Operations and results in 2007Accounting and valuation principles
According to the provisions in the Swedish National Pension Funds Act (2000:192), the annual report shall be prepared in compliance with generally accepted accounting principles. Based on the stipulations and recommendations applicable to comparable financial companies, the buffer funds have developed joint accounting and valuation principles which have been applied here.
Trade date accounting
Transactions influence the balance sheet on the trade date, i.e. on the date when the rights and risks of ownership are substantially transferred between the parties. The resulting receivable or liability is reported under "other assets" or "other liabilities", respectively. In cases where netting is permitted, it is applied.
Assets and liabilities held in foreign currencies are valued at the rate of exchange on the balance sheet date. Changes in the value of foreign currency assets and liabilities are divided between those attributable to the change in the value of the asset or liability and those caused by fluctuations in the exchange rate.
Both realized and unrealized value gains/losses arising on exchange rate fluctuations are recognized in the income statement within net foreign exchange gains/losses.
Shares and participations
Listed shares and participations are stated at fair value based on the latest price quoted on the balance sheet date. Unlisted holdings are reported according to EVCA's or other similar principles. Fair value should be primarily calculated on the basis of arm's length transactions, although other valuation methods may be used.
The general rule is that prudence and consistency should be exercised in reporting of holdings at fair value.
Fixed income securities
Fixed-income securities are stated at fair value based on the latest price quoted on the balance sheet date. For an instrument that is not quoted in an active market, fair value is established by using a generally accepted valuation technique based on discounted cash flow analysis with the help of yield curves.
Capital gains/losses and unrealized value gains/losses comprise the difference between amortized cost and fair value. Acquired premiums and discounts accrue over the remaining maturity or until the coupon rate is adjusted. Changes in amortized cost are recognized in interest income.
In a true repo (repurchase) transaction, the asset remains in the balance sheet and the proceeds received are recognized as a liability. The divested security is reported in the balance sheet as a pledged asset under memorandum items. The cash value difference between spot and forward legs accrues over the maturity period and is recognized in interest.
Derivatives are stated at fair value based on the last quoted price on the final business day of the year. For an instrument that is not quoted in an active market, fair value is established by using a generally accepted valuation technique based solely on observable market inputs.
Because these models can incorporate subjective assumptions, changes in the input variables can have a large impact on the value of derivatives. Positions with a positive fair value are taken up as investment assets in the balance sheet, while positions with a negative fair value are taken up as liabilities. In addition, the nominal amounts of open positions with daily settlement are reported in a note.
Securities on loan remain in the balance sheet and are taken up under memorandum items as pledged assets. Premiums received and accrued are recognized in interest income.
Contributions from and disbursements to the national pension scheme, as well as transfers from the Första AP-fonden's Liquidation Fund and Fjärde AP-fonden's (AP4) Special Asset Management Fund are recognized directly in the Fund's net assets.
The AP funds are exempt from all income tax on domestic investments in Sweden. For investments outside Sweden, the tax liability varies from country to country.
Commission costs consist of external costs such as custodian fees and fixed fees to external managers. Costs of this type are recognized in the income statement as deductions from operating income.
Performance-based fees to external managers are payable only if the manager delivers returns over a predetermined level. Performance- based fees are recognized as a deduction from net investment income for the respective asset class, and are therefore not included in commission costs.
Management fees paid for unlisted assets with contracts providing for a refund in the event of a profitable exit may be accrued as receivables on the line "Other assets" in the balance sheet.
Management fees paid for investments with contracts under which fees are not refunded upon exit are recognized as commission costs.
Expenses for external asset managers include not only their management fees but also administrative charges for equity and fixed income funds or other similar instruments.
All management costs, with the exception of direct transaction costs such as brokerage commissions, custodian bank fees and fixed fees for external management are recognized under operating expenses. Investments in equipment and acquired software of a standard nature are expensed as incurred.
Expenses for software that is developed by or substantially adapted for the Fund are capitalized as intangible assets if their probable economic benefits are expected to exceed their cost after one year. This means that investments in equipment and software are normally expensed as incurred.