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G28 Supplementary information – financial risk management

Financial risk management

Through its comprehensive international operations, Sandvik is exposed to financial risks.

Group Treasury is the function responsible for managing most of the Group’s financial risks. The primary objectives of the function are to contribute to the creation of value by managing the financial risks to which the Group is exposed to during the ordinary course of business, and to optimize the Group’s financial net.

The Board of Directors is responsible for establishing the Group’s finance policy, which comprises guidelines, objectives, and limits for financial risk management within Group Treasury as well as the management of financial risks within the Group.

Group Treasury supports subsidiaries with loans, deposits, foreign exchange deals, banking solutions, and acts as an advisor in financial matters. The function conducts internal banking operations and is based at the head office in Stockholm. It is also responsible for the Group’s bank account arrangements.

In addition, Group Treasury conducts payment advice and payment solutions, and is responsible for the Group’s global policy for granting credit to customers in conjunction with sales. The customer finance activity is carried out through the business area Sandvik Mining and Rock Solutions at selected locations worldwide.

Finally, Group Treasury also manages the financial risks associated with the Group’s defined-benefit pension plans.

Only institutions with a solid financial position and solid credit ratings are accepted as Sandvik’s counterparties in financial transactions.

Currency risk – Transaction exposure

Risk

Transaction exposure is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

Sandvik’s annual transaction exposure, meaning the Group’s net flow of currencies, after full offsetting of the counter-value in the exporting companies’ local currencies, and measured at the average exchange rate, amounted to SEK 15,242 million (19,376) in 2023. The most important currencies for one year of exposure are shown in the following graph.

Exposure

Net flow in foreign currencies

2022 2023 AUD CAD CHF CNY EUR JPY ZAR Other USD 6,600 6,600 3,500 4,200 -1,500 -600 800 700 2,800 2,000 -11,300 -17,400 17,300 18,000 2,800 2,300 -1,700 -500
Comments

Sandvik generally offers customers the possibility to pay in their own currencies through the global sales organization. As a result, the Group is continuously exposed to currency risks associated with account receivables denominated in foreign currency and with future sales to foreign customers. Since a large percentage of production is concentrated to a few countries, while sales occur in many countries, Sandvik is exposed to a large net inflow of foreign currencies.

In order to mitigate the currency risk, pricing is adjusted against both customers and suppliers in circum­stances where Sandvik is affected negatively by currency movements. To further reduce exposure to foreign currencies, currencies received are used to pay for purchases in the same currency via a monthly netting structure.

The net flow of all sales and purchases in non-functional currencies is hedged through financial instruments and bank account balances in accordance with guidelines set in the Group’s finance policy. In addition, major project orders are currency hedged to protect the gross margin. Under the finance policy, the Chief Financial Officer has a mandate to hedge the annual transaction exposure. At year-end, the total hedged amount was SEK 1,786 million (528). The average duration for the hedged volume of foreign currency was 2 months (3). Unrealized results from outstanding currency contracts for hedging of future net flows amounted to SEK –67 million (–232) at year-end. This amount consists of SEK –68 million in losses related to contracts maturing in 2024 and SEK 1 million in losses related to contracts maturing in 2025 or later.

If all exchange rates for the exposure currencies were to change by 5 percent in an unfavorable direction, total EBIT over a 12-month period would change by approximately SEK –2,331 million (–2,119), assuming that the composition is the same as it was at year-end.

Sensitivity analysis by currency

AUD

CAD

CHF

CNY

EUR

USD

ZAR

Other

Total

–257

–187

–32

–95

–637

–879

–97

–146

–2,331

Currency risk – Translation exposure

Risk

Translation exposure occurs when assets and liabilities are denominated in different currencies.

Since the Swedish krona (SEK) is Sandvik’s functional currency, a translation risk related to the valuation of the net assets in foreign subsidiaries and the profit/loss in foreign currency achieved during the period occurs. The net assets, which usually consist of the foreign subsidiaries’ shareholders equity, are translated to SEK at the rates applied at the balance sheet date. At December 31, the Group’s net assets in subsidiaries in local currencies amounted to SEK 113,876 million (91,589).

