Comments and Notes Sales of Services/Contracts and Similar Assignments Income from the sale of services is recognised on the basis of the degree of completion at the balance sheet date, when all the following conditions are satisfied: • Income attributable to the assignment can be reliably calculated; • It is likely that the financial benefits to the contractor associated with the assignment will arise for the contractor; • The degree of completion can be reliably calculated; • The expenditure that has arisen and the expenditure that remains to complete the assignment can be reliably calculated. The degree of completion is determined by dividing the expenditure that has arisen in relation to the total estimated expenditure for the assignment. If the degree of completion cannot be reliably determined, only those amounts corresponding to the expenditure that has arisen are recognised as revenues, and then, only to the extent that it is likely that they will be remunerated by the buyer. If it appears likely that all the expenditure for an assignment will exceed total revenues, the probable loss is accounted immediately, and fully, as an expense. Research and Development Expenditure Expenditure for research are expensed as incurred, while expenditure for development is capitalised as follows: Capitalisation of development expenses in the group are only applied to new products where significant development costs are involved, where the products have a probable earnings potential that the company may benefit from, and the costs are clearly distinguishable from ongoing product development expenditure. Leasing The Group has entered into both capital and operational leases. Capital leases are not material and primarily relate to vehicles. For operational leases the lease payments are expensed straight-line over the lease period. For capital leases the leased asset is carried on the balance sheet with a corresponding liability for future lease payments. The leased asset is depreciated over the same period as for assets of the same kind owned by the Group. The liability for future lease payments is interest bearing. Other Operating Revenues/Expenses Other operating revenues/expenses primarily consist of gains/losses from sales of fixed assets, translation gains and losses related to operating assets and liabilities and revenues for sub-letting of premises. Borrowing Costs Borrowing costs are expensed in the period to which they are attributable, and are not normally included in the acquisition value of an asset as the Group does not normally construct such assets where this is allowed. Debt issuance expenses are expensed straight-line over the length of the loan. Pension and Similar Commitments RR 29 Employee Benefits has been applied since 1 January 2004 for all pension and similar commitments. In previous years, provisions were calculated pursuant to the rules and regulations prevailing in each country. The effect of the adoption of RR 29 has been accounted directly against shareholders’ equity as of 1 January 2004. The transition to IFRS has not resulted in any additional impact on the Group as the standard RR 29 is in applicable sections identical with IAS 19. Expenditure for defined contribution plans are expensed as incurred. Expected expenditure under defined benefit plans are recorded as a liability calculated in accordance with actuarial models. Differences between expected and actual development of this liability are not expensed as long as the deviations remain within the so called corridor. Pension expense for the year consists of pensions earned, interest expense and – if applicable – expensed actuarial gains and losses. A deduction is made for the yield on plan assets set aside to cover the obligation. Obligations related to defined benefit plans are shown net in balance sheet, i.e. after a deduction of the value of any plan assets. Income Tax Income tax comprises: • Current tax is the tax calculated on taxable earnings for the period, and corrections regarding previous periods; • Deferred tax is the tax attributable to taxable temporary differences to be paid in the future, and the tax that represents a reduction of future tax attributable to deductible temporary differences, deductible loss carry-forwards and other tax deductions. The income tax expenses for the year consist of current and deferred tax, and shares in associated companies’ tax. Receivables and Liabilities Provisions for loss risks are made on a case-by-case basis; foreign-currency receivables and liabilities are converted at year-end exchange rates. The difference between acquisition value and year-end value is accounted as income. In those cases where currency hedging is undertaken, the forward rate is applied. Forward premiums are accounted linearly over time as interest income/ expense. Inventories Inventories are accounted according to the FIFO principle. Market terms are applied for intra-group transactions. The necessary provisions are made for obsolescence and intra-group earnings. Raw materials, and purchased finished and semi-finished goods, are valued at the lower of cost and market value. Manufactured finished and semi-finished goods are valued at the lower of manufacturing cost (including a reasonable portion of indirect manufacturing costs) and market value. Depreciation According to Plan Depreciation according to plan is calculated on the original acquisition value and based on estimated financial life-span; the depreciation terms for various asset classes are: Capitalised development expenditure 3–8 years Patents and trademarks 20 years Other intangible assets 3–10 years Computers 3–8 years Machinery and equipment 3–15 years Office buildings 20–50 years Industrial buildings 20–50 years Land improvements 5–30 years 55HEXAGONANNUALREPORT2005