N O TE 4 C ritical e s timat e s a n d judgments The prepar ation of fnancial reports requires the Boar d of Director s and Group M ana g ement to mak e es timates and jud gments usin g cert ain assumptions. Es timates and jud gments will impact both the s t atement of income and the balance sheet as w ell as disclosures such as contin g ent liabilities. Actual results ma y difer from these es timates and jud gments under diferent assumptions and conditions. Acquisition of subsidiaries / oper ations and contin g ent consider ations includin g acquisition related option liabilities The v aluation of identifable assets and liabilities in connection with the acquisition of subsidiaries or oper ations in v olv es that items in the acquired compan y’ s balance sheet as w ell as items that ha v e not been recogniz ed in the acquired compan y’ s balance sheet , such as cus tomer relations, should be v alued at fair v alue . In normal circums t ances, as quoted mark et prices are not a v ailable for the assets and liabilities that are to be v alued, diferent v alu - ation methods ha v e to be used. These v aluation methods are based on a number of assumptions. F or a per sonnel intensiv e compan y lik e Securit as, emplo y ee related items such as accrued salaries, accrued social benefts, holida y pa y , lon g -term emplo y ee benefts and pos t -emplo yment benefts are signifcant items in the balance sheet that can be difcult to v alue . Accounts receiv able is another e xample of a signifcant balance sheet item where it can be difcult to v alue the amount of bad debt and thus to what e xtent the y will be collected. Other items that can be difcult both to iden - tif y as w ell as to v alue are contin g ent liabilities that could ha v e arisen in the acquired compan y in connection with for e xample litigations. The v aluation of identifable assets and liabilities is also dependent on the accountin g en vironment that the acquired compan y / oper ations has been activ e in. This is true for e xample for the basis of prepar ation for the fnancial report - in g and consequently the e xtent of adjus tments that are necessar y in or der to follo w the Group ’ s accountin g principles, the frequenc y for which closin g s ha v e been prepared and the a v ailabilit y of diferent t ypes of dat a that can be necessar y in or der to v alue identifable assets and liabilities. All balance sheet items are thus subject to es timates and jud gments. This also means that the initial accountin g ma y ha v e to be pro visionally determined and subsequently adjus ted. All acquisition calculations are fnaliz ed no later than one y ear after the acquisition is made . Considerin g the abo v e description, Securit as has chosen not to s t ate the reasons to wh y the initial accountin g of the business combination is pro visional nor which assets and liabilities for which the initial accountin g is pro visional for each individual business combination unless it is a material adjus tment . All pa yments to acquire a subsidiar y / oper ation are recor ded at fair v alue at the acquisition date , includin g debt related to contin g ent consider ations and acquisition related option liabilities (deferred consider ations). This debt is measured at fair v alue in subsequent periods with re-measurement throug h the s t atement of income . The fnal outcome of deferred consider - ations often depends on one or more e v ents which only will be confrmed b y a future de v elopment , such as the future proft abilit y de v elopment for an a greed period. The fnal outcome can therefore either be lo w er or hig her than the initially recogniz ed amount . Short -term deferred consider ations, which amount to M SEK 224.7 (166.7 and 97.7) and is included in other cur - rent liabilities (note 34) and lon g -term deferred consider ations, which amount to M SEK 319.5 (439.4 and 199.8) and is included in other lon g -term liabili - ties (note 30), are thus subject to critical es timates and jud gments. f urther information re gar din g acquisitions is pro vided in note 16 and re gar din g re v aluation of deferred consider ations in note 11. Impairment tes tin g of g oodwill, other acquisition related int an g ible assets and shares in associated companies In connection with the impairment tes tin g of g oodwill, other acquisition related int an g ible assets and shares in associated companies, the book v alue is compared with the reco v er able v alue . The reco v er able v alue is determined b y the hig her of an asset’ s net realizable