EX-15.1 7 d52839dex151.htm EX-15.1 EX-15.1

Exhibit 15.1

Swedish annual report for 2020

in English (adjusted version)


Contents

 

Financial report

  

CEO comment

     2  

Business in 2020

     4  

Letter from the Chair of the Board

     9  

Report of independent registered public accounting firm

     26  

Report of independent registered public accounting firm

     27  

Consolidated financial statements and notes

     29  

Report of independent registered public accounting firm

     80  

Management’s report on internal control over financial reporting

     81  

Risk factors

     82  

Five-year summaries

     95  

Alternative performance measures

     97  

The Ericsson share

     102  

Remuneration report

  

Statement from the Chair of the Remuneration Committee

     1  

Introduction

     2  

Remuneration 2020 at a glance

     3  

Total remuneration to the President and CEO and Executive Vice Presidents

     5  

Variable remuneration

     6  

Comparative information on the change of remuneration and Company performance

     11  

 

Corporate Governance report

  

Corporate Governance report

     1  
 

 

Ericsson Annual Report 2020

 

Our legal annual report consists of three parts published as one pdf, which can also be downloaded separately:

 

    The Financial report, including CEO comment, business strategy, the annual accounts and consolidated accounts of the Company

 

    The Corporate Governance report

 

    The Remuneration report

The Company’s annual accounts and consolidated accounts are included on pages 10–85 in the Financial report and are reported on by Deloitte in the auditor’s report. The Corporate Governance report and the Remuneration report have also been subject to assurance procedures by Deloitte. We also file an Annual Report on Form 20-F with the U.S. Securities and Exchange Commission (SEC). All parts of the legal annual report are available on Ericsson’s website. The report Ericsson 2020 in review, published on Ericsson’s website, describes the Company, its strategy and organization.

 


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1    Financial report 2020

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

This is Ericsson

Ericsson provides high-performing solutions to enable its customers to capture the full value of connectivity. The Company supplies communication infrastructure, services and software to the telecom industry and other sectors. Ericsson has approximately 100,000 employees and serves customers in more than 180 countries. Ericsson is listed on Nasdaq Stockholm and the Ericsson ADS trade on NASDAQ New York. The Company’s headquarters are located in Stockholm, Sweden.

It all started in a mechanical workshop in Stockholm in 1876 where Lars Magnus Ericsson designed telephones and his wife Hilda manufactured them by winding copper wire coils. With 5G now a commercial reality, we continue to invest to strengthen our 5G leadership. Our portfolio is designed to help our customers digitalize and to increase efficiency in an intelligent and sustainable way, while finding new revenue streams.

The business is divided into four segments with the telecom operators as the main customer group. The segments are Networks, Digital Services, Managed Services and Emerging Business and Other. The market is divided into five geographical market areas: North America, Europe and Latin America, Middle East and Africa, South East Asia, Oceania and India and North East Asia.


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Financial report 2020 | CEO comment

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Entering a new chapter of growth and profitability

 

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Börje Ekholm

President and CEO

  

Despite a challenging environment in 2020, we completed our turnaround, delivered on our financial targets, and established a leadership position in 5G. More importantly, our people continued to deliver and to serve our customers with no disruptions. The pandemic showed the criticality of the digital infrastructure for society. Looking ahead, this infrastructure will increasingly drive global sustainable growth and Ericsson is well positioned to create value from the ongoing digital transformation.

 

“We were able to complete our turnaround, increase market share and accelerate our expansion into the enterprise market. We are also beginning a new chapter of profitable growth showing how critical our technology really is.”

During 2020, we have seen good momentum for our focused strategy. We were able to complete the turnaround, underscored by organic topline growth of 5%, a strong gross margin of 40.3%, operating margin of 12.0% and solid free cash flow before M&A amounting to SEK 22.3 billion. This means we have successfully exceeded our 2020 targets set three years ago.

As we move into the next phase of our journey, we do so from a strong position. We continue to transform the Company through maintained focus on R&D. Over the last few years, we have added more than 5,000 engineers and R&D now accounts for 26% of the total workforce. Technology leadership is critical for providing competitive solutions to our customers, but it is equally important for our cost competitiveness.

In November 2020, we presented a long-term profitability target of 15–18% EBITA margin excluding restructuring charges for the Group, and a long-term free cash flow target (before M&A) of 9–12% of sales. These targets will be achieved mainly by increasing market share in our primary segments and accelerating growth in the enterprise market. We stand firmly by our 2022 targets as an important stepping stone towards our long-term targets.

We made critical inroads into the enterprise market with the acquisition of Cradlepoint. With solutions for wirelessly connecting fixed and temporary sites such as field services and IoT devices, Cradlepoint complements our established enterprise offerings and creates new revenue streams for our mobile operator customers.

We continue to see that M&A will play an important role in further strengthening our

Company and our focus going forward will be on opportunities close to our portfolio. To ensure that we do not repeat mistakes, we have established a disciplined end-to-end process built on thorough evaluation, careful due diligence, integration planning as well as accountability and close follow-up.

The global pandemic

The COVID-19 pandemic has put the world under extreme stress. Our focus throughout has been on the health and safety of our employees, customers and other stakeholders. At the start of the pandemic, we transitioned nearly all of our staff to working from home and by the end of 2020 about 90,000 of our colleagues were working remotely, with minimal disruption to our customers. I am inspired by the level of commitment that my colleagues have shown throughout the past year. It has been a difficult one on many levels, but our people – all around the Company – have continued to deliver. All of them have my deepest gratitude.

The COVID-19 pandemic has accelerated the pace of digital transformation and confirmed that wireless connectivity is critical infrastructure that underpins society. Eventually we will return to more normal circumstances, but I don’t believe that we will revert back to the status quo that existed before. For example, we will most likely see remote working as part of the new normal.

Capturing the 5G opportunity

5G is a transformational technology, more so than previous generations of mobile connectivity. With 4G, the world had a global standard that empowered the emergence of platform companies whose value was

 


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Financial report 2020 | CEO comment

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

multiplied by the underlying network. This ecosystem allowed consumers to digitalize. With 5G, enterprises will be able to choose cellular connectivity as a primary access technology, likely speeding up their digitalization.

However, I caution against looking for the killer 5G app. With 4G, we did not predict in advance the emergence of the many new business models such as streaming or ride hailing. Countries that built out their 4G infrastructure first, came to dominate the app economy. We believe this development will be similar for 5G, but for enterprise applications.

Despite the pandemic, the pace of introducing new 5G functionality increased during 2020. According to our estimates, there were 220 million global 5G subscriptions at the end of 2020, with China accounting for 175 million of those – or almost 80%. 5G is no longer an eventuality, it is here and now.

Europe used to be a leader in wireless technology but started to fall behind on 4G. It now runs the risk of falling even further behind North America and North East Asia. Europe must find ways to speed up the roll-out of 5G to avoid losing its competitiveness. Return on capital for European operators is lower than cost of capital. We believe that Europe needs to review its regulation of operators, spectrum policies, while also allowing for industry consolidation.

Our Company’s position

We are now a leader in 5G technology. Since 2015, we have shipped 6 million 5G-ready radios and during 2020, we announced 44 5G contracts and we closed the year with 122 commercial agreements and 79 live 5G networks globally. Through our focused strategy, we continue to develop and deploy products, solutions and services that push the industry forward – like the introduction of software enabling 5G to operate independently of 4G networks.

We firmly believe in openness and the value of standardization. Open RAN continues to be widely discussed in our industry and we are actively participating in defining Open RAN standards. We believe Open RAN standards will continue to evolve in the coming years, starting with less-demanding applications. In October 2020, we introduced a new Cloud RAN portfolio for increased network flexibility, as a complement to high-performing purpose-built networks. We will continue to strengthen our position in Open RAN, however 5G is happening now and our

focus must be on providing the wider ecosystem of developers and enterprises fast access to 5G so they can benefit from its full potential.

Our patent portfolio in cellular technology is world leading and through our 5G leadership we are confident in the strength of the portfolio long term. Thanks to our investments in R&D, we now have more than 57,000 granted patents and over 100 signed licensing agreements. Return on R&D investments, through licensing based on fair, reasonable, and non-discriminatory terms and conditions, is critical to ensure new investments in innovation and the continued success of open, collaborative standardization. However, when these terms are breached, we will take swift and firm action.

Sustainability and responsible business

Sustainability and corporate responsibility are integral parts of our business strategy and operations. We continue to support the ten principles of the UN Global Compact and the UN Guiding Principles on Business and Human Rights as important elements of our commitment to responsible business.

During 2020, Ericsson remained a driving force for global climate action. Our approach can help break the energy curve for mobile networks and how digitalization can reduce carbon emissions 15% by 2030 in sectors like transport and manufacturing. We have a target to be carbon neutral in our operations by 2030 and our 5G Smart Factory in the US, which integrates sustainability into its building design and operations, is an example of how this impacts our ways of working.

In addition, as part of our digital inclusion efforts we became the first private-sector partner of UNICEF’s Giga initiative which aims to connect every school on the planet to the internet by 2030.

We continue to improve and strengthen our Ethics and Compliance program. In June, we welcomed the independent compliance monitor who will oversee our progress in enhancing this program. While this will surely be a demanding process, I view it as a way to make sure we reach our high ambitions.

Most importantly perhaps, we remain steadfast in our efforts to foster a culture of integrity where we speak up and resolutely address any instance of incorrect behavior. We spend a significant amount of time in the Executive Team discussing these matters to ensure that we keep improving and be the company we want to be – and that

people expect us to be. We have taken many important steps to engage the workforce in a cross-functional fashion, including making our processes more robust and increasing our headcount in the compliance area. But this important work continues, as we need to make sure that compliance is an integral part of how we conduct all our business.

In summary

I am proud of our results during 2020. Not only were we able to complete our turnaround, we also showed the world how critical our technology is to economic growth and sustainable development. Vital parts of our society, such as hospitals and schools, as well as families and friends, depend on the infrastructure we provide. These achievements would not be possible without our incredible people. The spirit of resourcefulness, and grit, is why Ericsson employees truly rock!

We should, however, not be complacent. 2021 will be an investment year to further strengthen our competitiveness. We also see that earnings in the year could be negatively impacted by lower patent licensing revenues due to important contract renewals and that the acquisition of Cradlepoint will have a negative effect on our operating margin. Our 2022 targets remain in place and they are a milestone on the journey towards reaching our long-term target of 15–18% EBITA margin excluding restructuring charges.

When we are finally able to look back upon the pandemic, we will see that we accelerated the digitalization of society which altered many ways of working. These developments present a great opportunity for us, as 5G will be front and center in the post-pandemic world. At the same time, we all look forward to meeting our friends and colleagues face-to face again, to interact, trade ideas and innovate. This is a basic human need that will remain. And as the physical and digital worlds continue to merge, our technology and innovations will play an essential role.

Börje Ekholm

President and CEO

 


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Financial report 2020 | Business Strategy

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Business strategy

 

Creating long-term value

Our strategy is to create long-term value through technology leadership. We aim to address long-term opportunities that present clear advantages of scale and new, profitable revenue streams. Our ambition is to grow faster than the market, with a focused approach based on the following criteria:

 

    Selective: product-led growth aligned with our streamlined portfolio and existing customer base.

 

    Disciplined: commercial and financial discipline, and excellence in contract execution.

 

    Profitable: growth is managed for positive returns and to support Group financial targets. New contracts for increased market footprint, may in some cases be associated with challenging near-term returns as the cost for telecom operators to change vendors can be high, however contracts are expected to be profitable over time.

A customer centric strategy

Our mission is to enable the full value of connectivity for our customers, the telecom operators. There are three key areas in which we can support our customers’ success:

 

    Capture new revenue streams and new opportunities made possible by 5G and Internet of Things (IoT).
    Improved end-customer experience – the main differentiator among telecom operators. Through Artificial Intelligence (AI) and automation, the customer experience can be considerably improved by ensuring coverage, performance and reliability. We can provide Key Performance Indicators for telecom operators so that the telecom operators can better analyze, understand, and optimize their networks to deliver a superior customer experience.

 

    Relentless efficiency improvements to lower the cost of delivering the increasing traffic in the networks. 5G will increase spectrum efficiency and is also significantly more power efficient, thereby reducing cost and supporting climate targets.
 

 

Ericsson business strategy

 

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Financial report 2020 | Business Strategy

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

The strategy stands on a foundation of four pillars:

Technology leadership

Investments in research and development (R&D) and technology leadership allow us to bring innovative solutions to the market ahead of competitors, giving our customers an advantage.

Ericsson has a strong commitment to R&D with substantial contributions to cutting-edge standards and technologies. It is the Company’s policy to protect and capitalize on its R&D investments by creating, securing, protecting and licensing a portfolio of patents in support of the overall business goals. The value of Ericsson’s IP portfolio by the end of 2020 extended to more than 57,000 granted patents.

Ericsson supports licensing standard essential patents on fair, reasonable, and non-discriminatory terms, known as FRAND, ensuring a healthy ecosystem for the future. These licensing terms support deep standardization and allow for scalable manufacturing, thereby lowering prices for consumers. Through FRAND licensing, innovative companies are compensated via patent royalties and are thus able to continue to reinvest in the next generation of technology, unlocking the latest digital experiences for everyone to enjoy.

Cost efficiency

A cost-efficient base is essential for our business. Investments in R&D enable not only technology leadership but also cost leadership. Using the latest technology enables us to bring down cost in our solutions. This benefits both us and our customers.

Data-Driven Operations

Network complexity is rapidly increasing with 5G, Cloud, IoT and other new technologies, and it is becoming challenging for humans to keep up with this complexity. Running a 5G network, including data points in IoT, combined with demands of mission critical use-cases, is only possible when applying AI, automation and data analytics to drive the “Data-Driven Operations” of telecom networks.

Global scale and skill

Our global presence and our close interaction with our customers bring opportunities for us to grow with discipline, leading to increased market footprint and advantages of scale. The expertise that our people have is a key asset that enables us to work close to our customers across the world.

5G – new revenue opportunities

With 5G our industry will move beyond connecting people; it will also connect machines and things. 5G is a powerful platform for innovation, opening up new revenue opportunities for telecom operators in both the consumer segment and the enterprise segment. We are already seeing that 5G is supporting telecom operators to deliver new, differentiating services to consumers with upside revenue potential, and there is also significant upside revenue potential for telecom operators who invest in delivering new 5G enterprise services. Our studies show that, globally, telecom operators could see an additional revenue opportunity of some USD 700 billion by 2030, driven by industry sectors such as healthcare, manufacturing and automotive.

We aim to address these enterprise opportunities and continue to sell through our existing telecom operator relationships and go-to-market models. Our ambition is to service our customers by developing competitive industrial solutions that are easy to scale, such as our global IoT platform and private networks solutions. We have increased our M&A capabilities, and we see portfolio-near acquisitions as enablers for future growth. Our aim is to grow and create value by investing in solutions that support our customers’ new revenue streams, drive traffic to mobile networks and drive increased demand for network quality.

Driving our business through four segments and five market areas

Our business is divided into four segments. All segments address the same customer group, primarily the telecom operators. The segments are Networks, Digital Services, Managed Services and Emerging Business and Other.

In Networks we provide hardware, software and services for our customers to build and evolve their mobile networks.

Digital Services is a software-led business supporting our customers as they move to a cloud-native environment, providing solutions for our customers to operate, control and monetize their mobile networks.

With our Managed Services offering we operate our customers’ networks. Our AI and data driven Managed Services offering, Ericsson Operations Engine, proactively manages telecom operator networks to enhance customer experience, drive agile service creation and optimize costs.

In Emerging Business and Other we explore how our customers can leverage connectivity in order to create new revenue streams and new types of businesses within the enterprise segment.

Our market is divided into five geographical market areas. The market areas are responsible for selling and delivering products and solutions developed by our segments. Staying close to our customers is key. In line with the strategy, we have shifted more responsibility to the market areas, to ensure that we stay close to our customers while maintaining central guidelines and governance structures to ensure, among other things, price discipline.

Sustainability and Corporate Responsibility

Our approach to sustainability and corporate responsibility is an integral part of the Company’s strategy, business model, governance and culture and is embedded across its operations to drive business transformation and create value for stakeholders.

We are committed to creating positive sustainability impacts and reducing risks to the Company and its stakeholders through its technology, solutions, operations and the expertise of its employees.

 


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Financial report 2020 | Business model

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Business model

Our business model is constructed to manage changing market requirements and to capture new business opportunities. Customer focus and motivated employees are key to driving our business, creating stakeholder value and building a stronger company long term.

 

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We develop innovative and cost

competitive solutions for our customers.

  Motivated and talented employees drive our business.

 

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Financial report 2020 | Business model

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

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We create value for our stakeholders by building a stronger company long term.

 

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Financial report 2020 | Business model

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

The four segments

 

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9

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Letter from the Chair of the Board

 

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Ronnie Leten

Chair of the Board

Dear shareholders,

The Board’s highest priority during the global pandemic has been the health, safety and well-being of Ericsson’s employees, customers and other stakeholders. The global challenges brought by the pandemic have required a lot from the organization. But, being a communication technology company, Ericsson was able to transition rapidly to a new reality and to adapt to new ways of working and collaboration, and by the end of 2020 about 90,000 employees were working remotely. The Board too has adjusted to the ‘new normal’, and has shifted from meeting face-to-face to virtual meetings, while remaining focused on its assignments.

I am truly impressed by all the efforts and accomplishments that Ericsson’s employees have made during this challenging year. We have increased our revenues organically by 5% and delivered a solid operating margin of 12.0%, which is the strongest since 2007. Free cash flow (before M&A) amounted to an impressive SEK 22.3 billion. We have also increased our market share in important countries and regions like for example the US, China, Japan and Europe. The organization’s relentless focus on innovation and its speed in execution is clearly reflected in our performance during 2020. I therefore want to take the opportunity, early on in this letter, to say thank you to all our employees for a job well done in 2020. Your efforts have not gone unnoticed.

One of the top priorities for the Board is to oversee the Company’s continued strengthening of its Ethics and Compliance program to ensure that the Company lives up to high standards, with our Code of Business Ethics providing an important framework. The Board views the Company’s ongoing initiatives to continuously foster a ‘speak-up’ culture as critical to succeeding with this work and supports the Company’s ongoing cultural transformation program, Ericsson on the Move, aimed at fostering a culture based on integrity and fact-based decision making. It is a key priority for the Board that Ericsson can retain, motivate and attract talented employees. For this purpose, Ericsson also has a long-term variable compensation program focused on value creation.

During the year, a three-year independent compliance monitorship started as part of the Deferred Prosecution Agreement with the U.S. Department of Justice (DOJ). The independent compliance monitor reviews Ericsson’s compliance with the terms of the settlement, evaluates Ericsson’s progress in implementing and operating its enhanced compliance program and will submit periodic reports. The Board has met with the monitor on several occasions and has been impressed by the level of expertise and the constructive approach.

Ericsson’s strategy is based on the needs of its customers, the telecom operators. The Board concludes that innovation and investments in technology and R&D have been fundamental in reaching the Company’s targets for 2020 and allowing Ericsson to build a stronger company long term. The Company’s continued investments have strengthened Ericsson’s position as a leader in 5G and its ability to gain 5G footprint through its customer-centric competitive offering. There are still several growth opportunities for Ericsson to address, including in the area of new enterprise applications that will leverage the speed, latency and security characteristics of 5G. These applications are expected to provide many new opportunities for Ericsson’s customers to capture growth.

The key to our successful business performance is linked to the achievement of our ambitious sustainability targets and programs. A strong focus on responsible business and sustainability delivers value to both Ericsson, our customers and society. For example, the

Company takes a full value chain approach to its climate action efforts, which include founding the 1.5°C Supply Chain Leaders initiative to help suppliers halve their emissions before 2030. We have set a target to be carbon neutral in our own operations by 2030 and to deliver a portfolio and solutions that help our customers break the energy curve. We also deliver digital solutions to transform industries and help reduce global emissions by 15%.

The Board is confident that Ericsson is well positioned to deliver long-term value through a combination of R&D investments and innovation, a continuous focus on responsible business, talent management and leadership. Furthermore, it is important for the Board that Ericsson continues its high focus in creating value for our customers. The Board monitors Ericsson’s capital structure with the aim of retaining a strong balance sheet and a positive free cash flow. The Board will propose a dividend for 2020 of SEK 2.00 (1.50) per share to the Annual General Meeting.

When we start to adjust to a life after the pandemic, it will become even more evident that mobile networks have become a large part of a nation’s critical infrastructure, and that high-quality connectivity is essential for everyday life. The Board remains positive to the long-term outlook for the industry and is confident that Ericsson is well positioned to execute its strategy of building a stronger Company long term.

Finally, on behalf of all members of the Board, I want to thank Börje Ekholm, and all employees at Ericsson, for your efforts in 2020. We are looking forward to working with you all in 2021.

Ronnie Leten

Chair of the Board

 


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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Board of Directors’ report

Contents

 

10   

Business in 2020

11   

Financial highlights

14   

Business results – Segments

16   

Business results – Market Areas

17   

Corporate Governance

17   

Material contracts

17   

Risk management

17   

Sourcing and supply

18   

Sustainability and Corporate Responsibility

18   

Information security

18   

US FCPA settlement

18   

Legal proceedings

19   

Parent Company

19   

Share information

19   

Proposed disposition of earnings

20    Guidelines for Remuneration to Group Management
25   

Board assurance

 

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2020 highlights

 

  Sales adjusted for comparable units and currency grew by 5%, with Networks growing by 10%. Reported sales increased by 2% to SEK 232.4 billion.

 

  Reported gross margin was 40.3% (37.3%), with improvements in all segments.

 

  Reported operating income improved to SEK 27.8 (10.6) billion.

