Note 1 – Accounting principles

The quarterly report has been prepared according to the IFRS standards that have been adopted by EU as well as the interpretations of the valid standards adopted by EU, IFRICs. This report has been prepared according to IAS 34, Interim financial reporting. In addition to the financial reports and their accompanying notes further information according to IAS 34.16A can be found in other sections of the quarterly report. New standards and interpretations have not had any material effect on Group accounting.

The parent company reports have been prepared according to the Swedish Company Accounts Act and RFR 2, Accounting rules for legal entities.

The quarterly report has been prepared according to the same accounting principles and conditions described in the Annual Report 2016 except the new additional consolidated accounting principles for Investment property which are described below.

Additional accounting principles

Investment property

Property is classified as project and development property, operations property and investment property. Investment properties are properties owned for the purpose of income from rent or appreciation or a combination of both. After a revision of Peab’s property portfolio it was decided that some property previously reported as project and development property, i.e. inventory properties, will instead be classified as operations property or investment property, in the case where there is no plan to divest the property and it is expected to remain in the Group for the foreseeable future. Property reclassification was carried out on 1 January 2017 and only affected the balance sheet.

Investment property, like operations property, is recognized in consolidated accounts at acquisition value minus accumulated depreciation and any write-downs. The acquisition value includes the purchase price and costs directly attributable to putting the asset in place in the condition required for utilization. Borrowing costs are included in the acquisition value of internally produced investment property.

Income from rent of investment property is recognized linearly in profit/loss for the year based on the terms in the leasing contract. Income from divestiture of investment property is normally recognized on the date of taking possession unless the risks and benefits have been taken over by the purchaser at an earlier date.

When investment property is divested the net effect on profit/loss is recognized as other operating income or other operating cost.

Depreciation principles

Depreciation is made linearly over the estimated useful life of the asset. The Group applies component depreciation, which means that depreciation is calculated on the estimated useful life of components. Components are primarily divided into buildings and land. The component land is not depreciated since its useful life is considered endless. Buildings, however, consist of several components that have useful lives which vary between 20 – 100 years.

Disclosure of fair value

The fair value of investment properties is disclosed in the Annual Report. The valuation is based on an internal valuation model. Annual external market valuations for a number of objects are also obtained as a complement to this valuation. External market valuations are to be performed every third year.

New IFRSs and interpretations that have not yet been applied

IFRS 15 Revenue from contracts with customers, will as of 2018 replace current standards related to revenue recognition. Peab has chosen not to prematurely apply IFRS 15 and is in the final phase of analyzing its impact. At this point in time no material effects have been identified but the analysis must be completed before any possible final effects can be quantified.

There are differences between operative and legal reporting in business area Project Development. Peab applies IFRIC 15, Agreements for the construction of real estate, in legal reporting. This principle requires applying IAS 18, Revenue, for housing projects in Finland and Norway as well as our own home developments in Sweden, which means revenue from projects is first recognized when the home is handed over. Operative and segment reporting is based on the percentage of completion. When IFRS 15 is implemented our own home developments in Sweden will be recognized according to so-called “revenue over time”. IFRS 15 will not lead to any changes in reporting regarding housing projects in Finland compared to the current application since revenue is first recognized when the home is handed over to the buyer. After implementation of IFRS 15 segment reporting will mirror legal reporting. The differences between operative and legal reporting will therefore no longer exist after implementation of IFRS 15.

IFRS 9 Financial instruments, will replace IAS 39 Financial instruments: Recognition and measurement, as of 2018. Peab has chosen not to prematurely apply IFRS 9. No material effects have been identified but there will be some impact on the recognition of credit losses as well as classification of financial assets. The analysis must be completed before any possible final effects can be quantified.

IFRS 9 requires loss reserves for anticipated credit losses. This differs from current regulations that only require loss reserves if something occurs that leads Peab to believe a customer may not be able to pay the entire balance due. However, historically Peab has only had minor credit losses in daily operations, which means the effect of IFRS 9 is not expected to be significant in this aspect.

Peab classifies holdings of an unlisted fund as Financial assets available-for-sale and the fund is valued at fair value via other comprehensive income. The holdings do not meet the criteria for IFRS 9 regarding equity instruments and therefore the fund will be recognized at fair value via the income statement.

IFRS 16 Leases, will replace IAS 17 as of 1 January 2019. Peab does not plan to prematurely apply the standard. Peab’s balance sheet total is expected to increase by activating assets representing rights of use according to operational leasing contracts and by entering as a liability obligations to pay future leasing fees. Peab currently estimates that the balance sheet total will increase by around two to five percent but the analysis must be completed before any possible final effects can be quantified.

Further information on the consequences of new IFRS standards application is found in the Annual Report 2016.