Disclosure of material accounting principles

Alfa Laval is engaged in the development, production and sales of products and systems based on three main technologies: separation/filtration, heat transfer and fluid handling. Alfa Laval’s business is divided into three Business Divisions ”Energy”, ”Food & Water” and ”Marine” that sell to external customers and are responsible for the manufacturing of the products and the division “Operations & Other” covering procurement and logistics as well as corporate overhead and non-core businesses. Alfa Laval has a wide range of customers in about 100 countries.

Alfa Laval AB is a public limited liability company. The company’s headquarters is in Lund and the company is registered in Sweden under the corporate registration number 556587-8054. The visiting address of the headquarters is Rudeboksvägen 1, 226 55 Lund, Sweden, and the postal address is Box 73, 221 00 Lund. Alfa Laval’s website is: www.alfalaval.com.

Unless otherwise stated, all amounts are reported in millions of Swedish kronor (MSEK) and refer to the period January 1 – December 31, 2024, for the income statement and cash flow items, and December 31, 2024, for balance sheet items. Figures in parentheses refer to the previous financial year.

Compliance with regulations and law

Alfa Laval applies IFRS® accounting standards as adopted by the European Union. Furthermore, the Annual Accounts Act and RFR 1 ‘Supplementary principles for consolidated groups’, issued by the Council for Sustainability and Financial Reporting in Sweden, are applied. The parent company applies the same accounting principles as the group, except in the cases specified in the section ‘Parent Company’s Accounting Principles.

The information in this annual report is such information that Alfa Laval AB (publ) is required to disclose in accordance with the Securities Market Act. The annual report was approved for publication on March 26, 2025. The statements of financial position and comprehensive income are adopted at the Annual General Meeting on April 29, 2025.

Cost method

The consolidated financial statements have been prepared according to the cost method, except for:

certain financial assets and liabilities, including derivatives, that are valued at fair value
defined benefit pension plans, for which the plan assets are measured at fair value

Changed accounting principles 2024

The revised and amended IFRS accounting standards that came into effect for the financial year 2024 have had no, or only very limited, impact on the group’s financial reports.

The following standards became applicable from January 1, 2024:

Classification of liabilities as current or non-current (amendment to IAS 1)
Lease liability in a sale and leaseback transaction (amendments to IFRS 16)
Supplier finance arrangements (amendment to IAS 7 and IFRS 7)

Changed accounting principles 2025 and later

The following standards, amendments, and interpretations will come into effect for financial years beginning on or after January 1, 2025. These have not been early adopted by the group. The assessment is that all, except IFRS 18, will not have any significant impact on the group’s operations or financial statements.

Amendments to IAS 21 – Lack of Exchangeability
Amendments to IFRS 9 and IFRS 7 – Amendments to the Classification and Measurement of Financial Instruments, and reporting of energy purchase agreements
IFRS 19 Subsidiaries without Public Accountability: Disclosures
IFRS 18 Presentation and Disclosure in Financial Statements

IFRS 18 introduces new requirements aimed at achieving comparability in reporting and providing users with more relevant and transparent information. The standard will not affect the accounting or valuation of items in the financial statements, but the effects on presentation and disclosures may become extensive. Management is currently evaluating the consequences of the new standard on the consolidated financial statements. No concrete conclusions about potential effects have been drawn yet. Alfa Laval will apply the new standard from its mandatory effective date of January 1, 2027. Retrospective application is required, and therefore comparative information for the financial year ending December 31, 2026, will be restated.

