The Group also applies Recommendation RFR 2:1 (Supplementary Accounting Rules for Corporate Groups) of the Swedish Financial Reporting Board, which specifies the supplementary rules that are required in addition to IFRS under provisions contained in the Swedish Annual Accounts Act. The annual accounts of the parent company have been prepared in accordance with the Annual Accounts Act, Recommendation RFR 2 Accounting for Legal Entities of the Swedish Financial Reporting Board and statements issued by the Swedish Financial Reporting Board.
The parent company’s accounts comply with the Group’s principles, except in respect of what is stated below in the section entitled differences between the accounting principles of the Group and the parent company. Items included in the annual accounts have been stated at cost, except in respect of revaluations of investment properties and in respect of financial instruments. The following is a description of significant accounting principles that have been applied.
Fabege's interim reports are prepared in accordance with IAS 34 Interim Financial Reporting.
Consolidated financial statements
Subsidiaries are those companies in which the Group directly or indirectly holds more than 50 per cent of the votes or in other ways exercises a controlling influence. Controlling influence means that the Group has the right to draw up financial and operational strategies. The existence and effect of potential voting rights that can currently be used or converted is taken into account in assessing whether the Group exercises a controlling influence. Subsidiaries are included in the consolidated financial statements as of the time when the controlling influence is transferred to the Group and are excluded from the consolidated financial statements as of the time when the controlling influence ceases. Subsidiaries are reported in accordance with the purchase method. Acquired identifiable assets, liabilities and contingent liabilities are carried at fair value at the date of acquisition. The surplus, defined as the difference between cost and fair value of the acquired interests and the sum of fair value of acquired identifiable assets and liabilities, is recognised as goodwill. If the historical cost is less than the fair value of the acquired subsidiary’s net assets, the difference is recognised directly in the profit and loss account. All inter-company transactions and balances within the Group have been eliminated in preparing the consolidated financial statements. In case of the acquisition of a group of assets or net assets that do not constitute an operation, the costs for the Group are instead allocated to the individually identifiable assets and liabilities in the group based on their relative fair values at the time of acquisition.
Interests in associated companies
A company is reported as an associated company if Fabege holds at least 20 per cent and no more than 50 per cent of the votes or otherwise exercises a significant influence on the company’s operational and financial control. In the consolidated financial statements associated companies are reported in accordance with the equity method. Interests in associated companies are reported in the balance sheet at cost after adjusting for changes in the Group’s share of the associated company’s net assets, less any decrease in the fair value of individual interests. In transactions among Group companies and associated companies that part of unrealised gains and losses which represents the Group’s share of the associated company is eliminated, except as regards unrealised losses that are due to impairment of an assigned asset.
For companies that are 50 per cent owned in which Fabege exercises a joint controlling influence together with another party, the company’s assets, liabilities, income and expenses have been included in the consolidated financial statements in proportion to Fabege’s ownership share (proportionate consolidation). In transactions between the Group and a joint venture that part of unrealised gains and losses which represents the Group’s share of the jointly controlled company is eliminated.
Minority interest consists of the market value of minority interests in net assets for subsidiaries included in the consolidated financial statements at the time of the original acquisition and the minority owners’ share of changes in equity after the acquisition.
Reporting of income
All investment properties are let to tenants under operating leases. Rental income from the company’s property management activities is recognised in the period to which it refers. Gains or losses from the sale of properties are recognised at the date of contract unless the purchase contract contains specific provisions which prohibit this. Rental income from investment properties is recognised on a straight-line basis in accordance with the terms and conditions of the applicable leases. In cases where a lease provides for a discounted rent during a certain period that is offset by a higher rent at other times, the resulting deficit or surplus is distributed over the term of the lease.
Interest income is distributed over the term of the contract. Dividends on shares are recognised when the shareholder’s right to receive payment is deemed to be secure.
Leasing – Fabege as lessee
Leasing agreements in which the risks and benefi ts associated with ownership of the assets are in all material respects borne by the lessor are classified as operating leases. All of the Group’s leases are classifi ed as operating leases. Lease payments are reported as an expense in the profit and loss account and distributed over the term of the agreement on a straight-line basis.
All properties in the Group are classified as investment properties, as they are held for the purpose of earning rental income or for capital gains or a combination of the two.
