Note 1 Accounting policies

(All figures in MSEK unless stated otherwise.)

General information

The financial reports of Castellum AB (the “Parent Company”) for the financial year ending 31 December 2020 were approved by the Board of Directors and the Chief Executive Officer on 15 February 2021, and will be proposed to the 2021 Annual General Meeting for adoption. The Parent Company is a Swedish public limited liability company registered in Gothenburg, Sweden. The business activities of the Group are described in the Directors’ Report.

Basis for preparation of the accounts

Castellum’s accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. The consolidated accounts have been prepared according to Swedish law by application of the Swedish Financial Reporting Board’s recommendation RFR 1 Supplementary Accounting Rules for Corporate Groups. The accounts are prepared based on the fair value of investment properties and derivatives, the nominal value of deferred tax and acquisition cost for the remaining items.

Critical assessments and estimates

Accounts are completed in accordance with the IFRS, and generally accepted accounting principles require assessments and assumptions affecting recognised assets, liabilities, income and costs, as well as other information. These assessments and assumptions are based upon historical experience and other factors which are considered reasonable under the prevailing circumstances. Actual outcomes may differ from these assessments if other assumptions are made or other conditions exist.

Investment properties

For valuation of investment properties, assessments and assumptions can have a significant effect on the income and financial position of the Group. These valuations require estimates and assumptions of future cash flows and determination of the discounting factor (required yield). To reflect the uncertainty that exists in the assessments and assumptions, an uncertainty range of +/– 5–10% is normally used in property valuations. Information about this, along with prevailing assessments and assumptions, is presented in Note 13.

Asset acquisitions versus business combinations

A company acquisition can be classified as either a business combination or an asset acquisition. An acquisition whose primary purpose is acquiring a company’s property (i.e. where the company’s potential property management and administration are of secondary importance to the acquisition) is classified as an asset acquisition. Other company acquisitions are classified as business combinations.

For asset acquisitions, no deferred tax is recorded in the acquisition. Instead, a possible tax discount reduces the acquisition cost of the property, meaning that changes in value will be affected by the tax discount in the subsequent valuation.

Deferred tax liability

According to the accounting rules, deferred tax is to be recognised using the nominal tax rate without discount, calculated according to the tax rates set by the Riksdag: 21.4% for 2019 and 2020, and 20.6% from 2021 onward. Actual tax is considerably lower, in part due to the possibility of selling properties in a tax-efficient manner, and in part due to the time factor.

Income from property management

Castellum’s operations are focused on cash flow growth from routine property management (i.e. growth in income from property management), the yearly objective being a 10% increase in income from property management. Income from property management also forms the basis of the annual shareholder dividend: at least 50% of income from property management. The size of the changes in value have therefore not been defined; they are neither part of the basis for dividends nor of any other basis, for example, the Executive Management’s incentive plan. To provide an accurate picture of Castellum’s view over its business operations, the statement of comprehensive income has been prepared accordingly (i.e. changes in value not affecting cash flow are presented after items affecting cash flow). Furthermore, one performance item has been added by which the business operations are managed and targeted: income from property management.

Classification

Fixed assets and long-term liabilities consist of amounts that are expected to be recovered, or mature more than twelve months from the balance sheet date. Current assets and short-term liabilities consist of amounts that are expected to be recovered or settled within twelve months of the balance sheet date.

Consolidated financial statements

The Group’s balance sheet and income statements include all companies where the Parent Company has a direct or indirect controlling interest, which is obtained when Castellum achieves a voting majority. All companies in the Group are wholly owned. In addition to the Parent Company, the Group comprises the Group companies and their respective sub-groups listed in Note 25. The consolidated financial statements are based upon the accounts prepared for all Group companies as of 31 December. The consolidated financial statements are prepared according to the acquisition method, which means that equity in the subsidiaries at the time of acquisition – calculated as the difference between the fair value of the assets and liabilities – is fully eliminated. The equity in the Group includes only the part of the equity in the subsidiaries that has been earned after acquisition.

Companies acquired or sold during the year are included in the consolidated income statement for the period in which they were owned. Intra-Group sales, income, losses and balances are eliminated in the consolidated accounts. The accounts of foreign operations are translated to SEK by translating the balance sheet at the exchange rate on the balance-sheet date – except for equity, which is translated at the historical exchange rate at the acquisition date, while profit or loss is translated at the average exchange rate for the period. Currency translation differences are recognised in other comprehensive income.

