DESCRIPTION OF IMPORTANT ACCOUNTING POLICIES
The consolidated accounts and the annual report of Odd Molly International AB for the financial year ending December 31, 2018 were approved by the Board of Directors and the President on April 4, 2019 for publication on April 4 and will be submitted to the Annual General Meeting 2019 for adoption. The parent company is a Swedish limited liability company (publ) based in Stockholm, Sweden.
Basis for the preparation of the accounts
Odd Molly’s consolidated financial statements are based on historical acquisition values, with the exception of financial derivative instruments. These assets and liabilities are reported at fair value.
Statement on compliance with applicable regulations
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the interpretative statements of the IFRS Interpretation Committee (IFRIC) as endorsed by the EC Commission for Application within the EU. In addition, the Swedish Financial Reporting Board’s recommendation RFR 1 Supplementary Accounting Rules for Groups has been applied.
Applied and changed accounting principles
Applied accounting principles are in line with those applied in the 2017 Annual Report. Changes to IFRS with effect from 2018 have not had any material effect on the Group’s accounts (see below).
New IFRS and interpretations that have begun to be applied on January 1, 2018
IFRS 9 Financial Instruments
The standard came into force on January 1, 2018 and is adopted by the EU.
a) Classifications and valuation
The company has not had any significant effect on the balance sheet or equity as a result of the new classification and valuation requirements. Currency derivatives are still valued at fair value within level 2, ie. fair value based on valuation techniques with observable market data. Other financial liabilities are classified as other financial liabilities valued at amortized cost. All financial assets and liabilities run with short maturities and based on this; the book value is estimated to approximately correspond to fair value.
According to IFRS 9, expected loan losses are to be booked for all outstanding instruments and receivables. The company has evaluated the current method for valuing accounts receivable and conducted a thorough analysis of the history of impairment. The company has historically had low credit losses, in 2018 these, for example, to only 0.13 percent of sales. The company’s assessment is that IFRS 9 does not entail any significant effects regarding write-downs of accounts receivable.
c) Hedge accounting
The company applies hedge accounting for the derivative instruments (currency forward contracts) that are used as protection against risks for exchange rate fluctuations linked to forecast cash flows related to the goods flow. The company will continue to report these instruments in accordance with IAS 39, which is in accordance with IFRS 9.
IFRS 15 Revenue from contracts with customers
The standard came into force on January 1, 2018 and is adopted by the EU. The standard contains an overall model for revenue recognition regarding customer contracts. The company has evaluated the type of contracts and transactions that fall within the scope of this standard. The evaluation includes loss of income as a result of complaints and returns from customers, revenues from retail customers with the right to return goods after the completed season, revenues from retail customers with the right to a reduction of the price before the sale season, as well as income and wastage generated from consignment customers. After the evaluation, the company’s previous assessment remains that the standard does not affect the Group’s accounts.
New IFRS and interpretations that have begun to be applied on January 1, 2018
IFRS 16 Leasing
IFRS 16 Leases shall be applied as from the financial year 2019. Odd Molly applies the simplified transition method and the main impact on Odd Molly’s accounts derives from the accounting of leases for premises. The opening effect on the balance sheet in the Group as of January 1, 2019 is that a leasing asset (user rights) and a leasing debt, respectively, amount to SEK 43.1 million each. The depreciation of the lease asset is estimated at SEK 13.1 million and the interest expense on the lease debt is SEK 2.2 million for the full year 2019.
|Estimated opening balance sheet showing the impact of IFRS 16 (current value)||(SEK million)
IFRS 16 adjustments
|Access rights assets||46.8|
|Prepaid leasing fees||-3.7|
|Long lease liabilities||30.1|
|Short lease liabilities||13.0|
CONSOLIDATED FINANCIAL STATEMENTS
Basis of consolidation
The consolidated financial statements comprise the Parent Company and its subsidiaries. The financial statements for the Parent Company and those subsidiaries that are included in the consolidated financial statements refer to the same period and are prepared according to the accounting policies that apply to the Group.
All intra-Group receivables and liabilities, revenue and expenses, profits or losses that arise in transactions between companies that are covered by the consolidated financial statements are eliminated in their entirety.
A subsidiary is added to the consolidated financial statements from the acquisition date, i.e., the day that the Parent Company obtains control, and is included in the consolidated financial statements until the day that control ceases. Normally, control is obtained over a subsidiary through a holding of more than 50 percent of voting shares, but can also be obtained in other ways, e.g., by agreement.
Subsidiaries that have been acquired are reported in the consolidated financial statements according to the acquisition method. This also applies to directly acquired operations. The acquisition method means, among other things, that the cost of the shares, or the directly acquired operations, is divided among the acquired assets, assumed obligations and liabilities on the acquisition date on the basis of their fair values at the time. If cost exceeds the fair value of the acquired company’s net assets, the difference represents goodwill. If cost is less than the fair value of the acquired company’s net assets, the difference is recognized directly in the income statement.
