Note 2 Accounting principles

Conformity with standards and regulations

The consolidated accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as well as the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Commission for application within the EU. These also include the International Accounting Standards (IAS) issued by IASB’s predecessor, the International Accounting Standards Committee (IASC), and the interpretations issued by IFRIC’s predecessor, the Standing Interpretations Committee (SIC).

In addition, recommendation RFR 1.1 - Supplementary Accounting
Principles for Groups, issued by the Swedish Financial Reporting Board (RFR), has been applied. RFR 1.1 specifies the necessary additions to the IFRS disclosure requirements in accordance with the Swedish Annual Accounts Act.

Basis of measurement

Assets and liabilities are reported at cost, with the exception of financial assets and liabilities, which are stated at fair value. Financial assets and liabilities stated at fair value consist of derivative instruments and financial assets that are stated at fair value in the income statement.

Functional and presentation currencies

The functional currency is the currency of the primary economic environment in which each entity operates.

The Parent Company’s functional currency is the Swedish krona, which is also the presentation currency of both the Parent Company and the Group. This means that the financial statements are presented in Swedish kronor (SEK). Unless otherwise stated, all figures are rounded off to the nearest million Swedish kronor (SEK million).

Estimations and assessments

Preparation of the financial statements in accordance with IFRS requires the company’s executive management and board of directors to make estimations and assessments as well as to make assumptions that affect the application of the accounting principles and the reported amounts of assets, liabilities, income and expenses. The estimations and assumptions are based on historic experience and of other factors that seem reasonable under current conditions. The results of these estimations and assumptions are then used to establish the reported values of assets and liabilities which are not clearly documented from other sources. The final outcome can deviate from the results of these estimations and assessments.

The estimations and assumptions are revised on a regular basis. The effects of changes in estimations are reported in the period in which the changes were made if the changes affected this period only, or in the period the changes were made and future periods if the changes affect both the current period and future periods.

When applying IFRS, assessments made by the company’s executive management and board of directors which have a material effect on the financial statements, and estimations that may result in substantial adjustments to the following year’s financial statements, are described in greater detail in Note 52 to the consolidated accounts.

Accounting principles

The accounting principles of the Group detailed below have been applied consistently for all periods presented in the consolidated financial statements, except for the depreciation method used for the Group’s nuclear power plants in Germany, which is described below under the heading Property, plant and equipment/Depreciation principles.

The Group’s accounting principles have been applied consistently for the reporting and consolidation of subsidiaries and associated companies.

New IFRSs and interpretations effective as of 2008

The new standards and amendments to standards and interpretations described below are effective as of the 2008 financial year, but have not had any effect on Vattenfall’s financial statements:

Amendments in IAS 39 - Financial Instruments: Recognition and Measurement, and IFRS 7 - Financial Instruments: Disclosures, which entail the possibility of re-classifying financial instruments in certain cases.

IFRIC 11 refers to an interpretation of IFRS 2 - Share-based Payment, “Group and Treasury Share Transactions”. The interpretation clarifies the accounting for transactions of own equity instruments in an entity that receives goods or services from employees.

IFRIC 14 refers to an interpretation of IAS 19 - Employee Benefits, “The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction”, and addresses how minimum funding requirements affect the ceiling in IAS 19 for a defined benefit asset.

New IFRSs and interpretations not yet adopted

New standards, amendments to standards and interpretations endorsed by the EU as per 31 December 2008, which are effective as of the 2009 financial year and which have not been applied prospectively:

IFRS 8 - Operating Segments, which defines an operating segment and what information shall be disclosed for each operating segment in the financial statements. IFRS 8 will entail a further split of the segments disclosed by Vattenfall compared to the segments reported in 2008.

Amendments in IAS 23 - Borrowing Costs, require that an entity must capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that takes a substantial period of time to get ready for its intended use or sale. The amendments are expected to have no or minimal impact on Vattenfall’s financial statements, as such borrowing costs are already capitalised within the Vattenfall Group.

Amendments in IAS 1 - Presentation of Financial Statements, will lead to changed presentation format of the consolidated financial statements in certain areas and the introduction of new titles for the statements. The amendment does not affect the calculation of numbers reported. It will entail that certain transactions that were previously recognised directly in equity, will be recognised as separate items in the statement that corresponds to the present Consolidated Income Statement - Consolidated Statement of Comprehensive Income - under the heading Other Comprehensive Income.

