Volvo Group—Research & Development Costs EXCERPTED - 9968

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Volvo Group—Research & Development Costs EXCERPTED WITH PERMISSION FROM CASES IN FINANCIAL REPORTING SEVENTH EDITION ELLEN ENGEL D. ERIC HIRST MARY LEA MCANALLY This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Volvo Group—Research & Development Costs 1 © Copyright 2012 by Cambridge Business Publishers. All rights reserved. No part of this publication may be reproduced in any form for any purpose without the written permission of the publisher. Volvo Group—Research & Development Costs Volvo Group supplies commercial vehicles including trucks, buses, construction equipment, engines and drive systems as well as aircraft engine components. Volvo Group annually invests roughly 13 billion Swedish Krona in research and development activities focused on achieving new technical breakthroughs focused largely on reducing environmental impact and meeting future emissions and other regulations globally. Volvo Group also offers its customers financial solutions. The Group, headquartered in Torslanda, Sweden, has about 90,000 employees, production facilities in 19 countries, and sales activities in some 180 countries. Source: Company annual report. Learning Objectives • Assess the cost components included in research and development (R&D) expenditures. • Compare and evaluate alternative accounting treatments of research and development costs. • Understand how capitalizing product development costs affects the balance sheet, the income statement, and the statement of cash flows. • Adjust financial statement amounts to compare U.S. and international methods of R&D accounting. Refer to the 2009 financial statements of Volvo Group. The company prepares financial statements under International Financial Reporting Standards (IFRS). ? Concepts ? a. The 2009 income statement shows research and development expenses of SEK 13,193 (millions of Swedish Krona). What types of costs are likely included in these amounts? b. Volvo Group follows IAS 38—Intangible Assets, to account for its research and development expenditures (see IAS 38 excerpts at the end of this case). As such, the company capitalizes certain R&D costs and expenses others. What factors does Volvo Group consider as it decides which R&D costs to capitalize and which to expense? c. The R&D costs that Volvo Group capitalizes each period (labeled Product and software development costs) are amortized in subsequent periods, similar to other capital assets such as property and equipment. Notes to Volvo’s financial statements disclose that capitalized product and software development costs are amortized over three to eight years. What factors would the company consider in determining the amortization period for particular costs? d. Under U.S. GAAP, companies must expense all R&D costs. In your opinion, which accounting principle (IFRS or U.S. GAAP) provides financial statements that better reflect costs and benefits of periodic R&D spending? ? Process ? e. Refer to footnote 14 where Volvo reports an intangible asset for “Product and software development.” Assume that the product and software development costs reported in footnote 14 are the only R&D costs that Volvo capitalizes. i. What is the amount of the capitalized product and software development costs, net of accumulated amortization at the end of fiscal 2009? Which line item on Volvo Group’s balance sheet reports this intangible asset? ii. Create a T-account for the intangible asset “Product and software development,” net of accumulated amortization. Enter the opening and ending balances for fiscal 2009. Show entries in the T-account that record the 2009 capitalization (capital expenditures) and amortization. To simplify the analysis, group all other account activity during the year and report the net impact as one entry in the T-account. This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Volvo Group—Research & Development Costs 2 f. Refer to Volvo’s balance sheet, footnotes, and the eleven-year summary. Assume that the product and software development costs reported in footnote 14 are the only R&D costs that Volvo capitalizes. i. Complete the table below for Volvo’s Product and software development intangible asset. (in SEK millions) 2007 2008 2009 1) Product and software development costs capitalized during the year 2,057 2,150 2) Total R&D expense on the income statement 3) Amortization of previously capitalized costs (included in R&D expense) 2,357 2,864 4) Total R&D costs incurred during the year = 1 + 2 - 3 ii. Provide the journal entry that Volvo Group prepared