Income

Rental and service income, and income from co-working

Rental income, which from an accounting perspective represents income from operating leases, is invoiced in advance and recognised as a linear allocation in profit or loss, based on the terms in the leases. The income is divided into rental income and service income. The former includes the customary rent debited including index adjustments, additional charging for investments, and property tax; the latter refers to all other additional charging for extra services such as heating, cooling, waste, water, and so on. Service income is recognised in the period the service was performed and delivered to the tenant. Rental and service income are paid in advance, and prepaid rents are recorded as deferred rental income.

In cases where a lease permits a reduction in rent during a certain period of time matched by a higher rent at another point in time, this rent deficit and surplus are distributed over the term of the lease. Pure discounts, such as reduction for gradual occupancy, are charged to the period in which they occur.

Income from United Spaces, the wholly owned co-working group, consists of membership fees and sales of other services.

Income from property sales

Income from property sales is entered as of the contract date, unless special conditions exist in the purchasing agreement. Sales of properties in corporate wrappers are net accounted for with reference to underlying property price and calculated tax. Earnings from sales of properties are recognised as changes in value and refer to the differences between received sales prices after deduction of sales costs, calculated tax and recognised values in the latest interim report, with adjustments for investments closed down after the latest interim report.

Financial income

Financial income consists of interest income and is recognised in the period it refers to. Group contributions received, as well as dividends received and anticipated, are also recognised as financial income. The effective interest method is applied in calculating financial income.

Financial costs

Financial costs include interest costs (interest and other costs that arise when borrowing money) and, as of 2020, letting costs and site leasehold fees. Pledging costs for mortgages are not considered financial costs but are capitalised as an increase in value of the investment property. Financial costs are recognised in the period they are attributable to. Interest costs also include costs for interest rate derivative agreements. Payment streams from these agreements are taken up as income in the period they refer to. Net financial items are not affected by market valuation of the interest rate derivatives entered into, which are instead recognised as changes in value under a separate heading. The portion of the interest cost pertaining to interest rates during the production period for larger new construction, extensions or reconstructions is capitalised. Interest is calculated based on the average funding cost for the Group.

Letting costs consist primarily of leases in United Spaces, the co-working group.

From an accounting perspective, site leasehold agreements are leases. The site leasehold fee is recognised as a cost for the period it refers to.

Remuneration to employees

Remuneration to employees is recognised in pace with the performance of services in exchange for remuneration. Remuneration under incentive plans, which is settled in cash and paid as non-pensionable salary, is recognised in pace with achieving objectives and the term of the plan.

Pensions and other post-employment benefits can be classified as defined-contribution or defined-benefit plans. The majority of the Castellum Group’s pension commitments are defined-contribution plans, fulfilled through regular payments to independent authorities or bodies administering the plans. Obligations regarding payments to defined-contribution plans are recognised as costs when they arise. A small number of employees within the Castellum Group have defined-benefit ITP plans with ongoing payments to Alecta. These plans are recognised as defined-contribution plans, since Alecta does not provide the information needed in order to report the plan as a defined benefit plan. There are, however, no indications of any significant liabilities exceeding what has been paid to Alecta.

Income taxes

Income tax is divided into current and deferred tax in profit or loss. Income tax is recognised in the income statement except when attributable to transactions recognised directly against equity, as the tax effect is also recognised directly against shareholders’ equity. Current tax is calculated based on the current tax rate of 21.4%, while deferred tax is based on the lower tax rate of 20.6% that applies from 2021 in Sweden. As regards Denmark and Finland, current and deferred tax are calculated at 22% and 20% respectively.

Deferred tax

Deferred tax on temporary differences arising between the recognised value of an asset or liability and its tax base is recognised in Castellum under the balance-sheet method. A tax liability or tax asset is thus realised on the date the asset or liability is sold. Exceptions are made for temporary differences arising from the initial recognition of assets and liabilities that make up asset acquisitions. Castellum has three items that contain temporary differences: properties, tax loss carry forwards and untaxed reserves. Deferred tax assets related to tax loss carry forwards are recognised, since it is probable that future taxable income, which may be utilised to offset tax loss carry forwards, will be available. Deferred tax liability is calculated on the difference between the properties’ recognised value and their tax base, as well as on untaxed reserves. For changes to any of the items above, the deferred tax liability/tax asset is also changed, which is recognised in profit or loss as deferred tax.

This year’s acquisitions were recognised as asset acquisitions, meaning that the deferred tax existing on the acquisition date was not included in the balance sheet.

Current tax

Current tax recognised in profit or loss corresponds to the tax the company must pay on taxable income for the year, adjusted for any current tax regarding previous periods.