Judgements

When applying accounting principles, management has made various judgments that can significantly affect the amounts reported in the financial statements. The main judgments made concern:

Provisions for claims and disputes, where management continuously assesses the likelihood of the outcome of business and legal disputes, which affects the group’s provisions.
Provisions for customer losses, where the ability to collect overdue receivables is analyzed to make an overall assessment of the group’s reserve for bad debt in relation to total receivables and historical losses.
Inventory obsolescence, where an assessment of future sales is made for inventory items with low turnover. For these items, the value is written down according to an obsolescence scale with an increasing percentage of write-downs per year for the time the inventory is expected to remain. If there has been no demand for an inventory item at all in the past two years, the value is written down to zero, regardless of whether there might be future demand.
Credit risk in customer contracts, i.e., the risk that customers will not be able to fulfill their obligation to pay. The assessment of credit risk, in turn, affects revenue recognition in the current period.
Current and deferred tax assets and liabilities. The main judgment relates to deferred tax assets on loss carryforward, which includes an analysis of the likelihood that the deferred tax assets will be utilized against future taxable profits. The actual value of these future taxable profits can be difficult to assess as it depends on future macroeconomic developments, the company’s earning capacity, and potential changes in tax regulations.

Estimates and assumptions

Alfa Laval has identified a number of sources of uncertainty in estimates, and one of these relates to the impairment test of goodwill. Goodwill is not amortized but is instead tested for impairment annually and whenever there is an indication of impairment. The testing is based on estimates and assumptions about future cash flows. The key assumptions made by management concern forecasted revenue growth and operating margin development, which are based on both historical performance and current market information as well as expected future developments. If profitability within the group, or parts of it, declines in the future, the impact could be significant, as it may trigger a substantial impairment of goodwill. Such an impairment would affect the net result and thus the financial position of the group. Furthermore, Alfa Laval has identified that business acquisitions, when they occur, contain estimation uncertainty. This is because estimates are made of the fair value of the acquired assets and liabilities, including intangible assets, and any contingent consideration at the acquisition date.

The group has also identified that its defined benefit pension plans contain estimation uncertainties, but does not consider there to be a significant risk of a material adjustment to these. The plan assets are valued at fair value and the present value of the benefit obligations in the defined benefit plans is decided through yearly actuarial calculations made by independent actuaries. If the value of the plan assets starts to decrease at the same time as the actuarial assumptions increase the benefit obligations the combined effect could result in a substantial deficit. The effect on profit and loss however only affects other comprehensive income and not net income. The risk has been limited since many of these defined benefit schemes are closed for new participants and replaced by defined contribution schemes.

Furthermore, the Group’s provisions also contain uncertainty in estimates, as provisions are generally based on assessments of probability and estimates of costs and risks. Alfa Laval primarily makes provisions for product claims, which usually relate to technical problems with delivered products or the products not meeting the promised technical performance. Estimates are made regarding the Group’s cost for the claims, including costs for replacement products and compensation to customers for costs incurred due to the problem. There is also uncertainty in the estimation of provisions for ongoing or expected legal disputes, as the outcome is not determined. The disputes are regularly reviewed at the group level, and an estimate is made of the expected exposure. Provisions are made based on the assessed exposure and the estimated outcome of the disputes.

Business combinations – consolidation principles

The consolidated financial statements include the parent company Alfa Laval AB (publ) and the subsidiaries in which it has a decisive influence.

The statement on consolidated financial position has been prepared in accordance with the purchase method. The difference between the purchase price paid and the net assets of the acquired companies is allocated to the step-up values related to each type of asset, with any remainder accounted for as goodwill. During the first 12 months after the acquisition the value of the goodwill is often preliminary. The reason for this is that, based on experience, there is some uncertainty in the purchase price allocation concerning:

primarily the calculation of the allocation to different intangible step-up values, that are dependent on different judgements and estimations;
the calculation of tangible step-up values, that are dependent on external market valuations, which can extend in time before they can be finalized;
adjustments of the purchase price contingent on contractual terms, that are dependent on the final size of the operating capital at the acquisition date, once this has been audited and the outcome has been approved by the parties; and
the final value of the acquired equity, which is also dependent on the audit of the acquired closing balance sheet.

Since the goodwill is a residual that emerges once all other parameters in the purchase price allocation have been established, it will be preliminary and open for changes until all other values are final.