to record 1) total 2009 R&D costs incurred during the year and 2) the amortization of previously capitalized product and software development costs. Consider your answer to part a, above to determine which accounts are affected. (Hint: you will not be able to allocate specific amounts for each of the accounts you credit, but you should be able to identify the accounts that are likely to be credited.) iii. What proportion of Total R&D costs incurred did Volvo Group capitalize (as product and software development intangible asset) in each of the three years? ? Analysis ? g. Assume that you work as a financial analyst for Volvo Group and would like to compare Volvo’s research and development expenditures to a U.S. competitor, Navistar International Corporation. Navistar follows U.S. GAAP that requires that all research and development costs be expensed in the year they are incurred. You gather the following information for Navistar for fiscal year end October 31, 2007 through 2009. (in US $ millions) 2007 2008 2009 Total R&D costs incurred during the year, expensed on the income statement 375 384 433 Net sales, manufactured products 11,910 14,399 11,300 Total assets 11,448 10,390 10,028 Operating income before tax (73) 191 359 i. Use the information from Volvo’s eleven-year summary to complete the following table: (in SEK millions) 2007 2008 2009 Net sales, industrial operations Total assets, from balance sheet 321,647 ii. Calculate the proportion of total research and development costs incurred to net sales from operations (called, net sales from manufactured products, for Navistar) for both firms. How does the proportion compare between the two companies? This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Volvo Group—Research & Development Costs 3 h. Assume that you work as a financial analyst for Navistar International Corporation. Your firm is considering the financial statement implications of adopting IFRS including IAS 38. As such, you decide to prepare pro forma (i.e., “as if”) information for Navistar assuming the company had adopted IAS 38 at the start of fiscal 2007. Refer to financial statement information for Navistar, in part g, above. To create the pro forma information, assume the following. • Beginning in fiscal 2007, 30% of Navistar’s total R&D expenditures could be considered product development costs and would be eligible for capitalization under IAS 38. • Internal forecasts predict that capitalized product development costs have an estimated useful life of four years. Had Navistar followed IAS 38, they would have amortized the development costs on a straight-line basis over four years, beginning the year after capitalization. • Your analysis should consider only the impact of adopting IAS 38. All other Navistar activity is reported using U.S. GAAP. i. What would Navistar have reported as Operating income before tax in fiscal 2007, 2008, and 2009 under IFRS? Is the difference significant? ii. What amount for “Capitalized product development costs, net” would Navistar have reported on its balance sheet at the end of each of the three years under IFRS? Calculate the relative size of the intangible asset each year compared to total assets. How does this compare to the relative size for Volvo Group? (Volvo Group’s 2007 balance sheet included “Capitalized product development costs, net” of 11,169, in SEK millions.) In your opinion, is this a significant asset on Navistar International’s balance sheet? iii. How would cash be affected for fiscal 2009 had Navistar followed IFRS? Would the cash flow statement be different? Assume that the tax treatment of R&D expenditures is not related to the accounting treatment. This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Volvo Group—Research & Development Costs 4 Internally Generated Intangible Assets (excerpt from IAS 38—Intangible Assets) 39. It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition. It is often difficult to: (a) identify whether, and the point of time when, there is an identifiable asset that will generate probable future economic benefits; and (b) determine the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the enterprise’s internally generated goodwill or of running day-to-day operations. Therefore, in addition to complying with the general requirements for the recognition and initial measurement of an intangible asset, an enterprise applies the requirements and guidance in paragraphs 40-55 below to all internally generated intangible assets. 40. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the asset into: (a) a research phase; and (b) a development phase. Although the terms “research” and “development” are defined, the terms “research phase” and “development phase” have a broader meaning for the purpose of this Standard. 