1. What advantages and disadvantages arise for firms that chose to employ the Swedish system of special reserves?

2. What are the potential benefits of the system of special reserves to the Swedish government?

3. In what way does the existence of the Swedish reserve system affect the ability of a financial analyst to evaluate a Swedish firm vis-a-vis a non-Swedish firm?

4. In what way does the use of “reserves” affect Sandvik’s financial statements for the year 2007? How does this compare with the effect of reserves in the previous year?

5. Show the accounting entry used to create the 2007 Appropriations figure in the income statement.

6. If you were to unwind the effect of reserves for 2007, how would Sandvik’s key profitability ratios, such as return on sales and return on assets change?

MINI CASE 

One of the accounting development patterns that was introduced in Chapter 2 was the macroeconomic development model. Under this framework accounting practices are designed to enhance national macroeconomic goals. A national policy advocating stable employment by avoiding major swings in business cycles would sanction accounting practices that smooth income. Similarly, national policies supporting growth in certain industries would sanction rapid write-offs of fixed assets to encourage capital formation. Sweden is a good example of this reporting pattern. Assets may be revalued upwards if they are deemed to have “enduring value,” the tax law permits shorter asset lives, and ceiling tests for depreciation charges include the higher of 130 percent declining balance method or 20 percent straight line. Companies are also permitted to allocate a portion of pre-tax earnings to special tax equalization reserves which are not available for dividends until reversed.