NEW STORES

Environmental hazards

CIRCULAR & RENEWABLE Circular Strategy and policy The fashion industry today largely depends on natural resources such as cotton or other cellulosic fibres, as well as oil-based fibres like polyester. With a growing global population and limited planetary boundaries, there is a risk that these resources will become increas- ingly scarce. Moving towards a circular model seeks to decouple future growth from resource use while accelerating innovation, more effi- cient operations and other business opportunities. This is why the H&M group has set out the vision to become 100 percent circular. It means building circularity into every stage of the value chain. In the shift from a linear to a circular model, the focus is on four key processes: design, material choice, production processes and prolonging the lifespan of products. – Recycled or other sustainably sourced materials, with the goal to have 100 percent more sustainable cotton by 2020 and 100 percent recycled or other sustainably sourced materials by 2030 (commercial goods). – The Sustainability Commitment, which is signed by all business partners, covers animal welfare and material ethics among other things. – The water management strategy, developed together with WWF, focus on issues related to the responsible use of water along the value chain. – The h&m group bans or limits chemicals considered as hazardous in the production of all its products by means of the H&M Chemical Restrictions, which all its business partners are committed to comply with. – The manufacturing Restricted Substances List (mRSL) focuses on chemical use in factories. The Restricted Substances Lists (RSL) is focused on chemicals found in finished products. – The h&m group collects old clothes and home textiles, from any brand and in any condition, for reuse and recycling on a global scale with the goal of collecting 25,000 tonnes annually by 2020. Renewable energy Climate change is one of the greatest challenges of our time. Its con- sequences will affect the entire planet and everyone living on it – making it a key risk to many industries, including fashion. The H&M group has decided to make a bold commitment by setting the goal of becoming climate positive across the entire value chain by 2040 – at the latest. In short, this means removing more greenhouse gas emissions from the atmosphere than the value chain emits. To reach this goal, three key priorities have been established: leadership in energy efficiency, 100 percent renewable energy, and climate resili- ence and carbon sinks. – The h&m group is committed to reducing the amount of energy used at every stage of the value chain, with the goal of reducing elec- tricity intensity in stores by 25 percent by 2030 compared to 2016 and having 100 percent of supplier factories enrolled in energy effi- ciency programmes by 2025. – The H&M group is committed to maximising the use of renewable and sustainable energy in its value chain, with the goal of sourcing 100 percent renewable energy in its own operations and working closely with government bodies and other stakeholders to push pro- 71 A Dm i N iST R AT iON R E PORT KPI GOAL 2017 2016 2015 Recycled or other sustainably sourced materials % of total material use (commercial goods) 100% by 2030 35% 26% 20% % of cotton from more sustainable resources (certified organic, recycled and Better Cotton)* 100% by 2020 59% 43% 34% Tonnes of garments collected through garment collecting initiative* 25,000 t per year by 2020 17,771 t 15,888 t 12,341 t % of renewable electricity in own operations* 100% 96% 78% % change in CO2 emissions from own operations compared Climate positive with previous year (scope 1+2**)* supply chain by 2040 -21% -47% -56% % change in electricity intensity (use kwh/m2 per opening hour compared to 2016; comparable stores with available energy data)* -25% by 2030 -2.7% n/a Indicators marked * have been reviewed by the company’s auditors. ** Scope 1 and 2 are direct and indirect emissions of greenhouse gases from the group’s own operations. KPI GOAL 2017 2016 2015 % employees agreeing with the statement “People here are treated fairly regardless of age, ethnicity, sex, sexual orientation and disabilities” Annual increase 90% Number of supplier factories (% of production volume) 50% of production using the Fair Wage method volume by 2018 227 (40%) 140 (29%) 69 Number of supplier factories (% of production volume) 50% of production enrolled in workplace dialogue training volume by 2018 458 (52%) 290 (42%) % of commercial business partners that regard the h&m group as a fair business partner 90% by 2018 94% 83% 84% gress in renewable energy access in production markets. Suppliers both within the H&M group and across the supply chain. The group’s are also encouraged to build their own renewable energy capacity. ambition has two focus areas: fair jobs and stewardship of diversity – The h&m group is committed to strengthening the planet’s natural and inclusiveness. systems so that they can better support ecosystems and climate – A set of specific policies guides the work as an addition to the group’s stability, and is exploring different kinds of carbon sinks. corporate values, such as the h&m group’s Global Compensation and Benefit Policy, Health and Safety Policy and the Employee Follow-up procedures and results Relations Policy, as well as the framework agreement with UNI Business partners must sign the Sustainability Commitment before Global Union. any order is placed. This sets out fundamental requirements as well – Although the H&M group does not own any factories or set factory as aspirational ambitions for business partners in the areas of healthy wages, the group is working to make sure everyone in the textile indus- workplaces, healthy ecosystems (including impact on climate and air try has a fair job. While monitoring compliance in suppliers’ facto- quality, impact on water resources, use of chemicals, waste, re-use and ries, the h&m group invests in creating systematic improvements recycling, conservation of species and natural habitats) and animal for the entire industry with a focus on two closely interlinked areas: welfare. Compliance with the fundamental requirements and perfor- – Well-functioning industrial relations are the best foundation mance against aspirational ambitions are followed up regularly through for achieving and monitoring good working conditions and fair the Sustainable Impact Partnership Programme (SIPP), which is inte- living wages in the textile industry. The H&M group has signed grated into regular supplier reviews and thereby works to provide a global framework agreement with IndustriALL Global Union better business opportunities for better sustainability performance. and other relevant stakeholders. The strategy is based on devel- oping functional workplace dialogue systems at factory level, as SOCIAL CONDITIONS AND EMPLOYMENT: FAIR & EQUAL well as advancing industrial relations systems in sourcing markets. Strategy and policy The goal is to have workplace dialogue programmes at supplier The h&m group believes that everyone should be treated in a fair and factories covering 50 percent of the production volume by 2018. equal way. As a global business, however, the group has operations – Closely connected to this work, the H&M group has developed a and suppliers in countries where there is a risk of human rights viola- fair living wage roadmap, working to improve wages for garment tions. The group has therefore set out the vision of being a 100% Fair & workers systematically by getting supplier factories to implement Equal company. In short, this means making sure that the company’s dedicated wage management systems, working with governments values as well as respect for human rights are upheld and promoted – to create the necessary legal frameworks and working with other 72 brands and partners to establish a common approach for respon- sible purchasing practices. The goal is for supplier factories cover- ing 50 percent of the production volume to have implemented wage management systems that support Fair Living Wages by 2018. – By acting as stewards of diversity and inclusiveness, the H&M group is helping to safeguard everyone’s right to equal treatment and lack of discrimination. This is manifested, for example, in the company’s Global Policy on Diversity, Inclusiveness and Equality. To further support the work on diversity and inclusiveness the H&M group has appointed a global leader for these issues. Follow-up procedures and results – The h&m group conducts internal audits to assess the implementa- tion of its policies. – The H&M group conducts annual employee surveys. – Business partners sign the Sustainability Commitment before any kind of order is placed. This sets out fundamental requirements and aspirational ambitions for the company’s business partners in the areas of healthy workplaces and healthy ecosystems (including health and safety, discrimination, diversity and equality, recognised employ- ment, fair living wages and benefits, working hours, freedom of asso- ciation and collective bargaining, child labour and young workers, as well as forced, bonded, prison and illegal labour). Compliance with the fundamental requirements and performance against aspi- rational ambitions are followed up regularly through the Sustain- able Impact Partnership Programme (SIPP), which is integrated into regular supplier reviews and thereby works to provide better busi- ness opportunities for better sustainability performance. HUMAN RIGHTS Strategy and policy The h&m group considers respect for human rights a fundamental part of a successful business. As stated in its Human Rights Policy, the company recognises its responsibility to respect human rights and hence the need to integrate this perspective across the operations and in all relevant activities. This means that the group needs to under- stand the risks and impacts on human rights, and to seek ways to prevent, mitigate and remediate these impacts. – The h&m group’s approach to human rights is based on the UN Guiding Principles on Business and Human Rights (UNGP). The company’s Human Rights Policy applies to all entities within the H&M group. – The h&m group has a recurring process for identifying and reviewing salient human rights issues. – All the company’s functions perform an annual sustainability risk assessment that includes human rights. – A due diligence process that includes human rights is conducted prior to entering into a new contract with a business partner. – All new markets (retail and production) are assessed on human rights, as are new materials, processes and products. – Human rights training is given to relevant staff covering basic human rights, the company’s responsibilities as per the uN Guiding Principles, due diligence and how to analyse and handle cases, situations and incidents with a human rights impact. Issue-specific follow-up procedures When an incident occurs, the group has a systematic approach to analysing the company’s responsibilities according to the uNGP and taking appropriate measures. ANTI-CORRUPTION Strategy and policy Corruption is a risk in many of the markets in which the H&M group and its suppliers operate. Acting with respect and integrity is an unquestionable rule within the company. Both are intrinsic to the company’s values. The company has a strong anti-corruption pro- gramme in place, with a focus on preventing corruption. – The h&m group’s Code of Ethics outlines the group’s expectations concerning business conduct with integrity, including a zero toler- ance policy towards any form of corruption or bribery. – All employees in contact with business partners must sign the Code of Ethics when employed. – it is mandatory for all the h&m group’s business partners to sign the Code of Ethics. – Risk of corruption is included in due diligence process for all new business partners. The company’s risk assessments for corruption focus on levels of risk defined by country, industry and position/function. – Once the level of risk has been ascertained, short- and long-term goals are set to help mitigate the risk. The group annually maps the biggest risks of corruption in its organisation, and uses the results to allocate resources in the best way. – Training is provided for employees and prioritised business partners. Follow-up procedures and results – All violations against the company’s Code of Ethics will be addressed and might lead to termination of business relationship or employment. – Number of violations against the Code of Ethics are tracked and reported yearly to CEO, CFO and board of directors as well as externally. – Internal audits are performed to ensure compliance with the Code of Ethics. – Business partners and employees can make use of the company’s open-door policy, complaint procedure and whistleblowing policy to report cases. – During 2017 there were 27* confirmed incidents of non-compliance that led to terminations and/or written warnings. Indicators marked * have been reviewed by the company’s auditors. 73 Fi NA NCi A L R E PORTS Group income statement SEK M 1 DECEMBER – 30 NOVEMBER 2017 2016 Sales including VAT 231,771 222,865 Sales excluding VAT, note 3, 4 200,004 192,267 Cost of goods sold, note 6, 8 -91,914 -86,090 GROSS PROFIT 108,090 106,177 Selling expenses, note 6, 8 -80,427 -75,729 Administrative expenses, note 6, 8, 9 -7,094 -6,625 OPERATING PROFIT 20,569 23,823 interest income and similar items 281 224 interest expense and similar items -41 -8 PROFIT AFTER FINANCIAL ITEMS 20,809 24,039 Tax, note 10 -4,625 -5,403 PROFIT FOR THE YEAR 16,184 18,636 All profit for the year is attributable to the shareholders of the parent company H & M Hennes & Mauritz AB. Earnings per share, SEK* 9.78 11.26 Number of shares, thousands* 1,655,072 * Before and after dilution. Consolidated statement of comprehensive income SEK M 1 DECEMBER – 30 NOVEMBER 2017 2016 PROFIT FOR THE YEAR 16,184 18,636 Other comprehensive income Items that are or may be reclassified to profit or loss Translation differences -1,496 1,186 Change in hedging reserves, note 19 -179 -578 Tax attributable to change in hedging reserves 39 139 Items that have not been and will not be reclassified to profit or loss Remeasurement of defined benefit pension plans, note 18 78 -78 Tax related to the above remeasurement -19 19 OTHER COMPREHENSIVE INCOME -1,577 688 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 14,607 19,324 All comprehensive income is attributable to the shareholders of the parent company H & M Hennes & Mauritz AB. 74 Fi NA NCi A L R E PORTS COMMENTS ON THE GROUP INCOME STATEMENT Tax Sales including VAT in the financial year 2016/2017 increased by 4 per- The H&M group’s final tax rate for the 2016/2017 financial year was cent and amounted to SEK 231,771 m (222,865). In local currencies, 22.2 (22.5) percent. The final tax rate for the year depends on the sales increased by 3 percent. results of the group’s various companies and the corporate tax rates Profit during the year was negatively affected by the weak sales in each country and any additional taxes relating to previous years. development in the physical stores of the H&M brand. This is mainly due to the transition in the industry, in which sales are increasingly taking place online but where the group’s online sales do not yet com- pensate for the reduced footfall to stores resulting from the great shift in the industry. In 2017 H&M’s online store was opened in further eight new markets: Turkey, Taiwan, Hong Kong, Macau, Singapore, Malaysia, Cyprus and the Philippines, all of which have had a good start. The H&M online store is currently available in 44 markets, including Kuwait which opened in December 2017. Five new H&M store markets were opened in 2017: Kazakhstan, Colombia, Iceland, Vietnam and Georgia, all of which have had a good start. SALES GROSS PROFIT SELLING AND PROFIT AFTER INCLUDING VAT AND GROSS MARGIN ADMINISTRATIVE EXPENSES FINANCIAL ITEMS SEK M +4% 55.2% 54.0% +6% 231,771 108,090 87,521 222,865 106,177 82,354 -13% 24,039 20,809 2016 2017 2016 2017 2016 2017 2016 2017 TOP TEN SALES MARKETS 2017 2016 CHANGE IN % 30 NOV – 17 2017 SEK M LOCAL NUMBER OF NEW STORES INC. VAT SEK CURRENCY STORES (NET) Germany 36,789 37,174 -1 -3 463 4 uSA 27,807 26,874 3 2 536 68 uK 14,580 15,058 -3 3 292 11 France 13,658 13,559 1 -1 240 2 China 11,030 10,842 2 3 506 62 Sweden 10,284 10,151 1 172 -4 italy 9,180 9,081 1 -1 175 9 Spain 8,140 7,894 3 1 175 6 Netherlands 7,484 7,898 -5 -7 145 0 Norway 6,120 5,926 3 1 128 1 Others* 86,699 78,408 11 8 1,907 229 Total 231,771 222,865 4 3 4,739 388 * Of which franchises 4,947 4,808 3 -2 219 31 75 Fi NA NCi A L R E PORTS Group balance sheet SEK M 30 NOVEMBER 2017 2016 30 NOVEMBER 2017 2016 ASSETS EQUITY AND LIABILITIES FIXED ASSETS EQUITY Intangible fixed assets Share capital, note 17 207 Brands, note 11 18 66 Reserves 1,015 2,651 Customer relations, note 11 8 20 Retained earnings 58,491 58,378 Leasehold and similar rights, note 11 592 630 TOTAL EQUITY 59,713 61,236 Capitalised development expenditure, note 11 6,361 4,567 LIABILITIES Goodwill, note 11 64 Long-term liabilities 7,043 5,347 Provisions for pensions, note 18 445 527 Property, plant and equipment Deferred tax liabilities, note 10 5,331 4,898 Buildings and land, note 12 824 850 Other interest-bearing liabilities, note 13, 22 Equipment, tools, fixture 350 213 and fittings, note 12 38,994 37,843 6,126 5,638 39,818 38,693 Current liabilities Other fixed assets Accounts payable 7,215 Long-term receivables 7,262 1,039 1,014 Tax liabilities 918 Deferred tax receivables, note 10 434 2,916 2,862 Liabilities to credit institutions, 3,955 3,876 note 22 9,745 2,068 Other interest-bearing liabilities, TOTAL FIXED ASSETS 50,816 47,916 note 13, 22 125 59 Other liabilities 3,672 5,036 CURRENT ASSETS Accrued expenses and prepaid Stock-in-trade, note 14 33,712 31,732 income, note 20 19,048 16,846 40,723 31,705 Current receivables Accounts receivable, note 19 5,297 4,881 TOTAL LIABILITIES 46,849 37,343 Tax receivables 2,375 – Other receivables 1,874 2,533 TOTAL EQUITY AND LIABILITIES 106,562 98,579 Prepaid expenses, note 15 2,770 2,071 12,316 9,485 Cash and cash equivalents, note 16 9,718 9,446 TOTAL CURRENT ASSETS 55,746 50,663 TOTAL ASSETS 106,562 98,579 76 Fi NA NCi A L R E PORTS COMMENTS ON THE GROUP BALANCE SHEET STOCK-IN-TRADE The H&M group remains in a strong financial position. The equity/ SEK M +6% assets ratio was 56.0 percent (62.1) and the share of risk-bearing capital was 61.0 percent (67.1). 