What is the difference between K2 and K3?

K2 is the simplified Swedish accounting standard for smaller companies. K3 is the main standard for most Swedish limited companies. Both are national adaptations of IFRS, but K3 permits capitalisation of development costs, amortisation of goodwill and different lease treatment.

No. K2 is a simplified standard that permits fewer disclosures and prohibits several treatments that IFRS allows, most importantly capitalisation of development costs. Assuming a K2 target reports on an IFRS basis is one of the most common valuation errors in Swedish diligence.

Which reporting basis does the buyer need?

It depends on the buyer. An IFRS-basis PE fund needs IFRS numbers; a Swedish strategic buyer often accepts K3; a private seller may only have K2 single-entity accounts. The basis should be agreed before the diligence scope is set.

Does K2 versus K3 actually move EBITDA?

Yes. On a software or product target, the difference between capitalising and expensing development costs alone can move EBITDA materially. Goodwill amortisation and lease treatment can move it further.

How is the bridge delivered?

We reconcile reported K2 or K3 figures onto the basis the buyer is underwriting and show every adjustment as a separate schedule with workings, rather than presenting a restated number without traceability.

K2 vs K3 Due Diligence: Swedish Accounting Divergences

Why K2 versus K3 matters in diligence

Most Swedish limited companies report under K3. Smaller companies report under K2. Both are national adaptations of IFRS, and both produce a recognizable set of financial statements. So it is easy to assume they are close enough to treat as interchangeable.

They are not. Four treatments diverge between the two standards, and on a software, product, biotech or brand target any one of them can move reported EBITDA enough to change the deal.

The difference matters most when a buyer is underwriting on an IFRS basis and is shown K2 figures without a bridge. The numbers look clean, the accounting looks reasonable, and the EBITDA is wrong.

The four divergence points

Capitalised development costs

K3 permits capitalisation of development costs in consolidated accounts where the criteria are met. K2 prohibits it entirely. On a software or product target this alone can move reported EBITDA materially.

Goodwill amortisation

K3 requires goodwill to be amortised. IFRS tests it for impairment. A K3 target shows an amortisation charge that an IFRS buyer will normally add back.

Lease treatment

K3 leases follow K3 rules that differ from IFRS 16. Operating leases a buyer would capitalise under IFRS sit off balance sheet under K3 — affecting both EBITDA and net debt.

P&L presentation

K3 allows cost-by-function or cost-by-nature presentation. K2 permits only one. Comparing two Swedish targets often means restating one before the numbers mean anything side by side.

Capitalised development costs — the biggest single difference

This is where most K2 versus K3 misunderstandings happen.

Under K3, a company can capitalise development costs that meet the criteria in its consolidated accounts, but not in its single-entity statements. Under K2, capitalisation is prohibited outright.

The practical effect on a target's EBITDA depends on how the seller has reported:

K3 consolidated accounts: development costs sit on the balance sheet and are amortised. EBITDA is higher than it would be under K2.
K2 single-entity or smaller companies: the same development costs are expensed as incurred. EBITDA is lower, but the cash was never consumed.

When a buyer sees EBITDA from a K2 target and compares it to a K3 target in the same sector, the comparison is meaningless unless both are put on the same basis.

Goodwill and leases — the secondary effects

These two divergences are less dramatic individually but compound the first.

Goodwill. K3 amortisation is a non-cash charge. An IFRS buyer adds it back, so the reported EBITDA difference is usually reconciled in the bridge. The risk is forgetting to check whether the seller's numbers already include the add-back or not.
Leases. IFRS 16 brings most operating leases onto the balance sheet. K3 does not always do the same. A K3 target may therefore look less levered than an IFRS-basis buyer expects, and lease payments sit inside EBITDA rather than below it.

How to confirm the reporting basis

Before the diligence scope is set, agree on the basis the buyer is underwriting and confirm the seller's actual basis.

Ask directly. "Are the reported figures on a K2, K3 or IFRS basis?" It is a simple question and the answer changes the entire approach.
Check the annual report. The basis is stated in the accounting policy notes and on the face of the financial statements.
Check the entity structure. A Swedish group may have K3 parent accounts and K2 subsidiary accounts. The buyer's basis might not match either.
Check the auditor's report. It usually confirms which framework the accounts are prepared under.

The bridge — what the buyer actually sees

We do not present a restated EBITDA with no workings. The bridge shows every adjustment, line by line, with the source and the reasoning.

A typical bridge from a K2 or K3 target onto an IFRS basis includes:

Development capitalisation: add back expensed amount, deduct amortisation of capitalised amount
Goodwill: deduct K3 amortisation (non-cash), add back to EBITDA
Leases: bring operating leases onto the IFRS basis, adjusting EBITDA and net debt
Presentation: restate cost-by-nature to cost-by-function or vice versa, where the buyer needs it

Each line is traceable to the accounts. The buyer can see what changed, why, and how much it moves EBITDA.

Worked example: a K2 to IFRS bridge for a Swedish target, step by step.

The practical request list

For a Swedish target, add these to the standard data request:

Confirmation of reporting basis — K2, K3 or IFRS, for each legal entity
Consolidated and single-entity accounts for the diligence period
Accounting policy note confirming capitalisation, goodwill and lease treatment
If K2 is reported: any voluntary switch to K3 in recent years, which would change comparatives
SIE4 export covering the same period — the easiest way to verify the reported numbers

Once the basis is confirmed, the bridge can be scoped and the EBITDA comparison becomes reliable.

Reading a Swedish SIE file in diligence · Swedish deal support · Discuss a deal

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