[SOLVED] One of the accounting development patterns that

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 writeoffs 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 â€œenduring value,â€ 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. Reproduced below are the parent company financial statements of Sandvik for the years 2006 and 2007 and selected notes. Sandvik is a global high technology company headquartered in Sweden, with advanced products and well-known brands. Its core areas of competence include high speed tools for metal working, machinery, tools and services for rock excavation, and specialty steels. The company states that it applies all IFRS and IFRIC interpretations approved by the EU to the extent possible within the framework of the Swedish Annual Accounts Act and considering the close tie between financial reporting and taxation. Examine the data presented and answer the following questions. 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-Ã -vis a non-Swedish firm? 4. In what way does the use of â€œreservesâ€ affect Sandvikâ€™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 Sandvikâ€™s key profitability ratios, such as return on sales and return on assets change?

The Groupâ€™s tax expense for the year was SEK 3,404 M (3.006) or 26.2% (27.0) of the profit after financial items. The adjustment of taxes attributable to prior years mainly relates to favorable tax litigation resolutions and advance rulings in Sweden and reversal of tax provisions upon finalization of tax audits of foreign subsidiaries. Reconciliation of the Groupâ€™s tax expense The Groupâ€™s weighted average tax based on the tax rates in each country is 29. 6% (27.0). The nominal tax rate in Sweden is 28.0% (28.0). Reconciliation of the Groupâ€™s weighted average tax rate based on the tax rates in each country, and the Groupâ€™s actual tax expense: Reconciliation of the Parent Companyâ€™s tax expense The Parent Companyâ€™s effective tax rate of 8.2% (0.8) is less than the nominal tax rate in Sweden, mainly due to tax-exempt dividend income from subsidiaries and associated companies:

Reconciliation of the Parent Companyâ€™s nominal tax rate and actual tax expense:

Reported in the balance sheet Deferred tax assets and liabilities The deferred tax assets and liabilities reported in the balance sheet are attributable to the following assets and liabilities (liabilities shown with a minus sign):

