Internal control over financial reporting

This chapter describes Epiroc's internal control over financial reporting in accordance with the requirements specified in the Swedish Code of Corporate Governance and the Swedish Companies Act.

Financial reporting risk management

Epiroc's system for internal control over financial reporting is implemented in accordance with the requirements specified in the Swedish Corporate Governance Code and the Swedish Companies Act, which ensures a high degree of reliability in the preparation of financial reports. The regulations used for internal control have been issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

1. Control environment

The Board of Directors (Board) is responsible for internal control and governs the work through the Audit Committee. Group Management sets the tone for the organization and influences the control awareness of employees. An important success factor is well-defined and well-communicated authority. Epiroc has dedicated Internal Control and Internal Audit functions. The Internal Audit function reports directly to the Board through the Audit Committee.

2. Risk assessment

An assessment of the financial reporting risks is conducted annually. If necessary, further control activities are introduced or existing ones are strengthened. The most significant risks in financial reporting are listed on the next page.

3. Control activities

To mitigate financial reporting risks, there are control activities in place. They are performed at all levels and at different stages of the business processes. Global financial key controls are being tested on a regular basis to ensure they are implemented and effective. The results are reported to the Audit Committee.

4. Information and communication

Epiroc has several information and communication channels that aim to ensure that information is identified, captured and communicated in a way and within a time that enables employees and managers to fulfill their responsibilities. Examples are the Group's policies and guidelines, the Epiroc Way (management system), business reviews and training.

5. Monitoring

The internal control activities are monitored by, for example, independent internal audits, balance sheet reviews, and external audits of financial information and results. Observations and deficiencies of significant importance are reported to Group Management, the Audit Committee and/ or the Board.

Key financial reporting risks and related internal controls

Inventory is not appropriately valued at the lower of cost or net realizable value

Inventories are reconciled at each reporting date.
Inventory costs and production variances are reviewed and approved by the divisions and net realizable values are compared to carrying values to identify need for adjustments of inventory values.
Inventory level and saleability of inventory are assessed at each reporting date.

Income taxes are not accounted for in accordance with applicable tax legislation

Tax calculations are prepared and reviewed at each reporting date.
The effective tax rate for each company is analyzed at each reporting date by Group Tax.
Compliance with transfer pricing policies is monitored regularly.
Ongoing tax audits and disputes are monitored and provision levels are evaluated by Group tax specialists.

Provision for bad debt is not calculated based on Group guidelines

A strong process and tools are in place for collection of trade receivables.
Bad debt provision calculation guidelines are available on the Group’s intranet.
Bad debt provision needs are recalculated and booked during each reporting cycle.
Independent balance sheet reviews are conducted to ensure entities have followed Group guidelines when calculating provisions.

Provision for inventory obsolescence is not calculated based on Group guidelines

Automated reports for calculation of the inventory obsolescence provision are in place.
Inventory obsolescence provision calculation guidelines are available on the Group’s intranet.
Inventory obsolescence provision needs are recalculated and booked during each reporting cycle.
Independent balance sheet reviews are conducted to ensure entities have followed Group guidelines when calculating provisions.

Balance Sheet account reconciliations are not properly documented. Balances are not justified

A standard template for balance sheet account reconciliations has been created and rolled out throughout the organization.
All internal audits include a balance sheet review. All issues identified must be addressed within a six-month period.
Group Internal Audit & Assurance includes a formal balance sheet review as part of each entity's operational internal audit. On average 40-50 entities are assessed on a yearly basis.
Balance sheet reconciliations are performed monthly at an operational level.

Reporting processes and procedures are not well documented

A documented manual of the business system and financial system used exists and is updated accordingly.
Period-end closing checklists exist, are maintained and used for financial reporting tasks. Management reviews the completed checklists on a timely basis.

Implementation of new IFRS standards is not performed properly

New IFRS standards applicable to Epiroc are known prior to their effective date.
Group Financial Reporting leads the implementation of new IFRS standards and sets a plan for all levels impacted.
Training for local finance teams is carried out.
Group guidelines are updated to reflect the requirements for the new IFRS standards.