 

  Reported net income was SEK 17.6 (1.8) billion.

 

  Free cash flow before M&A amounted to SEK 22.3 (7.6) billion. 2019 included a payment of SEK –10.1 billion related to the resolution of the US SEC and DOJ investigations.

 

  The Board of Directors will propose a dividend for 2020 of SEK 2.00 (1.50) per share to the AGM.

 

Business in 2020

In 2020, sales increased by 2% driven by sales growth in Networks, where sales increased by 7%, primarily driven by increased hardware deliveries following the increased market footprint. From a geographical perspective growth was primarily driven by increased sales in North East Asia, North America and Europe.

Sales decreased in Digital Services by –6% mainly due to a decline in sales in the legacy portfolio, primarily in hardware. Managed Services sales declined by –12%, mainly due to reduced variable sales in a large contract in North America, post the merger between two large operators, and transfer of a contract to an associated company. Exits of non-strategic contracts also contributed to the sales decline.

A stronger Swedish krona (SEK) had a negative impact on reported sales in all segments. Sales growth adjusted for comparable units and currency was 5%.

IPR licensing revenues increased to SEK 10.0 (9.6) billion as lower volumes with one licensee were offset by new contracts.

Gross margin improved to 40.3% (37.3%) with improved gross margins in all segments. A lower share of services sales had a positive impact on the gross margin. The improved Networks margin was supported by operational leverage. Digital Services margin improved due to increased share of software as well as limited impact from the critical contracts in 2020. Managed Services gross margin improved mainly as an effect of efficiency gains.

Operating expenses increased to SEK –66.3 (–64.2) billion. Research and

 

development (R&D) expenses increased in segment Networks through increased investments in a broader portfolio of antenna and site solutions and in 5G. Selling and administrative (SG&A) expenses increased mainly due to the acquired Cradlepoint business as well as continued investments in compliance and digital transformation. Provision release from from impairment losses on trade receivables was lower than previous year, impacing the year negatively SEK 0.1 (0.7) billion.

Restructuring charges increased to SEK –1.3 (–0.8) billion. The restructuring charges were mainly related to restructuring of the acquired antenna and filter business in segment Networks and to organizational changes as a consequence of the operator merger in North America.

Operating income was SEK 27.8 (10.6) billion. Operating income in 2019 was impacted by costs of SEK –10.7 billion related to a resolution regarding the investigations by the US SEC and DOJ.

The number of employees increased to 100,824 (99,417) mainly due to the acquisition of Cradlepoint.

Free cash flow before M&A amounted to SEK 22.3 (7.6) billion. 2019 was impacted by payments of SEK –10.1 billion related to the resolution of the US SEC and DOJ investigations.

The improvement in cash flow was driven by improved profitability. Net cash at December 31 was SEK 41.9 (34.5) billion.

 
 


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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

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Financial highlights

Net sales

Reported sales increased by SEK 5.2 billion or 2% to SEK 232.4 (227.2) billion. Networks sales increased by SEK 11.0 billion or 7%, Digital Services sales decreased by SEK –2.5 billion or –6%, Managed Services sales decreased by SEK –3.0 billion or –12% and Emerging Business and Other sales decreased by SEK –0.3 billion or –4%. Sales adjusted for comparable units and currency increased by 5%.

IPR licensing revenues increased to SEK 10.0 (9.6) billion as lower volumes with one licensee were offset by new contracts.

Sales growth in Networks was primarily driven by higher hardware deliveries following increased footprint. In the geographical dimension, sales growth was primarily driven by North East Asia, North America and Europe. Sales growth adjusted for comparable units and currency increased by 10%.

Digital Services sales declined mainly due to lower sales in the legacy portfolio, primarily in hardware. Sales grew in South East Asia, Oceania and India and in North East Asia. Sales adjusted for comparable units and currency declined by –3%.

Sales declined in Managed Services, mainly due to lower variable sales in a managed services contract in North America post the merger between two large operators, and transfer of a managed services contract to an associated company. Sales adjusted for comparable units and currency decreased by –10%.

Sales in Emerging Business and Other declined due to reduced sales in the media businesses. Sales adjusted for comparable units and currency decreased by –4%.

In the market area dimension, sales growth in North East Asia, North America as well as in South East Asia, Oceania and India offset a decline in the two remaining market areas.

The sales mix by commodity was: software 22% (21%), hardware 41% (38%) and services 37% (41%).

Gross margin

Reported gross margin was 40.3% (37.3%). Gross margin excluding restructuring charges improved to 40.6% (37.5%) with strong margin improvements in all segments. A lower share of services sales had a positive impact on the gross margin. Networks margin was supported by operational leverage. Digital Services margin improved due to increased share of software as well as limited impact from the critical contracts in 2020. Managed Services gross margin improved mainly as an

 

effect of efficiency gains. The gross margin in Emerging Business and Other increased driven by Emerging Business (IoT Platforms, Edge Gravity exit and Cradlepoint).

Restructuring charges included in the gross margin increased to SEK –0.7 (–0.3) billion.

Operating expenses

Operating expenses increased to SEK –66.3 (–64.2) billion with increases in research and development expenses, selling and administrative expenses and reduced provision release from impairment losses on trade receivables.

Research and development (R&D) expenses

R&D expenses increased to SEK –39.7 (–38.8) billion. Higher R&D expenses in segment Networks driven by investments in a broader portfolio of antenna and site solutions and in 5G, while R&D investments in Digital Services decreased.

Restructuring charges impacted R&D expenses by SEK –0.4 (–0.3) billion.

Selling and administrative (SG&A) expenses

SG&A expenses increased to SEK –26.7 (–26.1) billion mainly due to the acquired Cradlepoint business as well as continued investments in compliance and digital transformation. Revaluation of customer financing was SEK –0.3 (–0.7) billion. Restructuring charges impacted SG&A expenses by SEK –0.2 (–0.1) billion.

Impairment losses on trade receivables

Impairment losses on trade receivables were SEK 0.1 (0.7) billion.

Other operating income and expenses

Other operating income and expenses was SEK 0.7 (–9.7) billion. Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations impacted 2019 negatively.

Share in earnings of JVs and associated companies was SEK –0.3 (–0.3) billion.

Restructuring charges

Restructuring charges increased to SEK –1.3 (–0.8) billion. The restructuring charges were mainly related to restructuring of the acquired antenna and filter business in segment Networks and to organizational changes as a consequence of the operator merger in North America.

 


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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

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Operating income and margin

Reported operating income improved to SEK 27.8 (10.6) billion. Operating margin in 2019 was impacted by costs of SEK –10.7 billion related to the resolution of the investigations by US SEC and DOJ. Operating income, excluding restructuring charges and the SEC and DOJ resolution regarding the investigations costs in 2019, improved to SEK 29.1 (22.1) billion, with an operating margin excluding restructuring charges of 12.5% (9.7%). The improvement was primarily driven by hardware sales in segment Networks.

Financial income and expenses, net

The financial net improved to SEK –0.6 (–1.8) billion, mainly due to positive currency hedge effects. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK 1.0 (–0.3) billion. The SEK strengthened against the USD between December 31, 2019 (SEK/USD rate 9.32) and December 31, 2020 (SEK/USD rate 8.19).

Taxes

Taxes were SEK –9.6 (–6.9) billion impacted by the increased income. The tax rate in 2020 was 35%. Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations were handled as non-tax-deductible in 2019. Excluding these costs, the 2019 tax rate was approximately 35%.

Net income and EPS

Net income improved to SEK 17.6 (1.8) billion driven by stronger operating income. EPS diluted was SEK 5.26 (0.67) and adjusted EPS was SEK 5.83 (1.07).

Employees

The number of employees on December 31, 2020, was 100,824, an increase of 1,407 employees compared with December 31, 2019. The increase is mainly to be found in the employee categories of R&D, product management and sales. 709 employees joined through the acquired Cradlepoint business.

Cash flow

Cash flow from operating activities

Reported cash flow from operating activities improved to SEK 28.9 (16.9) billion, as a result of improved income. The impact from changes in net operating assets and liabilities was SEK –3.6 (2.8) billion and SEK –0.5 billion when adjusted for a capital injection of SEK –3.0 billion made into the Ericsson Swedish Pension Trust, affecting cash flow negatively, as described under “Financial position”. Working capital efficiency has improved as a result of a strong focus on cash flow. Accounts receivables days of sales outstanding improved to 69 (75) days and

adjusted working capital days improved to 65 (75) days. The increased business momentum has led to an increasing demand for customer financing solutions. Most of such financing has been successfully transferred to banks and the amount of customer finance credits on the balance sheet remains low. Provisions of SEK 4.0 (7.6) billion were utilized, of which SEK 0.8 (1.8) billion related to restructuring charges.

Free cash flow

The improved profitability, in combination with continued focus on cash flow, resulted in Free cash flow before M&A of SEK 22.3 (7.6) billion.

Cash flow from investing activities

Reported cash flow from investing activities was SEK –15.2 (–3.5) billion. Acquisitions/ divestments of subsidiaries was SEK –9.6 (–1.5) billion of which SEK –9.5 billion was related to the acquisition of Cradlepoint. Investments in interest-bearing securities amounted to SEK –1.3 (4.2) billion. Investments in property, plant and equipment were SEK –4.5 (–5.1) billion, including investments in the US production plant. In addition, product development decreased to SEK –0.8 (–1.5) billion due to reduced capitalization of development expenses.

Cash flow from financing activities

Reported cash flow from financing activities was SEK –12.5 (–6.9) billion. Dividends were SEK –6.0 (–4.5) billion of which SEK –5.0 billion was related to dividends to shareholders and SEK –1.0 billion to dividends to minority shareholders in Ericsson’s subsidiaries. Borrowings declined mainly due to repayment of a bilateral loan with the European Investment Bank (EIB). The impact of lease liabilities was SEK –2.4 (–3.0) billion.

Financial position

Gross cash was SEK 72.0 (72.2) billion, while net cash increased to SEK 41.9 (34.5) billion as a result of the strong free cash flow despite cash payments for Cradlepoint of SEK –9.5 billion and repayment of the bilateral loan with the European Investment Bank (EIB) of SEK –5.8 billion.

Liabilities for post-employment benefits increased to SEK 37.4 (35.8) billion, due to lower interest rates despite a capital injection of SEK –3.0 billion into the Swedish Pension Trust. The Swedish defined benefit obligation (DBO) was calculated using a discount rate based on the yields of Swedish government bonds. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 11.8 billion lower (SEK 25.6 billion) as of December 31, 2020.

 


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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

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During 2020 there was a funding need for approximately SEK 4 billion for the Swedish pension plan of which SEK 3 billion was covered by payments in second and third quarter into the Swedish Pension Trust and SEK 1 billion by providing a pledged business mortgage to PRI Pensionsgaranti. Details regarding Ericsson’s pension plans can be found in note G1 “Post-employment benefits” of the Annual Report.

The average maturity of long-term borrowings was 2.7 years as of December 31, 2020, unchanged from 12 months earlier.

Ericsson has an unutilized revolving credit facility of USD 2.0 billion.

Ericsson has an undrawn credit facility agreement of EUR 250 million with the European Investment Bank (EIB).

Ericsson refinanced a loan of USD 170 million with the Swedish Export Credit Corporation (SEK) with a new bond loan of USD 200 million, resulting in a net increase in funding of USD 30 million. The new facility is set to mature in December 2030.

The Company’s primary liquidity requirements are to fund research and development activities to strengthen the product portfolio, additional capital expenditures (e.g. investing in production- and test facilities), investment in working capital, regular dividends and debt repayment schedules.

At December 31 2020, gross cash amounted to SEK 72.0 billion, comprising SEK 43.6 billion of cash and cash equivalents and SEK 28.4 billion of interest-bearing securities. Ericsson expects that gross cash together with cash flow generated by the operations, will provide sufficient liquidity to fund the requirements for the next twelve months and thereafter for the foreseeable future. The Company continues to review the short-term and long-term cash needs on a regular basis, factoring in any changes to the strategic plan, the competitive landscape and overall market terms, as and when required.

The capital turnover remained at 1.4 (1.4) times, while Return on Capital Employed (ROCE) improved to 17.0% (6.7%) driven by improved operating income.

In June 2020, Moody’s upgraded Ericsson’s rating to Ba1 (“investment grade”) with stable outlook and in November Standard & Poor’s upgraded Ericsson’s rating to BBB- (“investment grade”) with stable outlook. Both Standard & Poor’s and Fitch have a long-term BBB- (“investment grade”) rating on Ericsson with stable outlook.

Research and development, patents and licensing

In 2020, R&D expenses amounted to SEK –39.7 (–38.8) billion. R&D expenses increased by SEK 0.8 billion when excluding

restructuring charges of SEK –0.4 (–0.3) billion and the net effect of capitalized and amortized development expenses of SEK 0.2 (0.3) billion. The number of R&D resources increased to 26,169 (25,100) and the number of patents continued to increase and amounted to more than 57,000 (54,000) granted patents by end of 2020.

Seasonality

The Company’s sales, income and cash flow from operations vary between quarters, and are generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators.

Most recent three-year average seasonality

 

     First
quarter
    Second
quarter
    Third
quarter
    Fourth
quarter
 

Sequential change, sales

     –24     13     5     19

Share of annual sales

     21     24     25     30

Off-balance sheet arrangements

There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated material effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.

Capital expenditures

For 2020, capital expenditure was SEK 4.5 (5.1) billion, representing 1.9% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

Annual capital expenditures are normally around 2% of sales. This corresponds to the needs for keeping and maintaining the current capacity level. The Board of Directors reviews the Company’s investment plans and proposals. As of December 31, 2020, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capital expenditures 2018–2020

 

SEK billion

   2020     2019     2018  

Capital expenditures

     4.5       5.1       4.0  

Of which in Sweden

     1.9       2.0       1.3  

Share of annual sales

     1.9     2.3     1.9

Capitalized development expenses

Capitalized development expenses reduced to SEK –0.8 (–1.5) billion due to 5G development projects. The net effect on operating income of capitalized and amortized development expenses was SEK 0.2 (0.3) billion.

 


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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

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Business results – Segments

 

 

Networks

Networks represented 71% (68%) of Group net sales in 2020. The segment offers a multi-technology capable Radio Access Network (RAN) solution for all spectrum network bands, including integrated high-performing hardware and software. The offering also includes a transport portfolio through own solutions and partnering, an integrated antenna solution and a complete service portfolio covering network deployment and support.

Net sales

Reported sales increased by 7% in 2020 to SEK 166.0 (155.0) billion. Growth was primarily due to increased hardware deliveries following the increased market footprint. Sales adjusted for comparable units and currency increased by 10%. From a geographical perspective growth was primarily driven by increased sales in North East Asia, North America and Europe. Sales declined in Latin America and Africa, due to the macroeconomic situation on the back of COVID–19.

The Networks share of IPR licensing revenues was SEK 8.2 (7.9) billion.

Gross margin

Reported gross margin increased to 43.6% (41.8%). Gross margin excluding restructuring charges increased to 43.8% (41.8%) as a result of the continued strengthening of operational leverage.

Operating income and margin

Reported operating income increased to SEK 30.9 (24.8) billion, with an increase in operating margin to 18.6% (16.0%). Operating margin excluding restructuring charges increased to 19.0% (16.0%) driven by sales growth and improved gross margin. Operating expenses increased by SEK –1.7 billion to SEK –41.9 billion due to higher R&D investments in 5G and in a broader portfolio of antenna and site solutions as well as an increase in restructuring charges.

Impairment losses on trade receivables impacted operating expenses by SEK 0.2 (–0.1) billion. Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK 0.3 (1.1) billion.

 

 

Digital Services

Digital Services represented 16% (18%) of Group net sales in 2020. The segment provides software-based solutions for business support (BSS), operational support (OSS), communication services, core networks, and cloud infrastructure. The focus is on cloud native and automation solutions supporting our customers’ 4G and growing 5G consumer and enterprise business.

Net sales

Reported sales decreased by –6% in 2020 to SEK 37.3 (39.9) billion. Sales adjusted for comparable units and currency decreased by –3%, mainly impacted by a sales decline in the legacy portfolio, primarily in hardware. Sales grew in South East Asia, Oceania and India and in North East Asia, while sales in the remaining three market areas declined.

The growth portfolio had good business momentum and sales grew by 6% in 2020. Important 5G Core contracts have been signed with several tier–1 operators and are expected to generate revenues in 2021 and beyond.

The Digital Services share of IPR licensing revenues was SEK 1.8 (1.7) billion.

Gross margin

Reported gross margin increased to 41.9% (37.2%) supported by an increased share of software sales. The impact of critical contracts was limited in 2020.

Operating income (loss)

Reported operating income (loss) was SEK –2.2 (–4.0) billion. Operating income (loss) excluding restructuring charges was SEK –2.2 (–3.4) billion. The improvement was driven by higher gross margin and lower operating expenses. Operating expenses declined by SEK 1.1 billion of which SEK 0.4 billion was related to lower restructuring charges. The net impact of capitalized and amortized development expenses was SEK –0.1 (–0.9) billion. R&D expenses remained at the same level as in 2019, with a shift of investments towards the cloud-native 5G portfolio.

 


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Ericsson Annual Report on Form 20-F 2020

 

 

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Breakdown of operating income in segment

Emerging Business and Other

 

SEK billion

   Full year
2020
     Full year
2019
 

Segment operating income

     –2.4        –12.5  

of which Emerging Business, iconective, media businesses, Cradlepoint and common costs

     –2.6        –2.4  

of which SEC and DOJ settlement costs

     0.3        –10.7  

of which costs for ST- Ericsson wind- down

     –0.1        –0.3  

of which a refund of social security costs in Sweden

     0.0        0.9  

Business results – Segments, cont.

 

 

Managed Services

Managed Services represented 10% (11%) of Group net sales in 2020. The segment provides Networks and IT Managed Services, Network Design and Optimization, and Application Development and Maintenance to telecom operators.

These are delivered through the AI-driven Ericsson Operations Engine, a set of capabilities that transform operations to enhance customer experience, drive agile service creation and optimize costs in multi-vendor environments.

Net sales

Reported sales declined by –12% in 2020 to SEK 22.6 (25.6) billion. Sales adjusted for comparable units and currency decreased by –10%, mainly due to reduced variable sales in a large contract in North America, post the merger between two large operators, and transfer of a contract to an associated company. Exits of non-strategic contracts also contributed to the sales decline. Sales in Managed Services IT showed growth.

Gross margin

Reported gross margin increased to 17.8% (15.6%). Gross margin excluding restructuring charges increased to 18.9% (15.8%), mainly as a result of efficiency gains and higher variable sales, partly offset by lower sales.

Operating income

Reported operating income was SEK 1.6 (2.3) billion. Operating income excluding restructuring charges was SEK 1.8 (2.4) billion. In 2019 there was a positive effect of a reversal of a provision for impairment of trade receivables of SEK 0.7 billion. Despite the decline in sales, operating income excluding restructuring charges and the above mentioned provision reversal, increased by SEK 0.2 billion compared to previous year.

Restructuring charges amounted to SEK –0.3 (0.0) billion.

 

 

Emerging Business and Other

Segment Emerging Business and Other represented 3% (3%) of Group net sales in 2020. Ericsson supports enterprises by providing reliable and secure cellular solutions that are easy to use, adopt and scale for global and local needs.

The segment includes:

 

    Emerging Business, including IoT, iconectiv, Cradlepoint and New businesses

 

    Media businesses, including Red Bee and a 49% ownership of MediaKind.

Net sales

Reported sales decreased by –4% in 2020 to SEK 6.5 (6.8) billion. Sales in Emerging Business grew driven by the acquired Cradlepoint business and by IoT platforms. Sales adjusted for comparable units and currency decreased by –4%.

Gross margin

Reported gross margin increased to 25.6% (18.9%). Gross margin excluding restructuring charges increased to 28.0% (19.6%). The increase was driven by Emerging Business (IoT Platforms, Edge Gravity exit and Cradlepoint).

Operating income (loss)

In 2020 operating income was positively impacted by SEK 0.3 billion related to a provision release related to costs for the compliance monitor.

In 2019 operating income was impacted by costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations, a refund of earlier paid social security costs in Sweden of SEK 0.9 billion and by a cost of SEK –0.3 billion related to the wind-down of the ST-Ericsson legal structure.

Reported operating income (loss) was SEK –2.4 (–12.5) billion. Operating income (loss) excluding restructuring charges and above mentioned one-off items of SEK 0.3 (–10.1) billion was SEK –2.1 (–2.3) billion.

Media Solutions operating income (loss) excluding restructuring charges and the above mentioned provision release related to the compliance monitor was SEK –0.3 (–0.3) billion including Ericsson’s 49% share in earnings of MediaKind.

Red Bee Media’s operating income improved, despite lower sales due to COVID–19.

The exit of the Edge Gravity business in the second quarter positively contributed to profitability.

Restructuring charges amounted to SEK –0.3 (–0.1) billion.

 


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Ericsson Annual Report on Form 20-F 2020

 

 

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Business results – Market areas

North America

Sales increased driven by 5G network deployments across all major customers. Managed Services sales decreased after the merger between two operators. In Digital Services the sales increase in the growth portfolio did not fully compensate for the decline in legacy products.

Europe and Latin America

Sales decreased due to earlier decisions on Managed Services contract exits and reduced sales in Latin America due to macroeconomic conditions following COVID-19. Networks sales increased in Europe as a result of market share gains, partly offsetting the sales decline in Latin America.

Middle East and Africa

Sales decreased primarily due to macroeconomic conditions and delayed investments in Networks and Digital Services. Continued 5G deployments in the Middle East contributed positively. Managed Services sales were stable.

 

South East Asia, Oceania and India

Network sales remained flat. Growth in Managed Services was driven mainly by a new contract. Digital Services sales increased due to continued LTE investments and 5G momentum.