41. If an enterprise cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in the research phase only. Research Phase 42. No intangible asset arising from research (or from the research phase of an internal project) should be recognized. Expenditure on research (or on the research phase of an internal project) should be recognized as an expense when it is incurred. 43. This Standard takes the view that, in the research phase of a project, an enterprise cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is always recognized as an expense when it is incurred. 44. Examples of research activities are: (a) activities aimed at obtaining new knowledge; (b) the search for, evaluation and final selection of, applications of research findings or other knowledge; (c) the search for alternatives for materials, devices, products, processes, systems or services; and (d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services. Development Phase 45. An intangible asset arising from development (or from the development phase of an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (b) its intention to complete the intangible asset and use or sell it; (c) its ability to use or sell the intangible asset; (d) how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (f) its ability to measure the expenditure attributable to the intangible asset during its development reliably. 46. In the development phase of a project, an enterprise can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits. This is because the development phase of a project is further advanced than the research phase. 47. Examples of development activities are: (a) the design, construction and testing or pre-production or pre-use prototypes and models; (b) the design of tools, jigs, moulds and dies involving new technology; (c) the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and (d) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services. This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Consolidated income statements SEK M 2008 2009 Net sales Note 7 304,642 218,361 Cost of sales (238,928) (186,167) Gross income 65,713 32,194 Research and development expenses Note 7 (14,348) (13,193) Selling expenses (27,129) (25,334) Administrative expenses (6,940) (5,863) Other operating income and expenses Note 8 (1,539) (4,798) Income from investments in associated companies Note 7, 9 25 (14) Income from other investments Note 10 69 (6) Operating income Note 7 15,851 (17,013) Interest income and similar credits 1,171 390 Interest expenses and similar charges (1,935) (3,559) Other financial income and expenses Note 11 (1,077) (392) Income after financial items 14,010 (20,573) Income taxes Note 12 (3,994) 5,889 Income for the period 10,016 (14,685) Attributable to: Equity holders of the parent company 9,942 (14,718) Minority interests Note 13 74 33 10,016 (14,685) Basic earnings per share, SEK Note 23 4.90 (7.26) Diluted earnings per share, SEK Note 23 4.90 (7.26) Other comprehensive income Income for the period 10,016 (14,685) Exchange differences on translation of foreign operations 6,149 (1,246) Exchange differences on hedge instruments of net investment in foreign operations (414) 159 Accumulated translation difference reversed to income (82) (136) Available-for-sale investments (459) 86 Cash flow hedges (2,249) 2,313 Other comprehensive income, net of income taxes 2,945 1,176 Total comprehensive income for the period 12,961 (13,509) Attributable to: Equity holders of the parent company 12,874 (13,561) Minority interests 87 52 12,961 (13,509) 67 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Consolidated balance sheets SEK M December 31, 2008 December 31, 2009 Assets Non-current assets Intangible assets Note 14 43,958 41,628 Tangible assets Note 14 Property, plant and equipment 56,248 54,289 Investment property 1,022 991 Assets under operating leases 25,429 82,699 20,388 75,668 Financial assets Associated companies Note 15 652 588 Other shares and participations Note 15 1,301 1,456 Non-current customer-financing receivables Note 16 50,432 39,713 Deferred tax assets Note 12 11,180 12,595 Prepaid pensions Note 24 2,442 2,049 Non-current interest-bearing receivables Note 17 694 585 Other non-current receivables Note 17 3,023 69,724 3,038 60,024 Total non-current assets 196,381 177,320 Current assets Inventories Note 18 55,045 37,727 Current receivables Customer-financing receivables Note 19 48,057 42,264 Tax assets 1,810 1,523 Interest-bearing receivables Note 20 1,965 410 