Under the Accounting Act, a business must prepare financial statements at the end of each financial year. These statements must include a balance sheet, a statement of earnings and notes to the financial statements. Groups must present this information for the parent company and on a consolidated basis. The Companies Act expands those requirements for limited companies, requiring them to prepare an annual report that includes a directors' report in addition to the financial statements. The directors' report must include the information necessary to understand the company's (and group's) results and financial position. Important post-balance sheet events must also be disclosed. Large companies must also submit a statement of changes in financial position, and the financial statements must present comparative figures for the previous financial year.

The Accounting Act prescribes the format (headings and disclosures) that a business is required to make in the financial statements. Supplemental requirements for limited companies are specified in the Companies Act. The Swedish Institute of Certified Public Accountants establishes additional rules. As a result, adequate levels of information are disclosed.

The balance sheet must comply, in general, with a prescribed format classifying assets as current and non-current. The total amount of untaxed reserves is disclosed under a separate heading between long-term liabilities and shareholders' equity.

A format is prescribed for the statement of earnings, which ordinarily consists of three separate sections covering results of operations, allocations to untaxed reserves and income taxes. The results-of-operations section is expected to disclose extraordinary items, and the nature of such items must be disclosed in a note to the statements. A recommendation from the Financial Accounting Standard's Council, provide guidance as to what is or is not an extraordinary item. This recommendation is in all material respects similar to IAS statement 8 "Unusual and Prior Period Items and Changes in Accounting Policies".

The statement of earnings discloses net sales and other revenues. Except for depreciation, financial expense (and financial income) and extraordinary items, all expenses are combined under a single heading, usually current (or operating) expenses.

The most unusual features of Swedish annual accounts are the untaxed reserves that companies establish to receive tax benefits. Although deferred taxes are associated with the untaxed reserves, Swedish financial statements do not yet include a provision for the deferred taxes. The untaxed reserves and the absence of deferred taxes distort a company's reporting, but the effect is minimised because of the segregation of the reserves on the balance sheet and the appropriations to and from the reserves on the statement of earnings. Financial statement users can easily make an approximate adjustment by allocating 72% of the untaxed reserves to equity and 28% (present tax rate 1995) to deferred taxes.

With effect from 1 January 1992, companies quoted on the stock exchange should prepare their consolidated financial statements following the new recommendation of the Financial Accounting Standards Council concerning untaxed reserves. All untaxed reserves should be divided into a deferred tax portion and a non-distributable equity portion. See Section G.3, page 64, for a discussion of untaxed reserves.

The contents of this article are intended as a general guide to the subject matter. Specialist advice should be sought for your specific circumstances.

For further information contact Per Snellman on Tel: +468 613 9000 0r Fax: +468 791 7511; or enter a text search 'Ernst & Young' and 'Business Monitor'.