33,712 31,732 Shareholders’ equity apportioned on the outstanding 1,655,072,000 (1,655,072,000) shares as of 30 November 2017 was SEK 36.08 (37.00). Stock-in-trade Stock-in-trade amounted to SEK 33,712 m (31,732), an increase of 6 percent in SEK compared to the same point of time last year. Currency adjusted, the increase was 7 percent. As of 30 November 2017, the closing stock level was higher than planned as a result of sales development during the autumn being 2016 2017 considerably below the group’s sales plan. The stock-in-trade amounted to 31.6 percent (32.2) of total assets and 16.9 percent (16.5) of sales excluding VAT. Financing As of 30 November 2017, the group had SEK 9,745 m (2,068) in loans from credit institutions with a term of up to 12 months, with an average term of 8 months. Loans from credit institutions within the Nordic countries amounted to SEK 9,320 m (2,000), with interest rates of between 0.00 and 0.072 percent. Loans from credit institu- tions outside the Nordic countries amounted to SEK 425 m (68), with interest rates of between 8.75 and 16.00 percent. 77 Fi NA NCi A L R E PORTS Group changes in equity Since there are no minority interests, all shareholders’ equity is attributable to the shareholders of the parent company H & M Hennes & Mauritz AB. TOTAL TRANSLATION HEDGING RETAINED SHAREHOLDERS’ SEK M SHARE CAPITAL EFFECTS RESERVES EARNINGS EQUITY SHAREHOLDERS’ EQUITY, 1 DECEMBER 2016 207 2,849 -198 58,378 61,236 Adjustment of opening balance* 7 ADJUSTED SHAREHOLDERS’ EQUITY, 1 DEC 2016 207 2,849 -198 58,385 61,243 Profit for the year – 16,184 Other comprehensive income Translation differences – -1,496 – -1,496 Change in hedging reserves Changes in the value of derivatives – -1,341 – -1,341 Reclassified to profit or loss – 1,162 – 1,162 Tax related to hedging reserves – 39 – 39 Remeasurement of defined benefit pension plans – 78 Tax related to the above remeasurement – -19 Other comprehensive income – -1,496 -140 59 -1,577 Total comprehensive income – -1,496 -140 16,243 14,607 Dividend – -16,137 SHAREHOLDERS’ EQUITY, 30 NOVEMBER 2017 207 1,353 -338 58,491 59,713 * Effective from the 2017 financial year, the way that certain defined contribution pension plans are recognised has changed in two of the Swedish companies. The effect in relation to previous years is reported as an adjustment of the opening balance of equity. TOTAL TRANSLATION HEDGING RETAINED SHAREHOLDERS’ SEK M SHARE CAPITAL EFFECTS RESERVES EARNINGS EQUITY SHAREHOLDERS’ EQUITY, 1 DECEMBER 2015 207 1,663 241 55,938 58,049 Profit for the year – 18,636 Other comprehensive income Translation differences – 1,186 – 1,186 Change in hedging reserves Changes in the value of derivatives – -223 – -223 Reclassified to profit or loss – -355 – -355 Tax related to hedging reserves – 139 – 139 Remeasurement of defined benefit pension plans – -78 Tax related to the above remeasurement – 19 Other comprehensive income – 1,186 -439 -59 688 Total comprehensive income – 1,186 -439 18,577 19,324 Dividend – -16,137 SHAREHOLDERS’ EQUITY, 30 NOVEMBER 2016 207 2,849 -198 58,378 61,236 78 Fi NA NCi A L R E PORTS Group cash flow statement SEK M 1 DECEMBER – 30 NOVEMBER 2017 2016 Current operations Profit after financial items* 20,809 24,039 Provisions for pensions 9 -9 Depreciation 8,488 7,605 Tax paid -6,051 -4,470 Other -20 – Cash flow from current operations before changes in working capital 23,235 27,165 Cash flow from changes in working capital Current receivables -1,115 -1,817 Stock-in-trade -2,414 -6,511 Current liabilities 1,881 4,938 CASH FLOW FROM CURRENT OPERATIONS 21,587 23,775 Investing activities investment in leasehold and similar rights -102 -139 investment in other intangible assets -2,058 -1,476 investment in buildings and land -27 -60 investment in equipment -10,284 -11,671 Other investments -25 -152 CASH FLOW FROM INVESTING ACTIVITIES -12,496 -13,498 Financing activities Short-term loans 7,677 2,068 Amortisation finance lease -57 – Dividend -16,137 CASH FLOW FROM FINANCING ACTIVITIES -8,517 -14,069 CASH FLOW FOR THE YEAR 574 -3,792 Cash and cash equivalents at beginning of financial year 9,446 12,950 Cash flow for the year 574 -3,792 Exchange rate effect -302 288 Cash and cash equivalents at year-end, note 16 9,718 9,446 * Interest paid for the group amounts to SEK 40 m (8). Received interest for the group amounts to SEK 260 m (224). 79 Fi NA NCi A L R E PORTS Parent company income statement SEK M 1 DECEMBER – 30 NOVEMBER 2017 2016 External sales excluding VAT 13 – Internal sales excluding VAT, note 5 4,069 3,985 GROSS PROFIT 4,082 3,985 Administrative expenses, note 6, 8, 9 -158 -173 OPERATING PROFIT 3,924 3,812 Dividend from subsidiaries 13,004 12,597 Interest income and similar items, note 27 18 153 Interest expense and similar items, note 27 -91 0 PROFIT AFTER FINANCIAL ITEMS 16,855 16,562 Year-end appropriations, note 23 -328 18 Tax, note 10 -773 -876 PROFIT FOR THE YEAR 15,754 15,704 Parent company statement of comprehensive income SEK M 1 DECEMBER – 30 NOVEMBER 2017 2016 PROFIT FOR THE YEAR 15,754 15,704 Other comprehensive income Items that have not been and will not be reclassified to profit or loss Remeasurement of defined benefit pension plans -1 -4 Tax related to the above remeasurement 0 1 OTHER COMPREHENSIVE INCOME -1 -3 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 15,753 15,701 80 Fi NA NCi A L R E PORTS Parent company balance sheet SEK M 30 NOVEMBER 2017 2016 30 NOVEMBER 2017 2016 ASSETS EQUITY AND LIABILITIES FIXED ASSETS EQUITY Property, plant and equipment Restricted equity Buildings and land, note 12 148 127 Share capital, note 17 207 Equipment, tools, fixture Restricted reserves 88 and fittings, note 12 219 313 295 367 440 Non-restricted equity Financial fixed assets Retained earnings 430 861 Shares and participation rights, note 24 588 Profit for the year 15,753 15,701 Receivables from subsidiaries 849 779 16,183 16,562 Other long-term receivables 111 11 Deferred tax receivables, note 10 79 42 TOTAL EQUITY 16,478 16,857 1,627 1,420 UNTAXED RESERVES, NOTE 25 TOTAL FIXED ASSETS 417 429 1,994 1,860 LIABILITIES CURRENT ASSETS Long-term liabilities Current receivables Provisions for pensions, note 18 182 191 Accounts receivable 4 – Receivables from subsidiaries 19,287 16,179 Current liabilities Other receivables 8 7 Accounts payable 3 Prepaid expenses, note 15 13 0 Tax liabilities 41 729 19,312 16,186 Liabilities to credit institutions, note 22 4,000 – Other liabilities 176 206 Cash and cash equivalents, note 16 133 376 Accrued expenses and prepaid income, note 20 142 7 TOTAL CURRENT ASSETS 19,445 16,562 4,362 945 TOTAL ASSETS 21,439 18,422 TOTAL LIABILITIES 4,544 1,136 TOTAL EQUITY AND LIABILITIES 21,439 18,422 81 Fi NA NCi A L R E PORTS Parent company changes in equity TOTAL RESTRICTED RETAINED SHAREHOLDERS’ SEK M SHARE CAPITAL RESERVES EARNINGS EQUITY Shareholders’ equity, 1 December 2016 207 88 16,562 16,857 Adjustment of opening balance* – 5 ADJUSTED SHAREHOLDERS’ EQUITY, 1 DEC 2016 207 88 16,567 16,862 Profit for the year – 15,754 Other comprehensive income Remeasurement of defined benefit pension plans – -1 Tax related to the above remeasurement – 0 Other comprehensive income – -1 Total comprehensive income – 15,753 Dividend – -16,137 SHAREHOLDERS’ EQUITY, 30 NOVEMBER 2017 207 88 16,183 16,478 * Effective from the 2017 financial year, the way that certain defined contribution pension plans are recognised has changed. The effect in relation to previous years is reported as an adjustment of the opening balance of equity. TOTAL RESTRICTED RETAINED SHAREHOLDERS’ SEK M SHARE CAPITAL RESERVES EARNINGS EQUITY SHAREHOLDERS’ EQUITY, 1 DECEMBER 2015 207 88 16,998 17,293 Profit for the year – 15,704 Other comprehensive income Remeasurement of defined benefit pension plans – -4 Tax related to the above remeasurement – 1 Other comprehensive income – -3 Total comprehensive income – 15,701 Dividend – -16,137 SHAREHOLDERS’ EQUITY, 30 NOVEMBER 2016 207 88 16,562 16,857 82 Fi NA NCi A L R E PORTS Parent company cash flow statement SEK M 1 DECEMBER – 30 NOVEMBER 2017 2016 Current operations Profit after financial items* 16,855 16,562 Provisions for pensions -10 -8 Depreciation 101 127 Taxes paid -1,498 -816 Cash flow from current operations before changes in working capital 15,448 15,865 Cash flow from changes in working capital Current receivables -3,126 -1,376 Current liabilities -231 21 CASH FLOW FROM CURRENT OPERATIONS 12,091 14,510 Investing activities investment in buildings and land -27 -61 Other investments -170 306 CASH FLOW FROM INVESTING ACTIVITIES -197 245 Financing activities Short-term loans 4,000 – Dividend -16,137 CASH FLOW FROM FINANCING ACTIVITIES -12,137 -16,137 CASH FLOW FOR THE YEAR -243 -1,382 Cash and cash equivalents at beginning of financial year 376 1,758 Cash flow for the year -243 -1,382 Cash and cash equivalents at year-end, note 16 133 376 * Interest paid for the parent company amounts to SEK 8 m (0). Received interest for the parent company amounts to SEK 20 m (21), note 27. 83 NOT E S Notes to the financial statements Corporate information recognition and measurement of financial assets and financial lia- The parent company H & M Hennes & Mauritz AB (publ) is a limited bilities. The standard is divided into three parts: classification and company domiciled in Stockholm, Sweden. The parent company’s measurement, hedge accounting and impairment. corporate identity number is 556042-7220. The company’s shares IFRS 9 requires financial assets to be classified in three different are listed on the Stockholm stock exchange, Nasdaq Stockholm. measurement categories: amortised cost, fair value through other The group’s business consists mainly of sales of clothing, accessories, comprehensive income or fair value through profit or loss. The clas- footwear, cosmetics and home textiles to consumers. The company’s sification is made at the time the asset is initially recognised based financial year runs from 1 December to 30 November. The annual on the characteristics of the asset and the company’s business model. report was approved for publication by the board of directors on In the case of financial liabilities, there are no significant changes 19 February 2018 and will be submitted to the annual general compared to IAS 39. The main change is for liabilities measured meeting for approval on 8 May 2018. at fair value. In this case the part of the change in fair value attrib- Ramsbury Invest AB’s holding of shares in H & M Hennes & Mauritz AB utable to a change in the credit risk of the liability is to be presented represents 38.3 percent of all shares and 70.0 percent of the total voting in other comprehensive income rather than in profit or loss, unless power. Ramsbury Invest AB (556423-5769) is thus formally the parent this would create an accounting mismatch. company of H & M Hennes & Mauritz AB. The second part relates to hedge accounting. IFRS 9 requires additional disclosures concerning risk management and the effects 1. ACCOUNTING PRINCIPLES of hedge accounting. In the main, the new principles provide the Basis for preparation of the accounts conditions for a fairer picture of a company’s management of finan- The consolidated accounts have been prepared in accordance with cial risks to be reported. the international Financial Reporting Standards (iFRS) issued by Finally, new principles have been introduced regarding impair- the International Accounting Standards Board (IASB) and the inter- ment of financial assets using a model based on expected losses. pretations provided by the IFRS Interpretations Committee. Since One of the aims of the new model is that reservations for credit the parent company is a company within the EU, only IFRS approved losses will be made at an earlier stage. by the EU are applied. The consolidated accounts also contain dis- The group has begun its evaluation of the effects of the new standard. closures in accordance with the Swedish Financial Reporting Board’s – IFRS 15, Revenue from Contracts with Customers. This standard recommendation RFR 1, Supplementary Accounting Rules for Groups. applies to annual reporting periods beginning on or after 1 January The financial statements are based on historical acquisition costs, 2018 (in the case of H&M, from the 2018/2019 financial year). The apart from certain financial instruments which are reported at fair value. standard replaces all previously issued standards and interpreta- The parent company’s functional currency is Swedish kronor, tions dealing with revenue (i.e. IAS 11 Construction Contracts, IAS which is also the reporting currency for the parent company and for 18 Revenue, iFRiC 13 Customer Loyalty Programmes, iFRiC 15 the group. Unless otherwise indicated, all amounts are reported in Agreements for the Construction of Real Estate, iFRiC 18 Transfers millions of Swedish kronor (SEK m). of Assets from Customers and SiC-31 Revenue: Barter Transactions Where relevant, accounting principles are described within each note. Involving Advertising Services). iFRS 15 contains an overall model for reporting revenue arising Parent company from contracts with customers. The idea is that everything starts The parent company applies the Swedish Annual Accounts Act and with an agreement between two parties concerning the sale of a good the Swedish Financial Reporting Board’s recommendation RFR 2, or service. Initially a customer agreement is to be identified, which Accounting for Legal Entities, which essentially means that IFRS is generates an asset (rights, a promise that compensation will be received) applied. In accordance with RFR 2, the parent company does not and a liability (commitments, a promise to deliver goods/services) apply IAS 39 to the measurement of financial instruments and does for the seller. Under the model the company then reports a revenue not capitalise development expenditure (IAS 38.57). Due to the link item and thereby demonstrates that the company is meeting a between reporting and taxation, year-end appropriations and untaxed commitment to deliver promised goods or services to the customer. reserves are reported in the parent company’s financial statements. H&M does not expect the standard to make any material differ- Group contributions that the parent company receives from subsidi- ence to the group. aries and provides to subsidiaries are reported under appropriations. – IFRS 16, Leases. This standard applies to annual reporting periods beginning on or after 1 January 2019 and will supersede IAS 17, Changes in accounting principles and disclosure requirements Leases, and its associated interpretations IFRIC 4, SIC-15 