North East Asia

Sales increased. Strong Networks sales growth was driven by 5G deployment in Mainland China and increased business volumes in Japan, Taiwan and Hong Kong. Digital Services sales grew through 5G core network deployments.

Other

IPR licensing revenues increased to SEK 10.0 (9.6) billion, as lower volumes with one licensee were offset by new contracts.

 

 

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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

        

Corporate Governance

In accordance with the Annual Accounts Act and the Swedish Corporate Governance Code (the “Code”), a separate Corporate Governance Report, including an internal control section, has been prepared and appended to this Annual Report.

Continued compliance with the Swedish Corporate Governance Code

Ericsson is committed to complying with best-practice corporate governance standards on a global level wherever possible. For 2020, Ericsson does not report any deviations from the Code.

Business integrity

Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity. Upon recruitment, new employees are asked to acknowledge the code. The Company reviews and updates the Code of Business Ethics’ content on a regular basis and periodically runs an acknowledgment process to ensure that everyone performing work for Ericsson has read and understood it.

Board of Directors

At the Annual General Meeting, held on March 31, 2020, Ronnie Leten was re-elected Chair of the Board, and Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Börje Ekholm, Eric A. Elzvik, Kurt Jofs, Kristin S. Rinne, Helena Stjernholm and Jacob Wallenberg were re-elected members of the Board. As of March 31, 2020, Torbjörn Nyman, Kjell-Åke Soting and Roger Svensson were appointed employee representatives by the unions, with Anders Ripa, Loredana Roslund and Per Holmberg as deputies.

Management

Since 2017 Börje Ekholm is the President and CEO of the Group. The President and CEO is supported by the Group management, consisting of the Executive Team.

Ericsson has a global management system (EGMS) to ensure that Ericsson’s business is well managed and has the ability to fulfil the objectives of major stakeholders within established risk limits and with reliable internal control. The management system also aims to ensure compliance with applicable laws, listing requirements and governance codes.

Remuneration

Remuneration to the members of the Board of Directors and to Group management are reported in note G2, “Information regarding

members of the Board of Directors and the Group management.” Further information about remuneration to the President and CEO and the Executive Vice Presidents is included in the “Remuneration report” appended to this Annual Report.

Guidelines for remuneration to Group management

The Board of Directors does not propose any changes to the Guidelines for remuneration to Group management resolved by the Annual General Meeting 2020, which are intended to remain in place for four years until the Annual General Meeting of shareholders 2024. The current Guidelines are included on pages 20–24.

Long-Term Variable Compensation Program 2020 (LTV 2020) for the Executive Team

Ericsson has share-based Long-Term Variable Compensation Programs in place for the Executive Team. LTV 2020 for the Executive Team was approved by the Annual General Meeting 2020. Details of LTV 2020 are explained in note G3, “Share-based compensation.”

 

 

Material contracts

Material contractual obligations are outlined in note D4, “Contractual obligations.” These are primarily related to leases of office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations as well as the purchase of components for the Company’s own manufacturing.

The Company is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. Such provisions are not unusual for certain types of agreements, such as for example financing agreements and certain license agreements. However, considering among other things the Company’s strong financial position, the Company believes that none of the agreements currently in effect would in and of itself entail any material consequence for Ericsson due to a change in control of the Company.

 

 

Risk management

Ericsson’s Enterprise Risk Management (ERM) framework is an integrated part of the Ericsson Group Management System. The aim of the ERM framework is to strengthen the Group’s governance by integrating risk management with strategy-setting and execution. The ERM framework is designed to establish an adequate and effective management of risk, i.e. the uncertainty in achieving the strategic

objectives of the Company. The framework provides methods to identify, assess and treat the risks, and to agree on the Company’s risk appetite and risk tolerance.

Each manager is responsible for handling the risks that emerges from the respective area of responsibility. The responsibility for identified prime risks of the Company is always allocated to an Executive Team member. The Group Risk Management function is responsible for driving the ERM strategy execution and the ERM operations on Group level. The head of each group function, market area and business area, is accountable for appointing one or several risk manager(s) to drive risk management within the unit’s area of responsibility, and for overseeing the ERM in the respective unit. The Chief Financial Officer is accountable for performing oversight of ERM, and the Board of Directors and the Audit and Compliance Committee are responsible for reviewing the effectiveness and appropriateness of ERM.

For information on risks that could impact the fulfillment of objectives, and form the basis for mitigating activities, see the other sections of the Board of Directors’ report, notes A2 “Critical accounting estimates and judgments,” F4 “Interest-bearing liabilities,” F1 “Financial risk management” and the chapter Risk factors.

 

 

Sourcing and supply

Ericsson’s hardware largely consists of electronics. For manufacturing, the Company purchases customized and standardized components and services from both global, regional and local suppliers.

The Company negotiates global supply agreements with its primary suppliers. In general, Ericsson endeavours to have alternative supply sources and seeks to avoid single source supply situations.

The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies. Ericsson is focusing internal manufacturing on new product introductions and new technologies. The majority of the matured portfolio is outsourced through production partners. Ericsson has internal production sites in Estonia, China and Brazil. During 2020 a new production site has been established in the USA.

The Company requires suppliers to comply with The Ericsson Code of Conduct for Business Partners. All partners and suppliers are required to develop, implement and maintain environmentally responsible business practices, considering their identified environmental aspects and risks.

Business Partners are required to have an environmental management system and

 


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Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

        

 

to be aware of and comply with applicable environmental legislation, permits and reporting requirement. Where the requirements in the Ericsson Code of Conduct for Business Partners are higher than local standards and laws, the requirements of the Code should be applied.

Ericsson works to reduce environmental impacts and emissions in product portfolio and supply chain. The circular economy encapsulates Ericsson’s approach to environmental sustainability, where the Company continuously strives to minimize the negative impacts of its operations, and to improve the environmental and energy performance of its products to reduce societal environmental impact. Minimizing waste is key to a circular economy and high reuse and recycling rates form part of the standard requirements for the Company´s smart product design.

Ericsson has set a target for high emitting and strategic suppliers to set their own 1.5°C aligned climate targets.

 

 

Sustainability and Corporate Responsibility

Ericsson’s approach to sustainability and corporate responsibility is an integral part of the Company’s strategy and culture and is embedded across its operations to drive business transformation and create value for stakeholders.

Ericsson is committed to creating positive sustainability impacts and reducing risks to the Company and its stakeholders through its technology, solutions, operations, and the expertise of its employees.

 

 

Information security

Information security, focused on preserving the confidentiality, integrity and availability of information, is a key element in Ericsson’s operational resilience. Information security is a highly prioritized area in Ericsson supporting a changing regulatory environment, stakeholder requirements and increased government oversight. As both the value of information and the capabilities of threat actors increase, information security has become a matter of national importance globally and a key consideration in the Information and Communication Technology (ICT) sector.

Policies and directives establish the security requirements across Ericsson. Ericsson’s Product Security framework includes a

mandatory area specifically addressing regulatory requirements for security, which is applicable to all products while the Enterprise Security Framework is the applicable internal regulation for protecting the company and ensuring that security is considered throughout the entire product life cycle.

Ericsson’s Information Security Management System is globally certified to ISO/ IEC 27001. Information security is governed through Ericsson’s Group Enterprise Security Board while the Product and Technology Security Board oversees product and portfolio security. The Audit and Compliance Committee of the Board of Directors receives regular updates on cyber security.

The security frameworks address secure development, business continuity, sales and delivery of products and services, while ensuring protection of the company’s and customers’ data.

Specific security training is mandatory for all employees, with in depth training developed to build Ericsson specific security competence.

Ericsson has a Group Crisis Management Council which is responsible for the handling of major incidents or crises.

 

 

US FCPA settlement

In December 2019, Ericsson reached the resolution of the investigations conducted by the US Department of Justice (DOJ) and by the Securities and Exchange Commission (SEC) since 2015 and 2013 respectively, regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA).

As a result, Ericsson agreed to enter into a Deferred Prosecution Agreement (DPA) with the DOJ to resolve criminal charges and agreed with the SEC to the entry of a judgment to resolve civil claims related to allegations of violations of the FCPA.

As part of this resolution, Ericsson agreed to engage an independent compliance monitor for a period of three years.

In June 2020, Ericsson announced that Dr. Andreas Pohlmann of the firm Pohlmann & Company – Compliance and Governance Advisory LLP had been appointed as Ericsson’s monitor. The appointment marked the start of the three-year term of the monitorship. The monitor’s main responsibilities include reviewing Ericsson’s compliance with the terms of the settlement and evaluating the Company’s progress in implementing and operating its enhanced compliance program and accompanying controls as well as providing recommendations for improvements.

Legal proceedings

Ericsson and Samsung were not able to renew the now expired patent license agreement between the parties in a timely manner.

On December 11, 2020, Ericsson filed a lawsuit in the US District Court for the Eastern District of Texas, against Samsung, for violating contractual commitments to negotiate in good faith and to license patents on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions. In addition, Ericsson also sought to obtain a ruling by the court that it had complied with its own FRAND commitments. The lawsuit was later amended to include claims of patent infringement against Samsung.

On December 17, 2020, Samsung informed Ericsson that it had filed suit in Wuhan, China, on December 7, 2020, seeking rate setting for Ericsson’s 4G & 5G standard essential patents.

On January 1, 2021 Ericsson filed a patent infringement case in the US District Court for the Eastern District of Texas against Samsung.

On January 4, 2021, Ericsson filed a complaint at the US International Trade Commission (ITC) as well as in Dusseldorf, Mannheim, and Munich Regional Courts in Germany, the District Court of the Hague in The Netherlands, and the Enterprise Court of Brussels in Belgium asserting infringement of patents by Samsung.

On January 7, 2021, Samsung asserted patent infringement claims against Ericsson in a complaint at the US ITC as well as in counterclaims the US District Court for the Eastern District of Texas.

On January 15, 2021, Ericsson filed an additional US ITC Action and a case in the US District Court for the Eastern District of Texas against Samsung for patent infringement.

On February 4, 2021, Samsung filed additional complaints at the ITC and in the U.S. District Court for the Eastern District of Texas against Ericsson for patent infringement.

On February 15, 2021, Ericsson filed additional complaints asserting claims of patent infringement against Samsung in the Mannheim and Munich Regional Court in Germany, the District Court of the Hague in The Netherlands, the Enterprise Court of Brussels in Belgium, and the Patents Court of the United Kingdom.

On February 19, 2021, Samsung asserted patent infringement claims against Ericsson in complaints filed in the Paris First Instance Court in France, the District Court of the Hague in The Netherlands, and the Enterprise Court of Brussels in Belgium.

In the context of the various court proceedings, the parties are involved in filing and contesting various pre-trial motions and related court awards, including as to venue.

 


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Ericsson Annual Report on Form 20-F 2020

 

 

The filing of multiple lawsuits, complaints and other proceedings, when parties take legal action over a patent license agreement renewal, is standard and consequently additional lawsuits, complaints and other proceedings, may follow.

As part of its defense to a now settled patent infringement lawsuit filed by Ericsson in 2013 in the Delhi High Court against Indian handset company Micromax, Micromax filed a complaint against Ericsson with the Competition Commission of India (CCI). The CCI decided to refer the case to the Director General’s Office for an in-depth investigation. In January 2014, the CCI opened similar investigations against Ericsson based on claims made by Intex Technologies (India) Limited and, in 2015, based on a now settled claim from iBall. Ericsson has challenged CCI’s jurisdiction in these cases before the Delhi High Court and is awaiting final appellate decision by the Supreme Court of India.

In April 2019, Ericsson was informed by China’s State Administration for Market Regulation (SAMR) Anti-monopoly bureau that SAMR has initiated an investigation into Ericsson’s patent licensing practices in China. Ericsson is cooperating with the investigation, which is still in a fact-finding phase. The next steps include continued fact finding and meetings with SAMR in order to facilitate the authority’s assessments and conclusions.

In April 2018, Telefonaktiebolaget LM Ericsson, the present President and CEO and the Chief Financial Officer of Ericsson as well as three former executives were named defendants in a putative class action filed in the United States District Court for the Southern District of New York. The complaint alleged violations of United States securities laws, principally in connection with service revenues and recognition of expenses on long-term service projects. Ericsson filed motion to dismiss the complaint. On January 11, 2020 the court granted Ericsson’s motion to dismiss. The decision became final and binding on April 15, 2020.

In addition to the proceedings discussed above, the Company is, and in the future may be, involved in various other lawsuits, claims and proceedings incidental to the ordinary course of business. For information on risks e.g. relating to lawsuits, claims and proceedings, see the chapter Risk Factors.

 

 

Parent Company

Telefonaktiebolaget LM Ericsson (the Parent Company) business consists mainly of corporate management, holding company functions and internal banking activities. It also handles

customer credit management, performed on a commission basis by Ericsson Credit AB.

As of 31 December 2020 (2019) the Parent Company had 3 (3) branch offices. In total, the Group has 77 (77) branch and representative offices.

Financial information

Income after financial items was SEK 8.3 (–3.1) billion. The Parent Company had no sales in 2020 or 2019 to subsidiaries, while 36% (35%) of total purchases of goods and services were from such companies.

Major changes in the Parent Company’s financial position for the year included:

 

    Increased current and non-current receivables from subsidiaries of SEK 8.9 billion.

 

    Increased current and non-current liabilities to subsidiaries of SEK 12.5 billion.

 

    Increased dividend from subsidiaries of SEK 3.9 billion.

 

    Increased impairment of investments in subsidiaries of SEK 2.5 billion.

At the end of the year, gross cash: cash, cash equivalents, short-term investments, and interest-bearing securities non-current amounted to SEK 57.0 (56.5) billion.

At the end of the year, non-restricted equity amounted to SEK 33.9 (32.2) billion and total equity amounted to SEK 82.1 (80.4) billion.

 

 

Share information

As of December 31, 2020, the total number of shares in issue was 3,334,151,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,072,395,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The largest shareholders of the Parent Company at year-end were Investor AB with approximately 22.81% of the votes (7.68% of the shares), AB Industrivärden with 15.14% of the votes (2.61% of the shares), Svenska Handelbankens Pensionsstiftelse with 4.12% of the votes (0.7% of the shares) and Cevian Capital with 3.25% of the votes (5.45% of the shares).

In accordance with the conditions of the Long-Term Variable Compensation Program (LTV) for Ericsson employees, 13,809,287 treasury shares were distributed to employees or sold in 2020. The quotient value of these shares was SEK 5.00 per share, totaling SEK 69 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 163.5 million.

The holding of treasury stock at December 31, 2020 was 6,043,960 Class B shares. The

quotient value of these shares is SEK 5.00, totaling SEK 30 million, representing 0.2% of capital stock, and the purchase price amounts to SEK 43.9 million.

 

 

Proposed disposition of earnings

The Board of Directors proposes a dividend SEK 2.00 (1.50) per share, and that the Parent Company shall retain the remaining part of non-restricted equity. The dividend is proposed to be paid in two equal installments, SEK 1.00 per share with the record date April 1, 2021, and SEK 1.00 per share with the record date October 1, 2021.

The Class B treasury shares held by the Parent Company are not entitled to receive dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:

 

Amount to be paid to the shareholders

     SEK 6,668,303,470  

Amount to be retained by the Parent Company

     SEK 27,246,946,648  

Total non-restricted equity of the Parent Company

     SEK 33,915,250,118  

As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 31.4% (29.6%) and a net cash amount of SEK 41.9 (34.5) billion.

The Parent Company’s equity would have been SEK 0.3 billion higher if assets and liabilities had not been valued at fair value pursuant to Chapter 4, Section 14a of the Swedish Annual Accounts Act.

The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.

The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is the Board of Directors’ assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group in addition to coming years’ business plans and economic development.

 


20

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

        

Guidelines for Remuneration to Group Management approved by the Annual General Meeting of shareholders 2020

Guidelines for Remuneration to Group Management

Introduction

These Guidelines for Remuneration to Group Management (the “Guidelines”) apply to the Executive Team of Telefonaktiebolaget LM Ericsson (the “Company” or “Ericsson”), including the President and Chief Executive Officer (the “President and CEO”) (“Group Management”). These Guidelines apply to remuneration agreed and changes to previously agreed remuneration after the date of approval of the Guidelines and are intended to remain in place for four years until the Annual General Meeting of shareholders 2024. For employments outside of Sweden, due adaptations may be made to comply with mandatory local rules or established local practices. In such cases, the overall purpose of these Guidelines shall be accommodated to the largest extent possible. These Guidelines do not cover remuneration resolved by the general meeting of shareholders, such as long-term variable compensation programs (“LTV”).

Objective

These Guidelines aim to ensure alignment with the current remuneration philosophy and practices applicable for the Company’s employees based on the principles of competitiveness, fairness, transparency and performance. In particular to:

 

    attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the Ericsson strategy,

 

    encourage behavior consistent with Ericsson’s culture and core values,

 

    ensure fairness in reward by delivering total remuneration that is appropriate but not excessive, and clearly explained,

 

    have a total compensation mix of fixed pay, variable pay and benefits that is competitive where Ericsson competes for talent, and

 

    encourage variable remuneration which aligns employees with clear and relevant targets, reinforces their performance and enables flexible remuneration costs.

The Guidelines and the Company’s strategy and sustainable long-term interest

A successful implementation of the Company’s strategy and sustainable long-term interests requires that the Company can attract, retain and motivate the right talent and can offer them competitive remuneration. These Guidelines aim to allow the Company to offer the members of the Group Management attractive and competitive total remuneration. Variable

compensation covered by these guidelines shall be awarded against specific pre-defined and measurable business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either Group, Business Area or Market Area level, strategic targets, operational targets, employee engagement targets, customer satisfaction targets, sustainability and corporate responsibility targets or other lead indicator targets.

The Company operates long-term variable compensation programs for the Group Management. These have been approved by the Annual General Meeting (“AGM”) and as a result are not covered by these Guidelines. Details of Ericsson’s current remuneration policy and how we deliver on our policy and guidelines and information on previously decided long-term variable compensation programs that have not yet become due for payment, including applicable performance criteria, can be found in the Remuneration Report and in note G2, “Information regarding members of the Board of Directors, the Group management” and note G3, “Share-based compensation” in the annual report 2019.1)

Governance of remuneration to Group Management

The Board has established a Remuneration Committee (the “Committee”) to handle compensation policies and principles and matters concerning remuneration to Group Management. The Board has authorized the Committee to determine and handle certain issues in specific areas. The Board may also on occasion provide extended authorization for the Committee to determine specific matters.

The Committee is authorized to review and prepare for resolution by the Board salary and other remuneration for the President and CEO. Further, the Committee shall prepare for resolution by the Board proposals to the AGM on Guidelines for Remuneration to Group Management at least every fourth year and on LTV and similar equity arrangements.

The Committee has the mandate to resolve salary and other remuneration for the other members of Group Management except for the President and CEO, including targets for short-term variable compensation (“STV”), and payout of STV based on achievements and performance.

In order to conduct its responsibilities, the Committee considers trends in remuneration, legislative changes, disclosure rules and the general global executive remuneration environment. It reviews salary survey data, Company results and individual performance before preparing salary adjustment recommendations for the President and CEO for resolution by the Board and before approving any salary adjustments for the other members of Group

Management. In order to avoid conflict of interests, no employee is present at the Committee’s meetings when issues relating to their own remuneration are being discussed. The President and CEO is not present at Board meetings when issues relating to the President and CEO’s own remuneration are being discussed. The Committee may appoint independent expert advisors to assist and advise in its work.

The Chair of the Remuneration Committee along with the Chair of the Board work together with Ericsson’s Investor Relations team, striving to ensure that healthy contact is maintained as necessary and appropriate with shareholders regarding remuneration to Group Management.

Overview of remuneration package covered by these Guidelines

For Group Management the remuneration package may consist of fixed salary, short-term and long-term variable compensation (STV and LTV), pension and other benefits.

The table below sets out the key components of remuneration of Group Management covered by these Guidelines, including why they are used, their operation, opportunity levels and the related performance measures. In addition, the AGM has resolved and may in the future decide to implement LTV for Group Management. The ongoing share-based LTV programs resolved by the AGM have been designed to provide long-term incentives for the members of Group Management and to incentivize the Company’s performance creating long-term value. The aim is to attract, retain and motivate executives in a competitive market through performance- based share related incentives and to encourage the build-up of significant equity holdings to align the interests of the members of Group Management with those of shareholders. The vesting period under the ongoing share-based LTV programs resolved by the shareholders is three years and vesting is subject to the satisfaction of identified performance criteria. Although LTV is an important component of the remuneration of Group Management, it is not covered by these Guidelines, because these programs are separately resolved by the AGM.

 

1) 

Information for 2020 can be found in the Remuneration report and in note G2, “Information regarding members of the Board of Directors and Group management” and note G3, “Share-based compensation” in the Financial report.

 


21

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Element and purpose    Operation    Opportunity    Performance measures

Fixed salary

 

Fixed compensation paid at set times.

 

Purpose:

 

•  attract and retain the executive talent required to implement Ericsson’s strategy,

 

•  deliver part of the annual compensation in a predictable format.

  

Salaries shall normally be reviewed annually in January.

Salaries shall be set taking into account:

 

•  Ericsson’s overall business performance,

 

•  business performance of the Unit that the individual leads,

 

•  year-on-year performance of the individual,

 

•  external economic environment,

 

•  size and complexity of the position,

 

•  external market data,

 

•  pay and conditions for other employees based in locations considered to be relevant to the role.

 

When setting fixed salaries, the impact on total remuneration, including pensions and associated costs, shall be taken into consideration.

  

There is no maximum salary level; however, salary increases (as a % of existing salary) for most Group Management members would normally be in line with the external market practices, employees in relevant locations and performance of the individual.

