According to the Swedish National Pension Funds Act (2000:192), the annual report shall be prepared according to generally accepted accounting principles, such that the assets in which AP4’s funds are invested shall be recognized at fair value. Based on this premise, AP1–AP4 have developed and put into practice a set of common accounting and valuation policies as summarized below.
The funds’ accounting and valuation principles are gradually being adapted to the international accounting standards, IFRS. Since IFRS is under extensive revision, alignment has so far focused on the information requirements of IFRS 7 and IFRS 13. A complete transition to IFRS would not materially affect the reported results and capital. AP4 meets the requirement of an investment company in accordance with IFRS 10. In the current IFRS the only major difference is that the cash flow statement is not established.
Trade date accounting
Transactions in securities and derivatives in the money and bond market, equity market and currency market are reported in the balance sheet on the trade date, i.e. at the time when the essential rights and risks are transferred between parties. Claims on or liabilities to the counterparty between the trade date and settlement date are reported under Other assets and Other liabilities. Other transactions, especially transactions in unlisted shares are recognized in the balance sheet on the settlement date, which is consistent with market practice.
Financial assets and liabilities are offset in the balance sheet when there is a legally enforceable right to offset transactions and there is an intention to settle net or realize the asset and settle the liability simultaneously.
Foreign currency translation
Transactions in foreign currencies are translated into Swedish crowns at the exchange rates prevailing at the transaction date. On the balance sheet date, assets and liabilities denominated in foreign currencies are translated to Swedish crowns at the closing date exchange rates. Changes in the value of assets and liabilities in foreign currency are divided between those attributable to the change in value of the asset or liability in local currency and those caused by currency rate changes. Foreign exchange earnings arising from changes in exchange rates are recognized in the income statement under Net income, changes in exchange rates.
Shares in subsidiaries/associated companies
According to the Swedish National Pension Funds shares in subsidiaries/ associated companies are recognized at fair value. Fair value is determined using the same methods used for unlisted shares. There is no requirement to prepare consolidated accounts.
Valuation of financial instruments
All of the Fund’s investments are stated at fair value such that realized and unrealized changes in value are recognized over the income statement. The lines Net profit/loss per asset class includes realized and unrealized gains. Please see the glossary in the annual report for information about each index in the case where reference is made to an index provider. The following describes how fair value is determined for the Fund’s different investments.
Listed shares and participation
For shares and participations traded on a regulated market or trading platform, fair value is determined based on official public quotation at year-end according to the Fund’s designated index, usually an average rate. Holdings not included in an index are recognized at quoted prices observable in an active market. Commission fees paid are recognized as expenses in Net income, listed shares.
Unlisted shares and participations
For shares and participations not traded on a regulated market or trading platform, fair value is determined based on a valuation obtained from the counterparty or other external party. The value recognized is updated upon receipt of a new valuation and is adjusted for any cash flows up to the end of the accounting period. If the Fund has good reason to judge the valuation to be incorrect, the valuation received is adjusted.
Stated values relating to unlisted participations comply with International Private Equity and Venture Capital (IPEVC) Valuation Guidelines, or equivalent principles, and are based primarily on transactions with third parties, though other valuation methods may be used such as discounted cash flow, net worth or multiples based valuation.
The valuation relating to unlisted real estate shares is based on a valuation according to the net worth method to the extent that the share has not been subject to transactions on a secondary market. From 2013 onwards, deferred tax liabilities are valued at the value used in real estate transactions, which differs from the valuation in the accounts of the real estate companies.
Bonds and other fixed income securities
For bonds and other fixed income securities, fair value is calculated based on the official public quotation (usually the bid rate) at year-end according to the Fund’s designated index provider. Holdings not included in an index are recognized at quoted prices observable in an active market. If an instrument is not traded in an active market and reliable market prices are not available, the instrument is measured using generally accepted valuation models, which discount cash flows using a yield curve appropriate for the instrument.
Interest income includes interest calculated using the effective interest method based on amortized acquisition cost. This value is the discounted present value of future payments, where the discount rate is the effective interest rate at the date of acquisition. This means that acquired premiums and discounts are amortized over the remaining term or until the next
interest rate adjustment and is included in and reported as Interest income. Changes in value due to interest rate changes are recognized in Net income
from interest-bearing assets, while changes in value due to exchange rate fluctuations are recognized in Net income changes in exchange rates.
For derivatives, fair value is calculated based on year-end market rates. If an instrument is not traded in an active market and if reliable market prices are not available, the instrument is measured using generally accepted valuation models, in which observable market data is used as the input data.
Derivative contracts with positive fair value at the balance sheet date are reported as assets, while positions with a negative fair value are reported as liabilities. Changes in value due to exchange rate changes are recognized in the income statement under Net Income, changes in exchange rates, while other changes in value are reported as Net income, derivatives. The difference between forward and spot rates for currency forwards are amortized linearly over the term of the contract and recognized as interest.
In repurchase transactions, so called repo, the asset remains in the balance sheet and the payment received is recognized as a liability. The security sold is reported as a Pledged asset in the balance sheet. The difference between the settlement in the spot and futures market is accrued over the term and reported as interest.
Securities lent are recognized in the balance sheet at fair value, while the compensation received for the loan is recognized as Interest income in the income statement. Collateral received for loaned securities may consist of securities and / or cash. If AP4 is entitled to exercise control over cash received as collateral, the collateral is recognized on the balance sheet as an asset, and an offsetting liability. In the case the Fund does not have disposal of the security it is not recognized on the balance sheet, but is specified separately under the heading "Assets pledged, contingent liabilities and commitments". This item includes the value of securities on loan and collateral of such.
Items recognized directly in fund capital
Receipts and payments that have been made to the pension system are recognized directly in fund capital.
Commission expenses are recognized as a deduction from operating income. They consist of external costs for management services, such as custodian fees and fixed fees to external managers and fixed charges for listed funds. Performance-based fees, which are paid when managers achieve returns above the agreed level where profit sharing is applied, are recognized as a deductible item in Net income for the relevant asset class.
Management fees for unlisted shares, for which a refund is permitted before dividends and where repayment is deemed probable, are recognized as Acquisition cost and will therefore be included in the unrealized result.
In other cases, they are reported as Commission expenses.
All management expenses, excluding brokerage fees, fees to external managers and custodian fees, are recognized as Operating expenses. Investments in equipment including in-house developed and purchased software are normally expensed as they are incurred.
AP4 is exempt from all income tax on investments in Sweden. Tax on dividends and interest withheld in certain countries is recognized net in the income statement under each type of income.
As of 2012, AP4 is registered for value added tax and is thus liable to pay VAT for acquisitions from abroad. AP4 is not entitled to recover paid VAT. Expensed VAT is included in the expense item to which it belongs.
Amounts in SEK m, unless otherwise specified.