and SIC-27. The accounting principles and disclosure requirements applied for The standard requires lessees to recognise assets and liabilities for 2016/2017 are the same as those applied in the previous year. all leases unless the lease term is 12 months or less or the underlying asset has a low value. This is based on the approach that the lessee Future accounting principles and disclosure requirements has a right to use an identified asset for a specific period of time and A number of new standards, revisions and interpretations of existing at the same time a liability to pay for this right. Recognition for standards have been published but have not yet entered into force. lessors will essentially be unchanged. Of these, only the standards below are expected to have any effect on The group has begun its evaluation of the new standard and the consolidated financial statements. expects it to result in recognition of material assets and liabilities – IFRS 9, Financial Instruments: Recognition and Measurement. associated with the group’s leases for premises. Since the standard This standard is to be applied to annual reporting periods beginning will be applied for the first time to the 2019/2020 financial year, the on or after 1 January 2018 (in the case of h&m, from the 2018/2019 judgement has been made that it is not yet possible to assess and financial year), when it will replace IAS 39, Financial Instruments: calculate its effects on the figures with any certainty. Recognition and Measurement. The new standard has been com- – IFRIC 23, Uncertainty over Income Tax Treatments. This inter- prehensively revised in various parts, including in respect of the pretation of the standard clarifies recognition and measurement 84 when there is uncertainty over income tax treatments. Assuming that the Eu approves the interpretation, it is to be applied starting from 1 January 2019. The group will evaluate the effect of the interpretation during 2018. Estimates, assumptions and assessments The preparation of the annual report and consolidated accounts requires estimates and assumptions to be made, as well as judgments in the application of the accounting principles. These affect carrying amounts for assets, liabilities, income, expenses and supplementary information. The estimates and assumptions are based on historical experience, other relevant factors and expectations of the future and are reviewed regularly. The actual outcome may therefore deviate from the estimates and assumptions made. The sources of uncertainty that have been identified by H&M are the measurement of stock-in-trade and the measurement of current and deferred tax – see note 10 and note 14. it is judged that, as at 30 November 2017, there are no such estimates or assumptions made in the financial statements that involve a signifi- cant risk of any material adjustment to the values of assets and liabilities in the forthcoming financial year, other than those mentioned above. Consolidated accounts Basis of consolidation The consolidated accounts cover the parent company and its sub- sidiaries, and have been prepared according to the acquisition method. The financial reports for the parent company and the subsidiaries included in the consolidated accounts cover the same period and have been prepared in accordance with the accounting principles that apply to the group. Intra-group income, expenses, receivables and liabilities, as well as unrealised gains and losses, are eliminated entirely in the preparation of the consolidated accounts. All compa- nies in which the group owns or controls more than 50 percent of the votes, or in which the group alone has a controlling interest through an agreement or otherwise, are consolidated as subsidiaries. Sub- sidiaries are included in the consolidated accounts from the date of acquisition, which is the date on which the parent company gains a controlling interest, and are included in the consolidated accounts until such date as the controlling interest ends. Business combinations In business combinations acquired assets and liabilities are identified and classified and are measured at fair value on the acquisition date. if the acquisition cost of the subsidiary’s shares exceeds the calculated value of the net identifiable assets of the acquired company at the time of acquisition, the difference is reported as goodwill upon consolida- tion. If the acquisition cost is less than the finally established value of the net identifiable assets, the difference is reported directly in the income statement. The minority interest in the case of acquisitions of less than 100 percent is determined for each transaction either as a proportionate share of the fair value of net identifiable assets or at fair value. Transaction costs associated with acquisitions are not included in the acquisition cost; instead these are expensed immediately. Translation of foreign subsidiaries The companies making up the group present their financial reports in the currency used in the economic environment in which the company concerned mainly operates, known as the functional currency. These reports form the basis of the consolidated accounts. The consolidated accounts are presented in Swedish kronor, which is the parent company’s functional currency and reporting currency. Assets and liabilities in foreign subsidiaries are translated at the exchange rate on the closing date, while the income statement is translated at the average exchange rate for the financial year. The translation difference arising from this, and also as a result of the fact that the net investment is translated at a different exchange rate at the end of the financial year than at the beginning of the financial year, is posted to equity as a translation reserve, via the statement of comprehensive income. On disposal of a foreign business the accumulated translation differences in the income statement are posted together with the profit or loss on disposal. Foreign currency monetary assets and liabilities in foreign currencies are converted at the exchange rate on the closing date. Exchange rate differences arising on translation are reported in the income statement with the exception of exchange rate differences in respect of loans, which are to be regarded as net investment in a foreign business. Exchange rate differences of this type are posted to equity as translation differences via the statement of comprehensive income. Interest income Interest income is recognised as it is earned. Other provisions Provisions are reported in the balance sheet when there is an under- taking as a result of an event occurring and it is likely that an outflow of resources will be required for the undertaking and when the amount can be reliably estimated. Cash flow statement The cash flow statement is prepared according to the indirect method. The reported cash flow covers only transactions involving payments in or out. 2. FINANCIAL RISKS The group’s financing and management of financial risk is carried out centrally within the group’s financial department in accordance with a financial policy established by the board of directors. The financial policy is the most important financial control tool for the company’s financial activities and establishes the framework within which the company works. The group’s accounting principles for financial instruments, including derivatives, are described in note 19. in the course of doing business the group is exposed to risk associ- ated with financial instruments, such as cash and cash equivalents, short-term investments, accounts receivable, accounts payable and loans. The group also executes transactions involving currency deriv- atives for the purpose of managing currency risk that arises in the course of the group’s business. The risks relating to these instruments are primarily the following: – interest rate risk associated with cash and cash equivalents and short-term investments – currency risk associated with flows and financial assets in foreign currencies – credit risk associated with financial assets and derivative positions – liquidity risk relating to liquidity and cash flow Interest rate risk Interest rate risk is the risk that the value of a financial instrument will vary due to changes in market interest rates and that changes in market interest rates may affect net profit. The group’s exposure to risk from changes in interest rates relates to cash and cash equiva- lents, short-term investments and liabilities to credit institutions and 85 NOT E S for financial leases. The original term of the investments is up to three currency, but when converted into SEK may increase if the Swedish months as of the closing date. The financial policy permits investments krona has weakened or decrease if the Swedish krona has strength- of up to two years. The group’s cash and cash equivalents and short- ened. Translation effects affect the group’s net assets on consolidation term investments as of the closing date amounted to SEK 9,718 m of the foreign subsidiaries’ balance sheets (translation exposure in (9,446). As of the closing date, liabilities to credit institutions and for the balance sheet). No exchange rate hedging (equity hedging) is financial leases amounted to SEK 10,220 m (2,340). The short term carried out for this risk. means that the risk of changes in value is limited. An interest rate increase of 0.5 percentage points on these amounts would increase Credit risk interest income from cash and cash equivalents and short-term investments are only permitted to be made in banks based in coun- investments by SEK 49 m (47), and would increase interest expense tries with a minimum rating of AA- (according to Standard & Poor’s for external borrowing and financial leases by SEK 51 m (12). A corre- long-term rating) and funds are only invested in banks with a mini- sponding decrease in the interest rate would reduce interest income mum rating of A- (Standard & Poor’s) and A3 (Moody’s). The financial by the same amount and would decrease interest expense related to policy stipulates for various ratings the maximum amount that may liabilities to credit institutions and for financial leases. be invested and the term for which it may be invested. Investments are only allowed in banks defined by Standard & Poor’s or Moody’s Currency risk as having systemic importance in the country where they are based. Currency risk is, among other things, the risk that the value of under Standard & Poor’s rating model the bank shall have at least financial instruments or future cash flows will vary due to changes “moderate systemic importance” and under moody’s model the bank in exchange rates. shall have at least “one-notch uplift for systemic support”. No further investments shall be made in countries or banks which have the mini- Currency exposure associated with financial instruments mum allowed long-term rating and a negative outlook. Maximum H&M’s currency risk associated with financial instruments is mainly credit exposure as of 30 November 2017 totalled SEK 16,551 m (16,189) related to financial investments, accounts payable and derivatives. and corresponds to the book value for cash and cash equivalents of The group’s accounts payable in foreign currencies are mainly handled SEK 9,718 m (9,446), accounts receivable of SEK 5,297 m (4,881) and in Sweden and are largely hedged through forward contracts. Based other SEK 1,536 m (1,862). Accounts receivable are divided between a on this, a change in the value of the Swedish krona of 2 percent in large number of customers with low amounts per customer. The aver- relation to other currencies would result in an insignificant momen- age debt was around SEK 2,794 (2,585). Bad debts during the year tary effect on profit related to the financial instrument holdings as from accounts receivable were insignificant. of the closing date. A 2 percent strengthening of the Swedish krona would have a positive effect on the hedge reserve in equity of around Liquidity risk SEK 200 m (269) before taking into account the tax effect, of which The strategy for h&m’s liquidity planning is to ensure good payment SEK 237 m (316) relates to EUR and SEK -230 m (-269) to USD. capacity and to identify future liquidity needs in the group. Liquidity The group’s exposure to outstanding derivative instruments is and financing risks are regulated in H&M’s financial policy, which reported in note 19. states that loans are to have an evenly distributed maturity structure The group’s operating result for the year was affected by exchange rate and that cash and unused credit facilities are to cover the company’s differences relating to flows of goods in the amount of SEK 44 m (-63). forecast short-term liquidity needs. As of 30 November 2017, the group had SEK 9,745 m (2,068) in Transaction exposure associated with commercial flows loans from credit institutions with a term of up to 12 months, with an The payment flows in the form of payments in foreign currencies for average term of 8 months. At the closing date, liquid assets amounted accounts receivable and payable expose the group to currency risk. to SEK 9,718 m (9,446). Starting from the first quarter of 2017 the To manage the currency risk relating to changes in exchange rates the H&M group has a five-year revolving credit facility (RCF) of EUR 700 m, group hedges its currency risk within the framework of the financial with an option to extend this for a further two years. The credit facil- policy. The currency risk exposure is dealt with at central level. Most ity is unused. of the group’s sales are made in euros, and the group’s most signifi- cant purchase currencies are the US dollar and the euro. Fluctuation in the uS dollar’s exchange rate against the euro is the single largest transaction exposure within the group. To hedge the flows of goods in foreign currencies and thereby reduce the effects of future exchange rate fluctuations, 100 percent of the group’s purchases of goods and the bulk of corresponding forecast inflows from the sales companies are hedged under forward contracts on an ongoing basis. The average term of outstanding forward contracts is around three months. Since the sole purpose of this currency management is to reduce risk, only exposure in the flow of goods is hedged. Translation exposure on consolidation of units outside Sweden In addition to the effects of transaction exposure, profits are also affected by translation effects as a result of changes in exchange rates for the local currencies of the various foreign subsidiaries against the Swedish krona, compared to the same period the previous year. The underlying profit/loss in a market may be unchanged in the local 86 NOT E S 3. SEGMENT REPORTING Cont. Note 3, Segment reporting The group’s business consists mainly of sales of clothing, accessories, footwear, cosmetics and home textiles to consumers. Internal follow- 2017 2016 up is carried out on a country by country basis by the CEO, who is the Total group’s chief operating decision maker. Each country is thus an oper- External net sales 200,004 192,267 ating segment. The various countries sell similar products via similar Operating profit 20,569 23,823 sales channels to similar customers, however. Goods purchasing is Operating margin, % 10.3 12.4 carried out collectively for the group. Some countries have similar eco- Assets excluding tax receivables and internal receivables 101,271 95,717 nomic characteristics, such as long-term economic results. In view of Liabilities excluding tax liabilities and internal liabilities 40,600 32,011 this, the countries may be combined in segment reporting in accord- Investments 12,750 13,661 ance with IFRS 8. H&M has combined countries to form the segments Depreciation 8,488 7,605 Asia & Oceania, Europe & Africa, and North & South America. The parent company and subsidiaries with no external sales are reported Operating results for each segment are based on how H&M tracks in a separate Group Functions segment. The same accounting principles results internally within the group and may deviate from the fiscal are applied to segment reporting as in the consolidated accounts. Trans- result in each market. actions between segments take place on normal commercial terms. The group’s property, plant and equipment amounted to SEK 39,818 m (38,693) as of 30 November 2017. The fixed assets are largely distrib- 2017 2016 uted between the countries in accordance with each country’s level Asia and Oceania of sales. In Sweden property, plant and equipment amounted to External net sales 29,557 27,416 SEK 2,113 m (1,722) as of 30 November 2017. Operating profit 1,143 1,927 Operating margin, % 3.9 7.0 4. NET SALES BY MARKET Assets excluding tax receivables and internal receivables 14,490 14,657 The group’s income is generated mainly by the sale of clothing, acces- Liabilities excluding tax liabilities and internal liabilities 1,487 1,430 sories, footwear, cosmetics and home textiles to consumers. Sales rev- investments 1,651 2,505 enue is reported less value-added tax, returns and discounts as sales Depreciation 1,455 1,169 excluding VAT in the income statement. Income from store and online sales is reported in conjunction with sale/delivery to the customer. Europe and Africa Franchise sales have two components: sales of goods to franchisees, External net sales 135,567 132,689 which are reported on delivery of the goods, and franchise fees, which Operating profit 4,066 4,006 are reported when the franchisee sells goods to the consumer. Operating margin, % 3.0 H&M Club is accounted for in accordance with the principles set Assets excluding tax receivables and internal receivables 45,894 41,143 out in IFRIC 13. Points earned that have not been used are reported as Liabilities excluding tax liabilities and internal liabilities 13,553 11,975 a liability as well as a reduction in revenue in order to meet the future investments 4,824 5,787 cost that will arise for the points issued. The liability is based on the Depreciation 4,118 3,995 fair value calculated per outstanding point. North and South America The group’s income exhibits seasonal variations. The first quarter External net sales 34,880 32,162 of the financial year is normally the weakest and the last quarter the Operating profit 794 971 strongest. Operating margin, % 2.3 3.0 Assets excluding tax receivables and internal receivables 18,959 17,369 No. of stores Liabilities excluding tax liabilities and internal liabilities No. of stores 6,785 5,998 2017 30 Nov. 2017 2016 30 Nov. 2016 investments 3,258 3,360 Sweden 8,236 172 8,127 Depreciation 176 2,120 1,791 Norway 4,900 128 4,744 127 Group Functions Denmark 4,639 110 4,549 102 Net sales to other segments 72,901 79,284 uK 12,622 292 13,005 281 Operating profit 14,566 16,919 Switzerland 5,471 100 5,860 98 Operating margin, % 20.0 21.3 Germany 30,959 463 31,291 459 Assets excluding tax receivables and internal receivables 21,928 22,548 Netherlands 6,191 145 6,536 145 Liabilities excluding tax liabilities and internal liabilities 18,775 12,608 Belgium 3,726 97 3,641 90 investments 3,017 2,009 Austria 4,666 86 4,637 83 Depreciation 795 650 Luxembourg 408 10 408 10 Finland 2,295 64 2,317 61 Eliminations France 11,383 240 11,300 238 Net sales to other segments -72,901 -79,284 uSA 26,330 536 25,495 468 Spain 6,816 175 6,610 169 Poland 4,402 175 3,825 166 Czech Republic 1,341 50 1,182 48 Portugal 1,075 32 1,037 31 italy 7,525 175 7,443 166 Canada 4,291 91 3,882 85 Slovenia 452 13 445 12 87 NOT E S Cont. Note 4, Net sales by market 6. SALARIES, OTHER REMUNERATION AND SOCIAL SECURITY COSTS No. of stores 2017 30 Nov. 2017 2016 30 Nov. 2016 2017 Board, CEO, of of which pens. ireland 961 24 929 23 executive Salary, Social which board, CEO, hungary 1,402 45 1,254 42 management other sec. costs pens. executive team, salary employees total Slovakia management 616 22 568 19 Sweden, parent company 20 Greece 0 15 9 1,576 9 35 1,531 35 Subsidiaries China 48 28,620 9,484 6,979 589 506 9,327 23 444 Group total 68 28,620 hong Kong 6,994 598 1,663 32 28 1,919 28 Japan 4,469 82 4,259 66 Russia 4,915 134 3,702 113 2016 Board, CEO, of of which pens. South Korea 1,807 executive Salary, 41 1,523 Social which board, CEO, 35 management other sec. costs pens. executive Turkey 2,962 70 2,581 62 team, salary employees total management Romania 1,979 56 1,745 52 Sweden, parent company* 19 0 13 Croatia 685 15 677 15 Subsidiaries 48 26,166 6,333 607 23 Singapore 899 13 963 13 Group total 67 26,166 6,346 620 36 Bulgaria 581 20 534 19 * Social security costs were affected by SEK 6 m relating to the repayment of premiums Latvia 326 8 274 8 for the previous year. malaysia 1,109 44 1,066 35 mexico 1,988 37 1,345 25 Chile 1,250 8 950 Board fees Lithuania 324 9 262 8 Board fees paid for the year as approved by the 2016 AGm amounted Serbia 363 12 307 9 to SEK 6,075,000 (5,825,000). Board fees were paid as follows: Estonia 350 10 314 8 SEK Australia 2,383 32 1,817 22 Stefan Persson, chairman 1,625,000 Philippines 926 32 776 21 Stina Bergfors 575,000 Taiwan 742 12 634 10 Anders Dahlvig 700,000 Peru 725 8 433 6 Lena Patriksson Keller 575,000 macau 135 2 166 2 melker Schörling 575,000 india 1,092 27 574 12 Christian Sievert 750,000 South Africa 780 17 566 8 Erica Wiking häger 700,000 Puerto Rico 91 2 57 2 Niklas Zennström 575,000 Cyprus 80 1 30 1 New Zealand 183 3 48 1 The fees were paid as resolved at the 2016 annual general meeting. Kazakhstan 158 3 This means that the fees related to the period until the next AGM was Colombia 188 3 held, i.e. the period 4 May 2016 to 10 May 2017. The amounts were iceland 76 2 paid out after the 2017 AGM. Vietnam 63 2 As of the AGm on 10 may 2017 the board consists of seven ordinary Georgia 7 1 members elected by the AGM. There are also two employee repre- Franchise 4,938 219 4,802 188 sentatives, with two deputies for these positions. Seven members of Total 200,004 4,739 192,267 4,351 the board are women, four are men, and four of the 11 are employed by the company. Board member Lena Patriksson Keller is the majority shareholder 5. REVENUE FROM GROUP COMPANIES in Patriksson Communication AB, which had business relations with The parent company’s internal sales consist of royalties of SEK 3,962 m H&M during the year. The transactions took place on market terms (3,849) and other income of SEK 107 m (136) from group companies. and remuneration for 2017 amounted to SEK 1.3 m (0.4). Outstanding balances as of 30 November 2017 totalled SEK 0.1 m (0). Remuneration of senior executives Remuneration of senior executives is based on resolutions on guide- lines adopted annually by the AGM – see the administration report on pages 68–69. Remuneration of the chief executive officer Remuneration paid to the CEO for the 2017 financial year in the form of salary and benefits amounted to SEK 13.7 m (13.4), which included variable remuneration of SEK 0 m (0). Pension benefits for the CEO are covered by a defined contribution plan and by the ITP plan. The combined pension expenses shall amount in total to 30 percent of the CEO’s fixed salary. Pension expenses amounted to SEK 4.1 m (4.0). The retirement age for the CEO is 65. 88 NOT E S Cont. Note 6, Salaries, other remuneration and social security costs The CEO is entitled to a 12-month period of notice. In the event that However, it will also be possible for payments to be made after ten the company cancels his employment contract, the CEO will also years of employment – but no earlier than 2021. receive severance pay of an extra year’s salary. The CEO’s terms of The 2013 annual general meeting resolved to change the basis of employment are determined by the board of directors. future contributions to HIP. The contribution is no longer linked to The CEO is not covered by the long-term variable remuneration, i.e. the increase in dividend; instead, contributions to HIP are based on what was previously referred to as supplementary guidelines on senior 10 percent of the increase in the company’s profit after tax between executives – see the administration report on page 68. two consecutive financial years. The increase in profit is calculated on profit after tax before any contribution to HIP. Thus when calculating Pension for the former CEO the contribution to HIP for year 2, the year’s profit after tax is com- The former CEO retired on 1 September 2009. The total pension pared with year 1’s profit after tax before any contribution to HIP. commitments entered as liabilities, which are based on the fact that This ensures that the two years are compared on a like-for-like basis; the former CEO receives a pension for the first three years of his in other words, profit after tax before any contribution to HIP. The retirement equivalent to 65 percent of his fixed salary followed by a first contribution to HIP based on an increase in profit was made for lifelong pension equivalent to 50 percent of the same salary, amount the financial year which ended on 30 November 2013. to SEK 140.6 m (141.3). The change in the year’s pension commitments The contribution to HIP for a financial year is expensed in the year entered as liabilities includes actuarial losses of SEK 3.5 m (actuarial to which it relates. For example, if profit after tax in year 1 is 100 and losses of SEK 2.5 m). Pension costs for the former CEO are included profit after tax in year 2 is 130, then the contribution is 3 and will be under “of which pensions to board, CEO, executive management”. expensed in year 2. There is a ceiling that limits the size of the contribution when the Remuneration of the executive management team increase in profit between two years may be deemed disproportion- The composition of the executive management as of 30 November ately large. The ceiling has been set at 2 percent of profit for the year 2017 encompassed, in addition to the CEO, ten (ten) individuals, after tax before any contribution to HIP. of whom six are women. The executive management team consists The contributions to the foundation are to be invested in h&m of the CFO and the individuals responsible for the following group- shares. H&M has no other commitments beyond this. wide functions: production, sustainability, expansion, communica- in the consolidated accounts the costs of the incentive programme tions, human resources, business development and logistics, as are recognised in accordance with the rules on short-term profit-sharing well as the persons responsible for the H&M brand and the person and bonus schemes set out in IAS 19. The expense will be recognised responsible for new business (which includes the other brands such when the amount has been established and an obligation exists. as COS, & Other Stories, ARKET, Monki, Weekday, Cheap Monday For 2017 no contribution was made to the incentive programme, and H&M Home). based on the principle for contributions to HIP that was adopted at Remuneration paid to other members of the executive management the 2013 AGM and is described above. team in the form of salary and benefits amounted to SEK 48.2 m (48.0), which included variable remuneration of SEK 0 m (0). In addition to 7. AVERAGE NUMBER OF EMPLOYEES this, an estimated expense of SEK 30.0 m (30.0) has been recognised in respect of remuneration that certain senior executives may receive 2017 2016 in accordance with the long-term variable remuneration, i.e. what was Total male % Total male % Sweden previously referred to as supplementary guidelines – see further descrip- 10,100 23 8,933 22 Norway tion in the administration report on page 68. This will be paid out no 1,799 10 1,723 9 Denmark 1,899 9 1,718 earlier than 2019, in accordance with the guidelines approved at the 9 uK 2014 AGM. Pension expenses relating to other members of the execu- 7,565 23 7,604 23 Switzerland 2,129 15 2,149 tive management team during the year amounted to SEK 17.0 m (15.1). 14 Germany 14,504 19 14,261 There are rules in place for members of the executive management 19 Netherlands 2,636 16 2,660 team with respect to supplements to retirement pension beyond the 17 Belgium 2,349 27 2,328 28 ITP plan. The retirement age varies between 62 and 65. The cost of Austria 1,955 10 1,907 11 this commitment is partially covered by separate insurance policies. Luxembourg 159 16 158 16 Finland 1,195 7 1,098 6 H&M Incentive Program (HIP) France 5,975 28 5,849 23 An extraordinary general meeting held on 20 October 2010 resolved to uSA 13,248 37 11,900 37 introduce an incentive programme for all employees of the H&M group. Spain 4,581 20 4,469 19 The programme was initiated by Stefan Persson and family through Poland 6,649 16 6,388 16 the donation of 4,040,404 H&M shares worth around SEK 1 billion to Czech Republic 1,121 13 1,054 13 a Swedish foundation, Stiftelsen H&M Incentive Program. Portugal 848 17 725 15 All employees of the h&m group, regardless of their position and italy 5,118 28 4,895 28 salary level, are included in the programme according to the same Canada 1,823 24 1,657 24 basic principle – based on length of employment, either full-time or Slovenia 162 10 137 9 part-time. The number of years that the employee has worked for the ireland 442 16 479 17 company previously is taken into account in the qualification period, hungary 750 16 682 17 which is five years unless local rules require otherwise. As a general Slovakia 316 16 294 16 rule, funds will begin to be paid out no earlier than the age of 62. Greece 1,186 17 1,061 17 89 NOT E S Cont. Note 7, Average number of employees 9. AUDIT FEES 2017 2016 GROUP PARENT COMPANY Total male % Total male % 2017 2016 2017 2016 China 11,497 28 10,224 29 Ernst & Young hong Kong 965 32 986 20 Audit assignments 29.0 26.0 Japan 3.5 3.2 1,801 41 2,198 28 Auditing other than audit assignments 4.4 3.6 0.2 0.8 Russia 2,724 26 2,368 24 Tax consultancy 13.0 10.7 0.1 0.2 South Korea 1,160 32 981 32 Other consultancy 3.1 1.9 Turkey – 3,305 46 2,770 48 Romania 1,078 25 1,068 28 Other auditors Croatia 332 10 343 Audit assignments 6.9 4.9 Singapore – 540 30 458 34 Total 56.4 47.1 3.8 4.2 Bulgaria 366 24 362 24 Latvia 305 14 239 17 malaysia 803 55 778 56 10. TAX mexico 1,534 49 852 51 income taxes in the income statement represent current and deferred Chile 721 46 659 46 corporation tax payable by Swedish and foreign subsidiaries. Current Lithuania 226 10 191 6 tax is tax that will be paid or received in respect of the current year as Serbia 195 19 169 18 well as adjustments to current tax attributable to previous periods. Estonia 245 5 216 The income tax rate in force in each country is applied. Australia 1,107 29 988 40 Deferred tax is calculated according to the balance sheet method Philippines 905 48 760 44 based on temporary differences arising between reported and fiscal Taiwan 370 30 397 33 values of assets and liabilities. Deferred tax is calculated using the tax Peru 657 54 757 53 rates that are expected to apply in the period when the receivables are macau 63 43 78 38 deducted or the liabilities are settled, based on the tax rates (and the india 1,329 60 989 59 tax legislation) in force on the closing date. Deferred tax receivables South Africa 548 34 471 38 are recognised for all temporary differences unless they relate to Puerto Rico 51 27 41 32 goodwill or an asset or a liability in a transaction that is not a com- Cyprus 68 19 28 18 pany acquisition and that, at the time of acquisition, affects neither New Zealand 215 24 185 26 the reported nor taxable profit or loss for the period. Also, temporary Kazakhstan 182 39 differences relating to investments in subsidiaries and associated Colombia 273 20 companies are taken into account only to the extent it is likely that iceland 20 15 the temporary difference will be reversed in the foreseeable future. Vietnam 102 25 Deferred tax receivables for temporary differences and loss carry- Georgia 68 16 forwards are recognised only to the extent it is likely that these will Other countries 914 72 901 68 be able to be utilised. Total 123,178 26 114,586 25 The carrying amounts of deferred tax receivables are tested as of each closing date and reduced where it is no longer deemed likely that they will be able to be utilised. 8. DEPRECIATION AND AMORTISATION The US tax reform (Tax Cuts & Jobs Act) was enacted in December Depreciation has been calculated at 12.5 percent of the acquisition 2017. For H&M this means that deferred tax liabilities and deferred cost of equipment and leasehold rights, and 20 percent for computer tax claims assignable to h&m’s uS subsidiary are to be remeasured equipment and vehicles. Amortisation on brands and customer rela- during the first quarter 2018. The effect of the remeasurement is tions relating to FaBric Scandinavien AB and capitalised development being analysed and the current assessment is that it will result in expenditure is assessed at 10 percent of the acquisition cost. Buildings positive one-off tax income in the first quarter of 2018. Cash flow are depreciated at 3 percent of their acquisition cost. No depreciation will not be affected by this one-off effect. is applied to land values. Depreciation and amortisation for the year Global companies such as h&m are sometimes involved in tax is reported in the income statement as follows: proceedings of varying extent and at different stages. H&M continu- ally evaluates tax proceedings in progress. Where it is likely that GROUP PARENT COMPANY additional tax will have to be paid and the outcome can be reasonably 2017 2016 2017 2016 estimated, the necessary reserve is made. As of the closing date, tax Cost of goods sold 736 847 – proceedings are in progress in some countries relating to internal pric- Selling expenses 7,175 6,256 – ing. H&M has made an assessment of the likely outcome and reserved Administrative expenses 577 502 101 127 the tax expense concerned. As of the closing date, this reserve totalled Total 8,488 7,605 101 127 SEK 424 m. This assessment took account of aspects such as whether agreements on double taxation exist and whether there are differ- ences between the tax rates in different countries. 