The concept of investment property includes buildings, land and land improvements, new builds, extensions or conversions in progress and property fixtures. Investment properties are recognised at fair value at the balance sheet date. Gains and losses attributable to changes in the fair value of investment properties are recognised in the period in which they arise in the income and expense item Unrealised changes in value, investment properties.
Gains or losses from the sale or disposal of investment properties consist of the difference between the selling price and carrying amount based on the most recent revaluation to fair value. Gains or losses from sales or disposals are recognised in the income and expense item Realised changes in value, investment properties. Projects involving conversion/maintenance and adaptations for tenants are recognised as an asset to the extent that the work being undertaken adds value in relation to the latest valuation. Other expenses are charged to expense immediately. Sales and acquisitions of properties are recognised at the time when the risks and benefits associated with ownership are transferred to the buyer or seller, which is normally on the contract date.
Tangible fixed assets
Equipment is recognised at cost less accumulated depreciation and any impairment. Depreciation of equipment is expensed by writing off the value of the asset on a straight-line basis over its estimated period of use.
In case of an indication of a decrease in the value of an asset (excluding investment properties and financial instruments, which are valued at fair value), the recoverable amount of the asset is determined. If the carrying amount of the asset exceeds the recoverable amount the asset is written down to this value.
Recoverable amount is defined as the higher of market value and value in use. Value in use is defined as the present value of estimated future payments generated by the asset.
In the consolidated financial statements loan expenses have been recognised in the profit and loss account in the year to which they refer, except to the extent that they have been included in the cost of a building project. Fabege capitalises borrowing costs attributable to the purchase, construction or production of an assets that takes a considerable amount of time to complete for its intended use or sale. The interest rate used to calculate the capitalised borrowing cost is the average interest rate of the loan portfolio. In the accounts of individual companies the main principle – that all loan expenses should be charged to expense in the year to which they refer – has been applied.
The income and expense item Tax on profit for the year includes current and deferred income tax for Swedish and foreign Group units. The current tax liability is based on the taxable profit for the year. Taxable profit for the year differs from reported profit for the year in that it has been adjusted for nontaxable and non-deductible items. The Group’s current tax liability is calculated on the basis of tax rates that have been prescribed or announced at the balance sheet date.
Deferred tax refers to tax on temporary differences that arise between the carrying amount of assets and the tax value used in calculating the taxable profit. Deferred tax is reported in accordance with the balance sheet liability method. Deferred tax liabilities are recognised for practically all taxable temporary differences, and deferred tax assets are recognised when it is likely that the amounts can be used to offset future taxable profits. The carrying amount of deferred tax assets is tested for impairment at the end of each financial year and an impairment loss is recognised to the extent that it is no longer probable that sufficient taxable profi ts will be available against which the deferred tax asset can be fully or partially offset. Deferred tax is recognised at the nominal current tax rate with no discount. Deferred tax is recognised as an income or expense in the profi t and loss account, except in those cases where it refers to transactions or events that have been recognised directly in equity. In such cases the deferred tax is also recognised directly in equity.
Deferred tax assets and tax liabilities are offset against one another when they refer to income tax payable to the same tax authority and when the Group intends to settle the tax by paying the net amount.
Transactions in foreign currencies are translated, upon inclusion in the accounts, to the functional currency at the exchange rates applying on the transaction date. Monetary assets and liabilities in foreign currencies are translated at the balance sheet date at the exchange rates applying on the balance sheet date. Any resulting foreign exchange differences are recognised in the profit and loss account for the period.
In preparing the consolidated financial statements, the balance sheets of the Group’s foreign operations are translated from their functional currencies into Swedish kronor based on the exchange rates applying at the balance sheet date. Income and expense items are translated at the average exchange rate for the period. Any resulting translation differences are recognised in equity and transferred to the Group’s translation reserve. The accumulated translation difference is transferred and reported as part of a capital gain or loss in cases where the foreign operation is divested.
Cash flow statement
Fabege reports cash flows from the company’s main sources of income: net operating income from the property management business and gains or losses from sales of properties in the company’s day-to-day activities.
Information about related parties
For information about the company’s transactions with related parties, see Note 6 in Annual Report 2010 in respect of compensation to senior executives and Note 36 for other related-party transactions.
