Component Depreciation in Swedish Real State Companies –A study of how private and municipal companies handle K3’s new requirement for component depreciation

Abstract: Background and problem discussion: From the 1st of January 2014, the K3 framework developed by the Swedish Board for Accounting Standards became mandatory for large Swedish companies. K3 contains a requirement for tangible assets to be divided into components if the difference in consumption of the components was likely to be significant. Also, additional costs are activated in the balance sheet if they fulfill the general asset criteria. Since real estate companies have large populations of tangible assets, they are affected by the new requirement. The K3 framework is principle-based and do not have specific guidance regarding which components should be accounted for and how additional costs should be treated. Instead, accounting professionals urged industry organizations to develop guidelines the companies could use. The way assessments are made and how the framework is interpreted can also be connected to the accounting motives within the organization. Private and municipal real estate companies are different in their ownership structures and can therefore make different assessments and alternatives for actions. Purpose: The thesis has explored how municipal and private companies handled the requirement for component accounting in practice, and how their choices are affected by institutional forces such as guidance from industry organizations as well as accounting motives emerging from their ownership structures. Methodology: The thesis has been based on a qualitative method where in-depth interviews have been made with CFOs in municipal and private real estate companies. By applying existing knowledge in the field on the empirics a deductive approach has been used. Analysis and conclusion: The study has showed that all companies have used guidance from industry organizations to prepare their component accounting, but that the municipal companies would have appreciated more specific guidance. The auditors have played a minor role in the implementation, but they had a principlebased approach in their advising. The thesis has also concluded that municipal companies made more detailed component plans than private companies and that they thought the new framework provided a more true and fair view for the users of their financial reports. The private companies strived to simplify the division of components as much as possible to reduce costs and to put resources on actions that maximized the company value in order to satisfy the owners, consistent with PAT. A potential agency problem has been identified in the relatively small municipal companies since the municipal board did not evaluate their earnings targets very thoroughly. Contribution: The study contributes with an overall description of the handling of component depreciation, and that companies address the new demand differently, depending on ownership structure and size of business. It also provides a feedback to the standard setter in terms of deficiencies such as insufficient initial guidance, insufficient knowledge from auditors and decreased comparability in the early stage.