement.
6.If you were to unwind the effect of
reserves for 2007, how would
Sandviks key profitability ratios,
such as return on sales and return
on assets change?
326Chapter 9 International Financial Statement Analysis
Amounts in SEK M 2007 2006
Revenue Note 2 20682 17932
Cost of sales and services-16111-13646
Gross profit4571 4286
Selling expenses-621-577
Administrative expenses-1982-1719
Research and development costs Note 4-1019-778
Other operating income Note 5 488 455
Other operating expenses Note 6-916-1344
Operating profitNote 3, 7, 8 521 323
Income from shares in group companies Note 9 5997 9264
Income from shares in associated companies Note 9 5 1
Income from investments held as non-current assets Note 9 0
Interest income and similar items Note 9 638 657
Interest expenses and similar items Note 9-1165-898
Profit after financial items5996 9347
Appropriations Note 10 3063 305
Income tax expense Note 11-745-29
Profit for the year8314 9623
Parent Company Income Statement
Parent Company Balance Sheet
Amounts in SEK M 2007 2006
ASSETS
Non-current assets
Intangible assets
Patents and similar rights Note 14 26 51
Total 26 51
Property, plant and equipment
Land and buildings Note 14 484 473
Plant and machinery Note 14 3624 3492
Equipment, tools and installations Note 14 305 309
Construction in progress and advance
payments Note 14 1352 974
Total 5765 5248
Financial assets
Shares in group companies Note 15 13762 11723
Advances to group companies 48 34
Investmments in associated companies Note 16 4 4
Advances to associated companies 0
Other investments 1 1
Non-current receivables Note 18 20 23
(continued)
Chapter 9 International Financial Statement Analysis327
Parent Company Balance Sheet(Continued)
Amounts in SEK M 2007 2006
Deferred tax assets Note 11 22 17
Total 13857 11802
Total non-current assets19648 17101
Current assets
InventoriesNote 19 6242 4599
Current receivables
Trade receivables 1255 1150
Due from group companies 16311 15846
Due from associated companies 131 474
Income tax receivables Note 11 393 16
Other receivables Note 18 518 456
Prepaid expenses and accrued income 679 423
Total 19287 18365
Cash and cash equivalents6 19
Total current assets25535 22983
TOTAL ASSETS45183 40084
EQUITY AND LIABILITIES
Equity
Non-distributable equity
Share capital 1424 1424
Legal reserve 1611 1611
Total 3035 3035
Distributable equity
Profit brought forward 1552 1637
Profit for the year 8314 9623
Total 9866 11260
Total equityNote 20 12901 14295
Untaxed reserves
Accelerated depreciation Note 21 2430
Tax allocation reserves Note 22 639
Other untaxed reserves Note 22 19 15
Total 19 3084
Provisions
Provisions for pensions and similar obligations Note 23 108 106
Provisions for taxes Note 11 55 42
Other provisions Note 24 154 127
Total 317 275
Non-current interest-bearing liabilities
Loans from financial institutions Note 25 1718 1669
Loans from group companies Note 25 30 3
Other liabilities Note 25 10131 2511
Total 11879 4183
(continued)
328Chapter 9 International Financial Statement Analysis
Noncurrent noninterest-bearing liabilities
Other liabilities 9
Total 9
Current interest-bearing liabilities
Loans from group companies 10902 12766
Other liabilities 1080 1324
Total 11982 14090
Current noninterest-bearing liabilities
Advance payments from customers 159 53
Accounts payable 1721 1734
Due to group companies 3655 27
Due to associated companies 82 125
Other liabilities 136 205
Accrued expenses and deferred income Note 28 2332 2004
Total 8085 4148
TOTAL EQUITY AND LIABILITIES 45183 40084
Pledged assets Note 29
Contingent liabilities Note 29 16068 11929
Parent Company Balance Sheet(Continued)
Note 10. Appropriations
Parent Company2007 2006
Accelerated depreciation 2429-143
Changes in tax allocation reserves 638 437
Changes in other untaxed reserves-4 11
Total 3063 305
Note 11. Income tax
Reported in Income Statement
Group
Parent
Company
Income tax expense2007 2006 2007 2006
Current tax-4396-3135-829-115
Adjustment of taxes attributable to prior years 229-16 67 64
Total current tax expense-4167-3151-762-51
Deferred taxes relating to temporary differences
and unused tax losses 763 145 17 22
Total tax expense-3404-3006-745-29
Chapter 9 International Financial Statement Analysis329
The Groups tax expense for the year was
SEK 3,404 M (3.006) or 26.2% (27.0) of the
profit after financial items.
