Effects of transition to International Financial Reporting Standards (IFRS)

The first quarter interim report 2005 will be the first financial report that Sandvik provides in accordance with IFRS. Comparative figures will be restated as from 1 January 2004. Detailed information on the effects of the transition will be published 31 March 2005.

The major effects on the comparative figures for 2004 relate to:
- Restatement of the pension provisions in accordance with IAS 19
- Reversal of goodwill amortization in accordance with IFRS 3
- The accounting for share-based payments in accordance with IFRS 2

The application of IAS 39, Financial Instruments, as from 1 January 2005 has preliminarily been estimated to increase equity by some SEK 70 M.

The analysis of the effects of the transition to IFRS is largely completed. The areas where the effects on Sandvik's reported results and financial position in 2004 are appraised to be most significant are described and quantified below.

Summary of major – preliminary – adjustments as of 1 January 2004 and estimated effects on 2004 results

1) SEK 175 M relating to pensions in accordance with IAS 19.
SEK 10 M relating to share-based payments in accordance with IFRS 2.
2) SEK 528 M relating to pensions under IAS 19.
3) SEK 34 M relating to net effects of option programs in accordance with IFRS 2.
4) SEK 353 M relating to pensions under IAS 19 and SEK 24 M to option programs in accordance with IFRS 2.
5) SEK 12 M relating to net effects of option programs in accordance with IFRS 2.
6) SEK 354 M relating to reversal of goodwill amortization in accordance with IFRS 3.
7) SEK 4 M relating to net effect of option programs in accordance with IFRS 2.

Background

In June 2002, the European Uninion's Council of Ministers decided that all exchange-listed companies within the Union as from fiscal year 2005 shall prepare consolidated financial statements fully in compliance with International Financial Reporting Standards (IFRS).

The accounting standards issued by the Swedish Financial Accounting Standards Council, in particular in recent years, have been closely aligned to IFRS. The Swedish standards, however, have not covered all areas of the IFRS, nor have they been fully updated as and when the international standards have been amended.

Sandvik has complied with the Swedish Council's standards and, thereby, has gradually applied standards that are in agreement with IFRS.

The transition from reporting in accordance with Swedish standards to IFRS reporting raise the requirements on the first report provided in accordance with the new standards. The comparative information for fiscal year 2004 must be restated and reported in accordance with IFRS. Sandvik intends to present the full transition effects by 31 March 2005.

The Stockholm Stock Exchange has proposed that listed companies already in the 2004 Fourth Quarter Interim Report and in the Annual Report shall provide information about the most important differences between the standards currently applied and the IFRS principles to be applied as from 2005. A quantified summary of the most significant effects of the transition shall be provided together with information on how 2004 results and financial position would have been affected had IFRS been applied already in the 2004 accounts.

IFRS 1 First-time Adoption of International Financial Reporting Standards contains specific transition rules. The effects on Sandvik's results and financial position partly depend on the choices made by Sandvik in areas where options exist.

IAS 19: Employee Benefits

As of 2003, Sandvik already complies with the rules for pension accounting set out in IAS 19 Employee Benefits. Under the transition rules, however, this standard must be applied as if adopted at 1 January 2004. Accordingly, the unrecognized actuarial gains reported earlier by Sandvik at 31 December 2003, SEK 528 M, must be set to zero, that is, reduce the provisions for pensions. Considering the tax effects, this increases the unrestricted reserves in shareholders' equity by SEK 353 M. Operating profit for 2004 is affected by a reversal of amortization of unrecognized actuarial gains, which is no longer required since the unrecognized gains at beginning of year are set to zero. The effect, however, is marginal. Sandvik has not yet decided how actuarial gains and losses will be dealt with in future, including the additional option to charge such gains and losses directly to equity in accordance with a recent decision by the IASB (International Accounting Standards Board).