The following amendments to standards and interpretations endorsed by the EU are expected to have no or minimal impact on Vattenfall’s financial statements:

Amendments in IFRS 2 - Share-based Payment: Vesting Conditions and Cancellations. These clarify, among other things, the treatment of vesting conditions related to share-based payments.

IFRIC 13 - Customer Loyalty Programmes. This interpretation addresses the reporting and valuation of a company’s obligation to provide free or discounted goods or services to customers that have qualified for such through previous purchases.

New standards, amendments to standards and interpretations not yet endorsed by the EU as per 31 December 2008 and effective as of the 2009 financial year or later:

Revised IFRS 3 - Business Combinations, and amendments in IAS 27 - Consolidated and Separate Financial Statements, entail amendments in the preparation of consolidated accounts and in the accounting for business combinations. The revised standards are expected to be effective as of the 2010 financial year and will affect the accounting for future business combinations made by Vattenfall.

Amendments in IAS 27 - Consolidated and Separate Financial Statements, “Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate”, which affect dividends received from subsidiaries, associated companies and joint ventures. The amendments may have an impact on Vattenfall’s financial statements.

Amendments in IAS 32 - Financial Instruments: Presentation, and IAS 1 - Presentation of Financial Statements. “Puttable Financial Instruments and Obligations Arising on Liquidation” states that certain well-defined financial instruments shall be classified as equity and not as a liability. The amendments are expected to have no or minimal impact on Vattenfall’s financial statements.

IFRIC 12 - Service Concession Arrangements. The interpretation provides, among other things, general principles on recognising and measuring the obligations and related rights in service concession arrangements. The interpretation is expected to have no or minimal impact on Vattenfall’s financial statements.

IFRIC 15 - Agreements for the Construction of Real Estate, clarifies when construction and sale of real estate shall be accounted for according to IAS 11 - Construction Contracts, or IAS 18 - Revenue. The interpretation is expected to have no or minimal impact on Vattenfall’s financial statements.

IFRIC 16 - Hedges of a Net Investment in a Foreign Operation, clarifies the accounting treatment in respect of net investments in foreign operations. The interpretation is expected to have no or minimal impact on Vattenfall’s financial statements.

IFRIC 17 - Distribution of Non-cash Assets to Owners, addresses questions on the situation when a dividend is distributed by using other assets than cash. The interpretation is expected to have no impact on Vattenfall’s financial statements.

Segmental information

In the accounts, a segment is an identifiable part of the Group that either provides products and services (business segments), or products and services in a certain economic environment (geographic area) that are exposed to risks and opportunities that distinguish it from other segments. Segmental information (see Note 6 to the consolidated accounts) is provided for the Group.

Classification of current and
non-current assets and liabilities

An asset is classified as a current asset when it is held primarily for commercial purposes or is expected to be realised within twelve months after the balance sheet date or consists of cash and cash equivalents, provided it is not subject to restrictions on its exchange or use for regulating a liability at least twelve months after the balance sheet date.

All other assets are classified as non-current assets.

A liability is classified as a current liability when it is held primarily for commercial purposes or is expected to be settled within twelve months after the balance sheet date or one for which the Group does not have an unconditional right to defer settlement of for a minimum of twelve months after the balance sheet date.

All other liabilities are classified as non-current liabilities.

Principles of consolidation

Subsidiaries

Subsidiaries are companies in which the Parent Company, Vattenfall AB, directly or indirectly holds more than 50% of the voting power, or in any other way has a controlling influence. Controlling influence entails a right to design a company’s financial and operational strategies with the purpose of gaining financial advantages.

Business combinations are accounted for using the purchase method. This method entails that the acquisition of a subsidiary is considered to be a transaction through which the Group indirectly acquires the subsidiary’s assets and takes over its liabilities and contingent liabilities. Through acquisition analysis of the business acquisition, the cost of the participating interests or business activities is established as well as the fair value of acquired identifiable assets and assumed liabilities and contingent liabilities. Deferred tax is taken into account for differences between the carrying amount and the corresponding tax base on all items except for goodwill. The difference between the cost of the subsidiaries’ shares and the fair value of acquired assets, assumed liabilities and contingent liabilities constitutes consolidated goodwill.

In a situation where a subsidiary is acquired in several stages, an acquisition analysis is also prepared for each acquisition transaction that takes place before a controlling influence is obtained. The reported value of goodwill is the sum total of the goodwill values calculated for each sub-acquisition.