Exposure

Group’s external debt by currency

E m p l o y e r o f C h o i c e C u s t o m e r F o c u s 2022 2023 USD 000 -6 274 EUR -29 920 -28 086 SEK -10 551 -11 226 Övrigt -209 -267 USD 000 -6,274 EUR -29,920 -28,086 SEK -10,551 -11,226 Other -209 -267

Net assets by foreign currency

2022 2023 CHF CNY EUR GBP INR Other USD AUD 8,521 3,845 5,808 42,685 4,848 2,828 15,677 29,664 9,020 4,101 5,863 33,914 4,569 3,523 16,400 14,198
Comments

To avoid translation risk in the balance sheets of subsidiaries, they are financed in their functional currency through the internal bank. External borrowing often takes place in a specific currency, as shown in the first graph. The currency risk that arises in the internal bank as a result of this is managed using various derivatives.

Sandvik has chosen not to hedge future profits in foreign subsidiaries. Sandvik has since 2023 started to hedge net investment in foreign currency. At year end there is USD 1,540 million hedged of a USD net asset. The second graph shows the distribution of net assets among various currencies.

If exchange rates were to change by 5 percent in an unfavorable direction, the net effect on other comprehensive income would be approximately SEK –4,927 million (–4,596). This net effect primarily comprises of translation exposure in equity.

Sensitivity analysis by currency

AUD

CHF

CNY

EUR

GBP

INR

USD

Other

Total

–426

–192

–290

–2,134

–242

–141

–784

–717

–4,927

Interest rate risk

Risk

Interest rate risk is defined as the impact that changes in market interest rates will have on the Group’s net interest items. That impact depends on the interest terms of assets and liabilities. Sandvik measures interest rate risk as the change over the forthcoming 12 months given a 1 percentage point change in interest rates.

Interest rate risk arises in two ways:

  • The Company may have invested in interest-bearing assets, the value of which changes when the interest rate changes.
  • The cost of the Company’s borrowing fluctuates when the general interest rate situation changes.
Exposure

If market rates were to rise by 1 percentage point across all tenors, in relation to loans for which the interest rate will be reset during the coming year, interest costs would be impacted by SEK –182 million (–165).

An interest-rate sensitivity analysis of interest rate swap agreements valid at year-end, and to which hedge accounting was applied, shows that other comprehensive income would change by SEK 0 million (8) and interest cost in the income statement would change by SEK –67 million (–65) as a result of a 1 percentage point rise in the interest rate curve.

Interest rates and fixed-interest terms on outstanding loans

Including effect of interest-rate dervivatives

Effective rate of interest, %

Fixed-interest term, months

Recognized liability, MSEK

Bond loans, MTN

3.6

29

30,480

Commercial papers

4.1

2

7,174

Other loans from banks

4.6

2

1,924

Total loans

3.8

23

39,578

Interest effect of currency derivatives

1.1

 

 

Total incl. currency derivatives

4.8

 

 

Comments

The Group’s interest rate risk arises mainly in connection with borrowing. Interest rate swap agreements are sometimes used to achieve the desired fixed interest term. The Group Chief Financial Officer has a mandate to vary the average fixed-interest term of the Group’s debt portfolio within an interval of 6–36 months. The average fixed-interest term on Sandvik’s borrowing was 23 months (24) at year-end, with consideration given to interest rate swap agreements entered into.

In line with the Group’s finance policy, internal lending to foreign subsidiaries is hedged with currency derivatives. Consequently, there is an interest-rate effect in currency derivatives of 1.1 percentages points between the currencies the Group borrows and the currencies the Group lends. The Group’s average interest expense, including other loans and effects of various derivatives, was 4.8 percent (3.2).

Hedge accounting is applied when an effective link exists between hedged loans and interest rate swaps. To the extent that fair value hedges are effective, the value of the hedged items are adjusted and the effects on the profit for the year are reduced. When cash flow hedges are effective, the effects are transferred from profit for the year to other comprehensive income.

The Group has interest rate swap agreements with a notional amount of EUR 1,000 million to which it applies fair value hedging and interest-rate swap agreements with a notional amount of SEK 500 million to which it applies cash flow hedging. The hedge relationships for these are 100 percent effective. Further information of all interest rate derivatives can be found at the end of this note.

