have been adjusted to the accounting principles of the parent company when consolidated with the SEB Group.
The current rate method is used for translating the financial statements of foreign subsidiaries to Swedish kronor. Since this means that various items in the profit and loss accounts and balance sheets are translated at different exchange rates, trans-lation differences arise, which are not recorded in the consoli-dated profit and loss accounts but are instead recorded directly in shareholders’ equity, distributed between statutory and free reserves. Exchange rate effects on subsidiaries’ equity in for-eign currency are also recorded as translation differences to such extent as it is exposed to currency risk.
Accounting principles
This Annual Report has been prepared in accordance with the Act (1995:1559) on annual accounts of credit institutions and securities companies (“AACS”), the recommendations of the Swedish Financial Accounting Standards Council (“SFASC”) and the accounting regulations of the Swedish Financial Supervisory Authority (“FSA”).
Accounting principles
Foreign currency valuation
Assets and liabilities in foreign currencies are valued at market (closing rate on balance sheet date).
The shareholdings of the parent company in foreign sub-sidiaries and associated companies are valued at the historical rate of exchange. The parent company’s foreign currency liabil-ities that are related to the hedging of shares in subsidiaries are also valued at the historical rate of exchange. This is adjusted against the arising translation difference in the consolidated accounts (see above under Consolidated accounts).
Classification of financial assets
Loan claims and securities purported to be held until maturity or for the long term, according to documented intent and abili-ty, are classified as financial fixed assets. Other financial claims, including assets taken over for the protection of claims, securi-ties which are not intended to be held for the long term and de-rivatives instruments are classified as financial current assets.
Valuation rules
Normally, financial fixed assets are valued at acquisition value and current assets at the lower of cost or market.
However, transferable securities and derivatives, as current assets, may be valued at market. The SEB Group has chosen the market value principle for derivatives instruments and securities in the trading portfolios.
Loans are reported on the balance sheet at acquisition value as long as they are not considered doubtful. Doubtful loans are reported net after deduction for incurred and probable credit losses, i.e. to the estimated recovery value of the loan.
Loans are classified as doubtful if it is probable that the con-tractual payments will not be fulfilled and the value of the col-lateral does not cover the credit amount. Such a situation exists if interest/principal is more than 60 days past due or the respective legal entity has determined that the counter-party is unlikely to fulfil its contractual payments. Information about doubtful loans is provided in a Note. From the time a loan is classified as doubtful the interest is accounted for on cash basis.
For doubtful loans, specific provisions are made for proba-ble credit losses. Provisioning is made on the difference between the outstanding amount and the estimated recovery value of the loan, which is arrived at by one of the following valuation methods:
■The total net present value of expected future cash flows.
■Net realisable value of the collateral, if such exists and utilisation thereof is deemed probable
■Market value of the loan, if this is a reliable estimate of the loan’s recovery value.
The entire outstanding amount of each loan specifically pro-vided for is included in doubtful loans, i.e. including the por-tion covered by collateral. Provisions for transfer risks are made by such amounts as are considered necessary according to the valuation of the claim per country and any transfer ob-stacles that may exist. Possible market value, type of claim and other relevant information are taken into account in the valua-tion of such claims.
When it is deemed probable that losses have occurred in groups of loans to be individually appraised, but which cannot yet be ascribed to individual loans, collective provisions are
made. Collective provisions are related to the part of the credit portfolio that does not meet the Group’s normal credit quality standards but is not classified as doubtful. The Group’s inter-nal risk classification system is one of the components that determine the size of the provision. Loans are individually val-ued except for certain homogeneous groups of loans with lim-ited value and similar credit risks, which are valued on a group basis. The appraisal methods to value these groups of loans are based on historical credit losses and assessed future develop-ments.
An incurred credit loss refers to a loan, or that part of a loan, which the Bank deems impossible to collect from the borrower or cannot be recovered from a sale of the collateral. In such a case, the loan is written off completely or written down to its recovery value. Simultaneously, any previously established specific reserve for probable credit losses is reversed.
Assets taken over are valued as current assets at estimated market value at the time of the take-over, after which valuation is made at the lower of cost or market.
External expertise is used for property valuations. If the asset is listed on the Stock Exchange, this value is normally used as market value. In other cases, e.g. in the case of unlisted shares taken over, analogue calculations have to be made.
Assets taken over are reported according to the nature of the asset and the main assets are shares and properties.
Interest-bearing securities that have been purchased at a premium or a discount are accounted for using accrual accounting over the life of the instrument. Thus, the effective rate of interest will be equal to such rate as makes the discount-ed present value of the future cash flow under the instrument equal to the historical cost, which means that the book acquisi-tion value is altered on a continuous basis, representing a so-called accrued acquisition value.
Transferable securities (interest-bearing securities and oth-ers) included in the trading portfolio are valued at market.
The market value is equal to the public share price on the balance sheet date. Resulting unrealised gains, recorded in the profit and loss account, are transferred to the reserve for un-realised gains within restricted shareholders’ equity, net of deferred tax, as these gains are not available for distribution.