The subsidiary’s financial statements, which are prepared in accordance with the Group’s accounting principles, are included in the consolidated accounts from the point of acquisition to the date when the controlling influence ceases.

A discontinued operation is reported separately from continuing operations if the discontinued operation amounts to a significant value.

Acquisitions and divestments of minority shares of subsidiaries are recognised within equity.

Associated companies

Associated companies are companies in which the Group has a significant - but not controlling - influence over their operational and financial management, usually through shareholdings of between 20% and 50% of the votes. In conjunction with the acquisition of an associated company, an acquisition analysis similar to that of a business combination is made. Identifiable surplus values are handled in a similar manner to surplus values in business combinations. From the point at which the significant influence is acquired, participations in associated companies are reported in the consolidated accounts in accordance with the equity method. The equity method entails that the value of the shareholding in associated companies reported in the consolidated accounts corresponds to the Group’s share of the associated companies’ equity plus consolidated goodwill and any unamortised value of consolidated surplus and deficit values. Dividends received from an associated company reduce the book value of the investment.

In the consolidated income statement, the item Participations in the results of associated companies is shown net after tax.

The equity method is applied up to the point when the significant influence ceases.

Joint ventures

In the accounts, joint ventures are activities in which the Group has a joint controlling influence over the operational and financial management through collaborative agreement with one or more parties. In the consolidated accounts, holdings in joint ventures are consolidated in accordance with the equity method.

Transactions that are eliminated on consolidation

Intra-group receivables and liabilities, income and expenses, as well as gains or losses arising from intra-group transactions between Group companies, are eliminated in their entirety when preparing the consolidated accounts.

Gains arising from transactions with associated companies and joint ventures are eliminated to an extent that corresponds to the Group’s holding in the company. Losses are eliminated in the same manner as gains, but only if there is no indication of any need for impairment.

Foreign currencies

Transactions in foreign currencies

Transactions in foreign currencies are translated to the functional currency at the exchange rate on the day of the transaction. On the balance sheet date, monetary assets and liabilities in foreign currencies are translated to the functional currency at the exchange rate applicable on that day. Exchange rate differences arising from translation of currencies are reported in the income statement. Operationally derived exchange gains and losses are shown under Other operating income and Other operating expenses, respectively.

Financial reporting of foreign activities

Assets and liabilities of foreign activities, including goodwill and other consolidated surplus and deficit values, are translated to SEK at the exchange rate in effect on the balance sheet date. Income and expenses of foreign activities are translated to SEK using an average exchange rate. Translation differences arising from foreign currency translation of foreign activities are reported directly against equity under the heading Translation reserve.

For the Vattenfall Group, key exchange rates applied in the accounts are provided in Note 4 to the consolidated accounts.

Revenue recognition

Net sales include sales proceeds from core businesses, i.e., sales, distribution and transmission of electricity and sales and distribution of heat.

Sales of electricity and heat

Sales of electricity and heat and related distribution and transmission are recognised as revenue at the time of delivery, excluding value-added tax and excise taxes.

Starting on 1 April 2006, Vattenfall has replaced intra-Group physical electricity transactions between Nordic electricity generation and sales activities in the Nordic countries with transactions vis-á-vis Nord Pool. The purchases that the sales activities make from Nord Pool are offset against sales of generation to Nord Pool in the reporting of the Business Group Nordic segment at the Group level.

The change in fair value of commodity derivatives that does not qualify for hedge accounting is reported in net sales.

Other revenues

In the case of service and consulting assignments, the percentage of completion method is applied, i.e., revenues and expenses are reported in proportion to the degree of completion. The degree of completion is established according to the relation between accrued expenses on the balance sheet date and estimated total expenses. In cases where losses are expected, a provision is established immediately.

Connection fees for electricity distribution/transmission and heat distribution are reported as revenues to the extent that they do not cover future obligations.

Government grants

Grants are reported at fair value when it can reasonably be assumed that the grant will be received and that the Group will meet the conditions of the grant.

A grant tied to a non-current asset reduces the book value of the asset.

A grant intended to cover expenses is reported in the income statement as Other operating income.

Operating expenses

Operating leases

Payments concerning operating leases are reported in the income statement on a straight-line basis over the leasing period. For a definition of operating leases, see below under the heading Property, plant and equipment/Leasing.

Financial income and financial expenses

Financial income

Financial income consists of interest income on bank balances, receivables and interest-bearing securities, returns from the Swedish Nuclear Waste Fund, dividend income, exchange rate differences, and positive changes in values of financial investments and derivative instruments used in financial activities.