Transaction costs are reported in net income, as other operating costs. If the value of an additional purchase price is changed the change is reported as other operating income or cost. In the case of successive acquisitions, goodwill is calculated and valued when the acquiring company gains control over the acquired company. Changes in holdings in subsidiaries, where the majority owner does not lose its decisive influence, are reported in equity. This means that these transactions no longer will generate goodwill or lead to any gains or losses. In addition, the transaction will result in a transfer between owners of the parent and non-controlling interests in equity. If the non-controlling interest’s share of reported losses is higher than its reported share of the equity, a negative non-controlling interest is reported.

Employee benefits

Employee benefits are reported according to IAS 19 ”Employee Benefits”.

The present value of the benefit obligations in the defined benefit plans is decided through yearly actuarial calculations made by independent actuaries. The plan assets are valued at fair value. The net plan asset or liability is arrived at in the following way.

+ the present value of the defined benefit obligation at December 31

– the fair value of the plan assets at December 31

= a net liability if positive / a net asset if negative

If the calculation per plan gives a negative amount, thus resulting in an asset, the amount to be recognized as an asset for this particular plan is the lower of the two following figures:

The above net negative amount.
The present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. This is referred to as the asset ceiling.

The items that relate to the vesting of defined benefit pensions and gains and losses that arise when settling a pension liability and the financial net concerning the defined benefit plan are reported in the income statement above net income. Past service costs are recognized in the income statement already when the plan is amended or curtailed.

Actuarial gains and losses are accounted for currently in other comprehensive income. Changes in the obligations that relate to changes in actuarial assumptions are accounted for in other comprehensive income. None of these actuarial items will ever be reported in operating income but will instead remain in other comprehensive income.

The return on plan assets is calculated with the same interest rate as the discount rate. The difference between the actual return on plan assets and the interest income in the previous sentence is reported in other comprehensive income.

The difference between short and long-term remunerations focuses on when the commitment is expected to be settled rather than the link to the employee’s vesting of the commitment.

Termination benefits are accounted for at the earliest of the following – the time when the benefit offer cannot be withdrawn, alternatively in accordance with IAS 37 as a part of for instance restructuring the operations.

For Swedish entities the actuarial calculations also include future payments of special salary tax. The Swedish tax on returns from pension funds is reported currently as a cost in the profit and loss and are not included in the actuarial calculation for defined benefit pension plans.

The discount rate used to calculate the obligations is determined based on the market yields in each country at the closing date on high quality corporate bonds with a term that is consistent with the estimated term of the obligations. In countries that lack a deep market in such bonds the country’s government bonds are used instead.

Financial instruments

Financial assets and liabilities are classified into three different portfolios:

Valued at fair value through profit or loss;
Valued at fair value through other comprehensive income and
Valued at amortized cost.

The classification into different portfolios reflects the valuation of the instruments, i.e. if the instrument is valued at fair value or amortized cost, and also where in the statement of consolidated comprehensive income the valuation to fair value is reported. The amortized cost is equal to the amount recognized upon initial recognition, less any principal repayments and plus or minus any effective interest adjustments.

Government grants

Government grants are recognized in profit and loss over the same periods as the costs the grants are intended to compensate for. The grants are recognized in the income statement as a deduction of these costs.

Hedge accounting

Alfa Laval applies two types of hedge accounting: cash flow hedges and hedges of net investments in foreign operations.

Cash flow hedges

Alfa Laval has implemented documentation requirements to qualify for hedge accounting on derivative financial instruments.

The effect of the fair value adjustment of derivatives is reported as a part of other comprehensive income for the derivatives where hedge accounting is made (according to the cash flow hedging method) and above net income only when the underlying transaction has been realized. Hedge accounting requires the derivative to be appropriate and expected to be effective regarding the identified risks.

For derivatives where hedge accounting is not applied, the valuation at fair value is reported either in cost of goods sold or the financial net. The fair value adjustment of derivatives is reported separately from the underlying instrument as a separate item called derivative assets/derivative liabilities in the statement of financial position.

Hedges of net investments in foreign operations

In order to finance acquisitions of foreign operations loans are raised, if possible, in the same currency as the net investment. The loans thereby constitute a hedge of the net investment in each currency. Exchange rate differences relating to these loans are therefore reported in other comprehensive income.

