Accounting policies

Description of important accounting policies

The consolidated financial statements and the annual report for Odd Molly International AB for the financial year ending December 31, 2016 were approved on March 27, 2017 by the Board of Directors and the CEO for publication on March 28 and will be submitted to the Annual General Meeting 2017 for adoption. The Parent Company is a Swedish limited liability company (publ) with its registered address in Stockholm, Sweden.

Basis of preparation

Odd Molly’s consolidated financial statements are based on historical cost, with the exception of financial derivatives. These assets and liabilities are recognized at fair value.

Statement of compliance with applicable rules

The consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the interpretations of the IFRS Interpretations Committee (IFRIC), as approved by the European Commission for application within the EU. The Swedish Financial Reporting Board’s recommendation RFR 1 Supplementary Accounting Regulations for Groups has been applied as well.

Applied and amended accounting policies

The applied accounting policies conform with those applied in the annual report 2015. Amendments to IFRS applicable as of 2016 have not had a material effect on the consolidated financial statements.

New IFRS and interpretations that have not yet taken effect

A number of new or amended standards and interpretations do not take effect until future annual periods and have not been applied prospectively in the preparation of these financial statements. There are no plans to prospectively apply additions or amendments that take effect in annual periods beginning after 2016.

IFRS 9 Financial Instruments takes effect on January 1, 2018 and has been adopted by the EU. The standard requires financial assets to be classified in three different measurement categories. For the Group, the standard will necessitate increased disclosures on risk management and the effect of hedge accounting.

IFRS 14 Regulatory Deferral Accounts took effect on January 1, 2016 and has not yet been approved by the EU. The standard specifies the reporting requirements for rate-regulated activities.

IFRS 15 Revenue from Contracts with Customers takes effect on January 1, 2018 and has been adopted by the EU. The standard, which contains a comprehensive model for revenue recognition with respect to contracts with customers, is not expected to affect the Group’s accounting.

IFRS 16 Leases took effect on January 1, 2019 and has not yet been approved by the EU. According to the new standard, most leased assets will be recognized in the balance sheet.

IFRS 10 Consolidated financial statements and IAS 28 Investments in Associates and Joint Ventures took effect on January 1, 2016 and have been approved by the EU. The standard clarifies how a parent company reports a transaction in which control over a subsidiary is lost.

IFRS 11 Joint Arrangements took effect on January 1, 2016 and is approved by the EU. The standard specifies, among other things, that a previous ownership interest in a joint operation is not remeasured if an additional interest is acquired as long as joint control is retained. IAS 16 Property, Plant and Equipment and IAS 38 Intangible assets took effect on January 1, 2016 and have been approved by the EU. The standard prohibits revenue-based depreciation of tangible non-current assets. IAS 27 Separate Financial Statements took effect on January 1, 2016 and has been approved by the EU. The standard gives entities the option of reporting investments in subsidiaries, etc. according to the equity method.

The Group has not evaluated the effects on the financial statements of the application of the above-mentioned new and amended standards and interpretations.

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

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. 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.

Operating segments

The company recognizes revenue and operating profit for two segments: wholesale and retail. The wholesale segment comprises sales to Odd Molly’s retailers through agents, distributors or its own sales force. Stores and shop-in-shops managed by retailers are included in the wholesale segment. The retail segment refers to sales to consumers through the company’s own channels: physical stores, outlets, shop-in- shops and the web shop, where Odd Molly has its own personnel. Operating profit for each segment is charged with expenses directly attributable to the segment. Common group costs for the fourth quarter and the full-year 2016 are distributed by segment using a key based on each segment’s share of the total cost of goods sold in the full-year 2016. Common group costs for the fourth quarter and the full-year 2015 are distributed by segment using a key based on each segment’s share of the total cost of goods sold in the full-year 2015.

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

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

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

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.

Translation of foreign operations

If foreign operation is in 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

Revenue

Operating segments

Tangible and intangible non-current assets with limited useful lives

Impairment

Impairment testing is conducted over the course of the term 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.

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

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

Financial assets

Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments. Receivables are associated with the Group’s delivery of goods and services. Measurements are made at amortized cost. Receivables are recognized in the amount that is expected to be received, after deducting bad debts, which are estimated individually. Loans and receivables have short maturities and are therefore measured at nominal value without discounting.

Financial liabilities

Other financial liabilities

This category includes interest-bearing and non-interest-bearing financial liabilities that are not held for trading. Measurements are made at amortized cost.

Non-current liabilities have a remaining maturity exceeding one year, while liabilities with the shorter maturities are recognized as current. Accounts payable have short expected maturities and are therefore measured at nominal value without discounting.

Derivatives

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

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.

Employee benefits

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.

Leasing

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

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

Shares in Group companies are recognized by the Parent Company at cost less any accumulated depreciation.