 

There are circumstances where higher salary increases could be awarded. For example, where:

 

•  a new Group Management member has been appointed at a below-market salary, in which case larger increases may be awarded in following years, subject to strong individual performance,

 

•  the Group Management member has been promoted or has had an increase in responsibilities,

 

•  an individual’s salary has fallen significantly behind market practice.

  

This element of the package does not require achievement of any specific performance targets.

 

However, individual performance and capability shall be taken into account along with business performance when determining fixed salary levels and any salary increases.

Short-term variable

compensation (STV)

 

STV is a variable compensation plan that shall be measured and paid over a single year.

 

Purpose:

 

•  align members of Group Management with clear and relevant targets to Ericsson’s strategy and sustainable long-term interests,

 

•  provide individuals an earning opportunity for performance at flexible cost to the Company.

  

The STV shall be paid in cash every year after the Committee and, as applicable, the Board have reviewed and approved performance against targets which are normally determined at the start of each year for each member of Group Management.

 

The Board and the Committee reserve the right to:

 

•  revise any or all of the STV targets at any time,

 

•  adjust the STV targets retroactively under extraordinary circumstances,

 

•  reduce or cancel STV if Ericsson faces severe economic difficulties, for instance in circumstances as serious as no dividend being paid,

 

•  adjust STV in the event that the results of the STV targets are not a true reflection of business performance,

 

•  reduce or cancel STV for individuals either whose performance evaluation or whose documented performance feedback is below an acceptable level or who are on performance counselling.

  

Target pay-out opportunity for any financial year may be up to 150% of annual fixed salary of the individual. This shall normally be determined in line with the external market practices of the country of employment.

 

Maximum pay-out shall be up to two times the target pay-out opportunity (i.e. 300% of annual fixed salary).1) 2)

  

The STV shall be based on measures linked to the annual business plan which in itself is linked to Ericsson’s long-term strategy and sustainability.

 

Measures shall include financial targets at Group, Business Area or Market Area level (for relevant members of Group Management). Other potential measures may include strategic targets, operational targets, employee engagement targets, customer satisfaction targets, sustainability and corporate responsibility targets or other lead indicator targets.

 

A maximum of four STV targets shall be assigned to an individual in total for a financial year. Financial targets shall comprise at least 75% of the target bonus opportunity with a minimum of 40% being defined at Group level. The minimum weighting for an STV target shall be 20%.

 

Performance of all STV targets shall be tested over a one-year performance period (financial year).

 

The STV measures and targets shall be determined by the Committee for the members of Group Management other than the President and CEO.

  

Malus and clawback

 

The Board and the Committee shall have the right in their discretion to:

 

•  deny, in whole or in part, the entitlement of an individual to the STV payout in case an individual has acted in breach of Ericsson’s Code of Business Ethics,

 

•  claim repayment in whole or in part the STV paid in case an individual has acted in breach of Ericsson’s Code of Business Ethics.

 

•  to reclaim STV paid to an individual on incorrect grounds such as restatement of financial results due to incorrect financial reporting, noncompliance with a financial reporting requirement etc.

     

 

The Board has the mandate to define STV measures and targets for the President and CEO, should STV be introduced for the President and CEO.

        


22

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Element and purpose    Operation    Opportunity    Performance measures

Pension

 

Contributions paid towards retirement fund.

 

Purpose:

 

•  attract and retain the executive talent required to implement Ericsson’s strategy,

 

•  facilitate planning for retirement by way of providing competitive retirement arrangements in line with local market practices.

  

The operation of the pension plan shall follow competitive practice in the individual’s home country and may contain various supplementary plans in addition to any national system for social security.

 

Pension plans should be defined contribution plans unless the individual concerned is subject to defined benefit pension plan under mandatory collective agreement provisions or mandatory local regulations.

 

In some special circumstances where individuals cannot participate in the local pension plans of their home countries of employment:

 

•  cash equivalent to pension may be provided as a taxable benefit, or

 

•  contributions may be made to an international pension fund on behalf of the individual on a cost-neutral basis.

  

Since 2011, members of Group Management in Sweden participate in the defined contribution plan (ITP1) which applies for the wider workforce in Sweden. The pension contribution for ITP1 is capped at 30% of pensionable salary which includes fixed salary and STV paid in cash.

 

According to the local collective bargaining agreement in Sweden, the members of Group Management are also entitled to an additional pension contribution for part-time retirement for which the cap is determined during the union negotiations for all the local employees.

 

Members of Group Management employed outside of Sweden may participate in the local market competitive pension arrangements that apply in their home countries in line with what is offered to other employees in the same country.

 

In all cases the annual pension contributions shall be capped at 70% of annual fixed salary.3)

   None

Other benefits

 

Additional tangible or intangible compensation paid annually which do not fall under fixed salary, short-term and long-term variable compensation or pension.

 

Purpose:

 

•  attract and retain the executive talent required to implement Ericsson’s strategy,

 

•  deliver part of the annual compensation in a predictable format.

  

Benefits offered shall take into account the competitive practices in the individual’s country of employment and should be in line with what is offered to other senior employees in the same country and may evolve year on year.

 

Benefits may for example include company phones, company cars, medical and other insurance benefits, tax support, travel, Company gifts and any international relocation and/or commuting benefits if the individual is required to relocate and/or commute internationally to execute the requirements of the role.

  

Benefit opportunities shall be set in line with competitive market practices and shall reflect what is offered to other senior employees in the individual’s country of employment.

 

The levels of benefits provided may vary year on year depending on the cost of the provision of benefits to the Company.

 

Other benefits shall be capped at 10% of annual fixed salary for members of Group Management located in Sweden.

 

Additional benefits and allowances for members of Group Management who are commuters into Sweden or who are on long-term assignment (“LTA”) in countries other than their home countries of employment, shall be determined in line with the Company’s international mobility policy which may include (but is not limited to) commuting or relocation costs; cost of living adjustment, housing, home travel or education allowance; tax and social security equalization assistance.

   None

 

1)

For most of the current members of Group Management, the current STV target opportunity is below 50% of the annual fixed salary.

2)

At present the President & CEO does not participate in STV. The Board has the mandate to decide to include the President and CEO in STV in the future. In doing so the Board shall:

 

   

determine the STV opportunity for the President and CEO within the ranges mentioned above and in line with the external market practices of the country of employment, keeping the STV opportunity of the other members of Group Management under consideration,

 

   

reduce the LTV opportunity in relation to the STV opportunity, keeping the total target cash compensation consisting of fixed salary, STV and LTV unchanged.

Should the Board decide to introduce STV for the President and CEO, the details will be disclosed in the Remuneration Report for the relevant year.

 

3)

Since most of the current members of Group Management are currently under ITP1 coverage, their pension contributions are currently capped at 30% of pensionable salary and the additional pension contribution for part-time retirement mandated by the local collective bargaining agreement in Sweden.


23

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Alignment of short-term variable compensation with the Company’s strategy and criteria for payment

These Guidelines for Remuneration to Group Management have been developed to support alignment of Ericsson’s business strategy and long-term interests of members of Group Management with that of shareholders, in particular:

 

    The targets for the STV shall be set each year either by the Board or the Committee as appropriate for the members of the Group Management. In determining the targets, the Board and the Committee shall take into account Ericsson’s focused business strategy, which is built on technology leadership, product-led solutions and global scale, along with internal annual and long-term business plans. Therefore, all members of Group Management shall have one or more Group financial targets derived from the long-term financial targets which amount to at least 40% of the target STV opportunity. At least 75% of the target STV opportunity shall be linked to financial measures. The Board and the Committee, as applicable, may also choose to include other operational, strategic, employee engagement, customer satisfaction or sustainability and corporate responsibility or other lead indicator measures to support the delivery of the business plan. For certain roles such targets may be supplemented by targets for the relevant Business Area, Market Area or Group Function.

 

    Maximum pay-out shall be achievable for truly outstanding performance and exceptional value creation.

 

    At the end of the performance period for each STV cycle, the Board and the Committee shall assess performance versus the measures and determine the formula-based outcome using the financial information made public by the Company for the financial targets. The Board has the discretion to adjust targets and the subsequent outcome in the event that they cease to be relevant or stretching or to enhance shareholder value. Adjustments shall normally only occur in the event of a major change (e.g. an acquisition or divestment) and shall be on the basis that the new target shall be no more or less difficult to achieve.

Consideration of remuneration offered to the Company’s employees

When developing these Guidelines, the Board and the Committee have considered the total remuneration and employment conditions of the Company’s employees by reviewing the application of Ericsson’s remuneration policy for the wider employee population to ensure consistency.

There is clear alignment in the remuneration components for the members of Group Management and the Company’s employees

in the way that remuneration policy is applied as well as the methods followed in determining fixed salaries, short-term and long-term variable compensation, pension and benefits, which are to be applied broadly and consistently throughout the Company. The targets under short-term variable compensation are similar and the performance measures under long-term variable compensation program are the same for the members of Group Management and other eligible employees of the Company. However, the proportion of pay that is linked to performance is typically higher for Group Management in line with market practice.

Employment contracts and termination of employment

The members of Group Management are employed on permanent rolling contracts. The maximum mutual notice period is no more than 12 months. In case of termination by the employee, the employee has no right to severance pay.

In any case, the fixed salary paid during the notice period plus any severance pay payable will not together exceed an amount equivalent to the individual’s 24 months fixed salary.

The employee may be entitled to severance pay up until the agreed retirement age or, if a retirement age has not been agreed, until the month when the employee turns 65. In a case where the employee is entitled to severance pay from a date later than 12 months prior to retirement, the severance pay shall be reduced in proportion to the time remaining and calculated only for the time as of the date when the employee’s employment ceases (i.e. the end of the period of notice) and until the time of retirement.

Severance pay shall be reduced by 50% of the remuneration or equivalent compensation the employee receives, or has become entitled to, from any other employer or from his/her own or other activities during the period that severance is paid to the employee by the Company.

The Company shall have the right to terminate the employment contract and dismiss the employee with immediate effect, without giving any advance notice and entitlement to severance pay, if the employee commits a serious breach of his/her obligations towards the Company.

Normally disputes regarding employment agreements or any other agreements concerning the employment of the members of Group Management, the way such agreements have been arrived at, interpreted or applied, as well as any other litigation proceedings from legal relations based on such agreements, shall be settled by arbitration by three arbitrators in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. Irrespective of the outcome of any arbitral award, the Company may, in the relation between the parties, carry all fees and expenses charged by

the arbitrators and all of its own litigation costs (including attorney’s fees), except in the event the arbitration proceedings were initiated by the employee without reasonable cause.

Recruitment policy for new members of Group Management

In determining the remuneration of a new member of Group Management, the Board and the Committee shall take into consideration all relevant factors to ensure that arrangements are in the best interests of the Company and its shareholders. These factors include:

 

    The role being taken on.

 

    The level and type of remuneration opportunity received at a previous employer.

 

    The geography in which the candidate is being recruited from and whether any relocation allowance is required.

 

    The skills, experience and caliber of the candidate.

 

    The circumstances of the candidate.

 

    The current external market and salary practice.

 

    Internal relativities.

Additional arrangements

By way of exception, additional arrangements can be made when deemed appropriate and necessary to recruit or retain an individual. Such arrangement could be in the form of short-term or long-term variable compensation or fixed component and can be renewed, but each such arrangement shall be limited in time and shall not exceed a period of 36 months and twice the annual fixed salary that the individual would have received if no additional arrangements were made. In addition, if appropriate, different measures and targets may be applied to the new appointment’s incentives in the first year.

In addition, it may on a case by case basis be decided by the Board and the Committee respectively to compensate an individual for remuneration forfeited from a previous employer during recruitment. The Board and the Committee will consider on a case by case basis if all or some of the remuneration including incentives forfeited need to be ’bought-out’. If there is a buy-out of forfeited incentives, this will take into account relevant factors including the form they were granted (cash vs. shares), performance conditions attached to these awards and the time they would have vested/ paid. Generally, buy-out awards will be made on a comparable basis to those forfeited.

In the event of an internal candidate being promoted to Group Management, legacy terms and conditions may be honored, including pension and benefit entitlements and any outstanding incentive awards. If a Group Management member is appointed following a merger or acquisition with/of another company, legacy terms and conditions may also be honored for a maximum period of 36 months.

 


24

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Board of Directors’ discretions

The Board upon recommendation from the Committee may in a specific case decide to temporarily deviate from these Guidelines in whole or in part based on its full discretion in unusual circumstances such as:

 

    upon change of the President and CEO in accordance with recruitment policy for new members of Group Management,

 

    upon material changes in the Company structure, organization, ownership and business (for example takeover, acquisition, merger, demerger etc.) which may require adjustments in STV and LTV or other elements to ensure continuity of Group Management, and

 

    in any other circumstances, provided that the deviation is required to serve the long-term interests and sustainability of the Company or to assure its financial viability.

The Committee is responsible for preparing matters for resolution by the Board, and this includes matters relating to deviations from these Guidelines. Any such deviation will be disclosed in the Remuneration Report for the relevant year.

 


25

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

        

 

Board assurance

The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB and adopted by the EU, and give a fair view of the Group’s financial position and results of operations.

 

The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations. The Board of Directors’ Report for the Ericsson Group and the Parent Company

 

provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

 

 


26

 

 

  Financial report 2020 | Report of independent registered public accounting firm

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Report of independent

registered public accounting firm

To the shareholders of Telefonaktiebolaget

LM Ericsson (publ):

 

 

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Telefonaktiebolaget LM Ericsson (publ) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 25, 2021, expressed an unqualified opinion on those financial statements.

 

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting. Our responsibility

is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

 

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes

in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte AB

Stockholm, Sweden

March 25, 2021

 


27

 

 

  Financial report 2020 | Report of independent registered public accounting firm

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Report of independent

registered public accounting firm

To the shareholders of Telefonaktiebolaget

LM Ericsson (publ):

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Telefonaktiebolaget LM Ericsson (publ) and subsidiaries (the “Company”) as of December 31, 2020, the related consolidated income statement, statement of comprehensive income (loss), statement of cash flows, and statement of changes in equity, for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 25, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue recognition of significant and complex contracts - Refer to Notes B1 and B2 to the financial statements

Critical Audit Matter Description

Ericsson generates revenues from sales of hardware, software and services to its customers. Total revenue for 2020 amounted to SEK 232.4 billion. The majority of these revenues are related to multi-year framework agreements with large customers which often include discounts and incentives arrangements. The customers issue purchase orders under these framework agreements that in combination constitute the firm agreement with the customer. These arrangements may give rise to a risk of material misstatement due to the incorrect identification of performance

obligations and timing of revenue recognition for each obligation, in particular for the significant contracts that could have a material impact on the financial statements.

Ericsson conducts an assessment at contract inception to determine which promised goods and services in a customer contract are distinct and accordingly identified as performance obligations. The Company considers there to be a distinct performance obligation if the customer can benefit from the good or service either on its own or together with other resources readily available, and if the Company’s obligation to transfer the good or service is separately identifiable from other obligations in the contract.

The amount and timing of revenue recognized is determined in relation to the individual elements of the contract. Transaction prices including variable considerations, discounts and incentive agreements, are estimated at the commencement of the contract (and periodically thereafter). Judgment is used in the estimation process based on historical experience with the type of business and customer and in allocating revenue to each performance obligation by reference to their standalone selling prices.

We identified revenue recognition of significant complex contracts as a critical audit matter due to that the application of revenue recognition accounting standards is complex and it requires management to make judgements and estimates in determining the amount and timing of revenue recognized in relation to individual elements of the contracts.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included, but were not limited to the following:

 

    We tested the effectiveness of the company’s controls over revenue recognition with particular focus on the controls related to the identification of performance obligations within revenue contracts and determination of the timing of recognition for each revenue obligation including the reviews performed by the company’s central board for material and complex deals.
 

 


28

 

 

  Financial report 2020 | Report of independent registered public accounting firm

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

    We tested a sample of significant and complex contracts to assess management’s judgements and estimates related to the identification of performance obligations based on the contract terms and determination of the timing of recognition for each revenue obligation.

 

    We tested a sample of revenue transactions recorded during the year by tracing them to supporting evidence of delivery and acceptance and assessed the judgements and estimates for revenue recorded in the period by comparing it to contractual terms such as, delivery terms, transaction prices including variable considerations, discounts and incentive agreements.

Valuation of Goodwill – Refer to Note C1 to the financial statements

Critical Audit Matter Description

Goodwill is a significant asset in the consolidated balance sheet and amounts to SEK 34.9 billion as of December 31, 2020. The Company’s evaluation of the carrying value of goodwill involves the comparison of the recoverable amount of each cash generating unit to their carrying values. Ericsson’s assessment is based on a discounted cash flow using a business plan covering 5 years, which requires management to make significant estimates and assumptions regarding forecasts of future sales growth, operating income, working capital and capital expenditure requirements, as well as assumptions on discount rates. Changes in these assumptions could have a significant impact on either the recoverable amount, the amount of any impairment charge, or both.

We identified goodwill as a critical audit matter because of the significant judgments made by management to estimate the recoverable amount. The assessment of management’s assumptions regarding recoverable amount requires a high degree of auditor judgment, including an increased extent of complexity and the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included, but were not limited to the following:

 

    We tested the effectiveness of management’s controls over goodwill impairment evaluation and determination of the recoverable amount with particular focus on the controls over management’s preparation and review of assumptions for future sales growth, operating income, working capital, capital expenditure requirements and method for determining the discount rate used.

 

    We evaluated management’s ability to accurately forecast future sales growth and operating income by comparing actual results to management’s historical forecasts, the company’s historical results, external analyst reports and internal communications to management and the Board of Directors.

 

    With the assistance of our fair value specialists, we evaluated the discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.

Realization of Deferred Tax Assets — Refer to Note H1 to the financial statements

Critical Audit Matter Description

Deferred tax assets are significant to the consolidated accounts and amounts to SEK 26.3 billion as of December 31, 2020. Ericsson recognizes deferred income taxes for tax attributes and for differences between the financial statement and tax basis of assets and liabilities at enacted (or substantively enacted) statutory tax rates in effect for the years in which the deferred tax liability or asset is expected to be settled or realized. The Company only recognizes deferred tax assets in countries where they expect to be able to generate corresponding taxable income in the future to benefit from tax reductions. Future realization of deferred tax assets depends on the existence of sufficient taxable income. Sources of taxable income include future

reversals of deferred tax assets and liabilities, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its recorded deferred tax assets.

We identified management’s determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets as a critical audit matter because of the significant judgments and estimates management makes related to taxable income. This required a high degree of auditor judgment, including an increased extent of complexity and the need to involve our income tax specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included, but were not limited to the following:

 

    We tested the effectiveness of controls over deferred tax assets with particular focus on management’s preparation and review over the estimates of taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized.

 

    We evaluated management’s ability to accurately estimate taxable income by comparing actual results to management’s historical estimates, historical taxable income, external analyst reports and internal communications to management and the Board of Directors.

 

    With the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law in the different tax jurisdictions.

/s/ Deloitte AB

Stockholm, Sweden

March 25, 2021

We have served as the Company’s auditor since 2020.

 


29

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated financial statement

Consolidated income statement

 

January–December, SEK million

   Notes      2020      2019      2018  

Net sales

     B1, B2        232,390        227,216        210,838  

Cost of sales

        –138,666        –142,392        –142,638  
     

 

 

    

 

 

    

 

 

 

Gross income

        93,724        84,824        68,200  

Research and development expenses

        –39,714        –38,815        –38,909  

Selling and administrative expenses

        –26,684        –26,137        –27,519  

Impairment losses on trade receivables

     F1        118        737        –420  
     

 

 

    

 

 

    

 

 

 

Operating expenses

        –66,280        –64,215        –66,848  

Other operating income

     B4        1,161        2,350        497  

Other operating expenses

     B4        –499        –12,060        –665  

Share in earnings of joint ventures and associated companies

     B1, E3        –298        –335        58  
     

 

 

    

 

 

    

 

 

 

Operating income

     B1        27,808        10,564        1,242  

Financial income and expenses, net

     F2        –596        –1,802        –2,705  
     

 

 

    

 

 

    

 

 

 

Income after financial items (loss)

        27,212        8,762        –1,463  

Income tax

     H1        –9,589        –6,922        –4,813  
     

 

 

    

 

 

    

 

 

 

Net income (loss)

        17,623        1,840        –6,276  
     

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to:

           

Owners of the Parent Company

        17,483        2,223        –6,530  

Non-controlling interests

        140        –383        254  

Other information

           

Average number of shares, basic (million)

     H2        3,323        3,306        3,291  

Earnings (loss) per share attributable to owners of the Parent Company, basic (SEK)1)

     H2        5.26        0.67        –1.98  

Earnings (loss) per share attributable to owners of the Parent Company, diluted (SEK)1)

     H2        5.26        0.67        –1.98  

 

1)

Based on Net income (loss) attributable to owners of the Parent Company.