Accounts receivable Note 20 30,523 21,337 Other receivables Note 20 15,024 12,082 Non interest-bearing assets held for sale Note 4 – 1,684 Interest-bearing assets held for sale – 97,379 8 79,308 Marketable securities Note 21 5,902 16,676 Cash and cash equivalents Note 22 17,712 21,234 Total current assets 176,038 154,945 Total assets 372,419 332,265 Shareholders’ equity and liabilities Shareholders’ equity Note 23 Share capital 2,554 2,554 Additional contributed capital – – Reserves 5,078 6,235 Retained earnings 66,436 72,334 Income for the period 9,942 (14,718) Equity attributable to the equity holders of the parent company 84,010 66,405 Minority interests 630 629 Total shareholders’ equity 84,640 67,034 Non-current provisions Provisions for post-employment benefits Note 24 11,705 8,051 Provisions for deferred taxes Note 12 8,260 3,638 Other provisions Note 25 8,136 28,101 6,360 18,049 Non-current liabilities Note 26 Bond loans 35,798 49,191 Other loans 47,298 56,035 Other liabilities 10,442 93,538 9,888 115,114 Current provisions Note 25 10,883 9,487 Current liabilities Note 27 Loans 62,631 51,626 Non interest-bearing liabilities held for sale Note 4 – 272 Trade payables 51,025 35,955 Tax liabilities 1,204 623 Other liabilities 40,397 155.257 34,105 122,581 Total shareholders’ equity and liabilities 372,419 332,265 Assets pledged Note 28 1,380 958 Contingent liabilities Note 29 9,427 9,607 Financial info rmation 2009 68 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Changes in consolidated Shareholders’ equity Shareholders’ equity attributable to equity holders of the parent company SEK M Share capital Other reserves1 Translation reserve Retained earnings Total Minority interests Total equity Balance at December 31, 2007 2,554 435 1,711 77,502 82,202 579 82,781 Income for the period – – – 9,942 9,942 74 10,016 Other comprehensive income Translation differences – – 6,126 – 6,126 23 6,149 Translation differences on hedge instruments of net investments in foreign operations – – (414) – (414) – (414) Accumulated translation difference reversed to income – – (82) – (82) – (82) Available-for-sale investments: Note 15, 23 Gains/losses at valuation to fair value – (459) – – (459) – (459) Change in hedge reserve Note 23 – (2,239) – – (2,239) (10) (2,249) Other comprehensive income (2,698) (5,630) – 2,932 13 2,945 Total income for the period – (2,698) 5,630 9,942 12,874 87 12,961 Transactions with shareholders Dividends – – – (11,150) (11,150) (54) (11,204) Share based payments Note 34 – – – 73 73 – 73 Changes in minority interests – – – – – (62) (62) Other changes – – – 11 11 80 91 Transactions with shareholders (11,066) (11,066) (36) (11,102) Balance at December 31, 2008 2,554 (2,263) 7,341 76,378 84,010 630 84,640 Income for the period – – – (14,718) (14,718) 33 (14,685) Other comprehensive income Translation differences – – (1,252) – (1,252) 6 (1,246) Translation differences on hedge instruments of net investments in foreign operations – – 159 – 159 – 159 Accumulated translation difference reversed to income – – (136) – (136) – (136) Available-for-sale investments: Note 15, 23 Gains/losses at valuation to fair value – 86 – – 86 – 86 Change in hedge reserve Note 23 – 2,300 – – 2,300 13 2,313 Other comprehensive income for the period – 2,386 (1,229) – 1,157 19 1,176 Total income for the period – 2,386 (1,229) (14,718) (13,561) 52 (13,509) Transactions with shareholders Dividends – – – (4,055) (4,055) (15) (4,070) Share based payments Note 34 – – – 4 4 – 4 Changes in minority interests – – – – – (2) (2) Other changes – – – 7 7 (36) (29) Transactions with shareholders (4,044) (4,044) (53) (4,097) Balance at December 31, 2009 2,554 123 6,112 57,616 66,405 629 67,034 1 For specification of other reserves please see Note 23. 69 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Consolidated cash-flow statements SEK M 2008 2009 Operating activities Operating income 15,851 (17,013) Depreciation and amortization Note 14 13,524 15,227 Other items not affecting cash Note 30 (133) 4,397 Changes in working capital: (Increase)/decrease in receivables 3,209 10,271 (Increase)/decrease in customer finance receivables (10,174) 12,806 (Increase)/decrease in inventories (6,664) 15,225 Increase/(decrease) in liabilities and provisions (9,675) (21,387) Interest and similar items received 1,100 353 Interest and similar items paid (1,302) (2,905) Other financial items 109 (514) Income taxes paid (5,076) (1,604) Cash-flow from operating activities 769 14,856 Investing activities Investments in fixed assets (12,664) (10,464) Investments in leasing assets (5,440) (4,246) Disposals of fixed assets and