IFRS 3: Business Combinations

The business combination accounting rules have been largely changed by the issuance of IFRS 3 Business Combinations. Sandvik has decided not to apply IFRS 3 retroactively to acquisitions completed prior to 1 January 2004. The new rules are being applied for future acquisitions from this date and, compared with earlier rules, mainly imply that only such restructuring provisions already carried in the balance sheet of the acquired company may be considered in the purchase price allocation, that the identification of intangible assets of the acquired company shall be more extensive (including trade marks, customer relations and customer agreements, patented and un-patented technology, etc.), that the fair value of the net assets acquired is measured disregarding any minority interests, and that goodwill henceforth shall not be amortized. The last-mentioned change is paired with a requirement that the book value of all goodwill that arose in earlier acquisitions shall be tested for impairment in connection with the transition to IFRS. Sandvik has performed such impairment tests and no cause for write-downs was identified. The effects of the new rules on acquisitions after 1 January 2004 are not deemed to be significant. The effect of the IFRS transition, therefore, is that the goodwill amortization, SEK 354 M, reported in the 2004 consolidated income statement will be reversed in the comparative income statement that will be published in the 2005 Annual Report.

IFRS 2: Share-based Payment

Sandvik earlier has reported costs for share-based employee compensation under an "intrinsic method", whereby an expense has been reported to the extent that the exercise price under an option program is less than the current market price of the Sandvik share. Under IFRS 2 Share-based Payment, an expense shall be recognized based on the estimated market value of an option at the allocation date. In the comparative 2004 income statement, the proportional part of such estimated value of options is expensed. Reporting under IFRS 2 implies a lower expense than earlier reported and, accordingly, there is a positive effect on equity in the 1 January 2004 opening balance and on 2004 results.

IAS 16: Property, Plant and Equipment

In valuing tangible fixed assets in the 1 January 2004 restated opening balance, Sandvik has concluded that, under the transition rules, earlier made revaluations may be considered "deemed cost" in the transition to IFRS and, hence, there are no transitional effects on equity or 2004 results. Further, Sandvik has already in the past essentially applied so-called component depreciation. The specified requirement for such accounting in the amended IAS 16 Property, Plant and Equipment, therefore, has no significant impact.

IAS 38: Intangible Assets

Since 2002, Sandvik has recognized expenditures for development aimed at producing new or significantly improved products and process as an intangible asset in accordance with the rules in IAS 38 Intangible Assets. Historically, systems and routines have not been developed in a manner whereby it is possible in conjunction with the transition to IFRS to apply such reporting from the earlier date – January 1999 – from which time IAS 38 has been in effect.

IAS 17: Leases

Sandvik earlier has applied the accounting rules of IAS 17 Leases, although the earlier Swedish transition rules allowed that all leases entered into prior to 1 January 1997 be dealt with under the rules for operating leases. Sandvik has not identified any significant old, still running, lease contracts that would have been differently reported had the classification been tested in accordance with the IFRS rules.

Other changes

In connection with the transition to IFRS, minority interest in equity will be reclassified as part of the Group's equity.

IAS 32 and IAS 39, Financial Instruments: Disclosure and Presentation and Recognition and Measurement, respectively, will be applied as from 1 January 2005. No restatement of 2004 reporting is required. The new rules essentially imply that most financial instruments, including derivative instruments, be marked to market. The rules that shall or may be applied by the end of 2005 have not yet in all respects been established. Among other items the rules for, hedge accounting are still being deliberated by the IASB and there may be changes to the current standards already in 2005. However, a preliminary estimate of the effect of revaluation of these instruments as of 1 January 2005 indicates a positive effect on equity of some SEK 70 M.

Sandvik has applied hedge accounting for the major part of hedges and forecast future currency flows. These so-called cash-flow hedges relate to hedging of projected sales and firm orders. IAS 39 as currently promulgated does not allow Sandvik to apply hedge accounting to its projected sales meaning that changes in the market value of Sandvik's foreign exchange derivative instruments shall be reported in income. The current deliberations on changes in IAS 39, however, may later in 2005 result in a possibility to apply hedge accounting.

Sandvik has entered into a number of interest-rate swaps allowing Sandvik to pay a fixed interest and to receive variable interest. These interest swaps are marked to market with the effect reported in financial items. Reporting interest swaps at fair value implies that reported results during the terms of the swaps may vary although the cumulative effect of the agreements is unchanged.

The summarized information on the effects of the transition to IFRS has been compiled based on the IFRS expected to be in force by 31 December 2005. Amendments to IFRS are made continuously and, accordingly, there may be additional changes.

Further information

At 31 March, 2005 Sandvik will release restated quarterly income statements and balance sheets for 2004 prepared in accordance with IFRS and information on the effects of implementation of IAS 39.

Sandviken, 8 February 2005

Sandvik AB; (publ)