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Parent Company Income Statement Amounts In SEK M 2007 2006 Revenue Note 2 20682 17932 Cost of sales and services -16111 -13646 Gross profit Selling expenses Administrative expenses 4571 4286 -621 -577 -1719 -1982 Research and development costs Other operating income Other operating expenses Operating profit Income from shares in group companies Income from shares in associated companies Income from investments held as non-current assets Interest income and similar items Note 4 -1019 -778 Note 5 Note 6 488 -916 455 -1344 Note 3, 7, 8 521 323 Note 9 5997 9264 Note 9 1 Note 9 Note 9 Note 9 638 657 Interest expenses and similar iterns -1165 -898 Profit after financlal Items 5996 9347 3063 Appropriations Income tax expense Profit for the year Note 10 305 Note 11 -745 -29 8314 9623 Parent Company Balance Sheet Amounts in SEK M 2007 2006 ASSETS Non-current assets Intanglble assets Patents and similar rights Note 14 26 Total 26 51 Property, plant and equipment Land and buildings Plant and machinery Equipment, tools and installations Construction in progress and advance раyments Note 14 484 473 Note 14 Note 14 3624 305 3492 309 Note 14 1352 974 Total 5765 5248 Financlal assets 11723 34 Shares in group companies Advances to group companies Investmments in associated companies Advances to associated companies Other investments Note 15 13762 48 Note 16 4 4 Non-current receivables Note 18 20 23 (continued) n in Parent Company Balance Sheet (Continued) Amounts in SEKM 2007 2006 Deferred tax assets Note 11 22 17 Total 13857 11802 Total non-current assets 19648 17101 Current assets Inventories Note 19 6242 4599 Current receivables Trade receivables Due from group companies Due from associated companies Income tax receivables Other receivables 1255 1150 16311 15846 131 474 Note 11 393 16 Note 18 518 456 Prepaid expenses and accrued income 679 423 Total 19287 18365 Cash and cash equivalents 19 Total current assets 25535 22983 TOTAL ASSETS 45183 40084 EQUITY AND LIABILITIES EQUITY Non-distributable equity Share capital Legal reserve 1424 1424 1611 1611 Total 3035 3035 Distributable equity Profit brought forward Profit for the year 1552 1637 8314 9623 Total 9866 11260 Total equity Untaxed reserves Accelerated depreciation Tax allocation reserves Other untaxed reserves Note 20 12901 14295 Note 21 2430 Note 22 639 Note 22 19 15 Total 19 3084 Provisions Provisions for pensions and similar obligations Provisions for taxes Note 23 108 106 Note 11 55 42 Other provisions Total Note 24 154 127 317 275 Non-current interest-bearing liabilities Loans from financial institutions Note 25 1718 1669 Loans from group companies Other liabilities Note 25 Note 25 30 3 10131 2511 Total 11879 4183 (continued) Parent Company Balance Sheet (Continued) Noncurrent non-interest-bearing liabilities Other liabilities Total 9. Current interest-bearing liabilities Loans from group companies Other liabilities Total 10902 12766 1080 1324 11982 14090 Current noninterest-bearing liabilities Advance payments from austomers Accounts payable 159 53 1721 1734 Due to group companies Due to associated companies Other liabilities 3655 27 82 125 136 205 2004 Accrued expenses and deferred income Total Note 28 2332 8085 4148 TOTAL EQUITY AND LIABILITIES 45183 40084 Pledged assets Contingent liabilities Note 29 Note 29 16068 11929 Note 10. Appropriations Parent Company Accelerated depreciation Changes in tax allocation reservIS Changes in other untaxed reserves 2007 2006 2429 -143 638 437 -4 11 Total 3063 305 Note 11. Income tax Reported in Income Statement Parent Group Company 2007 2006 Income tax expense 2007 2006 Current tax -4396 -3135 -829 -115 Adjustment of taxes attributable to prior years Total current tax expense Deferred taxes relating to temporary differences and unused tax losses 229 -16 67 64 -4167 -3151 -762 -51 763 145 17 22 Total tax expense -3404 -3006 -745 -29 2007 2006 Group Profit after financial iterns Weighted average tax based on each country's tax rate Tax effect of: Non-deductible expenses SEK M SEK M 12997 11113 -3849 -29.6 -3001 -27.0 -195 -1.5 -179 -1.6 Tax exempt income Adjustments relating to prior year Effects of unused tax losses, net 199 1.5 244 2.2 229 1.8 -16 -0.1 75 0.6 -22 -0.2 Other 137 1.1 -32 -0.3 Total reported tax expense -3404 -26.2 -3006 -27.0 2007 2006 Parent Company SEK M SEK M Profit before tax Tax based on the nominal tax rate for the 9059 9652 -2537 -28.0 -2703 -28.0 Parent Company Tax effects of: Non-deductible expenses Tax-exempt income Adjustments relating to prior years -33 -0.4 -59 -0.6 1758 19.4 2669 27.6 67 0.7 64 0.7 Total reported tax expense -745 -8.2 29 -0.3 Tax items recognized directly in equity Group 2007 2006 Deferred tax relating to hedging reserve 31 34 Total 31 34 Parent Company 2007 2006 Current tax relating to taxable group contributions 843 -95 Total 843 -95 2007 2006 Deferred Deferred Deferred tax Deferred tax liabilities liabilities Group Intangible assets Property, plant, and equipment Financial non-current assets tax assets Net tax assets Net 34 -666 -632 39 -282 -243 96 -965 -869 195 -1573 -1378 58 -2 56 26 -31 -5 Inventories 1445 -62 1383 1034 -30 1004 Receivables 66 -335 -269 95 -237 -142 Interest-bearing liabilities Noninterest-bearing liabilities 325 -263 62 549 -184 365 513 -761 -248 393 -444 -51 2007 2006 Deferred Deferred Deferred tax Deferred tax Group tax assets liabilities Net tax assets liabilities Net Other 19 -49 -30 20 -261 241 Unused tax losses 84 84 Total 2640 -3103 -463 2351 -3042 -691 Offsetting within companies Total deferred tax assets and liabilities -1317 1317 -1031 1013 - - 1323 -1786 -463 1338 -2029 -691 Parent Company Property, plant and equipment -37 -37 -38 -38 Note 21. Parent Company's Accelerated depreciation Land and Plant and Equipment, tools Patents and buildings machinery and installations similar rights Total Balance at 1 January 2006 2075 182 29 2287 Accelerated depreciation for the year 127 13 143 Balance at 31 December 2006 2202 195 32 2430 Balance at 1 January 2007 2202 195 32 2430 Accelerated depreciation for the year -1 -2202 -195 -32 -2430 Balance at December 2007 Note 22. Parent Company's Other Untaxed Reserves 2007 2006 Tax allocation reserves Appropriated at 2002 tax assessment Appropriated at 2004 tax assessment 435 204 Balance at 31 December 639 Other untaxed reserves 19 15

Question: One of the accounting development patterns that

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