leasing assets 2,905 3,849 Shares and participations, net Note 30 (29) (38) Acquired and divested subsidiaries and other business units, net Note 4, 30 (1,317) 149 Interest-bearing receivables including marketable securities 10,882 (5,663) (8,866) (19,616) Cash-flow after net investments (4,894) (4,760) Financing activities Increase/(decrease) in bond loans and other loans Note 30 18,230 12,655 Cash payment to AB Volvo shareholders’ (11,150) (4,055) Dividends to minority shareholders (54) (15) Other 8 7,034 (58) 8,527 Change in cash and cash equivalents, excluding translation differences 2,140 3,767 Translation difference on cash and cash equivalents 1,028 (245) Change in cash and cash equivalents 3,168 3,522 Cash and cash equivalents, January 1 Note 22 14,544 17,712 Cash and cash equivalents, December 31 Note 22 17,712 21,234 The effects of major acquisitions and divestments of subsidiaries in each year have been excluded from other changes for the balance sheet items in the cash-flow statement. The effects of currency movements in translation of foreign Group companies have also been excluded since these effects do not affect cash flow. Cash and cash equivalents include cash and bank balances but also bank certificates which matures within 3 months from aquisition. Financial info rmation 2009 70 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Notes to consolidated financial statements where hedge accounting is not considered to be fulfilled, unrealized gains and losses up until the maturity date of the financial instrument will be charged to the financial net in the income statement. – During 2009 Volvo has applied hedge accounting for certain net investments in foreign operations. The current result for such hedges is reported in a separate component in shareholders’ equity. In the event of a divestment, the accumulated result from the hedge is recognized in the income statement. See notes 36 and 37 for the valuation of all financial instruments in the Volvo Group and for details and further description on principles for economic hedging, hedge accounting and changes to the policies for hedging and hedge accounting during 2009 and going forward. Research and development expenses Volvo applies IAS 38, Intangible Assets, for reporting of research and development expenses. In accordance with this standard, expenditures for development of new products, production systems and software shall be reported as intangible assets if such expenditures with a high degree of certainty will result in future financial benefits for the company. The acquisition value for such intangible assets shall be amortized over the estimated useful life of the assets. In order for these development expenditures to be reported as assets, a number of criteria must be met. For example, it must be possible to prove the technical functionality of a new product or software prior to its development being reported as an asset. In normal cases, this means that expenditures are capitalized only during the industrialization phase of a product development project. Other research and development expenses are charged to income as incurred. Tangible and intangible non-current assets Volvo applies acquisition values for valuation of intangible and tangible assets. Borrowing costs are included in the acquisition value of so called qualifying assets from January 1, 2009. Investment property is reported at acquisition cost. Information regarding estimated value of investment property is based on discounted cash flow projections. The estimation is performed by the Group’s Real Estate business unit. The required return is based on current property market conditions for comparable properties in comparable locations. In connection with participation in industrial cooperation projects together with other companies, such as the aircraft engine projects that Volvo Aero participates in, Volvo pays in certain cases an entrance fee to participate. These entrance fees are capitalized as intangible assets. Depreciation, amortization and impairment Depreciation is made on a straight-line basis based on the acquisition value of the assets, adjusted in appropriate cases by write-downs, and estimated useful lives. Impairment tests for depreciable non-current assets are performed if there are indications of impairment at the balance sheet date. Goodwill is reported as an intangible non-current asset with indefinite useful life. For non-depreciable non-current assets such as goodwill, impairment tests are performed annually, as well as if there are indications of impairments during the year, through calculation of the asset’s recovery