Sandvik’s loan conditions do not currently include financial covenants linked to key figures. Only under exceptional circumstances are assets pledged in connection with debt raising. Such pledging is disclosed in note G27.

In the event that Sandvik has surplus liquidity, it is placed in bank deposits or in short-term money market instruments (durations of up to 90 days), which means that the interest-rate risk (the risk of a change in value) is low.

Liquidity and refinancing risk

Risk

Liquidity and refinancing risk is defined as the risk that financing possibilities will be limited when loans are to be refinanced, and that payment commitments cannot be honored as a result of insufficient liquidity.

Exposure

Maturity profile for borrowing and liquid assets

Nominal amount

E m p l o y e r o f C h o i c e C u s t o m e r F o c u s 2025 2026 2027 2028 2029 2030 2031 2032 2033 Jan Likvida tillgångar juni 2024 Juli 4 363 -5 525 -5 802 -1 658 0 -995 -1 315 -10 833 -478 -3 647 -3 868 -6 078 dec 2024 Liquid assets 4,363 -5,525 -5,802 -1,658 0 -995 -1,315 -10,833 -478 -3,647 -3,868 -6,078 June 2024 July Dec 2024
Borrowing and remaining credit periods

 

Currency

Recognized liability, MSEK

Average remaining credit periods, years

Bond loans, MTN

EUR, SEK

30,480

3.8

Commercial papers

EUR, SEK

7,174

0.1

Other loans from banks

Other

1,924

5.8

Total borrowings

 

39,578

3.2

Comments

According to the finance policy, the Group’s liquidity reserve, comprising of unutilized committed credit facilities and accessible cash and cash equivalents, should at all times exceed 10 percent of the Group’s projected annual revenues. The liquidity reserve should also exceed the amount of loans maturing within 12 months. At year-end, the Group’s committed long-term credit facilities and accessible cash amounted to SEK 18,465 million. Loans maturing in 2024 are SEK 11,311 million (9,092).

Sandvik has a revolving credit facility totaling SEK 11,000 million maturing in 2028. In addition, Sandvik has a committed credit facility totaling EUR 500 million that can be substituted for a long-term loan before June 2024. The facilities were unutilized at year-end.

The aim of Sandvik’s financing strategy is to achieve a well-balanced maturity profile for liabilities to thereby minimize the refinancing risk. The finance policy further stipulates that the debt portfolio’s weighted average duration should exceed 3 years. At year-end 2023, the weighted average duration amounted to 3.2 years. The maturity structure for the Group’s financial liabilities and derivatives is presented further down in this note.

At year-end, Standard & Poor’s, the international credit rating agency, had assigned an A– credit rating to Sandvik’s long-term borrowing and A–2 for its short-term borrowing. For a continuous update on Sandvik’s credit rating, please visit home.sandvik.

Credit risk

Risk

The Group’s commercial and financial transactions give rise to credit risk in relation to Sandvik’s counterparties. Credit risk or counterparty risk is defined as the risk for losses if the counterparty does not honor its commitments.

The credit risk to which Sandvik is exposed to can be divided into three categories:

  • Financial credit risk
  • Credit risk in trade receivables
  • Credit risk in customer financing
Exposure

Total credit risk

2022

2023

Trade receivables1)

18,685

18,477

Cash and cash equivalents

10,489

4,363

Unrealized net gains on derivatives

638

2,137

Other receivables2)

1,398

1,503

Customer finance

5,127

5,908

Total

36,337

32,388

1)

The age structure of trade receivables are further described in note G19.

2)

Comprises parts of the Group’s other receivables from contract assets

Expected credit loss

 

2022

2023

Opening balance, January 1

–871

–1,107

Provisions made during the year

–157

–761

Provisions used during the year

–65

–701

Unutilized provisions reversed during the year

82

78

Business combination

–21

68

Translation difference

–75

49

Closing balance, December 31

–1,107

–971

Comments

Sandvik has entered into agreements with the company’s most significant banks, covering such matters as the right to offset assets and liabilities that arise from financial derivative transactions, so-called ISDA agreements. This means that the company’s counterparty exposure to the financial sector is limited to the unrealized net gains that arise in derivative agreements, investments and bank balances. At December 31, the value of these amounted to SEK 5,030 million (11,127).