The Bank’s holding of its own shares as a result of its deal-ings as market maker are reported as a deduction item from shareholders’ equity. The result from sales of own shares is not reported in the profit and loss account but as a change in share-holders’ equity.
The hedging of employee stock option programmes with the help of a so-called total return swap is reported in accordance with its economic implications so that when the daily price drops below the contract price, the difference is charged to unrestricted shareholders’ equity. Dividends received through the swap are credited to shareholders’ equity, while interest paid is charged to the profit and loss account. When the daily price exceeds the contract price, the profit and loss account is charged with the relevant social security contributions.
Derivatives contracts, which also include currency futures, are valued at market. Positive closing results are classified as other assets while negative closing results are classified as other liabilities.
Market values are obtained by using the same valuation methods as the market uses for each respective instrument in calculating the respective closing values. For linear
instru-Accounting principles
ments, this means that future flows under the instruments are discounted to the balance sheet date according to the relevant yield curve.
Hedge accounting of financial assets and liabilities implies that the hedge instrument is valued according to the same val-uation principle as the hedged position.
Hedge accounting is subject to the following conditions: the position is exposed to an interest rate/equity price/commodity price or currency rate risk.
The hedged positions have been identified on an individual or collective basis.
Repurchase transactions
In the case of a real repurchase transaction, a so-called repo, the asset continues to be recorded on the selling party’s balance sheet and the settlement received among deposits or borrow-ing. The security that has been sold is reported as pledged as-sets under memorandum items. The buying party reports the settlement paid as a loan claim on the selling party. Accrual accounting is applied to the difference between the spot and forward payment over the life of the transaction as interest.
Security loans
Securities lent remain on the balance sheet as securities, report-ed as plreport-edgreport-ed assets under memorandum items. Valuations are made in the customary way. Borrowed securities are not reported as assets. In those cases where the borrowed securities are sold (short sale), such amount as corresponds to the real value of the securities is reported as a liability.
Tangible fixed assets
Office equipment is reported at acquisition value and depre-ciated according to plan. The difference between scheduled depreciation and depreciation for tax purposes is reported as additional depreciation within legal entities.
Equipment leased to clients is reported at acquisition value and depreciation is made on an annuity basis, based on a con-servatively estimated residual value at the end of the contract period. For leased equipment that cannot be sold under normal market conditions, the scheduled residual value is set at zero.
Financial leasing is reclassified in the consolidated accounts as lending, which means that leasing income in this respect is reported as interest income and amortisation in accordance with the principle that economic risks and advantages are essentially transferred to the lessee.
Investments in properties held for the purpose of generating rental income or value increase are reported according to SFASC RR 24. The property holdings are valued at market.
Intangible fixed assets
Development expenditures are capitalised since two years only if resulting in an identifiable and by the Group controlled asset,
Financial liabilities
Accrual accounting is applied to financing costs for financial liabilities. The calculation is based upon an original liability equal to the amount obtained net of essential costs attributable to the creation of the liability. Accrual accounting is then ap-plied to the difference between this acquisition value and the redemption value, together with interest and any fees over the life of the liability by analogy with the method applicable to fixed-interest assets.
Deferred taxes
Differences between tax base and book value of assets and lia-bilities lead to deferred tax claims and tax lialia-bilities. Deficit deductions lead to deferred tax claims to the extent it is deemed possible to use them. The Group’s deferred tax claim and tax liability have been calculated using a tax rate of 28 per cent in Sweden and the tax rates prevailing in each respective country for companies abroad. A deferred tax claim that cannot be offset against a deferred tax liability is reported under other assets. Deferred tax liabilities are reported under provisions.
Provisions
A provision is made whenever an obligation has arisen as the result of an event that has occurred. Such provision is subject to the condition that it can be calculated in a reliable way and that it is probable that the obligation will be settled within a fixed period of time. The provisions are examined every clos-ing date and adjusted, if necessary.
Pension commitments
Depending upon local conditions, there are both defined bene-fit and defined contribution pension plans within the Group.
The pension commitments of the Group with respect to defined benefit pensions are covered by the pension funds of the Group, through insurance or through allocations on the balance sheet. Pensions are valued and reported in accordance with RR 29 Employee benefits. Previously, pensions were reported according to local rules in each respective country. As from 1 January 2004, defined benefit pension plans are calculat-ed at present value according to the actuarial, so-callcalculat-ed Projected Unit Credit Method. The assumptions upon which the calculations have been made are found in Note 9 b. In those cases in which the net of accumulated actuarial gains and loss-es deviatloss-es by more than 10 per cent from that which is greater of the pension comitment and plan asset, the excess amount is reported as income, alternatively as a cost. The excess amount is written off during the expected remaining period of service.
Pension commitments and any special plan assets are conso-lidated on a net basis per unit on the balance sheet. The esti-mated pension costs of the defined benefit plans are reported under staff costs.
The pension costs of the defined contribution pension plans
Accounting principles
The parent company recompenses itself for pensions paid from the pension funds, provided their position so permits. Pensions paid and compensations from the pension funds are reported under appropriations.