value. If the calculated recovery value is less than the carrying value, a write-down is made to the asset’s recovery value. See note 14 for goodwill. Depreciation periods Capitalized type-specific tools 2 to 8 years Operational leases 3 to 5 years Machinery 5 to 20 years Buildings and Investment property 25 to 50 years Land improvements 20 years Trademarks 20 years Distribution networks 10 years Product and software development 3 to 8 years Aircraft engine projects 20 years Non-current assets held for sale and discontinued operations Volvo applies IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. In a global group like Volvo, processes are continuously ongoing regarding the sale of assets or groups of assets at minor values. In cases in which the criteria for being classified as a non-current asset held for sale are fulfilled and the asset or group of assets is not of minor value, the asset or group of assets and the related liabilities are reported on a separate line in the balance sheet. The asset or group of assets are tested for impairment and, if impaired valued at fair value after deduction for selling expenses. The balance sheet items and the income effect resulting from the revaluation to fair value less costs to sell are normally reported in the segment Group headquarter functions and other, until the sale is completed and the result from it is assigned to the other segments. Inventories Inventories are reported at the lower of cost, in accordance with the first-in, first-out method (FIFO), or net realizable value. The acquisition value is based on the standard cost method, including costs for all direct manufacturing expenses and the apportionable share of the capacity and other related manufacturing costs. The standard costs are tested regularly and adjustments are made based on current conditions. Costs for research and development, selling, administration and financial expenses are not included. Net realizable value is calculated as the selling price less costs attributable to the sale. Share-based payments Volvo applies IFRS 2, Share-based Payments for share-based incentive programs. IFRS 2 distinguishes between “cash-settled” and “equity-settled”, in Volvo’s case, shares. The Volvo program includes both a cash-settled and an equity-settled part. The value of the equity-settled payments is determined at the grant-date, recognized as an expense during the vesting period and credited to equity. The fair value is calculated according to share price reduced by dividend connected to the share before the allotment. The additional social costs are reported as a liability, revalued at each balance sheet date in accordance with UFR 7, issued by the Swedish Financial Reporting Board. The cash-settled payment is revalued at each balance sheet day and is reported as an expense during the vesting period and as a short term liability. An assessment whether the terms for allotment will be fulfilled is made continuously. If the assessment changes, the expense will be adjusted. The employee stock option program which ended in 2008 was accounted for in accordance with the transition principles of IFRS 2, meaning that the equity-settled part was accounted for at fair value at each reporting period and provided for as an accrued expense over the vesting period. See note 34. Financial info rmation 2009 74 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Note 14 Intangible and tangible assets Intangible assets, acquisition costs Goodwill Entrance fees, industrial programs Product and software development Other intangible assets Total intangible assets Value in balance sheet 2008 24,813 3,569 23,290 6,987 58,659 Capital expenditures – 262 2,602 71 2,935 Sales / scrapping – 0 (274) (81) (355) Acquired and divested operations 41 0 3 (3) 41 Translation differences (1,035) 2 (716) (314) (2,063) Reclassifications and other 8 0 243 59 310 Value in balance sheet 2009 23,827 3,833 25,148 6,719 59,527 Accumulated depreciation and amortization Goodwill Entrance fees, industrial programs Product and software development Other intangible assets Total intangible assets Value in balance sheet 2008 – 1,699 10,909 2,093 14,701 Capital expenditures – 63 3,126 400 3,589 Sales / scrapping – 0 (260) (66) (326) Acquired and divested operations – 0 0 0 0 Translation differences – 0 (256) (78) (334) Reclassifications and other – 0 220 48 269 Value in balance sheet 2009 0 1,762 13,739 2,398 17,899 Net carrying value in balance sheet 2008 24,813 1,870 12,381 4,894 43,958 Net carrying value in balance sheet 2009 23,827 2,071 11,409 4,321 41,628 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited. Eleven-year