1. Procedure Investments Above SEK 500 M
KA/Group Business Control

2. Document Information Title: Procedure Investments Above SEK 500 M
Description:
Responsible: KA/Sarah Kopfer
Valid as of: 1 September 2010
Reviewed: 1 September 2012

3. Background Procedure Investments Above SEK 500 M
As from 1 January 2009 borrowing costs (i.e. interest costs) must be capitalized as part of the cost of an investment, according to IFRS
Depreciation on interest cost reported in EBIT
Limited to investments above SEK 500 M (limit set by Sandvik)
Procedures to be used when calculating interest costs on investments above SEK 500 M
Appropriation requests
Follow up

4. Procedure Investments Above SEK 500 M
No need to submit an overdraft appropriation request on previously approved investments due to borrowing cost
Interest costs is however to be taken into account for previously approved investments above SEK 500 M in follow up, i.e. separate information required
New appropriation requests above SEK 500 M to include costs for borrowing
Appropriation request to include effects of interest costs on key figures but interest costs are however to be excluded in DCF calculation, see appendix 1
In the cash flow analysis the interest cost paid is included in investment activities instead of financing activities
Interest rates are distributed periodically by SFS to the BA, which in turn capitalizes the interest based on the construction in progress amount
No cash flow effect after capitalization as the negative EBIT effect is countered by depreciation being added back
Large investments to be coordinated on Business Area level
KC/Group Financial Control to be informed in order to ensure correct reporting on Group level
Specified and reported in “Spec 18”, fixed assets
Existing guidelines reviewed annually
KC/Group Financial Control to update reporting routines when needed

5. DCF Calculation Effects Procedure investments above SEK 500 M
Appendix 1
DCF Calculation Effects Procedure investments above SEK 500 M
Borrowing costs are not to be included in the DCF calculation as that would increase the required investment return
i.e. increases the threshold limits compared to investments below SEK 500 M, which are still defined by the standard investment routine without borrowing costs
Effects of borrowing costs on key figures still needs to be clearly noted
Fulfills external requirements but does not affect the internal investment assessment procedure

6. Extract from Financial Guidelines 2.2.2.01.01
Appendix 2
Extract from Financial Guidelines
As from 1 January 2009 and provided that certain criteria's have been met, borrowing costs (i.e. interest costs) must be capitalized as part of the cost of a qualifying asset
Borrowing costs are only required to be capitalized by Sandvik companies for a qualifying asset when the related amount for the investment exceeds the equivalent of 500 MSEK and the forecasted borrowing costs to be capitalized exceed 25 MSEK. A qualifying asset is an asset that takes more than one year to get ready for its intended use or sale. Examples of qualifying assets are manufacturing plants, power generation facilities and certain buildings. Assets that are ready for their intended use or sale when acquired are not qualifying assets

7. Extract from Financial Guidelines 2.2.2.01.01
Appendix 2
Extract from Financial Guidelines
The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When borrowing funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified. However, borrowed funds are normally obtained from SFS. In such cases the borrowing costs eligible for capitalization are determined by applying the Group’s average capitalization rate to the expenditure on the qualifying asset. The Group’s capitalization rate is set by SFS, Sandvik Financial Services
The reporting entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the date when the entity first meets all of the following conditions:
a) it incurs expenditures for the asset;
b) it incurs borrowing costs; and
c) it undertakes activities that are necessary to prepare the asset for its intended use or sale
The entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete

8. Appendix 3
P/L, Balance Sheet and Cash Flow Effects Procedure investments above SEK 500 M
P/L
Interest cost is depreciated over the useful life of the asset, similar to the CAPEX investment
Commences after completion of the investment
Depreciation of capitalized interest cost affects EBIT adversely
Scheduled depreciation in COGS
Balance sheet
Interest cost increases total investment sum
Interest rates are distributed periodically by SFS to the BA, which in turn capitalizes the interest based on the construction in progress amount
Included in fixed asset, i.e. capital employed
Cash flow
Capitalized interest costs during construction in progress is to be included in investments instead of part of financial items
Negative cash flow effect on Business Area level
No net cash flow effect on Group level, i.e. cash flow for the period
No effect after capitalization as depreciation is added back in cash flow analysis