Sandvik companies are generally exposed to credit risk associated with outstanding trade receivables from ongoing sales. The credit risk is normally spread over a large number of customers within different segments in the business areas. Sandvik’s total credit losses, defined as the total of receivables written off and change in bad debt reserve, amounted to SEK –100 million (–194), equivalent to 0.1 percent of sales. The gross value of trade receivables was SEK 19,300 million (19,606) at December 31. Total impairment of these was SEK –804 million (–921). An age analysis of trade receivables at December 31, is presented in note G19.

Sandvik offers short-term and long-term customer financing through its own Financial Services companies and in partnership with financial institutions and banks. At year-end, the value of outstanding credits referring to finance leases amounted to SEK 6,602 million (5,277), of which SEK –154 million (–150) was reserved for doubtful receivables.

In addition to the traditional financing of equipment, Sandvik also offers operational leases for equipment as well as short-term rentals. At year-end, the net carrying amount of the operational lease portfolio was SEK 696 million (791) and the short-term rentals was SEK 670 million (537).

Raw materials price risk

Risk

Sandvik’s financial risks related to raw materials are primarily concentrated to electricity. The price risk is partially hedged through the signing of financial contracts. A change in the electricity price of SEK 0.1 per kWh is estimated to affect Sandvik’s EBITA by plus or minus SEK 65 million (85) on an annual basis, based on the prevailing conditions at year-end 2023.

Exposure

For Sandvik’s large production units in Sweden and Finland, the electricity price is continuously hedged through derivatives. Electricity consumption at these units normally totals around 200 GWh. The hedging horizon at year-end was about 36 months (36) expected consumption.

Comments

The volume of electricity hedged with derivatives was 205.4 GWh (264.2) at year-end. The market value of these derivative contracts amounted to SEK 20 million (175).

For a more detailed breakdown of the quarterly effects on cash flow of the transactions that have been recognized in the hedge reserve, see the table at the end of this note.

Pension commitments

Risk

Sandvik has comprehensive pension obligations in the countries in which it operates. The pension solutions and funding requirements vary depending on legislation and local agreements. The largest funded pension plans are found in the US, UK, Finland, Sweden, Germany, and Canada. Three main risks are associated with Sandvik’s pension obligations: Interest rate fluctuations, capital market volatility, and changes in life expectancy.

Exposure

The Group-funded pension liability has an average duration of 14.3 years. The average duration of the Group’s interest-bearing assets in the pension portfolio is 11.8 years. The allocation to interest-bearing assets is 55 percent of the pension portfolio. Due to the asset allocation and differences in duration between the interest-bearing assets and the liability, Sandvik is exposed to interest rate fluctuations, both when discounting the liability but also as market values change in the bond portfolio. If the average discount rate falls by –50 basis points the pension liability would increase by SEK 1,640 million.

18 percent of the pension portfolio is invested in equities. A 20 percent movement in the equity portfolio would result in a change in market value of SEK 719 million. If the life expectancy assumptions increase by one year, the pension liability would rise by 3.0 percent which corresponds to SEK 697 million. The calculated total loss potential for one year (pension risk), based on stress tests, is on aggregate SEK 6,268 million.

Development of pension liability and assets

Liabilities Assets Funding level 2019 2020 2021 2022 2023 0 10,000 20,000 30,000 40,000 MSEK 60 80 100 0 20 40 %
Comments

In 2023, the pension assets totaled SEK 21,859 million (21,699) and the corresponding pension liability amounted to SEK 22,306 million (21,766), which is equal to a funding level of 98 percent (100). The return on Sandvik’s pension assets was 5.3 percent during the year (–20.4). In addition, Sandvik has unfunded pension commitments of SEK 1,379 million (1,396).

The pension plans are governed through Sandvik’s Pension Supervisory Board (PSB). PSB is responsible for implementing policies and directives, approving new plans or material changes and closure of existing plans. The pension plans and governance are further described in note G22.