summary The eleven-year summary presents each year in accordance with General Accepted Accounting Practice for that year. Earlier years are not restated when new accounting standards are applied. The years 1999– 2003 are accounted for in accordance with Swedish GAAP for the respective year. As from 2004 the reporting is based on IFRS. The transition to IFRS is described in note 3 in the Annual Reports 2005 and 2006. As from January 1, 2007, the benefits from the synergies created in the business units are transferred back to the product areas. Also, as from January 1, 2007, the responsibility for the Group’s treasury operations and real estate has been transferred from Financial services, which, as from January 1, 2007, only are consolidated in accordance with the purchase method. Comparison figures for 2006 have been recalculated. Consolidated income statements SEK M 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net sales 125,019 130,070 189,280 186,198 183,291 211,076 240,559 258,835 285,405 303,667 218,361 Cost of sales (99,501) (104,548) (155,592) (151,569) (146,879) (164,170) (186,662) (199,054) (219,600) (237,578) (186,167) Gross income 25,518 25,522 33,688 34,629 36,412 46,906 53,897 59,781 65,805 66,089 32,194 Research and development expenses (4,525) (4,876) (5,391) (5,869) (6,829) (7,614) (7,557) (8,354) (11,059) (14,348) (13,193) Selling expenses (8,865) (10,140) (15,766) (16,604) (16,866) (19,369) (20,778) (21,213) (26,068) (27,129) (25,334) Administrative expenses (4,791) (4,974) (6,709) (5,658) (5,467) (5,483) (6,301) (6,551) (7,133) (6,940) (5,863) Other operating income and expenses (611) 622 (4,096) (4,152) (1,367) (618) (588) (3,466) 163 (1,915) (4,798) Income (loss) from investments in associated companies 567 444 50 182 200 27 (557) 61 430 25 (14) Income from other investments 170 70 1,410 309 (3,579) 830 37 141 93 69 (6) Income from divestment of subsidiaries 26,695 – – – – – – – – – – Restructuring costs – – (3,862) – – – – – – – – Operating income (loss) 34,158 6,668 (676) 2,837 2,504 14,679 18,153 20,399 22,231 15,851 (17,013) Interest income and similar credits 1,812 1,588 1,275 1,217 1,096 821 654 666 952 1,171 390 Interest expenses and similar charges (1,505) (1,845) (2,274) (1,840) (1,888) (1,254) (972) (585) (1,122) (1,935) (3,559) Other financial income and expenses 131 (165) (191) (201) (55) (1,210) 181 (181) (504) (1,077) (392) Income (loss) after financial items 34,596 6,246 (1,866) 2,013 1,657 13,036 18,016 20,299 21,557 14,010 (20,573) Income taxes (2,270) (1,510) 326 (590) (1,334) (3,129) (4,908) (3,981) (6,529) (3,994) 5,889 Income (loss) for the period 32,326 4,736 (1,540) 1,423 323 9,907 13,108 16,318 15,028 10,016 (14,685) Attributable to Equity holders of the parent company 32,222 4,709 (1,467) 1,393 298 9,867 13,054 16,268 14,932 9,942 (14,718) Minority interest 104 27 (73) 30 25 40 54 50 96 74 33 32,326 4,736 (1,540) 1,423 323 9,907 13,108 16,318 15,028 10,016 (14,685) Consolidated income statements Industrial operations SEK M 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net sales 116,382 120,392 180,615 177,080 174,768 202,171 231,191 249,020 276,795 294,932 208,487 Cost of sales (92,772) (97,131) (149,477) (145,453) (141,256) (158,453) (180,823) (192,400) (214,160) (232,247) (179,578) Gross income 23,610 23,261 31,138 31,627 33,512 43,718 50,368 56,620 62,635 62,685 28,909 Research and development expenses (4,525) (4,876) (5,391) (5,869) (6,829) (7,614) (7,557) (8,354) (11,059) (14,348) (13,193) Selling expenses (8,117) (9,285) (14,663) (15,393) (15,891) (18,317) (19,616) (19,999) (24,671) (25,597) (23,752) Administrative expenses (4,632) (4,651) (6,474) (5,464) (5,259) (5,310) (6,147) (6,481) (7,092) (6,921) (5,838) Other operating income and expenses (587) 309 (3,071) (2,989) (540) 7 (397) (3,275) 249 (1,457) (2,432) Income from Financial Services 1,066 1,499 325 490 926 1,365 2,033 – – – – Income (loss) from investments in associated companies 478 341 (86) 126 166 2 (568) 61 428 23 (15) Income from other investments 170 70 1,408 309 (3,581) 828 37 141 93 69 (13) Income from divestment of subsidiaries 26,695 – – – – – – – – – – Restructuring costs – – (3,862) – – – – – – – – Operating income (loss) 34,158 6,668 (676) 2,837 2,504 14,679 18,153 18,713 20,583 14,454 (16,333) 131 This document is authorized for use by Sinan Onat, from 4/9/2012 to 6/17/2012, in the course: iMBA 515: Accounting for External Reporting - Ketz (Spring 2012), Pennsylvania State University - University Park. Any unauthorized use or reproduction of this document is strictly prohibited.

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