Income Taxes

Income taxes include both current and deferred taxes. These are recognized in the income statement unless the underlying transaction is recognized in other comprehensive income or equity. In such cases, the tax is recognized accordingly. Current tax refers to the tax payable or receivable for the current year, based on the tax rates enacted at the balance sheet date, and adjustments for prior years’ taxes. Current tax liabilities and tax assets are offset when there is a legally enforceable right to offset and when there is an intention to settle on a net basis.

Deferred tax is recognized using the balance sheet method. Deferred tax is calculated using the tax rates and tax laws that have been enacted, or substantively enacted, by the balance sheet date and are expected to apply when the deferred tax asset is realized or the deferred tax liability is settled. Deferred tax assets are recognized only to the extent that it is probable that they can be utilized against future taxable profits.

Regarding the Pillar II rules, the group has applied the temporary exemption, issued by the IASB in May 2023, from the accounting requirements for deferred taxes in IAS 12. Accordingly, the Group neither recognizes nor discloses information about deferred tax assets and liabilities related to Pillar II income taxes.

Inventories

The Group’s inventory has been accounted for after elimination of inter-company gains. The inventory has been valued according to the “First-In-First-Out” (FIFO) method at the lowest of cost or net realizable value, taking into account obsolescence.

This means that raw material and purchased components normally are valued at the acquisition cost, unless the market price has fallen. Work in progress is valued at the sum of direct material and direct labour costs with a mark-up for the product’s share in capital costs in the manufacturing and other indirect manufacturing costs based on a forecasted assumption on the capacity utilization in the factory. Finished goods are normally valued at the delivery value (i.e. at cost) from the factory if the delivery is forthcoming. Spare parts that can be in the inventory during longer periods of time are normally valued at net realizable value.

Leasing

Alfa Laval has decided to apply a practical expedient for leasing contracts where the contract period is maximum 12 months or the leased asset is of low value. With reference to the materiality rules in IAS 8.8, Alfa Laval has chosen to apply IFRS 16 for leases concerning buildings and land, company cars and other vehicles, forklifts, large servers and large printers. The present value for other leases is estimated to be non-material. The leasing fees for these leases are expensed as incurred.

Lease contracts can include both a leasing part and a service part. According to IFRS 16, the company in these cases can choose to separate them from each other and thus only recognize the leasing part in the balance sheet or capitalize the entire contract. Alfa Laval has chosen to exclude the service part from the lease accounting, which is instead expensed.

When Alfa Laval is the lessee, leased assets are accounted for as right-of-use assets and a corresponding financial payable to the lessor in the statement on financial position. The leasing fee to the lessor is accounted for as financial cost calculated as interest on the outstanding payable and as amortization of the payable. The right-of-use asset is depreciated according to plan in the same manner as for purchased assets.

Non-current assets (tangible, intangible and right-of-use)

Assets have been accounted for at cost, net after deduction of accumulated depreciation according to plan. Depreciation according to plan is based on the assets’ acquisition values and is calculated according to the estimated useful life of the assets.

The following useful lives have been used:
Tangible:
Computer programs, computers	3.3 years
Office equipment	4 years
Vehicles	5 years
Machinery and equipment	7–14 years
Land improvements	20 years
Buildings	25–33 years
Right-of-use assets	depends on the lease term

Intangible:
Patents and unpatented know-how	10–20 years
Trademarks	10–20 years
Licenses, renting rights and similar rights	10–20 years
Internally generated intangible assets	5 years

The depreciation is made according to the straight-line method.

Any additions to the purchase price in connection with investments in non-current assets or acquisitions of businesses are amortized over the same period as the original purchase price. This means that the time when the asset is fully depreciated is identical regardless of when payments are made. This reflects that the estimated useful life of the asset is the same.

Upon sale or scrapping of assets, the results are calculated in relation to the net book value after depreciation according to plan. The result on sales is included in other operating income or cost.