The adjustment of taxes attributable
to prior years mainly relates to favorable
tax litigation resolutions and
advance rulings in Sweden and reversal
of tax provisions upon finalization of tax
audits of foreign subsidiaries.
Reconciliation of the Groups tax
expenseThe Groups weighted average
tax based on the tax rates in each country,
is 29. 6% (27.0). The nominal tax rate in
Sweden is 28.0% (28.0).
Reconciliation of the Groups
weighted average tax rate, based on the
tax rates in each country, and the Groups
actual tax expense:
Reconciliation of the Parent Companys tax
expenseThe Parent Companys effective
tax rate of 8.2% (0.8) is less than the nominal
tax rate in Sweden, mainly due to
tax-exempt dividend income from subsidiaries
and associated companies:
2007 2006
Group SEK M % SEK M %
Profit after financial items 12997 11113
Weighted average tax based on each
countrys tax rate-3849-29.6-3001-27.0
Tax effect of:
Non-deductible expenses-195-1.5-179-1.6
Tax exempt income 199 1.5 244 2.2
Adjustments relating to prior year 229 1.8-16-0.1
Effects of unused tax losses, net 75 0.6-22-0.2
Other 137 1.1-32-0.3
Total reported tax expense-3404-26.2-3006-27.0
Reconciliation of the Parent Companys
nominal tax rate and actual tax
expense:
2007 2006
Parent CompanySEK M % SEK M %
Profit before tax 9059 9652
Tax based on the nominal tax rate for the
Parent Company-2537-28.0-2703-28.0
Tax effects of:
Non-deductible expenses-33-0.4-59-0.6
Tax-exempt income 1758 19.4 2669 27.6
Adjustments relating to prior years 67 0.7 64 0.7
Total reported tax expense-745-8.2 29-0.3
330Chapter 9 International Financial Statement Analysis
2007 2006
Group
Deferred
tax assets
Deferred
tax
liabilities Net
Deferred
tax assets
Deferred
tax
liabilities Net
Intangible assets 34-666-632 39-282-243
Property, plant,
and equipment 96-965-869 195-1573-1378
Financial non-current assets 58-2 56 26-31-5
Inventories 1445-62 1383 1034-30 1004
Receivables 66-335-269 95-237-142
Interest-bearing liabilities 325-263 62 549-184 365
Noninterest-bearing
liabilities 513-761-248 393-444-51
Group2007 2006
Deferred tax relating to hedging reserve 31 34
Total 31 34
Parent Company2007 2006
Current tax relating to taxable group
contributions 843-95
Total 843-95
Tax items recognized directly in equity
Reported in the balance sheet
Deferred tax assets and liabilitiesThe
deferred tax assets and liabilities reported
in the balance sheet are attributable to the
following assets and liabilities (liabilities
shown with a minus sign):
2007 2006
Group
Deferred
tax assets
Deferred
tax
liabilities Net
Deferred
tax assets
Deferred
tax
liabilities Net
Other 19-49-30 20-261 241
Unused tax losses 84–84– — —
Total 2640-3103-463 2351-3042-691
Offsetting within companies-1317 1317– -1031 1013–
Total deferred tax assets
and liabilities 1323-1786-463 1338-2029-691
Parent Company
Property, plant
and equipment– -37-37– -38-38
Chapter 9 International Financial Statement Analysis331
Note 21. Parent Companys Accelerated Depreciation
Land and
buildings
Plant and
machinery
Equipment, tools
and installations
Patents and
similar rights Total
Balance at 1 January 2006 1 2075 182 29 2287
Accelerated depreciation for the year 0 127 13 3 143
Balance at 31 December 2006 1 2202 195 32 2430
Balance at 1 January 2007 1 2202 195 32 2430
Accelerated depreciation for the year-1-2202-195-32-2430
Balance at December 2007– — — — —
Note 22. Parent Companys Other Untaxed Reserves
2007 2006
Tax allocation reserves
Appropriated at 2002 tax assessment–435
Appropriated at 2004 tax assessment–204
Balance at 31 December–639
Other untaxed reserves 19 15