v alue and its v alue in use . Since under normal circums t ances no quoted mark et prices are a v ailable to assess an asset’ s net realizable v alue , the book v alue is normally compared with the v alue in use . The calculation of the v alue in use is based on assumptions and jud gments. The mos t import ant assumptions are the or ganic sales gro wth, the de v elopment of the oper atin g mar g in, the oper atin g w orkin g capit al requirements and the rele v ant W A C C, which is used to discount future cash fo ws. All in all, this means that the v aluation of the balance sheet items g oodwill, which amounts to M SEK 14 275.4 (14 727.4 and 13 338.8), acquisition related int an g ible assets, which amounts to M SEK 1 501.9 (1 574.1 and 1 096.5) and shares in associated companies, which amounts to M SEK 108.0 (108.2 and 125.6) are subject to critical es timates and jud gments. A sensitivit y analysis re gar din g the or ganic sales gro wth, the oper atin g mar g in and the W A C C is pro vided in note 16. V aluation of accounts receiv able and the pro vision for bad debt losses Accounts receiv able , which amounts to M SEK 10 490.1 (10 965.0 and 9 724.1), is one of the mos t signifcant balance sheet items. Accounts receiv - able are accounted for at nominal v alue net after pro visions for probable bad debt . The pro vision for bad debt losses, which amounts to M SEK -474.6 (-419.3 and -344.7), is thus subject to critical es timates and jud gments. As s t ated abo v e , accounts receiv able is often an import ant item in relation to the acquisition of subsidiaries / oper ations. f urther information re gar din g the credit risk in accounts receiv able is pro vided in note 6. Information re gar din g the de v elopment of the pro vision for bad debt losses durin g the y ear is pro vided in note 25. Actuarial calculations re gar din g emplo y ee benefts such as pensions and medical benefts Emplo y ee benefts are normally an area where es timates and jud gments are not critical. Ho w e v er , for defned beneft plans relatin g to benefts particularly for pensions and medical benefts and where the pa yment to the emplo y ee is se v er al y ear s into the future , actuarial calculations are required. These calculations are based on assumptions re gar din g economic v ariables such as the discount r ate , the e xpected return on plan assets, salar y increases, infation r ate , pension increases and the infation r ate for medical benefts, but also on demogr aphic v ariables such as the e xpected life span. All in all, the balance sheet item pro visions for pensions and similar commitments, which amounts to M SEK 1 470.6 (1 453.5 and 1 151.2), is subject to critical es timates and jud gments. The Group ’ s opinion is that the mos t import ant assumptions are the discount r ate , the infation r ate and the e xpected life span. A sensitivit y analysis re gar din g these three v ariables is pro vided in note 31. Actuarial calculations re gar din g claims reser v es and timin g of outfo ws The Group is e xposed to v arious t ypes of risks in the da y -to-da y runnin g of the business. The oper ational risks can result in the need to recogniz e reser v es for dama g es resultin g from propert y claims, per sonal in juries as w ell as w ork er s ’ compensation claims relatin g to the Group ’ s emplo y ees. Claims reser v es are calculated based on a combination of case reser v es and incurred but not reported reser v es. Actuarial calculations are per formed on a quarterly basis to assess the adequac y of the reser v es based on open claims and his torical dat a for incurred but not reported claims. Actuarial calculations are based on se v er al assumptions. Claims reser v es comprise a lar g e number of individual insur ance cases, where some cases are com - pensated with a lump-sum pa yment and other s are paid o v er a lon g er period of time . It is thus not possible to disclose an y det ailed information re gar din g the timin g of outfo ws from claims reser v es. All in all, this means that the balance sheet items short -term liabilit y insur ance-related claims reser v es, which amounts to M SEK 586.2 (662.8 and 526.2) and is included in short -term pro visions (note 35), and liabilit y insur ance-related claims reser v es, which amounts to M SEK 384.8 (410.5 and 461.3) and is included in other lon g -term pro visions (note 32), are subject to critical es timates and jud gments. 84 Annual R eport Notes and comments to the consolidated fnancial s t atements Securit as Annual R eport 2012