Impairment of assets

When there are indications that the value of a tangible asset or an intangible asset with a determinable useful life has decreased, there is a valuation made if it must be written down. If the reported value is higher than the recoverable amount, a write down is made that burdens net income. When assets are up for sale, for instance items of real estate, a clear indication of the recoverable amount is received that can trigger a write down.

Goodwill is not amortized but is instead tested for impairment both annually and when there is an indication. The recoverable amount for goodwill is determined from the value in use based on discounted future cash flows. For other assets the recoverable amount is normally determined from the fair value less costs to sell based on an observable market price.

For the impairment testing of goodwill, three of Alfa Laval’s operating segments, the three business divisions “Energy”, “Food & Water” and ”Marine” have been identified as the cash-generating units within Alfa Laval. Technically a recently acquired business activity could be followed independently during an initial period, but acquired businesses are normally integrated into the divisions at a fast rate. This means that the independent traceability is lost fairly soon and then any independent measurement and testing becomes impracticable. The net present value is based on the projected EBITDA figures for the next five years, less projected investments and changes in operating capital during the same period and thereafter the perceived expected average industry growth rate. The used discount rate is the pre-tax weighted average cost of capital (WACC).

Other operating income and other operating costs

Other operating income relates to for instance commission, royalty and license income. Other operating costs refer mainly to restructuring costs and royalty costs.

Comparison distortion items that affect the operating income are reported in other operating income and other operating costs.

Provisions

The group recognizes provisions when there is a legal or constructive obligation, it is probable that a cost will be incurred to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is an estimate of the expenditure required to settle the present obligation at the balance sheet date. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. A provision is reversed when it is no longer probable that an outflow of resources will be required to settle the obligation.

A provision is only used for the purpose it was originally recognized for. Provisions are not recognized for future operating losses. An expectation of future operating losses is though an indication that certain assets of the operation may be impaired. If a contract is onerous, the present obligation under the contract is recognized and measured as a provision, once the assets used in order to finalize the contract have been tested for impairment.

Research and development

Research costs are charged to the result in the year in which they are incurred. Development costs are charged to the result in the year in which they are incurred provided that they do not fulfill the conditions for being capitalized.

Revenue recognition

Revenue from contracts with customers are reported as “Net sales” in the statement of consolidated comprehensive income. ”Net sales” are referring to sales value less sales taxes, cancellations, late delivery fees and discounts. Contracts with customers relate to sale of goods, services and projects. Alfa Laval recognizes the revenue when the performance obligation has been satisfied by transferring control over goods or service to the customer. Performance obligations can be satisfied either over time or at a point in time.

Alfa Laval transfers control of goods or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:

the customer simultaneously receives and consumes the benefits provided by Alfa Laval’s performance as Alfa Laval performs. This is normally the case for Alfa Laval’s service offerings;
Alfa Laval creates or enhances an asset that the customer controls as the asset is created or enhanced. This is normally the case when Alfa Laval performs the work at the customer’s premises, which mainly relates to installation/commissioning; or
Alfa Laval’s performance does not create an asset with an alternative use to Alfa Laval and Alfa Laval has an enforceable right to payment for performance completed to date.

Alternative use to Alfa Laval means if Alfa Laval can sell the equipment to another customer. The number of engineering hours spent by Alfa Laval on making a product or process solution customer specific with a unique configuration is a good indication of whether there is an alternative use to Alfa Laval or not. As a practical expedient, only orders of more than EUR 1 million and with more than 200 engineering hours are recognized over time.

In order to establish the performance over time an output or input method is used. In Alfa Laval output methods are more applicable to service and component deliveries, whereas input methods are more applicable to projects and module sales. Depending on the nature of the project, the following methods are used:

Input methods:

The proportion that the project costs incurred for work performed to date bear to the estimated total project costs.
Surveys of work performed.

Considering the type of projects that Alfa Laval companies are involved in, the first method is usually the preferred.

Output methods:

Completion of a physical proportion of the performance obligations.