Leases

Leases where essentially all risks and benefits associated with ownership fall to the lessor are classified as operational leases. From a reporting perspective, all current rental agreements attributable to Castellum’s investment properties are to be regarded as leases. Recognition of these leases is indicated by the income policy and by Note 3.

There are also a small number of low-value leases, where Castellum is the lessee. These pertain primarily to cars. Payments made during the leasing period are expensed in profit or loss in a straight line over the leasing period.

Investment properties

Investment properties are properties held for the purpose of generating rental income, capital appreciation, or a combination of both rather than for use in the company’s own operations for production and supply of goods and services or for administrative purposes and sales in operating activities. All of Castellum’s properties, whether owned or used through site leasehold agreements, are deemed to make up investment properties. If the Group begins investment in an existing investment property for continued use as an investment property, it is also recognised as an investment property going forward.

Valuation

Investment properties, which upon acquisition were recognised at acquisition cost including expenses directly attributable to the acquisition, have been recognised in profit or loss at fair value together with changes in value. Fair value was established through an internal valuation model described in Note 13. The note also indicates the assumptions serving as the basis for the valuation. The valuation model is built on a valuation based on the current value of future cash flows with differentiated required yields per property at market rates, depending on factors including location, purpose, condition and standard. In order to provide further assurance for the internal valuation, part of the portfolio has been valued externally.

Change in value

Change in value is recognised in profit or loss and consists of both unrealised and realised change in value. The unrealised change in value is calculated based on the valuation at the end of the period compared with the valuation last year, or alternately on the acquisition cost – if the property was acquired during the year – plus additional expenses capitalised during the period. For properties sold during the year, unrealised change in value is calculated based on the valuation at the latest interim report prior to the sale, compared with the valuation at the end of the preceding year adjusted for additional expenditures capitalised during the period. The method for calculating realised change in value is indicated by the accounting policies for income from property sales.

Additional expenditures

Additional expenditures that entail economic benefits for the company (i.e. they increase valuation and can be reliably calculated) are capitalised. Costs for repairs and maintenance are expensed in the period they arise in. For major new construction, extensions and reconstructions, interest costs during the construction period are capitalised.

Acquisitions and sales

For acquisitions and sales of properties or companies, the transaction is recognised as of the signing date, provided no special conditions exist in the purchasing contract.

Tangible fixed assets

Tangible fixed assets consist of equipment recognised at acquisition cost less any accumulated depreciation and impairment. The acquisition cost includes the purchase price and costs directly attributable to bringing the asset to the site, in usable condition in accordance with the aim of the acquisition. Depreciation of equipment is based on the acquisition cost less any later impairments. The residual value is assumed to be non-existent. Impairments on assets acquired during the year take the acquisition date into account. Depreciation is on a straight-line basis, which means equal depreciation over the period of use – normally five years, except for computers, which are expected to have a three-year period of use.

Goodwill

Goodwill in the consolidated accounts represents the difference between the acquisition cost and the Group’s share of the fair value of the acquired Group company’s identifiable net assets at the acquisition date.

Goodwill recognised in the Group is attributable to deferred tax and the acquisition of the co-working company United Spaces. On the acquisition date, goodwill is valued at acquisition cost; thereafter, it is valued at acquisition cost less any impairment. Goodwill is tested at least once a year regarding the need for any impairment, or when there is an indication that a recognised value is not recoverable.

Financial instruments

Financial instruments recognised in the balance sheet include cash and cash equivalents, rent receivables, financial assets, other receivables and loan receivables among assets; and interest rate and currency derivative instruments, accounts payable, other liabilities and loans among liabilities.

Financial instruments are initially recorded at fair value equivalent to acquisition cost plus transaction costs, excepting the category of financial instruments recognised at fair value through the income statement, where transaction costs are excluded. Subsequent recognition occurs thereafter depending on classification in accordance with the below.

Financial transactions such as receipt or payment of interest and credits are recognised on the settlement day of the bank keeping the account, while other receipts and payments are recognised on the accounting date of the bank keeping the account.

A financial asset is removed from the balance sheet when the rights in the agreement are realised or expire, or when the company no longer exercises control over it. A financial liability is removed from the balance sheet when contractual obligations in the agreement have been paid or otherwise extinguished.

Cash and cash equivalents

Cash and cash equivalents could consist of the Group’s available cash balances in banks and similar institutions, as well as bank deposits with a residual maturity of no more than ten (10) banking days, short-term investments in government bonds and bank and municipal bonds with a residual maturity of a maximum of three (3) months. At 31 December, cash and cash equivalents consisted entirely of unappropriated bank balances.