Provisions and contingent liabilities
Provisions are recognised when the company has a commitment and it is likely that an outflow of resources will be required and the amount can be reliably estimated.
Contingent liabilities are recognised if there exists a possible commitment that is confirmed only by several uncertain future events and it is not likely that an outflow of resources will be required or that the size of the commitment can be calculated with sufficient accuracy.
A financial asset or financial liability is recognised in the balance sheet when the company becomes a party to the commercial terms and conditions of the instrument. A financial asset is removed from the balance sheet when the rights inherent in the agreement are realised or expire or if the company loses control over them. A financial liability is removed from the balance sheet when the obligation arising from the agreement has been met or ceased for other reasons.
Transaction date accounting is used for derivatives while settlement date accounting is used for spot purchases and sales of financial assets. In connection with each financial report the company assesses whether there are objective indications of impairment of financial assets or groups of financial assets. Financial instruments are recognised at amortised cost or fair value, depending on the initial categorisation under IAS 39.
Calculation of fair value of financial instruments
Fair value of derivatives and loan liabilities is determined by discounting future cash flows by the quoted market interest rate for each maturity. Future cash flows in the derivatives portfolio are calculated as the difference between the fixed contractual interest under each derivatives contract and the implied Stockholm Interbank Offered Rate (STIBOR) for the period concerned. The present value of future interest flows arising therefrom is calculated using the implied STIBOR curve. For the callable swaps included in the portfolio the option component has not been assigned a value, as the swaps can only be called at par value and thus do not have an impact on earnings. Decisions to call swaps are made by the banks.
Shareholdings have been categorised as “Financial assets held for trading”. These are valued at fair value and changes in value are recognised in the profit and loss account. Quoted market prices are used in determining the fair value of shareholdings. Where no such prices are available fair value is
determined using the company’s own valuation technique.
For all financial assets and liabilities, unless otherwise stated in the Notes, the carrying amount is considered to be a good approximation of fair value. Set-off of financial assets and liabilities Financial assets and liabilities are offset against each other and the net amount is recognised in the balance sheet when there is a legal right of set-off and there is an intention to settle the items by a net amount or to simultaneously realise the asset and settle the liability.
Cash and cash equivalents
Cash and cash equivalents consist of cash assets held at financial institutions. Cash and cash equivalents also includes short-term investments with maturities of less than three months from the date of acquisition that are exposed to insignificant risk of fluctuations in value. Cash and cash equivalents are recognised at their nominal amounts.
Trade receivables are categorised as “Loans and receivables”, which means that the item is recognised at amortised cost. Fabege’s trade receivables are recognised at the amount that is expected to be received after deducting for uncertain receivables, which are assessed individually. The expected maturity of a trade receivable is short, and the value is therefore recognised at the nominal amount with no discount. Impairment of trade receivables is recognised in operating expenses.
Long-term receivables and other receivables
Long-term receivables and other (current) receivables primarily consist of promissory note receivables relating to sales proceeds for properties that have been sold but not yet vacated. These items are categorised as “Loans and receivables”, which means that the items are recognised at amortised cost. Receivables are recognised at the amount that is expected to be received after deducting for uncertain receivables, which are assessed individually. Receivables with short maturities are recognised at nominal amounts with no discount.
Fabege does not apply hedge accounting of derivatives and therefore categorises derivatives as “Financial assets or financial liabilities held for trading purposes”. Assets and liabilities in these categories are stated at fair value and changes in value are recognised in the profit and loss account.
Trade payables are categorised as “Other liabilities”, which means that the item is recognised at amortised cost. The expected maturity of a trade payable is short, and the liability is therefore recognised at the nominal amount with no discount.
Fabege’s liabilities to credit institutions and holders of Fabege commercial paper and other liabilities are categorised as “Other liabilities” and valued at amortised cost. Long-term liabilities have an expected maturity of more than 1 year while current liabilities have a maturity of less than 1 year.