Consolidated statement of comprehensive income (loss)

 

January–December, SEK million

   2020      2019      2018  

Net income (loss)

     17,623        1,840        –6,276  

Other comprehensive income (loss)

        

Items that will not be reclassified to profit or loss

        

Remeasurements of defined benefits pension plans including asset ceiling

     –4,618        –6,182        –2,453  

Revaluation of borrowings due to change in credit risk

     99        –651        207  

Tax on items that will not be reclassified to profit or loss

     880        1,363        285  

Items that have been or may be reclassified to profit or loss

        

Cash flow hedge reserve

        

Gains/losses arising during the period

     136        –290        —    

Reclassification adjustments on gains/losses included in profit or loss

     281        —          —    

Translation reserves

        

Changes in translation reserves

     –5,376        1,925        2,011  

Reclassification to profit and loss

     124        54        36  

Share of other comprehensive income of JV and associated companies

     –81        131        14  

Tax on items that have been or may be reclassified to profit or loss

     –86        60        —    
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     –8,641        –3,590        100  
  

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     8,982        –1,750        –6,176  
  

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss) attributable to:

        

Owners of the Parent Company

     8,787        –1,403        –6,470  

Non-controlling interests

     195        –347        294  


30

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated balance sheet

 

SEK million

   Notes      Dec 31
2020
     Dec 31
2019
     Dec 31
2018
 

Assets

           

Non-current assets

           

Intangible assets

     C1           

Capitalized development expenses

        3,857        4,040        4,237  

Goodwill

        34,945        31,200        30,035  

Intellectual property rights, brands and other intangible assets

        4,805        2,491        3,474  

Property, plant and equipment

     C2        13,383        13,850        12,849  

Right-of-use assets

     C3        7,980        8,487        —    

Financial assets

           

Equity in joint ventures and associated companies

     E3        1,274        1,565        611  

Other investments in shares and participations

     F3        1,519        1,432        1,515  

Customer finance, non-current

     B6, F1        1,221        2,262        1,180  

Interest-bearing securities, non-current

     F1, F3        21,613        20,354        23,982  

Other financial assets, non-current

     F3        4,842        5,614        6,559  

Deferred tax assets

     H1        26,296        31,174        23,152  
     

 

 

    

 

 

    

 

 

 
            121,735      122,469      107,594  

Current assets

           

Inventories

     B5        28,097        30,863        29,255  

Contract assets

     B6, F1        11,273        12,171        13,178  

Trade receivables

     B6, F1        42,063        43,069        51,172  

Customer finance, current

     B6, F1        1,916        1,494        1,704  

Other current receivables

     B7        16,014        14,479        20,844  

Interest-bearing securities, current

     F1        6,820        6,759        6,625  

Cash and cash equivalents

     H3        43,612        45,079        38,389  
     

 

 

    

 

 

    

 

 

 
            149,795      153,914      161,167  
     

 

 

    

 

 

    

 

 

 

Total assets

        271,530        276,383        268,761  
     

 

 

    

 

 

    

 

 

 

Equity and liabilities

           

Equity

           

Capital stock

     E1        16,672        16,672        16,672  

Additional paid in capital

     E1        24,731        24,731        24,731  

Other reserves

     E1        –2,689        2,292        965  

Retained earnings

     E1        47,960        38,864        44,610  

Equity attributable to owners of the Parent Company

     E1        86,674        82,559        86,978  

Non-controlling interests

     E1        –1,497        –681        792  
     

 

 

    

 

 

    

 

 

 
            85,177      81,878      87,770  

Non-current liabilities

           

Post-employment benefits

     G1        37,353        35,817        28,720  

Provisions, non-current

     D1        2,886        2,679        5,471  

Deferred tax liabilities

     H1        1,089        1,224        670  

Borrowings, non-current

     F4        22,218        28,257        30,870  

Lease liabilities, non-current

     C3        7,104        7,595        —    

Other non-current liabilities

        1,383        2,114        4,346  
     

 

 

    

 

 

    

 

 

 
            72,033      77,686      70,077  

Current liabilities

           

Provisions, current

     D1        7,580        8,244        10,537  

Borrowings, current

     F4        7,942        9,439        2,255  

Lease liabilities, current

     C3        2,196        2,287        —    

Contract liabilities

     B6        26,440        29,041        29,348  

Trade payables

     B8        31,988        30,403        29,883  

Other current liabilities

     B9        38,174        37,405        38,891  
     

 

 

    

 

 

    

 

 

 
        114,320        116,819        110,914  
     

 

 

    

 

 

    

 

 

 

Total equity and liabilities

        271,530        276,383        268,761  
     

 

 

    

 

 

    

 

 

 


31

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated statement of cash flows

 

January–December, SEK million

   Notes      2020      2019      2018  

Operating activities

           

Net income (loss)

        17,623        1,840        –6,276  

Adjustments to reconcile net income to cash

     H3        14,915        12,226        7,830  
     

 

 

    

 

 

    

 

 

 
            32,538      14,066      1,554  

Changes in operating net assets

           

Inventories

        384        261        –4,807  

Customer finance, current and non-current

        370        –858        1,085  

Trade receivables and contract assets

        –3,185        10,995        –2,047  

Trade payables

        4,303        –372        2,436  

Provisions and post-employment benefits

        –2,669        –3,729        6,696  

Contract liabilities

        –560        –1,579        –808  

Other operating assets and liabilities, net

        –2,248        –1,911        5,233  
     

 

 

    

 

 

    

 

 

 
        –3,605        2,807        7,788  
     

 

 

    

 

 

    

 

 

 

Cash flow from operating activities

        28,933        16,873        9,342  

Investing activities

           

Investments in property, plant and equipment

     C2        –4,493        –5,118        –3,975  

Sales of property, plant and equipment

        254        744        334  

Acquisitions of subsidiaries and other operations

     H3, E2        –9,657        –1,753        –1,618  

Divestments of subsidiaries and other operations

     H3, E2        59        248        333  

Product development

     C1        –817        –1,545        –925  

Other investing activities

        801        –331        –523  

Interest-bearing securities

        –1,348        4,214        2,242  
     

 

 

    

 

 

    

 

 

 

Cash flow from investing activities

        –15,201        –3,541        –4,132  

Financing activities

           

Proceeds from issuance of borrowings

     F4        4,400        4,851        911  

Repayment of borrowings

     F4        –8,643        –4,476        –1,748  

Sale of own shares

        163        197        107  

Dividends paid

        –5,996        –4,450        –3,425  

Repayment of lease liabilities

     F4        –2,417        –2,990        —    

Other financing activities

        1        –32        78  
     

 

 

    

 

 

    

 

 

 

Cash flow from financing activities

        –12,492        –6,900        –4,077  

Effect of exchange rate changes on cash

        –2,707        258        1,372  
     

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

        –1,467        6,690        2,505  

Cash and cash equivalents, beginning of period

        45,079        38,389        35,884  
     

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

     H3        43,612        45,079        38,389  
     

 

 

    

 

 

    

 

 

 


32

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated statement of changes in equity

Equity and Other comprehensive income (loss) 2020

 

SEK million

   Capital
stock
     Additional
paid in
capital
     Other
reserves
     Retained
earnings
     Stockholders’
equity
     Non-controlling
interests
     Total
equity
 

January 1, 2020

     16,672        24,731        2,292        38,864        82,559        –681        81,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     —          —          —          17,483        17,483        140        17,623  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

                    

Items that will not be reclassified to profit or loss

                    

Remeasurements related to post-employment benefits

     —          —          —          –4,614        –4,614        –4        –4,618  

Revaluation of borrowings due to change in credit risk

     —          —          99        —          99        —          99  

Tax on items that will not be reclassified to profit or loss

     —          —          –20        899        879        1        880  

Items that have been or may be reclassified to profit or loss

                    

Cash flow hedge reserve

                    

Gains/losses arising during the period

     —          —          136        —          136        —          136  

Reclassification to profit and loss

     —          —          281        —          281        —          281  

Translation reserves 1)

                    

Changes in translation reserves

     —          —          –5,434        —          –5,434        58        –5,376  

Reclassification to profit and loss

     —          —          124        —          124        —          124  

Share of other comprehensive income of JV and associated companies

     —          —          –81        —          –81        —          –81  

Tax on items that have been or may be reclassified to profit or loss

     —          —          –86        —          –86        —          –86  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     —          —          –4,981        –3,715        –8,696        55        –8,641  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     —          —          –4,981        13,768        8,787        195        8,982  

Transactions with owners

                    

Sale of own shares

     —          —          —          163        163        —          163  

Long-term variable compensation plans

     —          —          —          150        150        —          150  

Dividends paid 2)

     —          —          —          –4,985        –4,985        –1,011        –5,996  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2020

     16,672        24,731        –2,689        47,960        86,674        –1,497        85,177  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1) 

Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SEK –3,359 million (SEK 966 million in 2019 and SEK 1,584 million in 2018), and realized gain/losses net from sold/liquidated companies, SEK 124 million (SEK 54 million in 2019 and SEK 36 million in 2018).

2) 

Dividends paid per share amounted to SEK 1.50 (SEK 1.00 in 2019 and SEK 1.00 in 2018).


33

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Equity and Other comprehensive income (loss) 2019

 

SEK million

   Capital
stock
     Additional
paid in
capital
     Other
reserves
     Retained
earnings
     Stockholders’
equity
     Non-controlling
interests
     Total
equity
 

January 1, 2019

     16,672        24,731        965        44,610        86,978        792        87,770  

Opening balance adjustment due to IFRS 16

     —          —          —          –249        –249        —          –249  

January 1, 2019, adjusted

     16,672        24,731        965        44,361        86,729        792        87,521  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     —          —          —          2,223        2,223        –383        1,840  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

                    

Items that will not be reclassified to profit or loss

                    

Remeasurements related to post-employment benefits

     —          —          —          –6,182        –6,182        —          –6,182  

Revaluation of borrowings due to change in credit risk

     —          —          –651        —          –651        —          –651  

Tax on items that will not be reclassified to profit or loss

     —          —          134        1,229        1,363        —          1,363  

Items that have been or may be reclassified to profit or loss

                    

Cash flow hedge reserve

                    

Gains/losses arising during the period

     —          —          –290        —          –290        —          –290  

Translation reserves

                    

Changes in translation reserves

     —          —          1,889        —          1,889        36        1,925  

Reclassification to profit and loss

     —          —          54        —          54        —          54  

Share of other comprehensive income of JV and associated companies

     —          —          131        —          131        —          131  

Tax on items that have been or may be reclassified to profit or loss

     —          —          60        —          60        —          60  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     —          —          1,327        –4,953        –3,626        36        –3,590  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     —          —          1,327        –2,730        –1,403        –347        –1,750  

Transactions with owners

                    

Sale of own shares

     —          —          —          197        197        —          197  

Long-term variable compensation plans

     —          —          —          377        377        —          377  

Dividends paid

     —          —          —          –3,301        –3,301        –1,149        –4,450  

Transactions with non-controlling interests

     —          —          —          –40        –40        23        –17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2019

     16,672        24,731        2,292        38,864        82,559        –681        81,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


34

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Equity and Other comprehensive income (loss) 2018

 

SEK million

   Capital
stock
     Additional
paid in
capital
     Other
reserves
     Retained
earnings
     Stockholders’
equity
     Non-controlling
interests
     Total
equity
 

January 1, 2018

     16,672        24,731        –334        55,866        96,935        636        97,571  

Opening balance adjustment due to IFRS 9

     —          —          –888        –95        –983        —          –983  

January 1, 2018, adjusted

     16,672        24,731        –1,222        55,771        95,952        636        96,588  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     —          —          —          –6,530        –6,530        254        –6,276  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

                    

Items that will not be reclassified to profit or loss

                    

Remeasurements related to post-employment benefits

     —          —          —          –2,457        –2,457        4        –2,453  

Revaluation of borrowings due to change in credit risk

     —          —          207        —          207        —          207  

Tax on items that will not be reclassified to profit or loss

     —          —          –44        330        286        –1        285  

Items that have been or may be reclassified to profit or loss

                    

Translation reserves

                    

Changes in translation reserves

     —          —          1,974        —          1,974        37        2,011  

Reclassification to profit and loss

     —          —          36        —          36        —          36  

Share of other comprehensive income of JV and associated companies

     —          —          14        —          14        —          14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     —          —          2,187        –2,127        60        40        100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     —          —          2,187        –8,657        –6,470        294        –6,176  

Transactions with owners

                    

Sale of own shares

     —          —          —          107        107        —          107  

Long-term variable compensation plans

     —          —          —          677        677        —          677  

Dividends paid

     —          —          —          –3,287        –3,287        –138        –3,425  

Transactions with non-controlling interests

     —          —          —          –1        –1        —          –1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

     16,672        24,731        965        44,610        86,978        792        87,770  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


35

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Notes to the consolidated financial statements

Section A – Basis of presentation

A1 Significant accounting policies

 

 

Basis of presentation

Introduction

The consolidated financial statements comprise Telefonaktiebolaget LM Ericsson, the Parent Company, and its subsidiaries (“the Company”) and the Company’s interests in joint ventures and associated companies. The Parent Company is domiciled in Sweden at Torshamnsgatan 21, SE-164 83 Stockholm.

The consolidated financial statements for the year ended December 31, 2020 have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and RFR 1 “Additional rules for Group Accounting,” related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering), and the Swedish Annual Accounts Act. For the financial reporting of 2020, the Company has applied IFRS as issued by the IASB (IFRS effective as per December 31, 2020). There is no difference between IFRS effective as per December 31, 2020, and IFRS as endorsed by the EU, nor is RFR 1 related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering) or the Swedish Annual Accounts Act in conflict with IFRS, for all periods presented.

The financial statements were approved by the Board of Directors on March 3, 2021. The financial statements are subject to approval by the Annual General Meeting of shareholders.

For disclosure about new standards and amendments applied as from January 1, 2020, can be found in the end of the note.

The preparations for the adoption of new standards and interpretations not adopted 2020 are disclosed at the end of this note, see subheading Other.

Basis of presentation

The financial statements are presented in millions of Swedish Krona (SEK). They are prepared on a going concern and historical cost basis, except for certain financial assets and liabilities that are stated at fair value: financial instruments classified as fair value through profit and loss (FVTPL), financial instruments classified as fair value through other comprehensive income (FVOCI) and plan assets related to defined benefit pension plans. Assets acquired under business combinations are fair valued at initial recognition. Financial information in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity with related notes are presented with two comparison years. For the consolidated balance sheet, financial information with related notes is presented with two comparison years.

Basis of consolidation and composition of the Group

The consolidated financial statements are prepared in accordance with the purchase method. Accordingly, consolidated stockholders’ equity includes equity in subsidiaries, joint ventures and associated companies earned only after their acquisition.

Subsidiaries are all companies for which Telefonaktiebolaget LM Ericsson, directly or indirectly, is the parent. To be classified as a parent, Telefonaktiebolaget LM Ericsson, directly or indirectly, must control another company which requires that the Parent Company has power over that other company, is exposed to variable returns from its involvement and has the ability to use its power over that other company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that such control ceases.

Intra-group balances and any unrealized income and expense arising from intra-group transactions are fully eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

The Company is composed of a parent company, Telefonaktiebolaget LM Ericsson, with generally fully-owned subsidiaries in many countries of the world. The largest operating subsidiaries are the fully-owned telecom vendor companies Ericsson AB, incorporated in Sweden and Ericsson Inc., incorporated in the US.

Foreign currency remeasurement and translation

Items included in the financial statements of each entity of the Company are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Swedish Krona (SEK), which is the Parent Company’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of each respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.

Changes in the fair value of monetary securities denominated in foreign currency classified as fair value through other comprehensive income (FVOCI) are allocated between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in Other Comprehensive Income (OCI).

Translation differences on monetary financial assets and liabilities are reported as part of the fair value gain or loss.

Foreign exchange effect is presented as a net item within Financial income and expenses, reported separately from other financial income and expenses items as this reflects the way the Company manages its foreign exchange risks on a net basis.

Group companies

The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet.

Period income and expenses for each income statement are translated at period average exchange rates.

All resulting net exchange differences are recognized as a separate component of Other comprehensive income (OCI).

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are accounted for in OCI. When a foreign operation is disposed of or sold, exchange differences that were recorded in OCI are recognized in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing rate.

 


36

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

The Company is continuously monitoring the economies with high inflation, the risk of hyperinflation and potential impact on the Company. There is no significant impact due to any currency translation of a hyper-inflationary economy.

 

 

Business and operations

For further disclosure, see the notes under section B

Revenue recognition

IFRS 15, “Revenue from Contracts with Customers” is a principle-based model of recognizing revenue from customer contracts. It has a five-step model that requires revenue to be recognized when control over goods and services are transferred to the customer.

The following paragraphs describes the types of contracts, when performance obligations are satisfied, and the timing of revenue recognition. They also describe the normal payment terms associated with such contracts and the resulting impact on the balance sheet over the duration of the contracts. The vast majority of Ericsson’s business is for the sale of standard products and services.

Standard products and services

Products and services are classified as standard solutions if they do not require significant installation and integration services to be delivered. Installation and integration services are generally completed within a short period of time, from the delivery of the related products. These products and services are viewed as separate distinct performance obligations. This type of customer contract is usually signed as a frame agreement and the customer issues individual purchase orders to commit to purchases of products and services over the duration of the agreement.

Revenue for standard products is recognized when control over the equipment is transferred to the customer at a point in time. This assessment shall be viewed from a customer’s perspective considering indicators such as transfer of titles and risks, customer acceptance, physical possession, and billing rights. For hardware sales, transfer of control is usually deemed to occur when the equipment arrives at the customer site and for software sales, when the licenses are made available to the customer. Software licenses may be provided to the customer at a point in time, activated or ready to be activated by the customer at a later stage, therefore revenue is recognized when customer obtains control of the software. Contractual terms vary, therefore judgment will be applied when assessing the indicators of transfer of control for both hardware and software sales. Software licenses are also sold on a when-and-if available basis or delivered to the customer network over a period of time. In such cases, the customer is billed on a subscription basis or based on usage, and revenue is recognized over time. Revenue for installation and integration services is recognized upon completion of the service. Costs incurred in delivering standard products and services are recognized as costs of sales when the related revenue is recognized in the Income statement. Costs incurred relating to performance obligations not yet fully delivered are recognized as Inventories.

Transaction prices under these contracts are usually fixed, and mostly billed upon delivery of the hardware or software, or completion of installation services. A proportion of the transaction price may be billed upon formal acceptance of the related installation services, which will result in a contract asset for the proportion of the transaction price that is not yet billed. Amounts billed are normally subject to payments terms within 60 days from invoice date. Customer finance agreements may be agreed separately with some customers where payment terms exceed 179 days.

Revenue for recurring services such as customer support and managed services is recognized as the services are delivered, generally pro-rata over time. Costs incurred in delivering recurring services are recognized as cost of sales as they are incurred. Transaction prices under these contracts are billed over time, often on a quarterly basis. Transaction price for managed services contract may include variable consideration that is estimated based on performance and prior experience with the customer. Amounts billed are normally subject to payments terms within 60 days from invoice date. Contract liabilities or receivables may arise depending on whether the quarterly billing is in advance or in arrears. Contracts for standard products and services apply to business in all segments.

Customized solution

Some products and services are sold together as part of a customized solution to the customer. This type of contract requires significant installation and integration services to be delivered within the solution, normally over a period of more than one year. These products and services are viewed together as a combined performance obligation. This type of contract is usually sold as a firm contract in which the scope of the solution and obligations of both parties are clearly defined for the duration of the contract. Customized solution does not have any alternative use to the Company as it cannot be sold to or used by other customers.

Revenue for the combined performance obligation shall be recognized over time if progress of completion can be reliably measured and enforceable right to payment exists over the duration of the contract. The progress of completion is estimated by reference to the output delivered such as achievement of contract milestones and customer acceptance. This method determines revenue milestones over the duration of the contract, and it is considered appropriate as it reflects the nature of the customized solution and how integration service is delivered in these projects. If the criteria above are not met, then all revenue shall be recognized upon the completion of the customized solution, when final acceptance is provided by the customer. Costs incurred in delivering customized solutions are recognized as costs of sales when the related revenue milestone is recognized in the Income statement. Costs incurred relating to future revenue milestones are recognized as Inventories and assessed for recoverability on a regular basis.

Transaction price under these contracts is usually a fixed fee, split into a number of progress payments or billing milestones as defined in the contract. In most cases, revenue recognized is limited to the progress payments or unconditional billing milestones over the duration of the contract, therefore no contract asset or contract liability arises on these contracts. In some contracts, revenue may be recognized in advance of billing milestones if enforceable payment rights exist at all times over the contract duration. This will result in an unbilled receivable balance until billing milestones are reached. Amounts billed are normally subject to payments terms within 60 days from invoice date. Customer finance agreements may be agreed separately with some customers where payment terms exceed 179 days.

Contract for customized solution applies to the Business Support Systems (BSS) business within the segment Digital Services.

Intellectual Property Rights (IPR)

This type of contract relates to the patent and licensing business. The Company has assessed that the nature of its IPR contracts is such that they provide customers a license with the right to access the Company intellectual properties over time, therefore revenue shall be recognized over the duration of the contract. Royalty revenue based on sales or usage is recognized when the sales and usage occur.

The transaction price on these contracts is usually structured as a royalty fee based on sales or usage over the period, measured on a quarterly basis. This results in a receivable balance if the billing is performed the following quarter after measurement. Some contracts include lump sum amounts, payable either up front at commencement or on an annual basis. This results in a contract liability balance if payment is in advance of revenue, as revenue is recognized over time. Amounts billed are normally subject to payments terms within 60 days from invoice date.

As described in note B1 “Segment Information”, revenue from IPR licensing contracts are allocated to the segments Networks and Digital Services.

Customer contract related balances

Trade receivables include amounts that have been billed in accordance with customer contract terms and amounts that the Company has an unconditional right to, with only passage of time before the amounts can be billed in accordance with the customer contract terms.

Customer finance credits arise from credit terms exceeding 179 days in the customer contract or a separate financing agreement signed with the customer. Customer finance is a class of financial assets that is managed separately from receivables. See note F1 “Financial risk management,” for further information on credit risk management of trade receivables and customer finance credits.

In accordance with IFRS 15, where significant financing is provided to the customer, revenue is adjusted to reflect the impact of the financing transaction.

 


37

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

These transactions could arise from the customer finance credits above if the contracted interest rate is below the market rate or through implied financing transactions due to payment terms of more than one year from the date of transfer of control. The Company has elected to use the practical expedient not to adjust revenue for transactions with payment terms, measured from the date of transfer of control, of one year or less.

