The Swedish National Pension Funds Act (2000:192) states that the annual report shall be prepared in compliance with generally accepted accounting principles, whereby the assets in which the Fund’s invests shall be stated at fair market value. Against this background, the First to Fourth AP funds (AP1, AP2, AP3, AP4) have developed joint accounting and valuation principles which have been applied and are summarized below.
Changed classification
As of 1 January 2008, management fees for unlisted assets and participations, for which a refund is permitted before dividends and which are deemed probable, are recognized as part of historical cost of the respective asset. Previously, this item was recognized in “other assets” in the balance sheet. The comparative figures have been restated.
Trade date accounting
Transactions in securities and derivative instruments in the money, bond, equity and foreign exchange markets are recognized in the balance sheet on the trade date, i.e. the date on which the rights and risks of ownership are substantially transferred between the parties. The receivable from or liability to the counterparty between the transaction date and settlement date is recognized in “other assets” or “other liabilities”, respectively. In cases where netting is permitted, it is applied.
Other transactions, particularly those pertaining to unlisted assets, are recognized in the balance sheet on the settlement date, in accordance with market practice.
Foreign currency
Assets and liabilities held in foreign currencies are stated at the closing day rate of exchange. 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. The fair value of shares and participates traded on an active market is normally established as the quoted bid rate in local currency on the last trading day of the year, and otherwise as the latest available bid rate.
Unlisted fund participations are stated at Första AP-fonden’s share of the valuation made by the fund manager based on the Fund’s total holdings. This is normally updated when a valuation has been obtained and adjusted for any cash flows up to the closing day of the period. The valuation complies with EVCA’s or similar valuation principles and 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.
Bonds and other fixed income assets
Bonds and other fixed income assets are stated at fair value. The fair value of shares and participates traded on an active market is normally established as the quoted bid rate in local currency on the last trading day of the year, and otherwise as the bid rate on the preceding day. For an instrument that is not quoted in an active market and reliable market prices are available, fair value is established by using a generally accepted valuation technique based on discounted cash flow analysis with the help of yield curves.
Net gains/losses comprise the difference between the average amortized cost and net selling price/fair value. Amortized cost is the net present value of future payments, where the discount rate is the effective rate of interest on the acquisition date. This means that acquired premiums and discounts are accrued over the remaining maturity or until the next interest conversion date. These premiums and discounts are recognized in interest income.
Repo transactions
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.
Derivative instruments
Derivatives are stated at fair value based on quoted market prices at the end of the year. For an instrument that is not traded in an active market, fair value is established by using a generally accepted valuation technique based solely on observable market inputs.
Positions with a positive fair value are taken up as assets in the balance sheet, while positions with a negative fair value are taken up as liabilities. The cash value difference between spot and forward legs accrues over the maturity period and is recognized in interest.
Securities lending
Securities on loan are recognised in the balance sheet at fair value. Collateral deposited for securities on loan consists of securities and cash. The value of securities on loan, and collateral for these, is recognized under memorandum items in the balance sheet. Compensation for securities on loan is recognized in interest income. In cases where Första AP-fonden has a right of disposal over the received collateral, this is recognized in the balance sheet as an asset and a corresponding liability.
Items recognized directly in net assets
Contributions from and disbursements to the national pension scheme, as well as transfers from the special management funds owned jointly by Första AP-fonden (AP1) and Fjärde AP-fonden (AP4), are recognized directly in the Fund’s net assets.
Performance-based fees to external managers
Performance-based fees, which are payable only if a manager delivers returns over a predetermined level, are recognized in net investment income for the respective asset class in the income statement.
Commission costs
Commission costs are recognized in the income statement as deductions from operating income. They consist of external costs such as custodian fees and fixed fees to external managers.
Brokerage commissions and fees paid for external management of unlisted assets, for which a refund is permitted before dividends and which are deemed probable, are recognized as part of the historical cost for the respective asset class in the balance sheet.
Operating expenses
All administrative expenses, excluding brokerage fees, fees to external managers and custodian bank fees, are recognised in operating expenses.
Investments in equipment and software developed or acquired by the Fund are normally expensed as incurred.
As a non-commercial enterprise, Första AP-fonden is exempt from value added tax (VAT), which means that the Fund does not have the right to VAT restitution. Paid VAT is included in the respective cost item.
Income taxes
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.