Translation of foreign operations
A foreign operation is an operation conducted in an economic environment with a different currency (the functional currency) than the Group’s reporting currency, which is Swedish krona (SEK). Assets, including goodwill and other surplus values, and liabilities in such operations are translated to the reporting currency on the closing date. The income statement of the foreign operation is translated using a weighted average of the year’s exchange rates. The exchange rate differences that arise through the translation are recognized in total comprehensive income. When a foreign independent operation is divested, the accumulated exchange rate differences are recognized in the income statement together with the gain or loss on the sale.
Translation of receivables and liabilities in foreign currency
Transactions in foreign currency are measured at the transaction day rate. Monetary receivables and liabilities that are expressed in foreign currency are translated at the closing rate. All exchange rate differences are accounted for in the income statement with the exception of exchange rate differences on loans in foreign currency that have been obtained to protect net investments in foreign operations. Exchange rate differences on such loans are recognized in other comprehensive income under the heading exchange rate differences, which are transferred to the income statement if and when the foreign operation is divested.
Revenue is recognized at the fair value of the consideration that has been or will be received for the goods and services sold within the Group’s ordinary activities. Revenues consist mainly of sales of clothing and other products within Odd Molly’s lifestyle concept, such as interior products and accessories, via own stores, own web shop and to retailers. Revenue is recognized upon delivery to the customer, according to current sales terms. Revenue is recognized excluding value-added tax and net after returns and discounts.
For the financial year 2018, the company reports revenue and operating profit for three segments; wholesale operations, retail operations and group-wide costs. Operating profit for each segment is charged to the direct costs segment. Costs that are not directly attributable to the wholesale or retail business are reported in the Group-wide costs segment. Previously, revenues and operating income for two segments were reported; wholesale operations and retail operations where the Group-wide costs were allocated by segment according to a key based on the respective segment’s share of total cost of goods.
Due to the implementation of the company’s license model, a new segment will be reported under the name License, starting in the first quarter of 2019. Within this segment, royalties and other direct revenues and expenses attributable to this part of the business will be reported.
Tangible and intangible non-current assets with limited useful lives
Tangible and intangible non-current assets are recognized at cost less accumulated depreciation/amortization and any impairment. Depreciation and amortization are applied on a straight-line basis over the asset’s useful life to its estimated residual value, where the useful lives are 3–5 years.
Impairment testing is conducted over the course of the year to determine whether there are any indications that assets may have decreased in value. If such an indication exists, the recoverable amount of the asset is estimated.
If substantially independent cash flows to an individual asset cannot be determined, the assets are grouped when tested for impairment at the lowest level where substantially independent cash flows can be identified (a cash-generating unit). Impairment is recognized when an asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. An impairment loss is charged to the income statement.
Impairment of assets attributable to a cash-generating unit is allocated primarily to goodwill, after which proportional impairment is applied to other assets included in the unit.
Estimation of recoverable amount
The recoverable amount is the higher of the asset’s net realizable value and value in use. Value in use is the present value of future cash flows discounted with an interest rate based on the risk-free rate of interest adjusted for the risk associated with the specific asset. For an asset that does not generate cash flows, the recoverable amount is estimated for the cash-generating unit to which it belongs.
Reversal of impairment
Impairment is reversed if a later increase in the recoverable amount can objectively be attributed to an event that has occurred after the impairment loss. Goodwill impairment is not reversed.
Impairment is reversed only to the extent that the asset’s carrying amount after the reversal does not exceed the carrying amount that the asset would have had if it had not been impaired.
Inventory is measured at the lower of cost and net realizable value. Net realizable value corresponds to the estimated selling price under normal conditions, less the costs necessary to execute the sale. Cost is calculated according to the first-in-first-out method, which means that the assets in inventory at year-end are considered the most recently purchased.
Financial assets are classified into different categories depending on the purpose of the acquisition of the financial asset. The classification is determined on the original acquisition date. A financial asset is derecognized from the balance sheet when the contractual rights to the cash flow cease.
Financial assets valued at amortized cost
Loan receivables and accounts receivable are financial assets with fixed payments or payments that can be determined at amounts. The receivables are linked to the Group’s deliveries of goods and services. Valuation is made at amortized cost. The receivables are reported at the amount at which they are expected to be received, after deductions for bad debts, which are assessed individually. Loan receivables and accounts receivable have short expected maturities and are therefore valued at nominal amounts without discounting.
Financial liabilities valued at amortized cost
In this category, interest-bearing and non-interest-bearing financial liabilities that are not held for trading purposes are reported. Valuation is made at amortized cost.
Long-term liabilities have a remaining maturity of more than one year, while liabilities with shorter maturities are reported as current. Accounts payable have short expected maturities and are therefore valued at nominal amounts without discounting.
Derivatives consist in Odd Molly’s case of forward exchange contracts, which are used as protection against the risk of changes in exchange rates associated with the cash flows from forecasted revenue and expenses related to the flow of goods.