Contract asset is unbilled sales amount relating to performance obligation that has been satisfied under customer contract but is conditional on terms other than only the passage of time before payment of the consideration is due.

Contract liability relates to amounts that are paid by or due from customers for which performance obligations are unsatisfied or partially satisfied. Advances from customers are also included in the contract liability balance.

Segment reporting

An operating segment is a component of a company whose operating results are regularly reviewed by the Company’s chief operating decision maker, (CODM), to make decisions about resources to be allocated to the segment and assess its performance. The President and the CEO is defined as the CODM function in the Company.

The segment presentation, as per each segment, is based on the Company’s accounting policies as disclosed in this note.

The Company generally has one subsidiary for each jurisdiction and within each of the subsidiaries, each financial statement item is defined and allocated to each of the different segments.

The Company’s segment disclosure about geographical areas is based on the country in which transfer of risks and rewards occur.

For further information, see note B1 “Segment information.”

Inventories

Inventories are measured at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.

Risks of obsolescence have been measured by estimating market value based on future customer demand and changes in technology and customer acceptance of new products.

A significant part of Inventories is Contract work in progress (CWIP). Recognition and derecognition of CWIP relates to the Company’s revenue recognition principles meaning that costs incurred under a customer contract are initially recognized as CWIP (see Revenue recognition policy). When the related revenue is recognized, CWIP is derecognized and is instead recognized as Cost of sales.

In note A2, “Critical accounting estimates and judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Trade payables

See accounting policies under the subheading for Financial instruments and risk management.

 

 

Long-term assets

For further disclosure, see the notes under section C

Goodwill

As from the acquisition date, goodwill acquired in a business combination is allocated to each cash-generating unit (CGU) of the Company expected to benefit from the synergies of the combination.

An annual impairment test for the CGUs to which goodwill has been allocated is performed in the fourth quarter, or when there is an indication of impairment. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs of disposal. In assessing value in use, the estimated future cash flows after tax are discounted to their present value using an after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Application of after-tax amounts in calculation, both in relation to cash flows and discount rate is applied due to that available models for calculating discount rate include a tax component. The effect of after-tax discount rate applied by the Company is not materially different from a discounting based on before-tax future cash flows and before-tax discount rates,

as required by IFRS. An impairment loss in respect of goodwill is not reversed. Write-downs of goodwill are reported under other operating expenses.

As a result of the application of IFRS 16 the impairment test has been modified to include also right-of-use assets in the carrying value but not lease liabilities.

Additional disclosure is required in relation to goodwill impairment testing: see note A2 “Critical accounting estimates and judgments” below and note C1 “Intangible assets.”

Intangible assets other than goodwill

Intangible assets other than goodwill comprise intangible assets acquired through business combinations, such as patents, customer relations, trademarks and software, as well as capitalized development expenses and separately acquired intangible assets, mainly consisting of software. At initial recognition, acquired intangible assets related to business combinations are stated at fair value and capitalized development expenses and software are stated at cost. Subsequent to initial recognition, these intangible assets are stated at initially recognized amounts less accumulated amortization and any impairment. Amortization and any impairment losses are included in Research and development expenses, which mainly consists of capitalized development expenses and technology; in Selling and administrative expenses, which mainly consists of expenses relating to customer relations and brands; and in Cost of sales.

Costs incurred for development of products to be sold, leased, or otherwise marketed or intended for internal use are capitalized as from when technological and economic feasibility has been established until the product is available for sale or use. Research and development expenses directly related to orders from customers are accounted for as a part of Cost of sales. Other research and development expenses are charged to income as incurred. Amortization of acquired intangible assets, such as patents, customer relations, trademarks, and software, is made according to the straight-line method over their estimated useful lives, not exceeding ten years.

The Company has not recognized any intangible assets with indefinite useful life other than goodwill.

Impairment tests are performed whenever there is an indication of impairment. Tests are performed in the same way as for goodwill, see above. However, intangible assets not yet available for use are tested annually.

Corporate assets have been allocated to cash-generating units in relation to each unit’s proportion of total net sales. The amount related to corporate assets is not significant. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.

In note A2, “Critical accounting estimates and judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Property, plant, and equipment

Property, plant, and equipment consist of real estate, machinery, servers and other technical assets, other equipment, tools and installation and construction in process. They are stated at cost less accumulated depreciation and any impairment losses.

Depreciation is charged to income statement, on a straight-line basis, over the estimated useful life of each component of an item of property, plant, and equipment, including buildings. Estimated useful lives are, in general, 25–50 years for real estate and 3–10 years for machinery and equipment. Depreciation and any impairment charges are included in Cost of sales, Research and development or Selling and administrative expenses.

The Company recognizes in the carrying amount of an item of property, plant, and equipment the cost of replacing a component and derecognizes the residual value of the replaced component.

Impairment testing as well as recognition or reversal of impairment of property, plant and equipment is performed in the same manner as for intangible assets other than goodwill, see description under “Intangible assets other than goodwill” above.

Gains and losses on disposals are determined by comparing the proceeds less cost to sell with the carrying amount and are recognized within Other operating income and expenses in the income statement.

 


38

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

Leases

The main types of assets leased by the Company are, in the order of materiality, real estate, IT-equipment and vehicles. Vehicles are mainly used under service contracts.

Leases when the Company is the lessee

The Company recognizes right-of-use assets and lease liabilities arising from all leases in the balance sheet, with exception of low value assets and short-term contracts. This model reflects that, at the start of a lease, the lessee always obtains the right to control an asset for a period of time and has an obligation to pay for that right. In the assessment of a lease contract the lease components are separated from non-lease components. The lease term is defined based on the contract lease term and when reasonably certain estimated extension or termination options are included.

At commencement date the lease liabilities are measured at the present value of the lease payments not paid at the commencement date, discounted using the Company’s incremental borrowing rate. The incremental borrowing rate is calculated considering interest swap rates, the creditworthiness of the entity that signs the lease and an adjustment for the asset being collateralized. Lease payments included in the liability are fixed payments, variable payments depending on an index or rate and penalties for termination of contracts.

After the commencement date, the amount of lease liabilities is measured on an amortized cost basis using the effective interest method where the lease liabilities increase related to the accrued interest and decrease due to lease payments made. In addition, the lease liability is remeasured if there is a modification, a change in the lease term or a change in the future lease payments resulting from a change in an index or rate used to determine such lease payments.

At commencement date the right-of-use assets are measured at cost, which equals the amount of the initial measurement of lease liability adjusted for any lease payments made at or before the commencement date less any lease incentives received plus any initial direct costs and restoration costs.

After commencement date the right-of-use assets are measured at cost less accumulated depreciation and impairment losses and adjusted for any remeasurements of the lease liabilities. The right-of-use asset is depreciated over the lease term straight-line. Impairment of right-of-use assets follows IAS 36. When there is impairment the asset value shall be written down to its recoverable amount.

The Company applies the recognition exemption for short-term leases and leases for which the underlying asset is of low value and recognizes the lease payments for those leases as an expense on a straight-line basis over the lease term. The interest expense on lease liabilities in the income statement is presented as a component of finance costs separate from the depreciation charges for right-of-use assets. In the statement of cash flows, cash payments related to the amortization of the lease liabilities are reported within financing activities. Interest payments, payments for short-term leases, low-value assets and variable lease expenses not included in the measurement of the lease liability are reported within operating activities. For more information regarding leasing, see note C3 “Leases.”

Leases when the Company is the lessor

Leasing contracts with the Company as lessor are classified as finance leases when the majority of risks and rewards are transferred to the lessee, and otherwise as operating leases. Under a finance lease, a receivable is recognized at an amount equal to the net investment in the lease and revenue is recognized in accordance with the revenue recognition principles. Under operating leases revenue as well as depreciation is recognized on a straight-line basis over the lease term. When the Company acts as a lessor it is mainly in relating to real estate sublease, financing and operating.

Accounting policies applied prior to 2019

Prior to 2019, IAS 17 was applied instead of IFRS 16. Comparative information has not been restated. The following accounting policies apply to periods prior to 2019.

Leasing when the company was the lessee

Leases on terms in which the Company assumed substantially all the risks and rewards of ownership were classified as finance leases. Upon initial recognition, the leased asset was measured at an amount equal to the lower of its

fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset was accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period did not exceed the lease term.

Other leases were operating leases, and the leased assets under such contracts were not recognized on the balance sheet. Costs under operating leases were recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received were recognized as an integral part of the total lease expense, over the term of the lease.

Leasing when the Company was the lessor

Leasing contracts with the Company as lessor were classified as finance leases when the majority of risks and rewards were transferred to the lessee, and otherwise as operating leases. Under a finance lease, a receivable was recognized at an amount equal to the net investment in the lease and revenue was recognized in accordance with the revenue recognition principles. Under operating leases the equipment was recorded as property, plant and equipment and revenue as well as depreciation was recognized on a straight-line basis over the lease term.

 

 

Obligations

For further disclosure, see the notes under section D

Provisions

Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. When the effect of the time value of money is material, discounting is made of estimated outflows. However, the actual outflows as a result of the obligations may differ from such estimates.

The provisions are mainly related to restructuring, customer and supplier related provisions, warranty commitments and other obligations, claims or obligations as a result of patent infringement and other litigations and customer finance guarantees.

Product warranty commitments consider probabilities of all material quality issues based on historical performance for established products and expected performance for new products, estimates of repair cost per unit, and volumes sold still under warranty up to the reporting date.

A restructuring obligation is considered to have arisen when the Company has a detailed formal plan for the restructuring (approved by management), which has been communicated in such a way that a valid expectation has been raised among those affected. Provision for restructuring is recorded when the Company can reliably estimate the liabilities relating to the obligation.

Customer contract provisions mainly consist of estimated losses on onerous contracts. For losses on customer contracts, a provision equal to the total estimated loss is recorded immediately when a loss from a contract is probable and can be estimated reliably. These contract loss estimates may include penalties under a loss contract.

Other provisions include provisions for obligations related to cash-settled share-based programs, litigations and other provisions. The Company provides for estimated future settlements related to patent infringements based on the probable outcome of each infringement. The actual outcome or actual cost of settling an individual infringement may vary from the Company’s estimate.

The Company estimates the outcome of any potential patent infringement made known to the Company through assertion and through the Company’s own monitoring of patent-related cases in the relevant legal systems. To the extent that the Company makes the judgment that an identified potential infringement will more likely than not result in an outflow of resources, the Company records a provision based on the Company’s best estimate of the expenditure required to settle with the counterpart.

In the ordinary course of business, the Company is subject to proceedings, lawsuits and other unresolved claims, including proceedings under laws and government regulations and other matters. These matters are often resolved over a long period of time. The Company regularly assesses the likelihood of any adverse judgments in or outcomes of these matters, as well as potential ranges of possible losses. Provisions are recognized when it is probable that an obligation has arisen and the amount can be reasonably estimated based on a detailed analysis of each individual issue.

 


39

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

Contingent liabilities

Certain present obligations are not recognized as provisions as it is not probable that an economic outflow will be required to settle the obligations or the amount of the obligation cannot be measured with sufficient reliability. Such obligations are reported as contingent liabilities. For further detailed information, see note D2 “Contingent liabilities.” In note A2 “Critical accounting estimates and judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

 

 

Group structure

For further disclosure, see the notes under section E

Business combinations

At the acquisition of a business, the cost of the acquisition, being the purchase price, is measured as the fair value of the assets given, and liabilities incurred or assumed at the date of exchange, including any cost related to contingent consideration. Transaction costs attributable to the acquisition are expensed as incurred. The acquisition cost is allocated to acquired assets, liabilities and contingent liabilities based upon appraisals made, including assets and liabilities that were not recognized on the acquired entity’s balance sheet, for example intangible assets such as customer relations, brands, patents and financial liabilities. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets. In acquisitions with non-controlling interests full or partial goodwill can be recognized. Final amounts are established within one year after the transaction date at the latest.

In case there is a put option for non-controlling interest in a subsidiary a corresponding financial liability is recognized.

Non-controlling interests

The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

When the Company ceases to have control, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest in an associate or financial asset. In addition, any amounts previously recognized in Other comprehensive income in respect of that entity are accounted for as if the Company had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in Other comprehensive income are reclassified to profit or loss.

At acquisition, there is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

Joint ventures and associated companies

Joint ventures and associated companies are accounted for in accordance with the equity method. Under the equity method, the investment in joint venture or associate is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. If the Company’s interest in an associated company is nil, the Company shall not, as prescribed in IFRS recognize its part of any future losses. Provisions related to obligations for such an interest shall, however, be recognized in relation to such an interest.

Investments in associated companies, i.e., when the Company has significant influence and the power to participate in the financial and operating policy decisions of the associated company but is not in control or joint control over those policies. Normally, this is the case in voting stock interest, including effective potential voting rights, which stand at least at 20% but not more than 50%.

The Company’s share of income before taxes is reported in item “Share in earnings of joint ventures and associated companies,” included in Operating income. This reflects the fact that these interests are held for operating rather than investing or financial purposes. Ericsson’s share of income taxes related

to associated companies is reported under the line item “Taxes,” in the income statement.

Unrealized gains on transactions between the Company and its joint ventures and associated companies are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Shares in earnings of joint ventures and associated companies are included in consolidated equity since they are undistributed. They are reported in retained earnings in the balance sheet.

Impairment testing as well as recognition or reversal of impairment of investments in each joint venture and associated company is performed in the same manner as for intangible assets other than goodwill. The entire carrying value of each investment, including goodwill, is tested as a single asset. See also description under “Intangible assets other than goodwill” below.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in Other comprehensive income are reclassified to profit or loss where appropriate.

In note A2, “Critical Accounting Estimates and Judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

 

 

Financial instruments and risk management

For further disclosure, see the notes under section F. Plan assets under IAS 19 are excluded from the financial risk management policy and financial instruments disclosures in section F.

Financial assets

Financial assets are recognized when the Company becomes a party to the contractual provisions of the instrument. Regular purchases and sales of financial securities are recognized on the settlement date. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Separate assets or liabilities are recognized if any rights and obligations are created or retained in the transfer.

The Company classifies its financial assets in the following categories: at amortized cost, at fair value through other comprehensive income (FVOCI), and at fair value through profit or loss (FVTPL). The classification depends on the cash flow characteristics of the asset and the business model in which it is held.

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement.

The fair values of quoted financial investments and derivatives are based on quoted market prices or rates. If official rates or market prices are not available, fair values are calculated by discounting the expected future cash flows at prevailing interest rates. Valuations of foreign exchange options and Interest Rate Guarantees (IRG) are made by using the Black-Scholes formula. Inputs to the valuations are market prices for implied volatility, foreign exchange and interest rates.

Financial assets at amortized cost

Financial assets are classified as amortized cost if the contractual terms give rise to payments that are solely payments of principal and interest on the principal amount outstanding and the financial asset is held in a business model whose objective is to hold financial assets in order to collect contractual cash flows. These assets are subsequently measured at amortized cost using the effective interest method, minus impairment allowances. Interest income and gains and losses from financial assets at amortized cost are recognized in financial income.

Financial assets at fair value through other comprehensive income (FVOCI)

Assets are classified as FVOCI if the contractual terms give rise to payments that are solely payments of principal and interest on the principal amount outstanding and the financial asset is held in a business model whose objective is

 


40

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

achieved by both collecting contractual cash flows and selling financial assets. These assets are subsequently measured at fair value with changes in fair value recognized in other comprehensive income (OCI), except for effective interest, impairment gains and losses and foreign exchange gains and losses which are recognized in the income statement. Upon derecognition, the cumulative gain or loss in OCI is reclassified to the income statement.

Financial assets at fair value through profit or loss (FVTPL)

All financial assets that are not classified as either amortized cost or FVOCI are classified as FVTPL. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near term. Derivatives are classified as held for trading, unless they are designated as hedging instruments for the purpose of hedge accounting. Assets held for trading are classified as current assets. Debt instruments classified as FVTPL, but not held for trading, are classified on the balance sheet based on their maturity date (i.e., those with a maturity longer than one year are classified as non-current). Investments in shares and participations are classified as FVTPL and classified as non-current financial assets.

Gains or losses arising from changes in the fair values of the FVTPL category (excluding derivatives and customer financing) are presented in the income statement within financial income in the period in which they arise. Gains and losses on derivatives are presented in the income statement as follows. Gains and losses on derivatives used to hedge foreign exchange risks are presented within net FX. Gains and losses on interest rate derivatives used to hedge financial assets and liabilities are presented in financial income and financial expense, respectively. Gains and losses on revaluation of customer financing are presented in the income statement as selling expenses.

Dividends on equity instruments are recognized in the income statement as part of financial income when the Company’s right to receive payments is established.

Impairment in relation to financial assets

At each balance sheet date, financial assets classified as either amortized cost or FVOCI and contract assets are assessed for impairment based on Expected Credit Losses (ECL). ECLs are the difference between all contractual cash flows that are due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at the original effective interest rate. Allowances for trade receivables and contract assets are always equal to lifetime ECL. The Company has established a provision matrix based on historical credit loss experience, which has been adjusted for current conditions and expectations of future economic conditions. The losses are recognized in the income statement. When there is no reasonable expectation of collection, the asset is written off.

Financial liabilities

Financial liabilities are recognized when the Company becomes bound to the contractual obligations of the instrument.

Financial liabilities are derecognized when they are extinguished, i.e., when the obligation specified in the contract is discharged, cancelled or expired.

Borrowings

Borrowings issued by the Parent Company are designated FVTPL because they are managed on a fair value basis. Changes in fair value are recognized in the income statement, except for changes in fair value due to changes in credit risk which are recognized in other comprehensive income.

Borrowings not issued by the Parent Company are initially recognized at fair value, net of transaction costs incurred. These borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Trade payables

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

Financial guarantees

Financial guarantee contracts are initially recognized at fair value (i.e., usually the fee received). Subsequently, these contracts are measured at the higher of:

 

    The expected credit losses.

 

    The recognized contractual fee less cumulative amortization when amortized over the guarantee period, using the straight-line-method.

Cash flow hedge accounting

The company has identified certain customer contracts where a fluctuation in the USD/SEK foreign exchange (FX) rate would significantly impact net sales and operating income recorded from the contracts. These contracts are multi-year contracts denominated in USD with highly probable payments at fixed points in time. From first quarter 2019, the Company has entered into FX forward contracts that match the terms of the foreign exchange exposure as closely as possible and designated these as hedging instruments.

At inception, the Company documents the economic relationship between the hedged item and hedging instrument. For FX hedges, the hedge ratio is usually 1:1. The Company designates changes in forward rates as the hedged risk. When applying hedge accounting, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in OCI. The gain or loss relating to an ineffective portion is recognized immediately in Financial income and expenses, net. Upon recognition of the hedged net sales, the cumulative amount in cash flow hedge reserve is released in the OCI as a reclassification adjustment and recognized in net sales.

 

 

Employee related

For further disclosure, see the notes under section G

Post-employment benefits

Pensions and other post-employment benefits are classified as either defined contribution plans or defined benefit plans. Under a defined contribution plan, the Company’s only obligation is to pay a fixed amount to a separate entity (a pension trust fund) with no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. The related actuarial and investment risks fall on the employee. The expenditures for defined contribution plans are recognized as expenses during the period when the employee provides service.

Under a defined benefit plan, it is the Company’s obligation to provide agreed benefits to current and former employees. The related actuarial and investment risks fall on the Company.

The present value of the defined benefit obligations for current and former employees is calculated using the Projected Unit Credit Method. The discount rate for each country is determined by reference to market yields on high-quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations. In countries where there is no deep market in such bonds, the market yields on government bonds are used. The calculations are based upon actuarial assumptions that are updated annually. Actuarial assumptions are the Company’s best estimate of the variables that determine the cost of providing the benefits. When using actuarial assumptions, it is possible that the actual results will differ from the estimated results or that the actuarial assumptions will change from one period to another. These differences are reported as actuarial gains and losses. They are, for example, caused by unexpectedly high or low rates of employee turnover, changed life expectancy, salary changes and changes in the discount rate. Actuarial gains and losses and gains and losses from remeasurement of plan assets are recognized in OCI in the period in which they occur. The Company’s net liability for each defined benefit plan consists of the present value of pension commitments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a net benefit to the Company, the recognized asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan, referred to as ‘asset ceiling’.

Interest cost on the defined benefit obligation and interest income on plan assets is calculated as a net interest amount by applying the discount rate to the net defined benefit liability. Current service cost relating to employee service is recognised in the profit and loss in the period. Past service cost relating to plan amendments or curtailment is recognized immediately in the period it occurs. Swedish special payroll tax is accounted for as a part of the pension cost and the pension liability respectively.

 


41

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

Payroll taxes related to actuarial gains and losses are included in determining actuarial gains and losses, reported under OCI.

In note A2, “Critical accounting estimates and judgments” further disclosure is presented in relation to key sources of estimation uncertainty.

Share-based compensation to employees and the Board of Directors

Share-based compensation is related to remuneration to employees, including key management personnel and the Board of Directors and could be settled either in shares or cash.

Under IFRS, a company shall recognize compensation costs for share-based compensation programs based on a measure of the value to the company of services received under the plans. For share-settled plans, a corresponding increase in equity shall be recognized.

As from 2017 the newly granted share-based programs are cash-settled, except for programs for the Executive Team. Those programs are share-settled.

Share-settled plans

Compensation costs are recognized during the vesting period, based on the fair value of the Ericsson share at the grant date, as well as considering performance – and market conditions. Examples of performance conditions could be revenue and profit targets while market conditions relate to the development of the Parent Company’s share price in relation to a group of reference shares.

