Comment regarding article in Svenska Dagbladet about Ericsson’s accounting
July 18, 2016
In an article in Svenska Dagbladet published yesterday on the newspaper’s website, it’s alleged that Ericsson’s accounting is inflated, according to the newspaper’s sources.
The company consequently wants to make the following comment:
- The claim that Ericsson in a wrongful way has reported income in its accounting is not correct
- The claim that the company has changed the definition of net cash to “embellish” the numbers is not correct
- The claim that it is “inexplicable and abnormal” for the company to tie up more capital even when the sales are decreasing is wrong.
The company’s auditors, Price Waterhouse Coopers, go through all financial statements and quarterly reports in line with the accounting standard ISRE 2410, and gives a formal Auditor’s report for the full year financial statement.
Additional details on these claims are found below, in the form of information from the company’s annual report and quarterly reports.
Ericsson’s quarterly report for the second quarter is presented on Tuesday July 19, at about 07.30.
1. The claim that Ericsson in a wrongful way has reported income in its accounting is not correct. The principle for revenue recognition is described in the company’s annual report in note C1, Significant accounting policies, p. 63 and onwards
Revenue is recognized when risks and rewards have been transferred to the customer, with reference to all significant contractual terms, when:
- The product or service has been delivered
- The revenue amount is fixed or determinable
- The customer has received and activation has been made of separately sold software
- Collection is reasonably assured
Estimations of contractual performance criteria impact the timing and amounts of revenue recognized and may therefore defer revenue recognition until the performance criteria are met. Regarding frame agreements and longer services contracts, the following applies: Distribution and/or accrual related to criteria for delivery-type contracts, ie contracts that relate to delivery, installation, integration of products and provision of related services, normally under multiple elements contracts. Under multiple elements contracts, accounting is based on that the revenue recognition criteria are applied to the separately identifiable components of the contract.
2.The claim that the company has changed the definition of net cash to “embellish” the numbers is not correct. Information from Q1-2016 report, page 24
The definition of Net Cash has been adjusted in order to more clearly represent Ericsson’s ability to meet financial obligations. Post-employment benefits will no longer be included in the calculation of Net Cash. Net Cash for prior periods has been recalculated using the new definition. The revised definition is as follows: Net Cash: Cash and cash equivalents plus short-term investments less interest-bearing liabilities (which include: non-current borrowings and current borrowings).
This definition is also more in line with how most other companies define their net cash.
We can also add that our Auditor’s report is available on page 129 in the Annual report 2015
All information to calculate the earlier definition of net cash is available in the company’s quarterly reports.
3. The claim that it is “inexplicable and abnormal” for the company to tie up more capital even when the sales are decreasing is wrong. Working capital is to a large degree impacted by the business mix where a high proportion of large projects, primarily network coverage projects, tie up more capital than for example software sales, which tie up less capital. This is also what happened in the first quarter with a business mix with a high proportion of coverage projects. Capital tied-up is a function of business mix and sales volumes.
Annual Report, 2015
Q1, 2016 Report