Odd Molly applies hedge accounting. To meet the requirements for hedge accounting requires a clear link to the hedged item. Moreover, the hedge must effectively protect the hedged item. Forward exchange contracts are recognized in the balance sheet at fair value.
For forward exchange contracts that meet the requirements for hedge accounting, changes in value are recognized through other comprehensive income in equity as a hedge reserve until the hedged flow meets operating profit, at which point the accumulated changes in the value of the hedging instrument are transferred to the income statement to meet the effects on profit of the hedged transaction.
For forward exchange contracts that, for accounting purposes, do not meet the criteria for hedge accounting, changes in value are recognized immediately in the income statement.
Provisions are recognized in the balance sheet when the Group has an obligation (legal or informal) as a result of a past event and it is probable that an outflow of resources that are associated with economic benefits will be required to settle the obligation and the amount can be reliably estimated. If the Group expects to receive compensation equivalent to the provision that has been allocated, e.g., through an insurance policy, the compensation is recognized as an asset in the balance sheet when it is virtually certain that the compensation will be received. If the effect of the time value of the future payment is considered material, the provision’s value is determined by measuring the estimated future payment at present value with a discount factor before tax that reflects the market’s current assessment of the time value and any risks attributable to the obligation. The gradual increase in the allocated amount according to the present value calculation is recognized as an interest expense in the income statement.
Pensions and other post-employment benefits
The company has only defined-contribution pension plans, which are recognized in the income statement in the period when the employee performed the service for the company. A defined-contribution pension plan entails a defined fee based on a certain percentage of salary paid to the employee’s pension account with an insurance company. The size of the employee’s pension depends on how much money has been paid in and the return that the money has generated, in contrast to a defined-benefit pension plan, where the employee is guaranteed a predetermined pension by the employer.
Leases in which essentially all the risks and benefits of ownership are not retained by the Group are classified as operating leases. Payments for these leases are expensed in the income statement and distributed on a straight-line basis over the term of the lease. Odd Molly has classified all current leases as operating.
Income tax is comprised of current tax and deferred tax. Income tax is recognized in the income statement when it relates to income statement items and directly against equity when the underlying transaction is recognized directly against equity. Taxes for items in other comprehensive income are recognized in other comprehensive income.
Current tax is tax that will be received or refunded for the current year, applying the tax rates in effect or essentially in effect on the closing date. This includes any adjustments to current tax attributable to previous periods.
Deferred tax is recognized in accordance with the balance sheet method, which means that deferred taxes are calculated on all temporary differences identified on the closing date, i.e., between the tax basis for assets or liabilities on the one hand and their carrying amounts on the other. Deferred tax assets are recognized in the balance sheet for unutilized tax loss carry forwards as well.
Deferred tax liabilities are not recognized in the balance sheet, however, for taxable temporary differences on goodwill. Deferred tax is not recognized either when the temporary difference relates to investments in subsidiaries and associated companies, since the Group can control when the temporary difference is reversed and it is likely that the temporary difference will not be reversed for the foreseeable future.
Deferred tax assets are recognized only to the extent it is likely that future taxable profits will be available and against which the temporary differences or unutilized tax loss carry forwards can be utilized. The carrying amounts of the deferred tax assets are tested on each closing date and reduced it to the extent it is no longer likely that sufficient taxable profit will be available to utilize all or part of the deferred tax assets.
Deferred tax assets and the liabilities are calculated with the help of the tax rates that are expected to apply to the period when the receivables or liabilities are settled, based on the tax rates (and tax laws) in effect or essentially in effect on the closing date. Deferred tax assets and tax liabilities are netted in the balance sheet, provided that the tax payment will be paid on a net basis.
Cash flow statement
The cash flow statement shows receipts and disbursements. The indirect method has been used for operating activities. In addition to cash and bank balances, cash and cash equivalents include short-term liquid investments with an original maturity of less than three months.
Important accounting estimates and assessments
The Group makes estimates and assessments about the future. The estimates for accounting purposes that result may deviate from actual results. Inventory is measured at the lower of cost and net realizable value. Net realizable value corresponds to the estimated selling price under normal conditions, less the costs necessary to execute the sale. Receivables are recognized at the amount that is expected to be received, after deducting bad debts, which are estimated individually.
PARENT COMPANY’S ACCOUNTING POLICIES
The Swedish Financial Reporting Board’s recommendation RFR 2 Reporting by Legal Entities has been applied in the preparation of the Parent Company’s financial reports. The Parent Company applies the same accounting policies as the Group except in the cases indicated below. The Parent Company recognizes untaxed reserves including deferred tax liabilities. In the consolidated financial statements, however, untaxed reserves are divided up between deferred tax liabilities and equity. The income statement and balance sheet for the Parent Company are prepared according to the Annual Accounts Act’s schedule.
Shares in Group companies are recognized by the Parent Company at cost less any accumulated depreciation.