For share-settled plans, a corresponding increase in equity shall be recognized. The reason for this IFRS accounting principle is that compensation cost for a share-settled program is a cost with no direct cash flow impact. All plans have service conditions and some of them have performance or market conditions.

For further detailed information, see note G3 “Share-based compensation.”

Cash settled plans

The total compensation expense for a cash-settled plan is equal to the payments made to the employees at the date of end of the service period. The fair value of the synthetic shares, being the cash equivalents of shares, is therefore reassessed and amended during the service period. Otherwise the accounting is similar to a share-settled plan.

For further detailed information, see note G3 “Share-based compensation.”

Compensation to the Board of Directors

Since 2008, the annual general shareholders meeting of the Parent Company has each year resolved that the Board members shall be able to choose to receive part of the Board remuneration in the form of synthetic shares. The program gives non-employee Directors elected by the General Meeting of shareholders a right to receive part of their remuneration as a future payment of an amount which corresponds to the market value of a share of class B in the Parent Company at the time of payment, as further disclosed in note G3, “Share-based compensation.” The cost for cash-settlements is measured and recognized based on the estimated costs for the program on a pro rata basis during the service period, being one year. The estimated costs are remeasured during and at the end of the service period.

 

 

Other

For further disclosure, see the notes under section H

Income taxes

Income taxes in the consolidated financial statements include both current and deferred taxes. Income taxes are reported in the income statement unless the underlying item is reported directly in equity or OCI. For those items, the related income tax is also reported directly in equity or OCI. A current tax liability or asset is recognized for the estimated taxes payable or refundable for the current year or prior years.

Deferred tax is recognized for temporary differences between the book values of assets and liabilities and their tax values and for tax loss carry-forwards. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and tax loss carry-forwards can be utilized. In the recognition of income taxes, the Company offsets current tax receivables against current tax liabilities and deferred tax assets against deferred tax liabilities in the balance

sheet, when the Company has a legal right to offset these items and the intention to do so. Deferred tax is not recognized for the following temporary differences: goodwill not deductible for tax purposes, for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and for differences related to investments in subsidiaries when it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is measured at the tax rate that is expected to be applied to the temporary differences when they reverse, based on the tax laws that have been enacted or substantively enacted by the reporting date. An adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement, unless it relates to a temporary difference earlier recognized directly in equity or OCI, in which case the adjustment is also recognized in equity or OCI. As prescribed in IFRIC 23, uncertainty over income tax treatment is considered if and when recognizing and measuring income tax items in the financial statements.

As a result of applying IFRS 16 “Leases,” the Company has not reported deferred tax on initial recognition. The exemption in IAS 12 is applied i.e. no deferred tax is reported for the initial recognition of a right-of-use asset and a lease liability. Subsequently, analysis will be made of temporary differences to determine if changes are related to initial recognition or if new temporary differences have arisen and if deferred tax should be reported.

The measurement of deferred tax assets involves judgment regarding the deductibility of costs not yet subject to taxation and estimates regarding sufficient future taxable income to enable utilization of unused tax losses in different tax jurisdictions. All deferred tax assets are subject to annual review of probable utilization.

In note A2, “Critical accounting estimates and judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Earnings per share

Basic earnings per share are calculated by dividing net income attributable to owners of the Parent Company by the weighted average number of shares outstanding (total number of shares less treasury stock) during the year.

Diluted earnings per share are calculated by dividing net income attributable to owners of the Parent Company, when appropriately adjusted by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share.

Rights to matching shares are considered dilutive when the actual fulfilment of any performance conditions as of the reporting date would give a right to ordinary shares.

Statement of cash flows

The statement of cash flows is prepared in accordance with the indirect method. Cash flows in foreign subsidiaries are translated at the average exchange rate during the period. Payments for subsidiaries acquired or divested are reported as cash flow from investing activities, net of cash and cash equivalents acquired or disposed of respectively.

Cash and cash equivalents consist of cash, bank, and interest-bearing securities that are highly liquid monetary financial instruments with a remaining maturity of three months or less at the date of acquisition.

New accounting standards and interpretations

There are no amendments of IFRS during 2020 that are estimated to have a material impact on the result and financial position of the Company, however, the IASB issued a COVID-19-Related Rent Concessions – Amendment to IFRS 16, effective from January 1, 2020 that provides practical relief to lessees in accounting for rent concessions occurring as a direct consequence of COVID-19, by introducing a practical expedient to IFRS 16. The practical expedient permits a lessee to elect not to assess whether a COVID-19 related rent concession is a lease modification. This amendment is estimated to not have a material impact on the Company’s financial statements.

A number of issued new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2020 and have not been applied in preparing these consolidated financial statements.

 


42

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A1, cont.

 

The IASB has issued the following Amendment with effective date January 1, 2021:

The IASB issued Interest Rate Benchmark Reform Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (the Phase 2 Amendments). The Phase 2 Amendments are effective for annual periods beginning on or after 1 January 2021 although early application is permitted. The practical expedient and reliefs available regarding changes to effective interest rates and hedge relationships do not apply to the Company.

To minimise the risk on transition date, the Company has assessed the impact of IBOR changes to its derivatives and non-derivatives contracts with plans to transition them to alternative reference rates or fixed rates where possible. Contractual modifications are ongoing and are expected to be concluded during 2021. Where derivative contracts with reference to LIBOR are entered into, the Company uses cleared instruments to minimise potential disruption over the transition date.

The Company is also currently assessing the need to implement operational and system changes to ensure that valuation and settlement of instruments affected by new benchmark rates can be handled within the internal reporting process. This exercise is not expected to have a significant impact on the financial reporting process.

The IASB has issued the following amendments with effective date January 1, 2022:

Amendments to “IFRS 3 Business Combinations” – Reference to the Conceptual Framework.

 

“IAS 16 Property, Plant and Equipment” – Proceeds before Intended Use, which prohibits entities deducting from the cost of an item of property, plant and equipment, any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and the costs of producing those items, in profit or loss.

Amendments to “IAS 37 Provisions, Contingent Liabilities and Contingent Assets” to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making. The amendments apply a “directly related cost approach.” The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract.

The Company has not yet finalized the evaluation of any impact on financial result or position from these amendments.

The IASB has issued the following new standard with effective date January 1, 2023:

“IFRS 17 Insurance contracts” establishes principles for the recognition, measurements, presentation and disclosure of insurance contracts.

The Company has not yet finalized the evaluation of any impact on financial result or position from IFRS 17.

 

 

A2 Critical accounting estimates and judgments

The preparation of financial statements and application of accounting standards often involve management’s judgment and the use of estimates and assumptions deemed to be reasonable at the time they are made. However, other results may be derived with different judgments or using different assumptions or estimates, and events may occur that could require a material adjustment to the carrying amount of the asset or liability affected. Examples of this could occur at change of strategy or restructuring. Judgments for accounting policies to be applied as well as estimates may also be impacted due to this. Following are the most important accounting policies subject to such judgments and the key sources of estimation uncertainty that the Company believes could have the most significant impact on the reported results and financial position.

The information in this note is grouped as per:

 

    Key sources of estimation uncertainty

 

    Judgments management has made in the process of applying the Company’s accounting policies.

Revenue recognition

Key sources of estimation uncertainty

The Company uses estimates and judgments in determining the amount and timing of revenue under IFRS 15, “Revenue from Contracts with Customers,” particularly when determining the transaction price and its allocation to performance obligations identified under the contract.

Transaction price may consist of variable elements such as discounts, performance related price and contract penalties. Transaction price, including variable considerations, is estimated at the commencement of the contract (and periodically thereafter). Judgment is used in the estimation process based on historical experience with the type of business and customer. This includes assessment of price concession based on latest available information on contract negotiations that could have retrospective impact on prices for products and services already ordered or delivered.

IFRS 15 also requires revenue to be allocated to each performance obligations by reference to their standalone selling prices. The Company considers that an adjusted market assessment approach should be used to estimate stand-alone selling prices for its products and services for the purposes of

allocating transaction price. These estimates comprised of prices set for similar customer and circumstances, adjusted to reflect appropriate profit margins for the market. Estimates are used to determine discounts that relate specifically to each performance obligations, thus impacting their stand-alone selling prices.

Judgments made in relation to accounting policies applied

Management applies judgment when assessing the customer’s ability and intention to pay in a contract. The assessment is based on the latest customer credit standing and the customer’s past payment history. This assessment may change during the contract execution, and if there is evidence of deterioration in the customer’s ability or intention to pay, then under IFRS 15 no further revenue shall be recognized until the collectability criteria is met. Conversely, this assessment may also change favorably over time, upon which revenue shall now be recognized on a contract that did not initially meet the collectability criteria.

Management also applies judgment in assessing criteria for contract combination. Master purchase agreement can cover a number of different businesses with the same customer and judgment is applied to assess if prices relating to the different businesses are highly dependent, in which case, contracts relating to such businesses shall be combined and the total transaction price allocated to each performance obligation based on estimated stand-alone selling prices. New contracts or contract amendments that cover new business scope may also be combined with existing business if there is a high dependency in prices. Contract amendments may also relate to prior performance obligations, in which case, judgment is also applied to assess if part of the transaction price shall be applied retrospectively.

Revenue for standard products shall be recognized when control over the equipment is transferred to the customer at a point in time. This assessment shall be viewed from a customer’s perspective considering indicators such as transfer of titles and risks, customer acceptance, physical possession, and billing rights. Judgment may be applied in determining whether risk and rewards have been transferred to the customer and whether the customer has accepted the products. In a sale of software license, judgment may also be applied to determine when the software is made available to the customer by considering when they can direct the use of, and obtain substantially all the benefits of, the license. Often all indicators of transfer of control are assessed together and an overall judgment formed as to when transfer of control has occurred in a customer contract.

 


43

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A2, cont.

 

Revenue for customized solutions shall be recognized over time if progress of completion can be reliably measured and enforceable right to payment exists over the duration of the contract. The progress of completion is estimated by reference to the output delivered such as achievement of contract milestones and customer acceptance. Judgment are applied when determining the appropriate revenue milestones that best reflect the progress of completion and are aligned with key acceptance stages within the contract.

Customer contract related balances

Key sources of estimation uncertainty

The Company monitors the financial stability of its customers, the environments in which they operate and historical credit losses. This is combined with expectations of future economic conditions to calculate expected credit losses (ECLs). ECLs on trade receivables and contract assets are assessed using a provision matrix based on days past due for groupings of customers that have historically had similar loss patterns. The amount of ECLs is sensitive to changes in the circumstances of our customers and the environments in which they operate as well as management’s expectations of future economic conditions. Actual credit losses may be higher or lower than expected, therefore are regularly monitored to ensure the provision matrix is updated if required. Management review of current and future conditions is based on latest observable economic updates and our internal assessment of the potential impact on our customers. Total allowances for expected credit losses as of December 31, 2020 were SEK 2.5 (3.0) billion or 5% (5%) of gross trade receivables and contract assets. For further detailed information see note F1 “Financial risk management”.

Customer financing assets are valued at fair value on an individual basis. When market pricing is not available, an internal valuation model is applied considering external credit rating, political and commercial risks and bank pricing. Regular monitoring of customer behavior is also a part of the internal assessment.

Inventory valuation

Key sources of estimation uncertainty

Inventories are valued at the lower of cost and net realizable value. Estimates are required in relation to forecasted sales volumes and inventory balances. In situations where excess inventory balances are identified, estimates of net realizable values for the excess volumes are made. Inventory allowances for estimated losses as of December 31, 2020, amounted to SEK 3.6 (3.4) billion or 11% (10%) of gross inventory. For further detailed information, see note B5 “Inventories.”

Classification in relation to companies owned by less than 100%

Judgments made in relation to accounting policies applied

Judgment in relation to classification of ownership less than 100% requires the Company to judge if the ownership shall be classified as subsidiary, joint venture, associated company or financial asset. See “Basis of consolidation and composition of the Group” as well as “Joint ventures and associated companies” under note A1 “Significant accounting policies” for a background. Financial assets refer to the ownerships that neither are subsidiaries nor JV/ associated companies.

Acquired intellectual property rights and other intangible assets, including goodwill

Key sources of estimation uncertainty

At initial recognition, future cash flows are estimated, to ensure that the initial carrying values do not exceed the expected discounted cash flows for the items of this type of assets. After initial recognition, impairment testing is performed whenever there is an indication of impairment, in addition goodwill impairment testing is performed once per year. Negative deviations in actual cash flows compared to estimated cash flows as well as new estimates that indicate lower future cash flows might result in recognition of impairment charges. Write-downs for intangible assets and goodwill amounted to SEK –0.1 (0.0) billion for 2020.

At December 31, 2020, the amount of acquired intellectual property rights and other intangible assets amounted to SEK 39.8 (33.7) billion, including goodwill of SEK 34.9 (31.2) billion.

For further discussion on goodwill, see note A1 “Significant accounting policies.” Estimates related to acquired intangible assets are based on similar assumptions and risks as for goodwill. For more information, see note C1 “Intangible assets.”

Judgments made in relation to accounting policies applied

At initial recognition and subsequent remeasurement, management judgments are made, both for key assumptions and regarding impairment indicators. In the purchase price allocation made for each acquisition, the purchase price is assigned to the identifiable assets, liabilities and contingent liabilities based on fair values for these assets. Any remaining excess value is reported as goodwill.

This allocation requires management judgment as well as the definition of cash-generating units for impairment testing purposes. Other judgments might result in significantly different results and financial position in the future.

Leases

Key sources of estimation uncertainty

At initial recognition and subsequent remeasurement, management estimates are made for the term applied in a lease contract. The outcome of these estimates may turn out not to match the actual outcome of the lease and may have an adverse effect on the right-of-use assets. For more information, see note C3 “Leases.”

Judgments made in relation to accounting policies applied

Lease contracts may give the lessee the right to shorten or extend a contract. Under such contracts management judgement of the lease term is required. The Group estimates its incremental borrowing rate to measure lease liabilities at the present value of lease payments as the interest rate implicit in the lease is not readily determinable. An incremental borrowing rate is used in discounting of the lease liabilities and requires judgement to reflect the rate of interest that would have to be paid to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. This estimated rate determines the discounting of lease liabilities and right-of use assets recognized in the statement of financial position. As well as the split between interest expense and depreciation recognized in the income statement over the lease term.

Provisions

Key sources of estimation uncertainty

Provisions are mainly related to estimates for onerous contracts with customers and suppliers. Onerous customer contract provision includes estimate of costs to be incurred based on the latest conditions and progress on the contract. Assumptions on the probable outcomes of revenue and costs, which may include costs of potential compensation or penalties on exit, are revised regularly based on latest available information and the provision remeasured accordingly. Other sources for estimation uncertainty are restructuring program execution, patent and other litigations. As commented above in the initial part of this note the amounts may come to differ due to future reassessments and outcomes.

At December 31, 2020, provisions amounted to SEK 10.5 (10.9) billion. For further detailed information, see note D1 “Provisions.”

Judgments made in relation to accounting policies applied

Whether a present obligation is probable or not requires judgment. The nature and type of risks for these provisions differ and management’s judgment is applied regarding the nature and extent of obligations in deciding if an outflow of resources is probable or not.

Supplier payments program

Judgments made in relation to accounting policies applied

With the aim of increasing working capital efficiency, Ericsson continuously renegotiates payment days with suppliers. The negotiations with suppliers for payment days is an integral part of the procurement activities. Some

 


44

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note A2, cont.

 

suppliers sell their Ericsson receivables to banks and Ericsson can if requested introduce a bank interested in purchasing such receivables. Ericsson does not pay or receive a fee, nor provide additional security under the program. This arrangement does not lead to any significant change in the nature or function of Ericsson’s liabilities because the supplier invoices are considered part of working capital used in Ericsson’s normal operating cycle. The maximum credit period agreed with any supplier does not exceed six months. Therefore, these liabilities remain classified as trade payables with separate disclosure in the notes, see note B8 “Trade payables.”

Contingent liabilities

Key sources of estimation uncertainty

As disclosed under ‘Provisions’ there are uncertainties in the estimated amounts. The same type of uncertainty exists for contingent liabilities. Given that there are a number of potential obligations, for example relating to ongoing litigation, a contingent liability may arise and/or expense may have to be recognized at a later stage.

Judgments made in relation to accounting policies applied

As disclosed under note A1, “Significant accounting policies” a potential obligation that is not likely to result in an economic outflow is classified as a contingent liability, with no impact on the Company’s financial statements. However, should an obligation in a later period be deemed to be probable, then a provision shall be recognized, impacting the financial statements.

Foreign exchange risks

Key sources of estimation uncertainty

Foreign exchange risk impacts the financial results of the Company, see further disclosure in note F1 “Financial risk management,” under Foreign exchange risk.

Pensions and other post-employment benefits

Key sources of estimation uncertainty

Accounting for the costs of defined benefit pension plans and other applicable post-employment benefits is based on actuarial valuations, relying on key estimates for discount rates, future salary increases, employee turnover rates and mortality tables. The discount rate assumptions are based on rates for high-quality fixed-income investments with durations as close as possible to the Company’s pension plans. In countries where there is not a deep market in high-quality corporate bonds, the market yields on government bonds shall be applied. Judgment is applied in determining the deepness of the high-quality corporate bond market in each country. The impact of applying an alternative discount rate based on Swedish covered bonds is disclosed in note G1, “Post-employment benefits.” At December 31, 2020, defined benefit obligations for pensions and other post-employment benefits amounted to SEK 108.2 (102.4) billion and fair value of plan assets to SEK 73.6 (69.7) billion. For more information on estimates and assumptions, see note G1 “Post-employment benefits.”

Deferred taxes

Key sources of estimation uncertainty

Deferred tax assets and liabilities are recognized for temporary differences and for tax loss carry-forwards. Deferred tax is recognized net of valuation allowances. The valuation of temporary differences and tax loss carry-forwards is based on management’s estimates of future taxable profits in different tax jurisdictions against which the temporary differences and loss carry-forwards may be utilized. These estimates are primarily based on business plans for the Company´s estimated outcome of deductibility in relation to larger provisions. As prescribed in IFRIC 23 estimates are made in relation to uncertain tax positions in a limited number of countries. Estimates are made for any expected changes in tax legislation with a potential material impact.

The largest amounts of tax loss carry-forwards are reported in Sweden, with an indefinite period of utilization (i.e. with no expiry date), except for withholding taxes that expire after five years. For further information, see note H1 “Taxes.”

At December 31, 2020, the value of deferred tax assets amounted to SEK 26.3 (31.2) billion. The deferred tax assets related to loss carry-forwards are reported as non-current assets.

Accounting for income tax, value added tax, and other taxes

Key sources of estimation uncertainty

Accounting for these items is based upon evaluation of income, value added and other tax rules in all jurisdictions where the Company performs activities. The total complexity of rules related to taxes and the accounting for these require management’s involvement in judgments regarding classification of transactions and in estimates of probable outcomes of claimed deductions and/or disputes.

COVID-19 impacts on the financial statements

The COVID-19 pandemic has impacted certain lines within our financial statements. Fiscal stimulus provided by governments and expansional central banks policies worldwide have reduced government bond yields and reversed the significant negative movement in the capital and equity markets in the first quarter 2020. The economic conditions improved in subsequent quarters in 2020 although the Company continues to monitor the effect of the pandemic on key items within the financial statements and provide additional disclosures where necessary.

Comments on areas of financial statements affected are in the following notes: C1 “Intangible assets”, E1 “Equity,” F1 “Financial Risk Management,” F4 “Interest-bearing liabilities,” G1 “Post-employment benefits” and H1 “Taxes.”

 


45

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

Section B – Business and operations

B1 Segment information

Operating segments

When determining Ericsson’s operating segments, consideration has been given to the financial reporting reviewed by the Chief Operating Decision Maker (CODM). Markets and what type of customers the products and services aim to attract has been considered, as well as the distribution channels they are sold through. Commonality regarding technology, research and development has also been taken into account. To best reflect the business focus and to facilitate comparability with peers, four operating segments are reported;

 

    Networks

 

    Digital Services

 

    Managed Services

 

    Emerging Business and Other.

Segment Networks support all radio-access technologies and offer hardware, software and related services for both radio access and transport. The product-related services comprise design, tuning, network rollout and customer support. 82% (82% in 2019 and 82% in 2018) of the IPR licensing revenues are reported as part of segment Networks.

Segment Digital Services includes products and services for operators in the areas of BSS, OSS, Cloud Core, Cloud Communication and Cloud infrastructure. It also includes consulting, learning and testing services. 18% (18% in 2019 and 18% in 2018) of the IPR licensing revenues are reported as part of segment Digital Services.

Segment Managed Services provides Networks and IT Managed Services, Network design and Optimization, and Application Development and Maintenance to operators.

Segment Emerging Business and Other includes:

 

    Emerging Business, including IoT, iconectiv, Cradlepoint and New businesses

 

    Media businesses, including Red Bee Media and a 49% ownership of MediaKind.

Market areas

The market areas are the Company’s primary sales channel with the responsibility to sell and deliver customer solutions.

The Company operates worldwide and reports its operations divided into five geographical market areas:

 

    Europe and Latin America

 

    Middle East and Africa

 

    North America

 

    North East Asia

 

    South East Asia, Oceania and India.

In addition, IPR licensing revenues and the majority of segment Emerging Business and Other are externally reported as market area Other.

Major customers

The Company derives most of its sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 500 customers, mainly consisting of network operators, the ten largest customers accounted for 50% (49% in 2019 and 48% in 2018) of net sales. The largest customer accounted for approximately 13% (10% in 2019 and 9% in 2018) and the second largest customer accounted for 10% (8% in 2019 and 8% in 2018) of net sales in 2020. These customers were reported under segment Networks, Digital Services and Managed Services.