90 NOT E S Cont. Note 10, Tax 11. INTANGIBLE FIXED ASSETS Intangible fixed assets with a finite useful life are reported at acquisi- GROUP PARENT COMPANY tion cost less accumulated amortisation and any accumulated write- 2017 2016 2017 2016 downs. Amortisation is distributed linearly over the assets’ expected Tax expense (-) / tax receivable (+): useful life. Current tax Development costs are capitalised to the extent that it is judged Tax expense for the period -4,044 -5,106 -772 -874 that the company will gain from future financial benefits and if the Adjusted tax expense acquisition cost can be reliably calculated. The reported value for previous years -14 -96 0 includes the direct costs of services and materials acquired, as well Total -4,058 -5,202 -772 -874 as indirect costs attributable to the asset. Other development costs, Deferred tax receivable (+) / as well as maintenance and training initiatives, are recognised as tax expense (-) in respect of: expenses in the income statement as they arise. Stock-in-trade -105 -55 – Goodwill is the amount by which the acquisition cost of the sub- Loss carryforward 13 2 – sidiary’s shares exceeds the calculated value of the subsidiary’s net Pension provisions -28 3 -1 -2 identifiable assets upon acquisition. Goodwill on acquisition of sub- Tax allocation reserve 110 – sidiaries is reported as intangible assets. Intangible assets with an Intangible fixed assets -366 -103 – indefinite useful life, including goodwill, are tested for impairment Property, plant and equipment -339 -333 – annually or more often if there is an indication of a decline in value. Other temporary differences 148 285 – If the carrying amount of the asset exceeds the recoverable amount (the Effect of changed tax rates – higher of the net realisable value and the value in use), the necessary Total -567 -201 -1 -2 amount is written down. Any write-down is recognised in profit/loss. Total -4,625 -5,403 -773 -876 GROUP Deferred tax recognised in other 2017 2016 comprehensive income in respect of: Brands* hedging reserves 39 139 – Opening acquisition cost Defined benefit pension plans 470 -19 19 0 1 Acquisitions during the year Total – 20 158 0 1 Closing acquisition cost 470 Reconciliation between current 470 tax rate and effective tax rate: Opening amortisation -404 -356 Expected tax expense according Amortisation for the year to the Swedish tax rate of 22% -48 -4,577 -5,289 -3,636 -3,648 Closing accumulated amortisation Difference in foreign tax rates -33 -452 69 -404 – Closing book value Non-deductible/non-taxable 18 66 -1 -87 2 0 Other – Customer relations* Tax for previous years -14 -96 0 Opening acquisition cost 131 Tax-free dividend subsidiaries – 2,861 2,772 Acquisitions during the year – Total -4,625 -5,403 -773 -876 Closing acquisition cost 131 Recognised deferred tax Opening amortisation -111 receivables relate to: -99 Amortisation for the year Pension provisions -12 131 161 79 42 Closing accumulated amortisation -123 Intangible fixed assets -111 195 180 – Closing book value Property, plant and equipment 8 20 384 266 – Loss carryforward in subsidiaries 30 20 – Leasehold rights and similar Stock-in-trade 682 921 – Opening acquisition cost 1,438 1,372 hedging reserves 106 62 – Acquisitions during the year 140 100 Other temporary differences 1,388 1,252 – Sales/disposals -326 -70 Total 2,916 2,862 79 42 Translation effects 13 36 Closing acquisition cost Recognised deferred tax 1,265 1,438 liabilities relate to: Opening amortisation -855 -721 Intangible fixed assets 1,408 1,026 Sales/disposals 323 69 Property, plant and equipment 1,872 1,586 Amortisation for the year -148 -175 Stock-in-trade 243 366 Translation effects -9 -28 Tax allocation reserve 1,780 1,890 Closing accumulated amortisation -689 hedging reserves -855 0 – Closing book value Other temporary differences 576 583 28 30 Total 5,331 4,898 As of the closing date, the group has no loss carryforward other than the recognised deferred taxes receivable. 91 NOT E S Cont. Note 11, Intangible fixed assets 12. BUILDINGS, LAND AND EQUIPMENT Costs relating to property, plant and equipment are reported in the GROUP balance sheet if it is likely that the company will gain from future 2017 2016 financial benefits associated with the asset and if the asset’s acquisi- Opening value, projects in progress 47 9 tion cost can be reliably calculated. Other costs and costs relating Change for the year -38 39 to ongoing maintenance and repair are reported as an expense in Translation effects 7 -1 the period in which they arise. Property, plant and equipment are Closing value, projects in progress 16 47 reported at acquisition cost less accumulated depreciation and any Total closing book value 592 630 accumulated write-downs. Depreciation is distributed linearly over Capitalised development expenditure the assets’ expected useful life. No depreciation is applied to land. Opening acquisition cost 4,852 3,376 The carrying amount of property, plant and equipment is tested for Acquisitions during the year 2,058 1,476 any indication of impairment. If the carrying amount of the asset exceeds the recoverable amount (the higher of the net realisable value Closing acquisition cost 6,910 4,852 and the value in use), the necessary amount is written down. Any Opening amortisation -285 -131 write-down is recognised in profit/loss. Amortisation for the year -264 -154 Closing accumulated amortisation GROUP -549 PARENT COMPANY -285 Closing book value 6,361 4,567 2017 2016 2017 2016 Capitalised development expenditure refers mainly to IT-related investments. Depre- Buildings ciation has commenced for those parts that were taken into use during 2013–2017, Opening acquisition cost 1,068 1,037 146 corresponding to around 40 percent of the capitalised development expenditure. 146 Acquisitions during the year Those projects that are not yet ready for use are tested for impairment annually. This 84 0 83 – year’s impairment testing of these projects did not result in any need for write-downs. Sales/disposals -37 -21 – Translation effects Goodwill* -16 52 – Opening book value Closing acquisition cost 1,099 1,068 64 229 64 146 Change for the year – Opening depreciation -423 -377 -83 -78 Closing book value 64 Sales/disposals 25 4 – * Brands, customer relations and goodwill assets were added through the acquisition Depreciation for the year -32 -31 -6 -5 in 2008 of the company FaBric Scandinavien AB, which is a cash-generating unit. Translation effects 11 -19 – h&m acquired the remaining 40 percent of the shares in FaBric Scandinavien AB at Closing accumulated depreciation -419 -423 -89 the end of November 2010. -83 Closing book value 680 645 140 63 A goodwill impairment test was carried out at the end of 2017. Significant assumptions Opening value, projects in progress used when testing goodwill for impairment are sales development and gross margin. 57 0 57 0 The impairment test is based on a calculation of value in use. The value in use has Change for the year -56 57 -56 57 been assessed based on discounted cash flows according to forecasts for the next five Translation effects 0 – years and with an annual growth rate of 2 percent (2) in subsequent years. A discount Closing value, projects in progress 1 57 rate of 14 percent (14) before tax was used. The cash flows are based on H&M’s business 1 57 plan. The growth rate of 2 percent (2) is based on H&M’s assessment of the opportuni- Total closing book value 681 702 141 120 ties and risks associated with the business. The discount rate is based on an average weighted capital cost that is estimated to be on a par with the external requirements Land that the market imposes for similar companies. No impairment was identified and Opening acquisition cost 148 137 7 3 H&M is of the opinion that reasonable possible changes in the variables above would Acquisitions during the year 0 3 not have such a significant impact that the recoverable amount would be reduced to – 4 Sales/disposals a lower amount than the carrying amount. -3 0 – Translation effects -2 8 – Closing book value 143 148 7 Equipment Opening acquisition cost 63,727 54,812 1,001 Acquisitions during the year 11,035 11,579 – Sales/disposals -4,960 -4,402 – Translation effects -1,866 1,738 – Closing acquisition cost 67,936 63,727 1,001 Opening depreciation -27,733 -24,044 -688 -566 Sales/disposals 4,583 4,055 – Depreciation for the year -7,711 -6,959 -94 -122 Translation effects 598 -785 – Closing accumulated depreciation -30,263 -27,733 -782 -688 Closing book value* 37,673 35,994 219 313 92 NOT E S Cont. Note 12, Buildings, land and equipment Cont. Note 13, Payments for operating leases and finance leases GROUP PARENT COMPANY Finance leases 2017 2016 2017 2016 The group has assets held under finance leases with a year-end Opening value, projects in progress 1,849 1,397 – 0 residual value according to plan of SEK 497 m (272). Change for the year -476 409 – Finance lease payments are due as follows: Translation effects -52 43 – 2017 Closing value, projects in progress Present value interest cost 1,321 1,849 Nominal – 0 In next twelve months 125 3 128 Total closing book value 38,994 37,843 219 313 In next two to five years 329 4 333 * Financial leases on store tills included in the closing book value of equipment More than five years ahead 21 0 21 amount to SEK 497 m (272). The contracts run for up to seven years. Total 475 7 482 2016 Present value interest cost Nominal 13. PAYMENTS FOR OPERATING LEASES AND FINANCE LEASES In next twelve months Leases are classified in the consolidated accounts as either finance or 59 1 60 In next two to five years operating leases. Finance leases exist when the financial risks and 190 3 193 More than five years ahead benefits associated with the ownership of an object are essentially 23 1 24 Total transferred from the lessor to the lessee, regardless of whether the 272 5 277 legal ownership lies with the lessor or the lessee. Assets held under finance leases are reported as fixed assets and future payment com- Leased property, plant and equipment mitments are reported as liabilities in the balance sheet. On initial GROUP recognition, the asset and liability are reported at the net present 2017 2016 value of future minimum lease payments and any residual value. On Opening balance 272 – subsequent occasions, the expense is distributed between an interest Additional contracts 280 272 portion and a repayment portion. All other rental agreements that do Amortisation -57 – not fulfil the conditions for classification as finance leases are consid- interest costs 1 – ered to be operating leases. Lease charges paid under operating leases Translation effects -21 – are expensed over the lease period using the straight-line method, Total 475 272 even if the payment schedule deviates from this. With effect from the 2016 financial year, H&M has not only operating leases but also some During the 2017 financial year expenses attributable to finance leases leases that are classified as finance leases. The group’s main leases including depreciation were charged to earnings for the group in the are rental agreements for premises. Variable (sales-based) rents are amount of SEK 55 m (0), as well as interest expenses of SEK 1 m (0). recognised in the same period as the corresponding sales. 14. STOCK-IN-TRADE Operating leases Stock-in-trade is valued at the lower of the acquisition cost and the The group has leases relating to rented premises which were entered net realisable value. From the moment the goods are transferred from into on normal market terms. Most of the agreements contain options the supplier to the transport service provider appointed by h&m, the to extend the term. Rental costs for the 2017 financial year amounted goods are owned according to civil law by H&M and become part of to SEK 23,317 m (22,332), of which sales-based rent amounted to SEK H&M’s reported stock-in-trade. The net realisable value is the esti- 4,191 m (3,853). mated market value less the calculated selling expenses. Goods that have not yet arrived at a store are valued at their actual Rent according to the group’s rental agreements (basic rent excluding acquisition cost including the estimated cost of customs duties and any sales-based rent) amounts to: freight. For the majority of the group’s stock in the stores the acquisi- tion cost is determined by reducing the selling price by the calculated GROUP gross margin (retail method). A small proportion of the sales compa- 2017 2016 nies calculate the acquisition cost as weighted average prices. Rental commitments in next twelve months 16,219 16,068 As of 30 November 2017, the closing stock level was higher than Rental commitments in next two to five years 41,788 41,605 planned as a result of sales development during the autumn being Rental commitments more than five years ahead 20,330 23,820 considerably below the group’s sales plan. Significant write-downs Total 78,337 81,493 are rare. There were no material write-downs during the financial year 2017. Only an insignificant part of the stock-in-trade is measured at net realisable value. The stock-in-trade is not considered to have any material degree of obsolescence. 93 NOT E S 15. PREPAID EXPENSES 17. SHARE CAPITAL AND DISTRIBUTION OF EARNINGS The share capital is divided between 194,400,000 class A shares (ten GROUP PARENT COMPANY votes per share) and 1,460,672,000 class B shares (one vote per share). 