Comments and Notes Accounting Principles As of January 1, 2005, the EU-approved adoption of IFRS was introduced, which also includes prevailing IAS (International Accounting Standards). The consolidated accounts have been prepared in accordance with the International Financial reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretation statements by the International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the EC Commission for application within the EU. These annual and consolidated accounts represent the first complete financial statements prepared in accordance with IFRS. In conjunction with the transition from previously applied accounting principles to reporting in accordance with IFRS, the Group has applied IFRS 1, which is the standard that describes the first time application of IFRS. Furthermore the recommendation RR 30 Supplementary accounting rules for groups issued by the Swedish Financial Accounting Standards Council has been applied. Hexagon publishes financial information with comparative data for the prior year in the annual report. All data relating to 2005 in the annual report has been prepared in accordance with IFRS. Comparatives for 2004 have been calculated in the manner set by IFRS 1. To the extent this data differs from previously reported they are referred to as “2004 (IFRS)” unless otherwise stated. In addition the data originally reported for 2004 under the previously applied accounting policies are also reported and are referred to as “2004 (RR)”. To the extent the data is unchanged it is referred to as “2004”. Data presented in brackets after 2005 data is to be considered “2004 (IFRS)”, unless otherwise stated. This annual report is an integrated part of a prospectus related to a new share offering. For this reason comparatives for 2003 have been included also. All data presented for 2003 and earlier periods have been reported at amounts which are unchanged from previously reported amounts. For a description of the accounting policies applied in the determination of “2004 (RR)” and “2003” data, please refer to the annual report for 2004. The parent company applies the Annual Accounts Act and RR 32. This means that the parent applies the same accounting principles as the group, except as outlined below. A summary of the transition impact that the conversion to IFRS has entailed on the Group’s financial result and position is included below. Basis of reporting for the Parent Company and the Group including critical estimates and assumptions The functional currency of the Parent Company is Swedish kronor as is the reporting currency for the Parent Company and the Group. Assets and liabilities are reported at historical cost with the exception of certain financial instruments (derivatives), which are reported at fair value. To prepare financial reports in accordance with IFRS requires the Board of Directors and management to make estimates, assessments and assumptions that will affect the application of accounting policies and the reported values/ amounts of assets, liabilities, revenues and expenses. The actual outcome may deviate from these estimates, assessments and assumptions. Consolidated Financial Statements The consolidated financial statements consolidate the parent company and the other companies in which the parent company has a controlling influence. The consolidated financial statements have been prepared in accordance with the acquisition method, which means that the parent company’s acquisition value of shares in subsidiaries is eliminated against subsidiaries’ shareholders’ equity at the time of acquisition. The shareholders’ equity of acquired subsidiaries is determined on the basis of a market valuation of assets and liabilities at the time of acquisition. In those cases where the acquisition value of shares in subsidiaries exceeds the acquired shareholders’ equity as stated above, the discrepancy is accounted as goodwill in the Balance Sheet. In ac cordance with the IFRS transition rules goodwill amortisation has been discontinued as of December 31, 2003. Goodwill values are assessed with regards the need for an impairment charge at each reporting date. Acquired companies are consolidated from the time of acquisition onwards. Divested companies are consolidated until their date of divestiture inclusive. The current method is used for the translation of foreign subsidiaries, meaning that balance sheets are converted at year-end exchange rates, and income statements are converted at average exchange rates for the period. The resulting translation adjustments are accounted directly to consolidated shareholders’ equity. Between 70 and 100 per cent of the net assets of foreign subsidiaries, including goodwill, are hedged, mainly through foreign-currency loans. Currency forward contracts are used to a lesser extent. In the consolidated financial statements, the effects of hedging are offset against those translation adjustments that were accounted directly to shareholders’ equity regarding the foreign subsidiaries. Associated Companies and Joint Ventures Hexagon applies the equity method for accounting associated companies and joint ventures. Associated companies are those companies where Hexagon does not hold the majority of voting power, but has a shareholding of between 20 and 50 per cent. Joint ventures are considered as holdings where Hexagon has 50 per cent ownership. Any differences between the acquisition value and equity value at the time of acquisition are termed goodwill, which is implicitly included in acquisition values. The Consolidated Balance Sheet accounts the holdings in associated companies at acquisition value adjusted for dividends, participations in earnings and losses in the period they remain a holding, and accumulated goodwill amortisation through to December 31, 2003. The Consolidated Income Statement includes equity income from associated companies’ earnings after elimination of internal profits. Associated company taxes are included in the Group’s tax expenses. At every reporting period end the carrying value of associated companies and joint ventures, including the implicit goodwill value included therein, are reviewed for any write-down needs. Segment reporting Business Areas represent the primary segments within the Group and geographical areas the secondary segments. Internal billings between Business Areas are negligible and are made at market rates. Revenues Hexagon applies the following principles for revenue recognition: Sales of Goods Revenues from sales of goods are recognised when all the following conditions are satisfied: • The company has transferred the essential risks and benefits associated with the ownership of the goods to the buyer; • The company does not retain any commitment in ongoing management usually associated with ownership, and nor does the company exert any actual control over the goods that have been sold; • Revenues can be reliably calculated; • It is likely that the financial benefits for the seller associated with the transaction will arise for the seller; • The expenditure that has arisen or is expected to arise as a consequence of the transaction can be reliably calculated. • Installation revenues comprise an insignificant portion of total revenues for equipment sold with a commitment to install the equipment.