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Accounting principles and Alternative performance measures

From Ratos year-end report 2017

Ratos’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and associated interpretations (IFRIC), as endorsed by the EU. This interim report was prepared in accordance with IAS 34, Interim Financial Reporting, and applicable provisions in the Swedish Annual Accounts Act. The parent company also applies RFR 2 Accounting for Legal Entities.

Reporting and measurement principles are unchanged compared with those applied in Ratos’s 2016 Annual Report. The following change has been made to the presentation form.

Amended presentation form for the consolidated statement of cash flows
To more clearly separate cash flows arising in operations conducted and the cash flows that relate to the financing of such operations, interest paid and interest received, which were previously included in operating activities, have been moved to financing activities (interest paid) and investing activities (interest received). Consequently, cash flow is based on operating profit instead of profit before tax, which was used in the past.

New IFRS that have not yet come into force

IFRS 15 Revenue from Contracts with Customers
IFRS 15 will be applied from 2018 and addresses the recognition of revenue from contracts with customers and the sale of certain non-financial assets. It replaces IAS 11 Construction Contracts and IAS 18 Transfers of Assets from Customers and related interpretations. Ratos’s subsidiaries operate in a variety of sectors and will be affected to different degrees by the new rules. In 2016, the portfolio companies commenced a review of their respective types of revenue and analysed whether the new rules in IFRS 15 will affect revenue recognition when the standard takes effect. This work continued in 2017. Ratos has chosen to apply the full retrospective approach during the transition, using the practical solutions provided in the standard. Based on this, the companies have applied the new standard to revenue for 2017 in order to identify any differences in recognition compared with IAS 11 and IAS 18, which were applied in the 2017 Annual Report. No material differences have been identified. Based on this and on additional analyses of the conditions for revenue from the existing operations in each company, all of Ratos’s portfolio companies concluded that the application of IFRS will not have any material impact on revenue recognition in the individual company. Accordingly, the previous preliminary conclusion that the transition to IFRS 15 would not have any material effects on the Ratos Group’s financial earnings and position was confirmed in the fourth quarter of 2017.

IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement The standard is effective from 2018. The amended standard primarily impacts the Ratos Group in terms of recognition of bad debts. The Group’s bad debts have been, and are expected to remain, very small. Moreover, a number of the portfolio companies already apply an impairment model that largely complies with the requirements in IFRS 9, which means that the impact of the new reporting standard will not be material. Any minor effects of the transition will be recognised as an adjustment of opening equity in the first quarter of 2018. Nor will the new rules for hedge accounting have a material impact on the Ratos Group’s financial position or earnings. Refer to Note 18 Financial instruments and Note 30 Financial risks and risk policy in Ratos’s 2016 Annual Report for a description of the hedges within the Ratos Group.

IFRS 16 Leases
IFRS 16 Leases replaces IAS 17 Leases and IFRIC 4 Determining Whether an Arrangement Contains a Lease and related rules. The standard is effective from 2019. Under the new standard, the lessee is required to recognise all contracts that meet the definition of a lease (except leases of 12 months or less and leases of low-value assets) as a right-of-use asset and liability in the statement of financial position. Leases that currently comprise operating leases will subsequently be recognised in the balance sheet, which entails that the current operating expense, corresponding to the leasing charges for the period, will be replaced by amortisation and interest expense in the income statement. Ratos’s financial statements will largely be impacted as follows: Improved operating profit, increased total assets, cash flow from leases moved from operating activities to financing activities (amortisation and interest paid).

IFRS 16 will impact Ratos’s portfolio companies to varying degrees and at year-end 2017, each company had developed a transition plan, including an inventory and analysis of existing leases and other factors concerning materiality, discount rates and the need for system support.

Alternative performance measures 2017

Alternative performance measures 2016