Receivables

Financial assets which are not derivatives, that feature fixed or fixable payments and are not quoted on an active market, are recognised as receivables. Financial assets are classified under amortised cost, fair value through profit or loss or fair value through other comprehensive income based on the character of the asset’s cash flow and on the business model that covers the asset. All Castellum’s financial assets that are not derivatives meet the criteria for contractual cash flows and are held in a business model whose purpose is to collect these contractual cash flows. The receivables are thereby recognised at amortised cost. The Group has rent receivables and other receivables, where the latter pertains chiefly to VAT and tax receivables, and receivables attributable to properties sold. After individual valuation, receivables were taken up at the amount at which they are expected to be received, which means that they are recognised at acquisition cost with allowance for uncertain receivables.

The simplified model for credit loss provisions is used for the Group’s receivables with the exception of cash and cash equivalents. Credit provisions are routinely assessed based on historic data as well as current and prospective factors. Owing to the short tenor of the receivables, the amounts of the allowances are insignificant. The Group defines “in default” as receivables that are overdue by more than 90 days; in such cases, an individual assessment and allowance are made. The allowance for cash and cash equivalents is assessed based on the likelihood of default and on prospective factors. Owing to short tenors and high credit ratings, the amounts of the allowances are insignificant.

Receivables in the Parent Company consist only of receivables from the subsidiaries, which are recognised at acquisition cost. Receivables from the subsidiaries are analysed in the general model, and the expected credit reserves are calculated based on the contract, adjusted for prospective factors and taking the value of the collaterals into account. Receivables without collaterals in properties are an insignificant amount, and given the value of the collaterals, the amount of the reserve is insignificant. For comparison figures under IAS 9: Financial assets that are not derivatives, feature fixed or fixable payments and are not quoted on an active market are recognised as receivables. Allowance is made for uncertain receivables when there are objective risk assessments that the Group might not receive the entire receivable.

Liabilities

Liabilities refer to credits and operating liabilities such as accounts payable. The majority of Castellum’s credit agreements are long-term. In the event short-term credits covered by unutilised long-term credit agreements are taken out, these are also considered long-term. The credits are recognised in the balance sheet on the settlement day and recognised at amortised cost. Accrued unpaid interest is recognised under accrued expenses. A liability is recognised when the counter-party has delivered and a contractual obligation to pay exists, even if an invoice has not yet been received. Accounts payable are recognised when the invoice is received. Accounts payable and other operating liabilities with short maturities are recognised at nominal value.

Foreign currency

Transactions in foreign currencies are translated to Swedish kronor (SEK) at the exchange rate current at the time of the transaction. Monetary assets and liabilities are translated at the rate on the balance sheet date.

Derivatives

Interest rate derivatives comprise financial assets or liabilities measured at fair value, with changes in value recognised in profit or loss. To manage exposure to fluctuations in the market interest rate in accordance with its adopted financial policy, Castellum has entered into interest rate derivative agreements. Changes in value will occur when using interest rate derivatives, depending primarily on changes to the market interest rate. Interest rate derivatives are initially recognised on the trade date at acquisition cost in the balance sheet, and subsequently appraised at fair value, with changes in value, in the income statement.

Changes in value can be realised as well as unrealised. Realised changes in value refer to settled interest rate derivative contracts and constitute the difference between the price at the time of settlement and the recognised value according to the latest interim report. Unrealised changes in value refer to the changes in value that arose during the period for the interest rate derivative agreements Castellum held at the end of the period. Changes in value are calculated based on valuation at the end of the period, compared to valuation from the previous year, or alternately the acquisition cost if the interest rate derivative agreement was entered into during the year. For interest rate derivatives settled during the year, an unrealised change in value is recognised and calculated based on valuation at the time of the latest interim report, prior to settlement, compared with valuation at the end of the preceding year. Rolling cash flows under the agreement are taken up as income for the period they refer to.

Castellum uses currency derivatives in order to hedge investments in Denmark and Finland as well as to manage currency risk and adjust its interest rate structure for borrowing in the international capital market. Financing of foreign investments can be achieved both through raising loans in the functional currency of the foreign company, and by entering into currency derivatives. Castellum applies hedge accounting for both net investments in foreign operations and currency exposure as a consequence of borrowing in the international capital market in those cases where currency derivatives are used. They are initially recognised in the balance sheet at acquisition cost on the transaction date, and thereafter reported at fair value in which the effective portion of the change in exchange rate regarding the hedging instrument is recognised in other comprehensive income, while the ineffective portion is recognised as a change in value in the income statement. The exchange rate on the balance sheet date is used to establish fair value.