Interest income is adjusted for transaction costs and any rebates, premiums and other differences between the original value of the receivable and the amount received when due. Interest income is reported as it is earned. The calculation is made on the basis of the return on underlying assets in accordance with the effective rate method.

Dividend income is reported when the right to receive payment is established.

Financial expenses

Financial expenses consist of interest expenses on loans, discounting effects and interest attributable to provisions, exchange rate differences, and negative changes in values of financial investments and derivative instruments used in the financial activities. Discounting effects are defined here as the periodic change of the present value which reflects that the due date is approaching.

Issue expenses and similar direct transaction costs for raising loans are distributed over the term of the loan in accordance with the effective rate method.

Borrowing costs directly attributable to investment projects in non-current assets which take a substantial period of time to complete, are not reported as a financial expense but should be included in the cost of the non-current asset during the construction period.

Leasing fees pertaining to finance leases are distributed between interest expense and amortisation of the outstanding debt. Interest expenses are distributed over the leasing period so that each accounting period is burdened in the amount corresponding to a fixed interest rate for the reported debt in each period. Variable fees are carried as an expense in the period in which they arise.

Financial assets and financial liabilities

General principles

Foreign exchange gains and losses concerning operating receivables and liabilities in foreign currencies are reported under operating profit, while foreign exchange gains and losses concerning other receivables and liabilities in foreign currencies are reported under net financial items.

For financial instruments traded on active financial markets, the fair value is set at the rate applicable when the market closes on the balance sheet date. The same rule applies for fixing the fair value of bilaterally traded financial instruments (OTC trading). For unlisted financial instruments, fair value is set by discounting estimated future cash flow. Discounting is done using discounting factors based on return curves in the cash flows of the respective currencies. The return curves are based on the market interest rates, such as swap rates, that apply on the balance sheet date.

Financial assets

Financial assets are classified into various categories depending on the purpose of the acquisition of the financial asset. The classification is determined at the original point of acquisition.

Settlement day accounting is applied for spot purchases and spot sales of financial assets.

Financial assets at fair value through profit or loss

In this category, assets are classified as holdings for commercial purposes, which means that the aim is for them to be divested in the near term. Derivative instruments not held for hedging purposes are always classified in this category.

Assets are restated on an ongoing basis at fair value, with changes in value reported in the income statement.

This category also includes cash equivalents, i.e., short-term investments with an original term of less than three months. The category also includes short-term investments with original terms exceeding three months.

Loans and receivables

Loans and receivables are financial assets with fixed payments or payments whose amounts can be determined. Receivables arise when the company provides money, goods and services directly to the debt or without the intention of doing business in the right of action. Acquired receivables are also covered. A valuation is made at amortised cost. Amortised cost is defined as the value at which a financial asset or liability is stated when it is initially recorded in the balance sheet, less any repayments, and with additions or deductions for the distribution over time of any differences between the amount initially recognised and the repayment amount.

Trade receivables are reported at the amount expected to be paid, i.e., less bad debts. Impairment losses on trade receivables are reported under operating expenses. Trade receivables have a short anticipated term and are therefore valued at a nominal amount without discounting.

This category also includes Cash and bank balances, i.e., immediately available balances with banks and similar institutions and Share in the Swedish Nuclear Waste Fund.

Available-for-sale financial assets

Financial assets available for sale are carried continuously at fair value, with changes in value recognised in equity. On the date that the assets are derecognised from the balance sheet, any previously recognised accumulated gain or loss in equity is transferred to the income statement.

Shares and participations for which there are no balance sheet date quotations and for which a fair value cannot be established are valued at cost, after taking accumulated impairment losses into account.

Financial liabilities

Financial liabilities have been classified into various categories depending on the purpose of the acquisition of the financial liability. The classification is determined at the date of original acquisition.

Financial liabilities at fair value through profit or loss

Derivative instruments not held for hedging purposes are always classified in this category. Valuation is conducted on a continual basis at fair value with changes in value reported in the income statement.

Other financial liabilities

In this category, interest-bearing and noninterest-bearing financial liabilities that are not held for commercial purposes are reported. A valuation is made at amortised cost.

Non-current liabilities have a remaining term of more than one year, while liabilities with shorter terms are reported as current. Trade liabilities have a short anticipated term and are therefore valued at a nominal amount without discounting.