2017 2016 2017 2016 There are no other differences between the rights associated with the Prepaid rent 2,118 1,527 – 0 shares. The total number of shares is 1,655,072,000. The dividend Other items 652 544 13 – paid per share 2017 was SEK 9.75. Total 2,770 2,071 13 0 The group’s managed capital consists of shareholders’ equity. The group’s goal with respect to managing capital is to enable good 16. CASH AND CASH EQUIVALENTS growth to continue and to be prepared to exploit business opportu- Cash and cash equivalents consist of cash and bank balances as well nities. The board of directors’ intention is to provide shareholders as short-term investments with a maximum term of three months with a continued good return while ensuring that, as in the past, expan- from the date of acquisition. These investments carry no significant sion and investments can proceed with a continued strong financial risk of changes in value. profile and freedom of action. Based on this, the board of directors has agreed a dividend policy stating that the total dividend should GROUP PARENT COMPANY exceed 50 percent of profit after tax, yet taking into consideration the 2017 2016 2017 2016 capital structure target. The dividend will be paid in two instalments Cash and bank balances 9,117 8,312 133 376 – one in the spring and one in the autumn. Short-term investments, 0–3 months 601 1,134 – The board of directors is of the opinion that the proposed distri- Total 9,718 9,446 133 376 bution of earnings is justifiable taking into consideration the financial investments are made on market terms and the interest rates are position and continued freedom of action of the group and the parent between -0.55 and 14.25 percent. The difference in interest rate company, and taking into consideration the capital structure target depends mainly on the currency in which the funds are invested. and the requirements that the nature and extent of the business, its risks and expansion and development plans impose on the group’s and the parent company’s equity and liquidity. H&M meets the capital requirements set out in the Swedish Companies Act. There are no other external capital requirements. Proposed distribution of earnings at the AGM 2018 At the disposal of the annual general meeting: SEK 16,182,717,249 The board of directors proposes a dividend of SEK 9.75 per share SEK 16,136,952,000 To be carried forward as retained earnings SEK 45,765,249 SEK 16,182,717,249 94 NOT E S 18. PROVISIONS FOR PENSIONS are mainly due to the financial assumptions, such as changes in the H&M has several different plans for benefits after employment has discount rate. Such gains or losses are recognised in other compre- ended. The plans are either defined benefit or defined contribution hensive income in the year they arise. plans. Defined contribution plans are reported as an expense in the For salaried employees in Sweden, H&M applies the ITP plan through period when the employee performs the service to which the benefit insurance policies with Alecta and Collectum, i.e. ITP 2 and ITP 1. relates. Defined benefit plans are assessed separately for the respec- According to statement UFR 3 from the Swedish Financial Reporting tive plan based on the benefits earned during the previous and cur- Board, ITP 2 is a defined benefit plan that covers a number of employers. rent periods. The defined benefit obligations less the fair value of The plan will be reported as a defined contribution plan until the com- managed assets are reported under the heading Provisions for pen- pany gains access to information that allows this plan to be reported sions. In the case of the Swedish entities, the actuarial calculations according to the rules for defined benefit plans. The ITP 1 plan is a also cover future payments of special payroll tax. Defined benefit defined contribution plan. See note 6 for information about pension plans are primarily found in Sweden, but also in the UK, Norway, to the previous CEO. Switzerland, Spain and Germany. Pension obligations are assessed Alecta’s surplus cannot be allocated to the insured employer and/ annually with the help of independent actuaries according to the or the insured employees. As of 30 September 2017, Alecta’s consolida- Projected Unit Credit Method. The assessment is made using actu- tion ratio was 158 percent (142). The consolidation ratio is calculated arial assumptions. These assumptions include such things as the dis- as the fair value of managed assets as a percentage of the obligations count rate, anticipated salary and pension increases as well as the calculated in accordance with Alecta’s actuarial assumptions. This expected return on managed assets. Changes in the actuarial assump- calculation is not in line with IAS 19. tions and outcomes that deviate from the assumptions give rise to actuarial gains or losses. The actuarial gains and losses arising GROUP PARENT COMPANY 2017 2016 2015 2017 2016 2015 Present value of defined benefit obligations 1,488 1,581 1,373 197 210 215 Fair value of managed assets -1,043 -1,054 -924 -15 -19 -20 Provisions for pension obligations recognised in the balance sheet 445 527 449 182 191 195 Opening balance, 1 December 527 449 451 191 195 223 Recognised pension expenses, net -23 150 49 5 10 -33 Premiums paid by employer -52 -55 -53 – Pensions paid out -17 -18 -14 -15 Disbursements from assets 10 – 20 – 20 Carrying amount of defined benefit obligations, 30 November 445 527 449 182 191 195 Of the total recognised obligation, SEK 210 m (205) relates to defined benefit pensions plans in Sweden and SEK 184 m (268) to plans in Switzerland. The weighted average maturity of these pension plans is 10.4 (10.7) years for the Swedish plans and 15.8 (17.0) years for the Swiss plans. The amounts recognised as pension expenses comprise the following items: Current service cost 67 73 67 – 0 interest expense 13 18 21 4 6 5 interest income -7 -10 -14 0 -1 Reductions/adjustments gains (-) and losses (+) -2 – Past service cost – -26 0 – Changes in foreign exchange rates for plans valued in a currency other than the reporting currency -14 17 18 – Pension expenses recognised in the income statement 57 72 92 4 6 4 Pension expenses recognised in other comprehensive income Acturial gains/losses financial assumptions asset -50 -13 -69 2 1 -4 Acturial gains/losses demographic assumptions liability – -44 – Acturial gains/losses financial assumptions liability -30 135 26 -1 3 -33 Acturial gains (-) and losses (+) -80 78 -43 1 4 -37 Total recognised pension expenses -23 150 49 5 10 -33 Significant acturial assumptions on the balance sheet date (weighted average amounts) Discount rate 0.95% 0.88% 1.33% 2.25% 2.75% Future salary increases 1.29% 1.36% 5.00% Future pension increases (inflation) 0.30% 0.34% 0.42% 1.75% 1.50% 1.75% A 0.5 percentage point reduction in the discount rate would increase the liability for the Swedish commitments by SEK 12.0 m (12.9). 95 NOT E S 19. FINANCIAL ASSETS AND LIABILITIES BY CATEGORY Loans receivable and Financial assets Derivatives for hedging Other financial Total carrying accounts receivable held to maturity recognised at fair value liabilities amount 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Other long-term receivables – 1,039 1,014 – 1,039 1,014 Accounts receivable 5,297 4,881 – 5,297 4,881 Other receivables – 497 848 – 497 848 Short-term investments – Cash and cash equivalents 9,117 8,312 601 1,134 – 9,718 9,446 Total financial assets 14,414 13,193 1,640 2,148 497 848 – 16,551 16,189 Accounts payable – 7,215 7,262 7,215 7,262 Liabilities to credit institutions – 9,745 2,068 9,745 2,068 Other liabilities – 903 1,176 – 903 1,176 Total financial liabilities – 903 1,176 16,960 9,330 17,863 10,506 The fair value of all financial assets and liabilities essentially corresponds to the book value. Assets and liabilities that are recognised at amortised cost have short remaining terms, making the difference between book value and fair value negligible. Financial instruments recognised in the balance sheet include on counting. Liabilities to credit institutions are measured at amortised the assets side cash and cash equivalents, accounts receivable, short- cost. All of the liabilities stated below under financial liabilities are term investments, long-term receivables and derivatives. On the liabili- measured at amortised cost and correspond to the book values. ties side are accounts payable, liabilities to credit institutions and GROUP derivatives. Financial instruments are reported in the balance sheet 2017 when the group becomes a party to the contractual terms of the 2016 Change in hedging reserves instrument. Financial assets are removed from the balance sheet Changes in the value of derivates when the contractual rights to the cash flows from the asset cease. -1,341 -223 Reclassified to profit or loss Financial liabilities are removed from the balance sheet when the 1,162 -355 Total obligation is met, cancelled or ends. -179 -578 Financial assets and liabilities at fair value through profit or loss Reporting of derivatives used for hedging purposes This category consists of two sub-groups: financial assets and liabili- All derivatives are reported initially and continually at fair value in ties held for trading, and other financial assets and liabilities that the the balance sheet. company initially chose to place in this category when they were first The group’s policy is for derivatives to be held for hedging purposes recognised. Assets and liabilities in this category are assessed con- only. Derivatives comprise forward currency contracts used to hedge tinually at fair value, with changes in value recognised in profit/loss. the risk of exchange rate fluctuations for internal and external flows No financial assets or liabilities have been classified in this category. of goods. To meet the requirements of hedge accounting there must be a Loans receivable and accounts receivable clear link to the hedged item. In addition, the hedge must effectively This category primarily covers cash and bank balances as well as protect the hedged item, hedge documentation must have been pre- accounts receivable. Cash and bank balances are valued at amortised pared and the effectiveness must be measurable. cost. Accounts receivable have a short expected term and are spread In hedge accounting, derivatives are classified as cash flow hedging across a large number of customers, with low amounts per customer, or as fair value hedging. In the past financial year and the previous and are measured without discounting at the original invoiced amount financial year all of the group’s derivatives were in the cash flow with deductions for doubtful receivables. The average debt was around hedging category. How these hedging transactions are reported is SEK 2,794 (2,585). Bad debts during the year from accounts receivable described below. were insignificant. Hedging of forecast currency flows – cash flow hedging Financial assets held to maturity Derivatives that hedge the forecast flow are reported in the balance Financial assets held to maturity are assets with payment flows that sheet at fair value. Changes in value are reported in equity as a are fixed or that can be established in advance and with a fixed term hedging reserve, through other comprehensive income, until such which the group has the express intention and capacity to hold until time as the hedged flow is recognised in operating profit, at which maturity. Assets in this category are valued at amortised cost, with the time the hedging instrument’s accumulated changes in value are effective interest rate being used to calculate the value. As of the closing transferred to the income statement where they then correspond to date, all of the group’s short-term investments fell into this category. the profit/loss effects of the hedged transaction. The category derivatives for hedging recognised at fair value is Other financial liabilities measured based on observable data; in other words, in accordance Financial liabilities that are not held for trading are valued at amor- with level 2 in the measurement hierarchy established in IFRS 13. tised cost. Accounts payable fall into this category. These have a short The fair value of forward exchange contracts is calculated by dis- expected term and are recognised at the nominal amount with no dis- counting the difference between the agreed forward rate and the 96 NOT E S Cont. Note 19, Financial assets and liabilities by category forward rate that can be obtained on the closing date for the remaining ASSETS/LIABILITIES Derivative contract term. Contracts are discounted to a risk-free rate based on 2017 assets liabilities Total government bonds. Gross amounts 497 903 -406 Total on balance sheet 497 903 -406 Forward contracts Financial instruments -281 0 All changes in the value of derivatives are recognised initially in equity Net amount 216 622 -406 as a hedging reserve through other comprehensive income. Through other comprehensive income, the fair value is transferred from the ASSETS/LIABILITIES Derivative hedging reserve to the income statement in conjunction with a hedged 2016 assets liabilities Total transaction taking place. Gross amounts 848 1,176 -328 Total on balance sheet 848 1,176 -328 The table below shows the outstanding forward contracts for cash Financial instruments flow hedging as of the closing date: -519 0 Net amount 329 657 -328 Book value and Nominal amount, Average remaining At the closing date, forward contracts with a positive market value fair value, SEK SEK term in months SELL/BUY 2017 2016 2017 2016 2017 2016 amount to SEK 497 m (848), which is reported under other current receivables. Forward contracts with a negative market value amount NOK/SEK 11 -36 751 957 2 3 to SEK 903 m (1,176), which is reported under other current liabilities. GBP/SEK -113 -53 2,677 3,377 3 Of the outstanding forward contracts, gains of SEK 36 m (losses of -69) DKK/SEK -22 -21 867 1,121 3 were transferred to the income statement when hedged transactions ChF/SEK 7 -18 610 750 3 occurred for these contracts. The residual fair value of SEK -442 m EuR/SEK -445 -393 16,781 19,967 3 (-259) is included in the hedging reserve in equity. PLN/SEK -45 -7 1,042 1,128 3 uSD/SEK -47 -328 5,513 4,734 3 20. ACCRUED EXPENSES AND PREPAID INCOME CAD/SEK -1 -26 645 612 3 JPy/SEK 3 14 787 820 3 GROUP PARENT COMPANY hKD/SEK -1 -29 209 405 3 2017 2016 2017 2016 RON/SEK -8 394 464 3 4 holiday pay liability CZK/SEK 1,385 1,359 – -13 – -4 290 304 3 Social security costs huF/SEK 619 845 35 -5 0 -6 263 323 3 4 Payroll liability AuD/SEK 1,577 1,427 0 6 0 -25 461 458 2 4 Costs relating to premises CNh/SEK 10,749 9,026 – -25 – -39 789 982 3 Other accrued overheads RuB/SEK 4,718 4,189 107 -22 7 -63 754 750 3 Total TRy/SEK 19,048 16,846 142 20 7 17 418 452 3 mXN/SEK -4 – 474 – 2 – SEK/uSD 273 688 15,473 16,820 2 21. RELATED PARTY DISCLOSURES SEK/EuR 36 9 1,603 1,628 2 Ramsbury Invest AB, which is owned by Stefan Persson and family, is Subtotal -395 -328 50,801 56,052 the parent company of H & M Hennes & Mauritz AB. The H&M group leases the following store premises in properties directly or indirectly Book value and Nominal amount, Average remaining owned by Stefan Persson and family: Drottninggatan 50–52 and fair value, SEK uSD term in months Drottninggatan 56 in Stockholm, Kungsgatan 55 in Gothenburg, SELL/BUY 2017 2016 2017 2016 2017 2016 Stadt hamburgsgatan 9 in malmö, Amagertorv 23 in Copenhagen, KRW/uSD -11 – 37 – 3 – Oxford Circus and Regent Street in London, Kaufinger Strasse in CLP/uSD 0 – 26 – 3 – munich, Via del Corso/Via Tomacelli in Rome, Wisconsin Avenue in Subtotal -11 – 63 – Washington DC and, since January 2008, premises for h&m’s head office in Stockholm. Rent is paid at market rates, and rental costs and Total -406 -328 other property-related expenses totalled SEK 384 m (466) for the financial year. Moreover, certain rent levels relating to previous years were renegotiated in conjunction with the review of the property port- folio being carried out by H&M. Karl-Johan Persson received remuneration in the form of salary and benefits amounting to SEK 13.7 m (13.4), which included variable remuneration of SEK 0 m (0), for work carried out during the 2017 financial year as CEO of H & M Hennes & Mauritz AB. Outstanding balances with related parties as of 30 November 2017 totalled SEK 51.8 m (3.1). 97 NOT E S 22. INTEREST-BEARING LIABILITIES Cont. Note 24, Participation in group companies GROUP PARENT COMPANY 2017 Corporate iD number Domicile more H & M Hennes & Mauritz B.V. & Co. KG Germany interest in next in next than 5 interest in next impuls Gmbh Germany rate % 12 2–5 years rate % 12 2017 30 Nov months years ahead 30 Nov months H & M Hennes & Mauritz Logistics AB Co. KG Germany H & M Hennes & Mauritz online shop AB & Co. KG Liabilities to Germany credit institutions & Other Stories AB & Co. KG Germany Nordic H & M New Business AB & Co. KG Germany Germany countries 0.00 – 0.072 9,320 – 0.032 4,000 H & M Hennes & Mauritz Holding B.V. Netherlands Outside Nordic H & M Hennes & Mauritz Netherlands B.V. Netherlands countries 8.75 – 16.00 425 – H & M Hennes & Mauritz Management B.V. Netherlands Liabilities, financial leasing 0.21 – 1.53 125 329 21 – H & M Hennes & Mauritz Belgium NV Belgium Total 9,870 329 21 4,000 H & M Hennes & Mauritz Logistics GBC NV Belgium h & m NB Belgium NV Belgium GROUP PARENT COMPANY H & M Hennes & Mauritz GesmbH Austria H & M Hennes & Mauritz Oy Finland more than 5 H & M Hennes & Mauritz SARL interest in next in next France interest in next rate % 12 2–5 years rate % 12 H & M Hennes & Mauritz Logistics GBC France 2016 France 30 Nov months years ahead 30 Nov months H & M Hennes & Mauritz LP uSA Liabilities to Hennes & Mauritz SL Spain credit institutions Hennes & Mauritz Customer Services SL Nordic Spain countries -0.15 – -0.10 2,000 – H & M Hennes & Mauritz sp. z.o.o. Poland Outside Nordic H & M Hennes & Mauritz Logistics sp. z.o.o. Poland countries 9.00 68 – H & M Hennes & Mauritz Logistics 1 Sp.z.o.o Poland Liabilities, H & M Hennes & Mauritz CZ, s.r.o. Czech Republic financial leasing 0.28 – 1.53 59 190 23 – Hennes & Mauritz Lda Total Portugal 2,127 190 23 – H & M Hennes & Mauritz S.r.l. italy H & M Hennes & Mauritz Inc. Canada H & M Hennes & Mauritz d.o.o. 23. APPROPRIATIONS Slovenia PARENT COMPANY H & M Hennes & Mauritz (Ireland) Ltd ireland H & M Hennes & Mauritz Kft hungary 2017 2016 H & M Hennes & Mauritz (Far East) Ltd hong Kong Group contributions provided -340 – Puls Trading Far East Ltd Depreciation in excess of plan hong Kong 12 18 H & M Hennes & Mauritz Holding Asia Ltd hong Kong Total -328 18 H & M Hennes & Mauritz Ltd hong Kong Hennes & Mauritz (Shanghai) Commercial Co Ltd China H & M Hennes & Mauritz (Shanghai) Trading Co Ltd China 24. PARTICIPATION IN GROUP COMPANIES H & M Hennes & Mauritz (Shanghai) All group companies are wholly owned. Garments & Accessories Co Ltd China H & M Hennes & Mauritz SK s.r.o. Slovakia Corporate iD No. of Book 2017 H & M Hennes & Mauritz A.E. number shares value Domicile Greece H & M Hennes & Mauritz LLC Parent company shareholding Russia H & M Hennes & Mauritz TR Tekstil Ltd Sirketi H & M Hennes & Mauritz Sverige AB 556151-2376 1,250 Turkey 0.1 Stockholm H & M Hennes & Mauritz Ltd h & m Online AB 556023-1663 South Korea 1,150 0.6 Stockholm H & M Hennes & Mauritz SRL H & M Hennes & Mauritz GBC AB 556070-1715 1,000 Romania 2.6 Stockholm H & M Hennes & Mauritz d.o.o. za trgovinu H & M Hennes & Mauritz Croatia International B.V. 40 0.1 Netherlands H & M Hennes & Mauritz PTE Ltd Singapore H & M Hennes & Mauritz India Private Ltd 8,650,000 12.5 india H & M Hennes & Mauritz EOOD Bulgaria H & M Hennes & Mauritz Japan KK 99 11.7 Japan Weekday Brands AB 556675-8438 Sweden FaBric Scandinavien AB 556663-8523 1,380 560.7 Tranås FaBric Sales AB & Co. KG Germany Germany H & M Hennes & Mauritz H & M Hennes & Mauritz S.A de C.V. mexico international AB 556782-4890 1,000 0.1 Stockholm H & M Hennes & Mauritz Management S.A de C.V. mexico h & m Fashion AB 556922-7878 50,000 0.1 Stockholm H & M Hennes & Mauritz Servicios S.A de C.V. mexico Total 588.5 H & M Hennes & Mauritz Support S.A de C.V. mexico H & M Hennes & Mauritz SIA Latvia 2017 Corporate iD number Domicile h & m Retail SDN BhD malaysia Subsidiaries’ holdings H & M Hennes & Mauritz SpA Chile H & M Hennes & Mauritz AS Norway H & M Hennes & Mauritz OÜ Estonia H & M Hennes & Mauritz A/S Denmark H & M Hennes & Mauritz UAB Lithuania H & M Hennes & Mauritz UK Ltd uK H & M Hennes & Mauritz d.o.o. Serbia H & M Hennes & Mauritz SA Switzerland H and M Hennes and Mauritz Proprietary Limited South Africa 98 Cont. Note 24, Participation in group companies 2017 Corporate iD number Domicile H & M Hennes & Mauritz Pty Ltd Australia H & M Hennes & Mauritz S.A.C. Peru H & M Hennes & Mauritz (Macau) Limited macau H & M Hennes & Mauritz Retail Private Limited india H &M Hennes & Mauritz INC Philippines H &M Hennes & Mauritz New Zealand Limited New Zealand H &M Hennes & Mauritz Cyprus Limited Cyprus H & M Hennes & Mauritz Kazakhstan LLP Kazakhstan H & M Hennes & Mauritz Colombia S.A.S Colombia H & M Hennes & Mauritz Iceland ehf iceland H & M Hennes & Mauritz Vietnam LLC Vietnam H & M Hennes & Mauritz Georgia LLC Georgia Hennes & Mauritz Uruguay S.A. uruguay H & M Hennes & Mauritz LLC ukraine 25. UNTAXED RESERVES PARENT COMPANY 2017 2016 Depreciation in excess of plan 112 124 Tax allocation reserve 305 Total 417 429 26. CONTINGENT LIABILITIES A contingent liability is reported where there is a possible obligation for which it remains to be confirmed whether the company has an existing obligation that could result in an outflow of resources. Alter- natively, there may be an existing obligation that does not fulfil the criteria for reporting in the balance sheet as a provision or other lia- bility since it is not likely that an outflow of financial resources will be required in order to settle the obligation or the amount cannot be reliably estimated. The group is involved in various types of disputes, but it is assessed that no current disputes will have any significant impact on the group’s results. For further information concerning tax disputes see note 10. Neither the group nor the parent company has any pledged assets. PARENT COMPANY 2017 2016 Parent company’s lease guarantees 11,406 13,064 Total 11,406 13,064 27. INTEREST INCOME, INTEREST EXPENSE AND SIMILAR ITEMS The parent company’s interest income and similar items consists of SEK 18 m (21) in interest income and SEK 0 m (132) in translation effects on receivables and liabilities from group companies. The parent company’s interest expense and similar items consists of SEK -11 m (0) in interest expense and SEK -80 m (0) in translation effects on receivables and liabilities from group companies. 28. KEY RATIO DEFINITIONS This report contains key financial ratios in accordance with the framework for financial reporting applied by the H&M group, which is based on IFRS. Other key ratios and indicators are also used to follow up, analyse and govern the business and to provide the H&M group’s stakeholders with financial information concerning the group’s financial position, results and performance in a consistent way. These other key ratios and indicators are considered necessary in order to be able to monitor performance against the group’s financial targets. A combination of continual growth, high profitability, stable cash flow and using capital in the right way is intended to generate a high overall return for the H&M group’s shareholders. It is therefore relevant to present key ratios relating to growth, profitability and capital, share-based measurements and terms relating to capital on a continuous basis. The key ratios and indicators used, referred to and presented in the reporting are defined as shown in the list below. Growth measurement Change in sales, %, local currency: The group’s total change in sales in local currency is calculated as the period’s net sales (calculated at the same average rate as was used for the same period in the previous year) minus the period’s net sales in the previous year, as a percentage of the period’s net sales in the previous year. Profit and yield measurements Return on equity: Profit for the year in relation to average shareholders’ equity. Return on capital employed: Profit after financial items plus interest expense in relation to average shareholders’ equity plus average interest-bearing liabilities. Sales including VAT: The total value of sales to customers including VAT and equivalent taxes. Gross profit: Net sales minus cost of goods sold. Gross margin: Gross profit in relation to net sales. Operating profit: Net sales minus all costs attributable to operations but excluding net financial items and income tax. Operating margin: Operating profit as a percentage of net sales for the year. EBITDA: Earnings before interest, taxes, depreciation and amortisation. Capital measurements Share of risk-bearing capital, %: Shareholders’ equity plus deferred tax liability in relation to the balance sheet total. Equity/assets ratio: Shareholders’ equity in relation to the balance sheet total. Capital employed: Shareholders’ equity plus interest-bearing liabilities. Net debt: interest-bearing liabilities including pension liability and accrued interest less cash and cash equivalents, investment shares and interest-bearing current and non-current receivables. Share-related measurements Equity per share: Shareholders’ equity divided by number of shares. Cash flow from operating activities per share: Cash flow from operating activities for the period divided by the average number of shares during the period. Earnings per share: Net profit for the period in relation to the number of shares during the period. P/E ratio: Price per share divided by earnings per share. 99 SiGN i NG OF T h E A N N uA L R E PORT Signing of the annual report The undersigned hereby provide an assurance that the annual report also that the administration report provides a true and fair view of and consolidated accounts have been drawn up in accordance with the development of the group’s and the parent company’s business, IFRS international accounting standards, as adopted by the EU, with position and earnings, and also describe the significant risks and good accounting practice, and that they provide a true and fair view uncertainties faced by the companies making up the group. of the group’s and the parent company’s position and earnings, and Stockholm, 19 February 2018 Stefan Persson Stina Bergfors Anders Dahlvig Chairman of the Board Board member Lena Patriksson Keller Christian Sievert Erica Wiking Häger Board member Niklas Zennström Ingrid Godin Margareta Welinder Board member Karl-Johan Persson Chief Executive Officer Our audit report was submitted on 19 February 2018 Ernst & young AB Åsa Lundvall Authorised Public Accountant 100 Au Di TOR’S R E PORT Auditor’s report To the general meeting of the shareholders of h & m hennes & INCOME TAXES Mauritz AB (publ), corporate identity number 556042-7220 Description of matter REPORT ON THE ANNUAL ACCOUNTS AND Accounting for income taxes is subject to complex tax legislation that require CONSOLIDATED ACCOUNTS interpretations and assessments by H&M. These interpretations may be ques- tioned by various tax authorities and courts. H&M conducts operations in a sig- Opinions nificant number of countries and tax jurisdictions. The pricing of cross-border We have audited the annual accounts and consolidated accounts of transactions and consequently how the taxable profit is distributed between H & M Hennes & Mauritz AB (publ) for the financial year 1 December the countries is determined by the transfer pricing model developed by the company. From time to time entities within the company are subject to ongo- 2016 to 30 November 2017, with the exception of the sustainability ing tax proceedings that may range from tax audits to tax litigations at multiple report on pages 70–73. The annual accounts and consolidated accounts levels of the court systems. The company evaluates the expected outcome of tax of the company are included on pages 65–100 in this document. proceedings in progress on a continuous bases. Where it is likely that additional tax will have to be paid and outcome can be reasonably estimated, necessary in our opinion, the annual accounts have been prepared in accord- provisions are made. ance with the Annual Accounts Act and present fairly, in all material The evaluation of the expected outcome of ongoing tax proceedings requires respects, the financial position of the parent company as of 30 Novem- assumptions and assessments that are complex by nature. Changes in assump- ber 2017 and its financial performance and cash flow for the year then tions and assessments may have a material effect on the financial statements, ended in accordance with the Annual Accounts Act. The consolidated and consequently income taxes is considered a key audit matter. accounts have been prepared in accordance with the Annual Accounts information related to the company’s accounting for income taxes is found in Act and present fairly, in all material respects, the financial position note 1 (section “Estimates, assumptions and assessments”) and note 10 (“Tax”). of the group as of 30 November 2017 and their financial performance Considerations of the matter in the audit and cash flow for the year then ended in accordance with Interna- Our audit included, among other things, the following audit procedures: tional Financial Reporting Standards (iFRS), as adopted by the Eu, – Review of the completeness and valuation of the amounts reported as current and the Annual Accounts Act. Our opinion does not cover the sustain- and deferred tax, among other things by reviewing tax calculations. ability report on pages 70–73. The statutory administration report is – Review of the company’s transfer pricing model and evaluation whether the consistent with the other parts of the annual accounts and consoli- company has complied with the model. dated accounts. – Review of the company’s assumptions and assessments concerning the We therefore recommend that the general meeting of shareholders outcome of ongoing tax proceedings and tax risks. We have included tax adopts the income statement and balance sheet for the parent com- professionals as part of our audit. pany and the group. – Assessment of appropriateness of disclosures provided in the financial Our opinions in this report on the annual accounts and consolidated statements. accounts are consistent with the content of the additional report that has been submitted to the parent company’s audit committee in accord- ance with the Audit Regulation (537/2014) Article 11. VALUATION OF STOCK-IN-TRADE Basis for opinions Description of matter We conducted our audit in accordance with International Standards As at 30 November 2017 H&M’s stock-in-trade amounts to SEK 33,712 million, spread across central warehouses and retail stores. Stock-in-trade is valued at the on Auditing (ISA) and generally accepted auditing standards in Sweden. lower of cost and net realisable value. The net realisable value is the estimated Our responsibilities under those standards are further described in market value less calculated selling expenses. Goods that have not yet arrived at the Auditor’s Responsibilities section. We are independent of the par- a store are valued at their actual acquisition cost including the estimated cost of customs duties and freight. For stock in the stores, cost is determined by reduc- ent company and the group in accordance with professional ethics for ing the selling price by the calculated gross margin. accountants in Sweden and have otherwise fulfilled our ethical respon- Estimating the net realisable value requires assumptions and assessments sibilities in accordance with these requirements. This includes that, concerning future events which are subject to uncertainty. Calculating the cost based on the best of our knowledge and belief, no prohibited services of customs duties and freight also requires assumptions. Changes in assump- referred to in the Audit Regulation (537/2014) Article 5.1 have been tions and assessments may have a material effect on the financial statements, and consequently valuation of stock-in-trade is considered a key audit matter. provided to the audited company or, where applicable, its parent com- pany or its controlled companies within the EU. information related to the company’s valuation of stock-in-trade is found in note 1 (the section “Estimates, assumptions and assessments”) and note 14 We believe that the audit evidence we have obtained is sufficient (“Stock-in-trade”). and appropriate to provide a basis for our opinions. Considerations of the matter in the audit Our audit included, among other things, the following audit procedures: Key audit matters Key audit matters of the audit are those matters that, in our profes- – Review of the company’s processes and procedures for stock accounting, sional judgment, were of most significance in our audit of the annual including the company’s procedures and assumptions used in the calculation of accrued costs for customs duties and freight. accounts and consolidated accounts of the current period. These mat- – Review of the reported acquisition cost on a sample basis. ters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts – Analysis of the company’s assessment of net realisable value, as well as review of assumptions and calculations for stock obsolescence. as a whole, but we do not provide a separate opinion on these matters. – Review of elimination of internal profits in stock at group level. For each matter below, our description of how our audit addressed the matter is provided in that context. – Assessment of appropriateness of disclosures provided in the financial statements. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial statements section of our 101 Au Di TOR’S R E PORT report, including in relation to these matters. Accordingly, our audit material if, individually or in the aggregate, they could reasonably be included the performance of procedures designed to respond to our expected to influence the economic decisions of users taken on the assessment of the risks of material misstatement of the financial basis of these annual accounts and consolidated accounts. statements. The results of our audit procedures, including the proce- As part of an audit in accordance with ISAs, we exercise professional dures performed to address the matters below, provide the basis for judgment and maintain professional skepticism throughout the audit. our audit opinion on the accompanying financial statements. We also: – identify and assess the risks of material misstatement of the annual Information other than the annual accounts accounts and consolidated accounts, whether due to fraud or error, and consolidated accounts design and perform audit procedures responsive to those risks, and This document also contains other information than the annual obtain audit evidence that is sufficient and appropriate to provide accounts and consolidated accounts and is found on pages 12–64. a basis for our opinions. The risk of not detecting a material mis- The Board of Directors and the CEO are responsible for this other statement resulting from fraud is higher than for one resulting from information. error, as fraud may involve collusion, forgery, intentional omissions, Our opinion on the annual accounts and consolidated accounts misrepresentations, or the override of internal control. does not cover this other information and we do not express any form – Obtain an understanding of the company’s internal control relevant of assurance conclusion regarding this other information. to our audit in order to design audit procedures that are appropriate In connection with our audit of the annual accounts and consoli- in the circumstances, but not for the purpose of expressing an opinion dated accounts, our responsibility is to read the information identified on the effectiveness of the company’s internal control. above and consider whether the information is materially inconsistent – Evaluate the appropriateness of accounting policies used and the with the annual accounts and consolidated accounts. In this proce- reasonableness of accounting estimates and related disclosures dure we also take into account our knowledge otherwise obtained in made by the Board of Directors and the CEO. the audit and assess whether the information otherwise appears to be – Conclude on the appropriateness of the Board of Directors’ and the materially misstated. CEO’s use of the going concern basis of accounting in preparing the If we, based on the work performed concerning this information, annual accounts and consolidated accounts. We also draw a conclu- conclude that there is a material misstatement of this other informa- sion, based on the audit evidence obtained, as to whether any mate- tion, we are required to report that fact. We have nothing to report in rial uncertainty exists related to events or conditions that may cast this regard. significant doubt on the company’s and the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, Responsibilities of the Board of Directors and the CEO we are required to draw attention in our auditor’s report to the related The Board of Directors and the CEO are responsible for the prepa- disclosures in the annual accounts and consolidated accounts or, if ration of the annual accounts and consolidated accounts and that such disclosures are inadequate, to modify our opinion about the they give a fair presentation in accordance with the Annual Accounts annual accounts and consolidated accounts. Our conclusions are Act and, concerning the consolidated accounts, in accordance with based on the audit evidence obtained up to the date of our auditor’s IFRS as adopted by the EU. The Board of Directors and the CEO are report. However, future events or conditions may cause a company also responsible for such internal control as they determine is neces- and a group to cease to continue as a going concern. sary to enable the preparation of annual accounts and consolidated – Evaluate the overall presentation, structure and content of the accounts that are free from material misstatement, whether due to annual accounts and consolidated accounts, including the disclo- fraud or error. sures, and whether the annual accounts and consolidated accounts in preparing the annual accounts and consolidated accounts, The represent the underlying transactions and events in a manner that Board of Directors and the CEO are responsible for the assessment of achieves fair presentation. the company’s and the group’s ability to continue as a going concern. – Obtain sufficient and appropriate audit evidence regarding the They disclose, as applicable, matters related to going concern and financial information of the entities or business activities within using the going concern basis of accounting. The going concern basis the group to express an opinion on the consolidated accounts. We of accounting is however not applied if the Board of Directors and the are responsible for the direction, supervision and performance of CEO intends to liquidate the company, to cease operations, or has no the group audit. We remain solely responsible for our opinions. realistic alternative but to do so. The Audit Committee shall, without prejudice to the Board of We must inform the Board of Directors of, among other matters, the Director’s responsibilities and tasks in general, among other things planned scope and timing of the audit. We must also inform of signifi- oversee the company’s financial reporting process. cant audit findings during our audit, including any significant defi- ciencies in internal control that we identified. Auditor’s responsibility We must also provide the Board of Directors with a statement that Our objectives are to obtain reasonable assurance about whether the we have complied with relevant ethical requirements regarding inde- annual accounts and consolidated accounts as a whole are free from pendence, and to communicate with them all relationships and other material misstatement, whether due to fraud or error, and to issue an matters that may reasonably be thought to bear on our independence, auditor’s report that includes our opinions. Reasonable assurance is a and where applicable, related safeguards. high level of assurance, but is not a guarantee that an audit conducted From the matters communicated with the Board of Directors, we in accordance with ISAs and generally accepted auditing standards determine those matters that were of most significance in the audit of in Sweden will always detect a material misstatement when it exists. the annual accounts and consolidated accounts, including the most misstatements can arise from fraud or error and are considered important assessed risks for material misstatement, and are therefore 102 the key audit matters. We describe these matters in the auditor’s report unless law or regulation precludes disclosure about the matter. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Opinions in addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the CEO of H & M Hennes & Mauritz AB (publ) for the financial year 1 December 2016 – 30 November 2017 and the proposed appropriation of the company’s profit or loss. We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory admin- istration report and that the members of the Board of Directors and the CEO be discharged from liability for the financial year. Basis for opinions We conducted the audit in accordance with generally accepted audit- ing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have other- wise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Responsibilities of the Board of Directors and the CEO The Board of Directors is responsible for the proposal for appropria- tions of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable con- sidering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolidation requirements, liquidity and position in general. The Board of Directors is responsible for the company’s organisa- tion and the administration of the company’s affairs. This includes among other things continuous assessment of the company’s and the group’s financial situation and ensuring that the company’s organisa- tion is designed so that the accounting, management of assets and the company’s financial affairs otherwise are controlled in a reassuring manner. The CEO shall manage the ongoing administration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulfill the compa- ny’s accounting in accordance with law and handle the management of assets in a reassuring manner. Auditor’s responsibility Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the CEO in any material respect: – has undertaken any action or been guilty of any omission which can give rise to liability to the company, or – in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appropriations of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act. As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judgment and maintain professional skepticism throughout the audit. The examination of the administration and the proposed appropriations of the company’s profit or loss is based primarily on the audit of the accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relationships that are material for the operations and where deviations and violations would have particular importance for the company’s situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability. As a basis for our opinion on the Board of Directors’ proposed appropriations of the company’s profit or loss we examined the Board of Directors’ reasoned statement and a selection of supporting evidence in order to be able to assess whether the pro- posal is in accordance with the Companies Act. Auditor’s opinion regarding the statutory sustainability report The Board of Directors is responsible for the sustainability report on pages 70–73 and for ensuring that it is prepared in compliance with the Annual Accounts Act. Our examination has been conducted in accordance with FAR’s auditing standard RevR 12 The auditor’s opinion regarding the statu- tory sustainability report. This means that our examination of the sustainability report has a different focus and is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that our examination provides a reasonable basis for our opinion below. A sustainability report has been prepared. Ernst & Young AB, Box 7850, 103 99 Stockholm, was appointed auditor of H& M Hennes & Mauritz AB by the general meeting of shareholders on 10 May 2017. Ernst & Young AB and auditors within the audit firm have been elected since before 17 June 1994. Under the current regulations, Ernst & Young AB cannot be reappointed after 16 June 2020. Stockholm, 19 February 2018 Ernst & young AB Åsa Lundvall Authorised Public Accountant 103 Ou R h iSTORy The H&M group – the first 70 years In 1947 Erling Persson opened the store Hennes in Västerås, Sweden. Today the H&M group has several clearly defined brands that together make fashion and design accessible to people all over the world. Hennes in Västerås, Sweden. 2000 The first H&M stores in the US and Spain open in the year 2000. In subsequent years H&M opens in more European markets. 2004 H&M’s designer collaborations start with Karl Lagerfeld, to be followed by collabora- tions with some of the world’s biggest design- ers and fashion icons. THE FIRST STORE 1947 1976 H&M’s story begins when founder Erling The first store outside Scandinavia opens Persson opens the first store in Västerås, in London. Sweden, selling women’s clothing. The store is called Hennes. H&M, Oxford Circus in London. The first designer collaboration, with 1964 Karl Lagerfeld in 2004. The first store outside Sweden opens in Norway. 2006 major expansion of online shopping at 1968 hm.com begins in Europe. The first franchise The name is changed to Hennes & Mauritz stores open, in the Middle East. when Erling Persson buys the hunting and fishing store Mauritz Widforss in Stockholm, including a stock of men’s clothing. This is the 2007–2009 start of sales of men’s and children’s clothing. 1980–1999 The h&m Foundation is established as a Global expansion takes off with new non-profit global foundation. The first H&M markets such as Germany, the Netherlands, stores in East Asia open in hong Kong, 1974 Belgium, Austria, Luxembourg, Finland Shanghai and Tokyo. New brands are added: H&M is listed on the Stockholm Stock Exchange. and France. COS is launched in 2007, while in 2008 H&M 104 Ou R h iSTORy Collecting. Australia and the Philippines become new H&M markets, while the online store opens in four new countries including China. The new H&M Sport is launched and H&M’s shoe concept is extended and updated. 2015–2016 The h&m Foundation announces the Global Change Award, supporting and encouraging innovation for a more circular fashion indus- try. Launch of the new H&M Beauty concept. COS WAS Eight new H&M markets are added, including LAUNCHED India, South Africa and New Zealand, and the h&m online store opens in a further IN 2007 21 markets. COS. acquires fashion company FaBric Scandina- The h&m group’s 3,000th store opens in vien AB and with it the brands Cheap Mon- Chengdu, China while the first H&M stores day, Monki and Weekday. H&M Home is in the southern hemisphere open in Chile launched in 2009. and Indonesia. H&M starts the Garment Col- lecting initiative, with the aim of closing the loop for textiles – becoming the first fashion 2010 company to collect old textiles in stores glob- The first H&M Conscious Collection is ally for reuse and recycling. launched, made with sustainable materials such as organic cotton and recycled polyes- & Other Stories. ter. Store number 2,000 opens in Osaka, NEW Japan. CLIMATE Recycled denim. GOAL 2017 New brand ARKET is launched. H&M cele- brates its 70th birthday and opens eight new online markets as well as its first stores in Kazakhstan, Colombia, Iceland, Vietnam and Georgia. The H&M group sets new sustainabil- 2014 ity goals: to use only recycled and sustainably Launch of the first denim garments made produced materials by 2030 and to be climate- using recycled fibres from H&M’s Garment positive throughout the value chain by 2040. H&M Conscious Collection 2010. 2011 The h&m incentive Program (hiP) for all employees is started with a gift of around SEK 1 billion, invested in h&m shares, from Stefan Persson and family. HIP works the same way for everyone in the H&M group – regardless of salary, role, country and whether full- or part-time. 2013 Launch of fashion brand & Other Stories. H&M opens its online store in the US. ARKET in Munich. 105 C A L E N DA R A N D CON TACT DETA i LS Annual general meeting TIME AND PLACE The 2018 annual general meeting will be held at 3 p.m. on Tuesday 8 May 2018 in the Erling Persson Hall, Aula Medica, Karolinska Institutet, Solna. Shareholders who are registered in the share register printout as of Wednesday 2 May 2018 and give notice of their intention to attend the AGM no later than Wednesday 2 May 2018 will be entitled to participate in the AGM. NOMINEE SHARES Shareholders whose shares are registered in the name of a nominee must re-register their shares in their own name in order to be entitled to participate in the AGM. In order to re-register shares in time, share- holders should request temporary owner registration, which is referred to as voting right registration, well in advance of 2 May 2018. NOTICE OF ATTENDANCE Shareholders must provide notice of their intention to participate H & M Hennes & Mauritz AB in the AGM by post, fax, telephone or via H&M’s website to: Attn. Annual General Meeting SE-106 38 Stockholm Shareholders must provide their name, Telephone: +46 (0)8 796 55 00, civil identity number and telephone number preferably between 08.00–17.00, (daytime) when providing notice of their stating notice of attendance at the AGm intention to participate. Fax: +46 (0)8 24 80 78 about.hm.com/agm DIVIDEND The board of directors has decided to propose to the annual general meeting on 8 may 2018 a dividend of SEK 9.75 per share for the 2016/2017 financial year. The board of directors proposes that the dividend is to be paid in two instalments during the year – in May and in November. The record date proposed for the first dividend payment of SEK 4.90 per share is 11 May 2018. With this record day, Euroclear Sweden AB is expected to pay the dividend on 16 May 2018. To be guaranteed dividend payment, the h&m shares must have been purchased no later than 8 May 2018. Ex-dividend day is 9 May 2018. The record date proposed for the second dividend payment of SEK 4.85 per share is 13 November 2018. With this record day, Euroclear Sweden AB is expected to pay the dividend on 16 November 2018. To be guaranteed the second dividend payment, the h&m shares must have been purchased no later than 9 November 2018. Ex-dividend day is 12 November 2018. Financial information CALENDAR H & M Hennes & Mauritz AB will provide the following information: 27 march 2018 Three-month report 8 may 2018 Annual general meeting 2018 in the Erling Persson hall, Aula Medica, Karolinska Institutet, Solna at 3 p.m. 28 June 2018 Six-month report 27 September 2018 Nine-month report Contact details HEAD OFFICE H & M Hennes & Mauritz AB, Mäster Samuelsgatan 46A, SE-106 38 Stockholm, Sweden, Telephone +46 (0)8 796 55 00 CONTACTS INVESTOR RELATIONS Nils Vinge For information about COVER COMMUNICATIONS Kristina Stenvinkel the h&m group’s various h&m Spring Fashion 2018 GOVERNANCE Liv Asarnoj brands see: photographed by hm.com Josh Olins. cosstores.com DISTRIBUTION POLICY h&m sends out the printed version weekday.com The annual report is printed of the annual report to shareholders on FSC® certified paper. cheapmonday.com who have specifically expressed an monki.com interest in receiving the printed version. stories.com The annual report is also available to arket.com read and download at about.hm.com. 106 Dress