At the time the hedge is opened, there is hedging documentation describing the hedging as well as the company’s strategy and risk management, and a description of the efficiency of the hedging and how it is measured and monitored.

Based on the criteria below, the hedging is deemed to be very efficient.

There is a financial link between the hedged item and the hedging instrument. The effects of credit risk are not predominant in the changes following from the financial link. The hedge ratio for the hedging relationship is the same as the one resulting from the quantity of the hedged item that the company actually hedges and the quantity of the hedging instrument that the company actually uses to hedge the amount of hedged items.

If a hedge ceases to be efficient for reasons related to the hedge ratio but nothing changes in the risk strategy, the company will rebalance the hedge.

Castellum designates only the spot risk in hedges using forward contracts; other parts of the market value are recognised in profit or loss.

The Group discontinues hedge reporting only when the hedge no longer meets the qualification criteria: when the hedging instrument is sold or redeemed, or when a hedged forecast no longer meets the requirements for being highly probable. Adjustments for counterparty risk – credit valuation adjustment (CVA) and derivative valuation adjustment (DVA) – are made when appraising derivatives at fair value.

Equity

Repurchase of own shares

Repurchased shares reduce equity by the purchase price paid, including any transaction costs.

Dividends

Dividends are recognised as a reduction of equity after resolution by the Annual General Meeting (AGM). Anticipated dividends are recognised as financial income by the recipient.

Earnings per share

Calculation of earnings per share is based on the Group’s net income for the year pertaining to the shareholders of the parent company, and on the weighted average number of shares outstanding during the year.

Provisions

Provisions are liabilities that are uncertain as regards time of payment or amount. A provision is recognised when there are contractual obligations, court orders or other legal grounds likely to involve future payments. The amount allocated is routinely assessed. Obligations that fall due in over a year are appraised through discounting.

Definition of operating segments

The Group’s operations are organised, governed and reported by geographical region. Operating segments are consolidated according to the same principles as the Group in its entirety. Income and costs reported for each operating segment are actual costs. No allocation of shared costs has thus been made. The same applies to the assets and liabilities recognised in the note on segments.

Cash flow statement

The cash flow statement has been prepared according to the indirect method. Net profit or loss is adjusted for effects of non-cash transactions during the period as well as for income or costs associated with the cash flow from investment or financing activities.

Differences in Group and Parent Company accounting policies

The Annual Report of the Parent Company has been prepared according to the Annual Accounts Act and by application of the Swedish Financial Reporting Board’s recommendation RFR 2, Accounting for legal entities. RFR 2 states that a legal entity shall apply the same IFRS/IAS that are applied in the consolidated accounts, with exceptions for and additions of rules and laws mainly according to the Annual Accounts Act, and with consideration to the relationship between accounting and taxation. Differences in accounting policies between the Group and the Parent Company are presented below.

Presentation

The income statement and balance sheet for the Parent Company are presented according to the Annual Accounts Act schedules.

Shares in Group companies

Shareholdings in Group companies are accounted for in the Parent Company according to the acquisition cost method. The carrying amount is regularly compared to the subsidiary’s consolidated equity. In the event the carrying amount is lower than the consolidated value of the Group companies, an impairment is recognised in profit or loss. Previous write-downs that are no longer justified are reversed.

Contingent liabilities

Contingent liabilities for the benefit of Group companies are financial guarantees and accounted for in accordance with RFR 2 (i.e. they are not recognised as provisions). Instead, Castellum provides information in the notes.

New accounting policies

New and revised existing standards and interpretations, approved by the EU

New standards that entered force in 2020

As of 2020, IASB has made a change in IFRS 3 concerning setting the boundary between business combinations and asset acquisitions by introducing a new definition of business activities. In practice, the new definition means that if the purchase consideration for the shares in a business acquisition is essentially attributable to the market value of the properties acquired, the acquisition constitutes an asset acquisition. In simpler terms, this means that the surplus value in its entirety is allocated to properties, and no goodwill thus arises.

Other EU-approved new and amended standards, as well as interpretations from the IFRS Interpretations Committee, are currently not expected to affect Castellum’s net income or financial position to any significant extent.

Otherwise, accounting policies and calculation methods remain unchanged compared to last year’s Annual Report.

Changes in Swedish regulations

Changes in 2020 had no material impact on Castellum’s accounting but have primarily entailed slightly increased disclosure requirements.

New standards that enter force in 2021

Other EU-approved new and amended standards, as well as interpretations from the IFRS Interpretations Committee, are currently not expected to affect Castellum’s net income or financial position to any significant extent. The same applies to Swedish regulations.