Liabilities included in a hedge relationship are reported in accordance with the principles described below.

Derivative instruments

The Company uses various types of derivative instruments (forwards, futures and swaps) to hedge various financial risks, primarily interest rate risks, currency risks and electricity price risks.

Derivative instruments with a positive market value are reported as a separate line item in the balance sheet under current assets, while derivative instruments with a negative market value are reported as a separate line item under current liabilities.

Derivative instruments are reported at fair value on the balance sheet date. Changes in value are reported in various ways, depending on whether the derivative instrument is classified as a hedge or not. In a situation where hedging is not applied, the change in value is reported in the income statement in the period in which it arises. Based on the purpose of the contract, changes in value are reported either under operating profit or as financial income/expense.

Embedded derivatives

In customer contracts on electricity that stretch over long periods of time, the price can be linked to the price trend for other commodities than electricity, and indirectly also to currency movements, since current commodity prices are quoted in foreign currency. Such contracts are considered to contain embedded derivatives. Vattenfall has signed such contracts with a number of major customers. Some of these contracts stretch over long periods of time - the longest contract has a term extending through 2019. In view of the structure of these contracts in general and their duration in particular, plus the fact that reliable market quotations are only available for a period of 27 months ahead in time, Vattenfall has made the judgement that a reliable value cannot be established on the portion of these embedded derivatives that pertains to the period extending beyond April 2011.

Hedge accounting

Hedge accounting is adopted for derivative instruments that are included in a documented hedge relationship. For hedge accounting to be applied, an unambiguous connection between the hedge and the hedged item is required. Further, it is necessary for the hedge to protect the risk effectively as intended, that the effectiveness of the measure can be demonstrated at all times to be sufficiently high through effectiveness testing, and that hedging documentation has been prepared. How changes in value are reported in these cases depends on the type of hedge entered into.

Cash flow hedges

For derivative instruments that constitute hedges in a cash flow hedge, the effective part of the change in value is reported under equity while the ineffective part is reported directly in the income statement. The part of the change in value that is reported under equity is then transferred to the income statement for the period when the hedged item affects the income statement. In cases where the hedged item refers to a future transaction, which is later capitalised as a non-financial asset or liability in the balance sheet (for example, when hedging future purchases of non-current assets in a foreign currency), the part of the change in value reported under equity is transferred to and included in the cost of the asset or liability.

If the conditions for hedging are no longer met, the accumulated changes in value that were reported under equity are transferred to the income statement/balance sheet for the later period when the hedged item affects the income statement/balance sheet. Changes in value from the day on which the conditions for hedging ceased to be met are reported directly in the income statement. If the hedged transaction is no longer expected to occur, the hedge’s accumulated changes in value are immediately transferred from equity to the income statement.

Cash flow hedges are used primarily in the following cases: i) when forward electricity contracts are used to hedge electricity price risk in future purchases and sales, ii) when forward exchange rate contracts are used to hedge currency risk in future purchases and sales in foreign currencies, and iii) when interest rate swaps are used to replace borrowing at a floating interest rate with a fixed interest rate.

Hedges of fair value

For hedges of fair value, hedge accounting is applied in cases where the hedge pertains to an item that is normally stated at amortised cost. In such cases, hedge accounting entails that the hedged risk in the hedged item is stated at fair value along with the change in value in the income statement.

A hedge of fair value is primarily used in cases where interest rate swaps are used for hedging interest rate risk on borrowings at a fixed interest rate.

Hedges of net investments in foreign operations

For derivative instruments and loans in foreign currencies that constitute hedges in hedging of net investments in foreign operations, the effective part of the change in value is reported under equity while the ineffective part is reported directly in the income statement. The changes in value reported under equity are transferred to the income statement at a later stage when the foreign activity is divested.

Hedging of net investments is primarily used when forward exchange rate contracts and loans in foreign currencies are used to hedge the currency risk of the company’s investments in foreign subsidiaries.

Intangible assets: non-current

Capitalised development costs

Development costs resulting from the application of research findings or other knowledge to produce new or improved products or processes are reported as an asset in the balance sheet from the time when the product or process is expected to become technically and commercially usable and the company has sufficient resources to complete the development work and subsequently use or sell the intangible assets. The reported value includes costs for materials, direct costs for salaries and indirect costs, all of which can be attributed to assets. Other development costs are reported in the income statement as expenses when they arise. In the balance sheet, development costs are reported at cost less accumulated amortisation and impairment losses.