Compensation to employees
Compensation to employees in the form of salaries, holiday pay, paid sick leave, etc. as well as pensions are recognised as it is earned. Pensions and other compensation paid after termination of employment are classified as defined contribution or defined benefit pension plans. The Group has both defined contribution and defined benefit pension plans. Pension costs for defined contribution plans are charged to expense as they are incurred. For defined benefit plans the present value of the pension liability is calculated using an actuarial method known as the projected unit credit method. Actuarial gains and losses are recognised in the profit and loss account to the extent that they exceed the higher of 10 per cent of the Group’s pension assets and pension liabilities at the beginning of the reporting period. Amounts outside this band are recognised in the profit and loss account during the employees’ estimated average remaining period of service. Employees in the former Fabege have defined benefit pension plans. As of 2005 no further accrual of this pension liability has been made.
The application of the new standard IFRS 8 Operating segments has resulted in the Group’s segment information being presented from the perspective of management and that operating segments are identified based on the internal reports submitted to the company’s chief operating decision maker. The Group has identified the CEO as the chief operating decision maker, which means that the internal reports used by the CEO for monitoring the business and making decisions on the allocation of resources have been used as a basis for the presented segment information. Based on the company’s internal reporting, two operating segments have been identified: Property Management and Improvement Projects. Rental income and property expenses, as well as realised and unrealised changes in value including tax, are directly attributable to properties in each segment (direct income and expenses). In cases where a property changes character during the year, earnings attributable to the property are allocated to each segment based on the period of time that the property belonged to each segment. Central administration and items in net financial expense have been allocated to the segments in a standardised manner based on each segment’s share of the total property value (indirect income and expenses).
This also applies to tax that is not directly attributable to earnings from property management activities or sales. Property assets are attributed to each segment pursuant to the classification on the balance sheet date.
Differences between the accounting principles of the Group and the parent company
The financial statements of the parent company have been prepared in accordance with the Annual Accounts Act, Recommendation RFR 2 Accounting for Legal Entities of the Swedish Financial Reporting Board and statements issued by the Swedish Financial Reporting Board. Tax laws in Sweden allow companies to defer tax payments by making allocations to untaxed reserves in the balance sheet via the income and expense item appropriations. In the consolidated balance sheet these are treated as temporary differences, i.e. a breakdown is made between deferred tax liability and equity. Changes in untaxed reserves are recognised in the consolidated profit and loss account and broken down into deferred tax and profit for the year. Interest during the period of construction that is included in the cost of the building is only recognised in the consolidated financial statements.
Group contributions and shareholder contributions are reported in accordance with Statement UFR 2 of the Swedish Financial Reporting Board. This means that Group contributions and shareholder contributions are recognised based on their economic significance. The contributions are reported as a capital transfer, i.e. as a decrease or increase of unrestricted equity. The consequence of this accounting principle is that only tax that is attributable to income and expense items is recognised in the profit and loss account.
Defined benefit and defined contribution pension plans are reported in accordance with hitherto applicable Swedish accounting standards, which are based on the provisions of the Swedish Pension Obligations Vesting Act (“Tryggandelagen”).
In the Parent Company, adjustments were made to the comparative figures for the items Receivables from Group companies and Liabilities to Group companies, because the items, which should rightly have been recognised in their net amount on 31 December 2009, were previously recognised gross.
New IFRS and interpretations
IAS 27 and IFRS 3 Business combinations
The revised IAS 27 and IFRS 3 apply to acquisitions (business combinations) as of the 2010 financial year. In the revised standard, the definition of business combination has changed, which could affect the classification of indirect acquisition of properties as asset acquisitions or business combinations. Acquisition-related costs may no longer be included in the cost, but should instead be recognised as an expense in profit and loss. For Fabege, the change entails that certain expenses resulting from property acquisitions classified as business combinations will be expensed.
Amendments to existing standards
A number of minor amendments to existing IFRS standards have become effective and apply to the 2010 financial year. The amendments pertain to such factors as IAS 7 Classification of expenditures on unrecognised assets and IFRS 8 Operating segments. The improvements to IFRS in 2009 had no impact on the Group’s fi nancial statements in 2010; nor did other new and amended standards and interpretations have any impact on the Group’s financial statements in 2010.
New and amended standards and interpretations that have not become effective
New and amended standards pertain to the amended disclosure requirements in IFRS 1, IFRS 7 and IAS 24. A new standard, IFRS 9 Financial instruments, becomes effective as of 2013. The impact of this standard cannot be determined as yet. In the opinion of management, other new and amended standards and interpretations will not have any significant impact on the Group’s financial statements in the period during which they are initially applied.