K2 to IFRS: A Worked Example for a Swedish Target
Most Swedish small and mid-sized companies report under K2 or K3, not IFRS. If you are a foreign buyer, or a Swedish buyer whose fund reports under IFRS, the same company can show very different EBITDA figures depending on the framework. This article walks through one illustrative bridge, step by step, so you can see where the differences come from and which figure to price on. The numbers are made up for illustration; the mechanics are what we do on real deals.
For the general picture of how K2 and K3 differ, see K2 and K3 in due diligence. This is the worked version.
The target
A Swedish software-enabled services company, an aktiebolag reporting under K2, with revenue of SEK 60m and reported EBITDA of SEK 9.0m. It employs 35 people and rents one office. The seller quotes the SEK 9.0m figure from the filed accounts. The buyer reports under IFRS and wants a comparable number. The SIE4 file is clean (we ran our seven SIE4 checks first), so the work starts from the ledger.
Step 1: confirm the reporting basis
Read the notes to the filed årsredovisning. They state whether the company applies K2 (BFNAR 2016:10) or K3 (BFNAR 2012:1). It matters because K2 is the simpler framework and rules out several things K3 and IFRS allow. Do not infer the framework from the company's size: some small companies choose K3, and some larger ones may be allowed to use K2 in the legal entity.
Step 2: capitalised development costs
Under K2, internally generated development costs are expensed as incurred. IFRS (IAS 38) requires capitalisation once specific criteria are met: technical feasibility, intention and ability to complete, probable future benefits, and reliable measurement of cost.
In our example the team spent SEK 6.0m on product development in the year, of which we judge SEK 4.0m would qualify. Under IFRS that SEK 4.0m goes onto the balance sheet and is amortised, so it disappears from EBITDA. That is a SEK 4.0m increase in IFRS EBITDA with no change in cash. The evidence for the split comes from timesheets, project records and the ledger's cost centres, which is another reason the ledger detail matters.
Step 3: leases
Under K2 the SEK 2.4m annual office rent is an operating expense inside EBITDA. Under IFRS 16 the lease is recognised as a right-of-use asset and a lease liability, and the rent becomes depreciation and interest, both below EBITDA. With three years left on the lease and a 3% discount rate, the liability is about SEK 6.8m. EBITDA goes up by SEK 2.4m, and net debt goes up by SEK 6.8m if the buyer counts lease liabilities as debt.
Step 4: goodwill
K2 requires goodwill and acquired intangibles to be amortised over their useful life. K3 also requires amortisation, with a longer maximum life. IFRS does not amortise goodwill; it tests it for impairment. Amortisation sits below EBITDA, so there is no effect on the EBITDA bridge, but net profit and equity will differ. If the target has acquisition goodwill, note the difference for the equity bridge and for any covenant based on profit.
Step 5: untaxed reserves
Swedish legal-entity accounts often carry untaxed reserves (obeskattade reserver), such as tax allocation reserves. IFRS has no such category: the reserve is split into a deferred tax liability at the corporate tax rate (20.6%) and equity. On a SEK 5.0m reserve, that is roughly SEK 1.0m of deferred tax and SEK 4.0m of equity. Appropriations (bokslutsdispositioner) sit below EBITDA under both frameworks, so EBITDA is unaffected, but the equity bridge and the tax forecast are.
The bridge
| Step | SEK m | Why |
|---|---|---|
| Reported EBITDA (K2) | 9.0 | As filed and as in the SIE4 file |
| Add: development costs expensed under K2 that qualify under IAS 38 | +4.0 | K2 cannot capitalise; IFRS can |
| Add: office lease expense removed under IFRS 16 | +2.4 | Cost moves to depreciation and interest |
| EBITDA on an IFRS basis | 15.4 | What an IFRS-reporting buyer's model will show |
| Less: capitalised development, still a real cash cost | -4.0 | Do not pay a multiple on it |
| Less: lease payments, still a real cash cost | -2.4 | Unless the lease liability is treated as debt |
| Cash-comparable EBITDA | 9.0 | Same business, same cash |
The same company is SEK 9.0m or SEK 15.4m, depending on the framework and on how you treat capitalised costs and leases. Neither is wrong. What is wrong is applying a multiple from one basis to an EBITDA figure from another. At a 6x multiple, the gap between SEK 9.0m and SEK 15.4m is SEK 38.4m of headline price. Sellers and their advisers will quote whichever figure suits the story, so the buyer needs to know which is which.
What to decide before you price
- Which EBITDA does your valuation multiple assume? Multiples from listed peers or IFRS-reporting deals are usually on an IFRS 16 basis. Multiples from many private Nordic deals are on a pre-IFRS 16, cash-cost basis.
- Are capitalised development costs a cost or an investment? If the business must keep spending to stay competitive, treat it as an operating cost and price on cash-comparable EBITDA.
- Are lease liabilities debt? If yes, use EBITDA before lease cost and add the liability to net debt. If no, keep the lease cost in EBITDA. Be consistent.
What we need to build this
- SIE4 files for each year, and the filed årsredovisning with notes
- A list of development projects with hours or cost by project and the status of each
- All lease contracts with term, rent and any options to extend or terminate
- The schedule of untaxed reserves and the tax computation
- Details of past acquisitions and any goodwill
Our data request checklist covers the rest, and the sample databook shows how a bridge appears in the output.
Frequently asked questions
What is the difference between K2 and K3?
K2 is a simplified Swedish framework for smaller companies, with limited options. K3 is the fuller framework, closer to IFRS, that allows for example capitalising development costs. Both are issued by the Swedish Accounting Standards Board (BFN).
Do I need to convert a Swedish target to IFRS in due diligence?
Only if your reporting or your valuation basis requires it. Often the useful step is a bridge for the few items that move EBITDA and net debt, not a full restatement.
Does IFRS 16 always increase EBITDA?
For a lessee, yes: it removes the operating lease expense from EBITDA and moves it to depreciation and interest. The lease liability is added to reported debt, so what matters is that EBITDA and net debt are treated consistently.
How long does a K2 to IFRS bridge take?
For a single target with a clean SIE4 file, the bridge is normally part of the 48 to 72 hour first-cut databook, with the development cost split confirmed with management afterwards.
K2 or K3 target on your desk? Send the filed accounts and the SIE4 file. We will tell you which adjustments move EBITDA and net debt, and by how much. Discuss a deal.