Research costs with the purpose of obtaining new scientific or technical knowledge are reported as expenses when they arise.

Goodwill

Goodwill represents the difference between the cost of a business combination and the fair value at the point of acquisition of acquired assets, assumed liabilities and contingent liabilities. The difference is the cost of goodwill.

Goodwill is valued at cost less any accumulated impairment losses. Goodwill is not subject to amortisation but is tested annually for impairment. Goodwill that arises on acquisition of associated companies is included in the reported value of Participations in associated companies.

Other non-current intangible assets

Other non-current intangible assets such as concessions, patents, licences, trademarks and similar rights as well as renting rights, mining rights and similar rights acquired by the Group are reported at cost less accumulated amortisation and impairment losses.

Principles for amortisation

Amortisation is reported on a straight-line basis in the income statement over the estimated useful life of the asset, provided the useful life not is indefinite. Estimated useful lives are unchanged compared with a year ago and are further described in Note 19 to the consolidated accounts, Intangible assets: non-current. Assessments of the residual value and useful life of an asset are conducted annually.

Property, plant and equipment

Owned assets

Property, plant and equipment are reported as assets in the balance sheet if it is likely that there will be future financial benefit for the company and the cost of the asset can be calculated in a reliable manner.

Assets reported as property, plant and equipment are land and buildings, plant and machinery as well as equipment, tools and fixtures and fittings. These assets are valued at cost less accumulated depreciation and impairment losses.

Cost includes the purchase price and costs directly attributable to putting the asset in place and in a suitable condition for use in accordance with the purpose of the acquisition. Examples of directly attributable expenses included in cost are delivery and handling, installation, land registration and consulting services. Borrowing costs directly attributable to investment projects in property, plant and equipment, which take a substantial period of time to complete, are included in cost of the asset during the construction period.

Within nuclear power operations in Germany and Sweden, cost at the time of acquisition includes a calculated present value for estimated costs for dismantling and removing the plant and restoring the site where the plant is located. Similarly, for mining operations in Germany, cost at the time of the acquisition includes a calculated present value for estimated costs for undertaking to restore the land.

The equivalent estimated cost calculated on the basis of the present value is reported initially as a provision.

See also below under the heading Other provisions than provisions for pensions.

Leasing

Leases are classified as either finance or operating leases. A finance lease exists when the economic risks and benefits associated with ownership are, in essence, transferred to the lessee; if this is not the case, it is classified as an operating lease.

Leased assets

Assets leased under finance leases are reported as assets in the consolidated balance sheet. A commitment to pay future leasing charges is reported as a non-current or current liability. The leased assets are depreciated on a straight-line basis over the shorter leasing period or useful life while the leasing payments are reported as interest and amortisation of the debts.

Operating leases normally entail the leasing charge being carried as an expense on a straight-line basis over the leasing period.

Hired out assets

Assets that are hired out under finance leases are not reported as property, plant and equipment, since the risks associated with ownership are transferred to the lessee. Instead, a financial receivable is entered for the future minimum leasing charges.

Assets hired out under operating leases are reported as property, plant and equipment that are subject to depreciation.

Subsequent costs

Subsequent costs for property, plant and equipment are only added to cost if it is likely that there will be future financial benefits associated with the asset for the company and the cost can be calculated in a reliable manner. All other future costs are reported as expenses in the period when they arise.

What is decisive for the assessment when a subsequent cost is added to cost is whether the cost concerns the replacement of identified components, or parts of them, whereby such costs are capitalised. Also in cases where new components are created, the cost is added to the cost of the asset. Any undepreciated reported values of replacement components, or parts of components, are retired and carried as an expense in connection with the replacement. Repairs are carried as an expense continuously.

Depreciation principles

Depreciation is reported on a straight-line basis in the income statement over the estimated useful life of the asset except for depreciation related to the German nuclear power plants (see below). The Group applies component depreciation, which means that the components’ estimated useful life provides the basis for the depreciation. Estimated useful lives are unchanged compared with last year for all property, plant and equipment except for the Group’s nuclear power plants. For the Swedish nuclear power plants, starting in 2008 the estimated useful life has been extended from 40 years to 50 years. For the German nuclear power plants, as per 1 April 2008 the depreciation method has been changed from the straight-line method to the units of production method, since this better reflects the expected pattern of consumption of the future economic benefits embodied in the assets. Estimated useful lives are further described in Note 20 to the consolidated accounts, Property, plant and equipment. Assessments of the residual value and useful life of an asset are conducted annually.