The Group’s financial instruments measured at fair value in the balance sheet

 

2022

2023

Financial assets

 

Derivatives

 

 

Foreign exchange contracts

462

2,074

Electricity and other derivatives

356

36

Total1)

817

2,110

Financial liabilities

 

 

Derivatives

 

 

Foreign exchange contracts

363

1,464

Interest-rate swaps

881

413

Electricity and other derivatives

1

11

Total2)

1,246

1,888

1)

Included in other receivables and financial assets.

2)

Included in other liabilities.

Financial assets and liabilities are not offset in the balance sheet. Derivative contracts are subject to framework agreements governing offsetting, and the carrying amounts of assets not offset in the balance sheet amounted to SEK 2,110 million. The carrying amount of corresponding liabilities was SEK –1,888 million. No collateral has been received or pledged. In the event of a default by a derivative counterparty, assets and liabilities for a total value of SEK 1,442 million would be offset in accordance with the framework agreement governing offsetting.

Calculation at fair value of the Group’s non-current borrowings would decrease the total carrying amount by SEK 373 million (1,427). When measuring interest-bearing liabilities, the company’s Swedish and European bond loans have been remeasured using observable market prices for identical securities to value the Group’s marketable debt instruments. Other non-current debt has been remeasured in accordance with the principles described below. For short-term loans and deposits, no remeasurement was carried out, given that the carrying amount is considered to represent a good approximation of the fair value due to the short duration.

 

Fair value through OCI

Fair value through profit or loss

Amortized costs

Hedge Accounting

Total carrying amount

Balance sheet items

2022

2023

2022

2023

2022

2023

2022

2023

2022

2023

Financial assets

 

 

 

 

 

 

 

 

 

 

Financial investments

 

101

625

789

 

 

 

 

625

789

Trade receivables1)

 

 

 

 

18,685

18,477

 

 

18,685

18,477

Other receivables2)

 

 

 

 

5,791

6,668

 

 

5,791

6,668

Derivatives3)

 

 

817

660

 

 

0

1,4497)

817

2,110

Cash and cash equivalents

 

 

 

 

10,489

4,363

 

 

10,489

4,363

Total financial assets

 

101

1,442

1,449

34,965

29,508

0

1,449

36,406

32,406

Financial liabilities

 

 

 

 

 

 

 

 

 

 

Borrowings4)

 

 

0

227

46,954

39,5785)

 

 

46,954

39,806

Derivatives6)

 

 

365

1,475

 

 

881

413

1,246

1,888

Accounts payable1)

 

 

 

 

11,625

9,488

 

 

11,625

9,488

Due to associates

 

 

 

 

6

1

 

 

6

1

Other liabilities8)

 

 

 

2329)

5,765

6,157

 

 

5,765

6,389

Total financial liabilities

 

 

365

1,935

64,351

55,225

881

413

65,597

57,572

1)

Excludes assets held for sales.

2)

Comprises parts of the Group’s other receivables and accrued income from contract assets, financial leasing, and customer financing recognized in the balance sheet.

3)

Derivatives form part of the other receivables and financial assets, recognized in the balance sheet.

4)

Recognized in the balance sheet as non-current and current liabilities to financial institutions and other liabilities.

5)

Whereof notional EUR 1,000 million is part of a fair value hedge.

6)

Derivatives form part of the other liabilities recognized in the balance sheet.

7)

Whereof SEK 1,449 Million is the Fair Value of a Net Investment Hedge.

8)

Form part of the Group’s other liabilities and accrued expenses from leasing recognized in the balance sheet.

9)

Contingent considerations measured according to Level 3. The liabilities are valued to fair value through profit or loss, using an internal model where the likelihood of the consideration payout is assessed and the expected payout is discounted to present value each reporting period, using an applicable discount rate specific for each transaction.