 

 

Operating segments 2020

 

     Networks     Digital
Services
    Managed
Services
    Emerging
Business and
Other
    Total
Segments
    Group  

Segment sales

     165,978       37,324       22,600       6,488       232,390       232,390  

Net sales

     165,978       37,324       22,600       6,488       232,390       232,390  

Gross income

     72,413       15,637       4,012       1,662       93,724       93,724  

Gross margin (%)

     43.6     41.9     17.8     25.6     40.3     40.3

Operating income (loss)

     30,851       –2,206       1,563       –2,400       27,808       27,808  

Operating margin (%)

     18.6     –5.9     6.9     –37.0     12.0     12.0

Financial income and expenses, net

               –596  
            

 

 

 

Income after financial items

               27,212  

Income tax

               –9,589  
            

 

 

 

Net income

               17,623  
            

 

 

 

Other segment items

            

Share in earnings of JV and associated companies

     37       28       5       –368       –298       –298  

Amortizations

     –775       –607       –5       –602       –1,989       –1,989  

Depreciations

     –3,764       –1,252       –386       –587       –5,989       –5,989  

Impairment losses

     –494       –119       –25       –58       –696       –696  

Restructuring expenses

     –746       –19       –258       –283       –1,306       –1,306  

Gains/losses on sale of investments and operations

     –129       12       5       –29       –141       –141  


46

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note B1, cont.

 

Operating segments 2019

 

     Networks     Digital
Services
    Managed
Services
    Emerging
Business and
Other
    Total
Segments
    Group  

Segment sales

     155,009       39,857       25,565       6,785       227,216       227,216  

Net sales

     155,009       39,857       25,565       6,785       227,216       227,216  

Gross income

     64,717       14,836       3,990       1,281       84,824       84,824  

Gross margin (%)

     41.8     37.2     15.6     18.9     37.3     37.3

Operating income (loss)

     24,767       –4,027       2,309       –12,485       10,564       10,564  

Operating margin (%) 1)

     16.0     –10.1     9.0     –184.0     4.6     4.6

Financial income and expenses, net

               –1,802  
            

 

 

 

Income after financial items

               8,762  

Income tax

               –6,922  
            

 

 

 

Net income

               1,840  
            

 

 

 

Other segment items

            

Share in earnings of JV and associated companies

     26       41       3       –405       –335       –335  

Amortizations

     –517       –1,413       –5       –603       –2,538       –2,538  

Depreciations

     –3,604       –1,478       –413       –566       –6,061       –6,061  

Impairment losses

     –295       –128       –24       –43       –490       –490  

Restructuring expenses

     –68       –614       –45       –71       –798       –798  

Gains/losses on sale of investments and operations

     –225       –2       –12       936       697       697  

 

1) 

Includes costs of SEK –10.7 billion in 2019 related to the resolution of the US SEC and DOJ investigations.

Operating segments 2018

 

     Networks     Digital
Services
    Managed
Services
    Emerging
Business and
Other
    Total
Segments
    Group  

Segment sales

     138,570       38,089       25,770       8,409       210,838       210,838  

Net sales

     138,570       38,089       25,770       8,409       210,838       210,838  

Gross income

     55,153       8,318       2,886       1,843       68,200       68,200  

Gross margin (%)

     39.8     21.8     11.2     21.9     32.3     32.3

Operating income (loss)

     19,421       –13,852       1,093       –5,420       1,242       1,242  

Operating margin (%)

     14.0     –36.4     4.2     –64.5     0.6     0.6

Financial income and expenses, net

               –2,705  
            

 

 

 

Income after financial items

               –1,463  

Income tax

               –4,813  
            

 

 

 

Net income (loss)

               –6,276  
            

 

 

 

Other segment items

            

Share in earnings of JV and associated companies

     28       27       3       —         58       58  

Amortizations

     –830       –2,295       –14       –807       –3,946       –3,946  

Depreciations

     –1,717       –933       –169       –456       –3,275       –3,275  

Impairment losses

     –308       –406       –29       –354       –1,097       –1,097  

Restructuring expenses

     –1,781       –5,366       –276       –592       –8,015       –8,015  

Gains/losses on sale of investments and operations

     –132       –36       –57       —         –225       –225  

Products and Services by Segments

 

     Networks      Digital
Services
     Managed
Services
     Emerging
Business and
Other
     Total
Segment
 

2020

              

Products

     122,229        20,447        81        3,429        146,186  

Services

     43,749        16,877        22,519        3,059        86,204  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     165,978        37,324        22,600        6,488        232,390  

2019

              

Products

     109,122        21,480        11        3,553        134,166  

Services

     45,887        18,377        25,554        3,232        93,050  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     155,009        39,857        25,565        6,785        227,216  

2018

              

Products

     96,931        20,458        —          4,036        121,425  

Services

     41,639        17,631        25,770        4,373        89,413  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     138,570        38,089        25,770        8,409        210,838  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


47

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note B1, cont.

 

Market area 2020

 

                                        Non-current  
     Net sales      assets 4)  
     Networks      Digital
Services
     Managed
Services
     Emerging
Business
and Other
     Total      Total  

South East Asia, Oceania and India

     21,464        4,329        4,219        36        30,048        812  

North East Asia 3)

     27,120        5,124        831        259        33,334        2,648  

North America 2)

     62,199        7,979        3,529        68        73,775        12,749  

Europe and Latin America 1)

     33,257        11,954        10,167        367        55,745        49,895  

Middle East and Africa

     13,281        6,144        3,854        19        23,298        140  

Other 1) 2) 3) 5)

     8,657        1,794        —          5,739        16,190        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     165,978        37,324        22,600        6,488        232,390        66,244  

1) Of which in EU 5)

                 29,501        48,133  

    Of which in Sweden 5)

                 1,123        43,627  

2) Of which in the United States 5)

                 77,835        11,533  

3) Of which in China 5)

                 18,745        2,136  

 

4) 

Total non-current assets excluding financial instruments, deferred tax assets, and post-employment benefit assets.

5) 

Including IPR licensing revenue reported under Other above.

Market area 2019

 

                                        Non-current  
     Net sales      assets 4)  
     Networks      Digital
Services
     Managed
Services
     Emerging
Business
and Other
     Total      Total  

South East Asia, Oceania and India

     21,850        4,033        3,836        57        29,776        1,199  

North East Asia 3)

     20,339        4,857        1,026        178        26,400        2,881  

North America 2)

     55,808        9,646        4,673        96        70,223        11,570  

Europe and Latin America 1)

     33,884        12,571        12,149        402        59,006        45,832  

Middle East and Africa

     14,604        7,015        3,881        25        25,525        151  

Other 1) 2) 3) 5)

     8,524        1,735        —          6,027        16,286        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     155,009        39,857        25,565        6,785        227,216        61,633  

1) Of which in EU 5)

                 35,729        44,306  

    Of which in Sweden 5)

                 589        38,313  

2) Of which in the United States 5)

                 73,279        10,176  

3) Of which in China 5)

                 15,860        2,402  

 

4) 

Total non-current assets excluding financial instruments, deferred tax assets, and post-employment benefit assets.

5) 

Including IPR licensing revenue reported under Other above.

Market area 2018

 

                                        Non-current  
     Net sales      assets 4)  
     Networks      Digital
Services
     Managed
Services
     Emerging
Business
and Other
     Total      Total  

South East Asia, Oceania and India

     21,337        4,824        3,388        40        29,589        445  

North East Asia 3)

     15,915        4,849        1,465        80        22,309        1,833  

North America 2)

     46,452        8,358        3,680        96        58,586        9,397  

Europe and Latin America 1) 6)

     33,887        12,172        13,191        313        59,563        39,481  

Middle East and Africa 6)

     13,826        6,451        4,046        15        24,338        50  

Other 1) 2) 3) 5)

     7,153        1,435        —          7,865        16,453        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     138,570        38,089        25,770        8,409        210,838        51,206  

1) Of which in EU 5)

                 35,941        38,423  

    Of which in Sweden 5)

                 2,315        34,434  

2) Of which in the United States 5)

                 61,446        8,349  

3) Of which in China 5)

                 14,601        1,525  

 

4) 

Total non-current assets excluding financial instruments, deferred tax assets, and post-employment benefit assets.

5) 

Including IPR licensing revenue reported under Other above.

6) 

2018 is restated due to a change in 2019 where sales reported on Morocco is reported on market area Middle East and Africa (earlier Europe and Latin America).


48

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

 

B2 Net sales

Net sales

     2020      2019      2018  

Hardware

     96,294        86,130        76,792  

Software

     49,892        48,036        44,633  

Services

     86,204        93,050        89,413  
  

 

 

    

 

 

    

 

 

 

Net sales

     232,390        227,216        210,838  

Of which IPR licensing revenues

     9,975        9,631        7,954  

Of which export sales from Sweden

     132,269        120,822        109,969  

B3 Expenses by nature

Expenses by nature

 

     2020      2019      2018  

Goods and services

     120,102        123,488        135,554  

Employee remuneration

     74,645        72,663        67,161  

Amortizations and depreciations

     7,978        8,599        7,221  

Impairments, obsolescence allowances and revaluation

     3,082        4,106        3,470  

Inventory increase/decrease (–/+), net

     –44        –704        –2,995  

Additions to capitalized development

     –817        –1,545        –925  
  

 

 

    

 

 

    

 

 

 

Expenses charged to cost of sales and operating expenses

     204,946        206,607        209,486  
  

 

 

    

 

 

    

 

 

 

Total restructuring charges in 2020 were SEK 1.3 (0.8) billion. Restructuring charges are included in the expenses presented above.

Restructuring charges by function

 

     2020      2019      2018  

Cost of sales

     725        337        5,938  

R&D expenses

     411        344        1,293  

Selling and administrative expenses

     170        117        784  
  

 

 

    

 

 

    

 

 

 

Total restructuring charges

     1,306        798        8,015  
  

 

 

    

 

 

    

 

 

 

B4 Other operating income and expenses

Other operating income and expenses

 

     2020      2019      2018  

Other operating income

        

Gains on sales of intangible assets and PP&E

     64        115        30  

Gains on sales of investments and operations 1)

     347        1,119        105  

Other operating income

     750        1,116        362  
  

 

 

    

 

 

    

 

 

 

Total other operating income

     1,161        2,350        497  

Other operating expenses

        

Losses on sales of intangible assets and PP&E

     —          —          –17  

Losses on sales of investments and operations 1)

     –488        –422        –330  

Write-down of goodwill 2)

     —          —          –275  

Other operating expenses 3)

     –11        –11,638        –43  
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

     –499        –12,060        –665  
  

 

 

    

 

 

    

 

 

 

 

1) 

Includes divestments presented in note E2 “Business combinations.”

2) 

For more information about the write-down of goodwill, see note C1 “Intangible assets.”

3) 

Includes cost of SEK –10.7 billion in 2019 related to the resolution of the US SEC and DOJ investigations.

B5 Inventories

Inventories

     2020      2019  

Raw materials, components, consumables and manufacturing work in progress

     9,510        8,209  

Finished products

     8,709        8,742  

Contract work in progress

     9,878        13,912  
  

 

 

    

 

 

 

Inventories, net

     28,097        30,863  
  

 

 

    

 

 

 

The amount of inventories recognized as expense and included in Cost of sales was SEK 61,647 (58,249) million.

Contract work in progress consists of costs incurred to date on standard and customised solutions where the performance obligations are yet to be fully delivered. These costs will be recognized as cost of sales when the related revenue is recognized in the income statement.

Reported amounts are net of obsolescence allowances of SEK 3,627 (3,386) million.

Movements in obsolescence allowances

 

     2020      2019      2018  

Opening balance

     3,386        2,611        2,425  

Additions, net

     2,266        2,228        1,079  

Utilization

     –1,781        –1,459        –987  

Translation differences

     –244        22        94  

Balances regarding acquired/divested businesses

     —          –16        —    
  

 

 

    

 

 

    

 

 

 

Closing balance

     3,627        3,386        2,611  
  

 

 

    

 

 

    

 

 

 

B6 Customer contract related balances

Trade receivables, customer finance, contract assets and contract liabilities

 

     2020      2019  

Customer finance credits

     3,137        3,756  

Trade receivables

     42,063        43,069  

Contract assets

     11,273        12,171  

Contract liabilities

     26,440        29,041  

Total trade receivables include SEK 0 (127) million balance relating to associated companies and joint ventures.

Of the total Customer finance credits balance SEK 1,916 (1,494) million is current.

Revenue recognized in the period

 

     2020      2019  

Revenue recognized in the year relating to the opening contract liability balance

     20,563        23,461  

Revenue recognized relating to performance obligations satisfied, or partially satisfied, in prior reporting periods

     458        31  

Revenue recognized relating to performance obligations satisfied, or partially satisfied, in prior reporting periods is a net adjustment that relates to contract modifications, retrospective price adjustments, settlement and adjustments to variable consideration based on actual measurements concluded in the year.

 


49

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note B6, cont.

 

Transaction price allocated to the remaining performance obligations

 

     2020      2019  

Aggregate amount of transaction price allocated to unsatisfied, or partially unsatisfied, performance obligations

     93,934        101,474  
  

 

 

    

 

 

 

The company expects that the transaction price allocated to the remaining performance obligations will be converted into revenue in accordance with the following approximation: 80% in 2021, 15% in 2022 and remaining 5% in 2023 and beyond.

For information about credit risk and impairment of customer contract related balances, see note F1 “Financial risk management.”

B7 Other current receivables

Other current receivables

 

     2020      2019  

Prepaid expenses

     1,857        1,418  

Advance payments to suppliers

     468        412  

Derivative assets 1)

     1,510        142  

Taxes

     10,839        9,778  

Other

     1,340        2,729  
  

 

 

    

 

 

 

Total

     16,014        14,479  
  

 

 

    

 

 

 

 

1) 

See also note F1 “Financial risk management.”

 

B8 Trade payables

Trade payables

 

     2020      2019  

Trade payables to associated companies and joint ventures

     81        102  

Trade payables, excluding associated companies and joint ventures 1)

     31,907        30,301  
  

 

 

    

 

 

 

Total

     31,988        30,403  
  

 

 

    

 

 

 

 

1) 

Of the trade payable amount SEK 8.6 billion relates to supplier invoices under Ericsson’s supplier payments program.

B9 Other current liabilities

Other current liabilities

 

     2020      2019  

Accrued interest

     181        238  

Accrued expenses

     28,895        31,159  

Of which employee-related

     15,182        13,303  

Of which supplier-related

     7,823        10,084  

Of which other 1)

     5,890        7,772  

Derivative liabilities 2)

     234        996  

Other3)

     8,864        5,012  
  

 

 

    

 

 

 

Total

     38,174        37,405  
  

 

 

    

 

 

 

 

1) 

Major balance relates to accrued expenses for customer projects.

2) 

See also note F1 “Financial risk management.”

3) 

Includes items such as VAT and withholding tax payables and other payroll deductions, and liabilities for goods received where the related invoice has not yet been received.

 

Section C – Long-term assets

C1 Intangible assets

Intangible assets

 

     2020      2019  
     Capitalized
development
expenses
     Goodwill      IPR1), brands
and other
intangible
assets
     Capitalized
development
expenses
     Goodwill      IPR1), brands
and other
intangible
assets
 

Cost

                 

Opening balance

     18,681        37,847        52,912        23,719        43,294        58,101  

Acquisitions/capitalization

     817        —          396        1,545        —          4  

Balances regarding acquired/divested business 2)

     —          7,104        3,500        –2,099        –7,093        –6,049  

Sales/disposals

     –1,256        —          –48        –4,551        —          –112  

Translation differences

     –193        –3,359        –2,847        67        1,646        968  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Closing balance

     18,049        41,592        53,913        18,681        37,847        52,912  

Accumulated amortizations

                 

Opening balance

     –10,896        —          –43,018        –14,768        —          –47,277  

Amortizations

     –906        —          –1,083        –1,519        —          –1,019  

Balances regarding divested business 2)

        —          35        843        —          5,922  

Sales/disposals

     1,256        —          48        4,551        —          112  

Translation differences

     99        —          2,297        –3        —          –756  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Closing balance

     –10,447        —          –41,721        –10,896        —          –43,018  

Accumulated impairment losses

                 

Opening balance

     –3,745        –6,647        –7,403        –4,714        –13,259        –7,350  

Balances regarding divested business 2)

     —          —          —          1,005        7,292        55  

Impairment losses

     —          —          –137        –36        —          –19  

Translation differences

     —          —          153        —          –680        –89  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Closing balance

     –3,745        –6,647        –7,387        –3,745        –6,647        –7,403  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net carrying value

     3,857        34,945        4,805        4,040        31,200        2,491  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1) 

Intellectual property rights.

2) 

For more information on acquired/divested businesses, see note E2 “Business combinations.”


50

 

 

Financial report 2020 | Notes to the consolidated financial statements

 

 

Ericsson Annual Report on Form 20-F 2020

 

Note C1, cont.

 

The total goodwill for the Company is SEK 34.9 (31.2) billion and is allocated to the operating segments Networks, with SEK 24.1 (26.5) billion, Digital Services, with SEK 3.0 (3.3) billion and segment Emerging Business and Other, with SEK 7.8 (1.4) billion, of which Cradlepoint SEK 6.5 billion. Segment Managed Services does not carry goodwill. More information is disclosed in note B1 “Segment information.”

Write-down during 2020

In Networks there was an impairment write-down of SEK 0.1 billion related to the portfolio of the antenna and filter business, which is reported in line item Research and development expenses.

Write-down during 2019 and 2018

In 2019 Digital Services and Networks there was an impairment write-down of SEK 0.04 billion related to capitalized development expenses triggered by a change in the GIC program, which is reported on line item Research and development expenses. In segment Emerging Business and Other there was a write-down of SEK 0.02 billion triggered by a change in business strategy, which is reported on line item Selling and administrative expenses.

In 2018 in Digital Services there was an impairment write-down of SEK 0.3 billion related to capitalized development expenses triggered by a change in the Business Support System (BSS) strategy, which is reported on line item Research and development expenses. In segment Emerging Business and Other for the Cash Generating Unit, CGU, Edge Gravity there was a goodwill impairment write-down of SEK 0.3 billion triggered by a change in business strategy, which is reported on line item Other operating expenses. There is no remaining goodwill for this CGU.

Goodwill allocation

The goodwill allocation has not changed since last year. Goodwill from acquisitions during the year has been allocated to segments Digital Services and Emerging Business and Other, of which Cradlepoint is the main part.

Impairment tests

Each operating segment is a CGU, except for segment Emerging Business and Other which consists of five CGUs. The value in use method has been used for goodwill impairment, which means that the recoverable amounts for CGUs are established as the present value of expected future cash flows based on five-year business plans approved by management.

Estimation of future cash flows includes assumptions mainly for the following key financial parameters:

 

    Sales growth

 

    Development of operating income (based on operating margin or cost of goods sold and operating expenses relative to sales)

 

    Related development of working capital and capital expenditure requirements.

 

The assumptions regarding industry-specific market drivers and market growth are based on industry sources as input to the projections made within the Company for the development 2021–2025 for key industry parameters:

 

    By 2025, about 35 years after the introduction of digital mobile technology, it is predicted that there will be 8.6 billion mobile subscriptions (excl. Cellular IoT).

 

    The number of mobile subscriptions is estimated to grow from around 7.9 billion by the end of 2020 to around 8.6 billion by the end of 2025. Out of all mobile subscriptions, 7.3 billion will be associated with a smartphone.

 

    The number of 5G subscriptions is forecasted to reach 2.8 billion (excl. Cellular IoT) by the end of 2025.

 

    By 2025, about 36 billion connected devices are forecasted, of which over 25 billion will be related to Internet of Things, IoT. Connected IoT devices including connected cars, machines, meters, sensors, point-of-sale terminals, consumer electronics and wearables.

 

    Cellular IoT is predicted to grow from 1.7 billion devices in 2020 to 5.2 billion devices in 2025.

 

    Mobile data traffic volume is estimated to increase by around four times in the period 2020–2025. The mobile traffic is driven by smartphone users and video traffic. Smartphone traffic will grow by around four times, and mobile video traffic is forecasted to grow by around 30% annually through 2025 to account for approximately 75% of all mobile data traffic.

The assumptions are also based upon information gathered in the Company’s long-term strategy process, including assessments of new technology, the Company’s competitive position and new types of business and customers, driven by the continued integration of telecom and data.

The business plans are based on specific estimates for the forecast period, 2021–2025, using a nominal annual growth rate of 1% (1%) per year thereafter. An after-tax discount rate of 8.0% (8.1%) has been applied for the discounting of projected after-tax cash flows. The same rate has been applied for all CGUs, since there is a high degree of integration between them, except for one CGU. There are no reasonable indications arising from our sensitivity analysis that would lead to an impairment.

The discount rate for CGU Emodo within segment Emerging Business and Other has been set to 12% due to the lower maturity of the business and the corresponding higher risk involved. If the discount factor in the impairment test would have been increased by four percentage points to 16% no head room would remain. This CGU has a carrying amount of SEK 0.4 billion.

The Company’s discounting is based on after-tax future cash flows and after-tax discount rates. This discounting is not materially different from a discounting based on before-tax future cash flows and before-tax discount rates, as required by IFRS. In note A1 “Significant accounting policies,” and note A2 “Critical accounting estimates and judgments,” further disclosures are given regarding goodwill impairment testing. The assumptions for 2019 are disclosed in note C1 “Intangible assets” in the Annual Report of 2019.

The Company has considered the effect of the COVID-19 pandemic in the impairment test and currently expect no material changes to expected future cash flows which could impact recoverability of intangible assets. Risk assessment on the business plans is carried out on a regular basis and an impairment review will be performed if conditions suggest that such assets may be impaired.

 


51

 

 

Financial report 2020 | Notes to the consolidated financial statements

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