Land and water rights are not subject to depreciation.

Investment property

Investment property is property held in order to earn rental income or an increase in value or a combination of these two objectives.

Investment property is reported in the balance sheet at cost less accumulated depreciation and impairment losses. Depreciation is done on a straight-line basis, and an assessment of residual value and useful life of an asset is conducted annually.

Inventories

Nuclear fuel, fossil fuels, and materials and spare parts

These inventories are valued at the lower of their cost and net realisable value. Net realisable value is the estimated sales price in operating activities, less estimated costs for completion and to bring about a sale.

The consumption of nuclear fuel is calculated as a depletion of the energy content of the fuel rods, and is based on the cost of each batch of fuel loaded into the core.

The cost of inventories is estimated through the application of the first-in first-out method (FIFO) and includes costs that arose on acquisition of the inventory items.

The value of the energy stored in the form of water in reservoirs is not reported as an asset.

Intangible assets: current

Emission allowances

As of 2005, a trading system applies in the EU (the Emission Trading
Scheme - ETS) with the purpose of reducing emissions of the greenhouse gas carbon dioxide. Within the framework of this system, concerned plants have received, without payment or for prices below fair value, so-called emission allowances (European Union Allowances - EUAs) from the authorities in each country. Sales and purchases of emission allowances are conducted on designated exchanges, where plants that have a greater need for emission allowances than their free-of-charge or subsidised allocation are required to purchase allowances to cover their remaining need and thereby settle their obligations.

During the first trading period, 2005-2007, trading was conducted only in EUAs. During the second trading period, 2008-2012, the trading being conducted in parallel with the first commitment period in the Kyoto Protocol, and the EU’s Emission Trading Scheme is being opened up to international trading in Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs).

Purchased emission allowances are reported as intangible assets under current assets at cost less accumulated impairment losses, while emission allowances that have been received free of charge from the respective countries’ authorities are stated at a value of SEK nil. As carbon dioxide is emitted, an obligation arises to deliver emission allowances (EUAs, CERs, ERUs) to the authorities in the respective countries. An expense and a liability are booked only in cases where the emission allowances that were received free of charge do not cover this obligation. This liability is valued in the amount at which it is expected to be settled.

Certificates

With the aim to increase renewable energy sources for electricity generation, Sweden and Poland have so-called electricity certificate systems. Plants included in a system receive, earned free of charge, certificates from the authorities in Sweden and Poland, respectively, in pace with their generation of electricity qualifying for certificates.

Accumulated certificates, earned free of charge, are reported as an intangible asset under current assets at fair value when obtained, whereas purchased certificates are reported at cost less accumulated impairment losses.

When electricity is sold, an obligation arises to deliver certificates to the authorities in the respective countries. This obligation is reported as an expense and as a liability. The liability is valued at the amount at which it is expected to be settled.

Impairment losses

Assessments are made throughout the year for any indication that an asset may have decreased in value. If there is an indication of this kind, the asset’s recoverable amount is estimated. For goodwill and other intangible assets with an indefinite useful life and for intangible assets that are still not ready for use, the recoverable amount is calculated annually.

If the essentially independent cash flow for an individual asset cannot be established for the assessment of any need for impairment, the assets must be grouped at the lowest level where it is possible to identify the essentially independent cash flow (a so-called cash-generating unit). An impairment loss is reported when an asset or cash-generating unit’s reported value exceeds the recoverable amount. Any impairment loss is recognised in the income statement.

Impairment of assets attributable to a cash-generating unit is allocated primarily to goodwill. Thereafter, a proportional impairment loss is conducted of other assets that are part of the unit.

Calculation of the recoverable amount

The recoverable amount is the higher of fair value less selling expenses and value in use. When calculating value in use, the future cash flow is discounted by a discounting factor that takes into consideration risk-free interest and the risk associated with the specific asset. For an asset that does not generate cash flow independently of other assets, the recoverable amount is calculated for the cash-generating unit to which the asset belongs.

Reversal of impairment losses

Impairment losses of financial assets that are reported at amortised cost are reversed if a later increase of the recoverable amount can be attributed to an event that occurred after the impairment loss was made.

Impairment losses on goodwill are never reversed. Impairment losses on other assets are reversed if a change has occurred in the assumptions that formed the basis for the calculation of the recoverable amount. An impairment loss is only reversed if the asset’s reported value after reversal does not exceed the reported value that the asset would have had if the impairment loss had not been made.