Net result per valuation category

 

2022

2023

Fair value through profit or loss

1,426

–299

Amortized costs

–1,408

–3,272

Hedge accounting

–64

835

Maturity structure relating to undiscounted casflows for financial liabilities and derivatives, nominal amounts

 

 

2022

2023

 

 

<6 months

6–12 months

1–5 years

>5 years

<6 months

6–12 months

1–5 years

>5 years

Bank loans

EUR, Other

–291

–42

–6,627

–1,800

–157

–183

–300

–1,809

Commercial papers

EUR, SEK

–7,303

0

0

0

–7,213

0

0

0

Bond loans, MTN

EUR, SEK

–409

–1,693

–20,005

–14,718

–3,850

–886

–22,029

–8,731

Derivatives

 

 

 

 

 

 

 

 

 

- Currency derivatives

 

124

35

7

0

–616

8

0

whereof outflow

 

–214

–5

0

0

–2,069

–4

–1

whereof inflow

 

338

39

7

0

1,453

12

1

- Interest rate derivatives

 

–24

–95

–344

–54

–119

–467

–581

- Electricity and other derivatives

 

5

111

238

0

1

10

19

Leases

 

–627

–616

–2,861

–1,744

–657

–649

–3,220

–1,658

Accounts payable1)

 

–11,625

 

 

 

–9,488

 

 

 

Total

 

–20,150

–2,300

–29,592

–18,316

–22,099

–2,167

–26,111

–12,198

1)

Excludes assets held for sales.

Supplier finance

Sandvik engages in programs whereby financial institutions offer to pay outstanding amounts to suppliers, while the Sandvik entity owing the amount repays it to the financial institutions according to the terms and conditions on the same date as the suppliers are paid, or later. These programs are typically designed to provide Sandvik with extended payment terms and the suppliers with shorter payment terms than stated on the original invoice.

Recognized in the balance sheet as part of accounts payable, the outstanding amount of obligations confirmed under the programs and remaining unpaid at year-end, was SEK 1,493 million. No guarantees have been issued as security to the financial institutions, nor have any assets been pledged.

Periods when hedged cash flows in the hedge reserve are expected to occur and impact earnings

 

Q1 2024

Q2 2024

Q3 2024

Q4 2024

Q1 2025

Q2 2025

Q3 2025

Q4 2025

2026 and later

Interest rate derivatives

0

Total

0

0

0

0

0

0

0

0

0

Derivative financial instruments – interest rate swaps

 

Cash flow hedges

Fair value hedges

Total

 

2022

2023

2022

2023

2022

2023

Carrying amount (included in other liabilities)

5

0

–886

–413

–881

–413

Notional amount

1,000

500

11,152

11,050

12,152

11,550

Change in fair value since 1 January

60

5

–896

–473

–826

–468

§ Accounting principles

Financial instruments

Financial instruments recognized in the balance sheet include assets, such as account receivables, financial investments and derivatives, and liabilities such as loan liabilities, account payables, and derivatives.

Recognition and derecognition

A financial asset or a financial liability is recognized on the balance sheet when the entity becomes a party to the contractual provisions of the instrument. Account receivables are recognized upon issuance of the invoice. A liability is recognized when the counterparty has performed under the agreement and the company is contractually obliged to settle the obligation, even if no invoice has been received.

At initial recognition, the Group measures financial assets and liabilities at its fair value plus or minus, in the case of a financial asset or liability not at fair value through profit or loss (FVPL), transaction costs including all fees, premiums and discounts that are directly attributable to the acquisition or issue of the financial asset and liability. Transaction costs of financial assets and liabilities carried at FVPL are expensed in the income statement.

A financial asset is derecognized when the rights to receive cash flows under the agreement have expired, or have been transferred and the Group has substantially transferred all of the risks and rewards. A financial liability is derecognized when the obligation specified in the contract is discharged or otherwise expires.

A financial asset and a financial liability are offset and presented in a net amount in the balance sheet only if there is a legally enforceable right to offset the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Classification and measurement
Financial assets excluding derivatives

Financial assets excluding derivatives, include equity and debt instruments. The Group classifies its financial assets as those to be measured at fair value, and those to be measured at amortized cost.

Equity instruments are measured at fair value, and gains and losses are recorded in the income statement. For those that are not FVPL, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income.

For debt instruments, which includes accounts receivables, the classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows. Amortized Cost: Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortized cost. Interest income from these financial assets is included in financial income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in the income statement. Fair Value through profit and loss: Assets that do not meet the criteria for amortized cost are measured as fair value through profit and loss.