If a performance obligation is not satisfied over time it is satisfied at a point in time. To establish the point in time when the customer obtains control of a promised asset and Alfa Laval satisfies a performance obligation, the following control criteria must be considered:

Alfa Laval has a present right to payment for the asset.
The customer has legal title to the asset.
The customer has physical possession of the asset.
The customer has the significant risks and rewards of ownership of the asset.
The customer has accepted the asset.

Alfa Laval uses a variety of delivery terms depending on the customers preference, including Ex Works. Alfa Laval’s preference is to use DAP (Delivered At Place) or DDP (Delivered Duty Paid) since these gives Alfa Laval better control that the customer really receives the goods in working order.

It is common that Alfa Laval provides a warranty in connection with the sale. The nature of the warranty can vary significantly across contracts. Normally warranties provide a customer with assurance that the related product will function as the parties intended according to the agreed-upon specifications. This is an assurance-type warranty. Alfa Laval’s warranties normally cover a 12 months’ period and are accounted for as a provision.

Operating segments

IFRS 8 means that the reporting of operating segments must be made according to how the chief operating decision maker monitors the operations. Furthermore, information must be given about products and services as well as geographical areas and information about major customers.

Alfa Laval’s operating segments consist of its divisions. The company’s board of directors constitutes the chief operating decision maker within Alfa Laval. Adjusted EBITA is monitored at the divisional level and is the most important alternative performance measure used for the group. The difference between adjusted EBITA for the operating segments and adjusted EBITA for the group is explained by the item ‘consolidation adjustments‘.

Functional currency and currency translation

Alfa Laval AB’s functional currency is Swedish kronor (SEK), which is also the group’s reporting currency for financial reports.

Exchange rate gains and losses related to trade receivables, trade payables, and other receivables and liabilities related to operating activities are included in other operating income and operating expenses. Exchange rate gains and losses related to other financial assets and liabilities are reported in the financial net.

In the group, exchange rate gains and losses on loans in foreign currency, which finance the acquisition of foreign subsidiaries, are transferred to other comprehensive income as an adjustment of the translation difference if the loans act as a hedge for the acquired net assets. These offset the translation difference that arises during the consolidation of the foreign subsidiaries. In the parent company, these exchange differences are reported above net income.

Almost all of Alfa Laval’s subsidiaries are affected by changes in exchange rates for their intra-group purchases. However, they usually sell in local currency and have most of their non-product-related and personnel-related costs in their local currency. Alfa Laval’s subsidiaries report in functional currency, which is normally the same as the local currency in each country. Subsidiaries in high-inflation countries may have a different functional currency than the local currency and therefore report in the currency defined for each country.

Foreign subsidiaries are translated according to the current rate method to SEK, which means that balance sheet items are translated at the exchange rate on the balance sheet date and income statement items at the average rate for the year. The translation difference that arises is an effect of the net assets in foreign subsidiaries being translated at a different rate at the end of the year than at the beginning, and the result being translated at the average rate. The translation difference is reported in other comprehensive income.

Parent company’s accounting principles

The parent company has prepared its annual report in accordance with the Swedish Annual Accounts Act and the recommendation RFR 2 “Accounting for Legal Entities”, issued by the Council for Sustainability and Financial Reporting in Sweden. The principles for the parent company are unchanged compared to the previous year. Differences between the group’s and the parent company’s accounting principles are specified below.

Subsidiaries

Shares in subsidiaries are reported in the parent company in accordance with the acquisition cost method. Transaction costs arising from business acquisitions are reported as shares in subsidiaries. The value of the shares is evaluated through an impairment test at least once a year. Received dividends are reported as financial income.

Presentation of the income statement and balance sheet

The parent company follows the format for income statements and balance sheets specified in the Swedish Annual Accounts Act. This includes, among other things, a different presentation of equity and that provisions for untaxed reserves are reported as a separate main heading in the balance sheet.

Group contributions to and from the parent company

The parent company reports group contributions according to the alternative rule in RFR 2. This means that both received and given group contributions are reported as appropriations in the income statement.