Employee benefits

Defined contribution pension plans

Defined contribution pension plans are post-employment benefit plans according to which fixed fees are paid to a separate legal entity. There is no legal or constructive obligation to pay additional fees if the legal entity does not have sufficient assets to pay all benefits to the employees. Fees for defined contribution pension plans are reported as an expense in the income statement in the period they apply to.

Defined benefit pension plans

Defined benefit pension plans consist of other post-employment benefit plans than defined contribution pension plans. The Group’s defined benefit pension obligations are calculated separately for each plan in accordance with the Projected Unit Credit Method by calculating employees’ current and past service cost. Estimated future salary adjustments are taken into consideration. The net obligation comprises the discounted present value of the total earned future salaries less the fair value of any plan assets. The discount rate consists of the interest rate on the balance sheet date of a first-class corporate bond with a lifetime that corresponds to the Group’s pension obligations. When there is no deep market in corporate bonds of this kind, the market rate yield on government bonds with an equivalent lifetime is used instead.

When benefits in a plan are improved, the proportion of the increased benefit attributable to the employees’ past service cost is reported as an expense in the income statement on a straight-line basis distributed over the average period until the benefits are wholly earned. If the benefits are fully earned, an expense is reported directly in the income statement.

For actuarial gains and losses, the so-called corridor rule is applied. Actuarial gains and losses arise from the effects of changes in actuarial assumptions. The corridor rule entails that the part of the net amount of the accumulated actuarial gains and losses that exceeds 10% of the greater of the obligations’ present value and the fair value of plan assets is reported in the income statement, starting in the year after that they arise, over the expected average remaining service period for the employees covered by the plan.

When the calculation leads to an asset for the Group, the reported value of the asset is limited to the net of unreported actuarial losses and unreported past service costs and the present value of future repayments from the plan or reduced future payments to the plan.

Other provisions than pension provisions

A provision is reported in the balance sheet when the Group has a legal or constructive obligation as a result of an event and it is probable that an outflow of financial resources will be required to regulate the obligation and a reliable estimate of the amount can be made. Where the effect of the time when payment is made is important, provisions are estimated by discounting the anticipated future cash flow at an interest rate before tax that reflects current market estimates of the money’s time value and the risks associated with the liability. The discount rate does not reflect such risks that are taken into consideration in the estimated future cash flow.

Changes in discounted provisions for dismantling, restoration or similar measures, which at the time of acquisition have also been reported as tangible non-current assets, are reported as follows: In cases where the change is due to a change in the estimated outflow of resources or a change in the discount rate, the cost of a non-current tangible asset is changed in an amount corresponding to the provision. When the change is due to an approaching payment date, the corresponding amount is reported as a financial expense. See also under the heading Property, plant and equipment/Owned assets.

Provisions are also reported for onerous contracts, i.e., where unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract.

Income tax expense

Income tax comprises current tax and deferred tax. Income tax is reported in the income statement except when the underlying transaction is reported directly against equity, whereby the associated tax effect is reported under equity.

Current tax is tax to be paid or received for the current year, with the application of the tax rates that are established or, established in practice as of the balance sheet date. Adjustments of tax paid attributable to previous periods are also included in this.

Deferred tax is calculated in accordance with the balance sheet method on the basis of temporary differences between the reported and taxable values of assets and liabilities. The following temporary differences are not taken into account: for a temporary difference that arises with the initial reporting of goodwill, initial reporting of assets and liabilities which are not business combinations and at the time of the transaction do not affect either reported or taxable profit. Further, such temporary differences attributable to shares or participations in subsidiaries or associated companies which are not expected to be reversed in the foreseeable future are not taken into account either. The valuation of deferred tax is based on how the reported value of assets or liabilities is expected to be realised or settled. Deferred tax is calculated in accordance with the tax rates and tax rules that have been established or have been established in practice by the balance sheet date.

Deferred tax assets concerning non-deductible temporary differences and tax-loss carryforwards are only reported to the extent that it will be possible for these to be used. The value of deferred tax assets is reduced when it is no longer considered likely that they can be used.

Contingent liabilities

A contingent liability is reported when there is a possible obligation that arises from events and whose existence is only confirmed by one or more doubtful future events or when there is an obligation that is not reported as a liability or provision because it is not likely that an outflow of resources will be required or cannot be measured with sufficient reliability.