Financial instruments measured at fair value in the balance sheet

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under the IFRS 13 disclosure requirements, the method applied to the valuation of assets and liabilities measured at fair value in the balance sheet is presented below. The valuation is divided into three levels:

Level 1: Fair value is determined according to prices listed on an active market for the same instrument.

Level 2: Fair value is determined based on either directly (as a price) or indirectly (derived from prices) observable market data that is not included in level 1.

Level 3: Fair value is determined based on input data that is not observable in the market.

Almost all of Sandvik’s financial instruments measured at fair value are measured according to Level 2. Some minor liabilities are measured at Level 3.

Measurements of fair value

The fair value of foreign exchange contracts is determined based on observable market prices. The fair value of interest-rate swaps is based on discounting estimated future cash flows under the contractual terms and conditions and maturity dates and based on the market interest rate for similar instruments on the balance sheet date. Where discounted cash flows are used, the future cash flows are calculated on the best assessments of company management. The discount rate applied is the market-based interest rate of similar instruments at the closing date.

All valuation techniques applied are accepted in the market and take into account all parameters that the market would consider in its pricing. These techniques are reviewed regularly to ensure their reliability. Applied assumptions are compared against actual outcomes to identify any needs for adjusting the measurement or forecasting tools.

For means of payment, receivables and payables with variable interest and current receivables and payables (for example, trade receivables and accounts payable), the fair value has been considered to correspond to the carrying amount.

Hedge accounting

Hedge accounting is applied in accordance with IFRS9 to decrease volatility in the income statement. To meet the criteria there must be a clear relationship between the hedging instrument and the hedged item. The relationship is expected to be highly effective and it must be possible to reliably measure such effectiveness. Moreover, the hedge must be formally designated and documented. Gains and losses on remeasurement of derivatives used for hedging purposes are recognized as described below under cash flow hedges and fair value hedges.

Cash flow hedges

Hedge accounting is applied when hedging a particular risk associated with highly probable future cash flows. The effective portion of the change in fair value for the year, of derivatives that are qualified as cash flow hedges in the hedge transaction, is recognized in other comprehensive income and the accumulated changes in a separate component of shareholders’ equity. The ineffective portion of a gain or loss is immediately recognized in the income statement. When the hedged item impacts income statement, the accumulated changes in value of the hedging instrument are reclassified to the income statement. The gain or loss relating to the effective portion of hedging instruments is recognized in the income statement within the same line as the hedged item.

Fair-value hedges

A fair value hedge is a hedge of the risk for changes to the fair value of a financial asset or liability. When a hedging instrument is used to hedge the exposure to changes in fair value, changes to the fair value of the instrument are recognized in the income statement for the year. The gain or loss on the hedged item attributable to the hedged risk, adjusts the carrying amount of the hedged liability and the change for the period is recognized in profit or loss. Realized and unrealized interest is reported in the income statement for the year for both the hedge and the hedged item.

Sandvik applies fair-value hedges to hedge the fair value of fixed rate funding recognized in the balance sheet, provided that the hedged item is otherwise recognized at amortized cost. The derivative instrument used is interest rate swaps. If the hedge relationship is discontinued, the carrying amount of the hedged item is adjusted with the accumulated amount referring to the hedge relationship.

Expected credit losses

Sandvik evaluates its trade receivables, contract assets and financial leases on a collective basis for each category, respectively. Each reporting entity classifies their receivables in suitable risk categories according to the Group policy.

Expected credit loss provisions are based on the full lifetime expected credit loss model with a provision matrix where fixed provision rates are applied depending on the number of days outstanding. The entities consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring the expected credit losses.

Credit risks are classified based on credit information provided by credit agencies, identified payment behavior of the customer and other relevant information available, such as lost contracts, changes in company management and other customer-specific information.

Additionally, a macroeconomic evaluation is conducted on the outlook of industries and countries relevant for our customers. Changes to the allowance for expected credit losses for accounts receivables are recognized in selling expenses.

Confirmed credit losses

Sandvik’s principles for the writing off of receivables are based on several prerequisites, such as proof of write-off, insolvency or failed legal and other collection processes. An assessment is made whether one or several of these prerequisites are fulfilled before the write-off takes place.